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Good morning. My name is Kim, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tidewater Midstream and Infrastructure Ltd. Fourth Quarter Results and Operations Update Conference Call. [Operator Instructions] Thank you. Joel Vorra, you may begin your conference.
Thanks, Kim. Thanks, everybody. Welcome to Tidewater's first earnings call, quarterly earnings call. On the call with me today is Joel MacLeod, Tidewater's President and CEO. Before passing it over to Joel for a review of quarterly highlights and the 2017 year, I'd like to remind you that some of the comments we make today are forward-looking and are based on Tidewater's current expectations, estimates and judgments. Forward-looking statements we express or imply today are subject to risk and uncertainties, which can cause actual results to differ from expectations. Some of the information provided also refers to non-GAAP measures. To know more about non-GAAP measures in these forward-looking statements, you can refer to our MD&A, which is available at tidewatermidstream.com and on SEDAR. Thanks, everybody, for joining. And we'll have a question and answer session after a brief update. And for now I'll pass it on to Joel MacLeod.
Thanks, Joel, and thanks, everyone, for making time. Today, I think to start, we'd like to give a big thank you to our shareholders who have been very supportive over the past 2.5 years in a very tough energy tape. Just a big thank you to our shareholders. Also, a big thanks to our employees and our board for all their hard work. We always say that we have one of the hardest working teams in Western Canada and continue to stand by that. So a big thanks to our employees and our board. And last and most important, in a tough energy environment, is just a big thank you to our producers, our customers, awful tough times out there, and we are more than happy to work extremely hard for our customers, improve netbacks and even now, after 2.5 years of grinding, showing some real egress options, and producer support for us is definitely at an all-time high, and we're more than happy to fight hard for our producer, customer friends.So to jump in to results and a bit of an overview, we don't want to speak word for word for our press release. I think, likely, all of you have gone through it. We'll just kind of hit some highlights, and then I'll pass it over to Mr. Vorra. But to start, '17, 2017, a tough year. When we look at our share price for the past even 2.5 years, we continue to see it go sideways. But I think we need to step back and, our team will tell you, hard on ourselves and our team. But we step back and we see what we've accomplished here in '17, and I think we should be pretty proud of ourselves to hit $60 million of EBITDA in 2017, to exit 2017 with $80 million of EBITDA. A huge accomplishment. We're excited to get our Q1 out here in the next 3 months or so to just show the market that we continue to deliver on what we said we would and something we're very proud of in a tough energy environment. Location of our assets from day 1 to today is everything, given dry gas is obviously a struggle. But I would never have dreamed we'd see condensate Canadian WTI at CAD 80 to CAD 85, and this is very positive for our assets in the areas we operate. We'll get into briefly an asset like Pipestone, which is one of the highest yielding condensate plays in North America and definitely Western Canada and for us to have a core area and the customer support that we do. We're real excited about the next 2, 3, 4 years.I think the other key component for me, when we look back on 2017 is, we've been able to execute on what we feel are 2 of the top projects in Western Canada. Again, we would never -- for myself, I would never dream we'd be able to sign a 15-year take-or-pay with an investment-grade counterparty in TransAlta, who has been an absolute pleasure to work with. The project is full steam ahead. Mr. Gellner and his team have just been an absolute pleasure to work with, and we're excited to get that project commissioned and just want to reiterate, it is full steam ahead. The producer support has been incredible and also TransAlta support -- we want to also say thanks to the TransAlta team.I think the second project, which we would argue, again, is one of the top projects in Western Canada is our Pipestone Montney Sour deep cut plant. It continues to be a bit of a race up in that area. Well results continue to get better. We continue to see roughly 200 barrels per million of condensate yields in an environment where condensate is at a 3-year high. This is all very positive for our plant. We've announced that we have our 2 customers in Kelt and Blackbird. And again, an absolute pleasure to work with both teams. They're about doing an incredible job, drilling some great wells. And in our latest releases over the past couple of weeks, we've also mentioned that we've signed a third customer that we've known very well for a long time and excited to have them in the plant. Our commercial team is doing a great job and confident that we can get the plant fully contracted here into '18.A few other just quick highlights, most of it is in the release, a 6-year storage contract with an investment-grade counterparty. We're