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Good morning, ladies and gentlemen, and welcome to the Tidewater Renewables Third Quarter Financial Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, November 9, 2023. I would now like to turn the conference over to Ray Kwan. Please go ahead.
Good morning. On the call with me today is Rob Colcleugh, Tidewater Renewables Chairman and 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 September 30, 2023. A copy of our news release, financial statements and MD&A maybe accessed on SEDAR+ or our website. Before passing the call over to Rob, I'll remind you that some of the comments made today maybe 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 could 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.
Thanks, Ray. Good morning, and thank you for joining our Q3 conference call. We're pleased to announce that HDRD Complex produced its first renewable diesel on October 22. And as of November 7, it's progressed to commercial operations. The facility is currently producing about 1,500 barrels a day of on-spec cold weather diesel and we'll be moving this rate up towards the facility's 3,000 barrel a day signed capacity in a safe methodical manner in the near term.
Gross project costs are expected to increase by $10.2 million. This is due to an increase in man hours resulting from the delay in commercial operations and the addition of incremental insulation [indiscernible] However, the project economics remain attractive and with payback expected within 2 to 3 years. The HDRD complex makes Tidewater Renewables the first stand-alone producer of renewable diesel at Canada.
We'd like to thank the government of British Columbia, the city of Prince George and our capital providers for their support. And personally, I'd like to thank our team who have demonstrated exceptional dedication to getting us online. Construction and commissioning [indiscernible] first standalone renewable diesel facility was not an easy -- was not easy, and we faced a number of challenges along the way, but we got it done.
Another highlight during the quarter relates to our co-processing projects, which were approved for the Canadian clean fuels regulation credit, generation in July of 2023. The corporation expects to maintain its position as one of the country's largest generators of emissions credits through a combination of its coprocessing projects and the HDRD Complex. I'm also pleased to announce that as of yesterday, I was appointed as Chief Executive Officer of both Tidewater Renewables and its parent Tidewater Midstream and Infrastructure LTD.
As you may know, I joined Tidewater Midstream Board of Directors in 2027, was appointed interim CEO of both companies last November. Since November, I've had the opportunity to work with both teams through the commissioning of the HDRD Complex and Tidewater Midstream strategic asset review. With these milestones behind us, I'm optimistic better future, and I'm excited for what comes next. I'll now turn the call over to Tidewater Renewables Chief Financial Officer to walk through our financial results.
Thanks, Rob. During the third quarter, Tidewater Renewables reported adjusted EBITDA of $14.5 million, up from $8.1 million reported in the second quarter of 2023, but down from the $16.1 million generated in the third quarter of 2022.
During the third quarter of 2023, we saw a strong performance from our coprocessing units as they ramped up out of the Q2 Prince George Refinery [indiscernible]. This was in part due to the installation of a purpose-made catalyst during the Q2 turnaround. And as Rob previously mentioned, the incremental benefits to see of our credit generation, which started in July.
Compared to Q3 2022, results were lower due to realized gains on our derivative contracts being $3.4 million lower. Total capital expenditures, including maintenance capital for the third quarter, were $33.7 million compared to $58.2 million in the same period last year. This spending was offset by $3.9 million of proceeds received from the sale of BC LCFS credits, which were awarded by the BC government achieving milestones under the renewable diesel project, Part 3 [indiscernible].
Now that the HDRD complex is successfully commissioned, we will focus on reducing our debt and strengthening our financial position as well as progressing our strong pipeline of renewable projects. Due to the HDRD Complex delay, our second half 2023 corporate adjusted EBITDA guidance is now expected to range between $25 million to $35 million, down from our previously disclosed $35 million to $45 million range. 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.
Thanks, Ray. As mentioned, the launching of the HDRD Complex's commercial operations signifies step change in the renewables business and more broadly, for the Canadian energy transition. And with that, I'll ask the operator to open the call to Q&A.
[Operator Instructions] Your first question is from Nick Boychuk from [indiscernible] Securities.
For the HDRD facility, what needs to happen to see increased production from 1,500 barrels per day to the 3,000 barrel per day for run rate capacity? And how long do you think that, that process takes?
