Good morning, ladies and gentlemen, welcome to Gibson's 2018 third quarter conference call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Mark Chyc-Cies, Vice President, Strategy, Planning, and Investor Relations. Mr. Chyc-Cies, please go ahead.
Thank you, Dulann. Good morning, thank you for joining us on this conference call discussing our third quarter operational and financial results. On the call this morning from Calgary are Steve Spaulding, President and Chief Executive Officer, and Sean Brown, Chief Financial Officer. Before passing the call over to Steve, I would like to caution you that today's call contains certain forward-looking statements that relate to future events or to the company's future performance. These statements are given as of today's date, and they are subject to risks and uncertainties as they are based on Gibson's current expectations, estimates, judgments, projections, and risks. Actual results could differ materially from the forward-looking statements expressed or implied today. The company assumes no obligation to update any forward-looking statements made on today's call. Additionally, some of the information provided refers to non-GAAP financial measures.
To learn more about forward-looking statements or non-GAAP financial measures, please refer to the September 30th, 2018 management discussion and analysis, which is available on our website and on SEDAR. I would like to turn the call over to Steve.
Thanks, Mark. Good morning, everyone, thank you for joining us. As I spoke about on our last quarter call, we are a different Gibson. A company focused on oil infrastructure and a business driving a 10% per share growth through infrastructure investments. The results we delivered over the last quarter demonstrate how our new strategy and continued focus on operational excellence is taking Gibson Energy in the right direction. Today, we are pleased to talk about the continued execution of our strategy. We had a very strong third quarter, with an adjusted EBITDA from continued operations of CAD 140 million, representing a new high for Gibson Energy. Distributed cash flow from combined operations of CAD 85 million. We continue to realize steady, predictable, and growing cash flows from our infrastructure segment, which is the core of Gibson Energy.
We're very pleased with the continued outperformance from wholesale, with a wide differential environment increasing our earnings, reducing our debt, and driving down our payout ratio and leverage. Notably, we're building momentum on our goal of doing what we said in terms of sanctioning new infrastructure, progressing on the non-core asset sales, maintaining a strong balance sheet, and producing strong, clean quarterly performance. In executing our strategy, we've made considerable progress in the past few months, especially on the objective of delivering an attractive total return to shareholders, inclusive of generating at least 10% per share growth on our distributive cash flow basis. Concurrent with our second quarter earnings release, we announced the sanction of two new tanks at Hardisty, the acceleration of our U.S. strategy, and the expansion of the Moose Jaw facility. In mid-October, we announced two more tanks with a senior oil sands customer.
We now have over three million barrels of new tankage under construction at Hardisty. What I'd like to highlight today is we now have half a billion CAD in growth capital under construction, which will be placed in service over the next 12 to 18 months. All our projects remain on or ahead of schedule and at or below budget. In aggregate, we expect to achieve a five to seven times EBITDA investment multiple on this half billion CAD of growth. This provides a clear line of sight to how we grow our infrastructure business and deliver greater than a 10% per share growth well into 2020. We will secure additional projects and remain confident in our ability to continue to grow our storage business in Canada, adding one to two million barrels of tankage a year.
Driving the new tankage demands are the egress constraints out of the basin, causing customers to seek additional tankage to increase their flexibility in getting these barrels to market. Continued modest growth in the Western Canadian oil production and refinery demand. Since we put out our initial target of one to two tanks per year, there's been a meaningful increase in global oil price. In that context, we have started to see oil sands players talk about the next wave of growth, both brownfield and greenfield. We've even seen M&A as certain producers look to high-grade their development projects. As a result, we remain confident on future oil sands expansion and production growth. Linking this back to our 10% growth target. At a run rate of two to four tanks per year, we will be able to reach our 10% growth target with just our terminals.
This would include new tankage builds and inside the fence projects at the terminal, which we typically spend CAD 20 million-CAD 30 million each year. To the extent we sanction growth outside our terminals, we will grow above our 10% target. That's where building another platform in the U.S. fits in very nicely. In building out our pilot system to the Wink Hub, we are investing a combined $100 million US in 2018 and 2019. We expect the investment will yield a five times investment multiple by 2020. We are focused on growing our position by investing CAD 25 million-CAD 50 million a year in the Wink area. We believe there is a significant opportunity to grow around our existing assets in the Permian Basin. Our intention has been to fund our growth into 2020 with the sale of non-core assets and retain cash flow.
