Good afternoon, ladies, and gentlemen. Welcome to the Tidewater Renewables Q3 Financial Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during the call you require immediate assistance, please press star zero for the operator. This call is being recorded today, Thursday, November the 10th, 2022 . I would now like to turn the conference over to Mr. Ray Kwan. Please go ahead, sir.
Thank you, Michelle. Good morning, everyone. On the call with me today is Joel MacLeod, Tidewater Renewables Chairman and CEO. Before passing the call over to Joel for a review of the quarterly highlights, 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 risk 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 at tidewaterrenewables.com as well as on SEDAR. With that, I will pass it on to Joel MacLeod for a review of the quarterly highlights.
Thank you, Ray. Good morning, everyone. Thanks for making time today. Tidewater Renewables delivered another solid quarter of outperformance with Adjusted EBITDA of CAD 16.1 million in the third quarter of 2022. Net cash provided by operating activities totaled CAD 5.2 million for the third quarter of 2022, with distributable cash flow of CAD 9.4 million. The corporation's base business continues to exceed previous guidance, with 2022 Adjusted EBITDA now expected to be between CAD 55 million and CAD 65 million. Tidewater Renewables remains confident in our ability to deliver 2023 run rate EBITDA of CAD 140 million-CAD 150 million before any value from Clean Fuel Regulation CFR credits.
Management estimates that the HDRD complex has the potential to generate an incremental CAD 30 million of run rate EBITDA from CFR credits, assuming a price of $95-$100 per credit. Renewables business continues to outperform expectations, where both Adjusted EBITDA and distributable cash flow. We do also want to highlight today that consistent with the global economic environment, Tidewater Renewables is experiencing capital cost inflationary pressures as we resolve supply chain disruptions while adhering to the construction timeline. Tidewater Renewables expects gross capital costs to be approximately 10% above the previously announced guidance of CAD 235 million of gross capital related to the HDRD project. The executive team and entire Tidewater team is taking this overrun seriously and personally.
These incremental costs are not expected to have a significant impact on the HDRD complex's economic returns, as renewable diesel and British Columbia LCFS credit prices continue to remain higher than previously forecasted. We continue to hold schedule with commissioning to commence in 90-120 days, where renewable diesel margins continue to exceed our expectations. Further, Tidewater Renewables remains confident in delivering CAD 150 million of run rate EBITDA once the HDRD facility is online. Again, want to emphasize the HDRD project still expects to have an extremely attractive two-year payback. The cost increases are comprised of below the three main buckets. One is pipes, valves, and fittings, which relate to supply chain, lack of materials, a custom mill run, having to occur in China for exotic metal, remaining pipes, valves, and fittings.
Higher costs anticipated as we've been paying premiums to expedite production and ship the product to site. The second bucket would be engineering and mechanical, and the third bucket would be electrical and instrumentation. During the quarter, we made significant progress on our RNG business, including the completion of preliminary engineering and design of the announced RNG facility located in Foothills County near High River, Alberta. On October 17th, 2022, we announced that we entered into a 20-year RNG offtake agreement with FortisBC Energy , where FortisBC expects to purchase up to 100% of the RNG facility's design capacity. Tidewater Renewables has also secured a long-term feedstock supply from our strategic partnership with Rimrock Cattle Company Ltd. We want to thank Fortis for all their support and look forward to growing our partnership with Fortis.
On October 24th, 2022, we also announced the closing of CAD 150 million five-year senior secured second-lien credit facility known as the AIMCo facility with an affiliate of the Alberta Investment Management Corporation or AIMCo. The AIMCo facility initially bears an interest rate of 6.5%, but is subject to scheduled escalations in year four and year five as well as inflation-based adjustments. In conjunction with the AIMCo facility, we issued 3.375 million warrants to AIMCo. Each warrant entitles a holder to purchase one common share of Tidewater Renewables at a price of CAD 14.84 a share, subject to certain adjustments for a term of five years.
Tidewater Renewables, all of us want to thank Mark, Matt, and Ben and the entire AIMCo team for all their support, and we look forward to growing our partnership with AIMCo. In August 2022, phase I of our FCC co-processing project was successfully commissioned ahead of schedule, and we began refining various renewable feedstocks, including those provided by our feedstock collection business, which is used cooking oil into renewable diesel and renewable gasoline. Final phase II full commissioning of the FCC is expected to occur in 2023, but we do continue to co-process product through the FCC unit at strong margins. As it relates to our renewable diesel, renewable hydrogen project, we expect to be commissioning in 90-120 days and expect to deliver approximately CAD 90 million of run rate EBITDA.
