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Edited Transcript of KEY.TO earnings conference call or presentation 22-Feb-19 2:00pm GMT

Q4 2018 Keyera Corp Earnings Call

CALGARY Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Keyera Corp earnings conference call or presentation Friday, February 22, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradley W. Lock

Keyera Corp. - Senior VP & COO

* C. Dean Setoguchi

Keyera Corp. - Senior VP & Chief Commercial Officer

* David G. Smith

Keyera Corp. - President, CEO & Director

* Lavonne Zdunich

Keyera Corp. - Director of IR

* Steven B. Kroeker

Keyera Corp. - Senior VP & CFO

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Conference Call Participants

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* Andrew M. Kuske

Crédit Suisse AG, Research Division - MD, Head of Canadian Equity Research, and Global Co-ordinator for Infrastructure Research

* Benjamin Pham

BMO Capital Markets Equity Research - Analyst

* Linda Ezergailis

TD Securities Equity Research - Research Analyst

* Patrick Kenny

National Bank Financial, Inc., Research Division - Research Analyst

* Robert Catellier

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research

* Robert Hope

Scotiabank Global Banking and Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Casey and I will be your conference operator today. At this time, I would like to welcome everyone to the Keyera Corporation year-End Results 2018 Conference Call. (Operator Instructions) Lavonne Zdunich, you may begin your conference.

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Lavonne Zdunich, Keyera Corp. - Director of IR [2]

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Thank you, and good morning, everyone. It's my pleasure to welcome you to Keyera's Year-End Conference Call. With me are David Smith, President and CEO; Steven Kroeker, Senior Vice President and CFO; Brad Lock, Senior Vice President and COO; and Dean Setoguchi, Senior Vice President and Chief Commercial Officer. We will open the call for questions once we complete our prepared remarks.

Before we begin today, I would like to remind listeners that some of the comments and answers that we will be providing speak to future events. These forward-looking statements are given as of today's date and reflect events or outcomes that management currently expects to occur based on their belief about the relevant material factors as well as our understanding of the business and the environment in which we operate. Because forward-looking statements address future events and outcomes, they necessarily involve risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties include general economic market and business conditions; fluctuations in supply, demand, inventory levels and pricing of natural gas, NGLs, isooctane and crude oil; the activities of producers and other industry players including our joint venture partners and customers; our operating and other costs; the availability and cost of materials, equipment, labor and other services essential for our capital projects; contractor performance; counterparty risk; governmental and regulatory actions or delays; competition for, among other things, business opportunities and capital; and other risks as are more fully described in our publicly-filed disclosure documents available on our website and SEDAR. We encourage you to review the MD&A which can be found in our 2018 Year-End Report that we published yesterday, and it's available on our website and SEDAR.

With that, I'll turn it over to David Smith, our President and CEO.

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David G. Smith, Keyera Corp. - President, CEO & Director [3]

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Thank you, Lavonne, and good morning, everyone. Yesterday we reported our 2018 year-end financial results. Even with the challenging industry environment, we focused on what we can control to deliver our strongest year ever. All of our key financial metrics achieved record levels. With confidence in our business outlook we maintained our dividend track record and increased our dividend by 7% in mid-2018.

Since we became a corporation in early 2011, Keyera has invested over CAD 5 billion and delivered a compound annual growth rate of approximately 9% for both distributable cash flow and dividends both on a per-share basis.

During 2018, Keyera achieved a number of operational milestones. With strong demand for our services, we handled record volumes at our Fort Saskatchewan fractionation facility, our Simonette gas plant and through our condensate system. In addition, we carried out the largest capital program in our company's history. Even with this increased activity, Keyera's employees remained dedicated to safety, achieving zero lost-time incidents for the year.

Keyera continues to execute successfully on our strategy, expanding and enhancing our integrated network of assets with disciplined capital allocation. We have CAD 2.1 billion in approved projects currently underway, mainly focused on establishing a strong position in the liquids-rich Montney and Duvernay development areas. The capital program begins delivering incremental cash flow mid-2019 when phase 1 of our Wapiti gas plant comes onstream. This begins the next phase of step changes in Keyera's growth as we expect to complete all of the projects in the CAD 2.1 billion capital program within the next 24 to 30 months.

Once all of these projects achieve their annual run rate, targeted for 2022, we expect this capital program to earn an annual return on capital of between 10% and 15%, consistent with our historical returns.