Sean will provide more color in his prepared remarks, our dispositions remain ahead of our initial schedule, with proceeds likely be at the top half of our target range. Since the investor day in January, we have sanctioned almost double our growth target for 2018 and 2019. We remain fully funded for all our sanctioned capital. In the third quarter, we had exceptional performance from the wholesale business. We will take advantage of the market opportunities when they are available. I want to set reasonable expectations for our wholesale business. Wholesale is a cyclical business, these profits will decrease as differentials tighten.
To be clear, what's best for Gibson over the long term is also what's best for our producer customers. On a mid-cycle wholesale basis, terminals will represent about three-quarters of our company. We want the pipelines to be built and improve the net backs to our customers, enable growth of Western Canadian oil production. This will allow us to continue to build out our storage business and continue to increase our high-quality infrastructure cash flows. One question we've started to get is about raising the dividend. In the strategy outlined in January, we were very clear. We would not put the company in a position where it relied on cyclical cash flows to fund the dividend. Nothing has changed. Wholesale is a cyclical business. The cash will be used to fund infrastructure growth.
With a half a billion of projects being placed in service over the next 12-18 months, we're getting closer to growing our dividend. Our half billion in capital growth provides a clear visibility to our 10% per-share growth into 2020. Growth capital is fully funded. We remain confident that dispositions will be ahead of schedule and at the high end of our range. We are focused on delivering strong operational financial results each quarter, particularly from the infrastructure segment, the outperformance in wholesale is very beneficial. We have a strong balance sheet. With our payout at the bottom of our target range and a leverage ratio below our long-term target, we're very pleased. The progress through the first nine months of this year have been excellent, and we are confident in the focused and strategic direction of our company.
I will now pass the call over to Sean, who will walk us through our outstanding financial results in more detail. Sean?
Thanks, Steve. As Steve mentioned, in the past few months, we've made meaningful progress on our strategy, and we also had a very robust third quarter. Similar to the first two quarters of the year, the results were driven by a very strong, though predictable, contribution from the infrastructure segment, while wide differentials helped push wholesale well above the top end of our expectation. Looking at our key metrics, adjusted EBITDA from continuing operations of CAD 140 million represents a meaningful increase relative to the CAD 96 million earned in the second quarter of 2018, as well as the CAD 43 million earned on a comparable basis in the third quarter of 2017.
Distributable cash flow from combined operations of CAD 85 million was a nearly 50% increase over the CAD 57 million generated in the second quarter of 2018 on a comparable basis, and more than twice as much as the third quarter of 2017. In the third quarter, we recorded total segment profit of CAD 142 million. This is a CAD 90 million or 177% increase relative to the third quarter of 2017. CAD 14 million of this increase was driven by a higher contribution from infrastructure, with the remainder largely from wholesale. Looking at infrastructure in more detail, this segment continued to provide the consistent cash flows that one should expect from a highly contracted ratable business. Results within terminals and pipelines were largely in line with the first two quarters.
We continue to expect terminals and pipelines to be right around that CAD 60 million per quarter, and the infrastructure segment as a whole around CAD 70 million per quarter, with the next step change being when we place additional projects into service at the start of next year. Within our logistics segment, with the sale of U.S. Environmental Services and with Canadian truck transportation moving to discontinued operations beginning this quarter, U.S. truck transportation now comprises the entire segment. Our focus in U.S. truck transportation is getting the business back into the black. Volumes are down relative to the third quarter of last year, which was partly due to challenges in hiring and retaining drivers, but mostly as a result of exiting the businesses outside of our focus basins.
This resulted in some shutdown, severance, and equipment relocation costs in the third quarter, and we have also been very focused on right-sizing our overhead costs to be more in line with the smaller fleet we will operate going forward. In the fourth quarter, we expect that beginning to move volumes on the dedicated acreage around our pilot expansion until the pipeline is in service in late 2019 will help boost our trucking volumes and profit. Importantly, we view our U.S. trucking capability as more of an enabler of our infrastructure strategy rather than as a standalone profit center. With where we sit today, we're likely at or slightly behind where we wanted to be on the trucking front. More importantly, we are well ahead on our infrastructure strategy in the U.S., which is our principal focus.
