Tidewater Renewables Ltd. (LCFS) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Tidewater Renewables Q1 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Friday, May 12, 2023. I would now like to turn the conference over to Ray Kwan. Please go ahead.

Thank you. Good morning, everyone. On the call with me today is Rob Colcleugh, Tidewater Renewables Chairman and Interim CEO; Bryan Morin, Chief Legal Officer. Before we get started, I would like to note that today's call is being recorded for the benefit of individual shareholders, the media and other interested parties who may want to review the call at a later time. A recording of today's conference call will be available through Cision. This morning, we reported results for the 3 months ended March 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 Rob, I'll remind you that some of the comments made today may be forward-looking in nature and are based on Tidewater's current expectations, judgments and projections. Forward-looking statements we express today are subject to risks and uncertainties, which 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 and 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 Q1 2023 conference call. Tidewater Renewables top priority continues to be the safe and successful commissioning and start-up of Canada's first stand-alone renewable diesel facility. Tidewater Renewables is proud to have sourced an additional $93.2 million worth of liquidity in the last few months, which should provide us with ample liquidity to finish our commissioning of the HDRD complex and support our growth projects. This support comes in the form of $43 million of newly issued capital emissions credits and $50 million of additional debt capacity from our existing lenders. The support received from our current capital providers and the government has been fundamental to the success of the HDRD complex. This project will provide significant value to our stakeholders while reducing the carbon intensity of fuels used in British Columbia and Canada. The HDRD complex is now over 95% complete and is progressing as expected with no change to the previously announced gross capital cost of $342 million. Commissioning operations are progressing on several units with the final completion and start-up expected to begin by the end of Q2. The HDRD project continues to be a leader in safety performance with 0 lost time injuries throughout the life of the project to date. And finally, of note, Tidewater Renewables recently published our inaugural ESG report. The report highlights the corporation's commitment to responsible energy development, its approach to sustainability, recent accomplishments and other materials that will help drive the success of Tidewater Renewables long-term ESG goals. The report is available on the company's website, and I would encourage you to take a look. I'll now turn the call over to Tidewater's Chief Financial Officer, Ray Kwan, to walk through our financial results.

Thanks, Rob. Tidewater Renewables reported first quarter adjusted EBITDA of $12.6 million, in line with the same period last year. For distributable cash flow, Tidewater generated $5.3 million compared to $7.9 million in the same period last year. Our quarterly performance was underpinned by our base take-or-pay contracts with Tidewater Midstream as well as continued realized hedging gains. This was, however, offset by lower product pricing for the canola and FCC co-processing units. Total capital expenditures for the first quarter of 2023 were $81.6 million compared to $47.4 million in the same period last year. Q1 capital relates largely to the construction of the HDRD complex. These expenditures were partially offset by funds received from the sale of B.C. LCFS credits awarded by the B.C. government for achieving milestones under the renewable diesel project Part III agreement, which totaled $23.3 million in the first quarter. Regarding Tidewater Renewables financial position, we ended the quarter with total net debt of $278.6 million. As mentioned, Tidewater was able to secure additional capital emission credits of $43 million, which were sold in Q2. We also expect to monetize $29.8 million worth of credits in Q3, followed by $10.6 million in 2024. Note that these are all capital emission credits and do not include any of the credits that will be generated via the production of renewable diesel. As previously announced, in 2022, we have only forward sold less than 7% of our operating emission credits in 2024 and 2025. We also amended our senior credit facility and AIMCo facility to provide a temporary increase of $25 million each for a combined total of $50 million. These amounts are repayable in variable quarterly installments based on the company's cash flow following the commissioning of the HDRD complex. These amendments also waive the financial covenants until and including September 30, 2023. 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 corporate adjusted EBITDA guidance is expected to range between $50 million to $60 million. At this point, I will turn the call back to Rob to wrap things up.

Thanks, Ray. As mentioned at the start of the call, my focus is ensuring that Tidewater Renewables successfully commissions the HDRD complex, creating value for our shareholders and establishing a platform for future growth. The HDRD's complex's EBITDA during the second half of 2023 will represent a step change in our business profile and should create significant shareholder value. And with that, I'll ask the operator to open the call to Q&A.