We want to provide an update on the project, so certain project milestones that were achieved in Q3. One, completion of construction of eight storage tanks, installed all pipe rack modules, completed liner installations for secondary containment, finished rail rack fan foundations, and installed rail rack modules. Installed approximately 80% of the equipment in the renewable hydrogen and reformer unit. Completed the renewable hydrogen purification unit and shipped it to Prince George. Installed utility buildings, including the electrical, instrumentation, air, and fire water. Pulled main power feeds from substation to new electrical buildings and stood up the flare stack. Again, we remain confident in our ability to more than double our current Adjusted EBITDA over the next six to nine months with the commissioning of the HDRD complex in the first quarter of 2023.
Our base business continues to materially outperform, the majority of which is backed by 10- 15 year take or pay agreements, and we do expect this to continue. Further, Tidewater Renewables continues to see material government support for various future renewable fuel initiatives and continues to be seen as a leader in clean fuels and gases within Canada and North America. Thanks again to our staff, board, shareholders, credit syndicate partners, and all stakeholders for all of your support. We look forward to continuing to deliver strong results through 2022 and into 2023. I'll pass it back to our Chief Financial Officer, Mr. Ray Kwan, and he'll walk you through the financial highlights of our quarter. Thank you.
Thank you, Joel. As Joel mentioned, another strong quarter. Adjusted EBITDA for the third quarter of 2022 was CAD 16.1 million, resulting in year-to-date Adjusted EBITDA of CAD 45.7 million. Our base plus growth assets continue to outperform with strong results from our logistics, marketing and storage, canola co-processing, as well as our used cooking oil collection businesses. In addition, we were able to commission phase I of the FCC co-processing project, which contributed to part of the quarter. We also reported third quarter distributable cash flow of CAD 9.4 million, compared to CAD 11.3 million in the second quarter of this year. The variance versus the second quarter is a function of higher interest costs due to draws on the senior credit facility to fund the HDRD complex through the summer construction season.
Total capital expenditures, including maintenance capital for the third quarter of 2022, were CAD 58.2 million, compared to CAD 62.2 million in the second quarter of this year. 2022 capital relates largely to the construction of the HDRD complex, but also includes the commissioning of the FCC and canola co-processing 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 CAD 11.5 million in the third quarter and CAD 22.7 million year- to- date.
In terms of our financial position, we ended the third quarter with total net debt of CAD 124.3 million, up from CAD 107.8 million in the second quarter of this year. On October 24th, as Joel mentioned, we were pleased to announce the closing of the CAD 150 million five-year senior secured second lien credit facility with AIMCo. We are excited to partner with a respected strategic long-term institutional investor like AIMCo. Finally, the proceeds from the AIMCo facility will be used to repay and extinguish the RNG credit facility and pay down the senior credit facility. The added debt capacity ensures that Tidewater Renewables has sufficient resources to simultaneously fund new growth projects and complete the HDRD project. With that, I'll turn the call over to the operator to open up for any questions.
Thank you, sir. Ladies, and gentlemen, we will now begin the question-and-answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If your question has been answered and you would like to withdraw, please press star followed by the number two. If you are using a speakerphone, please lift your handset before entering any keys. One moment please for your first question. Your first question will come from Justin Strong of Scotiabank. Please go ahead.
Hi, guys. Thanks for taking my call. Just wanted to get an idea of what's coming up for construction activities, and just wanna get the near-term outlook for development of the HDRD facility. If you wanna jump in, I'll start, but Ray's welcome to jump in. We are heading out to Prince George tomorrow, so excited to see the progress. We do see updates daily, weekly, and I would say to see construction 75% complete, all major process units either on site or within Canada and en route. Justin, we have a lot of confidence we're gonna remain here on schedule. What's remaining? Ray can probably speak to some of the details better than I can. I know our pretreatment facility is 80%-90% complete.
Our hydrogen units are. I can see pictures of them in front of me right now. They're on site or on way to the facility. It's more the commissioning process, which will start here in 90 or so days, and starting to feed product through the pretreatment facility, the rail rack, the tanks, and then into commissioning. Where we're struggling a bit is on some of the smaller components, just given the lack of supply of specialty metals. We do feel through our network and the mill run we are gonna run, the small components aren't gonna be an issue.