In Canada, truck transportation's profit of CAD 6 million was largely in line with the run rate we have seen for the last few quarters. Volumes were up slightly over the third quarter of last year, with lower cost offsetting a decrease in revenue. In wholesale, the wide differentials, in concert with several other opportunities materializing, resulted in a great quarter. Adjusted EBITDA was CAD 72 million, and segment profit was CAD 68 million. On a comparative basis, this contribution to Adjusted EBITDA is 76% higher than the second quarter of this year, and adjusting for the CAD 9 million impact from IFRS 16 related to railcar leases, over CAD 70 million ahead of the third quarter of last year.
A significant contributor of the increase in wholesale relative to both the second quarter of 2018 and the third quarter of 2017 was a result of increased contributions from the refined products and crude oil businesses. In particular, our strong third quarter at Moose Jaw reflects the ability to move term contracts for the sale of most of our products from a WCS to a Brent-based benchmark, in addition to the benefit from discounted Canadian barrels. Crude oil was also able to take advantage of other ongoing locational and quality arbitrage opportunities in the quarter. With the NGL market in injection season in the third quarter, NGL wholesale posted a small loss on an Adjusted EBITDA basis, similar to the third quarter of 2017.
As we looked at the structure of the market and our opportunities ahead of our last call, we felt we were well-situated for the second half of the year, in part due to the positions we had brought in from the second quarter. Performing a similar exercise ahead of this call, we believe that with the less advantageous positions we carried in from the third quarter, as well as the more limited number of visible opportunities on the horizon, the segment is more likely to contribute Adjusted EBITDA of between CAD 30 million and CAD 50 million in the fourth quarter, resulting in a full-year Adjusted EBITDA contribution of between approximately CAD 170 million and CAD 190 million.
In terms of notable items in corporate costs, on the tax front, starting this quarter and going forward, we will include the current income tax expense instead of cash payments in our calculation of distributable cash flow, as we believe that this best reflects the cash flow earned in the quarter for the suite of businesses we have today. As we talked about on our last call, we wanted to balance the obvious benefits of withholding cash payments with the desire for our distributable cash flow to faithfully represent the cash flow generated by our business, and we think that this shift best achieves that. As a result, we recognized current income tax of CAD 24 million for the quarter, while our cash payment in the quarter was effectively zero.
While the approach makes a lot of sense from an accounting perspective, we also believe that this approach will make it simpler for people to forecast our tax expenses. Based on the range for wholesale mentioned earlier, current tax expense will be about CAD 40 million-CAD 50 million in 2018. The main driver for movements in our tax expense will be the variability from wholesale, which is fully taxable at our corporate tax rate of about 27%. With CAD 85 million in distributable cash flow from combined operations generated in the third quarter, the trailing 12-month figure improves to CAD 272 million and implies a payout ratio of approximately 70%, which is at the bottom end of our target range. In calculating our distributable cash flow for the last 12 months, we have also switched to the current tax method for prior quarters.
Under the current tax method, our trailing 12-month distributable cash flow is CAD 49 million lower under cash tax paid, resulting in a payout ratio about 11% higher than it otherwise would have been. Importantly, as Steve mentioned, we have half a billion dollars of infrastructure projects that will come into service in the next 12-18 months, at which point we expect we will continue to be within our 70%-80% target payout range, with three-quarters of cash flow from our terminal and 85% from infrastructure, assuming more normalized earnings from wholesale. In terms of funding our current growth to get to that position in 2020, we are fully funded, with our funding capacity based on our anticipated disposition proceeds and retained cash flows over the first nine months fully covering our sanctioned projects.
