Tidewater Midstream and Infrastructure Ltd. has filed its condensed interim consolidated financial statements and Management's Discussion and Analysis ("MD&A") for the three and six month periods ended June 30, 2021.
SECOND-QUARTER 2021 FINANCIAL PERFORMANCE
- Tidewater Midstream delivered another record quarter of Adjusted EBITDA growth. This performance continues to highlight the resiliency and stability of the Corporation's integrated business model and the Corporation continues to grow in the energy sector with the creation of Tidewater Renewables Ltd., as described below. Adjusted EBITDA increased to $52.3 million in the second quarter of 2021 as compared to $41.9 million in the second quarter of 2020, resulting in 25% Adjusted EBITDA growth year over year. Net income attributable to shareholders was $64.3 million for the second quarter of 2021 as compared to a net income of $1.1 million in the second quarter of 2020. This increase is the result of both realized and unrealized gains on derivative contracts related to the Corporation's feedstock for its downstream operations, secured at a lower cost, as well as the Corporation's realized gain on the sale of assets from its Pioneer Pipeline disposition.
- Net cash provided by operating activities totaled $42.3 million for the second quarter of 2021, with distributable cash flow of $17.3 million and a payout ratio of 20%.
- On July 21, 2021, the Corporation announced the formal creation of Tidewater Renewables Ltd. ("Tidewater Renewables") as a wholly owned subsidiary of the Corporation. Tidewater Renewables was formed to become a multi-faceted, energy transition company focusing on the production of low carbon fuels. The creation of and the initial public offering of Tidewater Renewables is a result of a thorough evaluation of financing alternatives with the goal of funding Tidewater Renewables' portfolio of clean fuel projects while allowing the Corporation to continue to deleverage through 2021.
- An amended and restated preliminary prospectus qualifying the initial public offering of Tidewater Renewables' common shares to the public (the "Offering") was filed on July 26, 2021. In connection with the Offering, Tidewater Renewables will ?acquire certain pre-existing operating assets as well as a number of growth projects from the Corporation that will provide an initial platform ?for the renewable diesel, renewable hydrogen, and renewable natural gas business units (the "Acquired Assets"). Tidewater Renewables expects the Acquired Assets to generate approximately $40 million of run-rate EBITDA primarily from take-or-pay contracts with the Corporation, as the primary counterparty, and from other non-take-or-pay activities. This will provide Tidewater Renewables with stable, long-term, contracted cash flows. The creation of Tidewater Renewables provides the Corporation with a focused vehicle for pursuing and funding growth opportunities in the renewable energy sector. Upon completion of the Offering, the Corporation would retain a majority equity stake in Tidewater Renewables (equity stake to be determined by ultimate price and size of the Offering).
- The Offering is expected to close and begin trading as a separate entity on the TSX in August 2021, and is subject to, and conditional upon, the receipt of all necessary approvals, including regulatory approvals.
- On June 30, 2021, the Corporation, together with its partner, TransAlta Corporation ("TransAlta"), successfully closed the sale of the Pioneer Pipeline (the "Pioneer Transaction") to ATCO Gas and Pipelines Ltd. ("ATCO") for gross proceeds of $255 million. Tidewater received net cash proceeds of approximately $135 million which included the sale of certain ancillary assets to TransAlta that closed concurrently with the Pioneer Transaction. The Pioneer Pipeline will be integrated into the Nova Gas Transmission Ltd. ("NGTL") and ATCO Alberta integrated natural gas transmission systems to provide reliable natural gas supply to TransAlta's power generating units at Sundance and Keephills. Tidewater Midstream used the proceeds from this disposition to accelerate its deleveraging plan.
- Tidewater Midstream anticipates after the closing of the expected Offering of Tidewater Renewables, it will achieve its consolidated leverage target of 3.0x to 3.5x net debt to annualized Adjusted EBITDA. Tidewater Midstream remains focused on high rate of return capital projects to support continued growth. The Corporation is currently evaluating multiple projects in the $5 million to $25 million capital cost range with payouts of under 3 years and remains committed to its leverage target of 3.0x to 3.5x net debt to annualized Adjusted EBITDA.
- Tidewater Midstream remains optimistic in its outlook for global energy demand as commodity prices strengthen. Within Western Canada, Tidewater Midstream 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 11,400 bbls/day, with combined gasoline and diesel production over 10,000 bbls/day. The PGR crack spread, a measure of refining margins, remains strong going into the third quarter at approximately $60/bbl. The Pipestone Gas Plant had its strongest quarterly run times and cash flow generation to date during the second quarter of 2021.
- The Corporation is committed to its Environmental, Social and Governance ("ESG") performance. The Corporation continues to advance its inaugural sustainability report, which is scheduled to be published in the first quarter of 2022.
OUTLOOK AND CORPORATE UPDATE
Tidewater Midstream is pleased to deliver a record quarter of EBITDA generation in the second quarter of 2021 as the PGR and Pipestone Gas Plant continue to run at high utilization rates. Continued consolidation and new investment in the energy sector, as well as a material recovery in commodity prices, have had an overall positive impact on producer balance sheets and Tidewater Midstream continues to work with its customers on ways to improve margins and related service offerings. Tidewater Midstream remains positive about the outlook for commodity prices in the second half of 2021. There is increased investor interest in the energy transition and renewable sectors, where Tidewater Midstream is uniquely positioned to play a key role in the continued development of renewable fuels, carbon capture, renewable natural gas, and renewable hydrogen through its creation of Tidewater Renewables.
