Tidewater Midstream and Infrastructure Ltd.

Good afternoon, ladies and gentlemen, and welcome to the Tidewater Midstream and Infrastructure Q2 2024 Financial Results Conference Call. At this time, note that all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. And if at any time during this call you require immediate assistance, please press star zero for the operator. Also note that this call is being recorded on Thursday, August 15, 2024. And I would like to turn the conference over to Michael Grasher. Please go ahead, sir.

Thank you, operator. And welcome everyone to Tidewater Midstream's second quarter 2024 results conference call. I'm Michael Grasher, Manager, Investor Relations. And joining me today are Jeremy Baines, CEO, and Aaron Ames, Tidewater Midstream's intern CFO. Also with us and available during the question and answer session is Sean Heaney, EVP, Planning and Strategies. Before we begin, please note the matters discussed on this call include forward-looking statements under applicable securities laws with respect to Tidewater Midstream and infrastructure LTD, including but not limited to statements regarding investments and acquisitions by the company, commercial arrangements of the company, the business strategies and operational activities of the company, markets and industries in which the company operates, cost and expense management, the company's leverage and plans for debt and leverage reduction, refinancing of the company's indebtedness, the value of the company's assets, and the future growth, objectives, targets, and financial and operational performance of the company and its businesses. Such statements are based on factors and assumptions that management believes are reasonable at the time they were made and information currently available. 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 learn more about these forward-looking statements and non-GAAP measures, please see Tidewater Midstream's financial reports, which are available on CDAR.

And with that, I will now pass the call over to Jeremy to go over the highlights of the quarter. Thanks, Michael. Thanks to everyone for joining us today.

I want to start by providing an overview of the transaction that was announced with our release this morning. From an operational standpoint, the HDRD complex continues to operate very well, averaging daily throughput of 2,925 barrels per day during the second quarter. This represents a 98% utilization rate. We are on track to meet and likely exceed the previously announced full-year utilization rate of 85% for 2024. During the first and second quarters of 2024, Tidewater Renewables forward sold BC LCFS credits at an average price of approximately $450 per credit to various counterparties. As we exited the second quarter, it became apparent that depressed low-carbon fuel credit prices in the U.S. we're going to have an impact on Canadian low carbon fuel credit prices. The higher price BC credit market is proving to be an attractive outlet for US producers of renewable fuel who are able to take advantage of US subsidies and earn Canadian compliance credits. The importation of substantial volumes of subsidized US renewable diesel into British Columbia has significantly reduced the demand by LCFS obligated parties for compliance credits. The result has been that Tidewater Renewables was unable to economically contract BC LCFS credit sales for the third quarter of 2024 and does not expect to do so in the short term. The revenue generated from future BC LCFS credit sales makes up a significant portion of Tidewater Renewables' overall corporate revenue and cash flow. The inability to generate any credit-based revenue would have significant negative impact implications for Tidewater Renewables underlying business and liquidity. To remedy this, management of Tidewater Renewables evaluated alternative liquidity sources, including a transaction whereby Tidewater Midstream would acquire certain assets from Tidewater Renewables in exchange for upfront cash proceeds and near-term BC LCFS credit purchases while the sector awaits a longer-term solution. In connection with the proposed transaction, Tidewater Renewables Board of Directors established an independent special committee to evaluate the proposed transaction and to negotiate the terms thereof with the independent special committee established by the Board of Directors of Tidewater Midstream and to assess alternative liquidity sources. The Renewables Special Committee has retained a financial advisor and legal counsel in connection with the proposed transaction. After numerous discussions, the special committees and boards of directors of both Tidewater Midstream and Tidewater Renewables have approved entering into a related party agreement whereby Tidewater Midstream will acquire these assets from Tidewater Renewables in exchange for an upfront cash payment of $129.7 million and a commitment to purchase a minimum of 80.7 million BC LCFS credits as they are produced by Tidewater Renewables over the next nine months. Upon completion of the transaction, Tidewater Midstream will reacquire all working interests in the PGR and BRC assets and the contracted take or pay commitment between Tidewater Midstream and Tidewater Renewables will cease to exist. The acquired assets are expected to generate run rate deconsolidated EBITDA of $40 to $50 million per year for Tidewater Midstream. Tidewater Midstream expects to finance the transaction through operating cash flow, a $25 million increase in its revolving credit facility, and a $150 million term loan. The transaction is expected to close during Q3 2024 and is subject to completion of financing, documentation, and TSX approval. Tidewater Renewables has also approached the federal and BC governments to discuss needed changes within the low-carbon fuels program to allow for a viable domestic renewable fuels industry. We believe that with expected regulatory changes and resultant market corrections, the BC LCFS credit market will correct and ultimately return to more sustainable levels. The current BC LCFS credit prices challenge tidewater renewables liquidity in the near term, and we feel this transaction provides the necessary runway for the market and regulatory environment to correct and return to support the long-term viability of our renewables business. Going forward, Tidewater Midstream will benefit from a simplified corporate structure as it requires a significant amount of deconsolidated EBITDA that was previously dropped down to Tidewater Renewables as part of the IPL. Moving forward, Tidewater Renewables will be able to focus all of its efforts on its renewable fuels business, which consists of the HDRD complex and the proposed SAP project where the feed study continues to progress. I will now provide a brief overview of our second quarter operations. On the downstream side of the business, the quarter started with PG crack spreads around $82 per barrel. As we have seen in previous years, crack spreads moderated slightly to approximately 78 per barrel in the middle of the quarter before strengthening throughout the latter half of the quarter as the summer driving season began to ramp up. Overall, crack spreads averaged approximately $81 per barrel for the quarter, below the same period last year, which averaged around $87 per barrel. Throughout the quarter, The PGR operated at capacity significantly higher than the same period last year, which is impacted by the six-week scheduled turnaround. Looking forward, Q3 crack spreads have continued to strengthen in part driven by unplanned refinery outages in the U.S., as well as increased demand through the summer driving season. On the midstream side of the business, during the second quarter, we completed the previously announced turnaround at the BRC. The turnaround was completed on time at $5 million below initial cost expectations, and most importantly, the turnaround was completed safely with no lost time incidents. An immense amount of time goes into the execution of these turnarounds, and to complete it without any safety incidents is a real testament to our team's focus on safe and reliable operations. This is a key priority for us. On the refinancing front, On June 4th, 2024, Tidewater Midstream completed an important milestone with the issuance of $100 million of convertible unsecured subordinated debentures. Proceeds from the issuance were used to repay the $75 million convertible debentures, which were due September 30th, 2024, with the remaining proceeds to be used for general corporate purposes. Also, August 15th, 2024, the maturity of the Tidewater Renewals Credit Facility's We're extended from August 18, 2024 to August 30, 2024 to provide time for the proposed transaction to close. I will now turn the call over to Jeremy to go through the financial results in our revised outlook.