really focused on customers and contracts. We've been, over the past 2.5 years, told our customers and contracts aren't great. But I think we've really delivered. The team's done an incredibly job to add, only in the past few weeks here, which was released in our result, a 6-year storage contract with an investment-grade counterparty, a big win. And then in our press release a couple of weeks ago, we mentioned a 5-year processing agreement at Ram River, 17 Bcf with another investment-grade counterparty, who is somewhat of a new customer, so just continuing to strengthen those customers and contracts. Our team's done an incredible job.20% EBITDA per share growth is something we continue to see as our 2 big projects come online into '19. We do feel strongly that we are going to achieve that $120 million of annualized EBITDA. We are fully funded. There is no questions around a funding gap, private equity capital. If there were additional projects that come forward here over the next 12 to 24 months, I think we have a pile of options. And private equity continues to be aggressively pursuing midstream and infrastructure opportunities. We've had the one slide in our corporate presentation, Slide 12, for the past 6 months or so, and we continue to see private equity's interest in North American midstream be near highs. So we've got lots of options as we look to other projects here in the next 6, 12 months, but want to reiterate that we are very focused on our 2 large projects and confident that we are going to deliver on those projects, and both are going extremely well on time and on budget.With that, I think I'll pass it over to Mr. Vorra, and he can walk you through kind of some of the financial highlights.
Thanks, Joel. As you mentioned, over the last 12, 24 months, we've been focused on EBITDA growth as we assess the various projects. We're looking at cash flow growth and EBITDA and cash flow per share growth. EBITDA growth over -- from year-end 2016 to 2017, was around 40% to 45%, which was great, and we were north of 20% EBITDA per share growth. So continue to work toward that metric and our cash flow metric and increasing 20-ish percent annualized year-over-year. And as Joel mentioned, I think we're feeling pretty good about 2018 and then into 2019 when the 2 large projects come online. We maintained a conservative payout ratio of just under 30% for 2017 and, like I said, continue to grow that distributable cash flow number and free cash flow number. Exit net debt was achieved around $150 million and exit net debt to EBITDA around 2.2x. So feeling good about leverage. And we continue to build our capitalization for long-term growth.We introduced, this year, 5-year term notes, which was another step in building our capitalization, $125 million successful debt offering of term notes, which was another win for 2017, and continue to grow our EBITDA and free cash flow and live within a fairly conservative debt-to-EBITDA metric. We also increased our credit facility from $180 million to $250 million, again, all part of funding the next stage of organic growth over the next 12 to 18 months and even getting into operating margins, continued to increase our operating margin over the year. Gathering and processing business was stable through the year and the liquids handling and infrastructure business continued to increase with our fractionation facility at the BRC and the straddle plants coming online. So I think building a fairly naturally hedged business in a tough commodity environment, where our straddle plants and even natural gas storage, I think, fairly set up quite well for a tough commodity price environment with either high or low gas prices. So I think 2017 was pretty successful from a financial point of view, and we continue to build that business in a tough commodity price environment. And as Joel said, I think everybody has been through the financial metrics. So I think unless, Joel, there's anything else you want to touch on, I think we could open it up to questions.
I think maybe just a last comment. Alignment, I think most of you on the call know the team but alignment is something that's extremely important to us with our shareholders. We believe in what we're doing. I know I've made a commitment to most of you to deploy $1 million of my own capital, buy stock, but just the message of alignment is so important to us. And again, just a big thank you to our shareholders. But with that, I think, operator, if we could -- Kim, if we could open it up to questions or if we've missed something, let us know. This is our first time running through this.
[Operator Instructions] Your first question comes from the line of Patrick Kenny from National Bank Financial.
Just back to your opening comment there, Joel, on the stock trending sideways, I wanted to get your thoughts on a couple of things that might be holding the share price back here. First is, just with respect to TransAlta's option to fund 50% of the pipeline and as you finalize the terms of the deal over the summer, wondering if you'll be negotiating a maturity date for that option such that, if TransAlta doesn't invest by a certain date, you'll be able to perhaps bring in another partner to go in 50-50 on the project and help bring leverage back down to that 2, 2.5x level?
