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On AIMCo's Strategic $150 Million Investment in Tidewater Renewables

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The Alberta Investment Management Corporation (AIMCo) announced it is making a strategic $150 million investment in Tidewater Renewables:

Calgary – Tidewater Renewables Ltd. (“Tidewater Renewables” or the “Corporation”) (TSX: LCFS) and Alberta Investment Management Corporation (“AIMCo”) are pleased to announce the closing of a $150 million five-year senior secured second lien credit facility (the “AIMCo Facility”) with an affiliate of AIMCo, on behalf of certain of its clients.

The AIMCo Facility’s term is five years, maturing on October 24, 2027 and at closing was drawn down by way of a single advance with net proceeds reflecting a 5% original issue discount. The AIMCo Facility will bear initial interest of 6.50% per annum (the “Base Interest Rate”), payable semi-annually. The Base Interest Rate will increase by 37.5 basis points in year four and five and is subject to certain inflation escalators, with a potential maximum cash coupon of approximately 8.50% by year five. As part of the AIMCo Facility, Tidewater Renewables issued 3.375 million warrants to AIMCo (the “AIMCo Warrants”). Each AIMCo Warrant entitles AIMCo to purchase one common share (“Common Share”) of Tidewater Renewables at a price per share of $14.84, for a term of five years. The exercise price reflects a 50% premium to the 10-day volume weighted average trading price of the Common Shares prior to closing of the AIMCo Facility. The AIMCo Warrants have a cashless exercise feature, which, if elected, can limit future dilution as in such circumstances only Common Shares for the in-the-money value of the Warrants are issued.

Proceeds of the AIMCo Facility will be used by Tidewater Renewables to repay 100% of the outstanding drawn credit under the Corporation’s senior credit facility, repay 100% of the outstanding drawn credit on the previously disclosed RNG credit facility (the “RNG Facility”) as well as enable the cancelation of the RNG Facility, for working capital, general corporate purposes, and for growth projects.

“AIMCo’s investment in Tidewater Renewables represents a rare opportunity for our clients to invest in renewable fuels, supporting the energy transition through a first-mover advantage in renewable fuels projects while ensuring long-term return objectives are met. We look forward to working with the high caliber management team in place at Tidewater Renewables and supporting the organization through its next phase of growth,” said Ben Hawkins, Head, Infrastructure, Renewables & Sustainable Investing.

“When Tidewater Renewables completed its IPO in August 2021, we successfully capitalized our business to execute on our near-term growth program which included funding the acquisition of pre-existing operating assets, as well as the development of our Canola Co-Processing Project, FCC Co-Processing Project, and the Renewable Diesel & Renewable Hydrogen complex (the “HDRD Complex”). Fast-forward 14 months later and we have successfully commissioned both co-processing projects ahead of schedule, continue to progress our flagship HDRD Complex, and entered a highly strategic RNG and Feedstock partnership, all while delivering consistent outperformance on our existing assets. We are excited to partner with a strategic long-term institutional investor in AIMCo and look forward to growing our partnership with AIMCo.” said Joel MacLeod, Executive Chairman and CEO of the Corporation.

The AIMCo Warrants also have two unique features: (1) If the consumer price index is greater than 4% per annum prior to a repayment of all or part of the AIMCo Facility, then the exercise price of the Warrants will be reduced by $2.00 per share go forward for that number of Warrants proportional to the amount of principal repaid. (2) AIMCo has the option to elect to be paid in cash (versus Common Shares) in connection with a cashless exercise. If the Corporation is unable or not permitted to make some or all of such cash payment, then the Corporation will assist AIMCo in the sale of the Common Shares issued upon such cashless exercise, with such sales to take place within 10 business days, and will be obligated to pay AIMCo certain market slippage costs (i.e. the difference between the trading price at the commencement of such sale process (the “Market Price”) and the sale price actually received by AIMCo) of up to 15% of the Market Price (with unsold Common Shares being deemed to have such maximum slippage) plus broker fees and related costs in respect of Common Shares sold. If the Corporation is not permitted to make some or all of such cash payments in connection with such sale process, then the Corporation is obligated to issue AIMCo Common Shares on a private placement basis having a value equal to such unpaid amounts and applying the maximum pricing discounts permitted by the Toronto Stock Exchange (“TSX”). For the unique feature in (2) approval of the Corporation’s shareholders is required by the TSX. As Tidewater Midstream and Infrastructure Ltd. owns approximately 69% of the Common Shares, it is able to provide such approval by giving its written consent, which it has done, in accordance with the exemption set forth in Section 604(d) of the TSX Company Manual. Accordingly, and as provided for in Section 604(d) of the TSX Company Manual, such unique feature will not be in effect until five business days after the issuance of this press release (which has been approved by the TSX) provided such written consent has been provided to the TSX by such time.

