Good morning or afternoon. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tidewater Midstream and Infrastructure Limited second quarter results. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. I would now like to turn the call over to Joel Vorra, CFO. Please go ahead.
Thanks, Michelle. Good morning, everybody. On the call with me today is Joel MacLeod, Tidewater's President, CEO. Before passing the call over to Joel to review the quarter, just want to remind everybody that some of the comments made today are forward-looking based on expectations, estimates, judgments. Forward-looking statements are subject to risks and uncertainties, and actual results may differ from expectations. We'll refer to non-GAAP measures. To know more about the non-GAAP measures and forward-looking statements, refer to Tidewater's MD&A disclosed on SEDAR. I think I'll pass over to Joel MacLeod for an overview of the second quarter.
Thanks, Joel, thanks everyone for making time. Good morning. I'd like to start, a big thank you to our team, our team members, our shareholders, and most importantly, our customers, through what was a tough quarter for us. We also want to emphasize the significant achievement for the Tidewater team with us completing our first large turnaround at the Brazeau River Complex without a lost safety time incident and being on time and on budget. Big thanks to the team for execution on that front. Our Brazeau turnaround is scheduled every four years, and as a result, we did experience reduced throughput at our largest plant, in addition to decreased throughput across the company, mainly due to the lower gas price environment.
Our gas storage assets and our extraction plants performed very well, where we only saw an approximate 5% impact to EBITDA, which we tried to guide towards the market. We expect Q3 to be in and around Q2. We're starting to see some very positive news flows, record customer support into Q4 and Q1. We remain confident in achieving our CAD 80 million of adjusted EBITDA for 2018 and also remain confident in achieving our CAD 120 million of annualized run rate EBITDA once our two large projects come online in mid to late 2019. We continue to feel our two large capital projects are two of the top energy infrastructure projects in Western Canada. This continues to be validated by third-party interest in these projects. Our team continues to do an incredible job where both projects remain on time and on budget.
If we start with the TransAlta pipeline project, it continues to go very well, and we do expect to submit our full regulatory package by the end of the month. Again, we're currently even a little ahead of schedule and on budget. Gas continuing to be weak through 2021 and power prices in Alberta being strong, we continue to push hard to even flow more than CAD 130 million a day through the pipeline. Project, again, is going extremely well. Significant support from producers as they continue to look for egress option and TransAlta, the entire TransAlta team has been an absolute pleasure to work with. Big thanks to the TransAlta team. Our other large capital project is our Pipestone Montney Sour Deep-Cut plant.
Recent news here in the past 48 hours, which we included in our press release, huge accomplishment to have Kelt agree to extend their 5-year take-or-pay to a 10-year take-or-pay and also increase their volume commitment from CAD 25 million to CAD 30 million a day. A big thank you to the entire Kelt team, Dave, Carol, Sadiq, just an absolute pleasure to work with, and then also to the Blackbird team and Garth and his entire team, and our two anchor tenants at the Pipestone plant. Also recent news, which was mentioned in our press release this morning, was a fourth customer was signed with a 7.5-year take-or-pay, and real excited to get them involved in the plant as well. Activity and well results, probably most of you on the call are aware, but those of you that aren't, continue to see big results around the Pipestone Montney play.
Big liquids yields, real excited about the play. It's still early stages and the results continue to impress, and it is becoming, if it isn't already, the premier condensate resource play in North America. We have more interest in our plant than we have capacity, and we do plan to fully contract the facility into the end of the year. Kind of the last point here at Ram River, our team again has done a great job there. Throughput is up. We signed another 5-year take-or-pay for an approximate incremental CAD 18 million a day, which comes online into Q4. That East Duvernay play, kind of down through Ram River, through the Sylvan Lake Gilby area. We're even seeing East Duvernay wells being drilled closer to Brazeau River and up into being around our Paddle River plant.
Real exciting to see more activity than we've seen probably in our history around our assets and our proposed plant at Pipestone, and overall, the customer support has been huge for us. With that, I think I'll pass it back over to Mr. Vorra.
