Tidewater Renewables Ltd

TSX:LCFS

Earnings Call Transcript

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Tidewater Renewables Q4 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, March 14, 2024.

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

[Ray Kwan, executive]

Thank you, operator. Good morning. On the call with me today is Jeremy Baines, 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 line. A recording of today's conference call will be available through Cision.

This morning, we reported results for the full year ended December 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 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 or are 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 Q4 2023 conference call. As I approach my 2-month anniversary, I want to acknowledge the hard work and dedication of the Tidewater team. Constructing and commissioning Canada's first stand-alone renewable diesel facility was not easy. But with our collective efforts, we overcame our initial operating challenges and the facility has been operating at design capacity for almost a month now.

Our priority is to maintain a high utilization at the HDRD Complex. This allows us to optimize returns, maximize free cash flow and help our customers meet their long-term ESG goals. Accordingly, we have secured purchasers for the HDRD Complex's operating emission credit production through the second quarter of 2024. This is a significant inflection point in the company's strategy. The facility will generate a lot of free cash flow as we move forward.

Our primary focus is on our current operations. However, I also see the importance of looking ahead. In 2023, Tidewater Renewables completed a feasibility assessment for an expansion of its renewable fuels facilities. In 2024, we are in the process of completing front-end engineering and design on a 6,500 barrel a day sustainable aviation fuel project.

To secure expertise and access to blending fuels, Tidewater Renewables and Tidewater Midstream have entered into a joint development agreement whereby both parties have the right to participate in up to 50% of the SAF project upon a final investment decision. The front-end engineering and design and regulatory applications are expected to be completed in 2025 and will be fully funded through the sale of capital emission credits.

The SAF facility is expected to utilize many of the same processes and draw upon the expertise our team has acquired from constructing and operating the HDRD Complex. In parallel, there is significant work underway on the commercial aspects of this project, including initial strong interest in offtake arrangement with major airlines. As a management team, we will approach this project methodically with an emphasis on commercial and financial viability.

Finally, I am pleased to announce that Jeff Hamilton has joined our Board of Directors, bringing 25 years of experience as a business leader and a strategic adviser to Tidewater Renewables. His previous roles included senior leadership positions at Bank of America Securities and JPMorgan. He is currently the Founder and CEO of Longwing Capital Advisors, where he provides strategic and financial advisory services to businesses focused on energy, clean-tech and renewables. Mr. Hamilton holds an MBA from Columbia Business School and a Juris Doctor from the University of Toronto, Faculty of Law.

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 fourth quarter, Tidewater Renewables reported adjusted EBITDA of $10.7 million, down from $14.5 million reported in the third quarter of 2023. The decrease is primarily the result of a $6.6 million realized financial hedging loss due to lower soybean prices, but partially offset by adjusted EBITDA contributed from the HDRD Complex. From the period from commencement of operations on November 7 to December 31, 2023, the HDRD Complex has contributed approximately $3.3 million of adjusted EBITDA. During this time, the utilization rate was approximately 56%. I should emphasize that this adjusted EBITDA was affected by higher feedstock costs purchased earlier in the year, start-up costs and our fixed operating overhead.

With declines in vegetable oil pricing and strong demand for renewable fuels and credits, we remain optimistic about the 2024 HDRD adjusted EBITDA generation. In 2024, we expect the HDRD complex to achieve an average throughput of 2,400 to 2,600 barrels per day, or 80% to 87% utilization inclusive of an expected average throughput of 1,800 to 2,000 barrels per day in the first quarter of 2024. That is indicative of an 85% to 95% utilization Q2 forward, the top end of which is roughly consistent with the conventional Prince George Refinery's utilization.

With the production at the HDRD Complex stabilizing, we are now looking to strengthen our financial position. We are currently in discussions with our capital providers to extend or refinance our credit facilities. And as previously communicated, our top priority for 2024 is debt reduction.

Finally, total capital expenditures, including maintenance capital for the fourth quarter were $31.7 million compared to $76.8 million in the same period last year. This spending was offset by $7.2 million of capital emissions credits in the fourth quarter and $21.6 million of additional capital emission credits expected in the first quarter of 2024.

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

[Jeremy Baines, executive]

Thanks, Ray. As mentioned, the launching of the HDRD Complex's commercial operations signifies a major step change in renewables business and more broadly for the Canadian energy transition.

With that, I will ask the operator to open the call to Q&A.

[Operator]

[Operator Instructions] Your question comes from the line of Nick Boychuk from Cormark Securities.

[Nicholas Boychuk, analyst]

Jeremy, welcome to the team. First question, guys, just on the production profile. So I think the fuels that we're seeing from HDRD and the coprocessing units came in a little bit higher than I was anticipating, but it seems like pricing might have been a little bit light. Can you kind of comment on what you're seeing on the commodity price itself. B.C. Diesel prices that you're realizing and then also on the LCFS credit. And as it relates to the [ presold ] credits as well, if there's any discount you've taken and how we should be thinking about that relative to the posted price that we're seeing from the province?