INFOR Financial Inc. and National Bank Financial Inc. served as exclusive financial advisors to Tidewater Renewables in connection with the AIMCo Facility.

Forward-Looking Information

This news release contains forward-looking statements and forward-looking information (collectively, “forward-looking statements”) that relate to the Corporation current expectations and views of future events. These forward-looking statements relate to future events or the Corporation’s future performance. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumption or future events or performance (often, but not always, through the use of words or phrases such as “will likely result”, “are expected to”, “expects”, “will continue”, “is anticipated”, “anticipates”, “believes”, “estimated”, “intends”, “plans”, “forecast”, “projection”, “strategy”, “objective” and “outlook”) are not historical facts and may be forward -looking statements and may involve estimates, assumptions and uncertainties which could cause actual results or outcomes to differ materially from those expressed in such forward-looking statements. No assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this new release should not be unduly relied upon. These statements speak only as of the date of this new release. In particular and without limitation, this news release contains forward-looking statements pertaining to Tidewater Renewables’ business as described under the heading “About Tidewater Renewables” below. Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond the Corporation’s control, which could cause actual results and events to differ materially from those that are disclosed in or implied by such forward-looking information. Such risks and uncertainties include, but are not limited to, the factors discussed under “Risk Factors” in the Corporation’s supplemented PREP prospectus dated August 12, 2021, filed on SEDAR. Tidewater Renewables’ does not undertake any obligation to update such forward-looking information, whether as a result of new information, future events or otherwise, except as expressly required by applicable laws.

ABOUT ALBERTA INVESTMENT MANAGEMENT CORPORATION (AIMCo)

Alberta Investment Management Corporation, AIMCo, is one of Canada's largest and most diversified institutional investment managers with CAD $168.3 billion of assets under management, as of December 31, 2021. AIMCo invests globally on behalf of 32 pension, endowment and government funds in the Province of Alberta. AIMCo's Infrastructure group manages a portfolio of over CAD $14 billion in investments, comprised primarily of long-term equity positions in OECD-based infrastructure assets. These assets typically provide essential services to the public and are either regulated or have highly contracted revenues with the potential for long-term capital appreciation. AIMCo infrastructure investments are intended to match long duration real return asset characteristics with inflation-indexed pension liabilities. For further information: mediarelations@aimco.ca

ABOUT TIDEWATER RENEWABLES

Tidewater Renewables is traded on the TSX under the symbol “LCFS”. Tidewater Renewables is a multi-faceted, energy transition company. The Corporation is focused on the production of low carbon fuels, including renewable diesel, renewable hydrogen, and renewable natural gas, as well as carbon capture through future initiatives. The Corporation was created in response to the growing demand for renewable fuels in North America and to capitalize on its potential to efficiently turn a wide variety of renewable feedstocks (such as tallow, used cooking oil, distillers corn oil, soybean oil, canola oil and other biomasses) into low carbon fuels. Tidewater Renewables’ objective is to become one of the leading Canadian renewable fuel producers. The Corporation is pursuing this objective through the ownership, development, and operation of clean fuels projects and related infrastructure, utilizing existing proven technologies. Organically, Tidewater Renewables will seek to leverage the existing infrastructure owned by Tidewater Midstream and Infrastructure Ltd. and in-house operational and engineering expertise, regarding the development of the Corporation’s portfolio of greenfield and brownfield capital projects as well as the expansion of the Corporation’s product offerings. Additional information relating to Tidewater Renewables is available on SEDAR at www.sedar.com and at www.tidewater-renewables.com.

AIMCo's strategic $150 million investment in Tidewater Renewables is structured in a way that increases the risk-adjusted returns over the five year period of this deal.

