Tidewater Renewables Ltd

TSX:LCFS

Earnings Call Transcript

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Tidewater Renewables 2024 Q3 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, November 14, 2024.

I would now like to turn the conference over to your speaker today, Ian Quartly, CFO of Tidewater Renewables. Please go ahead, sir.

[Ian Quartly, executive]

Thank you, operator, and welcome, everyone, to Tidewater Renewables Third Quarter 2024 Results Conference Call. On the call with me today is our Chairman and CEO, Jeremy Baines, who will provide an update on operations and transactions during the quarter. I will follow with our financial results, and then we'll open the line for your questions.

Before we get started, I'd 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. The recorded call will be available through Cision.

This morning, we reported results for the third quarter ended September 30, 2024. A copy of our news release, financial statements and MD&A may be accessed on SEDAR+ or on 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, non-GAAP measures and risk factors, please see the company's various financial reports, which are available on our website and on SEDAR+.

I'll now turn the call over to Jeremy.

[Jeremy Baines, executive]

Thank you, Ian, and thanks to everyone for joining our Q3 results conference call today. I'll begin by providing an overview of the significant transactions that were executed during the quarter and provide an update on several important initiatives that we continue to progress.

On September 12, we completed the previously announced transaction with Tidewater Midstream. This transaction involved the sale of several key assets, including our canola co-processing and fluid catalytic cracking infrastructure, various refinery interests and a natural gas storage facility as well as the associated decommissioning liabilities associated with these assets. Cash proceeds of $122 million were used to reduce outstanding debt on the senior credit facility.

As part of this transaction, the contracted take-or-pay and operating agreements were terminated effective August 1, 2024, and Tidewater Midstream assigned Tidewater Renewables the right to receive certain BC LCFS credits valued at $7.7 million. We also entered into a separate agreement to sell BC LCFS credits to Tidewater Midstream until March 2025 for minimum cash proceeds of approximately $77.5 million as long as the HDRD Complex continues to operate at over 90% utilization.

In addition to the sale of assets to Tidewater Midstream on September 12, we also completed the sale of assets from our used cooking oil feedstock business for total proceeds of $10.6 million. This was a great outcome for the business as these noncore assets didn't contribute meaningful adjusted EBITDA or free cash flow for Tidewater Renewables, and the sale will allow management to focus our attention on the company's core assets.

The sale also has no impact on the day-to-day operations at the HDRD Complex. We will continue to optimize the feedstock mix, including canola oil, used cooking oil, tallow and other low-carbon feedstocks to reduce operating costs and maximize emission credits generated.

Turning to external developments. We've been actively engaging in discussions with both the government of Canada and the government of British Columbia regarding potential modifications to low-carbon fuel policies. Our discussions focused on ensuring that Canadian renewable fuel producers, like Tidewater Renewables, are able to compete on a level playing field with the U.S. renewable diesel producers -- we are currently benefiting from overlap -- who are currently benefiting from overlapping U.S. and Canadian policies.

We firmly believe that the BC and Canadian federal governments understand the importance of a strong domestic renewable fuel industry, including the high-paying jobs and technological advancements that businesses like ours bring to the economy. We are optimistic that there are policy changes that the government can implement that will support a more competitive environment for Canadian producers, and we continue to work towards that end.

Tidewater Renewables has also engaged external trade law counsels to prepare a trade remedy complaint against U.S. renewable diesel imports, which we believe are unfairly priced and have a significant negative impact on the competitiveness of our Canadian operations.

Based on the available information and advice received, we think a trade case against renewable diesel imports from the U.S. has a reasonably high likelihood of success. Filing of the complaint will likely occur before the end of 2024. And if a government investigation initiates and confirms that unfairly traded imports are harming Canadian producers, duty relief could be available as early as some point in late Q2 2025.

Moving on to our third quarter operational performance. I'm pleased to report that our HDRD Complex continued to perform exceptionally well. For Q3 2024, we achieved average daily throughput of 2,849 barrels per day, representing a 95% utilization rate. Since the start of commercial operations in November 2023, Tidewater Renewables has produced and sold over 140 million liters of renewable diesel into the local British Columbia market.

This strong performance is a testament to the effectiveness of our operations and our ongoing commitment to safety and environmental stewardship. This performance not only exceeded our operational guidance, but also reflects our continued dedication to operational excellence. Additionally, during the quarter, we received emissions credits in recognition of achieving a 6-month operational milestone at the HDRD Complex.

