Tidewater Midstream and Infrastructure Ltd. (TWM) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Tidewater Midstream and Tidewater Renewables year-end financial results. [Operator Instructions] This call is being recorded on Thursday, March 9, 2023. I would now like to turn the conference over to Mr. Scott Bauman. Please go ahead.

Thank you, operator, and welcome, everyone, to Tidewater Midstream and Tidewater Renewables combined fourth quarter results conference call. I'm Scott Bauman, Tidewater's Director of Capital Markets. And on the call with me today are Robert Colcleugh, Tidewater Midstream and Tidewater Renewables Interim CEO; Brian Newmarch, Tidewater Midstream's Chief Financial Officer; Doug Beamer, Tidewater Midstream's VP of Corporate Finance; Brent Booth, Tidewater's Executive Vice President of Downstream Marketing; Rob McNeil, Tidewater's Downstream Director of Engineering. And also joining on the call, we have Tidewater Renewables Chief Financial Officer, Ray Kwan. Before passing the call over to Rob to review some highlights, I just wanted to quickly remind everybody that some of the comments made today may be forward-looking in nature and are based on Tidewater's current expectations, estimates, judgments and projections. Forward-looking statements we may express or imply 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 Tidewater Midstream and Tidewater Renewables financial reports, which are available at tidewatermidstream.com, tidewater-renewables.com and on SEDAR. And with that, I'll pass it off to Rob to discuss some of the highlights for the quarter.

Thanks, Scott. Good morning, and thank you for joining our Q4 2022 conference call. This is the first call that I've had the privilege of hosting since taking on the role as Interim CEO for both Tidewater Midstream and Tidewater Renewables, and that goes back to the end of November of 2022. Well, it's only been a few months in the seat. I did serve on the Tidewater Midstream board since 2017. So I'm very familiar with the business and the assets and the team. As I've settled into the role, I've established a clear near-term strategic priorities and that's increasing shareholder value and ensuring that the Tidewater Renewables successfully commissions its renewable diesel plan. I recognize that, to date, shareholders have not benefited from the growth that Tidewater Midstream has been delivering. We believe that our company trades at a material discount to the sum of the value of our assets, especially relative to Midstream peers. We also do not believe that this discount will fix itself. While we've implemented a program of disciplined capital allocation, I've also kicked off a review of our asset base, and we'll be evaluating alternatives that could unlock this value that we see. My second priority, as I mentioned, is the successful commissioning of Tidewater's renewable HDRD complex, which will be Canada's first renewable diesel plant. As we announced this morning, this project is facing an increase to its capital costs as we deal with the logistical labor and inflationary pressures that pretty much all major projects seem to be facing within the industry. The project is now over 90% complete, and we're down to a very modest amount of capital to be spent that I'd consider at risk, which gives us a high degree of confidence in this $342 million capital cost figure. The project economics also continue to look strong with an estimated run rate of EBITDA of $80 million to $90 million per year. And we are working with our lenders to ensure that we continue to have capacity to fund our project through start-up. We're seeing a very strong market for both BC-LCFS credits and federal CFR credits that this project will generate. For the first half of 2023, we expect to receive proceeds of approximately $53 million from the sale of Part 3 BC-LCFS credits that are under executed agreements. Now focusing on the results that we delivered in Q4. I think the numbers speak for themselves. Consolidated full year EBITDA of approximately $250 million at the high end of our guidance range, and deconsolidated maintenance capital of $41.5 million, which is at the low end of our guidance range. Within the Midstream business, last year, we completed major planned turnarounds at our Pipestone, Ram River and Brazeau natural gas processing plants. The turnarounds were completed safely and largely within expected time lines. These facilities are now processing volumes at their expected capacity, and we've seen a steady incline in corporate processing volumes with the turnarounds behind us. As we discussed throughout 2022, we saw very strong refining margins at our Prince George Refinery. That played a significant role in driving our consolidated full year EBITDA of approximately $250 million. This is an asset that benefits from the fact that it serves the region with a significant amount of industrial demand for refined products and realize some of the highest refining margins in North America. Our refining schedule is -- our refinery is scheduled for its 4-year planned turnaround during the second quarter of 2023. And over the last 12 months, our local Prince George team supported by a specialized turnaround team has been working on the planning, procurement and scheduling of the turnaround. We expect to be up and running mid-May as we flip into summer driving season, and we see increased industrial demand following spring breakup. On the Tidewater Renewables front, in addition to the HDRD complex work, the team has been advancing our first renewable diesel natural gas project, which is located in Southern Alberta. This is an integrated project with our partner, Rimrock Cattle Company, and has a 20-year offtake agreement with Fortis. Renewables has an exciting pipeline of opportunities and continues to see substantial support on the government and regulatory front. Now I'd like to turn it over now to Tidewater Midstream's Chief Financial Officer, Brian Newmarch, to walk us through some of our financial results.