Thanks, Joel. Good summary. I'll walk through some of the financial highlights for the quarter, as Joel alluded to. A bit of a tough quarter with gas prices where they are, but I think looking at the base business and some of the natural hedges and how the infrastructure and some of the assets we have react in different price environments, we were able to hold within 5% of Tidewater's record EBITDA in Q1 and maintain CAD 19 million in adjusted EBITDA, which is a 26% increase over the same period Q2 last year. Overall, happy with the quarter, but as Joel said, I think a little bit of a tough quarter, first non-EBITDA growth quarter and I think expect sort of the same thing through the end of the summer into Q3, but feeling good about Q4 and Q1 and into 2019.
Joel talked about some of the projects that'll come online in 2019 that'll further add to cash flow. The fee-for-service business remained strong, was supported by increased gas storage fees in a low commodity price environment, existing take-or-pay contracts, as well as some increased volumes at the Ram River Gas Plant. Operating margin, operating income remained strong. EBITDA margin around 28% versus 24% in the first quarter of 2018 and 26% for the same period, Q2 2017, primarily, again, driven by margins on the fee-for-service piece of the business and a little bit of a higher margin in Q2 for that larger contribution from gas storage. Again, stable operating margin of 32% versus CAD 23 million in the first quarter.
Revenue was CAD 69 million in the second quarter versus CAD 56 million in the same quarter in 2017, or a 23% increase consistent with that EBITDA increase year-over-year and consistent with our goal of increasing adjusted EBITDA per share and even cash flow per share of 20% year-over-year. Again, maintain conservative payout ratio under 30% with the projects that we're looking at. Want to be mindful of funding some of the projects we're looking at and pay close attention to our free cash flow, distributable cash flow, CAD 11.6 million for this quarter in the second quarter. I think maintaining that conservative payout ratio is important, especially given some of the large projects that we have and funding those projects with existing capacity on the credit facility and free cash flow that we're generating over the next 12-24 months.
Maintenance capital remains in that CAD 12 million-CAD 13 million range for full year 2018. We're through a significant portion of that now with the BRC turnaround behind us, and as Joel said, a big thanks to the operations team and engineering teams who pulled that off on budget and on schedule over a two-week, 16-day period. Net debt around CAD 250 million. Obviously, the main driver of that and the main driver of capital in the quarter are those two large projects that we continue to move forward on, have secured long lead items on both projects, and that would be the main driver of capital spend in the quarter. Again, remain fully funded with free cash flow and existing credit facility to complete those projects. I think overall, financially, from a financial highlight point of view, happy with the quarter.
I think good to see the business perform in a volatile commodity price environment, like Joel said, a little bit of a tough quarter, within 5% of our record adjusted EBITDA from Q1 and excited about the base business into the end of the year in 2019. With that, I think we'll open it up to questions from anybody on the call.
Okay. At this time, if anybody would like to ask a question, please press star one on your telephone keypad. Again, that would be star one on your telephone keypad. Your first question comes from Patrick Kenny from National Bank Financial. Your line is open.
Hey, good morning, guys. First off, just curious on the TransAlta pipeline, what gives you confidence in your assertion that they'll ultimately pick up their option to fund half the pipe? I mean, is that just from recent conversations you've had with the company, or are there certain financial incentives that'll be in the final agreement that cause you to believe they'll exercise it?
Yeah, Pat, our team meets weekly. They've been just an absolute pleasure to work with. We don't want to guarantee an exercise, that's where we feel it's headed, great to have them on board, I think they're also very happy with what they've seen on execution, time, budget. I think our team is definitely outperforming on that project. We meet with them on a regular basis, at least twice a week, that gives us a lot of confidence.
Fair enough. Over to BRC. After the turnaround in June, of course, there's a bit of a lag in the data that we can see from the AER. Just wondering if you can update us on what current throughput levels look like at BRC, and maybe worth a refresh as well on what % of capacity is underpinned by take-or-pays and for how long.
Wait, Joel, do you want to handle that one or do you want me to handle that?
Yeah. I'm happy to handle it, I think you'll see the public data. With the anchor tenant in Bellatrix transitioning out of the plant, the throughput today is, I'd say 20%-30% lower than what it has been in the past. We expect to fill those volumes moving into the fourth quarter and into 2019, especially as we backstop the TransAlta pipeline, significant producer support at Brazeau. Yeah, you'll see after the turnaround in public data, 20-ish to 25% down volumes at the BRC through the summer, which is part of the reason why we expect the third quarter to be similar to what we see in the second quarter. As far as take-or-pays at the BRC, that's a plant that is pretty much 100%, 90%-95% take-or-pay at the BRC. When we see volume fluctuations there, it's not a significant impact on EBITDA.
