Tidewater Midstream and Infrastructure Ltd.

Good day, ladies and gentlemen, and welcome to the Tidewater Midstream Third Quarter Financial Results Conference Call. At this time, all lines are in its own mode. Following the presentation, we'll 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, November 9th, 2023. I would now like to turn the conference over to Scott Bauman, Director of Capital Markets. Please go ahead.

Thank you, Operator, and welcome everyone to Tidewater Midstream's third quarter 2023 results conference call. I'm Scott Bowman, Tidewater's Director of Capital Markets, and joining me today are Rob Coakley, Tidewater's recently appointed CEO, Brian Newmarsh, Tidewater's Chief Financial Officer, and other members of Tidewater's management team. Before passing the call off 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 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 Q3 conference call. I first joined Tidewater's board member back in May of 2017 and subsequently took on the role of interim CEO about a year ago. Now, taking on the role of permanent CEO and reflecting on the past year, I can say for one, I'm Glad it's over. It's been a lot of work, but more importantly, I think we've largely done what we said we would do and have put Tidewater under a very strong footing as we look towards the future. I've had the opportunity to work closely with the team members across the organization and to take a deep dive into our assets, our operations, and our commercial strategy. During this time, I've been impressed with our team's creativity, hard work, and commitment to our business, along with the company's safety-first culture. Further, I believe that we've got the right leadership team in place to get our core assets performing as they should be and to surface new creative opportunities. Our top priority over the last year has been clear. It's been creating and increasing shareholder value. I've been pretty candid in the last few calls, I think, on our asset review process, and we announced the outcome earlier in the quarter that resulted in the sale of our Pipestone Natural Gas Processing Facility and Dimmesdale Natural Gas Storage Facility assets to AltaGas. There's no doubt these are first-class assets and businesses located in the heart of the Montney, and we think that the transaction was truly a win-win transaction for both parties. From our perspective, we're happy with the value that we received for the assets. The transaction proceeds will lead to a significant de-leveraging for our business that will help to provide us with flexibility and the means to build out our business around our core assets. We continue to work towards closing the transaction and having received the key regulatory approvals in recent weeks, we expect the transaction to close within the fourth quarter. As you're aware, this morning we also announced the start of our commercial operations at our renewable diesel facility in Prince George. This has been a major focus for both Tidewater Midstream and Tidewater Renewables over the past year. We're very excited to be waving the Canadian flag as the first renewable diesel facility and anticipate that this project will provide material contribution to our consolidated cash flow profile. We've also made considerable progress in the cost reduction and business controls front that will become more evident with future quarters. Over the course of the last year, We encountered and overcame two major challenges, the Alberta wildfires during the second quarter and Tidewater's first turnaround at PGR since acquiring the asset in 2019. Our current three throughput volumes at both Brazzo River Plant and our Prince George Refinery speak to the strength of our team and the resiliency of these assets. The team at the Brasso River Complex restored the assets to pre-wildfire levels during the quarter, safely bringing the facility throughput back up to the levels seen in the first quarter of 2023. The BRC is uniquely positioned in the deep basin, having multiple egress solutions, natural gas storage infrastructure, a fractionation facility, and liquids handling infrastructure to help enhance our customers' net back and price realizations. We've also seen an increase in upstream A&D activity in the area, and that should lead to additional capital deployment and growing volumes in the region. Our downstream business saw record throughput at the Prince George refinery during the quarter following the second quarter turnaround. PGR continues to generate significant cash flow for our business and consistently demonstrates industry-leading operational metrics while operating in one of North America's best crack spread markets. Tidewater Renewables co-processing assets co-located at the Prince George Refinery were also approved for credit generation under the Canadian Clean Fuels Regulations during the quarter. Continuing with Tidewater Renewables, as I mentioned, the HDRD complex produced its first renewable diesel on October 22nd, and as of November 7th, has progressed to commercial operations. The facility is currently producing around 1,500 barrels a day of ONSPEC cold weather diesel, and the corporation is actively working on safely increasing production rates towards the facility's 3,000-hour-a-day design capacity. Despite the delays in commissioning the HDRD complex, project economics remain attractive, with payback expected within two to three years. As production volumes ramp up during the fourth quarter of 2023, we expect the HDRD project to generate run-rate annualized corporate adjusted EBITDA on the range of $90 to $150 million. once fully operational. This is a huge milestone for Tidewater and indeed for Canada. So we've made significant changes and accomplished a number of important goals over the last year, but until there's demonstrable value in creation for shareholders, we're not resting on our laurels. This is a journey, not a destination, and we are constantly evaluating ways to unlock value. Eventually, this will get reflected in the stock. I'll now turn the call over to Tidewater Midstream's Chief Financial Officer, Brian Newmarsh, to walk through our financial results.

