Tidewater Renewables Ltd

TSX:LCFS

Earnings Call Transcript

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Tidewater Renewables first quarter financial results conference call. [Operator Instructions]

I would now like to turn the conference over to Mr. Ray Kwan. Please go ahead.

[Ray Kwan, executive]

Thank you. Good morning. On the call with me today is Jeremy Baines, Tidewater Renewables' Chairman and CEO. 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 first quarter ended March 31, 2024. 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 Jeremy, 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 Jeremy to discuss some highlights from the quarter.

[Jeremy Baines, executive]

Thank you, Ray. Good morning, and thank you for joining our Q1 2024 conference call. Today, I am proud of both our performance and our product. On the performance side, it wasn't completely smooth, but it was successful. We overcame the operating challenges we discussed at year-end, expanded our commercial reach and exceeded our previous HDRD throughput guidance. Moreover, we are carrying this building momentum into the second quarter, and we have so far maintained a utilization rate of approximately 95%. I believe this showcases the team's commitment to operational excellence and continuous improvement.

As for our renewable diesel, it offers a genuinely viable solution for reducing greenhouse gas emissions. We take pride in supplying Canada with a homegrown, low-carbon energy solution that works in our existing machinery and with our current infrastructure. I want to emphasize that renewable diesel is a proven emissions reduction solution that is available today, compatible with existing assets and doesn't require the replacement of our energy distribution network.

Our proposed 6,500 barrel a day SAF project continues to make solid progress, and we are busy integrating the lessons learned from the construction and operation of the HDRD Complex into its design basis. We continue to progress commercial arrangements and are evaluating potential offtake agreements for the SAF project. The SAF project remains subject to a final investment decision, which is expected in 2025. We remain committed to approaching this project methodically with an emphasis on commercial and financial viability.

Finally, I want to welcome Mr. Todd Moser to our Board of Directors. Mr. Moser brings over 35 years of refining, biofuel and environmental experience to Tidewater Renewables with previous roles, including senior leadership positions at Petro-Canada, Maple Leaf Foods and most recently as President and CEO of Terrapure Environmental. Mr. Moser also has extensive board experience, including service with the Canadian Renewable Fuels Association and the National Renderers Association.

I will now turn the call over to Tidewater Renewables' Chief Financial Officer to walk through our financial results.

[Ray Kwan, executive]

Thanks, Jeremy. During the first quarter, Tidewater Renewables reported adjusted EBITDA of $25.3 million, the highest recorded EBITDA since inception and up from $12.6 million reported in the first quarter of 2023. The increase is primarily the result of strong contribution from the HDRD Complex, partially offset by the $8.1 million realized financial hedging loss due to lower soybean prices. For the quarter, the HDRD Complex contributed approximately $20 million of adjusted EBITDA with the facility's throughput averaging approximately 2,120 barrels a day or a 71% utilization. This is slightly higher than our previously forecasted Q1 range of 1,800 to 2,000 barrels a day. In 2024, we expect to exceed a full year utilization rate of 85%, representing an average throughput of 2,550 barrels a day. Initial operating results for April and May show continued improvement with a utilization rate of 95%.

For the quarter, Tidewater Renewables ended with net debt of approximately $307 million, down from $346.6 million at year-end 2023. The lower debt balance is due to higher cash flow generation due to stable operations at the HDRD Complex, lower total capital expenditures and the addition of capital emission credits received in the quarter. With these tailwinds, our improving liquidity and the $27.7 million of bank debt repaid in the first quarter, we are confident in our ability to extend our senior credit facility and expect to provide an update in short order.

At this point, I will turn the call back to Jeremy to wrap things up.

[Jeremy Baines, executive]

Thanks, Ray. With that, I will ask the operator to open the call to questions.

[Operator]

[Operator Instructions] Your first question is from Nick Boychuk from Cormark Securities.

[Nicholas Boychuk, analyst]

Can you guys expand on the OpEx cost reduction goal that you mentioned in the MD&A for HDRD? Just what exactly that entails and the magnitude of that potential cost decrease?

[Jeremy Baines, executive]

The cost reduction goal, I think that you're referring to, is really around the G&A expense reductions that we've been doing. We've -- in the -- early in the second quarter, we've taken a number of initiatives to optimize the costs and our structure. And we've got a couple of million dollars at the renewables level that we've taken out of the cost structure go-forward.

