Earnings Call: Q4 2016

Mar 8, 2017

Good morning, and welcome to the Gibson 2016 fourth quarter results conference call, in which management will review the financial results of the company for the three months ended December 31st, 2016. I will now turn the call over to Tamara Schock, Vice President, Finance and Corporate Affairs. Please go ahead. Thank you, Toby, and thanks everyone for joining us this morning. During today's call, forward-looking statements may be made. These statements relate to future events or the company's future performance and will use words such as expect, should, estimate, forecast, believe, or similar terms. Forward-looking statements speak only as of today's date, and undue reliance should not be placed on them as they are subject to risks and uncertainties which could cause actual results to differ materially from those described in such statements. The company assumes no obligation to update any forward-looking statements made in today's call. Any reference during today's call to non-GAAP financial measures such as EBITDA, adjusted EBITDA, pro forma adjusted EBITDA, distributable cash flow, or payout ratio is a reference to a financial measure excluding the effect of certain items that would impact comparability. For further information on forward-looking statements or non-GAAP financial measures used by Gibson, please refer to the 2016 fourth quarter management discussion and analysis issued yesterday by the company and, in particular, the sections entitled Forward-Looking Statements and Non-GAAP Financial Measures. All financial amounts mentioned in today's call are in Canadian dollars unless otherwise stated. Participating on today's call are Stewart Hanlon, President and CEO, and Sean Brown, Chief Financial Officer. The format for the call will be that Stu will provide an overview of our results, and Sean will highlight a few items regarding our capital spending, our financial position, and the debt repayment refinancing initiative, which we announced this morning. This will be followed by a question and answer session. Cam Dellar, our Manager of Investor Relations, and I will be available after the call to answer analyst modeling questions. With that, I'll turn it over to Stu. Thanks, Tammy, and good morning, everyone. While 2016 was undoubtedly a difficult year for us, the highlights of our fourth quarter of 2016 include a 50% sequential improvement in combined adjusted EBITDA, with all business segments contributing quarter-over-quarter gains. While some of these improvements were to be expected as normal seasonal gains were realized from higher winter demand within the Industrial Propane and wholesale NGL segments, more importantly, the storage and connection infrastructure we commissioned, coupled with continued improvements in our more activity-sensitive businesses, provided more meaningful support. As we noted in our third quarter report, a significant highlight in the final months of 2016 was the successful commissioning of 2.9 million barrels of storage infrastructure at Hardisty and 300,000 barrels of storage, plus related rail loading infrastructure at Edmonton. Much of this tankage was brought into service under budget, and 1.8 million barrels of storage at Hardisty was brought into service ahead of schedule, for which we successfully contracted short-term tenants. Speaking to business conditions in the fourth quarter, a rebalancing of crude market supply and demand fundamentals that began during the second half of 2016 accelerated in the final months of the year. Additionally, the outlook for a more balanced market was amplified by OPEC's announcement in November of a coordinated agreement with certain non-OPEC countries to reduce combined output by 1.8 million barrels per day. This improved outlook, combined with a 10% increase in crude prices over the third quarter, prompted further improvements in overall activity levels as our customers gained greater confidence that the worst of the cycle was over. The U.S. onshore rig count increased by more than 100 rigs over the third quarter to average 567 rigs in the fourth quarter in 2016. In Canada, despite wet weather and road access issues encountered by our customers early in the quarter, we saw the active rig count increase 7% in the fourth quarter over the same period last year. Additionally, many of our customers announced their 2017 capital budgets during the fourth quarter of 2016, which in aggregate reflected an approximate 40%-50% increase in conventional spending, the first annual increase since 2014. On the oil sands side, two discrete but particularly important announcements were made in the fourth quarter regarding the commissioning of two brownfield oil sands projects, first with Cenovus' Christina Lake Phase G, and secondly with Canadian Natural's Kirby North project, representing combined production capacity of 90,000 barrels of bitumen per day. The sanctioning of these projects reflect the earliest indications that Canadian oil sands resources can once again begin to successfully compete for capital in the current crude price environment. While I'm pleased to finally see healthier market conditions manifest themselves, we will remain cautious as we progress through 