It's Rob. There's nothing that's stopping us from doing it. We're just doing in a methodical way. So the timing is a little uncertain, but we're -- we've already started to ramp things up a bit. Just going through the commissioning process, we've got some intermediate product that's filled up a couple of tanks. And so we want to train those as we get our sales tanks starting to fill up. And so there's a little bit of give and take on how much we stream about 10% of that, along with the feedstock in. So that will take a little bit of time. But as I say, it's in the works right now. And then it's just sort of incrementalism. We start dialing it up as we feed off gas into the hydrogen reactor and it's sort of step-by-step a little bit of an increase in the hydrogen, a little bit of an increase in the feedstock. But yes, it's in the works now. I just hesitate to give you any timing, but we'll let the market know when we're up to design capacity.
That's fair. On the renewable content, anything you can share in terms of how much you've already layered in and what you are thinking for the 2024 run rate? I know it's predominantly going to be the canola and virgin feedstocks for the time being, but how comfortable are you guys with some of the renewable sources and layering those in to get the better credit and stuff?
Yes. We want to get to it as soon as we can. So it's sort of yin and yang between our commercial group and our operations group. We've been pretty active getting everything lab tested. We've got a lab that we as we look at all of the feedstock opportunities. So we've already done that. We know what they look like. It's just a matter of when the ops team is comfortable with us beating it in. So we're pretty keen to get on it. But yes, there's lots of feedstock. As I said, we're being the first to market is helpful in terms of feedstock. We're not competing with others right now. So we think we're going to be in the [indiscernible] once we get some of these other feeds introduced.
And then just last for me on the debt repayment, it sounds as if, for 2024, at least that's going to be one of the top priorities for cash flow that comes off of the HDRD facility. Can you just remind us what you're comfortable with in terms of a landing spot for where that leverage maybe exits in 2024? How much are you comfortable holding on this business right now?
Yes. Good question, Nick. I think overall, like we mentioned before, yes, our top priority is to reduce leverage. And I think from our point of view, we want to get down to at least our target of less than 1.5x debt-to-EBITDA, at least over the next 18 months. So for 2024, I mean we're still formulating in terms of what our CapEx program is going to be as well as kind of our outlook. So you'll hear more of that potentially into -- in Q1.
Your next question is from Cole Pereira from Stifel.
Can I understand you don't want to give an exact date on the ramp-up. But I mean, is it a matter of weeks, months, quarters, like high level, how should we kind of think about the process?
Yes, weeks.
Okay. Got it. And on the CapEx front, Ray, can you just give us some high-level ranges how we should be thinking about growth, maintenance and LCFS credits just for Q4?
For Q4? Yes, in terms of overall spending wise, I think we have minimal maintenance capital that we expect [indiscernible] so probably less than $2 million to $3 million, I think. In terms of pricing for LCFS, we do have a marketing arrangement that we have with investment-grade counterparties. So it's tough for us to actually say the exact numbers. But certainly, if you use kind of historical BC LCFS pricing and then -- which has ranged between [indiscernible] between $450 to $500 as well as CFR credits in kind of that $100 range. That's probably the right way to think about at least from a pricing perspective in Q4.
Your next question is from Robert Catellier from CIBC Capital Markets.
Congratulations on reaching the commercial operating status for the facility. I just wanted to ask a similar follow-up question on the capital side. I'm curious as to how much working capital you'll need as you ramp up to your full production from here?
Yes, I mean we already have. I think you can see in our inventory on our balance sheet, we have canola that we purchased. So we do have a stock of canola for processing into our HDRD facility. I think we should probably maintain that level of working capital, I think, going forward. So in terms of any incremental, we don't see much beyond that.
Okay. And then a follow-up on the $10.2 million of incremental CapEx to complete the facility. I mean, that's understandable given the delays. How much of that is already spent in Q3? And how much more is on come in Q4?
Yes. So we were forecasting potentially up to at least $3 million to $4 million for this quarter here for incremental spend out of that $10 million.
Okay, sort of have to have asked those modeling questions. But I was just curious as you move from development and construction into production, what type of lag do you anticipate in terms of monetizing the production credits from the time you produce and sell to the actual monetization of the credit?