The other piece is really CapEx. We have optimized our capital program and eliminated a number of expenses that we've been -- that we're potentially on the docket to be spent, and we decided they weren't necessary or weren't going to provide the appropriate return that we needed. So we have pared that back to conserve cash flow.

And the other piece of it, as we increase our throughput, obviously, the fixed cost component becomes smaller per unit. That drives significant costs in our OpEx. There is a one capital project that is in the budget that we are doing around our off-gas and we are -- where we'll be reducing even further the amount of natural gas that we're using in our energy intensity, and that project is ongoing and should be started up in the next week or so here. So that's really the focus at renewables, really running HDRD optimally and having the right overhead structure.

[Nicholas Boychuk, analyst]

Got it. And just following up on that, the CapEx component you referred to, is it fair to assume then that the focus really going forward is on the SAF project getting that to FID for 2025 and that the RNG things that were previously discussed are kind of on the back burner a little bit or deprioritized?

[Jeremy Baines, executive]

Yes. Our focus is renewable fuels. I think we've demonstrated our ability with the renewable diesel facility. SAF is the next significant growth project we are working on. We are very focused. We have a significant part of the team. Working on getting that project, all of the things that go into front-end engineering design, proper commercialization, stakeholder consultations, regulatory approvals, all of that is being worked in parallel as we speak. And the RNG project is working through some regulatory permitting, but that's slowed the project down a bit here and not the main focus of the team. SAF is our main growth pillar focus.

[Nicholas Boychuk, analyst]

Are you able to expand on any of the similarities or differences between what you experienced with HDRD and how you think you'll be able to apply that to the SAF project with a little bit more of a cleaner build-out and, I guess, path to all project operations?

[Jeremy Baines, executive]

Yes. I mean it's a great question. Obviously, we're very proud of our safety record and our -- the production record we've had over the last, call it, 3 months at HDRD, but there were a significant amount of learnings that happened. One is making sure we've got the appropriate front-end engineering and design and regulatory work all locked down before we progress to commitments. We are taking a methodical approach to our pre-FID SAF project.

I do think we are one of the most capable companies in Canada, and there are technical learnings and you saw some of the start-up challenges that we had at HDRD and all of those things around appropriate configurations of hydrogen compressors and heat tracing of certain elements. And all of that stuff will be applied and will make us better and allow us to execute more effectively and cost on time. So all of those things are -- there's a long list of things we have incorporated that will make it a smoother and even more well-executed project.

[Nicholas Boychuk, analyst]

And then last for me, and then I'll get back in the queue. Just thinking about hedging for the remainder of the year. So '24 and '25, I think you've got about 50% and 30% of the feedstock for HDRD locked up with prices kind of at lows for the year? Are you guys thinking about potentially entering additional hedges? Or are you happy kind of having more merchant picture now?

[Ray Kwan, executive]

Yes. This is Ray here. Thanks, Nick, for the question. I mean our hedging strategy is relatively unchanged. Like you mentioned, right now, we're 50% hedged. I think we're comfortable with those levels for 2024 despite kind of the soybean futures market being below our average hedge price. But that said, for 2025, we are only 30% hedged. So if credit prices and/or diesel prices continue to be favorable, we believe next year will look a lot better from an EBITDA capture rate, just given the fact that the co-processing units and the HDRD units are able to benefit from the lower feedstock costs here.

[Nicholas Boychuk, analyst]

Jeremy, welcome to the team.

[Jeremy Baines, executive]

Thank you.

[Operator]

Your next question is from Robert Catellier from CIBC Capital Markets.

[Robert Catellier, analyst]

Congratulations on the good operating results of the HDRD facility. I'm curious if that's the -- really the focus of the credit facility extension, just getting the facility up and running to a more stable operating rate. Maybe you could just discuss what gives you confidence in the credit facility renewal.

[Ray Kwan, executive]

For sure. Thanks for the question, Rob. It's Ray here again. Yes, look, I mean, it's -- I think one of the key things that the lenders wanted to see is the HDRD Complex operating at close to full utilization and design. I think overall, in terms of our negotiations regarding the extension of the senior credit facility, I can't talk much about it, but suffice to say, I believe the lenders are happy with the performance to date.

