Gibson Energy Inc

TSX:GEI

Earnings Call Transcript 2018-Q3

[Operator]

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 Chyc-Cies, Vice President, Strategy, Planning and Investor Relations. Mr. Chyc-Cies, please go ahead.

[Mark Chyc-Cies]

Thank you, Deon. Good morning, and thank you for joining us on this conference call discussing our third quarter operational and financial results. On the call this morning from Calgary are; Steve Spaulding, President and Chief Executive Officer; and Sean Brown, Chief Financial Officer.Before passing the call over to Steve, I'd 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 website and on SEDAR.Now I'd like to turn the call over to Steve.

[Steven R. Spaulding, President, CEO & Director]

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. Our company is focused on oil infrastructure and our business driving at 10% per share growth through infrastructure investment. 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 million, representing a new high for Gibson Energy, and distributive cash flow from combined operations of $85 million. We continue to realize steady, predictable, and growing cash flows from our infrastructure segment, which is the core of Gibson Energy.We're very pleased with the continued outperformance from Wholesale. With a wide differential environment increasing our earnings, reducing our debt, and driving down our payout ratio and leverage. Notably we're building momentum. On our goal of doing what we said in terms of sanctioning new infrastructure, progressing on the noncore asset sales, maintaining a strong balance sheet, and producing strong clean quarterly performance.In executing our strategy we've made considerable progress in the past few months. Especially on the objective of delivering an attractive total return to shareholders, inclusive of generating at least 10% per share growth on our distributive cash flow basis. Concurrent with our second quarter earnings release, we announced the sanction of 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 million barrels of new tankage under construction at Hardisty.What I'd like to highlight today is we now have $0.5 billion in growth capital under construction, which would 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 5x to 7x EBITDA investment multiple on this $0.5 billion 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 million to 2 million barrels of tankage a year. Driving the new tankage demands are the egress constraints 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've started to see oil sands players talk about the next wave of growth, both brownfield and greenfield. We've even seen M&A, as certain producers look to high-grade their development project. 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 million to $30 million 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 Pyote system to the Wink Hub, we're investing a combined USD 100 million in 2018 and 2019. We expect that investment will yield a 5x investment multiple by 2020.We are focused on growing our position by investing $25 million to $50 million a year in the Wink area. We believe there is a significant opportunity to grow around our existing assets in the Permian basin. Our intention has been to fund our growth into 2020, with the sale of noncore 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 and 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 first 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 third quarter, we had exceptional 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 then 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 flow.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. Also as a cyclical business, the cash will be used to fund infrastructure growth. With $0.5 billion of projects being placed in service over the next 12 to 18 months, we're getting closer to drawing our dividend.In summary, our $0.5 billion in capital growth provides a clear visibility to our 10% per share growth into 2020. Growth capital is fully funded. We remain confident that dispositions will be ahead of schedule and at the high end of our range. We are focused on delivering strong operational financial results each quarter particularly from the infrastructure segment. 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 the leverage ratio below our long-term target, we're very pleased. So the progress through the first 9 months of this year have been excellent and we are confident and -- 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?

[Sean M. Brown, Senior VP & CFO]