It is very important to our strategy that our growth remains fully funded, and as we continue to add new infrastructure growth projects, we will ensure we remain fully funded for our capital commitments. In terms of the divestitures, reiterating what Steve said, we would view the processes as ahead of schedule, with proceeds likely to come in at the upper end of our target range of CAD 275 million-CAD 375 million. Of the three remaining dispositions, both the sales processes for NGL wholesale and non-core U.S. Environmental Services are well advanced, and we continue to work towards an announcement over the next few weeks, with the expectation for both of these dispositions to be closed right around the end of the year, if not sooner. The last package would be our Canadian truck transportation business. We have received initial non-binding bids for this business and are happy with the interest shown.
We are now in the second round of the process and expect to receive binding bids late in the year, with the potential for an announcement in 2018, and if not, then early 2019, with timing of closing depending on the ultimate buyer. As we complete each of these three dispositions, we will be able to pay down our revolving credit facility with the proceeds subsequently reinvested in the infrastructure business over time. At the end of the quarter, our net debt to EBITDA was 2.9x relative to our target range of 3x-3.5x. As we work through the dispositions to focus our business around infrastructure, reinvest the proceeds into high-quality cash flows, reduce our debt, and decrease our payout ratio, all these steps will be supportive of our goal of securing an investment-grade credit rating.
During the third quarter, we are upgraded to BB+ by S&P, and we continue to believe as we execute on our strategy, it will make the case stronger for moving Gibson into investment grade. In summary, we continue to deliver on our strategy and are excited by where we have gotten over the first nine months of the year and where we are headed. We had a very strong third quarter, demonstrating the reliability of our infrastructure businesses and are excited by the upside we are realizing from our wholesale segment. Our payout ratio and leverage ratios are now at or below target levels. We're fully funded, and the dispositions continue to advance. We are very pleased with how things are going and will look to sustain the momentum. At this point, I will turn the call over to the operator to open it up for questions.
Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press star and one. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Robert Hope from Scotiabank. Please go ahead.
Good morning, everyone. Just wanted some additional color on the comments on spending CAD 50 million per annum, if I heard that correctly, around Wink. Can you just walk us through where you see the long-term growth projects in that region and how that business could evolve over time?
As we talked about last quarter, we're building into Wink. Right now, it looks like we're going to build a 16-inch pipeline from our two gathering systems that we have there into Wink. When we look at the acreage around, and we've been in discussions with the producers in and around our two gathering systems. We feel pretty confident that we'll be able to build out the gathering into those systems and then to continue to expand our connectivity in the Wink area. With our goal of adding tankage there in Wink as we move forward.
All right. That's helpful. Just moving over to the ongoing M&A processes. I believe we heard kind of in the top half of the range, towards the upper end of the range. Has your views on these asset sales, or have you seen any muted interest just given the commodity price environment and some producer shut-ins?
Thanks, Robert. No, not really. As I said on my prepared remarks, both NGL wholesale and ES North are well advanced in the latter stages of the process. No, I wouldn't say we've seen muted interest, certainly from there. On the Canadian truck transportation side, as I stated, we are basically halfway through the process. We have gotten initial non-binding bids. Management presentations are occurring as we speak and expect binding bids near year-end. Have not necessarily seen muted interest there either. Our messaging, consistencies to the process, after we had launched these, was that we expected proceeds to be at or near the high end of the range. On today's call, we reconfirm that.
Thank you.
Thank you. Our next question comes from Linda Ezergailis from TD Securities. Please go ahead.
Thank you. I'm wondering if you could help us understand kind of the path to investment grade, how you might balance that with funding your growth, perhaps by adding some leverage. I guess layered on top of that, as your tank build-out has accelerated, I'm wondering if your target credit metrics might also shift over time.
Thanks, Linda. I think there's a couple questions there. I think first and foremost, we need to go back to the governing principles that we outlined at our Investor Day. With those governing principles, we outlined a payout ratio of 70%-80% and leverage of three to three and a half times. Our view is that if we're building at the investment multiple, certainly in the tankage side, that we are, which is five to seven times, that is a fully funded model. As the capital has increased, certainly throughout the year here and into 2019, nothing has changed. Our view on leverage is that still three to three and a half times is appropriate for the balance of businesses that we have. As you saw for the quarter, we came in below that.