If you ask kinda where's the risk, it would be around some of the very small components and just ensuring that we don't have to re-engineer a small amount around a butterfly valve and convert it over to a ball valve. None of the major equipment, major reactors, do we have any concern, as they're all either on site or within Canada and en route to Prince George. Ray, I'm sure I missed one or two pieces. Is there anything you wanna add?
Yeah. The only thing I'll add is that, you know, we've had close to 188 workers on site last week and expect that to peak at around 220 through December and January here. You know, as Joel mentioned before, all the tanks are done, secondary containment in place, rail rack installed. I mean, those should quickly be commissioned in Q1 there. In addition to that, the pretreatment should be next, followed by the HDRD, and then finally, the renewable diesel facility would be the last piece to be commissioned here into Q1.
That's great. Thanks. It sounds like things are going pretty well. Just one follow-up from me. It's been a while since you guys IPO'd and laid out your initial kind of assumptions around the economics. I know you said that, you know, economics still look strong, but just wondering if you see any kinda like deviations from what you were thinking a year ago in terms of either like obviously credit prices have strengthened, but like maybe feedstock prices just any color around that.
Yeah, I think, Justin, there are a few pieces. The positives would be there are more positives than negatives when we see diesel prices. Even if you looked at diesel prices in your question 12 months ago to today, we are probably up $30+ a barrel on the diesel price, which is helpful. The CFR, Clean Fuel Regulations credit, which obviously we talk about quite a bit. In our IPO, we did not model any value there. Obviously being able to forward sell those credits at $95 and now $100 adds about an incremental $40-ish a barrel should credit values hold there. Those two are very significant. On the feedstock question, to your point, you will see in our financials at September 30th, feedstock prices were actually about the same as the IPO. That was a low.
You'll see our mark to market was slightly negative. Since September 30th till today, again, you'll see the feedstock prices have moved up. We do have those hedges on. Those hedges protect us. We're about 50% hedged in 2023, 40-ish% in 2024, and a small amount into 2025. Overall, the economics on renewable diesel have definitely improved, and that's why we wanna hold the timeline and get this facility online and generate this large amount of cash flow.
That's great. Thanks for taking my call.
Thanks, Justin.
Your next question comes from Robert Catellier of CIBC Capital Markets. Please go ahead.
Yeah. Hi, guys. I just wanna follow up on the cost increase. Judging from your comments, it was largely related to material costs. I'm wondering if you're seeing anything on the labor, FX, or any other source of cost pressure.
Yeah, you hit it on the head, Rob. Majority is materials, especially for our small pipes, valves, and fittings that are exotic metals and finding these items that are typically off the shelf and having to have a custom mill run. The good news is the dollar amount is fairly small. It's not a CAD 10+ million type incremental cost as they're small components. On the labor side, where we do have to look to re-engineer around some of these small valves or component, there is an incremental labor cost. Our rates have not gone up, so our team's done one heck of a job of locking in rates, working with our staff.
I think from, or even over the past six months, we've said coming into winter, if oil prices are $100+, I'd still say I'm a little nervous that our staff could get pulled away or poached onto other projects if energy prices are back in that $100+. We haven't seen that, Rob, but just wanna say that it's still a risk, the same as it was six and 12 months ago. Again, no one has been poached. We still have incredible people out there. Our labor rates are locked in, but we have in this 10% increase, we have included some allowance for labor costs, but we are not seeing that right now.
Okay. You're kinda walking into my second question there. I'm just wondering. How do you know the revised estimate is the right number? I guess another way to say it is what are you doing to manage risk on the balance?
Yep. Detailed board meetings, two days of board meetings, walk through in detail, what are we doing to lock things in. I think locking down labor, having control over those remaining materials, which we feel we do with a custom mill run, and then double, triple-checking. We have 4,900 components. We're double, triple auditing those items daily and just ensuring some of these small components that are specialty metals, we don't need to re-engineer around them. All the large components, Rob, we are highly confident we will have on-site and most of which are on-site today. What are we doing to lock down all kind of the remaining risk? I think just continuing to stay on top of the project, going out to site tomorrow to just continue to motivate the team. They're in good spirits.
