Tidewater Renewables Ltd

TSX:LCFS

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen, and welcome to the Tidewater Renewables Q2 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, August 10, 2023. I would now like to turn the conference over to Mr. Ray Kwan. Please go ahead, sir.

[Ray Kwan, executive]

Good morning. 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 June 30, 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 may 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 or on SEDAR+. And with that, I'll pass it off to Rob to discuss some highlights from the quarter.

[Robert Colcleugh, executive]

Good morning, and thank you for joining our Q2 2023 conference call. Since our last call, Tidewater Renewables has made significant progress on the HDRD Complex. We're now 100% mechanically complete and are fully immersed in the commissioning process. We've successfully commissioned the key utility systems being glycol steam, Aereon flare and filled our feedstock tanks with pretreatment consumable tanks and silos. More importantly, we've successfully commissioned the pretreatment unit with canola. First production of renewable hydrogen is expected within the week and the start-up of the renewable diesel unit is anticipated in late August.

Commercial operations are now expected to commence. As I said, in late August 2023, and that is a change from previously when we were talking about the end of June 2023. This is due to resource challenges and pretty minor commissioning issues. The delay is expected to raise gross project cost by approximately $8 million. However, this is anticipated to be entirely offset by higher realized value of our emissions -- capital emissions credits. So net project costs and run rate EBITDA expectations are in line with previous guidance and the project's economics remain attractive with payback expected within 2 to 3 years.

We also take great pride in our impeccable safety record with over 950,000 filled man hours without a lost time incident. The HDRD Complex is Canada's first stand-alone renewable diesel facility and its cash flow is expected to launch next stage of Tidewater Renewables growth. I'm also pleased to announce that we've had 2 capable additions to the Tidewater Renewables team.

Firstly, Andrea Decore is coming on as Executive Vice President, Strategy and Corporate Development for Tidewater Renewables. Before joining Tidewater, Andrea spent over 19 years at Suncor Energy, most recently as Vice President of low-carbon fuels and GHG offsets. We're very excited to put her significant commercial leadership experience to work. Corporation is also pleased to welcome Mr. Simon Bregazzi to its Board of Directors. Simon brings 30 years of finance and industry experience to Tidewater Renewables. Simon spent the first half of his career in finance, ultimately establishing and leading Goldman Sachs' Calgary Investment Banking office, and he spent the second half of his career in energy and energy transition as Co-Founder and CEO of Jupiter Resources, and more recently as Co-Founder and CEO of Carbon Alpha, a leading provider of carbon capture and storage solutions.

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

[Ray Kwan, executive]

Thanks, Rob. As you may know, we successfully completed the turnaround maintenance program at the Prince George Refinery in the second quarter, which came in on budget and within our expected time line. This turnaround, however, did impact our results as almost no renewable feedstocks were processed in our coprocessing units. Accordingly, Tidewater Renewables reported second quarter adjusted EBITDA of $8.1 million down from $16.9 million in the same period last year. Since the turnaround, both coprocessing units are up and operating and generating renewable products. Total capital expenditures including maintenance capital for the second quarter were $55.8 million compared to $62.2 million in the same period last year.

In the quarter, the PGR turnaround CapEx offset the declining HDRD capital expenditures. HDRD spending were also offset by funds received from the sale of BC LCFS credits awarded by the BC government for achieving milestones under the renewable diesel project part III agreement, which totaled $78.7 million. At the end of the quarter, total net debt totaled $293 million. In this quarter, we were able to access a temporary $50 million debt capacity increase with our lenders and then subsequently converted $25 million of that to a permanent facility under our senior credit facility via an accordion feature. Total availability under the corporation's senior credit facility is now $175 million.

The $25 million of temporary debt capacity through the term facility is subject to variable quarterly repayments based on the company's cash flow following the commissioning of the HDRD Complex. Due to the HDRD Complex delay, our second half 2023 corporate adjusted EBITDA guidance is now expected to range between $35 million to $45 million, down from $50 million to $60 million. To be clear, the guidance revision is based on the expected timing and ramp-up of the HDRD Complex.

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

[Robert Colcleugh, executive]

Thanks, Ray. As mentioned, we're only a few weeks away from first production at the HDRD complex. Looking forward to providing a more fulsome update post start-up of the facility. So with that, I'll ask the operator to open the call to Q&A.

[Operator]

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. [Operator Instructions] Your first question comes from the line of Nick Boychuk from Cormark Securities.

[Nicholas Boychuk, analyst]

Can we get a bit of an update on the strategy and how you're thinking about the '24 and '25 feedstock hedging for the HDRD. What you're going to put in place and how comfortable you are with merchant exposure for the feedstocks?

