Good afternoon, ladies and gentlemen, and welcome to Tidewater Renewables' first quarter financial results conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a questioning and answer session. Instructions will be provided at that time for you to queue up for a question. If anyone has any difficulties hearing the conference, please press star zero for operator assistance at any time. I would now like to turn the conference over to Mr. Ray Kwan. Please go ahead.
Thank you. Good morning. On the call with me today is Jeremy Baines, Tidewater Renewables Chairman and CEO. 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 first quarter ended March 31, 2024. 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 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 on our website and on SEDAR+. With that, I'll pass it off to Jeremy to discuss some highlights from the quarter.
Thank you, Ray. Good morning, and thank you for joining our Q1 2024 conference call. Today, I am proud of both our performance and our product. On the performance side, it wasn't completely smooth, but it was successful. We overcame the operating challenges we discussed at year-end, expanded our commercial reach, and exceeded our previous HDRD throughput guidance. Moreover, we are carrying this building momentum into the second quarter, and we have so far maintained a utilization rate of approximately 95%. I believe this showcases the team's commitment to operational excellence and continuous improvement. As for our renewable diesel, it offers a genuinely viable solution for reducing greenhouse gas emissions. We take pride in supplying Canada with a homegrown, low-carbon energy solution that works in our existing machinery and with our current infrastructure.
I want to emphasize that renewable diesel is a proven emissions reduction solution that is available today, compatible with existing assets, and doesn't require the replacement of our energy distribution network. Our proposed 6,500 barrel a day SAF project continues to make solid progress, and we are busy integrating the lessons learned from the construction and operation of the HDRD complex into its design basis. We continue to progress commercial arrangements and are evaluating potential offtake agreements for the SAF project. The SAF project remains subject to a final investment decision, which is expected in 2025. We remain committed to approaching this project methodically, with an emphasis on commercial and financial viability. Finally, I want to welcome Mr. Todd Moser to our board of directors. Mr.
Moser brings over 35 years of refining, biofuel, and environmental experience to Tidewater Renewables, with previous roles including senior leadership positions at Petro-Canada, Maple Leaf Foods, and most recently as President and CEO of Terrapure Environmental. Mr. Moser also has extensive board experience, including service with the Canadian Renewable Fuels Association and the National Renderers Association. I will now turn the call over to Tidewater Renewables' Chief Financial Officer to walk through our financial results.
Thanks, Jeremy. During the first quarter, Tidewater Renewables reported Adjusted EBITDA of CAD 25.3 million, the highest recorded EBITDA since inception and up from CAD 12.6 million reported in the first quarter of 2023. The increase is primarily the result of strong contribution from the HDRD complex, partially offset by the CAD 8.1 million realized financial hedging loss due to lower soybean prices. For the quarter, the HDRD complex contributed approximately CAD 20 million of Adjusted EBITDA, with the facility's throughput averaging approximately 2,120 barrels a day, or a 71% utilization. This is slightly higher than our previously forecasted Q1 range of 1,800-2,000 barrels a day. In 2024, we expect to exceed a full year utilization rate of 85%, representing an average throughput of 2,550 barrels a day.
Initial operating results for April and May show continued improvement, with a utilization rate of 95%. For the quarter, Tidewater Renewables ended with net debt of approximately CAD 307 million, down from CAD 346.6 million at year-end 2023. The lower debt balance is due to higher cash flow generation due to stable operations at the HDRD complex, lower total capital expenditures, and the addition of capital emission credits received in the quarter. With these tailwinds, our improving liquidity and the CAD 27.7 million of bank debt repaid in the first quarter, we are confident in our ability to extend our senior credit facility and expect to provide an update in short order. At this point, I will turn the call back to Jeremy to wrap things up.
Thanks, Ray. With that, I will ask the operator to open the call to questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. Questions will be taken in the order received. Should you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Once again, that is star one should you wish to ask a question. Your first question is from Nick Boychuk from Cormark Securities. Please ask your question.
Thanks. Good morning, guys. Can you guys expand on the OpEx cost reduction goal that you mentioned in the MD&A for HDRD? Just what exactly that entails and the magnitude of that potential cost decrease?