Weather is. I guess you're sitting in Toronto, but if you were sitting here in Calgary or in Prince George, we definitely, winter is here. We expected this, but just wanna be there to support our team and continue to be on top of the project. Ray, there may be some other pieces you can think of that we're doing to just minimize the risk of any further increases.
Yeah. Like, I mean, to your question on, like, currency, I mean, luckily, a lot of the assets and a lot of the big components were ordered prior to the big drop that we saw from a currency perspective-wise in, let's call it September, late September overall. I think we've mitigated that issue, fairly okay from that side of things. You know, in terms of what Joel brought up, I think labor is the thing that, you know, certainly that we're concerned. Not concerned, but see that as potential risk, I think, from our perspective-wise. At the same time, the good thing is we've locked in the unit labor costs, I think, overall. It's just depending on productivity is kind of the key thing.
Again, what Joel has indicated, every week we have a meeting in terms of talking about the HDRD project. We're ensuring that we have enough people and labor to actually functionally continue on and move forward on this project and accelerate and meet our commissioning and startup timelines here.
Okay. Sorry if you've already touched on this, but how much has been spent to date? Or said another way, how much is left to spend on that project?
As of September 30th, we've incurred about CAD 195 million, and we're about 75% complete overall on the project.
Okay, last question from me. I'm just curious as to why you're not including the CFR credits in your guidance, or what's it gonna take for you to have the confidence in the value there to address it in your guidance?
Yeah. I think from day one, even the IPO, Rob, which I know you were involved, we wanna have some cushion, just given the moves and the volatility in the components. Even the LCFS component remains strong. The diesel price has moved way more than we anticipated all up, but we wanna just have some cushion and some allowance here. Two, even with elections, politics, we don't foresee any risk on CFR. For us to say we know with 100% confidence CFR values are gonna continue to hold $100 a credit. The good news is, since press releasing those two sales, we've had inbound interest and potentially even at slightly higher amounts. There's just so many variables that we do not wanna try and be over promotional.
We wanna have some conservatism, and it's great that we have CAD 30 million of incremental annualized EBITDA as cushion. I've never had a project where you have 30+ million of annualized EBITDA of cushion, and we wanna just have that available.
Okay. Thank you for patiently answering my questions. I'll jump back in the queue.
Thank you, Rob.
Ladies, and gentlemen, once again, if you would like to ask a question, please press star one at this time. Your next question will come from Robert Kwan of RBC Capital Markets. Please go ahead.
Good morning. Just around the inflationary pressures, outside of the specific project, are you seeing similar trends, though, with some of your other projects, or do you see this as more of a large project issue or Northern BC issue? Outside of, obviously, the components that you talked about.
Yeah, it's a good question, Robert. I think if you read through the parent company, which I know you're well aware of, even on our maintenance CapEx, you'll see parent company saw similar 10% type costs. I think in general, oil and gas, when I talk to even the big producers, everyone in Calgary and Western Canada is seeing inflationary. I think there's a range of 5% up to 20%+, depending on what it is. There's definitely a pull on labor. I would say our labor rates even. An example would be in our board meeting yesterday, our auditors presented and mentioned a 36% increase in 12 months on their staff within our audit firm. We're not seeing 36%. I'm not trying to scare anyone, but I'm just giving you examples real-time that we're seeing.
We are very fortunate that we locked in our labor rates on this project. We don't see there's high unlikelihood that rates could change within the construction of HDRD. I think you're asking across other projects and maybe RNG. If we speak to our RNG project, I would say, in general, a 5% increase on top of those pieces as well. It's really what's hit us here on this project is those exotic components, and North America is essentially sold out on a lot of those small components, valves, fittings. We've had to set up a custom mill run.
Confident those will be delivered, but you focus on all the big items, which we've done a heck of a job, and it burns us to see that some of these very small components are actually resulting in the cost increase. We're seeing costs of five and 10 times for some of these very small valves and components that are specialty metals, which are typically off the shelf.
Got it. Thanks, Joel. I guess then with that as the backdrop, does this change your approach to pursuing, you know, other projects, particularly as you get the renewable diesel facility up and running? Like I said, does that just cause you to take a step back and just let the cash come in or do you still pursue projects here?
No, it's a really good question, Robert. I think you know myself, our team, we're typically pretty aggressive, but I would say definitely our risk tolerance has moved down given the inflationary pressures and on this project, and we're taking it to heart. I still think we've done a hell of a job to keep it at 10%, but it still stings. To your point, as we evaluate other projects, that government support is extremely helpful and we do expect to see continued government support on future projects. Yes, we need to have more cushion, contingency and within the economics as well. I would say our selectivity or projects have to compete and we have to pick the best projects and move forward.