What we have been the beneficiary of is size earnings from wholesale, and we've used those earnings to fund infrastructure growth capital that has covered really a big part of the equity portion, in addition to the expectation of disposition proceeds. I think, in short, the answer is that we do think we are trending very well towards that. The path to investment grade is visible and very real, but we will not materially, or actually not materially. We will not change our target leverage from three to three and a half times because that is what we view as being appropriate for our business mix.
Okay, thank you. Maybe under your new definition or a new approach to incorporating cash taxes in your free cash flow or distributable cash flow metric, can you give us a sense of what the outlook might be beyond 2018 based on, I guess, your outlook on wholesale as well?
It really depends. I think in our prepared remarks, we covered it. This year would be fairly representative of it. Going into this year with a budget that I would've characterized probably in below mid-cycle for wholesale, we'd expected no cash taxes. Given the performance in wholesale, which we indicated we view as being largely fully taxable at that, call it 27%, we have an expectation of, call it, in around CAD 40 million of taxes that would be payable this year. Depending on your outlook for wholesale next year, I would guide you to something in around that calculus. If you were expecting CAD 100 million for wholesale next year, then you could probably model in something at around CAD 27-ish million dollars of taxes.
Maybe I can then ask you what your outlook for wholesale is in terms of maybe some of the inputs on differentials or comment on how you see that evolving over the next year and what some of the moving parts are.
Maybe I'll get Steve to talk about the differentials or the outlook for more of a macro environment. We're not going to provide a forecast for wholesale at this time. I think our efforts have been throughout the year to be as transparent as possible as we move from quarter to quarter in providing sort of what our outlook is for the next quarter as we move forward. As you said, there is a lot of moving parts that go into that wholesale number. As we think about budgeting, we're certainly not budgeting the outperformance we've seen this year. Again, Steve can talk about it. We do expect that differentials will remain wider throughout next year. Again, from a budgeting perspective, we're not expecting the same outperformance that we have this year.
Yeah. We have no crystal ball when it comes to what the actual differential will be in the next month or the upcoming months. We do know as long as we have egress issues out of the basin, and really until Line 3 starts up, the differentials are gonna be wide. To what extent, it's difficult to project.
So that's-
As long as they're wide, we do capture those opportunities across our Moose Jaw terminal, across that crack spread across that facility, our Moose Jaw facility.
What would be the secondary factors beyond basin egress that you look towards from a planning perspective?
Obviously, we believe that more rail cars will move out of the basin within the next couple of months. We think that that'll get fully ramped up out of the HURC facility there at Hardisty and then out of the Edmonton facilities and numerous other facilities. We do believe that the producers are contracting to move out the incremental production via rail car and unit train. Also, we'll see numerous other ways of people trying to get the barrels out of this basin and try to alleviate the large differentials.
Thank you.
Thank you. Our next question comes from Andrew Kuske from Credit Suisse. Please go ahead.
Thank you. Good morning. I think the question is probably for Steve, just to start off with. When you look at IMO's sanctioning of Aspen last night, how do you think about just the longer-term prospects for terminal development? Do you anticipate others, as the egress issues start to fade away in the early '20s, of really rushing and building oil sands capacity?
I don't know about rushing. Oil sands is not a rush type of activity. I think we spoke a little bit in our prepared remarks. To us, when we developed that one to two tanks a year, or let's say 500,000 to 1 million barrels of tankage a year, we were using really no egress issues, and we were using a CAD 40 to CAD 50 crude oil price. Today, with Brent trading in the 70s, we believe the egress issues will be solved with Line 3, TransCanada, and hopefully TMX. We hope that all three actually move forward. With that, we'll be able to debottleneck the production in Canada and allow for future growth.
In the U.S., you have the three and a half million barrels of pipeline being built into the Permian Basin, which will debottleneck Cushing down to the Gulf Coast. You'll really have a much cleaner view or a cleaner path of our production to the Gulf Coast, where we have the most sophisticated refineries in the world on the U.S. Gulf Coast that desperately want this Canadian production. With that and the higher crude oil pricing, we think that first we'll see these brownfield expansions, and then we'll see bigger greenfield, larger expansions as we move forward. They take a tremendous amount of time in planning and in execution.
