Good morning, ladies and gentlemen, and welcome to the Tidewater Renewables third quarter financial results conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer 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, November 9th, 2023 . I would now like to turn the conference over to Ray Kwan. Please go ahead.
Good morning. On the call with me today is Rob Colcleugh, Tidewater Renewables Chairman and CEO, Bryan Morin, Chief Legal Officer. Before we get started, I would like to note that today's call is being recorded for the benefit of individual shareholders, the media and other interested parties who may want to review the call at a later time. A recording of today's conference call will be available through Cision. This morning, we reported results for the three months ended September 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, I'll remind you that some of the comments made today may be forward-looking in nature and are based on Tidewater's current expectations, judgments, and projections. Forward-looking statements we express today are subject to risks and uncertainties, which can cause actual results to differ from expectations.
Further, some of the information provided refers to non-GAAP measures. To know more about these forward-looking statements and non-GAAP measures, please see the company's various financial reports, which are available on our website or on SEDAR+. With that, I'll pass it off to Rob to discuss some highlights from the quarter.
Thanks, Ray. Good morning, and thank you for joining our Q3 conference call. We're pleased to announce that HDRD Complex produced its first renewable diesel on October 22nd, and as of November 7th, it's progressed to commercial operations. Facility is currently producing about 1,500 barrels a day of on-spec cold weather diesel, and we'll be moving this rate up towards the facility's 3,000 barrel a day design capacity in a safe and methodical manner in the near term.
Gross project costs are expected to increase by CAD 10.2 million. This is due to an increase in man-hours resulting from the delay in commercial operations, and the addition of incremental insulation and tracing. However, the project's economics remain attractive and with payback expected within 2-3 years. The HDRD Complex makes Tidewater Renewables the first standalone producer of renewable diesel in Canada.
We'd like to thank the Government of British Columbia, the City of Prince George, and our capital providers for their support. Personally, I'd like to thank our team, who have demonstrated exceptional dedication to getting us online. Construction and commissioning of Canada's first standalone renewable diesel facility was not easy, and we faced a number of challenges along the way, but we got it done.
Another highlight during the quarter relates to our co-processing projects, which were approved for the Canadian Clean Fuel Regulations credit generation in July 2023. The corporation expects to maintain its position as one of the country's largest generators of emissions credits through a combination of its co-processing projects and the HDRD Complex.
I'm also pleased to announce that as of yesterday, I was appointed as Chief Executive Officer of both Tidewater Renewables and its parent, Tidewater Midstream and Infrastructure Ltd. As you may know, I joined Tidewater Midstream Board of Directors in 2017, was appointed interim CEO of both companies last November. Since November, I've had the opportunity to work with both teams through the commissioning of the HDRD Complex and Tidewater Midstream's strategic asset review.
With these milestones behind us, I'm optimistic about our future, and I'm excited for what comes next. I'll now turn the call over to Tidewater Renewables Chief Financial Officer to walk through our financial results.
Thanks, Rob. During the third quarter, Tidewater Renewables reported Adjusted EBITDA of CAD 14.5 million, up from CAD 8.1 million reported in the second quarter of 2023, but down from the CAD 16.1 million generated in the third quarter of 2022. During the third quarter of 2023, we saw strong performance from our co-processing units as they ramped up out of the Q2 Prince George Refinery turnaround.
This was in part due to the installation of a purpose-made catalyst during the Q2 turnaround, and as Rob previously mentioned, the incremental benefits CFR credit generation, which started in July. Compared to Q3 2022, results were lower due to realized gains on our derivative contracts being CAD 3.4 million lower.
Total capital expenditures, including maintenance capital for the third quarter, were CAD 33.7 million, compared to CAD 58.2 million in the same period last year. This spending was offset by CAD 3.9 million of proceeds received from the sale of BC LCFS credits, which were awarded by the BC government for achieving milestones under the Renewable Diesel Project, Part 3 Agreement.
Now that the HDRD Complex is successfully commissioned, we will focus on reducing our debt and strengthening our financial position, as well as progressing our strong pipeline of renewable projects.
Due to the HDRD Complex delay, our second half 2023 corporate Adjusted EBITDA guidance is now expected to range between CAD 25 million-CAD 35 million... down from our previously disclosed CAD 35 million-CAD 45 million range. 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 to wrap things up.
Thanks, Ray. As mentioned, the launching of the HDRD Complex's commercial operation signifies a step change in the renewables business and more broadly for the Canadian energy transition. With that, I'll ask the operator to open the call to Q&A.
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. If you wish to cancel your request, please press the star followed by the two. If you're using a speakerphone, please lift your handset before pressing any keys. Your first question is from Nick Boychuk from National Bank Financial . Please ask your question.
Thanks, good afternoon, guys. For the HDRD facility, what needs to happen to safely increase production from 1,500 barrels per day to the 3,000 barrel per day run rate capacity? And how long do you think that process takes?
