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Tidewater Midstream Fourth Quarter, Full Year 2020 Results

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   |    Monday,March 15,2021

Tidewater Midstream and Infrastructure Ltd. reported its Q4 / full year 2020 results.

Q4 Highlights:

• The Corporation’s full year performance continues to highlight the resiliency and stability of its integrated business model, given the challenges faced due to the global pandemic. Adjusted EBITDA increased to $48.8 million in the fourth quarter of 2020 as compared to $40.0 million in the fourth quarter of 2019, resulting in 22% Adjusted EBITDA growth. Adjusted EBITDA also increased by $1.2 million as compared to the third quarter of 2020 resulting in 3% Adjusted EBITDA growth. Net income attributable to shareholders was $7.1 million for the fourth quarter of 2020 as compared to net loss of $12.6 million in the fourth quarter of 2019. The increase is a result of realized and unrealized gains on derivative contracts.
• Net cash provided by operating activities totaled $54.6 million for the fourth quarter of 2020, with distributable cash flow of $13.5 million and a payout ratio of 25%.
• The Corporation has received material interest from external capital providers to develop various renewable energy and clean fuels projects. Tidewater has also had significant support from the BC and federal governments on their renewable initiatives and the Corporation wishes to thank the BC and federal governments for their support. With the increasing BC low carbon fuel standard credit prices and the commencement of the Canadian Clean Fuel Standard in 2022, the economics of these projects continue to display attractive returns and complement Tidewater’s asset base. The Corporation has a vital role to play in the long-term renewable energy transition in Canada and is currently developing clean fuels through its existing hydrogen and carbon capture assets, its ability to blend ethanol and renewable diesel and its current canola co-processing project. Tidewater is also evaluating opportunities in various renewable energy initiatives including renewable diesel, co-processing, renewable hydrogen, blue hydrogen, renewable natural gas, carbon capture, and other renewable energy projects.
• The Corporation, together with its partner TransAlta Corporation (“TransAlta”), continues to move forward on its sale of the Pioneer Pipeline to ATCO Gas and Pipelines Ltd. (“ATCO”) for gross proceeds of $255 million (the “Pioneer Transaction”). Net cash proceeds to Tidewater will be approximately $135 million which includes certain ancillary assets and completion of budgeted restoration work to be paid for by TransAlta. The transaction is subject to customary conditions for a transaction of this nature including regulatory approvals by the Alberta Utilities Commission and the Alberta Energy Regulator. Regulatory approval is anticipated in the second quarter of 2021 and Tidewater remains proactive in its efforts to complete the transaction on a timely basis.
• Tidewater’s top priorities remain free cash flow generation and debt reduction. Tidewater is committed to reducing leverage throughout 2021 with a target of 3.0x to 3.5x Net Debt to annualized Adjusted EBITDA, with closing of the Pioneer Transaction.
• The current market environment is showing positive signs of increased producer activity and increasing demand for the Corporation’s services and underutilized capacity. Tidewater continues to see strong demand at PGR as a result of large infrastructure projects in central and northern British Columbia. Throughput at PGR remains strong at over 12,000 bbls/day with combined gasoline and diesel production over 10,500 bbls/day. The PGR crack spread, a measure of refining margins, has continued to rise and has been at its highest point since the first quarter of 2020. The Pipestone Gas Plant had its strongest run times in December and cashflow generation to date during the fourth quarter.

Environmental, Social and Governance

• Tidewater remains committed to improving its Environmental, Social and Governance (“ESG”) performance and disclosure by reducing emissions with responsible and efficient energy infrastructure investment, enhancing environmental performance and improving disclosure through the posting of Tidewater’s ESG metrics on its website. In November 2020, as part of its commitment to enhancing disclosures, Tidewater published a significant increase in ESG metrics and corporate policy disclosures which highlight several improving trends. This information is available at www.tidewatermidstream.com/esg/. Under this section, Tidewater has provided an overview of its recent ESG accomplishments, identified key relevant metrics to track, recognized improvement opportunities, and published goals to improve overall sustainability.
• In January 2021, the Government of Canada’s $750 million Emissions Reduction Fund endorsed two small scale Tidewater projects given their goal to eliminate or lower routine venting of methane rich natural gas. This will result in a reduction of GHG emissions with the projects expected to be online by the end of 2021.
• With Tidewater’s integrated network of infrastructure assets, it is well positioned to be an impactful contributor in reducing GHG emissions. A key contribution includes the construction and operation of the Pioneer Pipeline, which provided the infrastructure for TransAlta to convert their coal fired power generation stations to clean natural gas provided by the BRC. Further, PGR is one of the only refineries in Western Canada that can utilize renewables to reduce its carbon footprint including canola oil, biodiesel and ethanol.