2017, being mindful of potential bumps in the road as this recovery takes shape. While prioritizing the efficient execution of our infrastructure growth projects currently under development, we will continue to carefully watch business conditions, deploy spare capacity within the logistics segment as appropriate, and look for the potential to slowly recover the associated pricing to pre-downturn levels. A highlight for us subsequent to the end of the year was reaching a definitive agreement with Superior for the sale of our Industrial Propane segment. We are pleased with the outcome of this extended sales process and believe that the transaction we announced on February 13th has surfaced maximum value for our shareholders while enabling near-term receipt of non-refundable cash proceeds and removing closing risks. On March 1st, we announced the receipt of CAD 412 million in gross proceeds, which will be used to strengthen our balance sheet and enable us to support our ongoing infrastructure-weighted organic growth initiatives. Later on in the call, Sean will discuss our plans in greater detail with respect to planned use of proceeds, as well as the debt refinancing we launched this morning, which will provide the company with significant benefits. I will now discuss fourth quarter performance highlights of our individual segments in more detail. Our infrastructure segment posted record quarterly results with segment profit of CAD 56 million, which was supported by storage capacity and related infrastructure we commissioned at Hardisty and Edmonton during the third and fourth quarters of 2016. The commissioning of this new infrastructure will enable growth to continue as we progress through 2017. Because these projects were commissioned in various stages beginning in late Q3 and into Q4, we will see the more fulsome run rate EBITDA capability of these assets as we progress into 2017. Initially in the first quarter, as the first full quarter contributions are realized, and then again in the second half of the year, as certain interim contracts are replaced with the originally programmed long-term customers. Considering this large tranche of tanks we placed into service and the commissioning schedule for the two 400,000-barrel tanks under development at our Edmonton terminal, we will continue to see growth within our infrastructure segment into the 2018 timeframe. Looking further into the future, we continue to make progress with commercial development opportunities that, with success, will enable us to add additional storage and connection infrastructure for our customers. The Brownfield oil sands project sanctioning I mentioned earlier is a good example of the potential new volumes, and we expect to see more of this type of development announced as the year progresses. Building on ongoing commercial discussions and in anticipation of success with our customer contracting process, we are moving forward with the front-end engineering and initial civil work to develop an array of up to four tanks on the east side of our Hardisty terminal. These new tanks represent the next tranche of continued expansion of our infrastructure footprint. Implementing the front-end work today will allow us to place them in service in early 2019. Similar to previous new tank construction projects, full development of these tanks will be supported by long-term fixed-fee contracts. Additionally, we continue to pursue smaller organic infrastructure projects within the WCSB that offer fixed-fee cash flow profiles. With unmatched connectivity and a competitive service offering at Hardisty and an increasingly similar offering at Edmonton, Gibson's is well-positioned to capture these opportunities and convert them into additional visible cash flow growth. Segment profit in our logistics business improved in the fourth quarter to CAD 15 million, which represents a 22% growth over the third quarter. Crude and other barrels hauled in the fourth quarter were relatively stable over the third quarter, with strong Canadian growth offset by declines in certain U.S. geographies where drilling and completion activities and crude production levels continued to lag or where pricing conditions did not offer an appropriate return on capital. Importantly, we achieved small yet consistent revenue gains in each of our main business lines. This, when coupled with steady gross margin performance and continued overhead cost reductions, allowed us to deliver a second sequential quarterly improvement in financial results. Excuse me. The recovering industry activity levels in the latter half of 2016 have continued to accelerate in 2017, with rig counts approaching two-year highs in both the U.S. and Western Canada. Despite these tailwinds, pricing competition remains intense in most operating areas. While we expect improvements in both volumes and pricing as we progress through 2017, we are cognizant of the potential for retrenchment in activity levels if increasing North American supply or non-compliance with OPEC delays the global price recovery. Given this point of view, while we expect 2017 to deliver materially better business conditions for our logistics segment than 2016, we remain cautiously optimistic as we commence the