Pat, great question. So absolutely, we're working through the details with TransAlta there. Do we have a definitive date at this time when they need to elect by? No. They've been very supportive, and our sense today is they're likely to exercise. On the flip side, our board, I can assure you, would love to own that pipeline 100%, but we're committed to what we have agreed to with our partner, they have the option. And then private equity, as we've tried to start to show on Slide 12 of our investor presentation, especially, with a 15-year take-or-pay, is eager to step in and pay a significant premium. We're, at this point, unlikely to do that. But nice that we've got multiple options in funding the project and -- to your point -- and where, I think, you know our heart is, just bringing our leverage to a point where we're comfortable and we have flexibility to jump on incremental opportunities.
Great. And then second, as it relates to expanding your customer base here with computer processors and other data crunchers picking up tolling EBITDA for no money down seems like a no-brainer. But I guess, if the goal is to build a portfolio of energy infrastructure assets that can eventually fetch evaluation more in line with your larger midstream peers, does contemplating an equity investment in these new data customers, no matter how lucrative the opportunity might be, not morph the perception of your company into becoming thought of as more of an asset manager over time? And does that pose a risk to your valuation one day rerating towards your peer -- midstream peers? I just wanted to get your thoughts on the trade-off there.
Can hear you loud and clear, Pat. I want to be very clear that our focus is midstream today, TransAlta, Pipestone projects, processing, egress, liquids. This is an opportunity that is not material today. It is definitely not a focus. But when we have an opportunity to generate EBITDA for no capital, we have to explore that. We have to explore opportunities that bring demand to Western Canada. Producers, Western Canada, Canada, in general, is having one heck of a time. And when there's opportunities for us to bring demand to Western Canada, not invest any capital, we're going to spend a little bit of time. But again, it's not material. I think we're going to leave it at that. Tolling wise, we're probably charging almost as high of tolls as we can. And with our reputation, we've been asked if we will take stock for noncash just for -- to be a partner and supportive. So we are considering it at this point in time, but it is not a focus. Our focus is our core business. And I think with that, we can leave it at that and happy to catch up with you, Pat, offline.
Your next question comes from line of Rob Hope from Scotiabank.
Maybe another question just on capital as well as funding. When you look out at 2018 and the comments regarding being fully funded, just want to get a sense of what you think the ultimate capital number for 2018 could be. And then you gave an indication that you expect TransAlta to exercise their option. What about Kelt and Blackbird?
Good question, Rob. Obviously, there's a few pieces that are in influx. I think we would -- we don't -- obviously don't want to speak for TransAlta. But yes, I would think that we'd consider most likely scenario that they would exercise, given, I think, what they've even said to the market. But -- and as far as Kelt and Blackbird, I don't think I want to speak for our other customers, but they do have the option. And I think, if it makes sense, they'll do that. When we talk about capital in 2018, it's tough to give you a firm number given those 3 options that are out there. But we'd be in the $180 million to $200 million-ish of capital, and we've got sufficient room in our free cash flow generation through 2018 and in our credit facility to handle that and a few other pieces and options that we have as well, should those parties not exercise. So I think, leave it at that. And I think we stick to our guidance where we would max out a little north of that 3x before EBITDA comes on. But when you look at a net debt to run-rate EBITDA, we're comfortable in the 3x and under 3x and into the end of 2019 getting closer to that 2x net debt to run-rate EBITDA.
All right. And then just taking a look at the BRC, I guess, 2 parts to the question. One, how do you intend to account for the outage? And then, B, if it's going to be a year of transition in terms of volumes, how do you think volumes will trend at BRC as you have some contracts rolling on and off?
So the outage itself and, Joel, speak up on the accounting side if I'm a little out to lunch. But it's a scheduled turnaround, so you'll see it as maintenance CapEx. But because we have 4 trains out there, the whole plant doesn't go down. I want to be very clear there. We do expect to see reduced throughput, not significant or a material impact to Tidewater corporately, and we're working hard. Gas storage would be a great example. That will help hedge or bring incremental EBITDA here Q2, Q3. So sorry, Rob, your question was, how do we expect throughput to be impacted through Q2, Q3. Some of it will be a function of gas price. In the background, we're working hard to bring in some incremental volumes, but do not want to set the expectation that Q2, Q3, we're going to see record throughputs at Brazeau.