Outlook & Corporate Update

Tidewater is well positioned to weather the current economic environment and remains focused on cash flow generation, increasing liquidity and reducing leverage. Tidewater is positive about the longer-term outlook for commodity prices in 2021 and beyond. Increased investor interest in the energy sector with the expectation of a global recovery along with fiscal stimulus programs has increased the attractiveness of commodities during the first quarter of 2021. Improving crude oil, natural gas, NGL and refined product pricing in the first quarter of 2021 is encouraging for the continuing strength of the Corporation’s business.

Tidewater’s forecasted payout ratio is expected to range from 20% to 25% with the remainder of Distributable Cash Flow used to reduce leverage. The proceeds from the Pioneer Transaction will significantly reduce leverage with net proceeds of approximately $135 million. A large portion of Tidewater’s cashflow is generated from take-or-pay contracts and long-term agreements with over 50% generated from investment grade counterparties. Tidewater remains committed to its target net debt to annualized Adjusted EBITDA of approximately 3.0x – 3.5x in 2021 with the completion of the Pioneer Transaction.

PGR is a 12,000 bbl/day light oil refinery that predominantly produces low sulphur diesel and gasoline to supply the greater Prince George region. PGR has significant onsite storage capacity of greater than 1.0 MMbbl and flexible logistics, with pipeline, rail and truck connectivity in place. The Prince George region is generally in short supply of refined products and the refinery’s location within the region makes it a critical piece of infrastructure with a significant logistical advantage to address demand in northern British Columbia.

PGR has significant advantages given its location as the Prince George market faces logistical and economic challenges given transport costs and the lack of offloading facilities in the area. Additionally, the refinery supplies the majority of the regional demand, which is comprised of major local industries such as forestry, mining and oil and gas.

During the fourth quarter of 2020, total throughput exceeded the refinery’s nameplate capacity at approximately 12,187 bbl/day, consistent with the third quarter of 2020.

Tidewater’s refined product yields at PGR were as follows:

Tidewater’s refining margins are largely driven by commodity prices, particularly the cost of crude feedstock and other raw materials, along with market prices for refined products. During the fourth quarter of 2020, Tidewater realized improved margins on diesel as a result of increased pricing which was partially offset by lower demand due to the implementation of new COVID-19 restrictions in December. Gasoline prices and volumes decreased slightly quarter over quarter as a result of seasonal demand. Overall, margins at the refinery increased approximately 10% from the third quarter as a result of strong diesel pricing.

Tidewater is encouraged by the resilience of the PGR asset in an unprecedented time with full-year crack spreads holding steady around $55/bbl. This demonstrates the refinery’s long-term value in servicing the markets in which it operates.

Tidewater is progressing on its Canola co-processing project and expects it to be online in late 2021. The project is supported by the BC government and will produce both renewable gasoline and renewable diesel.

The Corporation continues to evaluate various renewable initiatives at PGR. These include expanding existing hydrogen assets, renewable hydrogen and the potential for a large-scale renewable diesel project with current support from the provincial government. Renewable diesel results in an approximate 80% – 90% reduction in greenhouse gas (“GHG”) emissions compared to regular conventional diesel and performs better in colder temperatures as compared to biodiesel.

Tidewater is also pursuing numerous low capital and high rate of return debottleneck and optimization opportunities within its downstream business unit.

The Pipestone Gas Plant is designed to process approximately 100 MMcf/day of sour natural gas. This asset includes two acid gas injection wells, a saltwater disposal well, and sales gas pipelines directly connected to the Pipestone Gas Storage Facility, as well as the Alliance and TC Energy pipeline systems. The facility is also pipeline connected to Pembina for the C2+ and C5+ liquid streams.

The Pipestone Gas Plant processed an average volume of 72 MMcf/day in the fourth quarter of 2020 which is consistent with the third quarter of 2020. Facility availability for the quarter averaged 77% which was impacted by an unplanned outage in early October. The Pipestone Gas Plant is fully contracted with over 80% committed on take-or-pay arrangements.