And obviously, if you look at Q1, I think there were a number of positive strides we made in the quarter, including net debt reduction of nearly $40 million. We paid $27.7 million of bank debt. And obviously, the throughput for HDRD is really strong right now. So suffice it to say, our discussions with the first lien lenders have been positive thus far, and we hope to have a resolution here shortly.

[Robert Catellier, analyst]

Okay. Great. Just give an update on the outlook for the capital credits, both for the second quarter and the remainder of the year. I just want to refresh on the accounting there. Does that flow through the income statement? Or is that a contra account to the capital that's been spent? And then I'll have a follow-up question.

[Ray Kwan, executive]

Yes, it's the latter. So we expect to receive about $15.3 million of capital emissions credits in the second quarter and close to $7 million for the remainder of this year. So -- and all of it is going to be offsetting essentially capital.

[Robert Catellier, analyst]

Okay. And then -- that's what I expected. And then just with respect to the production credits, is there a similar outlook you're able to provide there? And really, what I want to get at is at what point do you think you'll be at a level or a comfort level with the facilities production to be able to sell the credits ratably with production? In other words, you don't want to sell too many and then have an operating outage or operating bump along the way and get caught short. So at what point are you going to be at the level where you're selling the credits ratably with expected production?

[Ray Kwan, executive]

Yes. So for the first quarter here, it's -- we have that credit marketing arrangement with an investment-grade counterparty. And bottom line, we received basically payment for and essentially transferred, I guess, the fuel codes associated with the BC-LCFS to the other party. So we get paid ratably for that.

In terms of the CFR, we do build inventory. And so you can see in terms of our deferred revenue as well as our inventory and our operating emissions credits, we do actually build the inventory associated with that. One of the unique arrangements with this agreement is that we do get paid on the CFR, but physical realization to EBITDA as well as revenues isn't until basically we push a button and transfer those credits over to the other party there. So if we have these marketing arrangements and credit arrangements, it will be more ratable. There is no minimums. There's no maximums associated with how much we have to sell. So it's a pretty flexible arrangement that we have here for the second quarter.

[Operator]

[Operator Instructions] And your next question is from Robert Kwan from RBC Capital Markets.

[Robert Kwan, analyst]

If I can just start kind of a high level and breaking down the quarter and think about the outlook. So you've got the $25 million of EBITDA. As you ramp up HDRD, that should be presumably additive to that. But was there anything else in the quarter that would impact 2024 that really would lead you to not take the Q1 results to annualize that and just include a ramp-up for HDRD?

[Jeremy Baines, executive]

Yes. Thanks for the question, Rob. I'll start, and then Ray can fill things in. It really is, I think, is straightforward as you think about it. Obviously, revenue is subject to diesel prices and credit values that are realized. Operationally, our OpEx is relatively fixed, and then you got to run the hedge through. And all of that basically, those things all staying same. It's just the volume for the rest of the year we'll be running, my expectation is 95% of design capacity, at least, and that is -- it's as simple as that.

[Ray Kwan, executive]

The only thing I'd add to Jeremy's comments is that the 85% utilization for this year implies basically 90% for Q2 to Q4. So if we're able to operate at this high level, then there is upside to that, to our EBITDA from Q1 here.

[Robert Kwan, analyst]

Got it. And then as we think about 2025, again, the caveat of what is diesel pricing, what is the feedstock pricing. But if you get into a lower hedge percentage to $8-ish million of realized losses should start to whittle away and just that in and of itself should be a tailwind to 2025?

[Ray Kwan, executive]

Yes.

[Jeremy Baines, executive]

Correct.

[Robert Kwan, analyst]

Okay. Just on the SAF project, I think last quarter, you talked about that, for all intents and purposes, any of the spending that's going into it right now is being covered by the government credits. Is that still kind of what you expect for 2024, that there's going to be no material dollars spent from the company on other...