It has an embedded inflation component with a potential maximum cash coupon of approximately 8.50% by year five and it can obtain shares through warrants if exercised at a nice premium during this period (strike price of $14.84):

The AIMCo Facility’s term is five years, maturing on October 24, 2027 and at closing was drawn down by way of a single advance with net proceeds reflecting a 5% original issue discount. The AIMCo Facility will bear initial interest of 6.50% per annum (the “Base Interest Rate”), payable semi-annually. The Base Interest Rate will increase by 37.5 basis points in year four and five and is subject to certain inflation escalators, with a potential maximum cash coupon of approximately 8.50% by year five. As part of the AIMCo Facility, Tidewater Renewables issued 3.375 million warrants to AIMCo (the “AIMCo Warrants”). Each AIMCo Warrant entitles AIMCo to purchase one common share (“Common Share”) of Tidewater Renewables at a price per share of $14.84, for a term of five years. The exercise price reflects a 50% premium to the 10-day volume weighted average trading price of the Common Shares prior to closing of the AIMCo Facility. The AIMCo Warrants have a cashless exercise feature, which, if elected, can limit future dilution as in such circumstances only Common Shares for the in-the-money value of the Warrants are issued.

Tidewater will use the proceeds to pay down debt and focus on growth:

Proceeds of the AIMCo Facility will be used by Tidewater Renewables to repay 100% of the outstanding drawn credit under the Corporation’s senior credit facility, repay 100% of the outstanding drawn credit on the previously disclosed RNG credit facility (the “RNG Facility”) as well as enable the cancelation of the RNG Facility, for working capital, general corporate purposes, and for growth projects.

Ben Hawkins, Head, Infrastructure, Renewables & Sustainable Investing at AIMCo states: 

“AIMCo’s investment in Tidewater Renewables represents a rare opportunity for our clients to invest in renewable fuels, supporting the energy transition through a first-mover advantage in renewable fuels projects while ensuring long-term return objectives are met. We look forward to working with the high caliber management team in place at Tidewater Renewables and supporting the organization through its next phase of growth.”

You can learn more about Tidewater Renewables by going over its latest investor presentation here.

Below, I embedded the overview:


Now, if you read the entire investor presentation here, you'll see Tidewater has serious growth prospects and a nice green energy platform:

And it is based in Calgary where AIMCo recently opened another office. 

It's funny, Alberta and renewable energy companies sounds like an oxymoron to many Canadians but Alberta is fast becoming Canada's renewable energy hub. 

There are some incredible renewable energy companies in Alberta and it makes sense, this is where traditional energy companies have thrived for decades. 

Now, I am not saying to sell your house and bet the farm on Tidewater Renewables shares. It's a young company that has tremendous potential but it's still early and there are risks which is why AIMCo was intelligent in the way it structured this deal. 

There is hardly any volume on the stock which tells you institutional investors are not on board yet (to be fair, it’s a micro cap/ small cap stock which doesn’t trade a lot).

Still, just its renewable diesel platform can be a huge money maker in the future.

The reason I like this deal is the way it was structured, reminded me a lot of how Jim Keohane, the former CEO of HOOPP and now AIMCo board member, used to structure deals (he had nothing to do with this deal except to approve it).

I also like it because even though AIMCo's CEO Evan Siddall is on record stating fossil fuel divestment is not their strategy, they are a big investor in renewable energy and are always on the lookout for great green and energy transition assets.

Don't say anything to Jack Mintz but even though AIMCo isn't divesting out of oil & gas, it's smart enough to take ESG (the E, S and G!), green and transition investments very seriously (that's where the puck is heading over the long run).

Alright, let me wrap it up there but before I do, I'd like to publicly congratulate Sarah Esler and Justin Lord at AIMCo for their recent promotions:

They both report to Sandra Lau, the Chief Investment Officer (James Barber has left the organization).

Below, AIMCo's new Chief Economist, Jean-David (J.D.) Tremblay-Frenette, explains why stagflation is the most likely scenario:

Our baseline view is one of mild stagflation. That is, inflation keeps rising and is above central bank targets despite interest rate decisions. In this case, inflation joins forces with higher rates to weaken demand and shrinking demand would cause the economy to slow down materially. In this scenario, real gross domestic product (GDP), or economic growth would not land in negative territory.

Our baseline view is that supply chain constraints subject to the notions of COVID-related lockdowns or commodity-related shocks remain the main source of inflationary pressure, not solely the effects of current monetary policy. And while goods-related inflation may slowly dissipate in the next few years, it may be replaced by wage and service inflation. These new cost pressures would affect the unemployment rate negatively.

Greater price and wage pressures, and higher rates of unemployment would eventually lead to lower growth. Looking at forward-looking indicators, consumer stress is inching higher month over month. This is the result of higher food and energy prices, mortgage rates and housing costs. These factors do not impact low, middle and high-income households to the same extent. However, collectively, they contribute to harm overall consumer confidence and could cut into consumer spending and housing, two of the most important economic growth drivers in North America. The result would be a drop in economic growth.

