Earnings Call: Q3 2018

Nov 7, 2018

Good morning, ladies and gentlemen, and 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 Hitzchess, Vice President, Strategy, Planning and Investor Relations. Mr. Hitzchess, please go ahead. Thank you, Doolin. Good morning and thank you for joining us on this conference call discussing our Q3 operational and financial results. On the call this morning from Calgary are Steve Spalding, 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 30, 2018 Management Discussion and Analysis, which is available on our Web and on SEDAR. Now, I would like to turn the call over to Steve. Thanks, Mark. Good morning, everyone, and 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. And 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 $140,000,000 representing a new high for Gibson Energy. Distributive cash flow from combined operations of $85,000,000 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 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 Q2 earnings release, we announced the sanction of 2 new tanks at Hardisty, the acceleration of our U. S. Strategy and the expansion of the Moose Jaw facility. In mid October, we announced 2 more tanks with a senior oil sands customer. We now have over 3,000,000 barrels of new tankage under construction at Hardisty. What I'd like to highlight today is we now have $500,000,000 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 5 to 7 times EBITDA investment multiple on this $500,000,000 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 1,000,000 to 2,000,000 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 some and refinery demand. Since we put out our initial target of 1 to 2 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 and 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 2 to 4 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 $20,000,000 to $30,000,000 each year. To the extent we sanction growth outside our terminals, we will grow above our 10% target. And that's where building another platform in the U. S. Fits in very nicely. Building out our pilot system to the Wink Hub, we are investing a combined US100 $1,000,000 in 2018 2019. We expect the investment will yield a 5 times investment multiple by 2020. We are focused on growing our position by investing $25,000,000 to $50,000,000 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 20 20 with the sale of non core assets and retained cash flow. Sean will provide more color in his prepared remarks. But 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 2019. With a steady outperformance from our infrastructure business and outperformance from our wholesale business, retained cash flows after the payments of dividends over the 1st 9 months of the year have continued to increase our funding capability. As a result, we remain fully funded for all our sanctioned capital. In the Q3, we had a sectional performance from the wholesale business. We will take advantage of the market opportunities when they are available. However, I want to set reasonable expectations for our wholesale business. Wholesale is a cyclical business and 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 3 quarters of our company. So we want the pipelines to be built and improve the netbacks to our customers and 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 $500,000,000 of projects being placed in service over the next 12 to 18 months, we're getting closer to growing our dividend. In summary, our $500,000,000 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. And the outperformance in wholesale is very beneficial. We have a strong balance sheet. And with our payout at the bottom of our target range and a leverage ratio below our long term target, we're very pleased. So the progress through the 1st 9 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 Q3. Similar to the 1st 2 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 $140,000,000 represents a meaningful increase relative to the $96,000,000 earned in the Q2 of 2018 as well as the $43,000,000 earned on a comparable basis in the Q3 of 2017. Similarly, distributable cash flow from combined operations of $85,000,000 was a nearly 50% increase over the $57,000,000 generated in the Q2 of 2018 on a comparable basis and more than twice as much as the Q3 of 2017. In the Q3, we recorded total segment profit of $142,000,000 This is a 90,000,000 dollars or 177 percent increase relative to the Q3 of 2017. Dollars 14,000,000 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 continues 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 1st 2 quarters. We continue to expect terminals and pipelines to be right around that $60,000,000 per quarter and the infrastructure segment as a whole around $70,000,000 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 were down relative to the Q3 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 Q3 and we have also been very focused on rightsizing our overhead costs to be more in line with the smaller fleet we will operate going forward. In the 4th quarter, we expect that beginning to move volumes on the dedicated acreage around our biote expansion until the pipeline is in service in late 2019 will help boost our trucking volumes and profits. 