Good afternoon, ladies and gentlemen. My name is Julie, and I will be your conference operator today. I would like to welcome everyone to the Tidewater Midstream and Infrastructure First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, you may press the pound key. With that, I would now like to turn the call over to Joel Vohra, CFO. Please go ahead.
Thanks, Julie. Good morning, everyone. On the call with me today, as usual, is Joel MacLeod, Tidewater's President and CEO. Before passing the call over to Joel for a review of the quarterly highlights, I'd like to remind you that some of the comments made today are forward-looking and based on expectations, estimates, and judgments. Forward-looking statements we express or imply are subject to risk and uncertainties, and actual results may differ from expectations. Further, some information provided are non-GAAP measures. To know more about forward-looking statements and non-GAAP measures, please refer to our financial reports, and MD&A on SEDAR. With that, I'll pass the call over to Joel MacLeod for a review of the quarterly highlights.
Thanks, Joel. Good morning, everyone. Thanks for joining our Q1 2019 conference call. Tough act to follow with our previous quarter being a record quarter in our Q4 2018. Nice to deliver what we would consider an in-line. We've seen some comments this morning exceeding expectations. We would consider it an in-line quarter, CAD 22 million of EBITDA in Q1 of 2019. Our focus remains our two large capital projects, where we will get into an update here on both projects, remain confident in our ability to deliver 50% plus EBITDA cash flow growth over the next four to six months as our large two capital projects come online here in the next four or so months.
Also great to expand our Pipestone Gas Storage Facility in Q1 with a 30-inch, 24-kilometer pipeline being completed. It connects our Pipestone gas plant and also connects into Alliance and TransCanada to offer some great egress optionality for our customers and producers in the area. The storage facility on the capacity we have today is fully contracted with multiple investment-grade counterparties within an average contract life of six years. Significant expansion opportunities to our Pipestone gas storage asset exist. The reservoir continues to outperform our expectations. We also have more customer support than ever. Our focus over the next 60 days is our funding plan for Pipestone phase 2, in addition to our Pipestone liquids hub.
We continue to have several options to fund the next three to CAD 400-plus million of capital, where our preference today is not to issue equity at these levels and not to take on any more leverage. Our credit syndicate remains very supportive, and we wish to thank them for their support, where we increased our credit capacity to approximately CAD 475 million when we take into account our CAD 125 million unsecured piece in addition to the expanded CAD 350 million credit facility. We strongly feel our two large capital projects are two of the top contracted energy infrastructure projects in Western Canada and our TransAlta pipeline and our Pipestone Montney sour deep cut plant. This continues to be reiterated through interest from various large private equity firms and industry peers around being involved in these large-scale contracted infrastructure projects. Maybe a quick update on our Pipestone plant.
Our Pipestone Montney deep cut sour gas plant construction continues to go extremely well with all pipelines complete, hydro-tested, all major modules complete. We drilled what looks to be, and completed, what looks to be potentially one of the longest AGI wells in Canadian history, and tests went extremely well. We remain confident we will be on time and on budget with our Pipestone Montney deep cut plant. Pipestone remains one of the most active areas in Western Canada, if not the most active area in Western Canada, with a total of 56 wells being spudded in the area in 2019 alone. We continue to see a lot of activity in the area and a lot of anticipation for our plant coming online, where it is fully contracted.
We have more customer support than ever in Pipestone phase 2 and the liquids hub and are working through a funding plan over the next couple of months, which would currently not include equity. Contract term on future expansions is also looking better than anticipated. 10-year take-or-pays may be possible. Don't want to set guarantee that expectation, but getting more and more interest for longer tenure on our contracts and it would be a huge step for Tidewater in lowering our cost of capital. Again, we want to thank our customers and Cal Pipestone and others who wish to remain nameless for their support as it means a lot to us. Maybe into the one negative piece of our release or one negative piece of our quarter here this morning relates to our TransAlta pipeline, where we do expect to see a cost increase of approximately 10%.
We take this very seriously as a team, but also want the market to be aware that it is a result of us accelerating our schedule, where we expect to be complete in approximately 30 days or less. This will be approximately four months ahead of schedule. The cost increase can be attributed to pre-spend on expansion capital, as it is feeling like we will be working with our partner in TransAlta to expand upward from the base 130 million cubic feet a day into 2020 and 2021 and into the future. A big thank you to our partner in TransAlta, who have been incredible partners, and we look forward to growing our partnership with them into the future. We plan to be flowing gas earlier than anticipated, but do not expect to be flowing a full 130 million cubic feet a day for every day in Q3.
