Tidewater Midstream and Infrastructure Ltd.

Good afternoon, ladies and gentlemen, and welcome to the Tidewater Midstream and Infrastructure Limited Quarter 2 Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, August 10, 2023. I would now like to turn the conference over to Scott Bauman. Please go ahead.

Thank you, Operator, and welcome everyone to Tidewater Midstream's second quarter 2023 results conference call. I'm Scott Bowman, Tidewater's Director of Capital Markets, and joining me today are Rob Coclo, Tidewater's Interim CEO, Brian Newmarsh, Tidewater's Chief Financial Officer, and other members of Tidewater's management team. Before passing off the call to Rob to review some highlights, I want to remind everyone that some of the comments made today may be forward-looking in nature and are based on Tidewater's current expectations, estimates, judgments, and projections. Forward-looking statements we may express or imply today are subject to risk and uncertainties which can cause actual results to differ from expectations. Further, some of the information provided refers to non-GAAP measures. To know more about these forward-looking statements and non-GAAP measures, please see the Tidewater Midstream Financial Reports, which are available at tidewatermidstream.com and on CDAR+. And with that, I'll pass it off to Rob to discuss some highlights from the quarter.

Thanks, Scott. Good morning, and thank you for joining our Q2 2023 conference call. Tidewater's quarter was very eventful. We conducted our first major turnaround of the Prince George Refinery, which, while on time and on budget, took the facility offline for about six weeks. We also overcame the challenges presented by the wildfires near the Brazzo River complex, which resulted in that facility being down for over three weeks. Finally, Tidewater Renewables completed the construction of the HDRD facility and began actively commissioning units to prepare for commercial operations. Fortunately, our midstream business continued to deliver consistent results during the quarter. So starting with our midstream business, our Pipestone Natural Gas Plant maintained consistent run times and strong throughput throughout the quarter, which helped offset the downtime at the BRC. We have previous, as we've previously discussed, the facility was safely evacuated during May and remained offline until utility commission, utility companies were able to safely restore power to the facility. Operations resumed when the power was restored in June, and we expect the financial impact of the wildfires at the BRC to be substantially offset by insurance proceeds. Our natural gas storage asset at Dimmesdale achieved record results in the quarter, and given the term structure of the futures market, it's expected to continue to drive strong results for the storage assets going forward. Moving to the downstream business, I'd like to thank our operations team at the Prince George Refinery for safely and successfully keeping the turnaround on time and on budget. The diligence of our operations team allowed us to maintain our excellent safety record on major maintenance projects as no lost time man hours were reported in the project. Operations at PGR resumed in June, which was time to capture the increase in demand for gasoline as a result of the onset of summer driving season. Within the tidewater renewables business, several process units of the HDRD facility have been successfully commissioned with the final two to take place over the next two weeks. First diesel is expected before the end of the month. The HDRD economics continue to remain attractive and the facility will be Canada's first renewable diesel plant. Although we've experienced minor delays while commissioning during the quarter, the project remains on track with the previously communicated net forecast capital cost of $174 million. Ramping up HDRD production volumes through the second half of the year, we should see 35 to 45 million of adjusted EBITDA on the second half of 2023, and we anticipate a run rate annualized corporate EBITDA to range from $130 to $155 million once the HDRD facility is fully operational. I'll now turn the call over to Tidewater Midstream's Chief Financial Officer, Brian Newmarsh, to walk through some of our financial results.

Thanks, Rob. During the second quarter of 2023, our midstream business drove consolidated adjusted EBITDA of $44 million, which includes about $8 million of contribution from the renewables business that we report on a consolidated basis, given our 69% ownership stake. On a deconsolidated Tidewater Midstream basis, second quarter adjusted EBITDA was approximately $36 million. As Rob mentioned, we undertook our once-every-four-year, six-week turnaround at our Prince George Refinery during the second quarter. This project equates to an approximate $45 million investment that will help enhance runtime and throughput at the facility and is the primary contributing factor to this quarter's distributed cash flow number. With the scheduled turnaround at our refinery, our midstream business delivers strong results during the quarter, with RAM, Pipestone, and our natural gas storage business offsetting the BRC wildfire-related outages. We saw a pickup in volatility in natural gas pricing during the quarter as these wildfires led to a loss of field receipts in the AECO market during the quarter that drove volatile cash prices. These price dynamics led to a very profitable quarter for our natural gas storage assets due to the additional extrinsic value capture and the wide storage spreads realized. Within our downstream business, we saw the seasonal bump to gasoline demand to finish the quarter with the stronger gasoline prices helping offset the lower diesel cracks. Despite softening diesel prices, PGR 211 crack spreads averaged about $85 Canadian dollars per barrel for the quarter. Our first half 2023 capital investments were driven primarily by the turnaround and are weighted to the first half of the year. Second quarter maintenance capital included unbudgeted costs at the BRC incurred due to the wildfire impacts. Despite the additional maintenance costs during the quarter, we still see our deconsolidated maintenance capital budget remaining within our previously guided range of $55 to $65 million, although we now expect to be at the higher end of this range. With PGR resuming operations, summer driving season in full swing, and the imminent completion of the HDRD facility, we expect Tidewater's annual consolidated adjusted EBITDA to be within the range of $190 to $210 million for 2023. We will refine this range once commercial production of renewable diesel commences at the renewables HDRD facility. I will now pass things back to Rob for some closing remarks. Thanks, Brian.