year. Our wholesale business delivered a material improvement in segment profit in the fourth quarter as cold weather later in the quarter and a strong downstream customer demand enabled us to distribute NGL volumes, which had previously been purchased at lower prices. Additionally, sales of refined products in the fourth quarter increased 12% over the same period in 2015, driven by strong demand for oil-based drilling fluids that we manufacture at our Moose Jaw facility. Our overall fourth quarter performance did not include meaningful contribution from our crude oil marketing activities, which continued to be hampered by continued narrow heavy oil price differentials. Similar to the approach taken throughout much of 2016, our wholesale crude team was focused on an underlying strategy to maintain internal volumes in order to maximize asset utilization and throughput rates within our business segments. On the cost side, we continued to execute on our strategy of reducing our leased rail car tally as we right-size our fleet given overall market conditions. As a result, we achieved annual run rate cost savings of approximately CAD 4 million exiting 2016 and expect another CAD 3 million in annualized savings for further fleet reductions planned in 2017. Similar to our logistics segment, our outlook for this segment is cautiously optimistic as we progress into 2017 with the anticipation for more normal seasonal weather patterns and an expectation for improved crude oil marketing activities and opportunities in the latter half of the year as growing oil sands supply meets constrained export pipeline capacity. Additionally, we continue to expect improvements in the demand and pricing dynamics for our drilling fluids, which would provide further cash flow gains within refined product sales. Segment profit of CAD 13 million in discontinued operations, essentially the Industrial Propane segment, was down approximately 10% over the same period last year, primarily due to lower oil field demand in Western Canada. With reasonably similar weather influences in the fourth quarter as compared to last year, oil field volumes were down 15% year-over-year. Now, that being said, I think it's important to note that this year-over-year deficit has narrowed from early in 2016, indicating a trend towards a healthier overall oil field customer base. The first quarter of 2017 continues to illustrate this trend, and we expect this business segment to realize relatively strong financial results. As we highlighted in our conference call following the announcement of the divestiture of this business, the underlying arrangement enabled us to retain cash flow generated until the nonrefundable cash proceeds were received, which occurred on March 1st. After that date, this benefit transfers to Superior. To summarize, I am pleased with our fourth quarter results, which for the first time in the past year, are extremely close to those achieved in the same period in 2015, and the significant accomplishments our team achieved with the commissioning of a significant expansion of our storage capacity at our key terminals. After managing through the most dramatic downturn in the energy industry, certainly in my memory, I'm pleased to say that our expectation is for brighter days ahead. Now I'll pass it over to Sean, who will discuss our capital expenditures, financial position, and the repayment and refinancing initiatives we launched this morning. Sean? Thanks, Stu. To start, I'd like to highlight Gibson's capital expenditures in the fourth quarter of CAD 43 million, CAD 35 million of which was spent on growth capital and CAD 8 million of which was spent on upgrade and replacement capital. Total 2016 growth capital expenditures of CAD 204 million were below our earlier spending guidance of roughly CAD 225 million. Though we have continued to complete many of our growth capital projects under budget, the largest reduction in 2016 expenditures was related to capital spend timing that pushed approximately CAD 15 million of originally planned 2016 spending into the early months of 2017. Additionally, total 2016 operating and replacement capital expenditures of CAD 29 million were below earlier guidance, largely as a result of supplier cost savings and low utilization of certain rolling stock within our logistics segment. As a reminder, in December of last year, we announced growth capital expenditure guidance for 2017 in the range of CAD 150 million-CAD 250 million. The low end consists primarily of infrastructure projects commercially secured and currently underway, including the twin 400,000-barrel tanks plus pipeline infrastructure we're constructing at our Edmonton terminal. The high end of the capital expenditure guidance range contemplates an additional CAD 100 million for projects that we are currently negotiating and includes a certain amount of growth capital associated with the front-end engineering for the new Hardisty tanks that Stu mentioned earlier. We currently have a backlog of growth projects that are approved and underway for 2017 and 2018 that totals approximately CAD 200 million. With the CAD 412 million of proceeds we received on March 1st from the successful sale of our Industrial Propane division