I think we've alluded to it in the past, we've got the storage assets at the BRC, which are a great hedge to volume fluctuations and commodity prices.
Just to add to that, we don't want to get ahead of ourselves, but activity that we're seeing in the Cardium, around the Ellerslie as well, and then even the East Duvernay is moving in, and we can point to public data and give the market a sense of where some of the activity is. I don't think that's going to be huge or overly impactful into Q4, Q1, but over the next few years, I think it will be. We also are working on a few large pieces to get TransAlta more gas into our pipeline. Those could actually also feed Brazeau with more gas. I think we just need a little more time to work through a few of those opportunities, but that TransAlta pipeline is huge in assuring Brazeau's sustainability and even potential expansions in the years to come at the Brazeau facility.
Sorry, remind me again, the 90%-95% take-or-pay, that's right through 2019?
We'd be through 2019 and even a little bit beyond. The contracts there aren't all for the same term, but we'd be into 2019 and some of those would go a little further than that.
Got it. Okay, great. Lastly, guys, just now that we're into August already, and correct me if I'm wrong, but I believe your non-compete with Secure expires this month. If so, wanted to get your thoughts on pursuing crude oil midstream opportunities, especially of course now that crude by rail volumes are on the way back up. Wondering if there's any low-hanging fruit out there for you, either at Acheson or elsewhere.
That's a good question, Pat. We've tried to focus on our core business with natural gas, NGLs, and the Secure team has been phenomenal to all of us. I think we got to wait till the non-compete expires here in the next little bit. Absolutely our customers, if they want us to look at crude, I think we would probably have to update the market too and ensure our shareholders are on side and our board is on side with us heading down the crude side, but we know it very well. I think we just need a little more time before we can give you a definitive response.
Your next question comes from Robert Hope from Scotiabank. Your line is open.
Kelt increasing their commitment. I was just wondering, can you give a sense of, in the region of Pipestone, are you seeing a scarcity capacity of the region that are helping you advance these conversations? Then I guess longer term, do you have the ability to expand the plant?
Hi, Rob. Absolutely, today, there is a definite shortage for sour processing on the north side of the river. Definitely that is impacting, I think commodity prices, liquids, condensate being around CAD 90 a barrel, is also driving a lot of the activity, but also the well results. When you look at Kelt, Advantage, NuVista, Blackbird, the results, even CNRL's drilling in there now, as you pull public data, big results and more liquids than most of the entities expected. Every one of the wells that we've seen has sour gas content. Shortage in capacity in Canada, Keyera's partnership there in Canada, the north of us, their message, and you guys would know this better than I, is roughly 2 years, post when we'll be up and running.
We've got a real window, with our commodity prices being high, guys want to flow and generate cash flow, especially when those initial rates are as large as they are. I think I answered your question. Capacity is definitely short on the sour processing side, where we're at at Pipestone, and that is driving interest and I think commodity price and well results is the other key piece. On the ability to expand for now, we have to focus on phase 1, we are laser focused on that piece. We will consider an expansion down the road. Right now, our focus is on phase 1.
That's helpful. Moving over to your storage operations, can you give an update of thinking on the potential to meaningfully update some of your storage operations in the province?
Yep. Storage operations, Joel probably knows them a little better than I do, he can jump in. Up at Pipestone Dimsdale there, we are injecting roughly CAD 50 million a day up there, down at Brazeau, we're injecting approximately CAD 25 million to CAD 30 million a day right now. We are doing a small expansion down at Brazeau, not material, to add another CAD 10 million a day. That would give you a sense of where we're at today. We continue to work through a phase II expansion of our Pipestone Dimsdale storage project, and hope to get the market an update on that front here in the next couple of months. Joel, anything you want to add there?
No. I think today, the assets are working well and continue to work to expand that piece up north near Pipestone.