I am confident that Keyera is doing the right things to continue to grow our business and bring value to our shareholders in the current industry environment.

With that, I'll turn it over to Dean Setoguchi.

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C. Dean Setoguchi, Keyera Corp. - Senior VP & Chief Commercial Officer [4]

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Thanks, David. Gathering and processing business units generated operating margin of CAD 272 million in 2018 compared to CAD 275 million last year. Although natural gas prices continue to be challenged, results from our gathering and processing segment were stable as producers remain active in liquids-rich areas of Alberta. For Keyera, this was most notable as our Simonette gas plant in Northwestern Alberta, which processed record volumes in 2018.

Overall, Keyera's gross processing volumes increased 5% over the prior year. With the completion of our development plans at our Simonette, Wapiti and Pipestone gas plants, we'll have a significant position supporting Montney development in Northwestern Alberta.

Our three gas plants will provide 950 million cubic feet a day of sour gas processing capacity and 90,000 barrels per day of condensate handling facilities. Simonette, Wapiti and Pipestone gas plants support some of the most attractive returns for producers who are actively drilling in the Montney. Keyera is focused on providing integrated midstream solutions for our customers which includes offering a full suite of services such as NGL fractionation, marketing, a water disposal solution at Wapiti, and the most reliable, efficient, and environmentally-responsible process for handling sulfur and carbon dioxide with acid gas injection facilities at each plant.

As David mentioned, we expect the first major project, Phase 1 of Wapiti gas plant, to be generating incremental cash flow by mid-year. This will be followed by the expansion of the Simonette gas plant by the fourth quarter of 2019; Phase 2 of the Wapiti gas plant; and the Wildhorse Terminal by mid-2020; and then the Pipestone gas plant in 2021. These projects are expected to add meaningful EBITDA over the next three years as they come onstream and volumes wrap up.

The liquids infrastructure segment generated a record operating margin of CAD 324 million in 2018, representing a 14% increase over the prior year. This was primarily due to incremental margin from recent capital investments such as the Norlite diluent pipeline, the Base Line Terminal, and increasing demand for many of our liquids infrastructure assets and services.

Our condensate system supports oil sands production and in 2018 we handled record volumes through our system. In early 2019, we added another shipper on the Norlite pipeline and Keyera's proprietary condensate system. This is the third new customer that has signed up for long-term service since Norlite became operational. Our condensate hub is backed by long-term fee-for-service agreements with major oil sands producers to provide transportation and storage to meet their growing diluent needs. The system is attractive to producers as it provides them with optionality and flexibility, given all of our condensate receive points and delivery options, and access to our storage. In addition, our system offers built-in capacity and reliability with assets such as the new South Grand Rapids diluent pipeline.

Keyera continues to pursue opportunities for our next growth platform. In the fourth quarter of 2018 we entered into a 50/50 joint venture with Wolf Midstream for the proposed development of an NGL and condensate-gathering system called the Key Access Pipeline System, KAPS. This proposed pipeline system would include the construction of two parallel pipelines to bring condensate and NGLs from the prolific Montney and Duvernay geological zones to Alberta's NGL hub in Fort Saskatchewan. A final investment decision is expected to be made in the first half of 2019, subject to obtaining sufficient customer support.

Our marketing business continues to be a strong contributor to Keyera's success, levering record results in 2018 with realized margin of CAD 296 million. Over the past 5 years, the marketing segment has generated over CAD 1 billion in realized margins. Marketing activities enhance returns from our fee-for-service business and provide an additional source of funding for our capital projects. Keyera's marketing segment creates value by utilizing our integrated gathering, processing and liquids infrastructure assets, including storage, fractionation and transportation capabilities. We also upgrade low-value butane into high-value isooctane at our AEF facility.

With that, I'll turn it over to Steven to discuss the financial results in more detail.

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Steven B. Kroeker, Keyera Corp. - Senior VP & CFO [5]

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Thanks, Dean. As mentioned earlier, we had an outstanding year with each of our key financial metrics achieving record results. Net earnings grew 36% to CAD 394 million. Adjusted EBITDA increased 31% to CAD 807 million, and distributable cash flow rose 25% to CAD 638 million, representing a 14% increase on a per-share basis.

All three of our business segments had an impressive year. Our liquids infrastructure and marketing segments both generated record financial results while the gathering and processing segment delivered stable results year-over-year.