[Ray Kwan, executive]

Sure. So in terms of our diesel pricing, our diesel pricing is priced off [ PT rack ] price. So that's publicly available on various websites, so you can look at that. And so that fluctuates with obviously [ Derek ] Harbor diesel prices as well as WTI and supply and demand locally as well, too. So that's kind of the pricing that occurred in the fourth quarter.

In terms of LCFS and CFR pricing, LCFS pricing in Q4 was actually pretty robust, I think, in general. If you look at historical Q4 data from the BC-LCFS website, it's ranged from [ $450 ] to as high as [ $520 ] in terms of the average BC-LCFS in terms of pricing. And then in addition to that, for CFR, we've seen ranges in terms of pricing. So that's anywhere between close to $150 to as high as $240 credit there. So I think from Q4 for us specifically, coprocessing units were really strong. I think for the HDRD, I think in general, that was more impacted on the feedstock cost versus actually on the pricing side of things, just given the fact that we were delayed and we had to basically process through some of the higher feedstock costs that we purchased in kind of Q3 of last year.

[Nicholas Boychuk, analyst]

Okay. And how should we be thinking about the feedstock mix and what you're looking at for the remainder of 2024? Have you now worked through that higher cost material and are now looking at more of a -- have a spot price less than 50% that you've hedged? Or how should we be thinking about that?

[Ray Kwan, executive]

Yes. So there's still some, I guess, premium that we do have to pay through Q1, but actually, it's coming down closer to market. And so you're going to see, hopefully, when we present Q1 results, a lot stronger in terms of EBITDA generation from HDRD as well as from the coprocessing units as well, too. And your second part of that question, just to repeat that, Nick?

[Nicholas Boychuk, analyst]

Just confirming that you're still hedged for about 50% of the feedstock cost in the -- I think was roughly around, call it, $0.60 a pound or something in that range?

[Ray Kwan, executive]

It is, yes. So nothing's changed on that.

[Operator]

Your next question comes from the line of Cole Pereira from Stifel.

[Cole Pereira, analyst]

Welcome, Jeremy. Can you guys talk about the confidence level you have that you're past all the major operational issues with the facility? And anything that you're really doing differently over the past few months to kind of mitigate that risk?

[Jeremy Baines, executive]

Yes. Cole, thanks for the question. Yes, definitely, we believe we are past the commissioning phase of the project. The final step in the project was getting the hydrogen compressors working properly. The final fix has really been the original valves that were put into the compressors just had too much lift in them, and we have gotten the proper valves now figured out and run. The compressors have been running well since the last week of February. And we've also done a bunch of online analytical testing with some equipment that we've hooked up to them and the forces that are taking place are much more appropriate.

So we feel like we're past that we can run at 3,000. We've demonstrated that, and we feel that we'll have normal refinery type reliability go forward. So just under probably 2,000 barrels a day on average in the first 2 months -- or for the first quarter, and we should be close to design the rest of the year.

[Cole Pereira, analyst]

Okay. Got it. And on the new SAF JV, I mean, you talked about an FID in likely in 2025. Can you talk about potentially what you think the cost of this asset would be and when you think it could potentially come in service? Or is that still all fairly up in the air?

[Jeremy Baines, executive]

It's going to be a material project. The throughput of approximately 6,500 barrels a day. Significant work will be done. And the reason we're doing the FEED study is that we -- we need to get a proper Class III capital cost estimates, so we can get to an FID. So I don't want to speculate on the cost of it. That FEED study is being done by very reputable global engineering firm. It's fully funded by the capital credits we have.

And then probably just as important as that, we are doing a significant amount of work around commercial arrangements that would build a project with the right risk return profile. We've had really significant interest in it from major airlines and other fuel users. And projects of this time, I think you can use -- I think we can -- we will do better than what we did with HDRD, from a construction time schedule. We've learned a lot doing that. And a lot of those learnings are going into our FEED study. So you can use sort of that time line. And really, the goal is to sort of hit the market as the regulations for SAF and British Columbia kick in and start to ramp up.

[Operator]

Your next question comes from the line of Robert Kwan from RBC.

[Robert Kwan, analyst]

Maybe I'll just continue here on the SAF project. So can you just talk about -- you mentioned on time line, but just wondering some of the lessons you did learn from the HDRD project and how you would pursue SAF, partly just as you think about where your debt levels may also be when you start and whether -- what happens if the FEED funding exceeds the credits that the government has given you?

[Jeremy Baines, executive]

Great questions. Lots of learnings, obviously, from the HDRD facility. Number one is starting out with a very robust front engineering and design study and as well, making sure the regulatory work is progressed and done properly. There were some design elements of HDRD that have caused some of the start-up issues and those are being incorporated and we will make sure that we don't get bit by those. It's a fairly similar process to HDRD with a few changes to be able to get to the SAF standards. So we think we've got a really good handle on being able to deliver and scale up those learnings that we did have.

As far as FID of the project, obviously, there will need to be significant commercial underpinnings. We are also exploring the various options available to these [ green ] projects available from the various infrastructure, government organizations and potentially looking for some credit of different backstopping as well in order to secure cash flows.

