Q3 2019 Earnings Call

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It is now my pleasure to turn the call over to Jennifer Waller Associate director of financial reporting an Investor relations for opening remarks. Please go ahead.

Thank you good morning, and thank you for joining US welcome to our third quarter 2019 earnings call with me today are Danville, Oregon, Our Chief Executive Officer, Adam outside our Chief Financial Officer.

Sanders, our chief commercial officer, Josh Ruple, our Chief operating officer as well as several other members of our senior management team.

Yesterday evening, we issued a press release announcing results for this three and nine months ended September 30th 2019.

If you would like a copy of the press release, you can find one on our website at U.S.D. partners Dot com.

Proceed. Please note that the safe Harbor disclosure statement regarding forward looking statements in last Night's press release applies to the statements of management on this call.

Also please note that information presented on today's call speaks only as of today November 7th 2019.

Any time sensitive information provided may no longer be accurate at the time of any web cast replay or reading of the transcript.

Finally, today's call will include discussion of Noncat financial measures. Please see last night's press release for reconciliations to the most comparable GAAP financial measures and with that I would like to turn the call over to Dan Borgen.

Like Jennifer good morning, everybody.

You know Mccall with us today.

You sent out another positive quarter partnership 18th consecutive quarter distribution.

Which is inconsistent with our previously stated 2019 distribution gardens.

Sided to see the higher rates are which.

Good majority workout clothes.

Terminal and those take effect this poor.

With the new higher rates are distribution coverage for the third quarter was approximately 1.04.

As we have mentioned all previous calls we continue to work with all remaining customer and hardesty and Stroud on renewing and extending its commitments.

Which come do and 2020.

Given the current lack of infrastructure supporting egress out of Western Canada, we continue to be optimistic about our recontracting efforts and our ability to create long term sustainable solutions.

Do you want recover units or D.R.U.

For our customers.

We look forward to reporting more on the continued momentum.

From these recontracting efforts and the D. are you in the near future.

We do feel very confident working with our good partner Gibson's.

Hardesty that we're nearing completion of the commercials stage.

And we look forward to talking more about that as a reminder, that is upstairs at the parent.

That means to the partnership is a long gated revenues of 10 plus years by in through the partnership on an exclusive relationship to the D. or you and it's real support.

Adam is now going to start us off with an update on the partnerships latest financial results in our liquidity position then we'll jump back into a recent marketing commercial developments with Brad.

Adam go ahead.

Thank you Dan and thank you for joining us on the call. This morning.

Yesterday afternoon, we issued our third quarter 2019 earnings release, which included the details of our operating in financial results for the quarter.

Plan to ensure our third quarter 10, q. with additional details sometime in the next few days.

For the third quarter, we reported net income of $2.1 million net cash provided by operating activities 14.6 million adjusted EBITDA 14 million industrial cash flow of 10.5 million.

The partnership results during the third quarter relative to the same quarter in 2018 were primarily influenced by higher revenue and it's harder to terminal as a result of higher rates on a portion of the terminally services agreements that became effective July one 2019, resulting from the partnership successful Recontracting efforts.

In addition, the partnership experience higher revenue during the quarter associated with contracted throughput that exceeded the partnerships existing capacity at Atari terminal.

The partnership entered into a terminally services agreement with the hardest yourself facility owned by our sponsor.

Terminalling services for the contracted throughput that exceeded the hardest terminals transloading capacity.

Under this arrangement the partnership in current operating costs payable to our sponsor at the same rate on a per barrel bases that the partnership is receiving from his customer.

Low revenue at the gas for terminal, resulting from the conclusion of a customer or customer agreements at the end of 2018 and in August of 2019, offset the higher revenue <unk> during the quarter.

Net income for the quarter decrease as compared to the third quarter of 2018, primarily as a result of the operating factors already discussed.

Coupled with the noncash loss associated with the five your interest rate derivative instrument, but the partnership entered into in November 2017.

Slightly higher interest expense incurred resulting from higher interest rates as well as high as I hire weighted average balance of debt outstanding and the third quarter of 2019.

Neck as provided by operating activities for the <unk> the quarter increased by 16% relative to the third quarter of 2018, primarily due to the higher rates at hardest day already mentioned.

Said by the conclusion of customer agreements at the partnerships Caspar terminal at the end of 2018 in August of 19.

Cash flows were also affected by the general timing of receipts and payments have accounts receivable accounts payable in deferred revenue balances.

As soon as of September 30th the partnership that net leverage a 3.7 times.

L.T.M. adjusted even based on its financial covenants and.

And available liquidity of approximate $176 million.