It's the cost reduction goal I think that you're referring to is really around the G&A expense reductions that we've been doing. We've early in the second quarter we've taken a number of initiatives to optimize the costs and our structure. And we've got a couple of million CAD at the renewables level that we've taken out of the cost structure go forward. The other piece of you know is really CapEx. We have optimized our capital program and eliminated a number of expenses that we've been you know that were potentially on the docket to be spent, and we've decided they weren't necessary or weren't gonna provide the appropriate return that we needed. So we have pared that back to conserve cash flow.
The other piece of it, as we increase our throughput, obviously the fixed cost component becomes smaller per unit. That drives significant costs in our OpEx. There is one capital project that is in the budget that we're doing around our off- gas, and we are. We'll be reducing even further the amount of natural gas that we're using, and our energy intensity, and that project's ongoing and should be started up in the next week or so here. So that, that's really the focus at renewables. Really running HDRD optimally and having the right overhead structure.
Got it. And, and just following up on that, the, the CapEx component you referred to, is it fair to assume then that the focus really going forward is, is on the SAF project, getting that to FID for 2025, and that the RNG things that were previously discussed are kind of, on the back burner a little bit, they're deprioritized?
Yeah. Our focus is renewable fuels. I think we've demonstrated our ability with the renewable diesel facility. SAF is the next significant growth project we are working on. We are very focused. We have a significant part of the team working on getting that project, you know, all of the things that go into front-end engineering design, proper commercialization, stakeholder consultations, regulatory approvals, all of that is being worked in parallel as we speak. And the RNG project is working through some regulatory permitting, but that's slowed the project down a bit here and not the main focus of the team. SAF is our main growth pillar focus.
Are you able to expand on any of the similarities or differences between what you experienced with HDRD and how you think you'll be able to apply that to the SAF project, with a little bit more of a cleaner build-out, and I guess, path to operations?
Yeah, I mean, it's, it's a great question. Obviously, we're very proud of our safety record and our, you know, the production record we've had over the last, call it three months, at, at HDRD, but there were a significant amount of learnings that happened. One is making sure we've got the appropriate, front-end engineering and design and regulatory work all locked down before we, progress to, commitments. We are taking a methodical approach to our pre-FID SAF project.
I do think we are one of the most capable companies in Canada, and there are technical learnings, and you saw some of the startup challenges that we had at HDRD, and all of those things around, you know, appropriate configurations of hydrogen compressors and heat tracing of certain elements, and all of that stuff will be applied and will make us better and allow us to execute more effectively and cost on time. So all of those things are. There's a long list of things we have incorporated that will make it a smoother and even more well-executed project.
Got it. Thanks. And then last for me, and then I'll get back in the queue. Just thinking about hedging for the remaining year of the year. So 2024 and 2025, I think you've got about 50% and 30% of the feedstock for HDRD locked up, with prices kind of at lows for the year. Are you guys thinking about potentially entering additional hedges, or are you happy kind of having a more merchant mix right now?
Yeah. This is Ray here. Thanks, Nick, for the question. I mean, our hedging strategy is relatively unchanged. Like you mentioned, right now we're 50% hedged. I think we're comfortable with those levels for 2024, despite kind of the soybean futures market being below our average hedge price. But, you know, that said, for 2025, we are only 30% hedged. So if credit prices and or diesel prices continue to be favorable, we believe next year will look a lot better from a EBITDA capture rate, just given the fact that the co-processing units and the HDRD units are able to benefit from the lower feedstock costs here.
Got it. Okay. Thanks, Ray. And, Jeremy, welcome, welcome to the team.
Thank you.
Thank you. Your next question is from Robert Catellier, from CIBC Capital Markets. Please ask your question.
Hey, good morning, everyone, and congratulations on the good operating results of the HDRD facility. I'm curious if that's really the focus of the credit facility extension, just getting the facility up and running to a more stable operating rate. Maybe you could just discuss what gives you confidence in the credit facility renewal.