Thanks, Steve. As Steve mentioned, in the past few months we've made meaningful progress on our strategy and we also had a very robust third quarter. Similar to the first 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 million represents a meaningful increase relative to the $96 million earned in the second quarter of 2018 as well as the $43 million earned on a comparable basis in the third quarter of 2017.Similarly, distributable cash flow from combined operations of $85 million was a nearly 50% increase over the $57 million generated in the second quarter of 2018 on a comparable basis, and more than twice as much as the third quarter of 2017.In the third quarter, we reported total segment profit of $142 million. This is $90 million or 177% increase relative to the third quarter of 2017. $14 million of this increase was driven by a higher contribution from infrastructure with the remainder largely from Wholesale.Looking at infrastructure in more detail, this segment continues to provide the consistent cash flow that one should expect from a highly contracted ratable business. Results within Terminals and Pipelines were largely in line with the first 2 quarters.We continue to expect Terminals and Pipelines to be right around that $60 million per quarter and the Infrastructure segment as a whole around $70 million per quarter with the next step change being when we place additional projects into service at the start of the next year.Within our Logistic 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 block.Volumes are down relative to the third quarter of last year, which is partly due to challenges in hiring and retaining drivers, but mostly as a result of exiting the businesses outside of our focus bases. This resulted in some shut down, severance and equipment relocation costs in the third quarter, 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 fourth quarter, we expect that beginning to move volumes on the dedicated acreage around our Pyote 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 Transportations' profit of $6 million was largely in line with the run rate we have seen for the last few quarters. Volumes were up slightly over the third quarter of last year, with lower 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 million and segment profit was $68 million. On a comparative basis this contribution to adjusted EBITDA is 76% higher than the second quarter of this year, and adjusting for the $9 million impact from IFRS 16 related to rail car leases, over $70 million ahead of the third quarter of last year.A significant contributor of the increase in Wholesale, relative to both the second quarter of 2018 and the third quarter of 2017 was a result of increased contributions from the refined product and crude oil businesses. In particular, our strong third quarter at Moose Jaw reflects the ability to move term contracts for the sale of most of our products from a WCS to a Brent based benchmark in addition to the benefit from discounted Canadian barrel.Crude oil was also able to take advantage of other ongoing locational and quality arbitrage opportunities in the quarter. With the NGL market in injection seasons in the third quarter, NGL Wholesale posted a small loss in an adjusted EBITDA basis similar to the third quarter of 2017.As we looked at the structure of the market and our opportunities ahead of our last call, we felt we were well situated for the second half of the year, in part due to the positions we had brought in from the second quarter. Performing a similar exercise ahead of this call, we believe that was the less advantageous positions we carried in from the third quarter as well as the more limited number of visible opportunities on the horizon the segment is more likely to contribute adjusted EBITDA of between $30 million and $50 million in the fourth quarter resulting in a full year adjusted EBITDA contribution of between approximately $170 million and $190 million.In terms of notable items in corporate costs, on the tax front starting this quarter and going forward, we will include the current income tax expense instead of cash payments in our calculation of distributable cash flow. As we believe that this best reflects the cash flow earned in the quarter for the suite of businesses we have today.As we talked about it on our last call, we wanted to balance the obvious benefits of withholding cash payments with the desire for a distributable cash flow to faithfully represent the cash flow generated by our business. And we think that this shift best achieves that.As a result, we recognized current income tax of $24 million 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 million to $50 million in 2018. The main driver from movements in our tax expense will be the variability from Wholesale, which is fully taxable at our corporate tax rates of about 27%.With $85 million in distributable cash flow from combined operations generated in the third quarter, the trailing 12-month figure improves to $272 million and applies a payout ratio of approximately 70%, which is at the bottom end of our target range.In calculating a distributable cash flow for the last 12 months, we've 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 million lower under cash back states resulting in a payout ratio about 11% higher than it otherwise would have been.Importantly as Steve mentioned, we have $0.5 billion of infrastructure projects that will come into service in the next 12 to 18 months. At which point, we expect we will continue to be within our 70% to 80% target payout rate. With 3/4 of cash flow from our terminal and 85% from infrastructure, assuming more normalized earnings from Wholesale.In terms of funding our current growth to get to that position in 2020, we are fully funded, with our funding capacity based on our anticipated disposition proceeds and retained cash flows over the first 9 months fully covering our sanctioned projects. It is very important to our strategy that our growth remains fully funded. And as we continue to add new infrastructure growth projects, we will ensure we remain fully funded for our capital 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 million to $375 million. Of the 3 remaining disposition, both the sales processes for NGL Wholesale and noncore environmental services are well advanced and we continue to work towards an announcement over the next few weeks. With the exception -- it's 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 nonbinding bids for this business and are happy with the interest shown. We are now in the second round of the process and expect to receive binding bids late in the year with the potential for an announcement in 2018, and if not then early 2019 with timing of closing depending on the ultimate buyer.And as we complete each of these 3 dispositions, we will be able to pay down our revolving credit facility with the proceeds subsequently reinvested in the infrastructure business over time. At the end of the quarter our net debt to EBITDA was 2.9x relative to our target range of 3 to 3.5x.Also as we work through the dispositions to focus our business around infrastructure, reinvest the proceeds into high quality cash flows, reuse our debt and decrease our payout ratio, all these steps will be supportive of our goal of securing an investment grade credit rating.During the third quarter, we were upgraded to BB plus by S&P, and we continue to believe as we execute on our strategy, it will make the case stronger for moving Gibson into investment grade.So in summary, we continue to deliver on our strategy and are excited by where we have gotten over the first 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 payment 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.

[Operator]

[Operator Instructions] Our first question comes from Robert Hope from Scotiabank.