The second half of 2023 will be transformative for Tidewater. HDRD will be generating Canada's first renewable diesel sales. Our PGR refineries at full production and capturing strong crack spreads. and our core midstream assets are expected to continue to deliver strong results. Finally, we are nearing the completion of our structured asset review, and we'll be speaking to the results at that time. I'll now ask the operator to open the call up for questions.

Thank you. If you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. Questions will be taken in the order received. If you wish to withdraw from the question queue, please press the star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. And our first question comes from Rob Hope from Scotiabank. Please go ahead.

Good morning, everyone. Good to see some strong results for the natural gas storage assets. When you take a look at these assets moving forward, how long do you think the strength could persist? And then secondly, do you view them as kind of core and integrated to your base business, just given we have seen a number of storage assets been transacted in the last couple of months?

Sorry, I apologize. We had a little technical difficulty. Could you repeat the question?

Oh, yes, of course. Just on the natural gas storage assets, one, do you view these as a core asset, or could these be for sale just given the fact that we have seen a number of them transact? And two, the strong margins that we saw in Q2, how much of that was just the puts and takes during the quarter with the fires, and how much of that will you think will persist into the back half of the year and into 2024?

Yeah, so let me take the last half of that question first. Yeah, we do like storage, and we think that the quarter was sort of just the first quarter of a number of strong ones, and that's just set up less by the intrinsic value of the spreads going forward. So we're quite confident that we're going to see similar numbers particular on Dimmesdale, it's more of a clean gas storage asset going forward. And not only that, but it does look like the North American market is short on gas storage in general, just given the volume of production that's up there. It's doubled over the last seven years in North America, gas production, and we've actually seen a decrease in the amount of gas storage. So I think this is a structural situation. In fact, we haven't even seen the very low gas prices this summer that we and others had anticipated from the NGTL maintenance cycles. And that's partly because they happened during the fires. The fires took things offline. So anyway, so yeah, we like it. Could it be for sale? As we've said before, all of our assets, you know, we want to understand where the market values our assets and compare that relative to where we value them. And so the decisions will be made on the asset review when we announce them. But everything is in the process to be investigated.

I appreciate that. And then maybe diving into the 2023 guidance a little bit more easy for us to strip out kind of LCFS. But when you take a look at the remaining variables, you know, is the key driver here just, you know, crack spreads at the refinery or are there any other issues we should be looking at? And I guess, you know, is Q4 going to be more indicative of kind of the run rate for 2024?

Yeah, so obviously cracks and the margins that we're finding in business are kind of the biggest factor here on how we look at the second half of the year here. You know, do I think there's any big changes coming? No, we're really happy with the way that our midstream, our GMP assets are performing. As we mentioned before, we take a look at kind of what gas storage did during the quarter. There was a chunk of extrinsic value capture that I spoke about before, but plus we've locked in a decent chunk of storage spreads here into Q3. Those do moderate slightly into Q4, but I think kind of the run rate seems in line with how we think about things.

And then would Q4 be a good run rate into 2024? Yeah, that's a fair assumption. Okay, thank you.

And our next question comes from Andrew Kuski from Credit Suisse. Please go ahead.

Thanks. Good morning. Maybe just on the PGR turnaround, you know, when you got under the hood of everything, were there any major surprises in the turnaround? And do you expect to see any benefits from any kind of incremental capacity creep or just minor debottlenecking that you've benefited from that you're going to see in quarters ahead?

Yeah, I think it's pretty minor. We wouldn't anticipate seeing much of an increase in capacity. There are a couple of de-bottlenecking items that were planned. They didn't come out as a result of the turnaround, but they were planned to coincide with the turnaround, but they're quite small. There really wasn't any surprises, which frankly was a surprise. It was our first turnaround in four years since we've owned the refinery, and we were kind of anticipating to find some issues, and we really didn't. So we're very happy with the result. But yeah, it just went quite smoothly.