Thank you, Jeremy. During Q2 2024, consolidated adjusted EBITDA was $45.3 million, of which $29.6 million was contributed by Tidewater Renewables. During the same quarter last year, consolidated adjusted EBITDA was $44 million, of which 8.1 million was from Tidewater Renewables. The year-over-year increase was primarily driven by a higher contribution from HDRD, which was commissioned during the fourth quarter of 2023. Year-to-date consolidated EBITDA was 85.1 million, of which Tidewater Renewables contributed 55 million. I'd like to turn to our expectations for the year. As a result of the uncertainty surrounding the BC LCFS credit market, we are lowering our previously issued 2024 consolidated adjusted EBITDA guidance. Assuming PG crack spreads averaging the 80 to 90 per barrel range and an expected completion of the transaction discussed by Jeremy during Q3, Tidewater Midstream now expects 2024 consolidated adjusted EBITDA to be in the range of 130 to 150 million. I'll now ask the operator to open the call up for questions.

Thank you, sir. Ladies and gentlemen, if you do have a question, please press star followed by one on your touchstone phone. You will then hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by two. And if you're using a speakerphone, we ask that you please lift the handset first before pressing any keys. Please go ahead and press star one now if you have any questions. And your first question will be from Rob Hope at Scotiabank. Please go ahead.

Thank you. Maybe just on the LCFS credit, how should we think about or how are you thinking about in guidance the headwind of the LCFS EBITDA relative to lower compliance costs at PGR? And are you looking to somehow lock in some of this lower carbon intensity for PGR?

Thanks for the question, Rob.

Yeah, that's exactly correct. We've built in the lower expected cost of LCFS credits go forward into the Tidewater midstream compliance costs, and we have locked in that price for credits for 2025 through this transaction and beyond. So we are From Tidewater Midstream's point of view, we are an obligated party and we needed the credits, so we have bought them at what we think is hopefully close to the bottom of the market. And then we've reflected that price that renewables will receive for credits that gives them a base price to be able to continue to operate and run the RD plant in a cash flow positive manner.

All right. Thanks for that. And then maybe... Can you give a little bit of insight into the $40 to $50 million of EBITDA that was acquired? How did the valuation come about? And can you just maybe also touch on other scenarios that Tidewater looked at?