[Robert Hope, Analyst]

Just wanted some additional color on the comments on spending $50 million per annum if I heard that correctly around Wink. Can you just walk us through where you see the long-term growth projects in that region and how that business could evolve over time?

[Steven R. Spaulding, President, CEO & Director]

Yes. As we talked about last quarter, we're building into Wink, right now it looks like we're going to build a 16 inch pipeline from our 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 up a 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.

[Robert Hope, Analyst]

All right. That’s helpful. And then just moving over to the ongoing M&A processes, I believe we heard kind of in the top half of the range, towards the upper end of the range. Has your views on these asset sales or have you seen any muted interest just given the commodity price environment and some producers shut-ins?

[Steven R. Spaulding, President, CEO & Director]

Thanks, Robert. No. No, not really, I mean, as I said on my prepared remarks, both NGL Wholesale, ES North are well advanced in the latter stages of the process. So no, I wouldn't say we've seen muted interest certainly from there. And on our Canadian Truck Transportation side, as I stated, we are through -- I think we are half way through the process, we have done initial nonbinding bids, management presentations are occurring as we speak and expect binding bids near year-end. So have not necessarily seen muted interests there either. Our messaging consistently through 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 reconfirmed that.

[Operator]

Our next question comes from Linda Ezergailis from TD Securities.

[Linda Ezergailis, Research Analyst]

I'm wondering if you could help us understand kind of the path to investment grade, how you might balance that with some funding your growth perhaps by adding some leverage. So and I guess layered on top of that as you are tank build out has accelerated, I'm wondering if your target credit metrics might also shift over time?

[Sean M. Brown, Senior VP & CFO]

Thanks, Linda. I think there's a couple of questions there. I think first and foremost, we need to go back to the governing principles that we've outlined at our Investor Day. With those governing principles, we outlined a payout ratio of 70% to 80% and a leverage at 3 to 3.5x. Our view is that if we're building at the investment multiples certainly in the tankage side that we are, which is 5 to 7x, 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 3.5x 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 in the beneficiary of it is that earnings from Wholesale. And we'd use 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 path to investment grade is visible and very real. But we will not materially or actually –- not materially -- so we will not change our strategic leverage from 3 to 3.5x because that is what we view as being appropriate for our business mix.

[Linda Ezergailis, Research Analyst]

Okay. And maybe under your new definition or new approach to incorporating cash taxes in your free cash flow, 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?

[Sean M. Brown, Senior VP & CFO]

Yes. It really depends, I think, in our prepared remarks we covered it, I mean, this year would be fairly representative of it. Going into this year with a budget that I would have characterized probably in below mid cycle for Wholesale, we'd have 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 million as taxes that would be payable this year. Depending on your outlook for Wholesale next year I would guide you to something in and around that calculus. So you're expecting $100 million for Wholesale next year, then you could probably model in something in and around $27-ish million of taxes.

[Linda Ezergailis, Research Analyst]

Well maybe I can ask you what your outlook for Wholesale is in terms of maybe some of the inputs on differentials there, a comment on how you see that evolving over the next year, what some of the moving parts are?

[Sean M. Brown, Senior VP & CFO]

Maybe I will get Steve to talk about the differentials or the outlook from 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 in providing sort of what our outlook is for the next quarter as we move forward. As you said, there is a lot of moving parts that go into that Wholesale number. As we think about budgeting, we're certainly not budgeting the outperformance we've seen this year. Again, Steve can talk about it. We do expect that differentials will remain wider throughout next year but again from a budgeting perspective we're not expecting the similar performance that we have this year.

[Steven R. Spaulding, President, CEO & Director]

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, so differentials are going to be wide. To what extent? It's difficult to project and as long as they are wide we're -- we do capture those opportunities across our Moose Jaw terminal, cross that out, that crack spread across that facility -- our Moose Jaw facility.

[Linda Ezergailis, Research Analyst]

And what would be the secondary factors beyond basin egress that you look towards more from a planning perspective?

[Steven R. Spaulding, President, CEO & Director]

Well I mean, obviously, we believe that more rail cars will move our basin within the next couple of months. We think that that will get fully ramped up out of the [ Hart ] facility, there at Hardisty and then out of the Edmonton facility the numerous other facilities, we do believe that the producers are contracting to move out the incremental production via rail car and unit train. Also, we will see various -- I mean we will see numerous other ways of people trying to get the barrels out of this basin and try to alleviate the large differential.

