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Good morning, ladies and gentlemen, and welcome to the Tidewater Renewables Q1 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Friday, May 12, 2023.I would now like to turn the conference over to Ray Kwan. Please go ahead.
Thank you. Good morning, everyone. On the call with me today is Rob Colcleugh, Tidewater Renewables Chairman and Interim CEO; Bryan Morin, Chief Legal Officer.Before we get started, I would like to note that today's call is being recorded for the benefit of individual shareholders, the media and other interested parties who may want to review the call at a later time. A recording of today's conference call will be available through Cision. This morning, we reported results for the 3 months ended March 31, 2023. A copy of our news release, financial statements and MD&A may be accessed on SEDAR or our website.Before passing the call over to Rob, I'll remind you that some of the comments made today may be forward-looking in nature and are based on Tidewater's current expectations, judgments and projections. Forward-looking statements we express today are subject to risks and uncertainties, which can cause actual results to differ from expectations.Further, some of the information provided refers to non-GAAP measures. To know more about these forward-looking statements and non-GAAP measures, please see the company's various financial reports, which are available on our website and on SEDAR.And with that, I'll pass it off to Rob to discuss some highlights from the quarter.
Thanks, Ray. Good morning, and thank you for joining our Q1 2023 conference call. Tidewater Renewables top priority continues to be the safe and successful commissioning and start-up of Canada's first stand-alone renewable diesel facility.Tidewater Renewables is proud to have sourced an additional $93.2 million worth of liquidity in the last few months, which should provide us with ample liquidity to finish our commissioning of the HDRD complex and support our growth projects. This support comes in the form of $43 million of newly issued capital emissions credits and $50 million of additional debt capacity from our existing lenders.The support received from our current capital providers and the government has been fundamental to the success of the HDRD complex. This project will provide significant value to our stakeholders while reducing the carbon intensity of fuels used in British Columbia and Canada.The HDRD complex is now over 95% complete and is progressing as expected with no change to the previously announced gross capital cost of $342 million. Commissioning operations are progressing on several units with the final completion and start-up expected to begin by the end of Q2. The HDRD project continues to be a leader in safety performance with 0 lost time injuries throughout the life of the project to date.And finally, of note, Tidewater Renewables recently published our inaugural ESG report. The report highlights the corporation's commitment to responsible energy development, its approach to sustainability, recent accomplishments and other materials that will help drive the success of Tidewater Renewables long-term ESG goals. The report is available on the company's website, and I would encourage you to take a look.I'll now turn the call over to Tidewater's Chief Financial Officer, Ray Kwan, to walk through our financial results.
Thanks, Rob. Tidewater Renewables reported first quarter adjusted EBITDA of $12.6 million, in line with the same period last year. For distributable cash flow, Tidewater generated $5.3 million compared to $7.9 million in the same period last year. Our quarterly performance was underpinned by our base take-or-pay contracts with Tidewater Midstream as well as continued realized hedging gains. This was, however, offset by lower product pricing for the canola and FCC co-processing units.Total capital expenditures for the first quarter of 2023 were $81.6 million compared to $47.4 million in the same period last year. Q1 capital relates largely to the construction of the HDRD complex. These expenditures were partially offset by funds received from the sale of B.C. LCFS credits awarded by the B.C. government for achieving milestones under the renewable diesel project Part III agreement, which totaled $23.3 million in the first quarter.Regarding Tidewater Renewables financial position, we ended the quarter with total net debt of $278.6 million. As mentioned, Tidewater was able to secure additional capital emission credits of $43 million, which were sold in Q2. We also expect to monetize $29.8 million worth of credits in Q3, followed by $10.6 million in 2024.Note that these are all capital emission credits and do not include any of the credits that will be generated via the production of renewable diesel. As previously announced, in 2022, we have only forward sold less than 7% of our operating emission credits in 2024 and 2025.We also amended our senior credit facility and AIMCo facility to provide a temporary increase of $25 million each for a combined total of $50 million. These amounts are repayable in variable quarterly installments based on the company's cash flow following the commissioning of the HDRD complex. These amendments also waive the financial covenants until and including September 30, 2023.For the HDRD complex, our start-up plan involves a gradual and measured increase in production, translating to a 75% to 80% utilization rate in the second half of 2023. Based on this utilization, second half 2023 corporate adjusted EBITDA guidance is expected to range between $50 million to $60 million.At this point, I will turn the call back to Rob to wrap things up.
Thanks, Ray. As mentioned at the start of the call, my focus is ensuring that Tidewater Renewables successfully commissions the HDRD complex, creating value for our shareholders and establishing a platform for future growth. The HDRD's complex's EBITDA during the second half of 2023 will represent a step change in our business profile and should create significant shareholder value.And with that, I'll ask the operator to open the call to Q&A.
[Operator Instructions] We have our first question with Robert Kwan from RBC Capital Markets.
Just -- you talked about post HDRD commissioning and the quote being strengthening your financial position and repaying debt. I'm just wondering what specifically does that mean to you in terms of dollars and credit metrics.