Thanks. As Rob mentioned, this is a strong year from an EBITDA perspective. Consolidated 2022 adjusted EBITDA of $250 million was a 19% increase over the previous year, and full year consolidated distributable cash flow was approximately $75 million, representing a 12% increase over 2021. I'm very focused on distributable cash flow as this provides us with the cash to pay our dividends, pay down debt or invest in profitable growth projects. Over the last year, we have significantly improved our balance sheet and reduced Tidewater Midstream's leverage, address near-term debt maturities and simplified our balance sheet. The financing transaction that we closed in the third quarter, coupled with our financial results have brought us within our targeted 2.5 to 3x debt-to-EBITDA leverage target. Despite leverage levels now within our targeted range, we're still exposed to the rising interest rate environment. This is leading us to take a conservative approach on how we finance future growth opportunities and has led to a delay in catalyzing major growth initiatives within the Midstream business. During the fourth quarter, Tidewater Midstream realized a $55 million noncash impairment that equates to an approximately 3.5% reduction in the $1.6 billion book value of our property, plant and equipment on our balance sheet. This reduction ties to the carrying value of minor non-core assets outside our major gathering and processing hubs that have minimal fee-for-service revenue associated with them. The second quarter turnaround at the Prince George Refinery will contribute to a moderate year-over-year increase in our maintenance capital budget that we forecast to be in the $55 million to $65 million range as announced in this morning's press release. This investment is part of our scheduled 4-year turnaround plan at a refinery and will help bring total throughput back above nameplate capacity of 12,000 barrels per day. We have time to turn around to coincide with the seasonal spring breakup that temporarily reduces industrial refined product demand in the region. Operations are scheduled to be back online with more than enough time to capture the increased demand from the summer driving season and the broader increase in industrial activity we continue to see within the region that lead to some of the highest refining margins on the [ continent ]. With our refinery turnaround scheduled for the second quarter, we have pared back near-term growth capital to maintain our leverage levels. We continue to evaluate longer-term growth opportunities, such as our Pipestone Phase 2 project, but are looking to partnerships to ensure we have the appropriate funding mechanisms to profitably support these initiatives. Lastly, we've been working on extending the maturity of our credit facility that's currently scheduled for August 2024, and we expect to have the maturity extended out until 2026 in the near term. This extension will push our debt maturities to 3 years and enhances our financial flexibility and the durability of our balance sheet. I will now pass the call over to Ray Kwan, Tidewater Renewables' Chief Financial Officer to walk through the Renewables results.

Thanks, Brian. Tidewater Renewables reported fourth quarter adjusted EBITDA of $16.7 million and distributable cash flow of $9.4 million. Full year performance yielded adjusted EBITDA of $62.4 million, well ahead of the $48 million forecast at year-end 2021 and distributable cash flow of $38.1 million. Our annual performance was underpinned by realized hedging gains from our coprocessing feedstocks, canola and FCC coprocessing, and growth in our feedstock collection business. Total capital expenditures, including maintenance capital, for the fourth quarter of 2022 were $76.8 million compared to $58.2 million in the third quarter of this year. For the year, total capital expenditures, including maintenance capital, were $244.6 million. 2022 capital relates largely to the construction of the HDRD complex, but also includes the commissioning of the FCC and canola coprocessing projects, the engineering design of the RNG facility and the expansion of our renewable feedstock collection business. These expenditures were partially 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 3 agreement, which totaled $10.6 million in the fourth quarter and $33 million for 2022. In the first half of 2023, we plan to concentrate our capital program on the construction and commissioning of the HDRD Complex and supporting the planned turnaround of our renewable fuel assets at the Prince George Refinery. Regarding Tidewater Renewables financial position, we ended the year with total net debt of $211 million from $124 million in the third quarter of this year. As Rob mentioned, with the announced cost increase for the HDRD complex, we expect to fund the remaining project costs through the sale of BC-LCFS credits and with the support of our capital providers, among other sources. For the HDRD complex, our start-up plan involves a gradual and measured increase in production, translating to a 75% to 80% utilization rate in the second half of 2023. Based on this utilization, second half 2023 adjusted EBITDA guidance for Tidewater Renewables is expected to range between $50 million to $60 million, inclusive of $35 million to $45 million of second half adjusted EBITDA contributed by the HDRD complex. At this point, I'll turn it over back to Rob to wrap things up.