Your next question comes from the line of Robert Kwan from RBC Capital Markets.
Joel, you mentioned earlier just talking about generally trying to find egress options for your customers. I'm just wondering now that you've kind of had this project out there with TransAlta and having that demand pull and another kind of outlets for producers, do you have just some color on how the producer inquiries have gone to get into your assets in general and the BRC in particular, just given you've got NGTL options, Alliance options and now what you've got here with TA.
Yes. Robert, it's been -- for me, it's been very eye-opening to see some very large producers even come and pat us on the back and say we really appreciate you guys opening up an option outside of the current options in Western Canada. I think most know, in some areas, there is only one option in TransCanada in certain areas. And that -- and even where producers sit today, obviously, equity values are down. A lot of them are unlikely to build new processing plants. At Brazeau, we've got 2 deep cut trains. So even potential ability to add liquid extraction to volumes that come off of shallow plants and want to get into that TransAlta system is another advantage. And even our storage assets that sit at Brazeau and today are larger than they've ever been. So just the synergies that our network has between deep cut, storage, egress. Producers are realizing the value of deep cut plants. I know you're well aware, but when liquids are at near 3-year highs and gas is at a 3-year-plus low, the value of a deep cut plant has gone up exponentially from when we went public 2.5 years ago. So our storage assets have definitely increased value, our deep cut plants have as well. And now we've got an egress option that not many of our peers can offer. And we're working hard to continue to add multiple egress options.
So I guess, just with the discussions that you're having, at least today, are they more likely to manifest themselves with respect to additional contracts at the existing facilities or volumes at the existing facilities? Or are you actually talking about various things that could be somewhat more material capital investments?
Yes, I think, right now, it's all of the above. There's a lot of interest to tie into our new TransAlta pipe. Are all those volumes going to flow through Brazeau? Probably not. Some of the producers may tie directly into that pipeline. But I think there could be a significant volume that could come through Brazeau, our storage. And we may even potentially look at a train 5 at Brazeau in the next 12 to 24 months as well. So just more optionality than we've ever had, and it's just going to help substantiate Brazeau long term, where volumes are going to want to flow to a new end market in TransAlta, and we've got a big site and a big plant that will likely reap the rewards in addition to a storage asset that will be much more sought after given we've got a demand market that's directly connected to our storage there at Brazeau as well.
Okay. If I can come back to the power question, and I totally get your answer with respect to being able to get EBITDA without putting anything down. But how are you thinking about that potential for an additional equity investment, particularly given the impact that we've seen with investor sentiment on some of your peers, where the market generally has not responded well to both business line or geographic diversification?
Rob, I think it's a great question. It keeps me up at night. Distraction. We are not very distracted. We're very focused on our key business. But even to see the whole midstream sector roll off 15-ish percent over the last 3 months, we want to stay focused and show our shareholders focus, and I can assure you and them we are. But it's a valid point. I'd just -- in an environment, where we can invest no capital and generate significant tolling cash flow, we need to explore those opportunities, especially when our customers are saying, bring us any egress option, bring us demand for Western Canadian gas, we need to be a part of that. And I know some feel it's crypto mining, only crypto mining, but there's some large data center enterprises that are very large, that are considering exploring low power options in Western Canada. And if we can be a part of facilitating big natural gas demand over the next 3, 5 years with some highly credible organizations that have massive power demand, we need to spend a little time with them.
Oh, no, and I understand kind of the no capital investment in generating ancillary revenues. I guess, I'm kind of more the statement around potential equity ownership than actually having your capital go out the door towards these types of revenue streams.
So just want to be clear, no -- when we say equity, it's noncash. We're generating tolls today that we would never imagine. They're not material, so nonmaterial tolls. But we're maxing out on the toll component, and we're being offered equity just to allow access to our infrastructure. But it is not a cash outlay for the equity.
Understood. Great. If I can just quickly finish. There was a statement of the 2018 CapEx of $180 million to $200 million type range. Was that a gross number? Or was that net of an assumption of some of these options being exercised?