A stagflationary environment is our baseline view over the next year or so. This view is underpinned by both shorter-term and medium-term drivers like consumer prices, household spending and cost of housing.

I also want to congratulate J.D. on his promotion and end with my quick takeaways on the Bank of Canada's decision to increase its policy rate by 50 basis points earlier today.

At lunch, after the press conference by Governor Tiff Macklem and Carolyn Rogers, Senior Deputy Governor (see below), I chatted with my favorite currency trader in Toronto:

  • I told him I was surprised the Bank didn't raise by 75 basis points given it kept harping on core (underlying) inflation but did note it followed the Reserve Bank of Australia which also surprised markets by raising its cash rate by 25 basis points instead of the anticipated 50 bps earlier this month.
  • Short rates around the world dropped as this latest move by the Bank of Canada fueled speculation that the Fed will only hike rates by 50 bps at its upcoming November meeting next week. 
  • My buddy remarked: "Only last week, they were pricing in that the Fed might hike by 100 basis points, 75 bps is still the consensus but now traders aren't sure. The Fed might go 50 bps and do another 50 in December and people will interpret it as a pivot or pause. All I know is that the Bank of Canada cannot go back to 75 bps at its next meeting, that's not going to happen. The problem? What if energy prices head back up and wages start spiraling out of control? What will central banks do then? I understand, we are approaching the holidays, people are tired of rate increases, especially low and middle-income working people, so the Bank of Canada threw them a bone so their variable rate mortgages don't go up as much. But if inflation comes roaring back next year and they are forced to raise rates above 5%, what will these central bankers do? It could get very ugly as it did in the late 70s/ early 80s."
  • I concurred and told him central banks are damned if they do, damned if they don't. On the one hand, any signs of a pivot or pause and animal spirits on Wall Street start speculating on garbage stocks like crazy, raising inflation expectations. On the other hand, if central banks keep raising rates aggressively, they're going to create another 2008 housing crash or possibly worse. That's deflationary and not in their interest. I think they like stagflation because they can inflate away their massive debts. The cynic in me sees the pandemic and monetary and fiscal responses afterward as something which will usher in a long period of stagflation but if they're not careful, central banks can easily create a deflationary shock. In fact, maybe they do know something is about to break in markets and they all talk among each other, and that's why they are easing up on the magnitude of rate increases. Who knows, all I know is that central banks are walking a fine line here, if they pause or pivot too early, it can backfire on them, if they keep their foot on the peddle, it can crash the housing market and backfire on them. Not an easy time to be a central banker!
  • Finally, I asked my buddy if it's time to go long the CAD versus USD and he told me it depends on what the Fed does at its next meeting. I then asked him if he's buying Alphabet shares (GOOG) at the close and he told me he's happy with his Apple and Bell shares and will soon lock in GICS at over 5% as "there is no use in speculating in these markets, they might go nowhere for a very long time like 1966-82."

Smart man. These markets are volatile and big tech earnings aren't great so far this week (Microsoft, Alphabet and now Meta shares got clobbered; up next are Apple and Amazon after the ECB meets on Thursday morning).

Anyway, watch AIMCo's new Chief Economist, Jean-David Tremblay-Frenette, explain why they are worried about a mix of high inflation and slowing growth. Also, watch the press conference by Governor Tiff Macklem and Carolyn Rogers, Senior Deputy Governor and read the opening statement here.

The Bank of Canada blinked but none of us know the real reasons as to why. Maybe the Fed's next move will give us some more insights, we shall see.  

Lastly, learn more about Tidewater Renewables through this recent interview with Joel MacLeod, Executive Chairman and CEO of the Corporation.This is a company worth keeping your eye on. 

Update: The Calgary Herald published an article from Amanda Stephenson of the Canadian Press, Investment boom coming for energy sector as 2050 looms, experts say, where AIMco's CEO Evan Siddall was quoted:

In an interview last month, Evan Siddall — head of the Alberta Investment Management Corp., which on Monday announced a $150-million investment in Tidewater Renewables, which is focused on the development of renewable fuels — said that AIMCo wants to be a leader in financing the transition to a low-carbon economy.

“We see the potential for strong financial returns,” said Siddall in the interview. “We’re a long-term investor, so unlike public markets that tend to operate quarter to quarter with much shorter-term horizons, we can look to a transition into 2030 and see the path to earning a return on decarbonization.”

Exactly, AIMCo is a long-term investor which can take a much longer investment horizon to realize on its investments. When investing in energy transition, this gives it an important advantage. 

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