Prince George Refinery
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 second quarter of 2021, total throughput was approximately 95% of the refinery's nameplate capacity at approximately 11,460 bbl/day. As a result of planned annual maintenance, second quarter throughput was down approximately 5% from the first quarter of 2021. Throughput during the second quarter of 2021 was approximately 8% higher compared to the same quarter of 2020.
Tidewater Midstream'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. Crack spreads remained strong averaging approximately $60/bbl during the quarter, consistent with the first quarter of 2021. The Corporation realized lower diesel demand during the second quarter, as compared to the first quarter of 2021, as a result of spring break up. Additionally, the Western Pipeline, which transports a portion of the refinery's feedstock, underwent unplanned maintenance during May and June. This was mitigated through trucking feedstock into the refinery, increasing operating expenses during the second quarter. Despite the lower diesel demand during the second quarter, the strong Prince George crack spread continues to demonstrate the strength of the regional refining market. Increased feedstock prices at PGR were also partially offset by realized gains on derivative contracts.
Tidewater Midstream continues to progress its canola co-processing project, with commissioning expected in the third quarter of 2021. The project is supported by the BC provincial government and will produce both renewable gasoline and renewable diesel, which generate BC low carbon fuel standard ("LCFS") credits. Tidewater Midstream continues to pursue numerous low capital and high rate of return debottleneck and optimization opportunities within its downstream business unit. Tidewater Renewables continues to evaluate various renewable initiatives at PGR.
Pipestone Gas Plant
The Pipestone Gas Plant is designed to process 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 NGTL pipeline systems. The facility is also pipeline connected to Pembina's liquid gathering systems for the C2+ and C5+ liquid streams.
The Pipestone Gas Plant processed an average volume of 92 MMcf/day in the second quarter of 2021, a 19% increase from Q2 2020 and an increase of 11% from Q1 2021. Facility availability for the quarter averaged 94%, an increase of 9% from Q1 2021. During the month of May, the Pipestone Gas Plant achieved a significant milestone by averaging a daily throughput of 100 MMcf/d combined with 100% facility availability. The Montney area continues to remain very active, and the plant remains fully contracted with over 85% committed capacity on take-or-pay arrangements.
Brazeau River Complex and Fractionation Facility
The BRC is a core asset for Tidewater Midstream, 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 including the NGTL system and gas storage.
The Brazeau River fractionation facility performed well during the second quarter of 2021, despite a 400 bbl/day reduction in throughput due to third-party turnarounds and maintenance activities. Decreased volumes were offset with strong NGL netbacks improving the frac spread margins realized at the Corporation's extraction facilities. During the second quarter of 2021, new agreements were signed with several investment grade counterparties for NGL service at Brazeau.
Concurrent with the close of the Pioneer Transaction, Tidewater Midstream's natural gas liquids extraction service ("OS-Ext") came into effect with NGTL at the Rat Creek West Meter Station. This service will allow Tidewater Midstream to extract higher value liquids from the natural gas stream prior to delivery of natural gas to the TransAlta facilities. No major facility modifications or capital expenditures were required to implement this service. Tidewater Midstream anticipates increased throughput at its Brazeau River Complex based on the improved economics provided by the OS-Ext service and forecasted frac spreads.
Throughput at the BRC gas processing facility for the second quarter of 2021 was consistent with the previous quarter. Strong AECO gas prices in the past six months have increased producer activity near the BRC. Tidewater Midstream continues to look for opportunities to increase third-party plant throughput by working diligently with producers to improve netbacks by utilizing the BRC's facilities.
Natural Gas Storage
Tidewater Midstream operates three natural gas storage reservoirs: 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.
All three storage facilities continued to withdraw in the second quarter as it progressed through what is typically a summer injection season. The Pipestone Gas Storage Facility continues to deliver high withdrawal rates, averaging 40,000 GJ/day over the quarter, with deliverability rates gradually decreasing as the facility is depressurized.
Similarly, both Brazeau Nisku A and Brazeau Nisku F storage pools continued to withdraw through the period, helping meet Pioneer Pipeline's demand and realizing both storage and liquids extraction value.
Consistent with the rest of the continent, the Alberta natural gas market saw steadily increasing cash prices throughout the quarter (ranging from $2.41 CAD/GJ to $4.16 CAD/GJ and averaging $2.93 CAD/GJ) with significant upwards volatility in late June corresponding with a North American heat wave. Operationally, all storage facilities performed well through the heat wave period and successfully met all delivery obligations.
The Pipestone Gas Storage Facility is largely contracted with take-or-pay contracts spanning through 2027 with multiple investment grade counterparties. The facility represents a significant contribution to Tidewater Midstream'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.
Tidewater Midstream's 2021 capital program focuses on small-scale optimization projects along with its renewable initiatives. Tidewater Midstream continues to evaluate and execute smaller capital projects in the $5 million to $25 million capital cost range with strong short-term returns on investment. Tidewater Renewables' 300 bbl/day canola co-processing project at PGR is expected to be commissioned in the third quarter of 2021.
The Corporation, through Tidewater Renewables, has begun engineering and construction on its renewable diesel and renewable hydrogen complex. Final investment decision is expected in the third quarter of 2021, with commissioning expected in the first quarter of 2023.