Tidewater Midstream and Infrastructure Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 15, 2024

There are 9 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the Tidewater Midstream and Infrastructure Q2 20 24 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. Also note that this call is being recorded on Thursday, August 15, 2024. And I would like to turn the conference over to Michael Grafcher.

Operator

Please go ahead, sir.

Speaker 1

Thank you, operator, and welcome, everyone, to Tidewater Midstream's Q2 2024 results conference call. I'm Michael Grafcher, Manager, Investor Relations. And joining me today are Jeremy Baines, CEO and Aaron Ames, Tidewater Midstream's Interim CFO. Also with us and available during question and answer session is Sean Meaney, EVP, Planning and Strategy. Before we begin, please note that 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.

Speaker 1

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 risks 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 SEDAR. And with that, I will now pass the call over to Jeremy to go over the highlights of the quarter.

Speaker 2

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 Q2. This represents a 98% utilization rate.

Speaker 2

We are on track to meet and likely exceed the previously announced full year utilization rate of 85% for 2024. During the 1st and second quarters of 2024, Tidewater Renewables forward sold BCL CFS credits at an average price of approximately $4.50 per credit to various counterparties. As we exited the 2nd quarter, it became apparent that depressed low carbon fuel credit prices in the U. S. Were going to have an impact on Canadian low carbon fuel credit prices.

Speaker 2

The higher priced BC credit market is proving to be an attractive outlet for U. S. Producers of renewable fuel who are able to take advantage of U. S. Subsidies and earn Canadian compliance credits.

Speaker 2

The importation of substantial volumes of subsidized U. S. 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 Q3 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.

Speaker 2

The inability to generate any credit based revenue would have significant impact significant negative 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 Tidewater Midstream and to assess alternative liquidity sources. The Renewable 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 $129,700,000 and a commitment to purchase a minimum of 80,700,000 BCLCFS credits as they are produced by Tidewater Renewables over the next 9 months.

Speaker 2

Upon completion of the transaction Tidewater Midstream will reacquire all working interest 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 $40,000,000 to $50,000,000 per year for Tidewater Midstream. Tidewater Midstream expects to finance the transaction through operating cash flow, a CAD 25,000,000 increase in its revolving credit facility and a CAD 150,000,000 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 fuel program to allow for a viable domestic renewable fuels industry.

Speaker 2

We believe that with expected regular chlorine changes and result in market corrections, the BC LCFS credit market will correct and ultimately return to more sustainable levels. The current BCLCFS 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 reacquires a significant amount of deconsolidated EBITDA that was previously dropped down to Tidewater Renewables as part of the IPOs. 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 2nd quarter operations.

Speaker 2

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 6 week scheduled turnaround. Looking forward, Q3 crack spreads have continued to strengthen in part driven by unplanned refinery outages in the U.

Speaker 2

S. As well as increased demand through the summer driving season. On the midstream side of the business, during the Q2, we completed the previously announced turnaround at the BRC. The turnaround was completed on time and $5,000,000 below initial cost expectations. And most importantly, the turnaround was completed safely with no lost time incidents.

Speaker 2

An amount 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 4, 2024 Tidewater Midstream completed an important milestone with the issuance of $100,000,000 of convertible unsecured subordinated debentures. Proceeds from the issuance were used to repay the $75,000,000 convertible debentures, which were due September 30, 2024 with the remaining proceeds to be used for general corporate purposes. Also on August 15, 2024, the maturity of the Tidewater Renewables credit facilities were extended from August 18, 2024 to August 30, 2024 to provide time for the proposed transaction to close.

Speaker 2

I will now turn the call over to Aaron to go through the financial results and our revised outlook.

Speaker 3

Thank you, Jeremy. During Q2, 2024, consolidated adjusted EBITDA was $45,300,000 of which $29,600,000 was contributed by Tidewater Renewables. During the same quarter last year, consolidated adjusted EBITDA was $44,000,000 of which $8,100,000 was from Tidewater Renewables. The year over year increase was primarily driven by a higher contribution from HGRD, which was commissioned during the Q4 of 2023. Year to date consolidated EBITDA was $85,100,000 of which Tidewater Renewables contributed $55,000,000 I'd like to turn to our expectations for the year.