Thanks, Ray. I'll just wrap up by thanking our hardworking staff for delivering on a record year in 2022 and for safely progressing our HDRD complex to near completion. I strongly believe that our focus on disciplined capital allocation and cost controls as well as our asset base review will soon deliver results to shareholders. Now before we open it up to the line to questions, I want to remind listeners that me and my team are available for questions you have at any time. You can find the contact information for the team at the bottom of the press release. And with that, we can turn it back to the operator for the Q&A period.

[Operator Instructions] Your first question is from Cole Pereira from Stifel.

On the asset disposition front, can you maybe talk a little bit about what you think might be on the block? And maybe give some sort of indication about the scale you might be thinking about?

Cole, thanks. I mean, I don't think we want to speculate what it may lead to. Right now, it's a review. So we're looking at all of our assets and how the market may value those and how we value them internally. So I would say we're not limiting it. So it is open to all of our assets. But speculating as to where that may lead, I think, is just probably a step too far.

Yes. Fair enough. And Rob, you talked about some past shareholder value. How do you think about increasing the dividend to be more in line with some of your peers in the infrastructure space as well?

Yes. Look, I think there's a number of different ways that we can sort of unlock some of the value that we've got here. As you'll probably have seen, I think I've been a little maybe a little repetitive. We are very focused on our cash flow generation. So that goes to cost controls. It goes to where we spend our growth capital or lack thereof. So yes, it's definitely on the table. Obviously, we've got some near-term issues, both on Renewables as well as Midstream, specifically, obviously, the HDRD project, which is front and center here. But then we've also got a turnaround at Prince George. But I'd remind you that that's sort of once every 4 years. So it absorbs a fair bit of capital, but we'll be looking at all of those options as soon as we complete the turnaround and the HDRD, which really is a couple of months away.

Got it. And on the capital cost increase for the renewable diesel facility, can you maybe give a bit more detail as what drove this? I mean I think we can all appreciate the current environment. But it's a pretty big increase right before coming into service and no real indication 3 months ago.

Yes. I feel the same. I think the reasons aren't really simple, but they can be traced back largely to increases in quantities of -- well, materials, but also everything from piping to fabrication. And that leads then -- when you have a larger increase in quantities, you have more labor. Obviously, we've also seen labor costs increasing. But all of those things seem to accelerate in November and December. And it's not that unusual with these projects where you get to the end of the line, and that's where some of these additional costs come to light. I think if you want to trace origins of it, we should have seen more engineering done at the front end. And that's really a function of being, as we said, this is the first renewable diesel plant in the country. So it's not like you can take pieces of units and strap them together and estimate a cost. It's more complicated than that, and engineers just don't have a history with it. So -- it was -- when that last estimate came out in November, it was -- from what I can tell, it was right when things were really accelerating on that front. So it was a challenging time to be putting out an estimate, I think, in retrospect. But -- anyway, we're pretty confident where we are right now, and we're down to a fairly small amount of capital that's sort of at risk. So hopefully, all of that is behind us.

Got it. And then just one more quick one for me. On the Renewables front, for the first half of 2023, I mean, should we be expecting a similar EBITDA contribution as the last 2 quarters? Or is there going to be some commissioning costs? Like how should we think about that?

Cole, it's Ray here. Yes, it's certainly not going to be as robust as the second half, just given the fact that we have HDRD kind of ramping up through the second half. So as you saw in our disclosure, like our thinking is that the HDRD project actually starts producing diesel towards the end of May, and then slowly ramps up thereafter. So really, it's just going to be reflective for the first half of this year, really just our base EBITDA generation. So anywhere between kind of that $40 million to $50 million that we're forecasting for the first half.

[Operator Instructions] Your next question is from Patrick Kenny from National Bank Financial.