[Operator]

Our next question comes from Andrew Kuske from Credit Suisse.

[Andrew M. Kuske]

I think the question is probably for Steve just to start off with. 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?

[Steven R. Spaulding, President, CEO & Director]

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 lets us say 500,000 to 1 million barrels of tankage a year, we were using really no egress issues and we were using a 40 to 40 -- $40 to $50 crude oil price. And today with the Brent trading in the $70s we believe the egress issues will be solved with line 3 and then Trans Canada and then hopefully TMA. We hope that all 3 actually move forward and with that we will be able to debottleneck the production in Canada in line for future growth. Also in the U.S., you have the 3.5 million barrels of pipeline being built into the Permian basin, which will debottleneck pushing down to the Gulf Coast. So you really have a much cleaner view or a cleaner path of our production to the Gulf Coast, where we have the most sophisticated refineries in the world on the U.S. Gulf Coast, that desperately want this Canadian production. With that and the higher crude oil pricing, we think that first we'll see these brownfield expansions and then we will see bigger greenfield larger expansions as we move forward. Obviously, they take a tremendous amount of time in planning and in execution.

[Andrew M. Kuske]

Okay. That’s helpful. And then maybe just shifting gears a little bit moving south of the border and just your positioning and -- in the stock, it seems like there's still a lot of experimentation going on by 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 side?

[Steven R. Spaulding, President, CEO & Director]

Right now we're just in a latency in that SCOOP/STACK area. We do have a trucking presence there and we do have a Wholesale -- 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 in kind of in the same boat as you, is that we're in a wait and see right in that basin.

[Operator]

Our next question comes from Jeremy Tonet from JPMorgan.

[Jeremy Bryan Tonet, Senior Analyst]

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 you think about it but -- going forward. But is there any reason ahead of Line 3 why you wouldn't continue to print quarters and this is difficult for the next year or so? I mean, what could prevent this quarter from repeating?

[Steven R. Spaulding, President, CEO & Director]

We do say we're going to have outside -- we will continue to have Wholesale earning. 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 we -- where our long-term target is with that 70% to 80% payout and our -- just with our infrastructure in 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.

[Sean M. Brown, Senior VP & CFO]

And Jeremy, I do want to reiterate, in the prepared remarks we did give some forward guidance for the fourth quarter 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 million to $50 million is what we're expecting for Q4, in an environment that is not dramatically different than what we saw in Q3.

[Jeremy Bryan Tonet, Senior Analyst]

That’s helpful. 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.

[Steven R. Spaulding, President, CEO & Director]

When you look at Moose Jaw it's very much like a fractionator down at 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 million to $25 million. And we believe even last quarter had a $20 to $25 dip, we would see a 1 year payout. So if we see the large dips today, we could pay that expansion up very quickly. Probably 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 products trade on.

[Jeremy Bryan Tonet, Senior Analyst]

That’s helpful. And then with the wide dips even without CBR it seems like the case for wide diffs 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?

[Steven R. Spaulding, President, CEO & Director]

Right. I mean, yes, we're definitely to see -- we are definitely looking into how we can participate to help the producers get the 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 doing manifests out to get these barrels out of Alberta and into the marketplace.

[Operator]

Our next question comes from Robert Catellier from CIBC Capital Markets.

[Robert Catellier]

You've effectively answered most of my questions. I guess I'll reiterate one question just for clarification. I agree with your, you 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?

[Sean M. Brown, Senior VP & CFO]

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, oil field cash flows for us are fantastic because it funds that infrastructure but our strategy now and going forward will be it is both infrastructure cash flows exclusively that will cover that dividend. So as we move forward, what we need to see is a certainty that infrastructure alone covers the dividend. And all of our other fixed charges including interest and maintenance capital if you look at consensus for the year right now, we are virtually there from an infrastructure perspective. 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 this all to the path to investment grade. I would say that we're going to be conservative with that capital structure. We're going to be conservative with our payout ratio, which is indicative or representative in an investment grade company and we'll consider dividend increases in that process.

[Robert Catellier]

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, to get the rating.

[Sean M. Brown, Senior VP & CFO]

Yes.

[Steven R. Spaulding, President, CEO & Director]

Yes, that would be accurate.

[Operator]

Our next question comes from Ben Pham from BMO.

[Benjamin Pham, Analyst]

I think I had couple of follow-ups on the payout's reconfiguration. Are you guys just on the dividend question, are you treating the payout's outlook as a new recon as you think about the dividend? I know you mentioned infrastructure cash flows but you got a 70% payout versus a 60% payout, it's a pretty wide gap.