For sure. Thanks. Thanks for the question, Rob. It's Ray here again. Yeah, look, I mean, it's, I think one of the key things that the lenders wanted to see is the HDRD complex operating at close to full utilization and design. I think overall, you know, in terms of our negotiations regarding the extension of the senior credit facility, I can't talk much, but about it, but suffice to say, I believe the lenders are happy with the performance today. And obviously, if you look at Q1, I think there were a number of positive strides we made in the quarter, including net debt reduction of nearly CAD 40 million. We paid CAD 27.7 million of bank debt, and obviously, the throughput for HDRD is really strong right now.
You know, suffice to say, our discussions with the first lien lenders have been positive thus far, and we hope to have a resolution here, shortly.
Okay, great. Just, you gave an update on the outlook for the capital credits, both for the second quarter and the remainder of the year. I just want to refresh on the accounting there. Does that flow through the income statement, or is that a contra account to the capital that's been spent? And then I'll have a follow-up question.
Yeah, it's the latter. So we expect to receive about CAD 15.3 million of capital emissions credits in the second quarter, and close to CAD 7 million for the remainder of this year. So, and all of it is gonna be offsetting, essentially capital.
Okay. And then, so that's what I expected. And then just with respect to the production credits, is there a similar outlook you're able to provide there? And really, what I want to get at is, at what point do you think you'll be at, a level or a comfort level with the facilities production to be able to sell the credits ratably with production? In other words, you don't want to sell too many and then have an operating outage or operating bump along the way and get caught short. So at what point are you gonna be at, the level where you're selling the credits ratably with expected production?
Yeah. So, for the first quarter year, it's—we have that, credit marketing arrangement, with an investment-grade counterparty. And, bottom line, we receive, the basically payment for... and essentially we transfer, I guess, the fuel codes associated with the BCLCFS to the other party. So we get paid ratably, for that. In terms of the CFR, we do build inventory. And so you can see in terms of our deferred revenue as well as our inventory and our operating emissions credits, we do actually build the inventory associated with that. One of the unique arrangements with this agreement is that we do get paid on the CFR, but, you know, physical realization to EBITDA, as well as revenues, isn't until, basically we push a button and transfer those credits over to, the other party there.
You know, if we have these marketing arrangements and credit arrangements, it will be more ratable. There is no minimums, there's no maximums associated with how much we have to sell. So it's a pretty flexible arrangement that we have here for the second quarter.
Okay. That's, that's very helpful. Thank you.
Thank you. Once again, please press star one should you wish to ask a question. And your next question is from Robert Kwan, from RBC Capital Markets. Please ask your question.
Great. Good morning. Am I going to start kind of a high level in breaking down the quarter and think about the outlook? So you've got, you know, the CAD 25 million in EBITDA. As you ramp up HDRD, that should be presumably additive to that. But was there anything else, in the quarter that would impact 2024, that really would lead you to not take the Q1 results to annualize that and just include a ramp-up for HDRD?
Yeah. Thanks for the question, Rob. I'll start, and then Ray can fill things in. It really is, I think, as straightforward as you think about it. You know, obviously revenue is subject to diesel prices and credit values that are realized. Operationally, our OpEx is relatively fixed, and then you got to run the hedge through and all of that. Basically, you know, those things all staying same, it's just the volume for the rest of the year. We'll be running... You know, my expectation is 95% of design capacity at least, and that is, it's as simple as that.
The only thing I'd add to Jeremy's comments is that, you know, the 85% utilization for this year implies basically 90% for Q2 to Q4. So, if we're able to operate at this high level, then, you know, there is upside to that, to our EBITDA from Q1 here.
Got it. And then as we think about 2025, again, the caveat of what is, you know, diesel pricing, what is the feedstock pricing? But if you get into a lower hedge percentage to, you know, CAD 8-ish million of realized losses should start to whittle away, and just that in and of itself should be a tailwind to 2025?
Yeah.
Correct.
Okay. Just on the SAF project, I think last quarter you talked about that for all intents and purposes, any of the spending that's going into it right now is being covered by the government credits. Is that still kind of what you expect for 2024, that there's going to be no material dollars spent from the company on the project?