Our three business segments also had a strong finish to the year, delivering strong results for the fourth quarter of 2018. The gathering and processing segment generated operating margin of CAD 74 million which included a one-time upward revenue adjustment for CAD 6 million. The liquids infrastructure segment earned CAD 84 million, reflecting the completion of the Base Line Terminal as the last tank came into service in October. And the marketing segment reported CAD 106 million in realized margin.

Marketing's impressive results were largely due to higher contributions from Keyera's isooctane and condensate business, plus our effective risk management strategy. Fourth quarter provided a good indication of the effectiveness of our hedging strategy as commodity prices declined sharply. As a result of this hedging strategy we had CAD 67 million of realized gains in the fourth quarter on the settlement of risk management contracts. CAD 23 million of these gains were related to risk management contracts put in place to protect the value of our butane that is used to produce isooctane at our AEF facility.

While this butane inventory value is protected and cash gains were realized in the fourth quarter, it will mean this higher-priced inventory will factor into isooctane margins realized in 2019 when the butane is consumed by AEF.

For 2019 we are maintaining our maintenance capital guidance of between CAD 100 million and CAD 110 million which includes both turnarounds at certain gas plants and non-recurring expenditures at Keyera Fort Saskatchewan and AEF as described last quarter. However, we have updated our cash tax guidance following the introduction of the accelerated investment incentive announced by the federal government last fall.

We now expect our 2019 cash taxes to be approximately CAD 25 million lower than our previous guidance and range between CAD 75 million and CAD 85 million. Our 2020 cash taxes are also expected to decrease, now estimated to be less than CAD 10 million.

Keyera continues to execute on our growth capital programs and in 2018 we invested CAD 1.3 billion in growth projects and acquisitions. This program included the completion of the baseline terminal, the Keylink NGL pipeline systems, liquids enhancements at our Simonette gas plant, and the Pipestone liquids hub. All of these projects are generating incremental fee-for-service cash flows.

In 2019 we plan on investing between CAD 800 million and CAD 900 million excluding acquisitions to advance our capital projects at the Simonette, Wapiti and Pipestone plants, and the Wildhorse Terminal.

Recognizing the dynamic environment that we operate in, Keyera has maintained a strong financial footing and is well-positioned to fund our current CAD 2.1 billion capital program. To date we have funded approximately one-third of this capital program while maintaining a net debt-to-EBITDA covenant ratio of 2.6 times. This is significantly below the debt covenant limit.

With respect to funding the remaining portion of this capital program, we do not plan on issuing common equity apart from the existing DRIP program and are comfortable operating in a net debt-to-EBITDA covenant ratio above 3 times.

As well in the event Keyera and Wolf Midstream reach a positive final investment decision on the proposed KAPS project, Keyera believes it is well-positioned to fund our 50% ownership interest in KAPS. Most of the spending on KAPS is expected in 2020 and 2021, when our existing capital program is concluding.

Assuming our current capital program is completed according to schedule, we expect KAPS will be funded without issuing common equity apart from our DRIP program.

That concludes my remarks. David?

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David G. Smith, Keyera Corp. - President, CEO & Director [6]

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Thanks, Steven. Although our industry continues to face a number of challenges, Keyera's year-end results demonstrate demand for our products and services continues to be strong while our marketing services continue to create value year-after-year. We expect to deliver another year of strong financial performance as we kick off the next phase of our cash flow growth with Phase 1 of the Wapiti gas plant. Market fundamentals are moving in our favor as more natural gas liquids are being produced from the Western Canada sedimentary basin. As the year unfolds, this is expected to result in higher fractionation fees as well as lower butane prices in Alberta that benefit our isooctane business.

Keyera is well-positioned to profit over the long term as well, as we continue to execute our strategy focused on maximizing cash flow from our existing assets, building a strong footprint in the liquids-rich Montney and Duvernay development areas in Northwestern Alberta, pursuing high-return opportunities to expand and integrate our value chain into major U.S. liquids hubs, and improving market access by considering opportunities further down the value chain.

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. Our team is committed to delivering another year of strong financial performance, operational excellence, and project execution.

With that, I'll turn it back over to the operator. Please go ahead with questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question here comes from Patrick Kenny with National Bank Financial.