Speaker 3

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 average in 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 $130,000,000 to $150,000,000 I'll now ask the operator to open the call up for questions.

Operator

Thank you, sir. And your first question will be from Rob Hope at Scotiabank. Please go ahead.

Speaker 4

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 these lower carbon intensity for PGR?

Speaker 2

Thanks for the question, Rob. Yes, 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.

Speaker 2

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.

Speaker 5

All right.

Speaker 4

Thanks for that. And then maybe can you give a little bit of insight into the $40,000,000 to $50,000,000 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?

Speaker 2

So the $40,000,000 to $50,000,000 of EBITDA is 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 that was done by the special committees of the board and 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 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.

Speaker 2

Thank you.

Operator

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

Speaker 6

Thank you. Good morning. Maybe just following on the LCFS credit discussion there. So 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?

Speaker 2

Yes. I mean, obviously, we'll be ongoing evaluating the market and where the price for credits and the market for credits is. We are 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.

Speaker 2

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 BC 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.

Speaker 2

S. Able to get the production subsidy effectively down there and then come into 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 expected these things have a way of fixing themselves and we really expect that will take place within this liquidity window that's been created and we'll obviously continue to evaluate as that unfolds.

Speaker 6

And I guess related to the timing of all this to unfold, on the new $150,000,000 term loan, can you comment on what the maturity date 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?

Speaker 2

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

Speaker 3

Yes. So we're looking at like we disclosed $150,000,000 term loan to be repaid over kind of something similar to like a 5 year term. And so those details are being worked through right now. And so we'll update the market as we finalize those details.

Speaker 6

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?

Speaker 2

Yes. So multipart 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 AECO has been very depressed with storage being quite full. Our view is producers were anticipating LNG Canada coming on and we had a bit of a warm weather.

Speaker 2

So I think a little bit of a head, but it looks like where the forward curve is as we move into the fall here, we expect production to come back on fairly quickly as prices get above $1 it starts to make economic sense for those producers to produce and that those expectations have been reflected in our guidance.

Speaker 6

Okay. And what about current throughput at BRC, just given where the spot price is today for AECO? Do you see any risk there in BRC being shut in temporarily as well or maybe just comment on

Speaker 5

the sustainable walk through? Yes.

Speaker 2

Our view is 2 pieces to that at BRC. 1 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 AECO price has actually been a bit of an advantage for us being able to bring in and straddle gas and extract there. So it's a different situation versus sort of the drier gas in the WRAM area.

Speaker 6

Got it. Okay, that's great.

Speaker 1

I'll leave it there. Thanks. Thanks, Pat.

Operator

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

Speaker 7

Great. Thank you. Can you just frame the compliance obligation at the PGR for midstream versus the amount of credits you're buying?

Speaker 2

I'm going to have Sean

Speaker 5

Robert, can you just repeat that?

Speaker 7

Yes. Just the magnitude of your compliance obligation at Midstream versus the amount of credits you're buying, like what's the offset?

Speaker 5

Yes. If you look at what ACRD 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 9 months, as Jeremy mentioned, we'll kind of

Speaker 1

be long credits for the rest of

Speaker 5

this year and into next year for most pretty much all of next year. So we definitely see this transaction is kind of covering our compliance for call it this year or next year.

Speaker 7

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.

Speaker 5

We won't be long credits, we'll satisfy our obligation. Remember that PGR is an obligated party. We're producing the fossil, we generate an obligation from the field reproduce. So we'll be able to utilize these credits to satisfy our obligation that comes due each year.

Speaker 7

Okay. So you're going to be still net short at PGR?

Speaker 2

No, it will be balanced. Yes, through the rest of so we've covered 2024s compliance and we've covered 2025s and plus or minus a little bit there. So we have basically just we are locking in our compliance as we go. We covered this year and then we'll be buying as we go as it and it will cover next year.