During the third quarter, we also continued to progress the front-end engineering design on our proposed 6,500-barrel per day sustainable aviation fuel project. The cost of the FEED study is fully funded through BC LCFS credits issued under an incentive agreement with the BC government, and the credits were forward sold to an independent third party at a fixed price earlier in 2024 before the significant decline in emission price -- emission credit prices. We are excited about the potential of this project, which is expected to go forward to a final investment decision in 2025, subject to securing the necessary regulatory approvals, financing and commercial agreements to derisk the cash flows to be received once operational.

Overall, the HDRD Complex' strong operational performance during the third quarter and the completion of the asset sales have improved the corporation's leverage profile. However, the demand for and price of emission credits remains weak, and regulatory change is needed to allow Canadian renewable fuels to compete on a level playing field with subsidized U.S. producers.

Now I'll turn the call over to Ian, who will provide a more detailed review of our financial results for Q3 2024.

[Ian Quartly, executive]

Thanks, Jeremy. During the third quarter of 2024, Tidewater Renewables reported adjusted EBITDA of $13.6 million, down from $29.6 million in the second quarter of 2024. This decrease was primarily due to the sale of EBITDA-generating assets to Tidewater Midstream, with the take-or-pay contracts being terminated effective August 1, 2024.

However, the decline was partially offset by the sale of emission credits in the third quarter, which were forward sold to independent third parties at fixed prices earlier in the year before the significant decline in emission credit prices. The first and second lien credit facilities were successfully refinanced following the asset sales Jeremy discussed earlier.

The aggregate principal amount of the first lien credit facility was reduced from $175 million to $30 million, and the maturity was extended to February 2026. The $25 million tranche B additional debt capacity under the second lien credit facility also had its maturity extended to February 2026. Compliance with the quarterly financial covenants under both credit facilities has been waived until September 30, 2025.

I'll now ask the operator to open up the call for questions.

[Operator]

[Operator Instructions] And we will now take our first question, and this comes from the line of Robert Catellier from CIBC.

[Robert Catellier, analyst]

I'm wondering if you could start with what the best outcome you'd like to see as a result of the trade complaint. And also, maybe you can talk about the timing. I didn't catch the timing you suggested in your prepared remarks.

[Jeremy Baines, executive]

Sure. Thanks for the question, Rob. Like the best outcome on the trade complaint, I think there is remedies that are prescribed, and they would be countervailing duties on subsidized product coming into the market, both from offsetting subsidy and as well, we believe, there's potential for dumping as well.

So that would be the best outcome that could come from the trade complaint. Timing, the best case, which I talked about in the prepared remarks, we've been told by counsel, would be that if they take the case up and move it forward, assuming we file before the end of the year, could be late Q2. And that would be the best possible outcome.

[Robert Catellier, analyst]

So this is -- the timing doesn't quite coincide with some of the comments in the MD&A about what you'd have to do to maintain your ability as a going concern. So what alternatives are you prioritizing and pursuing in order to maintain them -- your status as a going concern?

[Jeremy Baines, executive]

Well, obviously, we're optimizing free cash flow. We are making -- running the business as we always have. Our strategy hasn't changed. We need to see some improvements in credit markets beyond March, where we forward sold our credits to Midstream under the transaction. So obviously, with changes on that front, or the other alternative is potential changes on the policy front, we would be able to get to there.

[Robert Catellier, analyst]

Okay. And then on that question, how does the recent BC election impact your view of government support of the company? I do think there's a nuance in the change, going from a majority to a slim majority for the government. How would you assess their support of the business and the industry following that election result?

[Jeremy Baines, executive]

Yes. I guess, I would emphasize that it looks like it's still a majority government. This is their signature policy. I don't believe that the desire for society to decarbonize emissions has changed. We represent an important industry that they have highlighted that they want to see develop in British Columbia.

We have a very skilled and well-compensated workforce. And everything that we have continued to have discussions in the background as they form government and appoint their cabinet is that this is an important file for them, and we expect that they will continue to be supportive of the industry and look for solutions that level the playing field for us.

[Operator]

And the next question comes from the line of Maurice Choy from RBC Capital Markets.

[Maurice Choy, analyst]

Just a quick follow-up on that trade remedy complaint. If the government does take up this investigation in Q2, is there a gauge just how long these investigations usually take in order to come to any conclusion, whether positive or negative?

[Jeremy Baines, executive]

Yes. So the advice we've been given is the best case is that they could come down with a solution or a decision as soon as, again, late Q2. They're -- they take various amounts of time based on the advice we've been given, depending on the complicatedness of the issue.

Ours is pretty black and white on the subsidy side, as I understand the case and how it's been described to us from counsel. The dumping part is a more complex calculation, but everything we pulled together today suggests that has taken place as well. So I guess, as early as late Q2, and it could take more months than that.