So the $40 to $50 million of EBITDA, this is cash flow that... When the drop-down took place was contracted to Tidewater Renewables. It was an asset that they had that they were able to monetize as part of this transaction to ensure their liquidity. The valuation was, you know, that was done by the special committees of the board. And it, you know, reflects a value for those types of cash flows in the market today. So that's how it came about. We expect it will be ongoing and, you know, It is bringing a good stream of cash flow that we understand very well back to tidewater midstream and provides liquidity and debt relief to tidewater renewables under the transaction.

Thank you.

Thank you. Next question will be from Patrick Kenny at National Bank Financial.

Please go ahead.

Thank you. Good morning. Maybe just following on the LCFS credit discussion there. It sounds like you're covered through 2025 based on this agreement, but assuming the credit market doesn't recover at some point next year, either on its own or with the help of policy changes, would the plan be to continue rolling over these purchase agreements with renewables until the market does stabilize, or do you then move towards satisfying PGR's compliance requirements in the open market?

Yeah, I mean, obviously, we'll be ongoing evaluating the market and where the price for credits in the market for credits is. We have a significant compliance obligation at TWM that we manage. And so, obviously, our expectation is that this will correct. We're already starting to see. There was a recent announcement come out by CARB yesterday about increasing Compliance obligations for fuels that we think will be supportive of the market in British Columbia. We are seeing some high cost biodiesel facilities in the U.S. having shut in and or shut down. And we expect through the winter season, the ability to bring in winter spec through imports into B.C. will take place. which will eventually correct the market. And we also do believe, given the unlevel playing field where you've got subsidized production in the U.S., able to get the production subsidy effectively down there and then come into the market in B.C. and get the sales credit as well as the double dipping that is possible. creating an unlevel playing field for our domestic market. It is in the best interest of the governments to fix that problem so that we have a viable domestic renewable fuels industry. The province of British Columbia in particular has been very supportive and has a stated goal to have that industry. And so we expect that, you know, these things have a way of fixing themselves and we will expect that will take place within this liquidity window that's been created. And, you know, we'll obviously continue to evaluate as that unfolds.

And I guess related to the timing of all this to unfold, you know, on the new $150 million term loan, can you comment on what the maturity date is? is expected to look like, whether this will be subordinate to your senior credit facility, and perhaps what are the outstanding items here, terms or conditions that still need to be sorted out before approval or commitment is in place in order to close the transaction by the end of the month?

Yeah, Rob, that's a good question. Things are well down the path. I'll let Aaron just give you a little more detail on that.

Yeah, so we're looking at... like we disclosed $150 million term loan to be repaid over kind of something similar to like a five-year term. And so those details are being worked through right now. And so we'll update the market as we finalize those details.

Okay. And I guess shifting gears to midstream, just with the shut-in at Ram River, are you able to – perhaps flow through any of the fixed costs to your customers while shut in? And if not, I guess, what does the monthly cash burn rate look like until operations are restarted over the next few months? And I guess related to that, do you have a sense as to what ACO price is needed for your customers to resume normal production levels?

Yeah, so a multi-part question. As far as the facility is on an operating cost flow-through, we are able to push those costs through to volumes that flow in the year, and we'll be managing that as we go forward. As far as cost to flow gas, like obviously, ACO has been very depressed with storage being quite full. Our producers were anticipating LNG cancer coming on, and we had a bit of a warm weather, so they got a little bit of a head. But it looks like, you know, with where the forward curve is as we move into the fall here, we expect production to come back on that. fairly quickly as prices get above a dollar. It starts to make economic sense for those producers to produce.

Those expectations have been reflected in our guidance.

What about current throughput at BRC, just given where the spot price is today for ACO? Do you see any risk there in BRC being shut in temporarily as well, or Maybe just comment on the sustainable throughput.

Our view is two pieces to that at BRC. One is a lot of the production is associated with oil economics, so that really changes the economics of the producers flowing there. And then the second part is the low eco price has actually been a bit of an advantage for us being able to – bring in a straddle gas and extract there. So it's a different situation versus sort of the drier gas in the RAM area.

Got it. Okay, that's great. I'll leave it there. Thanks. Thanks, Pat.

The next question is from Robert Kwan at RBC Capital Markets. Please go ahead.

Great, thank you. Mr. Nick, can you just frame the compliance obligation at the PGR for midstream versus the amount of credits you're buying?

I'm going to have Sean start us off. Robert, can you just repeat that?

Yeah, just the magnitude of your compliance obligation at midstream versus the amount of credits you're buying, like what's the offset? Yeah, if you look at what, you know, HDRD kind of can produce over a full year versus what we're obligated to at PGR, I would say between a quarter to half a year. So with this transaction kind of buying all the credits that they'll be producing over the next nine months, as Jeremy mentioned, will kind of be long credits for the rest of this year and into next year for most, pretty much all of next year. We definitely see this transaction as kind of covering our compliance for this year and next year. Okay, so if you're going to be long credits, just what is the monetization strategy? Is it going to be monetizing as you... Sorry. Go ahead. We won't be long credits. We'll satisfy our obligation. Remember that PGR is an obligated party. We're producing a fossil regenerate an obligation from the fuel reproduced. So we'll be able to utilize these credits to satisfy our obligation that comes through each year.