Thanks, Rob. During the third quarter of 2023, record throughput from our downstream business drove a 10% increase in consolidated adjusted EBITDA of about $49 million. This includes $15 million of contribution from Tidewater Renewables that we report on a consolidated basis due to our 69% ownership stake. The Prince George refinery achieved record throughput during the quarter, averaging more than 12,700 barrels per day, helping to drive strong Q3 results. Prince George 211 cracks increased slightly during the quarter, averaging approximately $87 per barrel, which was primarily driven by higher diesel pricing. Moving to our midstream business, our Pipestone Natural Gas Processing Plant and Gimsdale Storage Facility continue to deliver strong financial returns. Volatile AECO natural gas prices early in the year allowed us to contract most of our parking loan volumes at profitable levels that contributed to the quarter. Additionally, we saw the Brazil River gas plant throughput return to 155 million cubic feet per day, rates that are more consistent with what we saw during the first quarter. The timing of working capital commitments surrounding the Q2 refinery turnaround and finishing construction at the HDRD complex led to an increase in our overall consolidated debt during the quarter. This is the reality with these large projects, as we see maximum capital deployment in the final stages of commissioning, and then as we start producing marketable products and generating meaningful cash flow, these projects rapidly deliver. We are fortunate to have supportive capital providers who have been very helpful with our efforts to bring the HGRD facility online. Our third quarter capital investments were focused on routine maintenance and optimization activities that support higher corporate throughput during the second half of the year. We continue to forecast our deconsolidated maintenance capital budget being within the previously guidance range of $55 to $65 million. The timing of the HDRD complex ramp up and the close of the Ulta gas transaction will impact Q4 EBITDAs that led to a revised $180 to $200 million full year consolidated EBITDA guide. These are two significant milestones that will materially help deliver our business. As we look ahead into 2024, we see enhanced financial flexibility and we're committed to properly capitalizing growth opportunities that will support possible future growth. I'll now pass things back to Rob for closing remarks.

Thanks, Brian. We're excited for the events in order to unfold as we ramp up operations of the HDRD complex and move to close on the Altgas transaction. Both of these events are transformative for Tidewater and are pivotal to the evolution of tidewater. We will continue to evaluate the opportunity set that we have in front of us and take decisive action to create shareholder value.

I'll now ask the operator to open the call up for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star one. If you want to withdraw your question, please press star two. Your questions will be pulled in the order they are received. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Robert Hope from Scotiabank. Please go ahead.

Hello, everyone, and congratulations, Rob, on the appointment. I want to go back to some of the comments you actually just made on taking decisive actions to maximize shareholder value you know, the asset review process with the also gas transactions behind you, you know, what are you looking to, or looking at for kind of further changes in the organization? And I guess more broadly, you know, how are you thinking about the LCFF state, just given that, you know, the stock is down quite a bit this year and relatively liquid.

Yeah, no, I agree. You know, I think part of it is, you know, we just got this up and running days ago. So we do want to take a, you know, a patient look at how LCFS trades. We're not going to make any, obviously, we're not making any announcements about anything, but I think that's, I think it's fair to actually, let's let the thing settle in. We'll certainly, I expect people to be interested. We've had can ramp up to capacity or design capacity and how quickly that translates into cash flow, which I think is pretty quick. I would like to see how that materializes before we make any decisions, but as we've said before, the process that we've gone through and the analysis that we've done and the parties that we've spoken to, it's not complete. We got a good transaction over the line, but we continue to evaluate everything that we've got, whether it's the LCFS position or any of our other assets. So it's an ongoing process of sort of unlocking that value or trying to.

Thanks for that. And then maybe just moving over to the UltaGas transaction, regulatory approval has been received, but can you talk or can you walk us through where we are in terms of the other kind of gating factors to get the transaction done?

Yeah, I mean, they're sort of blocking, tackling things. A few commercial pieces that are, you know, I think we've got good visibility on. So, you know, when we say... End of the quarter, I think we're hoping that that's conservative.

But, yeah, they're in hand and moving forward. Maybe just to reframe, like, is it the EPC contracts or the commercial agreements that are kind of where most of the work is being spent on right now?

Well, yeah, they're both, but they're well in hand, I think, is the important piece. All right. Thank you. Thank you.

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

Great. Good morning. Just to kind of come back to, you know, the different options, you've been clear you want to see how the HDRD facility kind of ramps up. Are there other kind of options or things that are on the table that you're considering that may be more timely that you may either want or need to pursue in the nearer term? Or should we really be thinking about it as obviously closed hail to gas, the Pipestone, Dimmesdale sale, you know, let the RD facility ramp up, which, you know, as you talked about is kind of over the coming weeks, and then kind of reevaluate the situation at that point? Is it kind of more a 2024 thing for any other alternatives?

Well, given we're almost in the middle of November, yeah, don't expect a giant announcement for us in the next couple of weeks.

Okay.

And then as you think about, can you talk about what some of the other things are on the table or without? That's probably fairly exhaustive. Is there anything that you would be ruling out, whether that's material share buybacks or are there certain assets that are largely untouchable in your mind from a sale perspective?