It's a nice change for us. Well, that's always good news. Maybe just shifting gears a little bit, and part of this ties into Pipestone. And typically like the bookends of producers, you know, those that really want to own processing on their own and those that only want to use processing, you know, whether they're contracted or they're more open. Could you give us just some color on your conversations you're having around, you know, expansion and just in general producer health and how that changes the conversations themselves?

Yeah, you're talking with regard to phase two of Pipestone?

Yes.

Yeah, I'm happy to get into that, but we're going to save those discussions for when we have discussions around our review process. So it all ties together in terms of assets that we're looking at, as well as where we're going to be spending our capital. And to be clear, expect to be able to do that sooner rather than later.

Okay, I appreciate that and respect that. If I could sneak in maybe one more just on that natural gas price volatility. What we're seeing in the power market in Alberta is obviously the renewable influence causing a lot more intraday vol in power markets and part of that would cascade into the gas price volatility. Are you seeing something similar and is that really affecting the value of storage spreads?

Not really, to be honest. We are seeing, and we experience this, pretty much anybody who uses power in this province has been seeing that volatility is pretty crazy on the power side. We don't see it reflected as much on the natural gas side. It's fairly normal vol there. We were anticipating to see some real volatility just as a result of on the system maintenance in Alberta. And we haven't really seen that, which is good for producers. And that was a result primarily of the forest of the fires. And a lot of the maintenance took place at the same time when that production was taken offline. So it smoothed itself out. We see the value of storage being structural, less of a, you know, the volatility helps. You know, if you own storage, you love to see that volatility, obviously. But there's a structural shortage of storage out in the market. And especially given the growth that we've seen in natural gas over the last, you know, seven plus years. And that's where we see the real value because that's enduring value that you can capture over time. And it's more predictable. And then you can trade around that to capture some of the, you know, what we'd consider extrinsic value from the volatility, any volatility that does show up, you know, whether that's weather-related or maintenance or anything else.

Okay. That's very helpful. I appreciate the color.

Our next question comes from Robert Kwan from RBC Capital Markets. Please go ahead.

Hey, good morning. I know you don't want to get, excuse me, into the asset review, which, I'm just wondering, when you do make the announcement, do you intend that it's going to be, you know, here's the path that we're going to move forward, or will it be something more definitive to the extent that you're going to divest that there'd be an agreement with the counterparty?

Yeah, I'm not exactly sure what you're going to cap, but I am pretty sure that I don't want to go down that road at all right now, Robert. We will have some answers to you, and we know that they are owed, and I don't anticipate it being very long, so you won't have to wait long.

Okay. That's fine. I can just ask about the guidance on the 190 to 210. There is a statement that you're going to update based on the RD commissioning. Just to be clear, though, does... the 190 to 210 include the 15 to 25 million that was in the renewables release? Or is it just a standalone? Okay. And then the last question just is on the quarter, and you talked about expecting to get insurance proceeds for the BRC. Did you book any provision to receive that in Q2, or is this a completely impacted quarter and any proceeds will be booked when received?

Yeah, there was a minimal accrual for insurance proceeds. We think there's more to come. Obviously, that's still a live discussion with the adjuster, but we took a conservative approach, in my opinion, as to what was recognized during the second quarter.

Okay, and so that was an accrued amount.

That wasn't anything that was paid out early? Correct. Okay, that's great. Thank you.

As a reminder, if you have a question, please press the star followed by the one. Our next question comes from Robert Cavalier from CIBC. Please go ahead.

Yeah, I'd like to go back to storage for a minute, please. I just wonder, in light of your bullishness on that, are you doing anything to position the company for more natural gas storage exposure? In other words, are you investing more in your storage position in anticipation of good spreads?

We don't have anything planned right now.

As you, I think, know that Dimmesdale is our biggest storage asset. And to really make that effective, that asset needs to be, needs to see some capital. It is, it's a little bit, it's scaled to be, well, it's scaled to be closer to 100 BCF, and that's going to take some capital to get there. So we don't have any plans outside of that asset or our other storage assets that we've got at the BRC.

Okay. And then just with respect to the wildfires, do those change how you use you view risk and manage risk either operationally or financially through leverage?

That doesn't change. That alone doesn't change anything with regard to the way we view it. We have been pretty clear, I think, that we would like to see our leverage lower than it is. And that's, you know, frankly, it's more a function of having crack spread exposure at the refinery, which is, you know, has some volatility associated with it, probably more so than certainly in the processing side or some of our other midstream assets. So the fire was, it was certainly important for us to go through that kind of an exercise with regard to our emergency response plans and making sure we evacuated well and we could track all of our workers and all of their families as Straton Valley was also evacuated, was informative to see how close that fire could get to that facility. It was quite remarkable, the wall of flames that was surrounding the facility as our workers were evacuating. And to see the... absolutely limited amount of physical damage that happened even though the fire was that close. So these are well engineered and well thought out plants and not just us but I've had this discussion with a number of other operators of gas plants in our province and in BC and it is remarkable how well some of these assets can survive those types of events.