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, but 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 $6,000,000 was largely in line with the run rate we have seen for the last few quarters. Volumes were up slightly over the Q3 of last year with lower costs 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 $72,000,000 and segment profit was $68,000,000 On a comparative basis, this contribution to adjusted EBITDA is 76% higher than the Q2 of this year and adjusting for the $9,000,000 impact from IFRS 16 related to railcar leases over $70,000,000 ahead of the Q3 of last year. A significant contributor of the increase in wholesale relative to both the Q2 of 2018 and the Q3 of 2017 was a result of increased contributions from the refined products and crude oil businesses. In particular, our strong Q3 at Moose Jaw reflects the ability to move term contracts for the sale of most of our products from a WCF 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 and injection season in the 3rd quarter, NGL wholesale posted a small loss in an adjusted EBITDA basis similar to the Q3 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 Q2. Performing a similar exercise ahead of this call, we believe that with the less advantageous positions we carried in from the Q3 as well as the more limited number of visible opportunities on the horizon, the segment is more likely to contribute adjusted EBITDA of between $30,000,000 $50,000,000 in the 4th quarter, resulting in a full year adjusted EBITDA contribution of between $170,000,000 $190,000,000 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 payment with the desire for a distributable cash flow to basically 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 $24,000,000 for the quarter, while our cash payment in the quarter was effectively 0. 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 $40,000,000 to $50,000,000 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 $85,000,000 in distributable cash flow from combined operations generated in the 3rd quarter, the trailing 12 month figure improved to $272,000,000 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 current our trailing 12 month distributable cash flow is $49,000,000 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 $500,000,000 of infrastructure projects that will come into service in the next 12 months to 18 months, at which point we expect we will continue to be within our 70% to 80% target payout range with 3 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 1st 9 months fully covering our sanctioned projects. It is very important to our strategy that our growth remains fully funded as we continue to add new infrastructure growth projects, we will ensure we remain fully funded for our capital commitment. 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 $275,000,000 to $375,000,000 Of the 3 remaining dispositions, both the sales processes for NGL Wholesale and Non Core 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 2nd 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. And 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 2.9 times relative to our target range of 3 times to 3.5 times. Also, 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 Q3, we are upgraded to BB plus by S and P and we continue to believe as we execute on our strategy, it will make the case stronger for moving Gibson's into investment grade. So in summary, we continue to deliver on our strategy and are excited by where we have got over the 1st 9 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 we'll 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. 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 $50,000,000 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? Yes. As we talked about last quarter, we're building into Wink. Right now, it looks like we're going to build a 16 inches pipeline from our 2 gathering systems that we have there into Wink. So when we look at the acreage around and we've been in discussions with the producers in and around our 2 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. And then just moving over to the ongoing M and 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. I mean, as I said on my prepared remarks, both NGL wholesale and ES North are well advanced in the latter stages of the process. So, no, I wouldn't say we see muted interest certainly from there. And on the Canadian truck transportation side, as I stated, we are through 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. So, I have not necessarily seen muted interest there either. Our messaging, consistency to the process after we had launched these was that we expected proceeds to be at or near the high end of the range and on today's call, I think we reconfirm that. Thank you. Thank you. Our next question comes from Linda Ozogales from TD Securities. Please go ahead. Thank you. I'm wondering if you could help us understand kind the path to investment grade, how you might balance that with funding your growth perhaps by adding some leverage. So, and 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 of questions there. I think 1st 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% to 80% and leverage of 3 to 3.5 times. Our view is that if we're building at the investment multiple certainly in the tankage side that we are, which is 5 to 7 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 3 to 3.5 times is appropriate for the balance of businesses that we have. As you saw for the quarter, we came in below that. And what we have been the beneficiary of is EdSight's 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. So I think in short, the answer is that we do think we are trending very well towards that. The passive investment grade is visible and very real, but we will not materially or actually not material, So we will not change our target leverage from 3 to 3.5 times because that is what we view as being appropriate for our business mix. Okay. Thank you. And 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. I mean this year would be fairly representative that going into this year with a budget that I would have 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 $40,000,000 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. So if you were expecting $100,000,000 for wholesale next year, then you could probably model in something in around 27 ish million of taxes. Well, maybe I can 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. But I mean, 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 and 