[Operator Instructions] We have our first question with Robert Kwan from RBC Capital Markets.

Just -- you talked about post HDRD commissioning and the quote being strengthening your financial position and repaying debt. I'm just wondering what specifically does that mean to you in terms of dollars and credit metrics.

Yes. So I mean, I think our primary goal over the near term, like we said before, is to strengthened Tidewater Renewables' financial position. I think where we want to be, I think, overall is probably half the amount of leverage on our balance sheet that we want to be over the next, call it, 24 months here. So I think the goal here for the next 12 months will be debt repayment, but also part of that is to move forward on some of that development of our RNG facility.

Okay. Ray, just unclear, when you say half the amount of leverage, are you talking about half the amount of debt, whatever that ends up being...

Yes.

At the end. Okay. And then there's also a specific mention of the remainder. Just working -- or focusing on that, so the remainder of 2023. So does that mean based on your projections you expect to achieve those targets by year-end?

Yes. Like in terms of our financial position, like, I think post HDRD commissioning. I mean, again, our single goal is to focus on certainly the balance sheet. So it will be debt repayment here over the back half of this year. I think 2024 -- we'll be evaluating our 2024 budget in terms of what we're looking to spend in terms of future growth projects. But as we stand today, I think our near-term goal will be debt repayment.

Right. So just to be clear, though. But you expect based on your budget by the end of 2023 you'll have achieved that leverage reduction that you want to be? And that 2024 you'll be kind of focusing more on strategic initiatives rather than financial?

Yes. So I think by the end of this year I think we're forecasting to be net debt of around $300 million total. And I think we would like to reduce that by half over the next 12 months thereafter.

Okay. Okay. And then just last. In March, Tidewater Midstream just talked about needing to take actions to surface value. I'm just wondering, is that a valuation process actively involving the participation of Tidewater Renewables? Or is that something that's just happening away from you and whatever they end up deciding may or may not impact you, but you're not involved?

Yes. Robert, it's Rob here. It is specific to Tidewater Midstream and I don't foresee any impact on Renewables.

Next question we have Nick Boychuk with Cormark Securities.

Just to start, could we get an update please on the unifiner replacement process at PGR for the coprocessing and FCC?

Sure. Like right now, for the unifiner as well as the FCC, we are moving in terms of installing pumps and as well as heat exchangers on both the canola coprocessing as well as new nozzles on the FCC coprocessing. But from my understanding, the turnaround is going well and the installation of these items are going well as well, too.

The catalyst has been replaced to be ready to roll. As we've said in the Midstream conference -- or in Midstream press release, I should say, the turnaround has gone as expected. No material groundwork.

Okay. Awesome. And then looking beyond HDRD, I was wondering if we could get a bit of status update on High River RNG as well. Just curious where it is in the permitting process? And also what your thoughts are on construction time lines and ultimately potentially [ product COD ]?

Sure. We continue to work through the regulatory process. Right now, we're answering SIRs, and those should be turned around in mid-June. So it's really up to the Alberta government, whether we've got more SIRs after that or whether it rolls right into an approval process. We obviously will be laying a fair bit of cement, so that will need to take place kind of at this time of the year. So we have been, I think, fairly clear before that we wouldn't start construction on it until next spring. But that's still our time line as it stands.

Okay. Great. And then beyond High River, [indiscernible] how you're prioritizing the future growth projects. What are you guys seeing in terms of different types of fuels. And then if there's, I guess, an option for you guys to start to do some M&A if some of those valuations are coming in a little bit more attractively now?

Yes. We are continuing -- we're evaluating things now. As you know, it takes quite a bit of time to get any kind of deal over the line. So I think it's important to keep our pipeline pretty active. And we've had a couple of interesting opportunities that we've taken a look at. And then we've got a couple of organic opportunities that we continue to assess as well in terms of costs and offtake and things like that. We've also -- on the larger side of things, we're just starting to investigate some SAF opportunities as well. But again, very early days on that one. But we are -- we have funding in place to -- for us to investigate that kind of a project.