From an investment point of view, given the timing and the amount of cash flow we'll be generating at HDRD and -- as well as our partner at Midstream, those progress payments over a few years, we think we'll be able to do it within the existing organization, but we have had significant inbound interest in partners and potential offtakers who are interested in investing. So we feel like the #1 thing we need to do is do the FEED study right and get the commercial underpinnings right. And then we will -- before we go FID, we will make sure we've got the capital in order to execute on it.

As far as the FEED study, I think that was your other question, how do we make sure we don't overspend on that. We have gotten capital credit grants from the B.C. government. We have also entered into a put agreement for the forward sale of those to ensure the price of those credits. So we are managing the engineering firm type to make sure they hit the hours and time and costs that they've represented to us, and we think we've got a pretty good risk profile on ensuring we bring that in on budget.

[Robert Kwan, analyst]

That's great. If I can just finish with a couple of questions here on hedging. The first is just the realized loss on the derivatives, I think it was $6.6 million in the quarter. How much of that was not related to Q4? And then just looking forward, you sold the operating credits through Q2. Can you just talk about the strategy in terms of how you want to monetize credits because -- is there a risk that if that you're going to get caught short here if you have force downtime?

[Jeremy Baines, executive]

So I just want to clarify that question a little bit, Robert, the first one. So we have booked in our balance sheet, the mark-to-market on the soybean hedge. We realized $6 million of that as I went through the income statement in Q4. It's not clear to me what your question is. Sorry.

[Robert Kwan, analyst]

Yes. So I think in prior quarters, you had been overhedged because you expected the facility to be up and running at full. So there was -- because of the drop in the price, some of that was hedging actual soybean consumed, but some of that was hedging stuff that you just didn't produce so you were just overhedged there. Is that -- was that an impact on Q4?

[Ray Kwan, executive]

Yes. So essentially, we were hedged 50% in Q4, total capacity wise. And we averaged, I think, just for the quarter, if you take a calendar day, Robert, just under -- around 1,000 barrels a day for the quarter for HDRD. So we were overhedged relative to how much production we brought on in the Q4 here.

[Robert Kwan, analyst]

So about [indiscernible] i.e., is that right? So like your numbers would have been about $4 million better if you just hedged as...

[Ray Kwan, executive]

Yes, if you want to put it that way. And then just on your...

[Robert Kwan, analyst]

[indiscernible] credit strategy?

[Jeremy Baines, executive]

Yes. Just on the operating credits, there's no minimum or maximum volume is just guaranteed price fixed price based on how much we produce.

[Operator]

And your next question comes from the line of Robert Catellier from CIBC Capital Markets.

[Robert Catellier, analyst]

Can you just walk us through the process to renewing the credit. It looks like you're pretty tight on liquidity, notwithstanding the credits you expect to monetize in Q1. Just give us the outlook there.

[Ray Kwan, executive]

Yes. Thanks, Rob. Great question. Yes, as you can see, it was very tight at year-end. But just given the fact that the HDRD Complex has been stabilizing in terms of overall production, we've been operating at 3,000 barrels a day for the last couple of weeks, so it's been pretty positive. Our liquidity is improving day by day. And I think the big thing is we will receive or we have received the capital emissions credits for Q1. So it's around $21.6 million.

So from a liquidity, it's improving. From a renewal of our credit facility, those discussions are still ongoing with our capital providers. I would indicate that they are all supportive -- of this facility and as well as the general energy transition role that we play, I think, overall. Our hope is that we could finalize an extension of this facility here over the next couple of months.

[Robert Catellier, analyst]

Okay. As you've acknowledged without giving any quantification, SAF is obviously a big ticket. What are your thoughts on bringing a third-party partner, not just a [ lender ], but equity partner?

[Jeremy Baines, executive]

So it's probably a little bit early to speculate on that. Obviously, we will evaluated as we go, and it will depend on how things progress over the next 1.5 years when we will get to the point to make an FID decision. I would say we're not averse to it, but we also feel like it's a very, very good project, and we are going to make sure that the commercial underpinnings provide the right risk return profile, so that we will ensure that we can attract the capital to make that investment if everything comes together the way we think it will. So -- it's a little bit early. I would say we're not averse. But right now, with everything we're seeing, we may not need that partner.

[Robert Catellier, analyst]

Okay. When you look forward here, just where the market is for SAF and where PGR is, can we assume you'll be looking at sites other than PGR for the SAF project?

[Jeremy Baines, executive]

At this point, we are looking at opportunities, but we actually think there's a very strong case for the facility to be done in the PG area. There are some attractive locations in conjunction with the existing refineries. And the ability to blend the JET A1 fuel with the SAF is very important for the end product that needs to get to market. So we actually think there's a lot of advantages to having it located near the HDRD and conventional refinery. There's also very good logistics for feedstock coming through there, and it's a straight shot easy to get to the end market in British Columbia.

[Robert Catellier, analyst]

By pipe or by rail and road?

[Jeremy Baines, executive]

Rail.

[Operator]

And there are no further questions at this time. I would like to turn it back to Jeremy Baines for closing remarks.

[Jeremy Baines, executive]

Thank you, 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, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.