This call is being recorded on Thursday, August 15th, 2024. I would now like to turn the conference over to Mr. Ian Quartly. Please go ahead.
Thank you, operator, and good morning, everyone. On the call this morning with me today is our Chairman and CEO, Jeremy Baines, who will take you through our operational activity, and I will follow with our financial results. Then we'll open the line for Jeremy and myself to take any of your questions. Before we get started, I'd 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 second quarter ended June 30, 2024, and announced that the boards of Tidewater Renewables and Tidewater Midstream have approved entering into a related party asset sales and forward credit sales agreement.
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, non-GAAP measures and risk factors, please see the company's various financial reports, which are available on our website and on SEDAR+. I'll now turn the call over to Jeremy. Please go ahead.
Thank you, Ian. Good morning, and thank you for joining our Q2 2024 conference call. I will divide my remarks in two sections. First, I'll cover the announcement of the recent transaction and asset and credit sales that we've entered into or, or will enter into. Second, I'll discuss our operational results for Q2. In the first half of 2024, we forward sold BC LCFS credits for approximately $ 450 per credit. However, as we approached numerous counterparties toward the end of the second quarter to contract BC LCFS credit sales for the third quarter, we were unable to secure any commercially acceptable bids for Q3 credit sales.
The public reporting of July BC LCFS credit sales by the BC government confirmed that the market price had significantly declined, with prices for July 2024 averaging only $ 207 per credit. The decline in credit prices is largely due to a surge of subsidized U.S. renewable diesel entering the BC market, driven by an oversupply and overlapping U.S. and Canadian low carbon fuel policies. With time, we expect that the temporary imbalance causing weak credit prices will revert to healthier levels for the renewable fuels industry. This will be driven by tightening compliance obligations in California and BC, and the requirement for winter spec diesel in the BC markets is anticipated to limit renewable diesel imports in late 2024 and early 2025.
All this is to say, we see nothing that fundamentally alters our strategic direction for the company and the success we are ultimately trying to achieve. The current market situation has created liquidity challenges. We are in discussion with the BC and federal governments to explore potential adjustments to the regulatory frameworks that will better support a domestic renewable fuels industry. To address the lack of forward sales for Q3 2024, management has been evaluating potential liquidity sources to offset the weak LCFS credit markets. In connection with the proposed transaction announced this morning, the corporation's board of directors established an independent special committee to evaluate and negotiate the terms of an asset sale and forward credit sales agreement with the independent special committee, established by the board of directors of Tidewater Midstream, and to assess alternative liquidity sources.
The Renewables Special Committee retained independent financial advisors and legal counsel. After considering all available alternatives, the special committees and board of directors of both Tidewater Renewables and Tidewater Midstream have approved entering into the related party agreement. Under the agreement, Tidewater Renewables will sell certain assets to Tidewater Midstream for cash proceeds of $ 130 million, and will sell to Tidewater Midstream the BC LCFS credits generated from the sale of renewable diesel over the next nine months, which will generate minimum additional cash flow of approximately $ 81 million. The transaction provides the needed cash to materially improve our liquidity and de-risk cash flows from credit sales over the near term.
The assets to be divested include our fully owned canola co-processing and fluid catalytic cracking co-processing infrastructure and steam methane reformer, as well as working interests in the Prince George Refinery, including tanks, rail and truck infrastructure, water treatment, and electrical utilities. The Tidewater Renewables natural gas storage facility, co-located at the Tidewater Midstream's Brazeau River Complex, is also included in the sale. These assets have historically generated annual adjusted EBITDA of between $40 million and $ 50 million. In addition to the sale of the assets and credits to Tidewater Midstream, Tidewater Renewables has entered into a definitive purchase and sale agreement with an unrelated third party for the sale of our used cooking oil business for 10 proceeds of $ 10.5 million. Subject to certain closing adjustments, net proceeds from the sale will be used to reduce outstanding debt.
While addressing the current market challenges is important, we must keep the big picture in mind. The need for lower carbon energy alternatives remains strong, with increasing urgency to address climate change. Government support for climate policies is expected to continue, particularly in our markets of North America. We've successfully commissioned Canada's first renewable diesel plant, operating at nameplate capacity. Our SAF project is progressing, aimed at reducing aviation sector emissions in a commercially viable way. And our business model leverages existing infrastructure and proximity to key sales markets, key feedstock supply, and North America's most supportive carbon, carbon credit jurisdictions. Despite current market volatility, we believe our strategic direction remains sound, and we will continue to progress our strategy. Moving on to our second quarter operational results.