Yes. So I mean, I think our primary goal over the near term, like we said before, is to strengthened Tidewater Renewables' financial position. I think where we want to be, I think, overall is probably half the amount of leverage on our balance sheet that we want to be over the next, call it, 24 months here. So I think the goal here for the next 12 months will be debt repayment, but also part of that is to move forward on some of that development of our RNG facility.
Okay. Ray, just unclear, when you say half the amount of leverage, are you talking about half the amount of debt, whatever that ends up being...
Yes.
At the end. Okay. And then there's also a specific mention of the remainder. Just working -- or focusing on that, so the remainder of 2023. So does that mean based on your projections you expect to achieve those targets by year-end?
Yes. Like in terms of our financial position, like, I think post HDRD commissioning. I mean, again, our single goal is to focus on certainly the balance sheet. So it will be debt repayment here over the back half of this year. I think 2024 -- we'll be evaluating our 2024 budget in terms of what we're looking to spend in terms of future growth projects. But as we stand today, I think our near-term goal will be debt repayment.
Right. So just to be clear, though. But you expect based on your budget by the end of 2023 you'll have achieved that leverage reduction that you want to be? And that 2024 you'll be kind of focusing more on strategic initiatives rather than financial?
Yes. So I think by the end of this year I think we're forecasting to be net debt of around $300 million total. And I think we would like to reduce that by half over the next 12 months thereafter.
Okay. Okay. And then just last. In March, Tidewater Midstream just talked about needing to take actions to surface value. I'm just wondering, is that a valuation process actively involving the participation of Tidewater Renewables? Or is that something that's just happening away from you and whatever they end up deciding may or may not impact you, but you're not involved?
Yes. Robert, it's Rob here. It is specific to Tidewater Midstream and I don't foresee any impact on Renewables.
Next question we have Nick Boychuk with Cormark Securities.
Just to start, could we get an update please on the unifiner replacement process at PGR for the coprocessing and FCC?
Sure. Like right now, for the unifiner as well as the FCC, we are moving in terms of installing pumps and as well as heat exchangers on both the canola coprocessing as well as new nozzles on the FCC coprocessing. But from my understanding, the turnaround is going well and the installation of these items are going well as well, too.
The catalyst has been replaced to be ready to roll. As we've said in the Midstream conference -- or in Midstream press release, I should say, the turnaround has gone as expected. No material groundwork.
Okay. Awesome. And then looking beyond HDRD, I was wondering if we could get a bit of status update on High River RNG as well. Just curious where it is in the permitting process? And also what your thoughts are on construction time lines and ultimately potentially [ product COD ]?
Sure. We continue to work through the regulatory process. Right now, we're answering SIRs, and those should be turned around in mid-June. So it's really up to the Alberta government, whether we've got more SIRs after that or whether it rolls right into an approval process. We obviously will be laying a fair bit of cement, so that will need to take place kind of at this time of the year. So we have been, I think, fairly clear before that we wouldn't start construction on it until next spring. But that's still our time line as it stands.
Okay. Great. And then beyond High River, [indiscernible] how you're prioritizing the future growth projects. What are you guys seeing in terms of different types of fuels. And then if there's, I guess, an option for you guys to start to do some M&A if some of those valuations are coming in a little bit more attractively now?
Yes. We are continuing -- we're evaluating things now. As you know, it takes quite a bit of time to get any kind of deal over the line. So I think it's important to keep our pipeline pretty active. And we've had a couple of interesting opportunities that we've taken a look at. And then we've got a couple of organic opportunities that we continue to assess as well in terms of costs and offtake and things like that. We've also -- on the larger side of things, we're just starting to investigate some SAF opportunities as well. But again, very early days on that one. But we are -- we have funding in place to -- for us to investigate that kind of a project.
[Operator Instructions] Next question we have Rob Catellier with CIBC.
I just want to follow-up on the leverage questions that were being asked at the beginning. In addition to your financial position, is there a key operating marker you need to see out of HDRD before undertaking new -- material new capital projects? For example, you have to be running for 6, 12 months? Or is there any sort of operating milestones you're looking for as well?
Yes. Well, I mean -- I guess 2 different questions. One, we're going to be looking to see what our capacity utilization is once we get it up and running. So I don't think it's going to take 6 months. Once it's up and running and we get some time under our belt, say, a month, we should know what that is. But it will be fairly instructive in terms of our cash flow to know whether we're hitting the 3,000 barrel a day, whether we're at 2,700, 2,800. That will be instructive. It's not going to delay any of the -- the next project that we've got is the RNG project in High River. So it's not going to delay that. We're moving forward with that process.
And I just want to make sure I have an understanding of the completion date. Reading the press release, it looks like it may have slipped from April to June. I just want to make sure I saw that correctly that is, in fact, a slip on the completion date. And then in light of that, what's being done to maintain the cost and the EBITDA guidance if, in fact, it has slipped?
Sure. I mean I don't -- we may be a little bit delayed. It's not from April. It would have been from May into June. We've got a couple of gating items that will really determine exactly which week it starts up. But we've got a fairly rigorous commissioning process. We've talked to a lot of the facilities that have started up, especially ones that have started up with Haldor Topsoe catalysts.We think we've taken the best operating start-up procedures from each of those other facilities, and we're going to follow those. So whether things are -- if it's middle of June, end of June, we're not going to be fussed by a week here or there. We're going to be very rigorous in the way we start this up because it's going to have 0 impact on value whether a week earlier or later. And Robert, did you -- was there another question that I missed?