Maybe just on the renewed focus here on cash flow conversion. Looks like cash as a percentage of EBITDA was about 30% last year, same as '21. You have the turnaround of PGR coming up here in Q2. It looks like that pushes up maintenance CapEx by $20 million or so year-over-year. Lease payments don't appear to be coming down from the run rate there of $45 million to $50 million. So maybe you can just kind of walk us through your thoughts as to what other line items might be helping to improve your cash flow conversion over the near term?

Patrick, it's Brian here. I appreciate the question. I think you pointed out both line items. When we think about what's transpired over the last 12 months in terms of turnaround activity and what we have on tap for the first half of the year, these are events that we need to get behind us from a maintenance capital perspective to ensure that all our facilities are running at nameplate capacity and contribute to EBITDA that we expect them to. As we look into the second half of the year and having these events behind us, I think you do see a step change in that distributable cash flow. We talked about the financing that we did in the summer that closed that obviously reduced our debt levels by about $85 million to $90 million. So that reduces the overall debt burden or did at the time. Unfortunately, that debt is all floating base interest rates. So there is a bit of an uptick in overall interest expense as a result of the increase in rates here. But I think the step change you will see as we look out to the second half of '23 and into '24 are clean quarters and clean years with reduced maintenance capital and then, of course, we will benefit from the cash, not just EBITDA coming out of the HDRD plan.

Yes. And I'd just add, if we're looking down the line even further and into a free cash flow number, we're going to be very, very focused on our growth CapEx, and that's real -- we're going to be minimizing the number of projects that are being chased around here. And again, that's going to drive that cash to the bottom line.

Okay. Got it. That's helpful. So more of a free cash flow improvement as opposed to just distributable cash flow, it sounds like. Okay.

That's right. Yes.

And then I guess, on the Pipestone 2 expansion, looks like you're still evaluating that project. I guess just given this latest 30% overrun on the HDRD, can you comment on where the latest cost estimate for Pipestone 2 might be at today versus the previous $300 million marker? And maybe just remind us if any of the inflationary pressures can be recovered through customer contracts to perhaps maintain that 6x build multiple on the project?

Yes, sure. So let me just differentiate a little bit on those 2 construction projects. HDRD is first of its kind. So we've got -- engineering is new. You've got some fairly funky catalysts and some interesting metallurgy involved as opposed to looking at Phase 2 of Pipestone, which is really a replica of Phase 1. So any of the question marks that we went through on Phase 1 are now behind us. And basically, the engineering and construction are just going to be a lot simpler. So it makes us very comfortable in terms of our capital budget on Phase 2. And yes, we are still evaluating and working through things. And part of our structured process here is talking to partners as well as potential buyers. So maybe Brian, do you have something to add?

Yes. Yes, just to add to that. I think when we provided the update capital cost path that was in the summer, and I think there has been give-and-takes, first of all, bulk commodities kind of we're at, we're screaming higher at that time of the year. We have seen a pullback in the actual underlying commodity prices for steel and whatnot itself, probably somewhat offset by labor. So we think that capital cost estimate remains intact from a high-level perspective. And then I know it's been kind of a bit of a prolonged story on catalyzing this Pipestone Phase 2. But we need to be really honest about, as I said, kind of capital costs, where those are kind of coming in and the fact that our cost of capital has increased given what interest rates have done. So we just want to make sure that we're catalyzing projects that are truly profitable before we execute them just for the safety of getting them done. And as Rob mentioned, to sharpen focus on capital allocation and generating free cash flow to the business.

Yes. So I mean it looks like that project still has potential, and you referenced partnerships, asset sales and "other sources of funding" for the HDRD. So I just want to confirm, is the incremental $82 million of funding expected to come from Renewables asset sales only and partnerships or perhaps other areas within the midstream portfolio with proceeds potentially being dropped down to Renewables? And then how might this impact your 69% ownership of Renewables when all said and done?

Yes. I mean the reality is we're not prepared right now to outline exactly how we're going to proceed there. We, as Tidewater Midstream, are still very engaged with the project, and I think it's very highly of the HDRD project. So we are looking at all options is the message, but speculating about what ownership is going to end up being in the near term. It's just, again, a little bridge too far.

Okay. So all options on the table, sounds like, okay. That's great. I'll leave here and jump back in the queue.