[Jeremy Baines, executive]

That's correct. We have an incentive agreement that we hit milestones with, and I think we've actually passed our first milestone and gotten those credits and everything is on track to meet all the milestones and collect all of the credits. We've also entered into an agreement with a counterparty to take those credits at a fixed price. And so we won't have material dollars out the door, although we are spending material dollars doing a significant amount of front-end engineering and design work, et cetera, with an internationally reputable engineering firm.

[Robert Kwan, analyst]

Got it. Just last question. You noted that you're blending some of the RD with the PGR's diesel. Can you just talk about how the economics work then for Tidewater Renewables and how you just split that between renewables and midstream?

[Ray Kwan, executive]

Yes. So I mean the -- those volumes that was described in the press release as well as the MD&A, it's customer specific. It's really depending on the blend that they prefer and want. So this specific customer wanted an equivalent to R30 blend, so 30% renewable diesel and then the conventional diesel is blended in there as well. So it really depends on the customer in terms of how they see it and how they want the recipe kind of produced, I think, overall. So we're happy to meet anyone's appetite for renewable diesel here. So -- and happy to do any type of blend whatsoever. And it's been great work from a logistic point of view by both the LCFS as well as the TWM team to actually execute the sale here to this customer.

[Robert Kwan, analyst]

I just wanted to -- I guess where I'm going is, is everything being billed to the customer on a third-party basis? You're blending -- you're billing the RD, they're [ billing ] the diesel and the blending fee? Or is there some sort of related party transaction where the renewable diesel is being sold in midstream?

[Ray Kwan, executive]

No. It's -- we purchased the conventional diesel at cost or the price that they're suggesting. There is no pickup or markup associated with blending here.

[Operator]

Your next question is from Devin Schilling from Ventum Financial.

[Devin Schilling, analyst]

Just a follow-up on the operating emission credits. The $30 million in sales during the quarter here, should we be expecting this to increase in Q2 given the higher expected utilization rates? Or is there more, I guess, timing issues at play here?

[Ray Kwan, executive]

Yes. I think it should hopefully continue.

[Operator]

Your next question is from Nate Heywood from ATB Capital Markets.

[Nathan Heywood, analyst]

I just want to dive in a little bit more into the feedstock that you guys are running through the facility. Early days here. Have you had some successes with running more soy and tallow. And just kind of the outlook for the rest of the year of introducing more feedstocks into the Street.

[Jeremy Baines, executive]

Yes. So thanks for the question, Nate. We have been primarily running the facility on canola oil to date, obviously, making sure we get it stabilized, lined out and running and we are doing that now. We have the one capital project that I mentioned that we're undertaking that should be on next week to help with some of the emissions at the facility. So once we have done that -- we have done a little bit of blending to date using tallow, soybean oil and used cooking oil. Once we get through this project this month, we are going to start looking at -- it's a very measured, methodical piloting of the various alternatives and calculating which ones provide the most economic benefit.

So we will start introducing and working on what is the most optimal feedstock from an economic point of view. So that's going to start taking place in Q2 and through Q3. And it moves, they all have their own both CI score and market prices, and those are moving all the time. So it will be some work to optimize it, but that is sort of the next step now that we've got all of the production running the way it should.

[Nathan Heywood, analyst]

Okay. Great. Appreciate the color there. Maybe just if you can touch on the SAF facility. What kind of shared infrastructure, what kind of synergies would you see with the RD facility or potentially even with the PGR facility?

[Jeremy Baines, executive]

Yes. I would say it's more of the PGR facility. Obviously, we are working at a location that will be repurposing an existing industrial site, which has a lot of good infrastructure in place around existing high-voltage power, high-pressure natural gas, water treatment, rail infrastructure, but then it will be tied into the loading, racks, the tanks and all of those things that are available and existing at the conventional refinery. So there is a significant amount of savings around the sort of utility infrastructure that this project will encompass.

Obviously, from an operational point of view, the 3 facilities are right beside each other effectively. We have common operations and, in particular, an ability to take conventional Jet A-1 and blend it with the SAF, which is really what the market is demanding. And that is one of the biggest, I think, beneficial links by having these facilities all together.

[Operator]

There are no further questions at this time. Please proceed for the closing remarks.

[Jeremy Baines, executive]

Thanks, everyone, for joining us on the call. Please don't hesitate to reach out to me or the team if you have any further questions. Thank you.

[Operator]

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.