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Patrick Kenny, National Bank Financial, Inc., Research Division - Research Analyst [2]

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I appreciate the return on capital guidance. Just wondering if we can view the bottom end of that 10% to 15% range as somewhat of a hurdle rate as you look to sanction future projects in the Montney and elsewhere? And perhaps if you can speak to what needs to happen to achieve the upper end at 15%, does that assume 100% utilization at the facilities? Would that encapsulate any upside from marketing?

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David G. Smith, Keyera Corp. - President, CEO & Director [3]

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It’s Dave here. I'll try and respond to that. The range that we're providing is, it's an average and it's an aggregate and it represents a number of different scenarios that we look at with each one of our capital investment projects. So I'm not sure we can be more specific about what the assumptions are behind the low and the high end of the range, unless we were to do it on a project-by-project basis. And that's not a disclosure that we're prepared to provide. What I can tell you is that when we look at a project, we expect it to stand on its own merits without the benefit of some of the upside opportunities that we often see when we're looking at the integrated value chain.

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Patrick Kenny, National Bank Financial, Inc., Research Division - Research Analyst [4]

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And then just moving over to the KAPS discussions here, and with respect to the level of interest from customers, wondering if you can speak to some of the moving dynamics here since November? We've seen production curtailments, another Peace Pipeline expansion, and some new competition from private equity in the Wapiti area. So just wondering if the level of interest is still as strong today as it was back in November?

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David G. Smith, Keyera Corp. - President, CEO & Director [5]

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I'll take a shot at that, and then Dean can chime in. I think we're very encouraged by the responses that we've seen. We continue to see drilling activity in that area, continuing to be strong. And when we talk to producers, particularly about condensate but also about NGL mix, they tell us two things. One is that there's going to be more than enough volume to fill the incremental capacity that Pembina has been talking about and that Keyera and Wolf are proposing. And the second thing they tell us is they would dearly love to have a competitive alternative. And so for both of those reasons, we've been getting pretty good traction and I feel like our timing is pretty good.

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Patrick Kenny, National Bank Financial, Inc., Research Division - Research Analyst [6]

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And then one last question if I could, just on this most recent outage at AEF? Wondering if you could just walk us through what happened there, is it a recurring issue at the plant? Something completely new and unavoidable? And then maybe if you had an internal availability target for the plant going forward, that'd be great.

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Bradley W. Lock, Keyera Corp. - Senior VP & COO [7]

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This is Brad. So we had a minor leak in the facility that occurred kind of mid-February. When we assessed it, we found that there was -- we couldn't isolate it so we were forced to take the facility down to deal with it. It's been repaired and turned back over to operations, and we're in the process of bringing the plant back up right now. So as we indicated, we expect it to be back up by the end of the month and we don't expect it to be a recurring issue.

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Patrick Kenny, National Bank Financial, Inc., Research Division - Research Analyst [8]

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Any internal availability targets for the plant going forward?

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Bradley W. Lock, Keyera Corp. - Senior VP & COO [9]

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Well, I think we continue to target running at or above nameplate, and I don't think anything that we've seen would prevent us from doing that through the remainder of this year.

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Operator [10]

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Your next question comes from Rob Hope with Scotiabank.

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Robert Hope, Scotiabank Global Banking and Markets, Research Division - Analyst [11]

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I want to first start off on your gathering and processing business. If we just look at the volumes at your plant, it seems like they were trending up through the end of the year. I just want to get a sense of what your expectations are for 2019 and just given the drilling activities, is that kind of small increases in volumes in some of these plants a trend that could continue through 2019?

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Bradley W. Lock, Keyera Corp. - Senior VP & COO [12]

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This is Brad here, again. So I think certainly the stronger pricing as you get into the back half of the year drives some increased volume, so I think that's somewhat expected. As we look out into 2019, the pricing forecast is -- continues to be softer in the summer than in the winter. So it's not unreasonable to expect a little bit of variability through the summer months as opposed to the winter months. That being said, we're still seeing some activity behind our plants, so hopefully that's going to temper some of that variability that we might have seen in previous years. But it's hard to say until we kind of get into the spring-summer season.

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Robert Hope, Scotiabank Global Banking and Markets, Research Division - Analyst [13]

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And then moving over to marketing, and I realize there's a number of moving parts here, but when you look at what you've seen so far in Q1 versus Q4 is it fair to say that you're seeing some of the similar dynamics if we adjust for the butane contract realization?