Speaker 7

Got it. Okay. In terms of the acquired assets and just in terms of the wording, it was seemed to be referencing the take or 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?

Speaker 2

Well, so I guess how it works, Robert, is 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 $40,000,000 to $50,000,000 a year. There is a little bit of variability in there depending on credits and a few pieces of volume.

Speaker 2

But 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 malaise in LCFS credit markets.

Speaker 3

And just to be clear, this is from a deconsolidated perspective. Obviously, from a consolidated perspective, there's no real impact because the same $40,000,000 to $50,000,000 that was at renewables is on a consolidated basis at midstream because we consolidate renewables. This is really on a deconsolidated basis that and from a credit agreement perspective and where cash flow sit from an ownership perspective.

Speaker 7

Right. Okay. And I guess just the last question, if I think about the guidance, so it's down $20,000,000 from prior, you mentioned the LCFS 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?

Speaker 7

Or is it really just pretty much everything down below?

Speaker 5

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 AECO is. Obviously, the last couple of months have been extremely depressed, probably very top on producers that are heavily weighted to

Speaker 2

the gas side. But when

Speaker 5

we look at the forward curve where it's coming, we do expect that facility to be on in the next couple of months here.

Speaker 7

Okay, that's great. Thank you.

Operator

Thank you. Your next question will be from Robert Catellier at CIBC Capital Markets. Please go ahead.

Speaker 8

Hey, you've answered most of my questions at this point. But I just wondered if we could go back to the term loan 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?

Speaker 3

I mean, we're down the path on the financing. So we feel confident, but there is subject to these requirements, regulatory requirements and the financing requirements. So but we feel confident that we can get this financed. Yes.

Speaker 2

Just a little more color there Rob. So 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.

Speaker 2

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.

Speaker 8

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 2 entities?

Speaker 2

Yes, I mean, yes, like I hear the question, but I understand where it's coming from. We continuously look at those alternatives. At this point, the special committees of the board decided this was the best solution to this issue. We'll continue as shareholders to monitor what makes sense, but there's nothing in the works, nothing announced. And it's something that may or may not happen in the future and there's no there's nothing happening on that front as we speak.

Speaker 3

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 I feel confident about that.

Speaker 8

Okay. Thanks guys.

Speaker 5

Thank you.

Operator

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

Speaker 1

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.

Operator

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.

Powered by Quartr

Key Takeaways

  • Tidewater Midstream announced a related-party transaction to acquire assets from Tidewater Renewables for CAD 129.7 million plus a commitment to purchase 80.7 million BC LCFS credits over 9 months, expected to add CAD 40–50 million in run-rate deconsolidated EBITDA and financed via operating cash flow, a CAD 25 million revolver increase and a CAD 150 million term loan closing in Q3 2024.
  • The HDRD renewable diesel complex averaged 2,925 barrels per day in Q2 at 98% utilization and is poised to exceed the previously guided 85% full-year utilization rate for 2024.
  • Depressed BC low-carbon fuel credit prices—driven by subsidized U.S. renewable diesel imports—have halted Q3 credit sales and strained Tidewater Renewables’ liquidity, prompting the asset acquisition while management seeks market and regulatory corrections to restore credit values.
  • On the refinancing front, Tidewater Midstream issued CAD 100 million of convertible unsecured subordinated debentures on June 4 to repay CAD 75 million of maturing debentures, and Tidewater Renewables’ credit facilities were extended to August 30 to support the pending transaction.
  • Due to LCFS market uncertainty, 2024 consolidated adjusted EBITDA guidance was lowered to CAD 130–150 million (from prior), with Q2 adjusted EBITDA of CAD 45.3 million—up from CAD 44 million a year ago, driven by higher HDRD contributions.
AI Generated. May Contain Errors.
Earnings Conference Call
Tidewater Midstream and Infrastructure Q2 2024
00:00 / 00:00