Our HDRD Complex delivered robust performance in Q2, achieving record Adjusted EBITDA of $ 29.6 million, a significant increase from performance in Q2. Performance, a significant increase from $ 8.1 million in the second quarter of 2023. This is primarily due to strong contributions from the HDRD Complex, though partially offset by a $ 9.9 million realized hedging loss due to lower soybean prices. The HDRD Complex averaged daily throughput of 2,925 barrels per day, which represents a 98% utilization rate. This was achieved with an excellent safety and environmental record. This performance exceeded our operational guidance and reflects our commitment to operational excellence. During the quarter, we have made significant strides in the front-end engineering and design for our SAF project.
During the second quarter, the team completed the process line, flow diagrams, plot plan, and equipment list, which was required to access the second of six milestones under our funding agreement with the BC Government. The BC LCFS credits granted under this agreement were forward sold at the higher prices experienced earlier in the year, and we still expect that the FEED study will be fully funded through the sale of these credits. The project remains subject to a final investment decision expected in 2025. I will now turn the call over to our Chief Financial Officer, Ian Quartly, to review our financial results.
Thanks, Jeremy. During the second quarter, Tidewater Renewables reported adjusted EBITDA of $ 29.6 million, the highest since the company's inception and up from the $ 25.3 million reported in the first quarter of 2024. The increase is driven by the excellent operational performance of the HDRD complex and strong credit prices, partially offset by $ 9.9 million of realized hedging losses. The HDRD complex contributed approximately $ 27 million to adjusted EBITDA, with a throughput average of 2,925 barrels a day, or 98% of design capacity, surpassing previous operational guidance. For 2024, we expect to exceed an 85% utilization rate, with a projected average throughput of 2,550 barrels a day. The third quarter's initial operating results continue to show strong utilization above 95%.
At the end of the second quarter, we had net debt of approximately $ 316 million, down from the $ 346.6 million at year-end 2023. The reduction is due to strong cash flow from the HDRD complex, lower capital expenditures, and the sale of carbon emissions credits. Also today, we have extended the maturity of our $ 175 million senior credit facility and the $ 25 million of additional debt capacity under the term debt facility that was due to mature on August 18th. The maturity has been extended to August 30th, 2024, to allow time for the proposed transaction with Tidewater Midstream to close. Now, with that, we'll ask the operator to open up the call for questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by one on your telephone keypad. You will hear a prompt that your hand has been raised, and should you wish to cancel your request, please press star followed by two. If you are using a speakerphone, please leave the handset before pressing any keys. One moment, please, for your first question. Your first question comes from the line of Nick Boychuk from Cormark Securities. Please proceed.
Thanks. Good afternoon, guys. Can you expand a little bit, please, on the, the BC LCFS credit purchase aspect of the midstream transaction? Like, just clarifying what the implied price of the BC LCFS credits purchased by Midstream will be, if the $ 80.7 million quoted in the press release is a guaranteed minimum that LCFS will receive. And then also the dynamic that would have to take place for renewables to receive cash flow higher than the $ 80.7 million.
Yeah, thanks for the call, Nick. So at this point, given the credits and the credit market in British Columbia, we're not able to disclose the exact purchase price of the credits. But the nature of the deal is that all Part 3 credits that Renewables has or may get outside of the SAF credits, and any credits that Renewables generates from the sales of renewable diesel during the period will be purchased by Tidewater Midstream. This will provide a floor and a backstop to allow the assets to be able to run and to be cash flow positive through the period, so we don't have to do anything on the operating rates and give them a backstop to get through the liquidity challenging period of low credit prices.
As long as renewables generates the credits from operating, they will be bought up to a minimum of $ 80 million.
Okay, thanks. And sorry, just to expand, what scenario would have to take place for the purchase to exceed $ 80.7?
Based on credits generated and the willingness of midstream to purchase them.
Okay, got it. Thanks. And then in the press release, it also mentions that it sounds as if it's contingent on HDRD reaching a utilization of 90%. Is that the case? And if so, what happens if utilization were to fall below the 90%?
No, that's just to get to the minimum. They will buy all the credits, up to that 80 million that they generate. So, that just, I guess, would provide enough credits to get to the 80 million, but it could be a little bit more. If they don't sell and generate the credits, could be a little bit less. But we-
Okay.
We expect they'll sell all those credits through the period.
Okay, that makes sense. And then on the assets that were sold, the canola co-processing, FCC steam reformer, and the others, you mentioned in the release in your remarks that those assets, I think, generated about $ 40-$50 million of EBITDA once they were contracted. Can you comment on the profile that they generated while they were in renewables over the last year, and what the implications might be for the future of renewables without those assets?