The Pioneer Pipeline is currently jointly owned and operated by Tidewater and TransAlta. The asset is held for sale, subject to closing of the Pioneer Transaction which is subject to customary conditions in a transaction of this nature including regulatory approvals by the Alberta Utilities Commission and the Alberta Energy Regulator. Following the execution of the purchase and sale agreement, the parties filed applications for regulatory approval. Regulatory approval is anticipated in the second quarter of 2021 and Tidewater remains proactive in its efforts to complete the transaction on a timely basis.

Upon the closing of the Pioneer Transaction, the Pioneer Pipeline will be integrated into NOVA Gas Transmission Ltd.’s (“NGTL”) and ATCO’s Alberta integrated natural gas transmission systems to provide reliable natural gas supply to TransAlta’s power generating units at Sundance and Keephills.

Tidewater has entered into a Project and Expenditure Authorization Agreement with NGTL at the Rat Creek West Meter Station for the natural gas liquids extraction service (OS-Ext) that will allow Tidewater to extract higher value liquids from the natural gas stream prior to delivery of natural gas at the TransAlta facilities. Tidewater does not expect any facility modifications or capital expenditures to be required to implement this service. It is expected that with this service Tidewater will be able to materially increase throughput subject to market conditions. It is anticipated that this service will commence concurrent with the close of the Pioneer Transaction.

The BRC is a core asset for Tidewater, offering a full suite of services to producers, including C2, C3, C4 and C5 pipeline connections, NGL fractionation capacity, sweet and sour deep-cut gas processing capability, truck loading and offloading facilities, natural gas storage facilities and two natural gas egress solutions given the BRC’s connection to the NGTL system and the Pioneer Pipeline.

Throughput at the BRC for the fourth quarter of 2020 was in-line with the previous quarter. Overall supply volumes at the fractionation facility decreased approximately 450 bbl/day in the fourth quarter of 2020 relative to the prior quarter largely driven by slightly lower gas supply and stable truck in volumes.

Due to the recent improvement in AECO gas prices, the Corporation continues to see increased activity in the Deep Basin area near the BRC, which has led to the tie-in of additional raw gas volumes to the BRC from a mid-sized producer which came online in the fourth quarter of 2020, and strong production volumes amongst the existing customer base. Tidewater works diligently with producers to improve netbacks by fully utilizing the BRC’s facilities.

Tidewater operates natural gas storage reservoirs at three different facilities: Dimsdale Paddy A (Pipestone Gas Storage Facility), Brazeau Nisku F, and Brazeau Nisku A. The Pipestone Gas Storage Facility and Brazeau Nisku A are owned through joint ventures with a private Canadian entity and are accounted for as equity investments.

After a successful summer season with expanded injection capabilities, the Pipestone Storage Facility exited October with record inventories in the ground. Similarly, both Brazeau Nisku A and Brazeau Nisku F storage pools continued to build inventories into October while continuing to meet the Pioneer Pipeline delivery obligations and realizing liquids value benefit through cycling.

The Alberta natural gas market in the fourth quarter was characterized by relatively low price volatility. While there was early price strength in the second half of October that allowed the facilities to begin withdrawal activity early, mild weather generally kept prices range-bound between $1.90 – $2.50 CAD/GJ with levels trending lower through November and December.

The facilities continued to perform well in the period as Tidewater moved into withdrawal mode. A well reactivation project at Brazeau Nisku A performed in the fourth quarter further increased reservoir deliverability.

The Pipestone Gas Storage Facility is fully contracted with take-or-pay contracts spanning up to eight-years with multiple investment grade counterparties. The facility represents a significant contribution to Tidewater’s fee-for-service gas storage business and offers producers at the Pipestone Gas Plant significant optionality where the plant has three egress solutions including connections to the TC Energy and Alliance systems and gas storage.

Capital Program

During 2019, Tidewater commissioned three of the largest capital projects in the Corporation’s history: the Pioneer Pipeline, Pipestone Gas Plant and Pipestone Gas Storage Facility. The Corporation’s focus in 2020 was on small-scale optimization and commissioning projects.

Tidewater’s 300 bbl/day Canola co-processing project at PGR is expected to come online in the fourth quarter of 2021 which will produce both renewable diesel and gasoline. Total capital for the project is approximately $10 million and includes significant support from the BC government.

Tidewater’s focus over the next 12 months is to employ the related cashflow generated from its 2019 large completed capital projects and PGR, as well as proceeds from the Pioneer Transaction, towards deleveraging with a target net debt to Adjusted EBITDA ratio of approximately 3.0x – 3.5x. To date, Tidewater has not committed to a significant capital program in 2021, however continues to evaluate smaller capital projects with the potential to generate returns in excess of 50%.