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

I just wanted to follow up on the funding question there. I want to make sure, first of all, I have the facts rate, we're looking at it the right way on the HDRD facility, specifically trying to narrow down the quantum of what type of funding is needed. So I believe you have $97.1 million left to spend according to the MD&A. I think you mentioned $53 million worth of credits that you can monetize. And I think there's $77 million of debt capacity on the facility. So I'm just -- with those 2 items, I was just wondering what level of additional sources of funding do you think you need?

Rob, it's Ray here. So just to add on to the capital there. Our forecast that we think for 2023 in terms of total CapEx, including maintenance capital, it's probably in that $130 million to $140 million range. So it is -- it accounts for HDRD, but also spending on the FCC coprocessing as well as our capital for maintenance for the PGR turnaround as well, too. So that has to be accounted in there. In addition to that, we do have some feedstock purchases that needs to be accounted in terms of the start-up and commissioning of our facility as well as to operate the HDRD facility. But overall, in terms of -- from a funding perspective wise, we could see from a GAAP perspective wise, it could be up to $50 million in terms of the funding gap that we're looking at.

Okay. So it's really -- yes, so it's the other items. It's the working capital for feedstock, et cetera, as well as the other projects that are underway. Okay. Just looking at just the state of the market for the credits. So a couple of things have changed. Obviously, we have the Inflation Reduction Act in the U.S. and the whole Buy America situation. So I will just give an updated view on the credit market and you're clearly still monetizing credits. But how does the Inflation Reduction Act in the U.S. and Parkland's decision not to build a [ settled ] refinery change your outlook on the credit market?

Yes, Rob, it's Rob. I mean, the credit market, as probably most participants can see, is really strong. Frankly, it's stronger than we had anticipated, both on the LCFS front as well as the CFR front. Now that has not really anything to do with the IRA. But clearly, the -- in certain areas, there will be more attractive markets in the U.S. because of the Inflation Reduction Act. So we've been talking to governments and some of our colleagues at much larger companies and explaining to particular federal governments that it probably is a very good time to step up if I don't want to lose projects to the United States. Having said that, we actually have 1 or 2 projects in the U.S. that we are looking at. So we're fairly flexible as well. We can go across the border very easily. Nonetheless, we look at each project on its own merits and its own economics. And so when we look at the HDRD and the credits that are going to be generated out of that as well as the Part 3 credits that we've received on the build side to get a 3x build multiple on a major project is still super attractive. So each project will be analyzed in its own. I can't speak to Parkland's decision. I don't know what they're going to do in the states, but it is certainly an interesting data point for our governments to be looking at.

Your next question is from Justin Strong from Scotiabank.

So just a quick follow-up on the cost escalation. It sounds like it's if you characterize it as a function of price and volume of components or maybe under kind of expected before? Is that fair?

Yes, Justin, that is fair. It's -- I think it was the additional quantities that really drove some of the later cost increases. But yes, they both obviously impacted. I mean everybody has been impacted by inflationary forces, especially over the last year from Ukraine and COVID, et cetera. And I think that we obviously experienced that, but then we also experienced the added uncertainty out of the gate from the -- from our engineering contractors with regard to a new type of project, frankly.

Great. And then -- so you just kind of mentioned that you're minimizing the types of projects that you'll be pursuing in the future. Previously, you did kind of cast a wide net of various different either clean fuels or carbon capture and storage. So you've cast widened out there. Can you give us an idea of what projects you're looking at less now? Or if it's more just like or stringent screen across the board?

Yes. Again, I guess I want to differentiate between Renewables and Midstream. So Renewables is clearly going to be a bit more of a growthy vehicle. There are -- there's a large pipeline of opportunities there, and we continue to kind of prime the pump on those opportunities and digging into what the economics are. So there is a little bit more project work, let's call it, future project work on the Renewables side. And that's just a nature of -- we're going to be spinning off $140 million, $150 million of cash of EBITDA in that business. So it is a unique -- not unique, but it's a larger scale renewables company that's going to have the capability of funding its own projects. So that's different than the Midstream side. The Midstream side, there has been a lot of projects get looked at. I couldn't categorize, which ones we won't be looking at and which ones we will be. CCUS is obviously has a part to play, and we are a carbon credit -- carbon tax paying entity. So we look at things as they relate to savings on the Midstream side. But in general, we'll be a lot more disciplined when it comes to understanding the EBITDA that comes out of projects, and risking that heavily and making sure it's a great deal of certainty. Again, everything will be traded off against generating cash flow to shareholders. So it's going to have to be very solid projects that get funded.