and the debt repayment refinancing initiatives announced this morning, we are fully financed for all these currently approved and underway growth capital expenditures. Incremental capital spending in 2017 or 2018 for projects that are not approved or commercially secured will be financed in a fashion neutral to our capital structure and will likely include some debt and some component of equity. We continue to have minimal requirements to invest growth capital within our logistics segment, given the amount of readily available spare capacity we have on hand. We will look to deploy this spare capacity to service customers in those circumstances where contracted pricing offers an acceptable return on capital. With this in mind, we also expect upgrade and replacement capital spending requirements to remain muted in 2017. Furthermore, the divestiture of Industrial Propane will remove approximately CAD 5 million of annual upgrade and replacement capital spending requirements, resulting in an estimate of CAD 35 million earmarked to this category in 2017. Looking at our balance sheet at the end of 2016 and adjusting to account for the receipt of the CAD 412 million received from the sale of our Industrial Propane division, we are comfortable that our leverage and liquidity profile will support our 2017 capital expenditures and dividend plans. In this regard, our total net debt to trailing 12-month pro forma adjusted EBITDA would have been 3.3 times after adjusting for the Industrial Propane proceeds. At the end of the fourth quarter, we had CAD 60 million of cash and remained undrawn on our CAD 500 million revolving credit facility. As mentioned earlier in the call, the company also launched a significant debt repayment refinancing exercise this morning. As per the press release, we intend to utilize a portion of the proceeds from the sale of our Industrial Propane business, along with the net proceeds from a new offering to repay certain indebtedness of the company and refinance certain long-term indebtedness. This includes a tender offer for our higher coupon Canadian dollar high-yield notes and a portion of our US dollar notes. As well, this includes the issuance of a minimum of CAD 300 million of new senior unsecured notes. The net effect of the repayment refinancing initiative is to strengthen our balance sheet through a reduction of overall term debt of over CAD 300 million, stagger and extend the company's debt maturity profile, and provide for significant annual interest savings on our term debt expected to be in the range of CAD 25 million-CAD 30 million. In addition, we also amended our revolving credit facility, which, among other things, extend the maturity by an additional 2 years. In summary, at the conclusion of this process, we feel the company would be conservatively capitalized and well-positioned from a financial perspective to pursue our current business plan while having the ability to capture incremental growth opportunities as attractive prospects arise during the year. The company declared dividends of CAD 182 million in the 12 months ended December 31st, 2016. Our payout ratio trended higher as we progressed through the first three quarters of 2016, as cash flow from certain of our activity-sensitive businesses tracked below prior year levels. As evidenced by our fourth quarter performance, these business lines have stabilized, and when looking at the visible contracted growth of our infrastructure segment, coupled with the interest cost savings from the refinancing initiatives we launched this morning, we remain comfortable with the current level of our dividend and expect sequential improvement in our dividend payout ratio through 2017 and into 2018. That being said, our board of directors, in agreement with management, have decided to temporarily pause the dividend increase we typically announce with the year-end results in the first quarter to further accelerate the recovery of our payout ratio. Looking into 2018, we are of the opinion that dividend growth is likely to return given our forecast and cash flow growth that is underpinned by commercially secured capital growth within our infrastructure segment. That concludes my comments, so I'll turn it back to Stu. Thanks, Sean. To conclude, we are pleased with the continued improvement of our quarterly operating and financial performance. The sale of the Industrial Propane division marks a material turning point in our evolution towards becoming a more streamlined, integrated midstream energy company. We look forward to our growing momentum in this transformation. Now, history suggests that the shape and pace of recovery in the energy sector rarely follows a smooth line. It often encounters bumps along the way. Accordingly, we will remain flexible and attentive to the business conditions as the year unfolds, maintaining a high degree of discipline with capital allocation and operating costs. That concludes our prepared comments. Operator, at this time, we'd like to open the call for questions. Thank you. Please press star one at this time if you have a question. The first question is from a participant. Please state your full name and your company and then proceed with your question. Your line is now