Well, the level of proceeds will be the same, going forward, effectively. So it's similar, either way. Obviously, that will be some cash flow that will no longer be accruing at the Tidewater Renewables level, but there will be a significant reduction in debt and a liquidity improvement through the period that will, we believe, get Tidewater Renewables through the current market disruption, and as it returns to normal and allow the company to continue operating. And, as the industry fundamentals come back, you can obviously see, you know, we had a great quarter in Q2. We're operating very well, and you can see the abilities of the business to generate cash flow in a more healthy credit environment.
We fully expect that to happen as we go forward.
Okay. And then the last from me, just the impact of selling the used cooking fuel business. Are there any read-throughs there that suggest that that was either harder to collect that or that the value that you were deriving from that wasn't enough? Like, how should we be thinking about the use of low-carbon feedstocks into HDRD moving forward?
Yeah, we continue to optimize low carbon fuels and feedstock into the renewable diesel. The strategic focus of that business was a bit of a distraction. It was a small amount of barrels of used cooking oil, and we have the ability to purchase those in the market, in a competitive market, at attractive rates. And we will continue to bring feedstocks into the renewable diesel facility and optimize the CI score of the feedstocks that we run.
Okay, understood. Appreciate the color, Jeremy. Thank you.
You bet.
Thank you. Your next question comes from the line of Robert Catellier from CIBC Capital Markets. Please proceed.
Yeah, good morning. I just want to start with the credit facility. I think I heard you say that it was extended basically to August 30th, so the end of the month effectively to... It sounds like just to bridge the closing of the sale of the assets to Tidewater Midstream. Is that, is that correct? And, you know, just after that, what, what's the expectation for either a renewal or replacement of that facility? I think you mentioned in your comments that you're looking at alternative liquidity sources. Are there any other tangible liquidity sources other than the sale of assets to Tidewater Midstream?
Hey, Robert, Ian here. Thanks for the question. So just addressing the first part. So yes, it's extended to August thirtieth to allow time for the transaction to close. We expect that the initial proceeds from the sale of the assets, Tidewater Midstream, will essentially pay off all the first lien credit facility debt. And then at that time, we'll have the term debt facility outstanding and a small operating line available to us moving forward.
And then what are the alternative liquidity sources you're looking at? Are there any other than the sale of assets to Tidewater?
So at this point, you know, we've been evaluating everything and all alternatives. Right now, the asset sales to Tidewater, the third-party asset sales of the used cooking oil business, as well as we're looking at some other smaller asset sales. You know, once this is all completed, it will focus the renewables business, the renewable diesel facility being the main asset, and we will continue to develop that renewables fuel business through the SAF project. So, right now, we believe, with this transaction, it will give the liquidity room that renewables needs to get through to a better credit market and the ability to generate operating cash flow and be a viable, sustainable, strong renewables fuel business.
Okay. So just on the, your optimism on the credit market, I just-- I'd like a little better understanding how you think we get to a better situation. I understand that, California has tightened their carbon intensity requirements, so that should help. But, and the, you know, the winter spec tightens the market in Canada also. But, you know, it just seems to me that, there is supply out there that can enter Canada. So I'm wondering, what the source of your optimism is, longer term. And maybe you can start with your recommendations to how you'd like to see the market change and what the response has been from the various levels of government.
Yeah. So thanks for the question. Obviously, you've hit on a couple of items. The announcement from CARB yesterday or the day before looks like they're gonna tighten their specs up there. The ability to import winter diesel is a challenge for most parties. They just don't meet that spec outside of our markets. And then we are already seeing some of the higher cost biodiesel facilities in the U.S. shutting in as a result of the oversupply. So that's. We're starting to see that market tighten up. And then we are in discussions on a number of fronts with both levels of government in Canada on things that should be done to... if we wanna have a domestic renewables fuel business, of what the regimes need to do.
Right now, we've got an unlevel playing field with producers outside of our market being able to double-dip and get a production or a tax credit based on the origin of where the product comes effectively, and then also get the credits in our market when they sell. And so we're having very productive discussions. We think that having renewables, a domestic renewables fuel industry in Canada and British Columbia in particular, with ours being, you know, the first facility in Canada, the governments are supportive of the industry, the jobs, and the technology that it brings.
There are some simple fixes that we believe the governments can make and are motivated to make, as we see continued support for lowering carbon intensity of our energy stacks in the world, really.