That'd be -- Rob, that'd be net. And obviously, as you know, capital commitments through December 2018 and January 2019, there can be some big fluctuation there, especially with long-lead items. But that would be assuming an exercise. So I would assume an exercise. And I would assume that we have options. Where, if there is not an exercise, we've got capital injection to fund not only those 2 projects, which we feel comfortable today that we can fund 100%, but even growth over the next 18 months.
And, Rob, just to add to that. As you're likely aware, the private equity interest continues to grow, the multiples are playing in the U.S. We're trying to relay some of that info even in our corporate presentation. We would be paid a premium in the event that TransAlta didn't exercise, and we're very unlikely to sell down a piece of that pipeline. But I think just to give a sense to the market that we've got lots of great options with 2 incredible projects, and they're highly sought after projects, that our phone rings on a weekly basis for parties looking at ways to get involved with both TransAlta and the Pipestone deep cut plant.
[Operator Instructions] Your next question comes from the line of Robert Catellier from CIBC.
It's Ian on for Rob. Just wanted to confirm the 6 Bcf storage contract that you mentioned. What percent of capacity is that?
Rob, that's a good question. We've talked about a couple phases at that Pipestone natural gas storage facility. It's a good question. It's a 100 Bcf reservoir. Obviously, the deliverability of that reservoir is going to depend on the infrastructure, Phase 1, Phase 2, and the pressure that's in that reservoir. So it's 100 Bcf reservoir. But I guess to answer your question, in short, today, it would be less than roughly half of what we could handle today.
Okay. Great. And then on Pipestone, can you just give a quick update on permitting status for the plant?
Yes, no problem. Permitting status on track, as planned. Any sour gas plant, I think we've relayed, if any of us had a sour gas plant, there will be statements of concern. That's public information. The team's done a great job of working through removing those. And today, we're on track, on schedule and feeling comfortable, confident we're going to hit our time line.
And then just as we approach sort of the start of a new NGL year, how are you positioned for volumes and marketing? And how is your outlook on that side compared to sort of the 2017 year?
So, Joel, feel free to speak up. I feel in line, in line with expectations. Frac fees, I would say, are at roughly what they were last year, maybe a touch, like we're talking single-digit percentage points, lower in certain cases for us to entice others to come in. But overall, feel good. I think we feel we're going to see some more liquids volumes this year, what the guys have been able to do at Ram and contract our investment-grade entity there. Sulphur may become not a material piece of our business but, in '18, you'll see some sulphur-related EBITDA that we likely didn't have,. And you'll likely see incremental liquids coming out of Ram as well as a result of our team been able to do a great job down at Ram. Pipestone won't come on until '19, so you won't see a massive move in liquids until 2019, but, Joel, anything else I'm missing there?
No. I think, as far as contracting, we would expect similar to what we saw last year. The straddle plants are fairly flat, running at what would be their capacity today at 98-plus run time on those. So no, I think you summarized it well.
There are no further questions at this time. I turn the call back over to the presenters.
Okay. I think if there's no other questions, Joel MacLeod, do you want to wrap up with some closing statements? And I know one thing, we always want to thank our supporters and our shareholders and even we've got a great group of analysts that are consistently fighting for us, especially over the last 24 months with a tough environment. So I know for me, we'd just like to thank all our supporters and shareholders and analysts and everybody, even our team, the Tidewater team that's grown significantly over the last couple years. It's been a lot of hard work, and we -- I think we'll continue to fight for our shareholders, our producers and everybody that's involved in the story.
No, and I think that's great. And I think you've all heard me say thank you multiple times, and it comes from the heart. Big thanks to everyone from shareholders to producers to our employees. And then just reiterate confidence in our ability to deliver what we've been able to do, 20% EBITDA growth, our 2 projects coming online in '19 and alignment, and even when we're out of blackout, shareholders and myself, insiders showing support and really believe in what we're doing. So thanks, again, and happy to wrap up. But, Kim, let us know, operator, if there's anything we forgot to do here today.
No. If your comments are finished, then this would be the conclusion of the conference call. And you may now disconnect.
Thank you.
Thank you.