Okay. That's helpful. Maybe just shifting gears a little bit, moving south of the border, and just your positioning in the STACK. It seems like there's still a lot of experimentation going on by a number of the producers on well spacing, among other things. Sort of where do you think we are in that process as far as the experimentation and getting really reliable production coming out, hitting expectations, and what does that mean from your opportunity set?
Right now, we're just in a wait and see in that SCOOP STACK area. We do have a trucking presence there, and we do have a wholesale crude oil business there. Right now, we're at a wait and see to see what opportunities do develop in that basin. We're kind of in the same boat as you, that we're in a wait and see right now in that basin.
Okay, that's great. Thank you.
Thank you. Our next question comes from Jeremy Tonet from J.P. Morgan. Please go ahead.
Good morning. Just wanted to pick up on wholesale a little bit here. It was a bit above our estimate this quarter, and you kind of laid out some of the gives and takes, I guess, as far as we think about it going forward. Is there any reason ahead of Line 3 why you wouldn't continue to print quarters in this zip code for the next year or so? What could prevent this quarter from repeating?
We will continue to have wholesale earnings. I would probably bracket it in between the second and the third quarter. We could go a little below that. We could go a little bit above that. Really, wholesale is an opportunity business. As long as Line 3, as long as those differentials are in that CAD 20-CAD 40 range, we're going to make upside earnings. When we talk about our mid-cycle earnings, which is where our long-term target is for that 70%-80% payout and just with our infrastructure and what we call mid-cycle wholesale, we're talking about CAD 12-CAD 15 range. Anything above CAD 12-CAD 15 range is above what we call our mid-cycle wholesale.
Jeremy, I do want to reiterate in the prepared remarks, we did give some forward guidance for the fourth quarter in this business. Consistent with what Steve said, we would have viewed in both our remarks Q3 as being somewhat abnormally good. It was a good quarter within wholesale, but that CAD 30 million-CAD 50 million is what we're expecting for Q4 in an environment that is not dramatically different than what we saw at Q3.
That's helpful. Thanks. Given how great the environment will be for the next year or so, is there any opportunity to kind of squeeze out incremental capacity at Moose Jaw? I imagine a larger expansion would take more time and capital and probably doesn't make sense, but just curious on that.
When you look at Moose Jaw, it's pretty much like a fractionator down in Mont Belvieu. It's really what type of feed we feed it. Depends on the actual capacity of the facility. There may be ways to feed it different grades of crude oil to expand the capacity a little bit. We are trending ahead of schedule on placing that in service. We talked about that last quarter, spending that CAD 20 million to CAD 25 million, and we believe even last quarter at a CAD 20 to CAD 25 diff, we would see a one-year payout. If we see the large diffs today, we could pay that expansion off very quickly. Probably when you look at Moose Jaw, one of the things we've really focused on is improving our sales of our products.
In the past, we sold a lot of those products on a WCS pricing. We've moved that benchmark now to Brent-based pricing because refined products really, they don't trade on WTI. They trade on really the water, Brent or LLS or MEH down in Houston. They're really in the big clearing markets, is what the refined products trade on.
That's helpful. Thanks. With the wide diffs, even with L3R, it seems like, the case for wide diffs are going to be there for some time. CBR is going to be a big part of the equation for some time. How does that impact, I guess, your view of expansions going forward? If you could expand a bit more there as far as needing extra storage for those movements or maybe participating more in kind of the USD expansions there. Just any thoughts that you can provide on these topics as far as it seems like it's only getting better?
Right. We're definitely looking into how we can participate to help the producers get their barrels to market. Rail is definitely one of those solutions. We're looking at possibilities to do back-to-back unit trains to help our producers or even do a manifest out to get these barrels out of Alberta and into the marketplace.
Great. That's it for me. I'll stop there. Thanks.
Thank you. Our next question comes from Robert Catellier from CIBC Capital Markets. Please go ahead.
You've effectively answered most of my questions. Thanks for your remarks. I guess I'll reiterate one question just for clarification. I agree with your being circumspect about raising the dividend. However, particularly after the asset sales, you're not going to have a lot of debt left to pay back. Is the gating factor to returning more capital to shareholders effectively achieving that investment-grade rating? Is there something else you're looking at?