Quitting approximately $7 million unrestricted cash in cash equivalent as an undrawn boring capacity by 169 million on a senior secured credit facility subject to continue compliance with financial covenants.

Pursuant to the terms of the partnerships credit agreement the partnerships borrowing capacity is currently limited to 4.5 times, it's trailing 12 month consolidated even <unk> as defined in the credit agreement.

As of September 30th the partnership was in compliance with its financial governance.

On October 24th the partnership declared a quarterly cast distribution of 36, and three quarters cents per unit or one dollar and 47 cents per unit on an annualized basis, which represents growth of 0.7% over the prior quarter and 2.8% over the third quarter of 2018.

Distribution is payable on November 14th to unit holders of record at the close of business on November 4th.

As Dan mentioned, we were pleased to announce or 18 consecutive quarterly distribution increases quarter, which is consistent with our previously stated 2019 distribution gods.

Distribution coverage for the quarter was approximately one point o. four.

As a quick update we continue to move forward with our previously announced organic growth project to construct and outbound pipeline connection to Casper and expect completion within the next several weeks.

Once completed we believe the connection will increase the terminals access to additional pipeline networks and refineries ultimately enhancing the sustainability caspers cash flows.

Dana Brad we'll talk more about the exciting developments round Casper and the potential growth associated with that new connection.

That I would now extending the call back over to Dan.

Thank you out appreciate a.

Good results or.

<unk> I'll turn it over you to give us a a a quick commercial update on.

Going on you.

You bet. So we've got two significant events in the Canadian market here recently that are worth talking about first was the unfortunate incident late last week with with the pipeline leak in North Dakota that pipeline remains shut down the Keystone line is one of.

Three major export.

Pipelines for or Canadian producers.

Just yesterday, they've they were asked by the state <unk> to remain shut down until they can provide a restart and return to service plan that's acceptable.

As a reminder, the capacity of this line.

Excuse me is 590000.

Barrels a day that's materials significant.

Two things will happen because of this will begin to see production back up in in Canada prices will reflect that they will discount to incense stored so our expectation is will start to see.

Inventories grow in Canada, and then secondly of course prices will discount to ensure a rail eat grass to maximize rarely eat grass. Prior to this event spreads between hardesty in Houston for Canadian heavy.

We're trading somewhere between 11 and $12 currently there at 19 to $20. So our expectations are that that our facility all facilities will see enough to go in and through put an activity.

The second material that involves the curtailment plan Buddy Alberta government as a reminder, current production levels as part of the <unk> plan in Canada, or approximately 3.8 million barrels a day.

That then solves to a curtailment level of approximately 75 to 100000 barrels a day.

Alberta government recently announce a special production allowance.

Whereby beginning with the December 2000 in 19 production month producers will be allowed to produce above their curtailment order as long as this extra production is shipped out of Alberta through additional rail capacity.

So the this event in the the incentives associated with this affective curtailment credit as a function of rail eat grass and.

The event with the Keystone pipeline. Both of these are are creating maximum demand for rarely grass so lots of of.

Challenges on a go forward base is based on that.

Commercially as we previously discuss in July 2019, the partnership renewed approximately 15, 15% of its capacity at the hardest Steve <unk> terminal for a multi year extension with one of its investment grade customers.

We continue to work with basically our remaining strategic customer to renew and extend the balance of the slots at heart as soon as Stroud.

Which come due in February in July of 2020.

We've made significant progress and when we look forward to reporting more on this in the future.

Finally, as we've previously discuss our sponsor executed a multi year take or pay Terminalling service agreement with the Alberta Petroleum marketing Commission or A.P.M.C., which is an agent of the government of Alberta, New agreement is for translating capacity at the hardest <unk> terminal.

Hurting in January 2020.

It supports our further growth that U.S.D. jeez hard to see south expansion and we'll be funded by our sponsor pursuant to its development rights at the hardest do terminal.

The Alberta government is currently in the process of divesting this commitment to the private sector.

Our expectation.

Was is that we will here.

Exactly how they plan to do that in who they plan to do that with.

We thought this week, but soon for sure given the January start.

On some of these most of these commitments.

Sooner than later would be helpful necessary needed given the the normal scheduling process.

So we we.

We look forward to hearing what those answers are we don't expect any kind of of economic impact to our current deal with the hey, P.M.C. or the upper to government.

Caspar, let's move on to that Dan or Adam and mentioned that were in the final stages of completion of our pipeline project, which.

Which creates advantage connectivity in effectively establishes a C.C.R.'s a hub to support.

The refining sector primarily.

In the Montana, Wyoming, Utah, Colorado regions. So we're excited about that additionally, ambridge announce a program to Incruse increase the capacity of their express pipeline.