Okay. So you're, you're going to be still net short at PGR. No, it will be balanced.

Yeah. Through the net, through the rest of, so we've covered 2024 is compliance and we've covered 25 and, uh, you know, plus or minus a little bit there. So we have basically just, you know, we are locking in our compliance as we go. We've covered this year, and then we'll be buying as we go, and it'll cover next year's.

Got it. Okay. In terms of the acquired assets and just in terms of the wording, it would seem to be referencing the take your pay that was going into renewables. Was it pretty close to being a complete offset in terms of the revenues or the costs saved that you were getting at the midstream level? Or is there any material change in EBITDA?

Well, so I guess how it works, Robert, is, you know, Renewables owns various functional units effectively that were PGR and the storage pool. There were associated take or pay obligations from midstream to use those assets going forward. Those associated take or pay obligations will now go away. The assets will be owned by Tidewater Midstream. And so the take or pay obligations were roughly $40 to $50 million a year. There is a little bit of variability in there depending on credits and a few pieces of volume. We expect that all will accrue now or that will all now accrue at the tidewater midstream level and in exchange renewables is going to be able to increase their liquidity, reduce a significant level of debt at renewables and be able to have the runway to get through the short-term Malaysian LCFS credit markets.

And just to be clear, this is from a deconsolidated perspective. Obviously, from a consolidated perspective, there's no real impact because the same, you know, 40 to 50 million that was at, you know, renewables is on a consolidated basis at midstream because we consolidate renewables. This is really on a deconsolidated basis and from a credit agreement perspective and where cash flows sit from an ownership perspective.

Right. Okay. And I guess just the last question, if I think about the guidance, so it's down $20 million from prior, you mentioned the LCSS values. So it sounds like if you're matched largely on PGR, is that... It sounds like that's pretty much then entirely the reduction at Tidewater Renewables. Is there any amount for Ram River in that that's material? Or is it really just pretty much everything down below? It's Sean. You're pretty spot on, Robert. There's a little bit coming down from Ram River, but as Jeremy mentioned, we're kind of looking at the forward curve where ACO is. Obviously, the last couple months have been extremely depressed, probably very tough on producers that are heavily weighted to the gas side. But when we look at the forward curve where it's coming, we do expect that facility to be on in the next couple months here.

Okay. That's great. Thank you.

Thank you. Once again, ladies and gentlemen, as a reminder, if you would like to have questions, please press star followed by one on your touchtone phone. And your next question will be from Robert Cotelier at CIBC Capital Markets. Please go ahead.

Hey, you've answered most of my questions at this point, but I just wondered if we could go back to the termone again and just your level of comfort securing that and getting that finalized in the window here that...

Tidewater Renewables has with its credit facility extension? We're down the path on the financing, so we feel confident.

But they're subject to these requirements, regulatory requirements, and the financing requirements. But we feel confident that we can get this financed.

Just a little more color there, Rob. Definitive documents are very far advanced. Discussions with lenders are very far advanced. They are obviously supportive. We put out the extensions that we've got that will allow us to move this forward. And I think our view is the lenders see the situation, they understand the short-term nature of the liquidity, and they see the plan that's been put forward. And it's a good plan for shareholders. debt holders, and it really is a good transaction to be supportive of.

Okay, so it sounds like it's more regulatory than the availability of financing. It's more a question of just finalizing it as opposed to the availability. Just bigger picture... understanding you have to close this transaction and get through this and deal with the immediate liquidity issue at renewables. But once that's done, I hate to ask this question, but is there a better structure and a motivation now to pursue consolidation of the two entities?

I hear the question and understand that where it's coming from. You know, we continuously look at those alternatives. At this point, the special committees of the board decided this was the best solution to this issue. You know, we'll continue as shareholders to monitor what makes sense, but there's nothing in the works, nothing announced. And, you know, it's something that, you know, may or may not happen in the future, and there's nothing happening on that front as we speak.

But this transaction greatly simplifies things, and so we're going down this path and trying to get this done in the timeframe that we indicated and feel confident about that.

Okay. Thanks, guys. Thank you.

Thank you.

And at this time, gentlemen, we have no other questions registered. Please proceed.

Thanks, everyone, for joining the call. The team is available to address any of the pending items with our contact information at the bottom of the press release this morning.

Thank you. Ladies and gentlemen, this does conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.