[Robert Colcleugh, executive]

Yes. Nick, yes, we are working on that. As you know, we've got a hedge in place for a portion of our Canola feedstock both through this year and through next year. So we're actively working on it. Obviously, we recognize that there's quite a bit of volatility in these, especially in the ag side of things. So we continue to grow our used cooking oil business, which has a very fixed cost associated with it. We're looking at a variety of different ways of both hedging that spread, if you want to call it the HOBO spread or I think there's a different usage of the name these days now but it is foremost in our mind and yes, we're actively doing it. So we've got about half hedged in the front part of -- with regard to the Canola exposure, but part of that is also because we plan to be adding more UCO and Tallow as we get the facility up and running and getting those lower CI feedstocks in the facility.

[Nicholas Boychuk, analyst]

Got it. And the pricing that you are seeing right now, it's indicative of what you're hoping to see when you were doing the initial HDRD planning, like there's no material moves against what you were expecting?

[Robert Colcleugh, executive]

Yes. I mean it is interesting because, as I say, it has been volatile on diesel markets are always susceptible volatile as well, but Canola market was more volatile. But nonetheless, we have -- partially because of the maps we've got hedged, but that spread and the resulting economics at the facility up, mean they've been the same. They were improved a little bit out of the gate after we IPO-ed, but they've been pretty steady. They've bounced around a little bit, but they're quite steady to where they've been for the last year.

[Nicholas Boychuk, analyst]

Okay. Great. Keeping with the facility on the incremental $8 million spend, is any of that coverable by the EPC contractors? And if not, can you expand a little bit on why that has to be borne by LCFS?

[Robert Colcleugh, executive]

Yes. Good question, Nick. Yes, like our hope is this is the capital increase that we've announced. This is $8 million like you indicated. There has been some vendor complications, I guess, as part of the startup and commissioning through this process here and the final, I guess, mechanical completions. So our hope is that we could recover portions of it, and we're still working through and with our vendors, on potentially recovering some of that capital back to us. But nothing that we can say right now and this is the current capital forecast that we're still kind of guiding towards.

[Nicholas Boychuk, analyst]

Understood. And then the last for me, if we could just get an update quickly on the High River RNG permitting process. I think there were some rebuttal process that was going on this June. Just curious how that went?

[Robert Colcleugh, executive]

Yes. We have -- so we've gone through the second round of SIRs and we've provided those responses to those questions to the regulator, and we're waiting for response. So hopefully, that takes us to, hopefully get that before -- certainly before the end of August. And we'll be looking at -- there are a couple of more steps, but really that is the largest regulatory hurdle that we've left in that project.

[Operator]

Your next question comes from the line of Justin Strong from Scotiabank.

[Justin Strong, analyst]

Just for a quick comment on net debt target. Like obviously, you guys have communicated that after the project begins cash flowing, that it will go to paying down debt. Just looking to see what that profile looks like in your mind.

[Robert Colcleugh, executive]

Yes. Thanks, Justin. Yes, like I mean, now with the HDRD, expected to come online here. I mean we do expect the relative amount of debts and as well as net debt to EBITDA to come down significantly both on absolute and relative level. But it really will depend on capital projects that we also undertake into '24, say, for instance, the RNG project. That said, I mean, like I've mentioned in the past call, is we hope to reduce our total leverage, hopefully, by half. But also looking at a debt-to-EBITDA target of less than 1.5x over time here. So our view is probably within the next 12 to 18 months. But again, depending on what we think about for spending in 2024.

[Justin Strong, analyst]

Great. And then maybe a quick follow-up. When do you think we'll get more clarity on what the 2024 capital program looks like?

[Robert Colcleugh, executive]

Well, I mean, as you know, we've been waiting on the Alberta government for regulatory approval on the RNG facility for a long time. So to be able to make any projections based on what has been a very messy regulatory regime when it comes to renewables is -- it's tough for us to make any judgments there. I think most of what we're looking at there would be a project financing that project. So it does have a little less impact in terms of $8 from our budget. But yes, we're going to need to play it by year, but I would expect once we get the HDRD up and running, and we've gotten the answer from the regulators. At that point, we've got a fairly narrow window to be able to provide that guidance.

[Operator]

Thank you. Your next question comes from the line of Robert Kwan from RBC Capital Markets.

[Robert Kwan, analyst]

If I can just ask about HDRD and what specifically did go to plan? And you mentioned resource challenges. I don't know if you can elaborate on that and maybe just more importantly, can you talk about what the critical path items are to getting it up and running and just your general confidence in being able to hit the remaining milestones as part of getting it up and running it and then ramp up in general?

[Robert Colcleugh, executive]

Yes. We can do that for sure. It's a bit of a laundry list, though when we talk about resources, each of these units. Some of them are proprietary, for instance, a Haldor Topsoe. Some of them just have some specialists who need to get to the site to help particularly on the commissioning side. So some when we talk resources, it tends to be human resources and just timing all of those appropriately.

We've had some minor issues with a gasket that was while was the incorrect material. But on a heat exchanger and it's a small issue in the greater scheme of things and certainly in the size of the facility, but we needed to take it then back to Edmonton, get it checked out, confirm that it was a simple gasket issue and nothing else. And anyway, but when you're getting to the bottom of the sort of major projects, things are very serialized, right? You have to do one before the other, sound like we can be working on 2 different issues.

