Good morning, ladies and gentlemen, and welcome to the Tidewater Renewables Q2 Financial Results conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a Q&A session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, August 10th, 2023. I would now like to turn the conference over to Ray Kwan. Please go ahead, sir.
Good morning. On the call with me today is Rob Colcleugh, Tidewater Renewables Chairman and Interim CEO, Brian Moran, 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 three months ended June 30th, 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 Colcleugh, 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 may 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 or on SEDAR+. With that, I'll pass it off to Rob Colcleugh to discuss some highlights from the call.
Thanks, Ray Kwan. Good morning, thank you for joining our Q2 2023 conference call. Since our last call, Tidewater Renewables has made significant progress on the HDRD Complex. We're now 100% mechanically complete and are fully immersed in the commissioning process. We've successfully commissioned the key utility systems, being glycol, steam, air, and flare, and filled our feedstock tanks with pretreatment consumable tanks and silos. More importantly, we've successfully commissioned the pretreatment unit with canola. First production of Renewable Hydrogen is expected within the week, and the startup of the Renewable Diesel unit is anticipated in late August. Commercial operations are now expected to commence, as I said, in late August 2023, that is a change from previously when we were talking about the end of June 2023.
This is due to resource challenges and pretty minor commissioning issues. The delay is expected to raise gross project costs by approximately $8 million. This is anticipated to be entirely offset by higher realized value of our emissions, capital emissions credits. Net project costs and run rate EBITDA expectations are in line with previous guidance, and the project's economics remain attractive, with payback expected within two years-three years. We also take great pride in our impeccable safety record, with over 950,000 filled man hours without a lost time incident. The HDRD Complex is Canada's first standalone Renewable Diesel facility, and its cash flow is expected to launch the next stage of Tidewater Renewables' growth. I'm also pleased to announce that we've had two capable additions to the Tidewater Renewables team.
Firstly, Andrea Decore, coming on as Executive Vice President, Strategy and Corporate Development for Tidewater Renewables. Before joining Tidewater, Andrea Decore spent over 19 years at Suncor Energy, most recently as Vice President of Low Carbon Fuels and GHG Offsets. We're very excited to put her significant commercial and leadership experience to work. Corporation's also pleased to welcome Mr. Simon Bregazzi to its Board of Directors. Simon Bregazzi brings 30 years of finance and industry experience to Tidewater Renewables. Simon Bregazzi spent the H1 of his career in finance, ultimately establishing and leading Goldman Sachs' Calgary Investment Banking office, and he spent the H2 of his career in energy and energy transition as Co-Founder and CEO of Jupiter Resources, and more recently, as Co-Founder and CEO of Carbon Alpha, a leading provider of carbon capture and storage solutions.
I'll now turn the call back over to Tidewater Renewables' Chief Financial Officer to walk through our financial results.
Thanks, Rob Colcleugh. As you may know, we successfully completed the turnaround maintenance program at the Prince George Refinery in the Q2, which came in on budget and within our expected timeline. This turnaround, however, did impact our results, as almost no renewable feedstocks, stocks were processed in our co-processing units. Accordingly, Tidewater Renewables reported Q2 Adjusted EBITDA of CAD 8.1 million, down from CAD 16.9 million in the same period last year. Since the turnaround, both co-processing units are up and operating and generating renewable products. Total capital expenditures, including maintenance capital for the Q2, were CAD 55.8 million, compared to CAD 62.2 million in the same period last year. In the quarter, the PGR turnaround CapEx offset the declining HDRD capital expenditures.
HDRD spending were also 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 78.7 million. At the end of the quarter, total net debt totaled CAD 293 million. In this quarter, we were able to access a temporary CAD 50 million debt capacity increase with our lenders, and then subsequently converted CAD 25 million of that to a permanent facility under our senior credit facility via an accordion feature. Total availability under the corporation's senior credit facility is now CAD 175 million. The CAD 25 million of temporary debt capacity through the term facility is subject to variable quarterly repayments based on the company's cash flow following the commissioning of the HDRD complex.
Due to the HDRD Complex delay, our H2 , 2023 corporate adjusted EBITDA guidance is now expected to range between $35 million-$45 million, down from $50 million-$60 million. To be clear, the guidance revision is based on the expected timing and ramp-up of the HDRD Complex. At this point, I will turn the call back to Rob Colcleugh to wrap things up.
Thanks, Ray Kwan. As mentioned, we're only a few weeks away from first production at the HDRD Complex. Look forward to providing a more fulsome update, post startup of the facility. With that, I'll ask the operator to open the call to Q&A.
Thank you, sir. 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 touch-tone phone. Again, that's star followed by one. If you would like to withdraw your request, please press star followed by two. Your first question comes from the line of Nicholas Boychuk from Cormark Securities. Please go ahead.
Thanks. Good afternoon, guys. Can we get a bit of an update on the strategy and how you're thinking about the 2024 and 2025 feedstock hedging for the HDRD, what you're going to put in place and how comfortable you are with a merchant exposure for the feedstocks?