I think the one message we'd want to give. It's not real per se right now, but even the LNG piece, for the first time, we've had some interest related to the storage facility as a result of LNG, which is interesting. Even to have the Brookfield team taking over the Enbridge assets into B.C., no guarantees that anything will happen, but nice to have some parties we know to try and explore other opportunities where hopefully we can work together and have some wins.
I appreciate the color.
Your next question comes from Robert Catellier from CIBC Capital Markets. Your line is open.
Hi, guys. Just wanted to get a little more context on your outlook. You're reiterating the outlook here, but is it safe to say that the composition of full-year EBITDA might be a little bit different? Maybe a way to address the question is how much frac and storage EBITDA is contemplated in that 2018 outlook?
Yeah, I think that's a great question, Rob. Yeah, I think you're right, the composition is a little different. The piece with storage revenue, though it really is fee for service, it's not all that different than a take-or-pay, where we're not taking commodity exposure. The movements in the storage spreads do have an impact on the fee. Once we lock in those contracts, that is essentially fee for service. Is there a move from straight take-or-pay processing into storage fee revenue? I think the answer there is yes, it'll be heavier weighted in these summer months to some storage fee revenue versus gas processing. On the NGL side, yeah, I think the same goes there, where we see frac spreads today where they are at north of CAD 0.90 a gallon.
I think with gas prices where they are, yeah, it is a bigger contributor in the summer months when gas prices are low. I think it's a fair comment. Yeah, we would have a little bit higher weighting to the NGL side and to where you look at where NGL prices are today. I think we would expect that. Want to be clear, too, that the storage piece is not all that different from processing fee revenue. Yeah, your comment holds where it would be a higher weighting in Q2, Q3.
Okay. When we look at the new customer that signed an LOI at Pipestone, I have two questions there. Is the fact that it's an LOI just a matter of working through the business process to get it completed into a definitive agreement, or is there something else there? Could you characterize the type of customer?
Yep. No problem, Rob. I think in Tidewater's history, we've only ever announced two non-binding LOIs. First one being TransAlta, which we did execute on the existing definitive agreement. We have a very high degree of confidence that this fourth customer at Pipestone will turn into a definitive agreement. We're into the gas handling agreement as we speak. All is going very well, and they're very happy. Confident we're going to get there. There's no reason to think that we're not, and we've been in discussions with them for six-plus months and maybe even a year. To characterize the customer, mid-size producer, above CAD 500 million market cap, for now, I think I just want to leave it at that without getting their consent to disclose other details.
A great partner and a name that everyone will know well and ecstatic to have them involved in the plan.
Yeah, that's the characterization I was looking for. Finally, the BC Oil and Gas Commission has new rules on, or measures agreement in the Blueberry River First Nations territory, and I'm wondering if that has any discernible impact on your business development plans at all.
Not right at this moment. Pipestone is obviously on the Alberta side of the border, but absolutely into the next two, three, four years and nothing on the table right now, nothing that'll impact anything existing. If you look at the well results in Inga, Fireweed, that Blueberry area, we are watching it closely, and the results are big. Big liquids. We own a non-op position in the Cypress plant, which would sit just to the southwest of there. Yes, I think it will impact plans, but we're probably, I don't know, 18 to 24 months out before we have to deal with that head-on. What I've seen our team do, even on the TransAlta project, has been unbelievable on the First Nations front, and we continue to go out of our way to work closely. I think our team does a great job there.
Okay. Thanks, guys.
If anybody would like to ask a question, please press star one on your telephone keypad. Your next question comes from Robert Kwan from RBC Capital Markets. Your line is open.
Good morning. Can you just refresh your thoughts on funding the capital plan, particularly if the options are either not exercised for Pipestone or the TransAlta pipe, or not taken up right away? Especially in that latter category, how fussed are you just about running leverage up until the options are exercised?
Great question, Rob. It's top of mind. We meet weekly. We have to be laser-focused on our two capital projects and on our balance sheet. I can assure our shareholders we are. We do have room. We will likely be giving an update to our credit facility here in the coming months where our credit syndicate has been a huge supporter of ours and do want to thank them for that. Right now, it is highly likely that TransAlta exercises. If they did not, we continue to be inbounded by private equity regularly, and they would pay even a premium to be involved in the project. We've got lots of options. We'd prefer not. We'd prefer to own that asset, as much of it as we can. Joel, maybe jump in if there's anything I'm missing there.