Thanks, Robert. No, I actually wouldn't tie it to the path to investment grade at all. Really what I would tie it to 100% is the growth of our infrastructure cash flows. As Steve said in his prepared remarks, the wholesale cash flows for us are fantastic because it funds that infrastructure. Our strategy now and going forward will be it is those infrastructure cash flows exclusively that will cover that dividend. As we move forward, what we need to see is the certainty that infrastructure alone covers the dividend and all of our other fixed charges, including interest and maintenance capital. If you look at consensus for the year right now, we are virtually there from an infrastructure perspective.
As we bring more tankage online in Q1 next year, we will certainly have excess cash flows, and that's when, from a dividend perspective, we'll start to consider it. I wouldn't tie it at all to the path to investment grade. I would say that we're going to be conservative with our capital structure. We're going to be conservative with our payout ratio, which is indicative or representative of an investment-grade company, and we'll consider dividend increases in that context.
Yeah. Effectively, the payout strategy is an investment-grade payout strategy. It's just a question of getting to the scale that you need to get the rating.
Yep. That'd be accurate.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from Ben Pham from BMO. Please go ahead.
Okay. Thanks. Good morning. I've got a couple of follow-ups on the payouts reconfiguration. Just on a dividend question, are you treating the payout outlook as a new recon, as you think with the dividend? I know you mentioned infrastructure cash flows, but you got a 70% payout versus a 60% payout. It's a pretty wide gap.
Sorry, Ben, I don't understand the question. Our payout ratio I think the way, and maybe this will help clarify it. What we've done this quarter, and as we talked about previously, given how taxes work, you install based on your budget at the start of the year. With the budget at the start of the year, we forecast that we would have no cash taxes payable. With the outperformance of wholesale, that situation has changed throughout the year. Our current tax expense was not reflective of our cash tax expense. That will need to be trued up in Q1 of next year. If we had stayed in our previous methodology, which was utilizing cash taxes into DCF, what the result of that would've been is a much lower payout ratio throughout this year, where we're not paying cash taxes because of the way tax installments work.
We would've had a balloon payment in Q1 of next year, which would've caught up to the taxes that were actually accrued or payable throughout the year. That delta is just the difference between our current cash tax expense, our current tax expense, and the actual cash taxes payable, which in my prepared remarks, I said was 11%. I'm not sure if that's what you're referring to. Utilizing the current tax expense methodology, our payout ratio was 70%. If we had stayed under the previous methodology, which again, would've resulted in a balloon, it would've been caught up in Q1 of next year. That would've resulted in a payout ratio of 59%.
Okay. Yeah, sorry. I just probably framed it the wrong way.
Does that answer your question?
Yeah. Are you thinking about the dividend from the new or may not be new, but the theoretical right way of thinking about it when you're including a notional current tax in the payout?
This is a temporal issue for us this year to the extent that your budget roughly equates your performance, then the two of them should be the same. Again, this is a temporal difference. For next year, assuming our budget is fairly representative of actual performance, we would expect our cash taxes to be very close to our current taxes. We're looking at this on what's the true economic reality of the business. We think for this year, the better methodology is to use that current tax number. That's the way we look at it. I think, again, the key here is that this is a temporal issue, really focused on the fact that as we went into budgeting this year, we did not budget the outperformance we're seeing from wholesale.
Okay. When you look at the proceeds that you think you can get in and then the excess cash from wholesale, in terms of your budget, are you producing more cash than CapEx that you can look to put that on the side, buy back stock, or pay down more debt than expected? Are you at that tipping point yet?
You can do the math. We've come out with our capital guidance, certainly for this year, and have talked about the sanctioned projects for next year. In December, as is normal, we will provide our capital guidance for 2019. I'm not going to provide forward guidance with respect to what we expect our excess cash flow to be for 2019. We are in, at minimum, what we consider a balanced position, and that ignores the extra leverage capability that we can add through the infrastructure EBITDA that we'll be adding in Q1.
Okay. I'm not sure you can comment on this. Just going into wholesale, abnormally strong quarter, and it drops off a little bit even though dips are wide in Q4. Was there any sort of unrealized derivatives, realized derivatives in Q3 that would've impacted the quarter that we should be thinking about?