Yes. So for the HDRD facility, just based on our marketing arrangements, we get paid probably anywhere every week to every 2 weeks, I think for the LCFS credits. And then for the CFR, once we receive them, and it's every quarter in terms of the generation, we would sell those thereafter. And then, obviously, the diesel will sell it to the local market in Prince George. So it's potentially over 2 weeks in terms of receiving cash there.
Okay. Great. And last question for me. I wondered if you could give us an update on the process for moving the RNG project along through the regulatory process?
Sure. We've -- we're waiting on final approvals from the provincial regulator now. So I think that we would anticipate weeks there, but that it will have -- it does have some municipal approvals that need to follow that. So to put a date on it has been -- would be foolish given the sort of peculiar track record of the provincial governments so far. So we're in the wait and see on that one.
[Operator Instructions] Your next question is from Robert Kwan from RBC Capital Markets.
Guess I just wanted to ask, so I think it was clear, but I want to confirm [indiscernible] your comments just around the Q4 guidance. But is there anything that's changed whether it's the base business or the renewable diesel facility just around that long-term kind of corporate run rate guidance. I think it was $130 million to $155 million of EBITDA?
No -- like that's a good question. I have a couple of other questions on that as well, too. I mean there was probably no perfect timing to remove that run rate EBITDA guidance, but we just felt that it just made the most sense to do that at the commencement of commercial operations. I mean the purpose of that run rate EBITDA was to signal to the market what that facility or the HDRD facility is capable of generating prior to being commissioned. And obviously, we showed that $90 million to $115 million at 100% design capacity. Now that the facility is commissioned, we intend to provide adjusted EBITDA guidance going forward. And obviously, we want to write more realistic operating scenarios. And obviously, post -- once we get a lot longer production history or the HDRD Complex. But to be clear, the assumptions that we use to determine run rate EBITDA for the HDRD is unchanged. So it's still $90 million to $115 million, assuming 100% uptime.
Got it. And just to kind of frame that, obviously, you're going to give us some updates, but Rob, you mentioned that the ramp-up is kind of in weeks. So generally speaking, that long-term run rate at least, based on what you said and what we know now, that's kind of a 2024 type figures or anything else that we need to think about? Obviously, look, you've got to figure out how this thing runs, but that's not a bad starting point?
Yes. I mean that's our expectation.
Okay. And just the last -- just a small thing around the quarter. There was a $1.9 million realized gain you booked. I just wanted to know, was that a hedge something that you physically produced in the quarter? Or was that something that you thought you were going to run through HDRD, and because it started up late, you got the benefit of the way commodity prices moved and that really wasn't kind of in the base business?
Yes. That's -- those are our financial hedges. And so obviously, we are expecting this facility to start up in Q3 here. But we've had hedges all through this year, we're about 50% hedged or was 50% hedged for 2023 and 50% hedged for 2024. But that was harder to hedge all our feedstock for when we started up. But unfortunately, we just started up here recently, and that's more of a financial hedge roll off.
Right. Okay. So the base business this quarter really did the $14.5 million minus $1.9 million? Is that the right way to think about it?
Yes.
Your next question is from Trevor Reynolds from Acumen Capital.
Just a question on the feedstock, obviously, very well positioned today being the first commercial operation on stream. Just wanted to get your sense on how you see that changing over the coming years and when you kind of expect things to become more competitive? And maybe just your views around that?
It continues to be the main -- sort of one of our main focuses, the feedstock side specifically. I think it will -- I think the market will always adjust. But for now, we've got our pickup feedstock. So it's a nice position to be in not to have to be scrambling for it, but we've got a couple of years before we really see the bulk of new facilities coming on. And frankly, even those -- we see more of those facilities dropping off than we do continuing on. So I don't think we will be -- we're not going to sit back and assume that, that -- those feedstocks will always be available, but we would like to continue to sort of dig in deeper on that side of the business pretty much as soon as we are reaching -- we reach capacity. So our UCO business, as you know, we've got -- we collect used cooking oil. We look to grow that side of the business, and we've got a whole lot of relationships on both the UCO and Tallow side of the business, and we're looking forward to sort of deepening those relationships in the near term.
There are no further questions at this time. I will now hand the call back to Rob. Please go ahead.
Okay. Well, thanks, everyone, for joining us on the call. And please don't hesitate to reach out to me or the team if you've got any questions. Have a good morning.
Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.
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