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. But again, from a budgeting perspective, we're not expecting the same outperformance that we have this year. Yes. I mean, we have no crystal ball on what when it comes to what the actual differential will be in the next month or the upcoming month. We do know as long as we have egress issues out of the basin and really until Line 3 starts up, the differentials are going to be wide. To what extent, it's difficult to project. And 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. And what would be the secondary factors beyond basin egress that you look towards from a planning perspective? Well, I mean, obviously, we believe that more railcars will move out of the basin within the next couple of months. We think that that will get fully ramped up out of the Heark facility there at Hardisty and then out of the Edmonton facilities and numerous other train. Also we'll see very I mean 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. And when you look at IMO 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. I mean oil sands is not a rush type of activity. But I think we spoke a little bit in that in our prepared remarks. But to us, when we develop that 1 to 2 tanks a year or let's say 500,000 to 1,000,000 barrels of tankage a year, we were using really no egress issues and we were using a $40 to $50 crude oil price. And today, with Brent trading in the 70s, once we believe we believe the egress issues will be solved with Line 3 and then TransCanada and then hopefully TMX. So we hope that all three actually move forward. And with that, we'll be able to debottleneck the production in Canada and allow for future growth. Also in the U. S, you have the 3,500,000 barrels of pipeline being built into the Permian Basin, which will debottleneck Cushing down to the Gulf Coast. So you'll really have a much cleaner view or 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. Obviously, they take a tremendous amount of time in planning and in execution. Okay, that's helpful. And then 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. So 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 SCOOPSTACK area. We do have a trucking presence there and we do have a wholesale crude oil business there. But right now, we're at a wait and see and to see what opportunities do develop in that basin. But we're pretty we're kind of in the same boat as you is 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 JPMorgan. Please go ahead. Good morning. Just want 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, but going forward. But is there any reason ahead of Line 3 why it wouldn't continue to print quarters and this is zip code for the next year or so? I mean, what could prevent this quarter from repeating? We do say we're going to have outside. We will continue to have wholesale earnings. So you would I would probably bracket it in between the second and the third quarter. I mean, we could go a little below that. We could go a little bit above that. Really, I mean, wholesale is an opportunity business. And as long as Line 3, as long as those differentials are in that $20 to $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% to 80% payout and our just with our infrastructure and what we call mid cycle wholesale, we're talking about $12 to $15 range. So anything above $12 to $15 range is above what we call our mid cycle wholesale. And Jeremy, I do want to reiterate in the prepared remarks, we did give some forward guidance for the Q4 in this business. So 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 $30,000,000 to $50,000,000 is what we're expecting for Q4 in an environment that is not dramatically different than what we saw in Q3. That's helpful. Thanks. I mean, 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's, it's very 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. So 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 $20,000,000 to $25,000,000 And we believe even last quarter at a $20 to $25 dip, we would see a 1 year payout. So if we see the large dips today, we can pay that expansion off very quickly. When you look at Moose Jaw, one of the things we've done really 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 and 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. So they're really in the big clearing markets is what the refined product is trade on. That's helpful. Thanks. And then with the wide dips, even with L3R, it seems like the case for wide dips are going to be there for some time. CBR is going to be a big part of the equation for some time. And 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. I mean, yes, we're definitely to see we're definitely looking into how we can participate to help the producers get their barrels to market. And rail is definitely one of those solutions. So 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 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 you're 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. So is the gating factor to returning more capital to shareholders effectively achieving that investment grade rating? Or 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. But our strategy now and going forward will be it is those infrastructure cash flows exclusively that will cover that dividend. So 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 in maintenance capital. If you look at consensus for the year right now, we are virtually there from an infrastructure perspective. And 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. But I wouldn't tie it at all to the passive 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 and investment grade company and we'll consider dividend increases in that context. Yes. So 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? Yes. That'd be accurate. Okay. Thank you. Thank you. Thank you. Our next question comes from Ben Fawn