Yeah. Hi, Nicholas Boychuk. We are working on that. As you know, we've got a hedge in place for a portion of our canola feedstock, both through this year and through next year. We're actively working on it. Obviously, we recognize that there's quite a bit of volatility in these, especially in the ag side of things. You know, we continue to grow our used cooking oil business, which has a very fixed cost associated with it. We're looking at a variety of different ways of both hedging that spread, if you want to call it the HOBO spread, or I think there's a different, they're using a different name these days now, it is foremost in our mind and, yeah, we're actively doing it.
We've got about half, half hedged in the front part of with regard to the canola exposure. Part of that's also because we plan to be adding more UCO and Tallow, as, you know, as we get the facility up and running and getting those lower CI feedstocks into the facility.
Got it. The pricing that you are seeing right now, it's indicative of what you were hoping to see, you know, when you were doing the initial HDRD planning, like there's no material moves against what you were expecting?
Yeah, I mean, it, it is interesting because, as I say, it has been volatile on, you know, diesel markets are always, you know, susceptible or volatile as well. canola, market was more volatile. Nonetheless, we have, partially because of the amounts we've got hedged, but, you know, that spread and the resulting economics at the facility have they've been the same. They were improved a little bit out of the gate when we, after we IPO'd. They've been pretty steady. They've bounced around a little bit, but they're quite steady to where they've been for the last year.
Okay, great. Keeping with the facility on the incremental CAD 8 million spend, is any of that coverable by the EPC contractors? If not, can you expand a little bit on why that had to be borne by LCFS?
Yeah, good, good question, Nicholas Boychuk. Yeah, like, our, our hope is, you know, this is the capital increase that we've announced. This is CAD 8 million, like you, you indicated. There has been some vendor complications, I guess, as part of the startup and, commissioning through this process here and the final, I guess, mechanical completions. Our hope is that we could recover portions of it, and we're still working through and with our vendors on potentially recovering some of that capital back to us. You know, nothing that we can say right now, and, you know, this is the, the current capital forecast that we're still kind of guiding towards.
Understood. Thanks, Ray Kwan. Then the last for me, if we could just get an update quickly on the High River RNG permitting process. I think there was some rebuttal in that process that was going on this June. Just curious how that went.
Yep. We have. We've gone through the second round of SIRs, and we've provided those responses to those questions, to the regulator, and we're waiting for a response. Hopefully, that takes us to, you know, hopefully get that before certainly before the end of August. We'll be looking at, there are a couple of more steps, but really, that is the largest regulatory hurdle that we've left in that, project.
Okay, excellent. Thanks so much, guys.
Thank you. Your next question comes from the line of Justin Chong from Scotiabank. Please go ahead.
Hi, guys. Just l ooking for a quick comment on net debt target. Like, obviously, you guys have communicated that, after the project begins cash flowing, that it will go to paying down debt. Just looking to see what that profile looks like in your mind.
Yeah, thanks, Justin Chong. Yeah, like, I mean, now with the HDRD expected to come online here, I mean, we do expect the relative amount of debt and as well as net debt to EBITDA to come down significantly on both on absolute and relative level. But it, it really will depend on capital projects that we also undertake into 2024, say, for instance, the RNG project. That said, I mean, like I've mentioned in the past call, is we hope to reduce our total leverage, hopefully by half. you know, also looking at a debt to EBITDA target of less than 1.5 x over time here. you know, our view is probably within the next, you know, 12 months-1 8 months, but again, depending on what we think about for spending in 2024.
Great. Thanks. There may be a quick follow-up. When do you think we'll get more clarity on what the 2024 capital program looks like?
Well, I mean, as, as you know, we've been waiting on the Alberta government for regulatory approval on the RNG facility for a long time. You know, to be able to make any projections based on, you know, what, what has been a very messy regulatory regime when it comes to renewables, it's tough for us to make any judgments there. I think most of what we're looking at there would be a, you know, project financing that project, so it does have a little less impact in terms of dollars out from our budget.
Yeah, we're gonna, we're gonna need to play it by ear, but I would expect, you know, once we get the HDRD up and running, and we've got an answer from the regulator, you know, there's, at that point, we've got a fairly narrow window to be able to provide that guidance.
Great. Thanks.
Thank you. Your next question comes from the line of Robert Kwan from RBC Capital Markets. Please go ahead.
Good morning. If I can just ask about HDRD and what specifically didn't go to plan? You mentioned resource challenges. I don't know if you can elaborate on that. Maybe just more importantly, can you talk about what the critical path items are to getting it up and running and just your general confidence in being able to hit the remaining milestones as part of getting it up and running and then the ramp-up in general?
Yeah, we can do that for sure. It's a bit of a laundry list, though, when we talk about resources. You know, each of these units, some of them are proprietary, for instance, Haldor Topsoe. Some of them just have some specialists who need to get to the site to help, particularly on the commissioning side. Some, when we talk resources, it's tends to be human resources, and just timing all of those appropriately. We've had some minor issues, you know, with a gasket that was, well, it was the incorrect material, but, on a heat exchanger.