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Bradley W. Lock, Keyera Corp. - Senior VP & COO [14]

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I would say that in Q1 we'll have to adjust for a couple factors, and one being our AEF facility being down for two to three weeks. The other factor being the higher feedstock prices, the butane prices for the first quarter until we get into the next contract year starting April 1. And then notably, RBOB and WTI prices are quite a bit lower than last year. I think until we get in the second quarter you won't start seeing the benefits of again, the low butane feedstock prices, which will be certainly an average of our new contract prices and the inventory that we still have available coming into the quarter as well.

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Steven B. Kroeker, Keyera Corp. - Senior VP & CFO [15]

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And the only thing I would add to that -- this is Steven, here. The only thing I would add to that is, again, because of our hedging strategy we do look forward to try and hedge RBOB margins as well. and so we do expect to have some of that benefit as well in Q1 and going forward.

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Robert Hope, Scotiabank Global Banking and Markets, Research Division - Analyst [16]

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All right. And then just maybe a broader comment, just given how weak butane has been in Alberta, even relative to where it's training in [W versus] propane, is that a dynamic that is expected to persist through 2019? I'm just trying to get a sense of how much butane benefit on the pricing you could get in 2019.

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Steven B. Kroeker, Keyera Corp. - Senior VP & CFO [17]

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I'll take that one. Rob, I think our outlook for the foreseeable future at least is that NGLs in general throughout North America are going to be in somewhat of an oversupply situation. And I think what we've seen through 2018 is we've seen that prices in Western Canada get discounted just because of the transportation costs and more limited market outlets. And we don't see that changing very much in -- throughout 2019 as we sit here today. That's our view. Having said that, as Dean mentioned earlier, we have a mix of terms, supply contracts, as well as shorter-term or spot-oriented pricing, and we have a mix of different pricing mechanisms on the butane. So I think we see it as a positive for our isooctane business, but I wouldn't assume that we can -- that we're buying all of our butane at spot, I guess is what I would say.

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Operator [18]

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Your next question comes from Ben Pham with BMO.

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Benjamin Pham, BMO Capital Markets Equity Research - Analyst [19]

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On your commentary on the frack, [the outlook], is that also based on some of the conversations that you're having with your counterparties?

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David G. Smith, Keyera Corp. - President, CEO & Director [20]

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I think the short answer, Ben, is yes. I mean, as you know during Q1 we're in the throes of the annual recontracting, and some of our recontracting is for longer term. And our commentary is reflective of those conversations.

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Benjamin Pham, BMO Capital Markets Equity Research - Analyst [21]

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Okay. And is there also anything to think about outside of NGL infrastructure, as you look to potentially lock in higher frack fees?

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David G. Smith, Keyera Corp. - President, CEO & Director [22]

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I'm not sure what you mean by that.

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Benjamin Pham, BMO Capital Markets Equity Research - Analyst [23]

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Just thinking a few years back, when frack fees saw some compression. There were some locational changes on the marketing side that you were able to offset some of that weakness. Does it essentially reverse, then, looking the other way? I mean, I guess in other words, does the volumes you're seeing sustain itself as your frack fees could go higher?

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Bradley W. Lock, Keyera Corp. - Senior VP & COO [24]

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We think the utilization of our fracks will be very strong in 2019 and as David mentioned, we think the prices are going to be a bit firmer than what they've been in 2018.

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Benjamin Pham, BMO Capital Markets Equity Research - Analyst [25]

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Okay, right. And the only last thing I want to check, it was on a commentary around the funding and the debt-to-EBITDA. There was some commentary around your comfort level being above 3 times, and I wanted to clarify that. Is that more than 3 times because your business is much more visible now with take-or-pay, or is it more 3 times during this growth phase and you want to get down to 2 to 3 long-term?

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Steven B. Kroeker, Keyera Corp. - Senior VP & CFO [26]

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Good question, Ben. Steven here. Again, the disclosure we tried to provide was that with respect to funding the growth portion, at times we may be above 3 and so we're comfortable being above 3 times while funding the growth program. Again, it always depends on a variety of factors, where you are in the capital program, where you are in the individual project cycle or the EBITDA performance. And so we just wanted to give some more guidance to people that our historical range of 2.5 to 3 is not something to be so anchored on while going through a growth phase.

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C. Dean Setoguchi, Keyera Corp. - Senior VP & Chief Commercial Officer [27]

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I think it also speaks to the confidence that we have in the CAD 2.1 billion program that we talked about, and the returns that we'll generate from that investment. And again, a third of that money was already invested in 2018 in previous, so we have two-thirds left to go and we'll be wrapping up that cash flow profile from those investments.