So in any event, what we have done in -- through this period is and I mentioned some of it was getting steam into the facility was a big deal. That obviously was hampered a little bit by the heat exchanger. But got the -- got natural gas flowing, got steam running and went to flare. That was a not insignificant issue. And then the other, not insignificant process commissioning issue was getting the pre-treatment done. And so pre-treatment, as you know, it allows us to use a lot more feedstocks. So it's a very strategic unit for us, but it is also one that isn't like other units or other processes in the refineries. So there's an operating figuring out your operating processes is important. These smart filters and clays and things that aren't necessarily as part of the normal refinery.

So anyway, we got through that, had a few issues there, but again, very small things, got it up and running and have had some good run times on the pre-treatment. And so the next piece of business is getting the -- commissioning the hydrogen unit. That's going to happen at the -- well in about 6 days, we anticipate getting that turned on, and that is a much more "normal" refinery process. And then once we're comfortable with that, again, not just talking a couple of days because it is fairly well understood process. Then we'll have the R&D unit, and that's it. Then we're first diesel. So we think we are well, I don't even want to say that we're being conservative or not. So you never know but I think we are very, very close to first diesel.

[Robert Kwan, analyst]

Okay. So suffice to say, your confidence level at this point is -- sounds maybe significantly higher than when you made the statement last quarter that you were close.

[Robert Colcleugh, executive]

Well, yes, I mean, we -- again, there's construction and then there's commissioning. So we're certainly not going to be rush and commissioning just to hit some date that people have published both.

[Robert Kwan, analyst]

Got it. Okay. As we look forward and just on the target for leverage reduction, Ray, you talked about one of the moving pieces is just what capital projects you want to undertake next year. I'm just wondering if you can talk about what you see the magnitude kind of high low on that amount? And just even generally what -- is there a merit in just letting the HDRD unit get up and running cash flow and just go tools down on growth for a bit here, just to make sure you get leverage in the right space, particularly given the rising interest rate environment?

[Ray Kwan, executive]

Yes. I mean, good question, Robert. And we tend to agree. Like I think there is that capability that we'd look to, not certainly pins down, but obviously minimized in terms of major capital projects that we're going to execute here over the next, let's say 12 to 18 months. I mean there are things that is strategic to us. Again, that Southern Alberta RNG project and I think the max capital spend that we would outlay from Tidewater Renewables could be up to let's call it, $30 million in that range over the next 2 years, but also too, I mean, -- the other thing that we want to do is and what we're focused on from a growth is obviously diversified, growing our feedstock supply. There is potential for additional partnerships that we could look to investigate. And then also, too, I mean, is there any other optimization projects at the HDRD complex that we could look at, whether it be adding tankage loading capacity, ways to reduce our feedstock costs, I think, and scheduling issues, I think, overall.

So I think we're going to be evaluating all those scenarios here. But to your point, we're not going to execute a major capital program and spending way over cash flow here over the next, let's call it, over the next 12 to 18 months.

[Robert Colcleugh, executive]

Yes. You got to remember the cycle time on these larger projects is in years. So getting something, getting active on something, it isn't -- doesn't necessarily require capital lately, but you do need to be looking a couple of years down the road.

[Operator]

Thank you. Your next question comes from the line of Robert Catallier from CIBC.

[Robert Catellier, analyst]

Yes. I was just wondering if you could update on outlook on the credits, specifically the value. What general terms is included in your guidance in terms of credit pricing and whether or not there's anything for CFR credits in there?

[Robert Colcleugh, executive]

Hey, Robert, yes, look, we do, at least for the back half of this year, we do have and as well as in our second half guidance to have a forecast for BC LCFS and CFR credits there. In general, I think I would say is we're anywhere between $450 million to $475 million on the BC LCFS. And then for the CFR credits, I think it's in work between kind of that $75 million to $100 million range that we're kind of thinking about overall.

[Robert Catellier, analyst]

So is that a new addition to the outlook, the run rate that will -- I think it's the $130 million to $155 million because I think previously, those were the CFR credits were excluded.

[Robert Colcleugh, executive]

No. They've -- like over time, we've included those numbers in there, and that's at the max design capacity, I think, in general. I mean I think we were also pretty conservative on what that CFR pricing could potentially be. So we've had a little bit built into it. But we're hoping that the CFR market will be strong and we think we will be here over the next let's call it, into 2024.

Again, the CFR market is still very nascent here. We haven't actually seen published trades on the CFR, but our feeling is that it should be hopefully robust over the next near term here.

[Operator]

Thank you. There are no further questions at this time. I'd now like to turn the call back over to Mr. Rob Colcleugh for any closing remarks.

[Robert Colcleugh, executive]

Great. Well, I think that's it. Thank you to everyone who's joined us on the call and please don't hesitate to reach out to call me, Ray or any of the team if you've got any questions. Thank you.

[Operator]

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.