That's great. And just kind of lastly on that, are there -- is there any learnings or anything you've taken from this HDRD process that has changed your thinking around the R&D, the current one or future ones? Yes. So is there any kind of different thinking going on there? Any more caution? Or would you not call it similar enough?

There are learnings, absolutely. I mean, that's even in a good project, you'd hope to have lots of learnings. With regard to RNG, it's a really simple process. I mean the complexity around the RNG is getting all of the pieces together, getting that high-quality offtake, getting the feedstock, getting your CI score, like all of the -- frankly, more of the commercial side of things. We're pretty comfortable, and we've kicked -- we're not under construction now on the RNG side, so we actually have quite a bit of time. Our team has been looking at a lot of the European projects. And we just have a lot more comfort with that construction project. It's vastly smaller. It's a simpler process. But one of -- there are definitely projects that have similar levels of complexity of the HDRD, that we're still very interested in. And we're in discussions on SAF on various fronts. And I think what we've learned is, it's pretty clear when it comes to engineering side. Obviously, like I said, the first project is the toughest one to get over from engineering contractor side and from contractors themselves. We learned a lot from that process. But in general, we will not kick off a complex project like that without doing a lot more engineering upfront, and that's one of the -- I think one of the changes we'll see around here is having those costs buttoned down in the very beginning. It's worth spending the extra dollars and the extra time upfront on all projects, whether it's a gas plant or whether it's a complex refinery.

Great. And so maybe just to summarize that, it sounds like a lot of the cost cut runs from the more specialty kind of pieces of equipment and catalysts that aren't as available, or you guys haven't engineered around before and the RNG project is simpler and more in the wheelhouse of the experience of your engineers. Is that fair?

Yes. I mean the process -- simply the process is just a lot more simple. You kind of -- you're letting biology do a lot of the work for you in the RNG side of things.

Yes, [indiscernible] adjustments has been around for quite some time. That's great. That's all for me.

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

If I can start with Tidewater Midstream here. And you've got the statement that you're focusing on maximizing cash flow generation. I just wanted to confirm, are you looking at just operating cash flow? Or are you talking about maximizing free cash flow? And if it's the latter, what does that mean then for the Pipestone expansion? Does that basically mean you're going to be looking at structures, partnerships and the like that would minimize, if not eliminate any CapEx?

Yes, I'd say that's fair. And we're looking at ultimately free cash flow once it has to trickle down all the way to free cash flow. We're just looking at opportunities around Phase 2. Again, we think the economics are excellent, and we are pretty comfortable on the cost side of things. Again, as I mentioned before, this is a replica of Phase 1. So I think that side of it, the economics are very attractive. And it's not so much -- it's not a cash flow issue as much as it is -- really a large project. Given the size of our company and the CapEx requirements for Phase 2, just in general, even with the economics being excellent, it's a big project for the size of our company to do it on our own.

Okay. If I can turn to Renewables here. And I want to make sure I'm understanding the disclosure in the numbers. So it looks like you ended the year with debt-to-EBITDA of 3.9x. The covenants at 4.5x. You've got another $97 million left to spend and $50-some-odd million of credit are put differently. You also talked about your funding gap being about $50 million. So I get this in quarterly timing. Is there something that you need to do to fit all of this in underneath the covenants, whether that's getting a waiver or otherwise?

Yes. Thanks, Robert. It's Ray here. So you're right there. Like we'll be working with our lenders to basically work through the -- in terms of looking for a covenant relief here over the next 2 quarters until the start-up of the renewable diesel facility. And to be fair, Bob just highlight that once this renewable diesel facility actually starts up, we'll be adding close to $80 million to $100 million of EBITDA associated with this project. So our net debt to annualized adjusted EBITDA will fall sharply. So like we'll be less than let's call it, 2x in 2024 at that time frame once we start up our HDRD facility. So to your point, we are working with our lenders and just for a temporary covenant relief for this year. But once the project starts up, I mean, we'll be hopefully in better footing, I think, overall from a financial point of view.