open. Hello? Hello. Oh, it's Linda Ezergailis from TD Securities, I guess. Good morning, Linda. Good morning. I wasn't sure if it was me or not because I did state my name. Congratulations on a recovering quarter. Thanks. Maybe we can just start with your Hardisty terminal tank initiatives. Can you comment on when you think you might get contracts and what the nature of the customers are that you are talking to or expect to talk to? Well, we are obviously in conversation with several potential customers for those tanks, I guess. The nature of the customers would be very similar to the customers which we have typically contracted for tankage with. Obviously larger scale E&P customers that have large production in the WCSB. With respect to timing, we are obviously well enough advanced with several customers that we are confident enough to start putting in place front-end engineering. As we move into the summer months, we will start the initial civil work. During that timeframe, we would expect that we'll make continued progress with respect to contracting. It would be premature for me to sort of say, expect it in the second quarter kind of thing. We are confident that we will get there given the robust nature of the demand that we see for tankage at Hardisty. In terms of timing of the actual contracting process, I'd prefer not to be too specific about that. We are starting the front-end engineering and the civil work with an anticipation that we'll need to place these tanks into service in 2019, and that's based on the conversations we're having with several customers. Okay, thank you. Just moving on to your financing strategy and how you think of capital allocation. Can you comment on what sort of duration or range of durations you're contemplating for your private placement? Would it be about five years? What sort of range of coupons you think would be in the mix? We're in the market today, and I'm not sure that I'm allowed to tell the market exactly what to give us. I would suggest that we certainly expect pricing for the offering to be similar to recent deals that have been made by companies in the high-yield market. The Canadian market remains very, very strong, and so we expect a good result. With respect to tenor, typically as we look to stagger the maturity profile of our debt, would be wanting to do a note that would be in excess of five years. I'd probably guide towards seven. Okay. That's helpful. Maybe just further to that, when you look to 2018 and contemplate the possibility of a dividend increase then or not, what are the factors that you think of when making that decision? Can you comment on your updated thoughts on what might be an appropriate payout ratio range? How you might think of a growth trajectory and continuing that versus just discrete decisions year-over-year? Any other factors. Of course. Thanks for that. I think as we continue the evolution of the business, as I talked about by spending the vast majority, if not all of our growth capital on our infrastructure segment. As we go into the future, the growth in that infrastructure segment gives us a pretty high degree of confidence that we would be able to contemplate a dividend increase in the 2018 timeframe. Thereafter, because we can point to infrastructure growth, and give some visibility to future growth within that infrastructure, I would suggest that the market should expect that a percentage payout of our infrastructure segment earnings would be the primary factor in terms of the dividend sustainability and growth. I think on a go-forward basis, that allows us then to be a lot more regimented with respect to dividend growth as opposed to making discrete decisions as you know we have been doing in the past. Okay. That's helpful. Thank you. Thanks, Linda. Thank you. The next question is from a participant. Please state your full name and your company, and then proceed with your question. Your line is now open. Will this be me? I guess this is you. Yes, that was you. All right. Robert Hope, Scotiabank. Thank you for taking my questions. Just want to circle back on some of the comments that Sean made. Just regarding the CAD 100 million of projects that you're currently negotiating, would that be in excess of the Hardisty East expansion? And if so, what are the type of projects you're looking for there? Thanks for that. No, that would be inclusive of the new tanks that Stewart talked about, the additional 100 million. Would that just be for 2017, or would that be a total amount? That'd be a total amount. I mean, the CAD 100 million, we'd come out with growth capital guidance of CAD 150 million-CAD 250 million. As I talked about, very comfortable with the CAD 150 million. To the extent we start significant construction on those new tanks, that would start eating into that CAD 100 million for sure. All right. That's helpful. That would be the CAD 100 million delta between the CAD 150 million and the CAD 250 million, right? Yes. Just for further clarity. Okay, great. With the refinancing as well as the capital in the door from the Industrial Propane business, can you give any color on what your thoughts are on M&A versus organic expenditures at this juncture? Yeah, I don't think our thought process has