Thanks, Nick. It's Rob. There's nothing that's stopping us from doing it. We're just doing it in a methodical way. So the timing is a little uncertain, but we've already started to ramp things up a bit. You know, just going through the commissioning process, we've got some intermediate product that's filled up a couple of tanks, and so we want to drain those as we get our sales tanks starting to fill up. And so there's a little bit of give and take on how much we stream, about 10% of that, along with the feedstock in, so that'll take a little bit of time.
But as I say, it's under in the works right now. And then it's just sort of an incrementalism. We, we start dialing it up, as we, we feed off- gas into the hydrogen reactor. And, you know, it's sort of step-by-step, a little bit of an increase in the hydrogen, a little bit of an increase in the feedstock. But, yeah, it's in the works now. I just hesitate to give you any timing, but we'll, we'll let the market know when we're, when we're up to design capacity.
Okay. That's fair. On the renewable content, anything you can share in terms of how much you've already layered in and what you're thinking for the 2024 run rate? I know it's predominantly going to be the canola and virgin feedstocks for the time being, but how comfortable are you guys with some of the renewable sources and layering those in to get the better credits and stuff?
Yeah, we want to get to it as soon as we can. So it's a sort of yin and yang between our commercial group and in our, in our operations group. We've been pretty active getting everything lab tested. We've got a lab that we can look at all of the feedstock opportunities in. So we've already done that. We know what they look like. It's just a matter of when the ops team is comfortable with us feeding it in. So we are, we're pretty keen to get on it. But, yeah, there's lots of, lots of feedstock.
As I said, we're being the first to market is helpful in terms of feedstock. We're not competing with others right now. So, you know, we think we're going to be in the driver's seat, you know, once we get some of these other feeds, introduced.
Thanks. And then just the last for me on the debt repayment. It sounds as if for 2024 at least, that's going to be one of the top priorities for cash flow that comes off the HDRD facility. Can you just remind us what, what you're comfortable with in terms of a, a landing spot for where that, that leverage maybe exits in 2024? How much are you comfortable holding on this business right now?
Yeah, good question, Nick. I think overall, like we mentioned before, yeah, our top priority is to reduce leverage. I think from our point of view, we want to get down to at least our target of less than 1.5x net EBITDA, at least over the next 18 months. So, for 2024, I mean, we're still formulating in terms of what our CapEx program is going to be, as well as kind of our outlook. So you'll hear more of that, potentially too in Q1.
Got it. Thanks, and congrats on the posting, Rob.
Thanks.
Thank you. Your next question is from Cole Pereira from Stifel. Please ask your question.
Hi. Good morning, all. I understand you don't want to give an exact date on the ramp-up, but I mean, is it a matter of weeks, months, quarters? Like, high level, how should we kind of think about the process?
Yeah, weeks.
Okay, got it. And on the CapEx front, Ray, can you just give us some high-level ranges, how we should be thinking about growth, maintenance, and LCFS credits just for Q4?
For Q4? Yeah. In terms of overall spending wise, I think we have minimal maintenance capital that we expect overall, so probably less than CAD 2 million-CAD 3 million, I think. In terms of pricing for LCFS, we do have a marketing arrangement that we have with investment-grade counterparties, so it's tough for us to actually, you know, say the exact numbers, but.
Certainly, if you use kind of historical BC LCFS pricing and then, which just has ranged between CAD 450-CAD 500, as well as CFR credits, in kind of that CAD 100 range, that's probably the right way to think about at least from a pricing perspective in Q4.
Okay, got it. That's all for me. Thanks. I'll turn it back.
Thank you. Your next question is from Robert Catellier from CIBC Capital Markets. Please ask your question.
Hi. Congratulations on reaching the commercial operating status for the facility. I just wanted to ask a similar follow-up question on the capital side. I'm curious as to how much working capital you'll need as you ramp up to your full production from here.
Yeah, I mean, we already have. I think you can see in our inventory, on our balance sheet, we have canola that we've purchased. So we do have, you know, a stock of canola for processing into our HDRD facility. I think we should probably maintain that level of working capital, I think going forward. So in terms of any incremental, we don't see much beyond that.
Okay, thanks for that. And then, follow-up on the, on the CAD 10.2 million of incremental CapEx to complete the facility. I mean, that's understandable given the, the delays. How much of that is, already spent in Q3, and how much more is on the come in, Q4?
Yeah. So, we're forecasting potentially up to at least CAD 3 million- CAD 4 million for this quarter here for the incremental spend out of the CAD 10 million.
Okay. Sorry to have to have asked those modeling questions, but I'm just curious, as you you move from development and construction into production, what what type of lag do you anticipate in terms of monetizing the production credits from from the time you produce and sell to the actual monetization of the credit?