Yeah, that's correct. We, we have a incentive agreement that we hit milestones with, and I think we've actually passed our first milestone and gotten those credits. And, everything's on track to meet all the milestones and collect all of the credits. We've also entered into, an agreement with a counterparty to take those credits at a fixed price. And so we, we won't have material dollars out the door, although we are spending material dollars doing a significant amount of, front-end engineering and design work, et cetera, with, you know, an internationally reputable engineering firm.
Got it. Just the last question. You noted that you're blending some of the RD with the PGR's diesel. Can you just talk about how the economics work then for Tidewater Renewables and how you just split that, between renewables and midstream?
Yeah. So, I mean, those volumes that was described in the press release as well as the MD&A, you know, it, it's customer specific. It's really depending on the blend that they prefer and want. So, you know, this specific customer wanted an equivalent to an R30 blend, so 30% renewable diesel, and then the conventional diesel is blended in there as well. So it really depends on the customer in terms of how they see it and how they want the recipe kind of produced, I think overall. So we're happy to meet anyone's, you know, appetite for renewable diesel here, so... And happy to do any type of blend whatsoever.
It's been great work from a logistics point of view by both the LCFS as well as the TWM team to actually execute this sale here to this customer.
I just wanted to. I guess where I'm going is, is everything being billed to the customer on a third-party basis? You're blending, you're bi-billing the RD, they're billing the diesel and the blending fee, or is there some sort of related party transaction where the renewable diesel is being sold to midstream?
No. It's we purchased the conventional diesel at cost or the price that they're suggesting. There is no pickup or markup associated with blending here.
Okay. Perfect. Thank you.
Thank you. Your next question is from Devin Schilling from Ventum Financial. Please ask your question.
Hi, thanks for taking my question here. Just to follow up on the operating emission credits. The CAD 30 million in sales during the quarter here, should we be expecting this to increase in Q2, given the higher expected utilization rates, or is there more, I guess, timing issues at play here?
Yeah, I think it should hopefully continue.
Okay. No, that's great. Thank you.
Thank you. Your next question is from Nate Heywood from ATB Capital Markets. Please ask your question.
Great, thank you. Appreciate the time. I just wanted to dive in a little bit more into the feedstock that you guys are running through the facility. Early days here, have you had some successes with running more soy and tallow? And just kind of the outlook for the rest of the year of introducing more feedstocks into the stream.
Yeah. So, thanks for the question, Nate. We have been primarily running the facility on canola oil to date. Obviously, you know, making sure we get it stabilized, lined out, and running, and we're doing that now. We have the one capital project that I mentioned that we're undertaking that should be on next week to help with some of the emissions at the facility. So once we are done that, we have done a little bit of blending to date using tallow, soybean oil, and used cooking oil. Once we get through this project this month, we are gonna start looking at you know... It's a very measured, methodical piloting of the various alternatives and calculating which ones provide the most economic benefits.
So we will start introducing and working on what is the most optimal feedstock from an economic point of view. So that's gonna start taking place in Q2 and through Q3, and, You know, it moves. They all have their own both CI score and market prices, and those are moving all the time. So it will be some work to optimize it, but that is sort of the next step now that we've got all of the production running the way it should.
Okay, great. Appreciate the color there. Maybe just if you could touch on, you know, the SAF facility and, you know, what kind of shared infrastructure, what kind of synergies would you see with the RD facility or potentially even with the PGR facility?
Yeah, I would say it's more the PGR facility. Obviously, we are working at a location that will be repurposing an existing industrial site, which has a lot of good infrastructure in place around existing high voltage power, high pressure natural gas, water, water treatment, rail infrastructure. But then it will be tied into the loading racks, the tanks, and all of those things that are available and existing at the conventional refinery. So, there is a significant amount of savings around the sort of utility infrastructure that this project will encompass. You know, obviously from an operational point of view, the three facilities are right beside each other effectively.
We have common operations, and in particular, an ability to take conventional Jet A-1 and blend it with the SAF, which is really what the market is demanding. And, that is one of the biggest, I think, beneficial links by having these facilities all together.
Great. Thank you very much.