changed materially over what we've been talking about for the last year or so, Rob. We have a very robust organic growth pipeline of projects that we can execute on. The M&A market is quite robust with respect to logistics and companies that would fit into our logistics segment. As Sean pointed out, we have a tremendous amount of spare capacity within that segment and don't feel the need to spend any significant amount of growth capital in that segment. The M&A market in terms of infrastructure, both in Canada and in the United States, remains very hotly contested and valuations remain very, very high. As such, I think our better tack at this point is to focus on the organic growth projects that we have in front of us. That's helpful. Thank you. Thank you. Thank you. The next question is from Robert Kwan from RBC Capital Markets. Please go ahead, your line is now open. Great. Good morning. Maybe if I can just come back to the dividend. Stu, you talked about paying out of infrastructure. Is that really going to be the way we should think about? Is it 100% of the infrastructure cash flows and then you can let the rest of the activity businesses open the payout ratio? Or would you like to trend to something even lower than that to open up the free cash flow profile? We haven't definitively landed on an actual percentage, Robert. I think that's a strategy that's sort of unfolding as we speak. Certainly you can expect that a very high percentage of the cash flow generated by our infrastructure segment would underpin the dividend. As we get into the 2018 timeframe on a run rate basis, the dividend or, sorry, the infrastructure cash flow generation basically underpins our dividend as well as the interest charges on our long-term debt. Essentially all of our capital charges are covered by infrastructure. On a go-forward basis, I think that's the capital structure and the dividend payout ratio that we would probably be comfortable with allowing the more activity-sensitive parts of our business, the logistics and wholesale parts of our business to provide free cash flow, which we could cycle back into growth for infrastructure. Got it. If I can then maybe just ask about logistics here. You guys have done, between logistics and wholesale, a great job reducing the OpEx. I guess that if I look at the gross margin trends, you were a little flattish versus Q3. The OpEx gains really drove the EBITDA or the segment profit for the quarter. I'm just wondering, how do you see those trends both on gross margin and then OpEx going forward? Is there a timing? Is it lagging where you've taken the costs out, but as things start to improve, you got to put more cost back into the business? How should we think about that going forward? Yeah, I wouldn't expect a lot of cost pressure on our operating margins within logistics. We have worked very hard to take a lot of costs out of the segment. A lot of those cost reductions are permanent in nature. We've consolidated our operations into larger facilities, closed some operating areas, deployed a lot more technology to permanently reduce the costs. I would expect margin improvement as we go into the latter parts of 2017 would be more in terms of seeing improved activity levels, seeing excess demand soaking up excess supply, and hopefully seeing a return to more normal pricing levels. I think that's where our operating margins start to improve as we go forward. I wouldn't expect a tremendous amount of grind in terms of margin on the cost side. I think we've done a pretty good job there. Okay. To be clear, as volume and pricing improve, that's obviously going to improve gross margin and almost dollar for dollar that should drop down to the bottom line? That's our expectation, yes. Okay. Maybe just to finish coming back to the advance work you're doing for those potential new tanks at Hardisty. Obviously, you don't want to get into the customers, and I'm just wondering, what's the driver of those discussions? Is it new oil sands volumes where customers are trying to get out in front of that? Is it KXL or Line 3 related? Or is it rail related or something else? Yeah, I think it's probably a combination thereof, but the primary driver would just be volume growth within the WCSB. I did mention two sort of discrete brownfield projects that have recently been sanctioned. That is an indication we see of growing volume within the WCSB. We also see improved efficiencies with drilling and completion activities. We see growing volumes coming out of the Viking area, as an example, and a return to sort of more normal operations within some of the conventional basins. Absent TMX expansion, which is still some years off, all those volumes drain down into Hardisty before they go into the export cycle. Be that in the export pipeline systems and/or be that later on this year, we would expect to see an uptick in crude by rail. That really makes Hardisty kind of the focal point for tankage for the WCSB, at least for the foreseeable future. Understood. Thank you very much. Thank you. Thank you. The next question is from Robert Catellier from CIBC Capital Markets. Please go ahead. Your line is now open. Good morning. You've gotten to most of my questions, but I just wanted a little