You know, it's a small issue in the greater scheme of things and certainly in the size of the facility, but, you know, we needed to take it then back to Edmonton, get it checked out, you know, confirm that it was a simple gasket issue and nothing else. Anyway, but when you're getting to the bottom of the sort of major projects, things are very serialized, right? You have to do one before the other. It's not like we can be working on two different issues. In any event, what we have done through this period is, and I mentioned some of it was, you know, getting steam into the facility was a big deal. That obviously was hampered a little bit by the by the heat exchanger.
Got the, got natural gas flowing, got it, got steam running and went to flare. That was, you know, a not insignificant issue. Then the other not insignificant process commissioning issue was getting the pretreatment done. Pre-treatment, as you know, it allows us to use a lot more feedstocks. It's a very strategic unit for us, but it is also one that isn't like other units or other processes in the refineries. You know, there's an operating, you know, figuring out your operating processes is important. You know, there's filters and clays and things that aren't necessarily as part of a normal refinery. Anyway, got through that.
Had, had a few issues there, but again, very small, small things, got it up and running and, and have, have had some good run times on the pretreatment. The next piece of business is getting the-- commissioning the hydrogen unit. That's gonna happen at the... well, in about six days, we anticipate getting that turned on, and that is a much more normal, quote-unquote, normal refinery process. You know, once we're comfortable with that, you know, again, not just talking a couple of days because it is fairly, it's a fairly well understood process. Then we'll have the RD unit, and that's it. Then we're, we're first diesel. We think we're-- Well, I don't even want to say that we're being conservative or not.
You never know, but I think we're, we're very, very close to, first diesel.
Okay. Suffice to say, your confidence level at this point is, sounds maybe significantly higher than when you made the statement last quarter that you were close?
Well, yeah, I mean, we... Again, there's construction and then there's commissioning. You know, we're certainly not going to be rushing commissioning just to hit some date that people have published about.
Got it. Okay. As we look forward and just on the target for leverage reduction, you know, Ray Kwan, you talked about one of the moving pieces is just what capital projects you want to undertake next year. I'm just wondering if you can talk about what you see the magnitude, kind of, high, low on that amount, and just even generally, is there a merit in just letting the HDRD unit get up and running cash flow and just go tools down on growth for a bit here just to make sure you get leverage in the right space, particularly given the rising interest rate environment?
Yeah. I mean, good question, Robert Kwan, and we tend to agree. Like, I think there is that capability that we'd look to, not certainly pens down, but obviously minimize in terms of major capital projects that we're going to execute here over the next, let's say, 12 months-18 months. I mean, there are things that is strategic to us. Again, the Rimrock RNG Facility project, and I think the max capital spend that we would outlay from Tidewater Renewables could be up to, let's call it, CAD 30 million, in that range, over the next two years. Also, too, I mean, the other thing that we want to do is, and what we're focused on from a growth is, is obviously, you know, diversify, growing our feedstock supply. There is potential for additional partnerships that we could look to investigate.
Then also, too, I mean, is there any other optimization projects at the HDRD Complex that we could, you know, look at, whether it be adding tankage, loading capacity, ways to reduce our feedstock costs, I think, and, and scheduling issues, I think, overall. You know, I think we're going to be evaluating all those scenarios here, but to your point, we're not going to execute a major capital program and spending way over cash flow here over the next, let's call it over the next 12 months-18 months.
You got to remember the cycle time on these larger projects is, is in years. You know, getting something, getting active on something, you know, isn't-- doesn't necessarily require capital outlay, but you do need to be looking a couple of years down the road.
That's great. Thank you.
Thank you. Your next question comes from the line of Robert Catellier from CIBC. Please go ahead.
Yeah, I, I was just wondering if you could update outlook on the credits, specifically the value and what general terms is included in your guidance in terms of credit pricing and whether or not there's anything for CFR credits in there.
Hey, Robert Catellier. Yeah, like, we do, at least, for the back half this year, we do have, and as well as in our second-half guidance, do have a forecast for BC LCFS and CFR credits there. In general, I think I would say is we're anywhere between CAD 450-CAD 475 on the BC LCFS, and then, for the CFR credits, I think it's anywhere between kind of that, you know, CAD 75-CAD 100 range that we're kind of thinking about overall.
Is that a new addition to the outlook, the run rate? I think it's the CAD 130-CAD 155, because I think previously those were, the CFR credits were excluded.
No, they've. Like, over time, we've included those numbers in there, and that's at the max design capacity, I think, in general. I mean, I think we were also pretty conservative on what that CFR pricing could potentially be, so we've had a little bit built into it. We're hoping that the CFR market will be strong, and we think we will be here over the next, you know, let's call it into 2024. Again, the CFR market is still very nascent here. You know, we haven't actually seen published trades on the CFR, but, you know, but our feeling is that it, it should be hopefully robust over the next, near term here.
Okay. Thank you.
Thank you. There are no further questions at this time. I'd now like to turn the call back over to Mr. Rob Colcleugh for any closing remarks.
Great. Well, I think that's it. Thank you to everyone who's joined us on the call, and please don't hesitate to reach out to call me, or Ray Kwan, or any of the team if you've got any questions. Thank you.
Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.