Keyera Corp.

Good morning. My name is Mark and I will be your conference operator today. At this time, I would like to welcome everyone to Kiera'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 Setteguchi, President and CEO, Eileen Maricar, Senior Vice President and CFO, Jamie Urquhart, Senior Vice President and Chief Commercial Officer, and Jared Bastilny, Senior Vice President, Operations and Engineering. We will begin with some prepared remarks from Dean and I lead, 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 Kiera's public filings available on CDAR Plus and on our website. With that, I'll turn the call over to Dean. Thanks, Calvin, and good morning, everyone.

Kiera 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. Sierra 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 GNP segment delivered its second highest quarter ever with 94 million in realized margin. And our liquid infrastructure segment delivered a third consecutive record quarter with a contribution of 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 place through our core liquids infrastructure in Edmonton and Fort Saskatchewan. Assets like Wapiti, Pipestone, the KFS complex, and most recently CAPS have all contributed meaningful volume and cash flow growth. As a result, we remain on track to reach our targeted range of 6% to 7% annual EBITDA growth from our fee-for-service business out to 2025. TAPS continues to deliver ahead of our expectations with higher than forecasted volumes in the third quarter, as customers delivered above their contracted commitments. TAPS 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 announced 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 $60 to $70 million. This project adds 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 420 and 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 Kiera 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 CAPS and the Pipestone expansion, in turn driving growth in high-quality fee-for-service cash flows. With a number of successful strategic investments made over the past few years, Kiera is now delivering sustainably higher levels of discretionary cashflow. 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 Kiera'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 de-bottleneck of existing FRAC, a new FRAC expansion, and a potential CAPS Zone 4 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 Kiera's financial performance for the quarter.

Thank you, Dean. Adjusted EBITDA for the quarter was $288 million, compared to $247 million for the same period last year. Distributable cash flow was $186 million, or 81 cents per share. compared to 162 million or 73 cents per share for the same period in 2022. These results were driven by record performance from our liquid infrastructure segment and continued strong performance from our gathering and processing and marketing segments. Net earnings were 78 million compared to 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. CARE continues to maintain a strong financial position, ending the quarter with net debt to adjusted EBITDA at 2.5 times, at the low end of our targeted range of 2.5 to 3 times. 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 $420 million and $450 million of realized margin in 2023. This is up from our previous guidance of $380 million to $410 million. These results are largely due to the continuous strength of iso-optane premiums and CARE's ability to access advantaged markets. For a full list of guidance assumptions, please refer to CARES Third Order MD&A released this morning. Growth capital for 2023 is now expected to range between $200 million to $220 million, previously $200 million to $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 $95 million to $105 million. GERA continues to expect cash tax expense to be nil for 2023. I'll now turn it back to Dean.

Thanks, Aileen. GERA 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, Kiara will continue to play an integral role enabling this growth. On behalf of Kiara'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 1 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 2 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 4 project, given what appears to be a strengthening volume outlook in the basin, as well as we've seen 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 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 going to 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 a three to four BCF of growth, which will drive also a lot of liquids production. You know, first of all, I want to, say that, you know, we're very happy that zones one to three extend through the little the richest liquids rich part of the of the of the Montney fairway. So we're going to 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 to the BC border to capture some of that growth as well. And Just like we see a lot of interest in caps, producers want optionality and they want to make sure that there's competition for the long term. They also want to have operational reliability so that when they make billions of dollars 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 4, but I do want to emphasize that we will not continue to proceed ahead of this project unless we have the commercial support from our producers. But again, I do want to emphasize 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 67% 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, and, uh, you know, we are tracking very well against the six to 7% fee for service EBITDA growth. And I do want to emphasize that national 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 going to be incremental to that. So we're very excited about how our business is performing across all three business segments. You know, we're, We had some scheduled maintenance in this quarter, so that created a little bit of noise with our GMP segment. But we're very excited about the volume growth and cash flow growth that we see there. Liquid 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 well positioned to deliver on the 6% to 7% EBITDA growth. And with that, maybe I'll just turn it over to you, Eileen, if you had any other questions or

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 Kwon at RBC Capital Markets. Please go ahead. Your line is open.

Thank you. Good morning. 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 was a 10% to 15% pre-tax unlevered return. And I guess just with the increase in interest rates, are those targets 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 Charlie 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 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 caps, we are also going to capture the integrated benefits of any assets and any investment that we added any part of our integrated value chain. So, you know, if that's on a gas plants, well, we're certainly going to be having, you know, contract discussions on caps and our frack and our, downstream storage terminaling marketing business. So that's the advantage of having a fully integrated system. And so when you look at our enterprise level returns, the expectations will be that there'll be much higher than that 10 to 15% range. And we've demonstrated over time that we've delivered superior return on cap returns at a corporate level. And again, that's part of that fully integrated strategy. But Adley, 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 flow for the level of take or pay. 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 capital is today.