By up to an additional 50000 barrels a day with the use of a drag reducing agent and incremental pomp capacity.

[noise], that's expected to be in service and Q1 of 2020, and we we anticipate that.

Jordi of this volume will be looking for solutions at C.C.R.. So as we learn more will be happy to to update folks obviously, given the current market conditions I just went over at a high level that should also drive demand for express E. <unk>.

Yes, and C.C.R. rail take away.

Given the Keystone and and other issues up in Canada.

Alright. Thanks can you give us a quick update on what all we've got going on at the the key things at the parent place yeah. So with our our Houston ship channel property are Texas deep water.

Up or do we call it.

T. D.W.P., we've worked really hard to create advantage crude connectivity options. We are effectively done on that and given that we're leveraging knows.

Activity.

Options in current kinetic Canadian heavy macro story that I just went over with.

The the group here to commercialize, Texas deep water as a heavy crude destination. So.

As an example, eight P.M.C., they're about to commercialize 120000 barrels a day of crude by row.

Eat grass origin out of Canada, well all of that eat grass origin barrels have to find a destination.

So given our developments from a connectivity standpoint.

Connected with the heavy hub in the Houston ship channel and we feel really good about our ability to commercialize, Texas deep water and create a solution not only for our producer customers, but over finer customers here in the Houston ship channel.

<unk>, we have position ourself <unk>.

At Texas, <unk> clean products.

For blending storage rail and waterborne transport.

So that one of the the critical edge is that we provide is is the rail eat grass option.

As we know Mexico, and we'll talk a little bit about Mexico, but Mexico in particular is a big consumer of U.S. export it like products and rail places significant role in that so we're we're excited about our ability to meet.

The options of not just waterborne, but rail as well as a as blending and storage. We're doing the same in the in jail space for the same macro reasons in jails have the same challenges that like products do that crude.

Does that Peck cams do so we're we're excited about the opportunities that are in that space and let me say this we're in advance discussions in in some cases advance negotiations in creating solutions and each one of these.

So we are very much looking forward to to the time that we can share specifics about the progress we're making in that area.

As it relates to Mexico are pretty focus we're focused on the three assets that we own we own one at a kid Toto wanted <unk> right outside a chihuahua.

In one it's a lie and all three of these are up and running.

We're purpose to about a one running them well into incrementally growing those and we're excited about that finally or secondarily. We then one to leverage not only those assets in those learnings, but partner with the railroads in those critical customers to.

Do grow into very purposeful way, new terminals terminals that that fit a network that makes sense for the Mexico market demand and finally, we want to leverage that with our Texas deep water position that I've referenced here and and.

Given the the export nature of of the Houston ship channel and given the import nature, Mexico. We think we're uniquely positioned to take full advantage of that.

Dan you mentioned, the D. or you and and as you mentioned, we continue to work with our partners on the D. or you value proposition and look forward to reporting more on that.

In the near future as well.

Great I appreciate that so with that I'll go ahead and move to to closing comments or contact our contract renewal discussions at hardesty and strata been very successful today.

As a reminder, we've contract at 100 per cent of our capacity it harder see through June 2020, and we continue to be actively engaged with the strout customer who represents the balance of our renewals.

As we have previously discussed we have several operating Castro projects at the sponsors sponsor today that could be possible drop down candidates for the partnership in the future.

But we also fully knowledge of challenges D.M.L.P. market faces today.

Our commitment is to always Ah look to do what is best for our public shareholders and create additional values, where we can.

Will continue to keep you updated and look forward to additional D.R.U. announcements as I mentioned earlier and as you heard Brad say we are.

Excited about that we are extremely confident about nearing completion of that working closely with our partner at Gibson's.

Two developed by state of the art facility that will offer unique.

Opportunities for customers to clear a safer nonhazardous non flammable Barrow from Canada.

Various markets in the U.S. heavy markets in the U.S. and as you heard Brad say, we always look to develop our network to meet the needs of our customers, whether it be heavy or whether it be a blended barrel, whether it'd be a light sweet barrel, whether B.A.I. liquids.

We always look to connect both create profit centers at the individual terminals, but also look to uniquely provide a network opportunity to optimize is the movement for our customers and and our railroad partners. In addition to that being able to Dan leverage that into distribution out of the Gulf.

Into Mexico, and fully utilizing those terminals for refined products.

As we continue to expand their.

So with that I will wind up to call say, thank you very much. Thank you for your patients.

We continue to make our distributions.

We've continued to exceed the Larry and index.

And we look for to sharing other very positive news with you in the very near term. Thank you again and have a great weekend.

Thank you ladies and gentlemen is completed today's conference call. Thank you for participating he may not just kidding.