Yeah. So, for the HDRD facility, just based on our marketing arrangements, we get paid probably anywhere every week to every two weeks, I think, for the LCFS credits. And then for the CFR, once we receive them, and it's every quarter in terms of the generation, we would sell those thereafter, and then obviously the diesel, we'll sell it to the local market in Prince George. So, you know, it's, it's potentially every two weeks in terms of receiving cash there.
Okay, great. And last question from me. I wondered if you could give us an update on the process for moving the RNG project along through the regulatory process?
Sure. We're waiting on final approvals from the provincial regulator now. So, I think that we would anticipate weeks there, but then it will have... it does have some municipal approvals that need to follow that. So, to put a date on it, it would be foolish, given the sort of peculiar track record of the provincial governments so far. So, we're in the wait-and-see on that one.
Okay. Thanks, everyone.
Thanks, Rob.
Once again, please press star one should you wish to ask a question. Your next question is from Robert Kwan from RBC Capital Markets. Please ask your question.
Good morning. Guess I just wanted to ask, so I, I think it was clear, but I want to confirm it, right, just from your comments just around the Q4 guidance. But is there anything that's changed, whether it's the base business or the renewable diesel facility, just around that, long-term kind of corporate run rate guidance? I think it was CAD 100 million-CAD 155 million of EBITDA.
No, there isn't. And, and like, that's a good question that I had a couple other questions on that as well, too. I mean, there was probably no perfect timing to remove that run rate EBITDA guidance, but we just felt that it just made the most sense to do that at the commencement of commercial operations. I mean, the purpose of that run rate EBITDA was to signal to the market what that facility, that facility, you know, or the HDRD facility, is capable of generating, prior to being commissioned.
And, obviously, we show that, that CAD 90 million-CAD 150 million at 100% design capacity. Now that the facility is commissioned, we intend to provide Adjusted EBITDA guidance going forward. Obviously, we want to incorporate more realistic operating scenarios and, you know, obviously, post once we get a longer production history for the HDRD complex. But to be clear, the assumptions that we use to determine run-rate EBITDA for the HDRD is unchanged, so it's still CAD 90 million-CAD 150 million, assuming 100% uptime.
Got it. And just to kind of frame that, obviously, you're going to give us some updates, but Rob, you mentioned that the ramp-up is kind of in weeks. So generally speaking, that, that long-term run rate, at least based on what you said and what we know now, that's kind of a 2024 type figure. Is there anything else that we need to think about? Obviously, look, you've got to figure out how this thing runs, but that's not a bad starting point.
Yeah, I mean, that's our expectation. Sure.
And just the last, just a small thing around the quarter. There was a CAD 1.9 million realized gain you booked. I just wanted to know, was that a hedge, something that you physically produced in the quarter? Or was that something that you thought you were going to run through HDRD, and because it started up late, you got the benefit of the way commodity prices moved, and that really wasn't kind of in the base business?
Yeah, that, that's those are our financial hedges. And so, obviously, we were expecting this facility to start up in Q3 here. But we've had hedges all through this year. We're, we're about 50% hedged, 50% hedged for 2023, and then, 50% hedged for 2024. But that was, you know, part of the hedge on our feedstock for when we started up. But unfortunately, we just started up here recently, and that's more of a financial hedge roll-off.
Right. Okay, so the base business this quarter really did the CAD 14.5 million minus CAD 1.9 million. Is that the right way to think about it?
Yep.
Okay. Thank you very much.
Thank you. Your next question is from Trevor Reynolds, from Acumen Capital. Please ask your question.
Morning, guys. Just a question on the feedstock. Obviously very well positioned today, being the first commercial operation on stream. Just wanted to get your sense on how you see that changing over the coming years, and maybe just your views around that.
Sure. Thanks, Trevor. It continues to be the main focus or sort of one of our main focuses, the feedstock side specifically. You know, I think it will. I think the market will always adjust. But, for now, you know, we've got our pick of feedstocks. So it's a nice position to be in, not to have to be scrambling for it. But we've got, you know, a couple of years before we really see the bulk of new facilities coming on.
And frankly, even those, you know, we see more of those facilities dropping off than we do continuing on. So, I don't think we will be. We're not going to sit back and assume that those feedstocks will always be available, but we would like to continue to sort of dig in deeper on that side of the business pretty much as soon as we've reached capacity.
So our UCO business, as you know, we collect used cooking oil. We look to grow that side of the business, and we've got a whole lot of relationships on both the UCO and tallow side of the business. And we're looking forward to sort of deepening those relationships in the near term.
Good. Yeah, that's my only question. The rest has been answered. Thanks.
Thanks, Trevor.
Thank you. There are no further questions at this time. I will now hand the call back to Rob. Please go ahead.
Okay. Well, thanks, everyone, for joining us on the call, and please don't hesitate to reach out to me or, or the team if you've got any questions. Have a good morning.
Thank you. Ladies and gentlemen, this conference has now ended. Thank you all for joining. You may all disconnect.