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Benjamin Pham, BMO Capital Markets Equity Research - Analyst [28]

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Thanks for providing all the additional disclosures. It's very helpful.

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Operator [29]

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Your next question comes from Linda Ezergailis with TD Securities.

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Linda Ezergailis, TD Securities Equity Research - Research Analyst [30]

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I'm wondering if you could just help us understand that return on capital range, how long it might take to ramp up to the full run rate? Within the range, that tend to be (inaudible)

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David G. Smith, Keyera Corp. - President, CEO & Director [31]

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Yes, Linda, it's Dave here. As I said earlier, it's a variety of different projects that will sort of achieve their annual run rate at different times. We picked 2022 because I believe the Pipestone project is probably the last one to sort of achieve its full run rate, and that would be in the 2022 time frame. So that's why we picked 2022 as sort of a target for that level of return.

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Linda Ezergailis, TD Securities Equity Research - Research Analyst [32]

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And based on your outlook for North American NGL markets being kind of net long for the foreseeable future, how does that factor into any sort of decision to twin or expand AEF, and what other factors might you consider and when at the earliest might that happen?

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David G. Smith, Keyera Corp. - President, CEO & Director [33]

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Well, it's something that we continue to look at, but it's not something that's imminent, Linda. I mean, as I always point out with AEF, we acquired that facility at what we think is somewhere between 20% and 25% of its replacement cost. So the economics of twinning it are quite different than the economics associated with the original acquisition. Having said that, we're always looking at opportunities to enhance the production, to de-bottleneck. And we will look in the future at expansion possibilities, but as I said earlier, it's not something that's imminent.

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Linda Ezergailis, TD Securities Equity Research - Research Analyst [34]

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And maybe you could just elaborate, as well, a little bit more on the value proposition for customers that KAPS has? You mentioned a competitive alternative and capacity. Are there other attributes in terms of flexibility or customized services, or potentially some sort of cost dynamic, that producers are looking for in your discussions?

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David G. Smith, Keyera Corp. - President, CEO & Director [35]

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There's a number of features of the proposal that we've been working on with Wolf and discussing with our customers. I think at this stage of the process, Linda, it would not be appropriate for me to get into the details. As you can appreciate, it's a competitive environment.

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Operator [36]

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Your next question comes from Andrew Kuske with Credit Suisse.

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Andrew M. Kuske, Crédit Suisse AG, Research Division - MD, Head of Canadian Equity Research, and Global Co-ordinator for Infrastructure Research [37]

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Maybe just a broad question to start, and with the implementation of the crude production quotas in Alberta, what were some of the broad impacts you've seen on your business just in, I guess since Jan. 1, since the implementation?

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C. Dean Setoguchi, Keyera Corp. - Senior VP & Chief Commercial Officer [38]

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I would say that the impact on our business has been negligible, if any. I mean, we provide a service and the services that we provide don't really change in terms of those -- what the government has done.

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David G. Smith, Keyera Corp. - President, CEO & Director [39]

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Andrew, I think it's fair to say we were expecting, perhaps, a little bit of a dropoff in condensate demand. But we really haven't seen that to any great degree. One thing I think that the condensate pricing in Canada has resulted in over the last few months is far fewer rail import barrels. So that's the one part of our business where just the -- but that has more to do with the price of condensate and the supply/demand for condensate, more so than the curtailments that were imposed on January 1.

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Andrew M. Kuske, Crédit Suisse AG, Research Division - MD, Head of Canadian Equity Research, and Global Co-ordinator for Infrastructure Research [40]

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And maybe just following up on that, when you think about the condensate market on a longer-term basis, and then Enbridge's potential future actions on Southern Lights, what does that mean for your positioning within the marketplace?

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David G. Smith, Keyera Corp. - President, CEO & Director [41]

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I think it's obviously, these are all factors that we watch very carefully. You've seen a significant growth in condensate supply from Western Canada over the course of the last 2 or 3 years, and we expect that that's going to continue. What we're expecting and hoping is that we'll see more crude oil export pipeline alternatives over the course of the next few years which will provide, I think, some support for growth in bitumen production, which will provide support for continued growth in demand for condensate. And so as that -- that's another factor on the demand side. You know, there's been lots of chatter about the possibility of Enbridge reversing Southern Lights, and that obviously will affect the supply/demand picture in Western Canada for condensate. Our perspective on it, obviously, is something we watch carefully but with our network what we've tried to create is a lot of flexibility so that we are not as concerned with where the condensate is coming from and our customers have access to barrels from a variety of different sources.