Our take-or-pay contract commences in Q4. We are eager to work through expansion plans to attempt to bring that up to as much as 400 million cubic feet a day of gas through the 20-inch pipeline, where expansions generate very attractive returns. Moving quickly into our gas storage business. We had some few comments there earlier on, but it continues to outperform. We continue to see significant growth on that front as well, and it does act as a natural hedge in what is a tough natural gas environment. Volumes and related tolls continue to set records. Great to finalize storage agreements with investment-grade counterparties.
Some of them took a few years to get in place, but incredible job by our team. We continue to focus on strengthening our customers and contracts across Tidewater as a whole. As we discussed on our Q4 conference call at our Brazeau River facility, we had a significant win and fully contracted our fractionation facility for the first time in our history. We did sign two new large investment-grade counterparties. Volumes started in April as the NGL contract season starts April 1. Great to see record throughput through our frac in April and continuing on. With that, we do continue to explore further expansions of fractionation capacity, potentially at other locations as well.
To wrap up, just want to reiterate, we remain confident in our ability to execute on our plan, where EBITDA cash flow/cash flow is expected to increase by greater than 50% in the next four to six months once the Pipestone gas plant and Pioneer Pipeline are online. A big thanks to all our customers, shareholders, all stakeholders, including communities where we operate. Our staff for all their hard work and support in Q1. I'll pass it back to Mr. Vohra, and he can walk you through some of the details around the financial side of our Q1.
Thanks, Joel. I'll run through a quick financial overview of the quarter. Then we can open it up to questions. We'll start on the income statement. On the revenue side of things, a fairly significant increase to revenue, about a 30% increase, not unexpected as we had the first real full quarter of the crude infrastructure and marketing business. The higher value commodity there will increase revenue, but lower margins overall than what we'd see in the gas processing business. We saw the same thing in operating expenses, which would include related marketing cost of sales and expenses. You can attribute both those revenue and OpEx increases to the marketing side and the crude infrastructure and marketing side of the business. Overall, operating margin, again, not unexpected.
Slight decrease as compared to prior quarters, given there's a bigger contribution to revenue and OpEx related to that crude side of the business. Want to highlight again, we do lock in margins and hedge going forward into 12 and 24 months. When we see fluctuations on the marketing side of the business, especially the volatility we saw in the fourth quarter and the closing of differentials, crude differentials in the first quarter, we do see an impact to hedging gains and losses, which shows up on our income statement in that other income portion of the income statement. To normalize your operating margin, you'd take that realized gain and put it back up into revenue. We'd see an operating margin around 20%, which would be what we'd expect likely going forward in that 18%-20% margin range.
EBITDA margin, same story there. Consistent with what we would expect. Has come down a little bit compared to other quarters, but again, related to that big increase in revenue and OpEx related to the marketing side of the business. Nothing out of the ordinary there. Then I think Joel touched on it. We'd consider the quarter right around that CAD 80 million run rate that we talked about, CAD 20 million a quarter, right in line with expectations. No big surprises there on the base fee for service or marketing side of the business. Payout ratio continues to be conservative, CAD 16 million in distributable cash flow with about a 20% payout ratio. Again, consistent with what we'd expect to see going forward.
Then on the capital side, definitely the most intensive quarter we've probably had as far as executing projects with essentially three large projects and all our pipelines going in the ground and significant progress on the Pipestone plant. Definitely a very active quarter on the capital side. I think overall, happy with the execution, and moving quickly forward to completion on those capital projects. On the debt side, not a large change to drawn debt, given the monetization of the cogeneration power facility at Pipestone, and also TransAlta's continued contribution on the pipeline in their 50% working interest. I think those are sort of the main pieces to touch on. Obviously, there's the introduction this quarter of the IFRS 15 and 16 changes, which happy to answer any questions on. With that, I think we'll open it up to the group for questions.
We will now begin the question and answer session. If you have a question, please press star, then the number 1 on your telephone keypad. If you wish to be removed from the queue, please press the pound key. Once again, that's star followed by the number 1 to ask a question. Robert Hope from Scotiabank, please go ahead. Your line is open.
Morning, everyone. Or I guess afternoon. I want to start off on the Pipestone expansions. Joel, I believe in your prepared remarks, you mentioned a financing plan in the next 60 days. Would that line up to when you are looking to sanction this thing?