clarification on the cost side here. With the progress you've made in 2016, how much of that almost CAD 40 million of cost savings that you were targeting has been realized, and what benefit is left to be realized in 2017? Well, I think, probably using the 80/20 rule is a good approach there, Robert. The CAD 40 million was a run rate. We would expect that the vast majority of that CAD 40 million will be manifested in our operations in 2017. Within that component, however, within that CAD 40 million, however, there was some variable cost that we will see come back into the system, as our activity levels ramp up. Off the top of my head, I would apply the 80/20 rule. 80% of that cost reduction is permanent and will be achieved on a run rate basis in 2017, and you could see maybe 20% of that cost creep back in. Okay. What are the practical implications of assuming single shipper status at both Hardisty and maybe you could speak to both the additional margin opportunities there and any incremental risk? If you're referring to single shipper status on our pipeline systems at Hardisty, I think practically that improves the efficiency of our operations and allows our wholesale group to be more effective in terms of attracting incremental volumes to those systems. That's the primary driver of the decision to go single shipper. Most of the gathering system pipelines in Western Canada are of that nature. It's really just a vehicle for us to simplify our operations and allow us to be a lot more efficient in terms of our wholesale group attracting volumes to those systems. To be clear, within our Hardisty and Edmonton terminals, those are all multi-shipper facilities. We do have some exclusive tankers that we utilize at Edmonton for our wholesale group. A myriad of shippers have status within both Hardisty and Edmonton, so the only place we are a single shipper would be on our pipeline systems. Yeah, that's understood. The final question here, I just want a little bit more color on the financing strategy here. On the one hand, I could see why you'd want to redeem some of the notes that are outstanding and extend the term. At the same time, it looks like you're actually shrinking the balance sheet by a reasonable amount in light of some bullish comments with respect to potentially new growth projects associated with tanks at Hardisty. Can you help us square that a bit and what ultimately would be the next financing steps if you're successful with some of those tanks? I just want to be clear that there's not a message here that growth is slowing, but rather just restructuring the balance sheet and we'll add to it down the road. Yeah. Maybe I'll take a stab at that and then Sean, you can fill in the blanks. Yeah, I think we are sort of right-sizing the balance sheet subsequent to the sale of the Industrial Propane segment. We wanted to make sure that from a total leverage perspective, with respect to net debt-to-EBITDA covenant ratios and that sort of thing, that we were in line. We will fortify the balance sheet somewhat with this refinancing opportunity. With the successful deal which we expect today, we will be in a position where our full 2017 and 2018 growth projects are essentially in a financeable situation. As Sean alluded to, assuming success with the contracting strategy around additional growth beyond the sort of the CAD 150 million that we talked about today, we'll look then to appropriately finance that with an appropriate mix of debt and equity to make sure that our capital structure remains credit positive. Sean, I don't know if you've got anything to add there. Yeah. No, I think all I would add is, I think actually there is no messaging here around a slowing of the growth at all. Actually, I'd say it's quite the inverse, almost. The one thing that I would note is that we do have CAD 412 million in proceeds right now, but we also have a CAD 500 million undrawn revolver. When you've got that much liquidity moving forward, the question is, what's the optimal capital structure and how do you reduce the cost of carry? What we've elected to do is pay down some of our higher coupon debt. As Stu said, strengthen the balance sheet to keep that on there for some of the capital and then longer term, to utilize some of that undrawn revolver to fund some of that capital just to reduce the cost of carry on the CAD 412 million that we have right now. Okay. Does the deal contemplated in the final outcome of this restructuring change your covenant structure become more covenant light, or is there any material change to covenants that you foresee? No. With the amendments, there is the actual headline covenants, longer term have changed. The final covenant ends up at 4.0 times as opposed to 3.5 times, but that was through sort of the negotiation of the banks that would have happened in the natural course, but the covenants have not changed materially other than that. Okay, thanks for those answers. That's it for me. Thank you. The next question is from Dirk Lever from AltaCorp Capital. Please go ahead. Your line is now open. Thank you very much. Good morning, gentlemen. Good morning. If you could, on the Hardisty, on those four tanks, are you looking at 400-500 in size? That remains sort of a subject of discussion and negotiation with the customers that we're talking to. Obviously, the ultimate size would be what the customer, at the end of the day, needs. Utilizing a pretty valuable land footprint, I wouldn't want to build anything probably smaller than a 400, but. Right. 