We do feel we can fund both projects 100% if we have to. It is going to be tight. Our expectation is that TransAlta exercises today, and that will give us some breathing room to look at other projects into 2019. Know that it's top of mind and we're watching it. Right now, we have room and we're real happy with how well the team's executing.
I'd echo those comments as well, Joel. You alluded to potentially an update on the credit piece, and I think we've been upfront in the past to live at a four-plus times debt to EBITDA is not something going forward that we're comfortable, but through a build-out of the project and prior to cash flow coming on, especially when we have 10, 15-year take-or-pays backstopping these projects, I think we're comfortable through the build-up, but not to live long-term in that space. Through the credit facility and then some of the options through the option exercises that the tenants have and then the inbounds from private equity, I think we've got a plan A, B, and C, and I think we're feeling good about our options that are on the table, and to have those 10, 15-year contracts are huge for us.
Got it. Can you just maybe elaborate, though, on the statement around wanting to own as much of it as possible, but it certainly either being or being very confident in the option exercise, and if not, having the private equity option. If you didn't have the option exercise, that obviously would give you the ability to own a lot more of the project, but would you move towards the private equity option fairly quickly?
I think we can. I think knowing the amount of interest in the private equity groups that we know well, even through the sale of our last business four years ago, we could. I think we just want to assess all our opportunities, and right now, Rob, we feel Q4 and Q1 could be some of our strongest results to date. We just need a few more months, and great to have options. I think for now, though, we'll leave it at that, but I'm hopeful and we will get an update out to the market here in the next 30, 60, 90 days and give a sense. We'd absolutely love to own as much of that TransAlta pipeline as we can. It's a great project.
There's a high likelihood that we will flow more than 130 million a day of gas on that line, which can take well over 300 million a day of gas, and I think it's going to be a transformational asset for Western Canada for years to come.
Got it. Just moving to gas storage at Brazeau. You've got the project to increase injection capacity. I just wanted to clarify, is that different from the joint venture you just entered into? The dollar amounts are about the same.
Yes, it would be different. Those are two different projects. Good question.
Can you just talk about then what the joint venture entails? Is it brand new? You didn't vend in any existing assets, did you?
No. That was, again, consolidating the area. There were three additional existing storage pools in the area. It wasn't all that material to us, to be honest, Rob, but it does increase storage at Brazeau, and I think storage, especially with the TransAlta piece, is going to give us a ton of flexibility there. It is in addition to the three existing storage reservoirs that we already had. That was a piece that we were looking at over the last 12-24 months, and we've now essentially consolidated 100% of what is around Brazeau. We do have a partner in that project, and there's potential for it to have some size. Right now, it's fairly small and immaterial to us and just adds to the existing storage base at Brazeau.
If I can just finish with one small cleanup question just around cash flow and specifically capitalized interest. You booked CAD 4 million in Q2. Was that isolated just to the quarter, or did you book the entire year-to-date amount and run it through the quarter?
Given the capital that's been spent on these two large projects, we did take 6 months of that interest. We've spent north of CAD 100 million this year on those capital projects, and that interest would be reflective of the CAD 100-plus million that we spent on capital through 2018.
Got it. A bunch of the-
It encompass both quarters.
Okay, perfect. Thank you.
I have no further questions. Thank you. I turn the call back over to the presenters for closing remarks.
Thanks, Michelle. I think I'll pass it to Joel in a minute. I think, again, just want to reiterate our thanks for customers and shareholders and all the stakeholders. Obviously, the share price isn't quite where we'd like it. Appreciate all the support that we've had from everybody and just want to reiterate that we're laser-focused on the next 12, 24 months and beyond and are going to work hard to continue to grow the base business and execute on the projects that are in front of us. To Joel, with that, I'll pass it to you.
I think that's good, Joel. Just I think also a big thanks to our staff. We reiterate that we feel our team is one of the hardest-working teams in Western Canada. We continue to see that through the summer. I can assure our shareholders in the market that we're grinding through and working extremely hard to deliver, and I think the customers see that. Again, just a big thanks to our staff and also all the support from shareholders. Thanks everyone for making time today. We appreciate it.
Thank you, everyone. This will conclude today's conference call. You may now disconnect.