No. Nothing really abnormal for the quarter that you need to think about.
Okay.
It was a good quarter for our wholesale business.
All right. Perfect. Okay. Thanks, everybody.
Thank you. Our next question comes from Robert Kwan from RBC Capital Markets. Please go ahead.
Good morning. If I can maybe come back to the dividend question and just how you are looking at the payout. You've talked about you're not wanting to pay out wholesale EBITDA. You want to be self-funding, and you want to drive the 10% growth. Are you looking at it then really as infrastructure EBITDA minus, as Sean, you mentioned, all the fixed charges around interest, maintenance, and then the cash tax on the infrastructure? Is the payout ratio target applied to that number?
No. The payout ratio target is more of a consolidated number, and we will likely update that payout ratio target as we move through Investor Day next year. Our business has changed dramatically from what the business was at Investor Day this January. You're right in how we think about the It is infrastructure less fixed charges. That's how we're thinking about it and as we think about increases. As the business moves forward, with the wholesale performance, our consolidated payout ratio is driving down, and it wouldn't make sense for our target to be based on that, as we've talked about the temporal nature of the wholesale earnings. From a target perspective, as we move through 2019, I would expect that we will revisit what the appropriate payout ratio is as we look to visibility and how we think wholesale will perform in 2019 and further.
I guess without color-coding everything, but effectively, you're going to have some amount of wholesale in mind, not necessarily to pay the dividend, but to fund the growth. Put differently, if wholesale actually did go to zero or close to zero, you wouldn't be in a self-funding position.
Again, this is speculating. I don't think we expect wholesale to go to zero next year, by any respect. As we sit here today, if wholesale were to go to zero in Q4 and for 2019, that would be accurate.
Right.
Asset sales right now. Actually, that's not entirely true. Asset sales plus our retained cash flows for the first nine months actually provide the capital we need for 2018 and 2019. Then we'd have to remodel what it looks like going forward. The model here is truly a self-funding model. We will ensure that our payout ratio, based on infrastructure, reflects that. I think, in a roundabout way, you're trying to ask if that's entirely true. To be abundantly clear, we will model the business, we'll design the business so that it is self-funded, going forward, and we will be relying on infrastructure cash flows to do that.
Got it. Self-funding is really the number 1 priority. Is that fair?
Yeah. No, it's an absolute priority. I don't think we've moved off of that from when we first came out with it, amongst the other things at Investor Day in January.
Got it. Just looking at new tank growth and the cadence of the growth. I don't know if this is just due to the significant number of new tanks that you've already announced year to date, but previously guidance was two to four or greater. Now your latest materials are just two to four. Are you seeing a slowdown in the business, or is it really just a function of you've already booked in a bunch of these tanks that you had in your previous guidance?
If we said two to four or greater, that was probably what we saw really coming in these last two quarters. On a long-term, we are on that two to four or one to two million barrels of tank build-out per year.
Got it. Maybe if I can just clean up something in the quarter. There was a mention of a contractual amendment at the Edmonton terminal that positively impacted the quarter. I'm just wondering if you can describe the nature of that and what the amount of that was.
Maybe I can start with that. It was just a contractual amendment around a future capital contribution in a contract. I think you would read in the footnotes, if you looked really carefully to one of our supplementary financial information deck, the quantum of that was CAD 12 million. What we also had was an accrual for a potential regulatory charge, which largely offset that. The contractual amendment would've showed up in revenue, and then you would've also seen at our Edmonton facility an increase in OpEx of an almost equal amount. We would view the two as being largely offsetting.
Got it. Net-net, the quarter was pretty clean of one-time items?
Yeah. No, absolutely. I think there is a very small net positive between the two. Yes, that's the way we're looking at it.
Okay. That's great. Thank you.
Thank you.
Thank you. I show no further questions in the queue at this time. I'd like to turn the call back to Mark.
Thanks, everyone, for joining us on our 2018 third quarter conference call. Again, I would like to note that we have also made certain supplementary information available on our website, gibsonenergy.com. If you have any further questions, please reach out at investorrelations@gibsonenergy.com. Thank you.
Thank you, ladies and gentlemen, for attending today's conference. This concludes the program. You may all disconnect. Good day.