Okay, thanks, Rob.

And our next question comes from Curtis Jensen from Robotian Company. Please go ahead.

Hey, good afternoon. Can you hear me okay? You bet.

Anyway, good work getting through the DGR turnaround and managing through the fires. I just kind of have a question about Pipestone. It seems to me there's probably definitely customer demand for an expansion. but I'm not sure how we're still talking about it because it occurs to me that, you know, Tidewater really is, I mean, you're in a capital-intensive business. That'd be obviously a very capital-intensive project, and yet you have a massive cost of capital disadvantage. So I guess I'm missing something about how we're still talking about expanding it without you know, a much larger partner who's got a lower cost of capital or something. But I guess one of my questions would be one of your customers Pipestones announced it's going to be acquired by Strathcona. And I'm wondering what implications does that have for your relationship? I mean in the context of an expansion there is Strathcona is somebody that might bring capital to a phase two.

Yeah, no, I understand where you're coming from.

And I certainly understand we've, we are, you know, well, a little bit, but it's, it's a fair question. But, you know, and my answer might not be totally satisfactory, but it, you know, A lot of this will come to light through our strategic asset review, which will be announced shortly. But yes, obviously, cost of capital is a very important thing when you're involved in large, especially large capital projects. So it isn't missed by us, your comments. We think that the asset review will help to clear things up.

All right. Thanks a lot. You got it.

There are no further questions at this time. I would like to hand it over to Scott Vollman.

Actually, we just had one more question back into the queue here.

So if you don't mind doing one last circle up for questions, that'd be great. Thank you.

We have Patrick Kenney with National Bank Financial. Please go ahead.

Thank you. Yeah, hey, guys. So it sounds like the asset review process is nearing completion here. And, of course, the HDRD will be fully up and running soon as well. So not to get into any details, but can you just remind us where you ultimately want to land, both from a capital structure standpoint and as well from a corporate structure perspective? I'm just wondering what the bullseye looks like, you know, say six to 12 months out. with respect to the consolidated balance sheet and structure?

Yeah, maybe I'll start off with kind of targets on capital structure levels of leverage. I think we're of the view that less debt is better. That's obviously become more obvious as we've seen floating rates increase and our cost of capital increase right alongside with it. And I think just having lower debt levels increases your degrees of freedom on strategy and how we kind of focus the business. I think as we spent kind of the last, call it six months, with Rob in his seat here, there's been an enhanced focus on cash flow generation, thinking through our cost structure, thinking how we can generate cash from each of these assets. And I think as we've spoken to throughout this call here, as we've worked through our portfolio review, which assets make the most sense to me in this business and which have value higher value potentially in other hands here. And I think that's all kind of part and parcel of the strategy. But I think there's a core possible business here that we're very focused on maximizing. And then, as I said, we've got some work to do on the balance sheet that is a priority for us.

And I think it ties into the asset review, as you mentioned, Patrick. We've got When we come out of this, if we've got a different mix of assets, we've got to look at what type of cash flow comes out of those assets and the volatility around it. Are you left with mostly take or pay type of contracts, in which case your appetite for some leverage is probably a little higher if you're more commodity exposed, then our appetite will certainly be lower for leverage.

And I guess the second part, would you guys be... leaning towards simplifying the corporate structure, just given some investor feedback, market appetite, or would you be averse to, I guess, adding complexity to the structure?

Well, in my mind, a lot of the complexity comes from consolidating our results with LCFS, with the renewables business. We've always said that It is not our end goal to own 70% of the renewables business in an ongoing way. And we also look at that asset as probably most investors look at it. We think we're at the finish line. We think it's tremendously undervalued, certainly relative to anything else in that space. But until we get the thing up and running and cash flowing on a steady basis, we're probably going to see a discount. I think that's probably the easiest way to reduce some of the complexity in tidewater midstream is to, you know, get to a more normal holding position and to sort of stop, well, eventually stop consolidating those results.

But I think that would go a long way to simplifying things.

I'm not sure how long it would take, though.

Yep. Got it. We'll let it run its course. Appreciate it. Thank you. Thanks.

If there are no further questions at this time, I would like to hand it over to Scott Bauman. Please go ahead.

Thank you, everyone, for joining the call today. The team is available to address any outstanding items with our contact information at the bottom of this morning's press release. Thank you.

Thank you, ladies and gentlemen. This concludes