It's unlikely you'll see us progress three projects at a time and even that next project in the RNG project, potentially one after that. We're gonna be very selective in our projects. Ray, jump in.
Yeah. The thing that I would mention, Robert, is that, you know, I think our go-forward projects would likely to be sub CAD 100 million in terms of what we're looking at versus the, you know, obviously the CAD 260 million HDRD project, of course. I think we're trying to focus on more smaller bite-sized type of projects, I think overall, versus kind of the mega projects that, you know, obviously that we're trying to commission and complete with HDRD here. Hopefully that gives you a sense of how we're thinking about things.
Got it. Maybe I'll just finish. Joel, you mentioned government support. Along those lines, was there anything in the feds' fall economic update, just your general thoughts, do you see it as creating opportunities, whether that's new projects, lowering risk or increasing return? Or do you think that maybe it just creates more competition, as others, you know, want capital to flow into the space?
It's a good point, Robert. We definitely, I would say, see more opportunity. To your point, even the IRA, the Inflation Reduction Act, I think it's and the inflationary pressures in Canada, it's reduced some of our competition in Canada. We haven't seen multiple IPOs, multiple projects, so we're excited and definitely we are one of the groups that would be in weekly, monthly discussions with both the federal and provincial governments. What potentially is to come is very exciting for Tidewater Renewables. I do feel we continue to probably be one of the parties that has received the largest amount of government support within Tidewater Renewables and also Tidewater Midstream. We do expect that to continue, Robert. We have multiple grants we've applied and continue to have dialogue.
I would say it's likely you're gonna see in the next six to 12 months incremental support. Then the rules of the game, as you're kinda heading, what additional grants, government incentive is gonna be there, contract for differences. There's a lot of hydrogen wording that I'm sure you're reading as well. We're pretty interested and excited about the next two, three, four months, but wanna see the rules, the policy, the incentives before we get too excited.
That's great. Thank you very much.
Thank you, Robert.
Your next question comes from Nate Heywood of ATB Capital Markets. Please go ahead.
All right, great. Thanks for taking my question here, guys. I just wanna talk a little bit about CCUS. We saw that your parent company was awarded two projects, one at BRC, one at Ram River for CCUS hub. Just wondering, you know, thinking long-term, I know it's a ways out, but do you think that there's potential for drop-downs to Tidewater Renewables? Or how are you thinking about getting exposure from the subsidiary here for CCUS?
Sure. It's a really good question, Nate. We as I hope you know, we try not to be too promotional. We kinda thought, should we put something in here? I think a key piece for those on the line is our F-pool. Tidewater Renewables F-pool gas storage asset is at Brazeau, where our parent company was selected for one of 19 CCUS hubs in all of Alberta, and our understanding is there was well over 100 applicants. The strategic value and nature of that asset is, and the value of the parent company being selected as a carbon hub is definitely significant to that asset. Just realize it's gonna probably take years before we all know the rules of the game and the economics.
Even Robert's questions on hydrogen incentives that we think are coming in or other pieces are gonna be another component. Still lots of work to do, but to your point, it feels as though there could be significant. Even with the 50% ITC on CCUS equipment, we're definitely exploring low capital opportunities and government incentives, and the government continues to push us to be involved. To your question, I think there's gonna be a lot of opportunities to work with our parent company on various CCUS opportunities. The parent company is also an emitter, which is helpful to have an emitter where we can help reduce their footprint, their emissions with two approved carbon capture hubs. Still lots of work to do. We didn't put it in our releases for a reason.
We don't wanna come across as too promotional, but even the number of inbounds we've seen since the government selected Tidewater Midstream are significant. Other potential capital providers potentially come in at a promote. Just a lot of work to do before Tidewater Renewables gets too excited, but definitely a material positive for us over the next two to 10 years.
All right, great. Thanks a lot, Joel. That's it for me.
Thanks, Nate.
There are no further questions at this time. I'll turn the conference back to Joel MacLeod for any closing remarks.
Well, just big thank you to everyone for making time today, and please don't hesitate to reach out to us if you have any questions, concerns. Thanks, everyone, and have a great day.
Ladies, and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask that you please disconnect your lines.