No, I think you answered it. Like, I was just curious how you can maintain cost if it slipped. But what you're doing is -- it's a question of a week or 2. It's not the slip that I thought may have been -- okay.
No. And...
So it's...
Yes. I mean -- and there's no 2 ways about it. Time is money, as they say. So any kind of slipping does have some impact, but it's not impacting us that much. So we have -- basically, we've got 2 things we're waiting on. So we're commissioning as we go. Most units have either been handed over to commissioning or are actually in the final walk-downs before handing it over to commissioning. So that's going on independently.And then we've got a burner that's being replaced and then there's a little bit of welding that's being done. But most of the things are on site. So any kind of delays, if we're talking a week or 2, they don't have a direct impact on costs, and we're not seeing that affecting us.
Okay. Fantastic. And then last one for me. It does appear that feedstock costs have dropped here. So I'm curious how that impacts your feedstock acquisition strategy and also the -- how you might look at hedging?
Yes, they have dropped. It's -- I mean, we come from an oil and gas environment and we're used to volatility. But some of these ag projects have some good volatility to them, too. So we've seen -- that's obviously impacted our hedge that we've got on right now. So we've got 40% to 50% of our canola purchases hedged. Once we get into the start-up phase, we may be looking at adding a little bit more because it is quite attractive right here and obviously plays well to our economics in terms of our feedstock against an output on the diesel side.So yes, I don't -- we will continue to look at hedging opportunities. Very importantly, we're continuing to look at other types of feedstock as well. As you know, we've got our used cooking oil business that collects product UCL right now. We've also got a line on some pretty interesting feedstocks that have very positive impacts on our CI. So those types of things will be -- as mentioned before, we'll be feathering those into the system as we're comfortable hopefully later in the summer. But in the meantime, yes, we're pretty happy to see canola prices where they are, and we'll be reviewing just how much we want to hedge going forward.
The next question comes from the line of Devin Schilling with PI.
Just with regards to the planned turnaround at PGR, what should we be modeling for a decrease from the base business and coprocessing activities during the quarter?
Yes. Just you model like 0 EBITDA for both the canola coprocessing and the FCC coprocessing. Yes, we're not building any volumes associated with that. So our still take-or-pay asset EBITDA is still $10 million a quarter, so equating to $40 million for the year. So I would assume probably $10 million at least from an asset EBITDA for our take-or-pays.
Okay. Sorry. So I thought the assets were shut down for about half the quarter. Is that not correct?
Yes. We just assumed in our model. Just -- effectively, it's not contributing for the entire quarter here.
Next question we have Nath Heywood with ATB Capital.
You talked a little bit about derisking the feedstock. I just want to switch to the other side here. Looking at the exposure on B.C. LCFS credit prices. Obviously, we've seen some strength even in the last month, price is around $475. So I'm just wondering what the forward sale appetite is from some of the offtakers you're talking to? And as you look to stabilize that exposure through 2024 and 2025. And if you have a target in mind that would be great as well?
Sure. Yes, we are continuing to see strength in LCFS credits and B.C. LCFS credits. We're also seeing strength, even though it's sort of pre-issuance, on the CFR credits as well. So it's a very good environment on that side of things. We are active in that market. We are not actively looking to forward sell. And we have had a bunch of questions about how much of our production credits we forward sold and which we've -- it's around 5%. We -- really just to test the market. So we haven't entered into that forward sale of production credits.I don't think that we're particularly interested in doing so. We will take them as they come. And we are fairly bullish on the credit situation. We're one of a small number of players that are actually generating credits in any material way. So I think it's -- the winds are at our backs a little bit on that side of things.
Perfect. I appreciate the color there. And then just finally on -- looking at the capital allocation, you guys are still looking to potentially deploy more capital towards renewable natural gas. I'm just wondering if you're seeing much in terms of the economics changing seeing the inflationary environment and the weaker localized natural gas prices.
Well, keep in mind that our -- with regard to gas prices, we've got a fixed price, which is offtake through Fortis which we've announced. So we're not impacted by variability on natural gas prices with regard to the RNG project. I don't think we're any different than anybody else in the construction world right now. We are seeing a much reduced inflationary environment. So we're pretty comfortable that we're still in the same ballpark as we were before in terms of the capital costs. As you know, the RNG project is vastly simpler construction project than an HDRD. So it should be fairly straightforward.And I guess the other thing I'd like to reference is -- I think you want to see our disclosures in terms of our grants. And we've been -- I think we're on a pretty steady track of collecting grants. And I don't think you'll see a significant outlay of capital required to come from Tidewater Renewables to get that project up and going thanks to the grants. As well as quite a bit of interest on the project finance side of things.
There are no further questions at this time. Rob, do you have any closing remarks.
No. Thank you for joining us. And as always, Ray and I are available for any questions or discussions. So please feel free to reach out. Thanks, operator. It's all yours.
You're welcome. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.