Yep. Hey, Rob. Joel MacLeod here. Obviously we need a funding plan with our balance sheet where it's at. Good news is, I think we've got lots of options in front of us and more and more interest as we get closer to completion on Pipestone phase one. Producer confidence continues to increase, and then even activity around Pipestone, Rob, has really picked up. To see 56 wells spud here, only end of May, a lot of activity in the area.
Is the limiting factor right now contracts or funding?
Today would be funding, but we're confident we have options. We just need to pin down the best option for our shareholders and need a little time to do that.
Okay. Nitty-gritty on IFRS 16, we'll hop back in the queue. Should we assume kind of 2.6 a quarter moving forward? Is your EBITDA guidance that you reiterated prior to those adjustments, if you will?
That'd be prior to those adjustments, Rob. That'd be what you can expect going forward. I think that goes back to the comment where this is sort of an inline quarter, given that impact from IFRS 15 and 16. That'd be what you can expect going forward.
All right. Thank you.
Thanks, Rob.
Robert Catellier from CIBC Capital Markets, please go ahead.
Hey, good afternoon, guys. I just wanted to talk about some of the funding options you might be addressing here. Today's announcement obviously had a preferred equity provider or a preferred equity structure. I want to know how you're evaluating future partners. Are you looking for somebody that can bring something to the table on an operating basis, or is it simply a cost to capital shootout?
I'd say, Rob, it's a cost of capital shootout, in addition to the right partner. We're confident in our ability to operate, build. Operatorship definitely something we're not focused on, and confident in our ability there to execute, and I think we've shown the market we can. Even our customers. The message continues to be, we want you to operate, we want you to market our products. You've done a great job at getting premiums and with gas storage through the ethane, propane, butane, condensate, crude. It's a cost of capital shootout, but at the same time, it's the right strategic partner who can help us fund significant growth here into the next two, three, five years.
Right. Makes sense. As you look at the pipeline to the Pipestone storage, how big can the storage position grow, and how much I don't know if you want to quantify it by operating factors or by financial factors like EBITDA, but what is the upside there?
I'll let Mr. Vohra start, then maybe I'll jump in.
Good question, Rob Hope. I think we'd like to stick to operating for now rather than give guidance. We do feel that it does open up a whole bunch of upside at the facility to increase the size. If you remember, a couple of years ago, we did talk about expanding that facility. It was a pretty large expansion at the time. That 30-inch pipe will give us the ability to go as high as 600 million to even potentially a BCF a day. We're not close to there now. Want to be clear that we're not close to that now. The pipeline being in the ground now does give us significant optionality and allows us to scale the facility in steps up to larger capacity. It does have the ability to significantly increase.
Today we'd be in that 70 to 80 potentially. The facility is outperforming, injection withdrawal capacity would be in the 70 to 80 and potentially higher million a day of injection and withdrawal capability.
Should we look at this really then as an enabler to further developing the area as opposed to immediate financial gain? Is that how you're positioning the asset?
Right. I think, yeah. It is a stepping stone and a piece. Now connecting the Pipestone plant and giving the plant three egress options in Alliance and TCPL and into storage. Yeah, I'd say it's a stepping stone into further development in the area. I think it's a little too early to get into what is the EBITDA cash flow upside guidance, but we do feel that there's a lot more optionality with that pipeline in the ground.
Okay. Thank you.
Once again, if you have a question, please press star one on your telephone keypad. Robert Kwan from RBC Capital Markets, please go ahead.
Hi. Thank you. Just on the Pipestone expansion. It sounds like you're talking about the financing side, just to be clear. You have a commercial lockdown in a satisfactory manner, and it really is just getting your financing in place?
Yeah, Rob, I would say, obviously it changes by the day with commodity prices. Obviously, the play at Pipestone is more condensate driven, today, assuming roughly a condensate net backs of where they're at today, yes, we feel we have commercial support to move forward. Want to be clear, that can change on any given day, and as you know as well, competition is exceedingly high in that Pipestone area, given it is one of the top plays in Western Canada.
Okay. Basically, it sounds like, say, some solid indications, but subject to positive FID and kind of dotting the I's and crossing the T's. Is that a fair way to think about it?
Yep. You've got it.
Okay. Just in terms of joint ventures going forward, if that is a funding source, do you likely see that being existing assets, or would you be looking at joint ventures into new projects?