No, there's not. Well, I'd say just in general, nothing is off the table. I mean, we will maximize value any way we can. Obviously, the stock hasn't moved. We've done transaction multiples of our trading multiples. We're coming out of this with near nothing in debt. And we've got HDRD online. So, you know, I think I'd like to let this saddle and see, you know, the market doesn't have the best, or I shouldn't say the market, the LCFS doesn't have the best liquidity. So there's definitely an impact on its valuation because of that. But we'd like to see where things trade, but there's nothing that's off the table. And like I said before, there are, all sorts of different options for us to force shareholder value to improve, and we will pursue them.

Okay, understood. And just one last question then. As you think about your potential to deploy capital into growth projects, you previously talked about anything that you're going to do in midstream. It sounds like it's smaller in nature, quick payback, that there isn't an appetite for large projects at the midstream level. Is that still the case?

Yeah, that's still the case. That's great. Thank you. Thank you.

Ladies and gentlemen, as a reminder, should you have a question, please press star 1. Your next question comes from Patrick Kenney from National Bank Financial. Please go ahead.

Thank you. Good morning, guys. Maybe for Brian, I know that at the time the Pipestone deal was announced, you were going to take a bit of time to consider right-sizing your senior credit facility. Just wondering if you could share any updates on where you'd like to see that capacity come down to from the current 600.

Yeah, it will be lower. I think as Rob mentioned at the outset here, if you take a look at the gross proceeds from the transaction, And that will pay back all the debt we have outstanding that will put us in a pretty strong spot financially. You pay, as you know, you pay standby low fees on credit capacity that you're not losing, that you're not using. That is a drag on the business, although it is not a massive drag. So it will be lower. I think our intent here is just to make sure that we have the adequate capacity to maintain the working capital in the business. As you know, running a refinery is pretty intensive from a capital, a working capital perspective, given the amount of feedstock we buy, having inventory and then process before we kind of receive the proceeds from the refined product sales. And then as we look to kind of, you know, at small kind of organic growth opportunities and around our asset base, we just want to make sure that we have the financial capacity to support that. So just maybe more significantly answer your question, lower, significantly smaller than it has been right now. And you've got our commitment that we will be running this business with lower levels of debt. And I think that's becoming more and more obvious given what we've seen in the industry market and the cost of capital and the cost of debt specifically.

And maybe just on the proceeds to be received, I mean, I guess half of it's in the form of Altigas shares. So just given the shares are trading above where they were when you did the deal, is there any way to lock in your price to be received here before everything officially closes? Or how are you thinking about maximizing your overall proceeds while minimizing market risk?

Frankly, we're pretty happy with the Altigas position and we think it's going to go higher.

Okay, great. Last one for me. I guess just from a pro forma business mix standpoint, any updates on where you'd like to land from a percent midstream versus percent refining, as well as maybe just your overall appetite for commodity-based cash flows as a percentage of run rate EBITDA? Is it less than 50%, less than a third? Just any thoughts around target cash flow quality profile would be great. Thanks.

I mean, we can't dial it per se. We've got opportunities in front of us on both businesses. I think it's important to remember that this business has been capital starved for a couple of years. Debt levels were too high and some businesses fairly obvious investments have not been made. And so, you know, we look at it less in terms of what the ultimate mix ends up being and more with the exact opportunity set that's in front of us right now. So we have, we've got a few things on the downstream side, but they're really not large, you know, kind of tankage types of stuff that will help us on trading and things like that. But it's not, It's not that we're directing capital because we prefer to see more of it at midstream versus more of it at downstream. It's just the opportunities that we've got in front of us and the one downstream is fairly fixed. There's not a lot of growth that we can build in there without having major expansions and things like that. I don't think anybody goes out and Well, I guess I shouldn't say that, but we're comfortable with our commodity exposure, and I would characterize it a little bit more as spread exposure rather than pure commodity exposure. When you look at both businesses, both downstream with your crack spreads, and then we've got a number of opportunities that would be frac-type spread opportunities. on the um on the midstream side and we like those they create they've got a ton of optionality um they're they tend to be unidirectional and that um we make money when those spreads uh widen and we like and we like to lock those in uh when it goes the other way it doesn't really cost us money so it's um it's truly kind of call options on spreads so uh we're we're very comfortable with that business um and the opportunities that we've got in front of us right now um are frankly the ones that we're going to do in the near term are a mix of there's some added processing capacities and adding some customers under long-term, you know, 10-year take or pays. That just happens to be in front of us. We'll do that business all day long. And then the other ones are also a little more midstream focused right now. But again, it's cash flow generation is our primary focus.

Got it. Thank you for your comments, Rob. Thanks, Brian. Thank you.

There are no further questions at this time. I'll turn the call over to Mr. Bowman for closing remarks. Please proceed.

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

Thank you all, and have a great day. Ladies and gentlemen, this concludes your conference call for today.

We thank you for participating and ask that you please disconnect your lines. Thank you.