Yeah, I agree with your view that it's an unlevel playing field, but you're dealing with two levels of government, one which has an election in October and the other next year. So I'm just questioning whether or not any structural change can take place in that nine-month period, where you're getting those credit sales that keep you cash flow positive or neutral.
Yeah. Like... Yeah, yeah, obviously agree there's an election, but that gives, there are some very simple things that can be done within the existing framework that the government has the power to do. And, you know, obviously, wouldn't do anything I wouldn't expect until the election, but the election is in October. That gives plenty of time for them to act, to support a domestic industry, within that timeframe.
Okay. Thank you.
Thank you. Your next question comes from the line of Robert Kwan from RBC Capital Markets. Please go ahead.
Hey, good morning. If I can just start on the credit sale agreements. First, are you going to backdate or you could be buying back all the credits that were generated in the third quarter? Or is it only going to be from the closing date forward?
Yeah. The effective date for that would be July first, so start of Q3.
Okay. So the correct quarter. Okay. And then, you talked about Tidewater Midstream having the obligation to buy credits up to that $ 80.7 million, but are renewables or renewables obligated to sell if the BC LCFS credit price goes above whatever is embedded in your agreement?
They are for the first six months, and then there's a sharing mechanism for the next quarter, to share price appreciation.
Okay. And then the last question I've got just is around the SAF project and, I guess a few different things. So the first is, it must be taking up some amount of management's time and focus. I'm just wondering, you know, why pursue it at all, or just like slow it down at this point?
Well, I think the reality is, that the fundamentals of it make a lot of sense. There is an upcoming, blending, obligation, for SAF coming in British Columbia. We have, a good team with good know-how, and we think we're in a good spot to be able to do that. We have a, Part 3 funding agreement with the British Columbia government that is covering the costs and, you know, the bulk of the work from the feed study is being done by a, a globally recognized independent engineering firm, and we have a small team of, employees that are supporting that.
And we have, you know, we think we can move it along and it's actually a great asset that we're developing and with the commercial underpinnings that we're pursuing, and if they come together, it's gonna be a nice value-adding asset. So, you know, to stop now wouldn't make sense given where we're at in the project and that we have the feed study funded.
Okay. I guess I'm just wondering, as you're talking with the BC Government, the government wants this to happen. In some ways, that's a negotiating position for you to keep trying to push or for them to have you push it forward. I guess the other thing is, if you've hedged out the credits at the higher price, that hedge must have value to you. So if that's in the money, is that not a liquidity generator upfront? And, or put differently, does that not just give you even more negotiating position with the government to try to get the changes that you want?
I mean, look, our view is we have we believe we have a significant position. Our renewable diesel plant is a has been a strong economic generator in the province. It has significant employees and has provided, you know, a good economic engine in an industry that the BC government wants to develop a domestic industry. So we think that it is in the British Columbia government and the people of British Columbia's interest to allow or to fix what is an unleveled playing field when it comes to the renewable diesel market, and they do want to see the SAF project proceed. We have to hit milestones to generate credits that we have made an agreement to then sell those credits at a price to an offtaker.
So if we don't continue, don't hit the milestones, we don't get the credits. So it is a, you know... Again, we think it's a very strategic and value-creating project if it comes together the way we think, and we're gonna continue to work on it.
That's great. Thank you.
Thank you. Once again, should you have a question, please press star followed by one on your telephone keypad. There are no further questions at this time. We have a follow-up question from Robert Catellier from CIBC Capital Markets. Please go ahead.
Yes. Since there's no other questions, I just had a modeling question here. I wondered if you could identify the $ 47.8 million changes in non-cash investing working capital that's on the use of cash this quarter. What was the... What's going on with that item? Can you describe it?
Yeah, certainly. So the majority of that was, payables and accrued liabilities that were outstanding at March 31st, that we have cash settled in Q2, so that was an outflow of working capital. And then offsetting that is we did have a, quite a large, Part 3 credit sale to a counterparty that was received, the cash was received on July 3rd. So that also results in what looks like a, a working capital change. So a little unusual in the second quarter. We'd expect that to be, a smaller number moving forward on a regular quarterly basis.
So, so is that related to the HDRD facility, or is it something, a new project you're working on going forward?
The Part 3 credit sales that were received in July were from a milestone from the HDRD construction.
Okay, thank you.
Thank you, and that concludes our question and answer session. I want to hand the call back to Jeremy Baines for any closing remarks.
Thanks, everyone, for joining us on the call. Please don't hesitate to reach out to me or the team if you have any questions. Thank you.
This concludes today's call. Thank you for participating. You may all disconnect.