Got it. If I can just finish with a question on caps here. I guess the first part is just specifically around the quarter. You said volumes were higher than you expect your customers delivering above average. 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 cap system? Or should we just think about filling up the excess capacity, being more linked to something like zone four?

That's a great question. I have to tell you, I've never been more optimistic on cash 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 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 forecast, 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 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 Canada LNG starting up, this is going to unlock more of the growth and the productive capacity of our basin. So we're going to help enable that growth. And so with that, you know, it's helping us with our contracting on CAPS. I'd also say, though, that some of our CAPS contracts, our 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 want to add anything to that?

Yeah, Robert, I think towards your first question is that, you know, the delivery of volumes above contract is noted. Yeah, it 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 CAPS are all of the big players in the basin, and as we see consolidation in the basin, I think we've 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 cash 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. Anytime you're bundling services, it's just more contracts involved and everything else. So I just say that some are discussions. you know, involve 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 Wilgu 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. And, you know what, I'm not a... poly legal policy expert, but I think it's positive overall. I think it emphasizes the the authority that the provinces have relative to the federal government. You know, I don't think that it necessarily affects us directly and some of the projects that we would be looking at. But I think generally for the for the base and you know, I think some of the uncertainty that is required that 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 that might help resolve situations like that where you have more regulatory certainty because it's going to 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 cap volumes, but just wondering on the other facilities as well.

Consolidation of, like, within the producers, you mean? Yeah.

Okay, yeah. No, I mean, that's a good question. And, you know, it's a theme that we're seeing on both sides of the border, obviously, with some mega transactions with ExxonMobil and also Chevron's announcement. But, you know, we're seeing that as well in our basins. I think overall, it's positive. It usually means that a more well-heeled company is acquiring production to create greater efficiencies. And a lot of times that can translate to more activity. You know, one of the examples could be, you know, Bonavista in our self-portfolio and I think people would understand their history and how they were taken private and they had a lot of debt. Well, that business, as I understand, is looking a lot better now in terms of where they're able to pay off debt and get in a good position and sell. But over that last several years, 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, you know, more consistent with a player like Tourmaline behind there. So we think overall, you know, consolidation is good.

It makes the base more efficient overall. Great. Thanks. That's it for me. Thank you.

Our next question comes from the line of Linda Azaghalis of TD Cohen. 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 iso-octane margins, 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 the infrastructure level, we're aiming to achieve, you know, very strong returns on any infrastructure asset that we make an investment in. When we flow that through our integrated system, including through our marketing business, that's what helps us generate those superior returns at a corporate level. 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 speculative financial trades on screens to generate our margins from that part of our business. 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, 23 has been an exceptionally strong year. You know, we've revised our guidance and now expecting to deliver between 420 to 450 for the year, and that would be a record, you know, 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 our ability to get a little bit more output 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 iso-octane premiums and also our ability to deliver to the highest value markets. And Eileen touched on that earlier in her her comments, we've actually gained some new iso-octane customers in advantage markets in 23 and expect that momentum to continue into 24 and beyond. So regarding 24, 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 24. So, overall, on track for record 23, and we continue to see continued strong performance in 24 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 once the supply season is known at that point.

Okay, and 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% to 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 process. that 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 that last question around the business update, do you expect that to be more of a regular annual process on timing, or is it similar to somewhat of a quasi-investor's aid? 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.

Next question, maybe high-level thoughts on appetite for acquisitions, whether it's opportunistic or more maybe strategic in the U.S., for example. And I'd 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.

Thanks for the question, Ben, and it is a good question. Just given what you're seeing in the industry today, you're very right that we have a very strong balance sheet, and that provides us optionality. And, 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 exist already and where we, when combined with our assets, we can make our system more efficient, we'll certainly look at those opportunities I do want to stress that 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, I'm not sure if we're going to hear that static, but the , you know, we have to make sure that we, stay within our financial debt parameters. And if we go beyond it, we have to have a plan to bring ourselves back into the two and a half to three times that EBITDA range. The second one is that it needs to be on strategy so that we won't do anything that would be a surprise to the market. And really it's about strengthening and extending our existing integrated value chain in Western Canada. And lastly, it's gotta be value accretive for our shareholders.

And Mark, are you there? It looks like we lost a couple online there for the questions.

So, we'll regroup, we'll call the two that we thought didn't get a chance to ask a question after the call today. And 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.