Right now, we would consider all options. Ideally, though, we would not encumber existing assets, but it's a function of cost of capital. If you can include one or two existing cash flowing assets, it'll help bring our cost of capital down. I would say right now we're evaluating multiple options, but ideally, we would encumber as least number of assets as possible and even maybe potentially be able to focus on the build-out of Pipestone phase 2, but do not want to set that expectation.
Understood. If I can just finish, we've been in discussion on IFRS 16. Just wondered when you were referencing IFRS 15, are you only referencing the way the cogeneration treatment's going to be on the balance sheet, or was there something else around contracting and IFRS 15 that we need to think about in the quarter?
No, that would be the main piece, that would be your main change or addition to that lease liabilities and other line item on the balance sheet. Rob, that'd be the big piece there, the treatment of the cogeneration under IFRS 15.
Got it. Great. Thank you very much.
Thanks.
Elias Sepsakos from Industrial Alliance, please go ahead.
Good morning. Focusing beyond the two major projects that might come up, which is an expansion of Pioneer and Pipestone too. Could you give some color as to what other capital projects that might be smaller, that might have an incremental impact, but something that we're not focusing on?
Great question, Elias Sepsakos. When we think through smaller projects, a frack, kind of what we hinted there as part of our preamble there, a fractionation facility at Acheson, maybe even up in the Pipestone area. We're not there today, that would be kind of a CAD 25 million-CAD 50 million type of project. Even some crude tankage at Acheson or other sites. We want to continue to add assets that act as a hedge when commodities move lower. Gas storage is one example, also crude tankage is something where we're trying to determine if we have commercial support to get a funding plan in place. Expansions of our gas storage. Joel mentioned going to 600 million cubic feet a day, we don't necessarily have to put CAD 150 million of capital. We could potentially do it phased as well.
If our BD team was sitting in here, they'd probably give you a list of another 20 or so, I think that's a good start. Joel, anything else you can think of that we want to-- Some of it's competitive as well, we don't necessarily want to put all our cards on the table, those would be some examples, Elias Sepsakos.
Yeah, I think there's some ongoing, smaller, high return projects that we'll always be looking at. The lion's share of the capital is going to be focused on the higher contracted longer-term assets.
Okay. If some of those smaller ones are approved or sanctioned, do you plan on sort of disclosing that over time? Would that be correct?
Yeah, I think over time and together in a larger capital update. Yeah, for sure.
If they're material, we have to. I think some of there's competitive pieces out there that we would need to think through. If it's a CAD 5 million or CAD 10 million project that generates, I don't know, a 50% rate of return, and we feel we're doing something on the edge, industry leading, we may be a little cautious there. Just want to be careful to promise that we're going to disclose everything that's not material.
Okay. That's it for me. Thanks very much.
Patrick Kenny from National Bank Financial, please go ahead.
Hey, good morning, guys. Just wanted to confirm if your limited partner on the Pipestone Gas Storage Facility had a ROFO on the Pipestone phase two expansion.
No, Pat, they don't have a ROFO on Pipestone phase two, but they'd be a partner we'd consider involving in other capital. They've been great.
Okay, great. Just on the acceleration of the Pioneer Pipeline, it looks like this is strategically beneficial to TransAlta, but perhaps at the financial expense of yourselves, modestly anyway. Just wanted to ask if there were any other options that TransAlta might have, within the JV agreement that could tweak the scope or timing of the overall project over time that might impact your expected returns one way or the other.
Good question. I can't think of anything material off the top of my head where they could force us to do something that would hurt us but benefit them. I want to start off, they've been an incredible partner. They've made payments when they haven't necessarily had to, and we're working definitely together with them on expansion. The one piece to our benefit would be Brazeau, and today our gas storage at Brazeau, where today we realize 100% of that benefit. Moving forward, there may be an opportunity also to involve TransAlta in gas storage, and more than happy to have those discussions with them. Realize we do have some levers where we would receive 100% of the benefit.
Want to be clear too, Pat, that although we haven't gone and amended guidance and any bit of guidance related to the pipeline, we will be flowing volumes earlier than expected. It's just how much is it and for how long. I don't think we're ready to go and talk about exactly what that looks like, but we will be flowing volumes a lot earlier than what was initially expected.
That's great. Thanks, guys.
Thank you. We have now reached the end of our Q&A session. I will now turn the call back over to Joel for closing comments.
Thanks. Well, thanks everyone for making time. Look forward to updating the market here as our two capital projects come online in Q2 and Q3. Thanks again for all the support and your time today.
This does conclude today's conference call. Thank you for participating, and you may now disconnect.