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C. Dean Setoguchi, Keyera Corp. - Senior VP & Chief Commercial Officer [42]

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And I think on the demand side, you probably saw that Enbridge announced that they expect line 3 to be -- the line 3 expansion to be up and running by the end of the year. So I think that's directionally 370,000 barrels per day, again, which is supportive for increased bitumen production but also condensate [deal and] demand as well.

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Andrew M. Kuske, Crédit Suisse AG, Research Division - MD, Head of Canadian Equity Research, and Global Co-ordinator for Infrastructure Research [43]

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And then one final, more maybe nit-picky question. The 40% of the pipe that you bought, the raw gas pipe across the (inaudible), how much would that cost to connect into your existing infrastructure, roughly?

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Bradley W. Lock, Keyera Corp. - Senior VP & COO [44]

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This is Brad. It would be small. So the pipe really just fills a gap right now, and so the dollars would be very, very small.

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Operator [45]

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Your next question comes from Robert Catellier with CIBC Capital Markets.

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Robert Catellier, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [46]

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We're not accustomed to seeing Keyera put out a potential FID date on a project as you have here with KAPS. What's changed to cause you to do that?

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David G. Smith, Keyera Corp. - President, CEO & Director [47]

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Rob, I think we feel like we're getting really close. We're not prepared to get into details, but I think last fall we were saying sometime in 2019. I think now we're getting more confident in seeing it in the next few months.

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Robert Catellier, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [48]

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Okay. And Dean made a comment about the funding assumption, that there's a confidence level in the project execution, to indicate that you can internally finance just with the DRIP. Is there another financing assumption in there? And I'm thinking perhaps preferred shares, or is this -- can you do this just with internally-generated cash flow and the DRIP?

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Steven B. Kroeker, Keyera Corp. - Senior VP & CFO [49]

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Good question, Rob. There's no explicit assumption about having to use hybrids. Obviously that's always an avenue available to us if things change in terms of business environment or something like that, but there's no explicit assumption.

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Robert Catellier, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [50]

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Okay. Then finally there was that Redwater case recently about well abandonment liabilities. And I'm just wondering what you're hearing from producers and what they're telling you about the impact of this on their activity levels, specifically wondering if there's a shift of the spending maybe to more treatment of those abandonment liabilities as opposed to new drilling?

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David G. Smith, Keyera Corp. - President, CEO & Director [51]

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Rob, I think the concern that I've heard expressed -- and this is really more speculative at this point -- but the concern that I've heard expressed is just a concern about availability of debt financing. I think the concern is that the Redwater decision is going to cause lenders to be more cautious with their borrowing base determination and their willingness to lend at the same levels. But as I said, I think this is more speculation at this stage. I don't know that there's been very much discussion on that. So that's really, I think, more the concern that some producers have is just the availability of debt funding. We don't, frankly, expect it's going to have a huge impact in our areas because most of our customers are living within cash flow right now. So access to incremental debt financing is not something that they're relying on. As far as the level of spending on, I think maybe what you were suggesting is that the company would be spending more money on reclamation. I don't think that that's something that we expect to see in the near term. Most prudent operators have a program of abandonment for the wells that are subject to that requirement, and I don't see that those programs. I don't see those programs being accelerated as a result of the decision.

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Robert Catellier, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [52]

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That's good color. And just a follow-up question then for Steve, I'm wondering if you're hearing any shift in tone with respect to the asset retirement obligations that Keyera has and how those are treated with respect to debt capacity?

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Steven B. Kroeker, Keyera Corp. - Senior VP & CFO [53]

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No. We haven't heard anything really around them.

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Operator [54]

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There are no further questions in queue at this time. I will turn the call back over to Lavonne Zdunich for any closing remarks.

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Lavonne Zdunich, Keyera Corp. - Director of IR [55]

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Thank you. This completes our year-end conference call. If you have any questions that you need to follow up on, please give me a call later today. Thanks for listening and have a good day.

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Operator [56]

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And ladies and gentlemen, this concludes today's conference call. You may now disconnect.