from BMO. Please go ahead. Okay. Thanks. Good morning. I've got a couple of follow ups on the payouts reconfiguration. Are you guys just on the dividend question, are you treating the payout outlook as a new recon as you think with the dividend? I know you mentioned infrastructure cash but you got a 70% payout versus a 60% payout. It's pretty wide gap. Sorry, Ben. I don't understand the question. I mean, our payout ratio, I think the way and maybe this will help clarify it. I mean, 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. So our current tax expense was not reflective of our cash tax expense. That will need to be trued up in Q1 of next year. So if we had stayed in our previous methodology, which was utilizing cash taxes into DCF, What the result of that would have been is a much lower payout ratio throughout this year, where we're not paying cash taxes because of the way tax installments work, but then we would have had a balloon payment in Q1 of next year, which would have caught up the taxes that were actually accrued or payable throughout the year. So 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%. So I'm not sure if that's what you're referring to. So utilizing the current tax expense methodology, our payout ratio was 70%. If we had stayed under the previous methodology, which again would have resulted in a balloon, so it would have been caught up in Q1 of next year, that would have resulted in a payout ratio of 59%. Okay. Yes, sorry, I just probably frame it the wrong way. Yes, I mean, I guess, I mean, 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? I mean, this is a temporal issue for us this year. To the extent that your budget roughly equates your performance, then the 2 of them should be the same. So again, this is a temporal difference. So 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. So 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. And so 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. And 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 kind of put that on the side, buy back stock or pay down more debt and expect? Are you at that tipping point yet? I mean, it's you can do the math. I mean, we've come out with our capital guidance, certainly for this year and I talked about the sanction projects for next year. In December, as is normal, we will provide our capital guidance for 2019. I'm not going to provide sort of forward guidance with respect to what we expect our excess cash flow to be for 2019, but I mean 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. And 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 our dips are widened in Q4. So was there any sort of unrealized derivatives realized derivatives in Q3 that would have impacted the quarter that we should be thinking about? No, no. Nothing really abnormal for the quarter that you need to think about. It was just a good 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. Hi, good morning. If I can maybe come back to the dividend question, just how you are looking at the payout. So 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. So 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? And is the payout ratio target applied to that number? No. I mean 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. So 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, I mean 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. So 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. So 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. So put differently, if wholesale actually did go to 0 or close to 0, you wouldn't be in a self funding position? Again, this is speculating. I mean, I don't think we expect wholesale to go to 0 next year by any respect. And as we sit here today, if wholesale were to go to 0 in Q4 and for 2019, that would be accurate. The asset sales right now, actually that's not entirely true. I mean asset sales plus our retained cash flows for the 1st 9 months actually provide the capital we need for 2018 2019 and then we'd have to remodel what it looks like going forward. I mean 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. And 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. So self funding is really the number one priority. Is that fair? Yes. No, it's an absolute priority. And 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 number, significant number of new tanks that you've already announced year to date. But previously, the guidance was 2% to 4% or greater, and now your latest materials are just 2% to 4%. Are you seeing 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 2% to 4% or greater, that was probably what was baked what we saw really coming in these last two quarters. So really on a long term, we are on that 2 to 4 or 1,000,000 to 2,000,000 barrels of tank build out per year. Got it. And 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? I can talk to 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 1 of our supplementary financial information deck, the quantum of that was $12,000,000 What we also had was an accrual for a potential regulatory charge, which largely offset that. So the revenue would have showed up or sorry, the contractual amendment would have showed up in revenue and then you would have also seen at our Edmonton facility an increase in OpEx of almost equal amount. And so we would view the 2 as being largely offsetting. Got it. So net net, the quarter was pretty clean of one time items? Yes. No, absolutely. I mean, I think there is a very small net positive between the two, but 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. Thank you. And thanks everyone for joining us on our 2018 Q3 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 investorrelationsgibsonenergy dotcom. Thank you. Thank you, ladies and gentlemen, for attending today's conference. This concludes the program. You may all disconnect. Good day.