[Maurice Choy, analyst]

Got it. And maybe as a quick follow-up, and given how you've mentioned the Q1 timing in terms of what you may or may not do in terms of actions. Asset dispositions was something that you mentioned as an option. I guess is that you probably wouldn't share what you might sell, but can I ask what assets are core to you that you wouldn't want to sell even if it's a minority stake? And with that -- to that end, are any of the processes that you have going on, that doesn't involve Tidewater Midstream?

[Jeremy Baines, executive]

So core assets, our core asset is the HDRD plant. Everything besides that, we would consider noncore. Could you repeat the second part of your question? You just sound like -- I couldn't quite hear the last part of that.

[Maurice Choy, analyst]

I'm just referring to how long these processes usually take. And fully recognizing the independent process with a third party as well as with Tidewater Midstream, just wondering whether or not you have any processes going on right now with anyone?

[Jeremy Baines, executive]

Yes, nothing we can comment on at this point. We just don't comment on transactions that are in process.

[Maurice Choy, analyst]

Got it. And maybe one last one for me. On the press release, you mentioned that you've paid certain fees to a term lender using new shares. Can I just get a gauge as to how much debt might be necessary to have off your books in order to, I guess, be back on site, both on liquidity and on covenants?

[Ian Quartly, executive]

Yes. Maurice, it's Ian here. So we've got our debt now is extended out to February 2025. We've got sufficient -- sorry, 2026. We've got sufficient liquidity right now and like we expect for that to continue. Ultimately, the liquidity will be dependent on the outcome of some of these trade complaints, any regulatory changes and, ultimately, where the emission credit prices land in the future.

[Operator]

[Operator Instructions] And we have a follow-up question from Robert Catellier.

[Robert Catellier, analyst]

Sorry about that, I was on mute. In addition to my question about the ideal outcome on the trade complaint, what would the ideal policy changes for the LCFS market in BC be there? What would the ideal outcome be there?

[Jeremy Baines, executive]

I mean there's a number of potential policy outcomes that would solve the problem, anything that levels the playing field. You have U.S. producers today double dipping, getting a production subsidy in the States, and then also getting the emissions credits from sales in Canada effectively.

It could be making -- and they have the ability, right, in the Act, make U.S. or any product subsidized in another jurisdiction ineligible for the LCFS credits. It could be an offsetting production subsidy, similar to the blenders tax credit, which becomes the production tax credit on January 1. Any of those types of outcomes would be supportive.

[Robert Catellier, analyst]

Okay. And then the EBITDA is a little hard to gauge, obviously, because the -- just the mismatch in timing, the pricing, the credit sales and the current state of the market. So there's a couple of ways to get at this, but effectively, I want to know what the EBITDA for the quarter would have been if you had the average Q3 credit market price as opposed to credit market values that were reflective of the first half of the year.

[Ian Quartly, executive]

Yes. Rob, it was about $12 million of EBITDA that was kind of deferred from Q2 into Q3 as a result of the higher credit prices earlier in the year.

[Operator]

[Operator Instructions] And the next question comes from the line of Trevor Reynolds from Acumen Capital.

[Trevor Reynolds, analyst]

I was wondering if you could provide a comment on the SAF FEED study? Obviously, with the disclosures that you have this quarter, it doesn't look like you're in a position to move forward with this. Like what needs to change? Or what's kind of the expected outcome of that FEED study?

[Jeremy Baines, executive]

Yes. So obviously, the FEED study is underway. We will have our full design, our capital estimate, and we've got a site identified and locked down. And so we are continuing to move that project forward. Obviously, the funding to get the FEED done is in place. We are working on the commercial aspects of that project, and there continues to be interest.

And at this point, obviously, funding for that project, there appears to be government funding available under existing programs. And then we've also had some inbounds from people potentially interested in partnering.

So our goal is to get the data done, get a commercial offtake that would reflect the support in FID, and then we'll make that decision when we get to that point. But right now, we view it as free option for the company to continue to do this work. And ultimately, we do expect that markets would be supportive of a project like that, and we're continuing to progress it.

[Trevor Reynolds, analyst]

Okay. And would the funding from the BC government be in the form of credits?

[Jeremy Baines, executive]

There's both potential Part 3 funding in the form of credits through the BC government programs as well as some federal programs as well that could be supportive.

[Operator]

And no further questions that came through, I would now like to hand the call over back to Jeremy Baines, CFO (sic) [ CEO ] of Tidewater Renewables. Please go ahead, sir.

[Jeremy Baines, executive]

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

[Operator]

Thank you. This concludes our conference call for today. Thank you all for participating. You may now disconnect.