400, 500, that's kind of the range we're talking about, yeah. Okay. You mentioned on the wholesale side that you still saw weakness on the crude marketing side. Are you looking at potentially a second half recovery then? I'm just trying to, I guess, I couldn't write fast enough, Stu. That's our current expectation. The reason for sort of that level of at least cautious optimism is we do see growing heavy oil volumes as we go into the latter half of this year, and that will be constrained by available pipeline capacity downstream of Hardisty. Right. We're starting today to see actual real apportionment, not just air barrels. Anytime you see sort of additional stresses within the marketing delivery systems within North America, you tend to see more volatility with crude oil price differentials. Volatility within those differentials allows us to use the services that we have to help our customers, but it also provides us with opportunities to capture greater margins. Right. We'd expect that in the second half of this year. Certainly, we're not seeing it thus far in the first quarter and wouldn't expect it really in a material way in the second quarter. We're cautiously optimistic about the second half. Terrific segue to the next question, which is, maybe you can give us a little bit of color of what's happening on the rail side. Like we have seen apportionment, rail shipments are up. Maybe you can give us a little color on how busy you've been and what it looks like going forward here. We're certainly still not anywhere near capacity at Hardisty. As you know, and to remind everyone, we are supported by 100% take or pay obligations for that facility. I would say that while we're starting to feel a lot more inbound in terms of that available capacity, we haven't seen a tremendous uptick in crude by rail volumes coming out of the Hardisty area as yet. Okay, it's just people prepping themselves for the eventuality down the road. I believe so, yeah. Thank you, Stu. Thanks, Dirk. Thank you. The next question is from a participant. Please state your full name and your company, and then proceed with your question. Your line is now open. Hello, this is Elias Foscolos from Industrial Alliance Securities. Good morning. Two questions. First one is, we saw some very strong volume growth in Edmonton Terminal along with Hardisty. I believe you expect to see Hardisty continuing. Would Edmonton sort of tail off for the time being? Yeah. Volumetric growth or volumes at Edmonton are somewhat less predictable than volumes at Hardisty. At Edmonton, we do handle a tremendous amount of refined product for a specific customer, and that particular contract is not volumetrically weighted, and so we do see fairly significant ebbing and flowing of volumes at Edmonton. That doesn't really impact the overall economic performance of the facility. With respect to Hardisty, yes, I would expect that as we continue to see volumetric growth within the WCSB, we will continue to see volumetric growth at Hardisty. As I'd mentioned in response to an earlier question, in the absence of a West Coast takeaway and/or absent a significant pickup in crude by rail for facilities other than at our Hardisty terminal, virtually all barrels need to come to Hardisty in order to get to export market. You'd almost be able to say, as the WCSB grows, so do our volumes at Hardisty. Okay, just following through on one more Hardisty question. Clearly, with the tanks that have come into service ahead of schedule, you've been able to utilize them and bring in revenue. Is the philosophy to only add additional tanks if you can get take or pay contracts, given that you have been, I guess, successful in non-take or pay contracts in terms of bringing in revenue? Yeah, we currently don't have a tremendous appetite for building tankage on spec. We would move forward with the sanctioning of additional tankage builds when we have successfully completed long-term contracts for them. Now, having said that, in the last big tranche of tanks that we did bring into service, we had one tank which was not contracted, which we utilized or which we need to utilize for basically working stock for moving customers into and out of a spare tank as we go into API 653 inspections every 10 years. We were able to contract for that tank, and so we currently don't have a spare tank. I would expect that as we move forward into the next tranche of tankage, we'll have at least one spare that we will require just for our working stock needs. Good. Well, thank you very much. That's it for me. Thank you. Once again, please press star one at this time if you have a question. There are no further questions. I would now like to hand the call back to Ms. Tammy Price. Please go ahead. Thanks again for your interest in Gibson. As mentioned earlier, Cam and I are available after the call if there are any more questions. Have a good day, everyone. Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.