Despite solid Q2 performance, Tidewater says subsidized US renewable diesel, overlapping policies fuel Q3 concerns

Tidewater Renewables announced Aug. 15 in its second-quarter financials that the company generated a record adjusted EBITDA of CAD$29.6 million (USD$21.6 million) during the three-month period, an increase of 17 percent from the previous quarter.

In addition, net cash provided by operating activities totaled CAD$32.5 million (USD$23.7 million) and the corporation generated record distributable cash flow of CAD$20.3 million (USD$14.8 million) in the second quarter.

Tidewater Renewables said its second-quarter results were driven by the improvements in throughput and reliability at the renewable diesel and renewable hydrogen complex (HDRD) at its Prince George refinery in British Columbia.

During the quarter, the HDRD complex averaged daily throughput of 2,925 barrels (122,850 gallons) per day, representing a 98 percent utilization rate.

Tidewater Renewables said it continued to make “meaningful progress” during the second quarter on the front-end engineering design (FEED) of its proposed 6,500-barrel-per-day (273,000-gallon-per-day) sustainable aviation fuel (SAF) project.

The SAF project remains subject to a final-investment decision, which is expected in 2025.

The company also announced in its second-quarter financials that the special committees and board of directors of both Tidewater Renewables and Tidewater Midstream have approved entering into a related party purchase and sale agreement in which Tidewater Midstream will acquire from Tidewater Renewables its canola coprocessing infrastructure, the fluid catalytic cracking coprocessing infrastructure, working interests in various other Prince George refinery units, and a natural-gas storage facility co-located at Tidewater Midstream’s Brazeau River complex.

Consideration for the transaction will consist of a cash payment by Tidewater Midstream of CAD$129.7 million (USD$94.7 million), and a commitment to purchase a minimum of CAD$80.7 million (USD$58.9 million) for BC LCFS credits, as they are produced by Tidewater Renewables, over the next nine months provided the HDRD complex continues to operate at over 90 percent utilization.

The proposed transaction is expected to close during the third quarter pending approvals.

The divestiture assets generated annual adjusted EBITDA of CAD$40 million to CAD$50 million (USD$29.2 million to USD$36.5 million) through previously contracted take-or-pay or operating agreements with Tidewater Midstream.

Upon close of the proposed transaction, the contracted take-or-pay and operating agreements will be terminated.

The corporation said it will use the net proceeds from the proposed transaction to repay amounts on its senior credit facility, which the company said will provide an immediate improvement to Tidewater Renewables’ liquidity issues and leverage profile and a reduction to cash-interest costs going forward. 

Tidewater Renewables also announced that it entered into a definitive purchase and sale agreement Aug. 14 for the sale of its used cooking oil (UCO) feedstock assets for CAD$10.5 million (USD$7.7 million), subject to certain adjustments prior to and following the closing of the transaction.

The sale is expected to close in September.

Net proceeds of this transaction will be used to repay outstanding debt balances.

Tidewater Renewables said its primary focus continues to be on maintaining a high and consistent utilization rate at the HDRD complex in Prince George.

The company expects the HDRD complex to exceed an average 2024 throughput of 2,550 barrels (107,100 gallons) per day.

It also expects to optimize the HDRD complex’s operating costs this year and progress the engineering design on its announced SAF project.

Tidewater Renewables also said that, in line with its objectives, the company expects to “execute a restrained 2024 capital program significantly offset by government funding.”

Its 2024 maintenance-capital expenditures are expected to be approximately CAD$4.4 million (USD$3.2 million).

On BC LCFS credit sales, the company forward sold credits during the first and second quarters at an average price of approximately CAD$450 (USD$328.37) per credit to various counterparties.

Towards the end of the second quarter, when the corporation approached numerous counterparties to contract BC LCFS credit sales for the third quarter, it was unable to secure any bids.

BC LCFS credit sales prices for July transactions reported by the British Columbian government in August confirmed that only two BC LCFS credit-sales transactions occurred at an average price of CAD$207 (USD$151.05) per credit.

“This sharp decline in BC LCFS credit prices is believed to be a function of large volumes of subsidized U.S. renewable diesel physically moving out of the oversupplied U.S. renewable fuel market and into the higher-value BC market,” Tidewater Renewables stated. “Aggravating the situation is, in management’s view, overlapping U.S. and Canadian low-carbon fuel policies [that] allow U.S. renewable diesel producers to take advantage of U.S. and state compliance credits, which are generated at the point of production, then import their volumes to Canada and generate BC LCFS emission credits at the point of sale.”

Tidewater Renewables said, in the long-term, it believes that the combination of supply/demand fundamentals forcing the shut-in of high-cost U.S. renewable fuel production, tightening California LCFS compliance obligations, and tightening BC LCFS compliance obligations is expected to ease the pressure on BC LCFS credit prices.

In addition, cold-weather diesel specifications are expected to limit physical imports of renewable diesel later this year and early next.

The company added that the current market situation, however, has created a liquidity issue for Tidewater Renewables.

“Tidewater Renewables relies heavily on revenue generated from environmental attributes such as the BC LCFS and Clean Fuel Regulations credits,” the company said. “The corporation has approached the BC government to discuss potential changes the government could make to the BC LCFS credit market in an attempt to improve liquidity and pricing stability for BC LCFS capital and operating emission credits. As the corporation had no forward sales contracted for BC LCFS credits expected to be generated from renewable diesel sales during the third quarter, management has been evaluating alternative liquidity sources for the corporation, including the proposed transaction (mentioned above), while the sector awaits a longer-term solution.”