Got that. And then my last question is just on the guidance you've given for Renewables for the second half of the year. So you've got HDRD of $35 million to $45 million. And then you've got corporate EBITDA of $50 million to $60 million, inclusive of HDRD. So that implies, call it, about $15 million from the rest of the business. How does that square up given, that's roughly the quarterly run rate? And I know things are going a bit better and you've got some realized gains on hedges. Let's just go back to the $40 million annual guidance at the IPO. Is there something coming off here fairly materially in the base business?

There isn't. I mean I think it's just for us is from a base business perspective wise, I mean we still have the FCC co-processing, the canola co-processing, our [indiscernible] feedstock collection business is actually outperforming, I think, from our point of view. So I think from a base perspective wise, we're just being conservative in terms of how we're forecasting for the second half of this year.

Okay. If I can just go back to an earlier question then. Is there any reason, at least based on where you're seeing the market dynamics right now, that you would be materially different than, call it, the $16 million to $17 million EBITDA -- quarterly EBITDA run rate on the base business?

Yes. We should be higher than that. Like in terms of our base businesses, at least, meeting that $20 million over the second half here. So...

The base business goes to $20 million. So that's like $40 million for the base business, and we're adding HDRD -- basically...

Exactly.

Like you said, it sounds like the corporate EBITDA guidance for the second half is very conservative.

It is. And it's just us assuming that a very steady and measured ramp-up in terms of the HDRD complex. So we start off, again, like late May in terms of a start-up and then we don't reach full capacity or at least 90% of utilization until September. So it's actually pretty conservative from our point of view.

No, no, I understand that. But the $50 million to $60 million is inclusive of that $35 million to $45 million on the HDRD. So the residual in that is the base business, which is like less than a quarter's worth of EBITDA, and we're talking about 2 quarters. Okay. But it's the base business basically?

It's the base business you shouldn't change. It's still $20 million for the second half.

To be clear, $20 million a quarter?

No, no, no. It's $20 million for the second half. So $40 million annualized for the base business.

And how does that square up then versus the $16.7 million, like I know you're doing well, but -- like how much outperformance are you currently getting then to get you to -- if you're getting $6.7 million of outperformance in the quarter?

Like currently, you mean, sorry, like it's so -- like the one thing that I'll say is that for the second half of this year, yes, we are assuming just the base business. And so we're not assuming any realized hedges from our feedstock in terms of -- and as well as we're assuming a conservative canola coprocessing as well as FCC coprocessing. And that's net of basically G&A and operating expenses associated with that. So again, just to reiterate, our base business, it's still $40 million that we're forecasting here. Compared to last year, last year, we've had really strong kind of hedges that basically supported that $60 million of EBITDA that we generated last year. But for this year, it's just being conservative in terms of what we're forecasting. And Robert, happy to take it offline as well, too.

Your next question is from Devin Schilling from PI Financial.

You guys talked about an offtake agreement here on the renewable diesel side. Can you guys maybe elaborate a bit on the economics? Is this a fixed price contract? Or variable based on a set margin? And also is the credit embedded in the sale?

So yes. So on this deal, it's with an investment-grade party. And so where we're selling this is basically into the U.S. So the -- essentially, the credits are attached with the volumes there. And the benefit of having this offtake is really just increased cash flow or quicker pay in terms of when we sell our renewable diesel, attached with the credits effectively.

Okay. And sorry, you said it's selling into the U.S. market.

Yes.

Okay. No, that's helpful. And then maybe if you guys can just provide a bit of an update on feedstock requirements. I guess what's all been secured thus far for 2023 production as well as 2024.

Sure. We are going to be starting up with canola product just to keep the complexity of things down. So again, we're hoping that the ramp-up happens quite quickly. And once that does, we'll start differentiating our feedstock a little bit and trying to get some lower costs there. As we've talked about in the past, particularly with the UCO market and [ Talon ] things like that, we think we'll be able to bring our feedstock cost down. We're not budgeting for any of that. So all of the numbers that Ray has mentioned are just using a proper canola feedstock. But we have our own business [ collects ] CCO. We've got relationships with a number of other larger UCO players -- in the [indiscernible] market as well. So we're looking forward to starting to differentiate that feedstock because it will have a pretty dramatic impact on our -- positively on our cash flow generation out of HDRD.

[Operator Instructions] There are no further questions at this time. Please proceed.

All right. That concludes our call. We appreciate everyone's time for dialing in. The team is available if there's further questions. And again, thank you for your time and your interest. Thank you.

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