[Sean M. Brown, Senior VP & CFO]

Sorry Ben, I don't understand the question. I mean our payout ratio, I think the way and maybe this will help clarify –- I mean what we've done this quarter and as we talked about previously given how taxes work, your installed base in 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 stack that's 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 thought 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 to 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 tax is stable, 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%.

[Benjamin Pham, Analyst]

Yes, so that's -- if I frame at the…

[Sean M. Brown, Senior VP & CFO]

Did that answer your question?

[Benjamin Pham, Analyst]

Yes. I mean I guess -- I mean, are you -- are you thinking about the dividend from the new or may not the new, but the theoretical right way of thinking about it, when you're including a notional current tax in the…

[Sean M. Brown, Senior VP & CFO]

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 what we're looking at this on, what 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 if we went into budgeting this year, we did not budget the outperformance we're seeing from Wholesale.

[Benjamin Pham, Analyst]

And when you at the proceeds that you think you can get in and 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?

[Sean M. Brown, Senior VP & CFO]

I mean you can do the math. I mean we come out with our capital guidance certainly for this year and have 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 directed cash flow to be for '19. But I mean, we are in at minimum what we consider a balance position. And that ignores the extra leverage capability that we can add through the infrastructure EBITDA that we'll be adding in Q1.

[Benjamin Pham, Analyst]

And I'm not sure you can comment on this, and it's just going into Wholesale a normally strong quarter and it drops off a little bit even though debts are a wider in Q4. So was there any sort of unrealized derivatives, real-life derivatives in Q3 that would have impacted the quarter that we should be thinking about?

[Sean M. Brown, Senior VP & CFO]

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.

[Operator]

Our next question comes from Robert Kwan from RBC Capital Markets.

[Robert Michael Kwan, Analyst]

If I can maybe come back to the dividend question and just how you are looking at the payout. So you've talked about 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?

[Sean M. Brown, Senior VP & CFO]

No. I mean the payout ratios targeted 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 would 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 '19, I would expect that we will revisit what the appropriate payout ratio is as we looked to visibility and how we think Wholesale will perform in '19 and further.

[Robert Michael Kwan, Analyst]

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 won't be in a self-funding position?

[Sean M. Brown, Senior VP & CFO]

We, 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. Asset sales right now -- yes actually that's not entirely true, I mean asset sales, plus our retained cash flows for the first 9 months actually provides the capital we need for '18 and '19. 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.

[Robert Michael Kwan, Analyst]

So self-funding is really the #1 priority, is that fair?

[Sean M. Brown, Senior VP & CFO]

Yes. No it's -- and 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.

[Robert Michael Kwan, Analyst]

Just looking at new tank growth and the cadences of the growth, I don't know if this is just due to the number -- so you never get a number of new tanks that you've already announced year-to-date, but previously the guidance was 2 to 4 or greater, now your latest materials are just 2 to 4. Are you seeing slow down 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?

[Steven R. Spaulding, President, CEO & Director]

If we said 2 to 4 greater that was probably what was baked -- what we saw really coming in these last 2 quarters. So we're really on a long term we are on at 2 to 4 or 1 to 2 million barrels of tank build out per year.

[Robert Michael Kwan, Analyst]

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.

[Sean M. Brown, Senior VP & CFO]

I can talk to -- maybe I can share 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 what our supplementary financial information deck, the quantum of that was $12 million. What we also had was an accrual for potential regulatory charge, which largely offset that. So the revenue would have showed up our story. 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 an almost equal amount. And so we would view the 2 as being largely offsetting.

[Robert Michael Kwan, Analyst]

Got it. So net-net the quarter was pretty clean of onetime items?

[Sean M. Brown, Senior VP & CFO]

Yes. No absolutely. I mean I think there is a very small net positive between the 2, but yes, that's the way we're looking at it.

[Operator]

I show no further questions in the queue. At this time, I'd like to turn the call back to Mark.

[Mark Chyc-Cies]

Thank you. And thanks everyone for joining us on our 2018 third quarter conference call. Again, I would like to note that we have also made certain supplementary information available on our website gibsonenergy.com. If you have any further questions, please reach out at [e-mail]. Thank you.

[Operator]

Thank you, ladies and gentlemen, for attending today's conference. This concludes the program. You may all disconnect. Good day