Q1 2020 Earnings Call

2020 results conference call at this time all participants happened place then the listen only mode. The floor will be opened for your question. Following the prepared remarks, if he would like to ask a question at that time. Please press Star then one.

If at any point. Your question has been answered you may remove yourself from the Q by pressing the pound key when asking a question. We do ask that you. Please pick up your handset to allow optimal sound quality lastly should be required operator assistance Press Star then zero. It's now my pleasure to turn the call over.

Jennifer Waller director of financial reporting an Investor relations for opening remarks. Please go ahead ma'am.

Good morning, and thank you for joining us today.

Welcome to our first quarter 2020 earnings call.

With me today are Dan Borgen, our Chief Executive Officer, I'm outdoor Chief Financial Officer spreads Sanders, our Chief commercial officer, Josh Ruble, 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 the three months ended March 31st 2020.

If you would like a copy of the press release, you can find want our web site at U.S.P. partners Dotcom.

Before you can see 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.

So please note that information presented on today's call speaks only as of today may seven 2020.

Any time sensitive information provided may no longer be accurate at the time of any webcast replay or reading of the transfer.

Finally, today's call will include discussion of non-GAAP financial measures.

The last night's press release for reconciliations to the most comparable GAAP financial measure and with that I'll turn the call over to dashboard and.

Thank you Jennifer good morning, everybody. Thanks for joining the call today I hope everyone is staying safe.

In these challenging times.

Let me say a quick thank you to our U.S. de team.

Oh really proud of the way that we have continued to work can be focused during this challenging.

Challenging time and and I.

I can tell you as an investor you can be proud of the team that we have.

And hard work that they're putting yet.

Yeah difficult conditions. So thanks to the rest teaching for all the hard effort and work here.

First quarter was good corporate partnership terminals continue to perform well under our long term secretary contract.

We have referenced before our strong contract structure and counterparty credit profile continue to provide the foundation.

Our business and predictable cash flows which are so important during these times.

Being said during the first quarter, we made the difficult decision.

Sure proactively strengthen our balance sheet by reducing.

Our quarterly distribution in order to divert free cash flow sports enhancing our liquidity position for future growth.

Given the uncertainty in the energy industry. We believe this is a prudent initiative, which will enhance long term value for our unitholders.

We believe this decision will enhance the partnership balance sheet and liquidity position, providing a strong base to weather the current downturn.

We remain excited about the contract renewals that we announced in December of last year at the Partnership's harder Street, and Stroud terminals as well as our sponsored recently announced joint venture with Gibson energy.

As a reminder of the joint venture with Gibson was created to build a genuine recovery unit, where do you are you at hardesty, which will create long term sustainable takeaway solutions, where the industry and enhance the castle profile of the partnership.

We've broken ground on the de argued project and we expect it will be placed into service in the second quarter 2021.

Do you are you is underpinned by long term contract with Conoco Phillips, which wants the D or you as Phil will be extended to 2031.

Well. The do you are you project is that the sponsor the longer term contracts at the D.R. you benefit the partnership because those contracts are matched up with a terminaling services agreement.

Partnerships Hardisty terminal and therefore will be elongated on the same term.

In addition, we have broken ground on our new destination terminals and Port Arthur Texas.

For the drooping that will be transloaded at our hardesty origination term.

We are currently in active discussions with existing and new customers hardesty to secure additional long term take or pay agreements to support future expansions have to be are you.

Adam is going to start us off with an update on the partnership's lightest financial results and our liquidity position.

I will jump back into the recent marking a commercial do about.

Adam.

Uh huh.

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

Yesterday afternoon, we issued our first quarter 2020 results, which included the details of our operating and financial results for the quarter.

We plan to ensure our first quarter 10-Q with additional details after close of market today.

For the first quarter, we reported net loss of 33.8 million.

Net cash provided by operating activities of 11.7 billion adjusted EBITDA of 12.3 million and distributable cash flow of 9.9 month.

The net losses, primarily due to a noncash impairment of the partnership's goodwill associated with the cash for tramadol, resulting from the overall downturn in the crude oil market and the decline in the demand for petroleum products.

In addition, we also reported noncash loss associated with the five year interest rate derivative instruments at the partnership entered into in November 2017.

The partnership's operating results for the first quarter 2020.

Due to the same quarter in 2019 are primarily influenced by higher revenue at our Hardisty terminal due to increased rates on a portion of the treasury services agreements that became effective July one 2019.

In addition, the partnership experienced higher revenue during the quarter associated contracted three pets that exceeded the partnership's existing capacity at Hardisty terminal.

Furthermore, in the third quarter 2018, the partnership entered into a Terminix services agreements with RC selfishly owned by the partnership sponsor to provide troubling services contracted throughput that exceeded the hardest your troubles translating capacity.

Yes arrangement the partnership incurred operating costs payable to our sponsor representing the same rate on a per barrel basis.

Partnership received in revenue for such contracted throughput.

No revenue its partnerships Casper terminal, resulting from the conclusion of the customer agreement in August 2019, partially offset the higher revenue hardisty during the quarter.

Net income for the quarter decreased as compared to the first quarter 2018, primarily as a result at the operating factors previously discussed.

The decrease was partially offset by lower interest expense incurred resulting from lower interest rates during the quarter, which were also partially offset by higher weighted average balance of debt outstanding in the first quarter.

Net cash provided by operating activities for the quarter increased by 15% relative to the first quarter 2000 Nike.

Primarily due to the general timing of receipts and payments of accounts receivable accounts payable and deferred revenue balances.

Adjusted EBITDA and DCF increased by seven and 17% respectively for the quarter relative to the first quarter 2019.

The increase adjusted EBITDA was primarily result of the operating factors are discussed.

DCF was also impacted by decrease in cash paid for interest during the quarter.

As of March 31st the partnership and approximately $5 million unrestricted cash and cash equivalents undrawn borrowing capacity, but I didn't 61 man on $385 million senior secured credit facility.

Yeah, I get to the partnerships continue compliance with financial covenants.

Pursuant to the terms of the partnership's credit agreements. The partnership borrowing capacity is currently limit to four and a half times trailing 12 months consolidated EBITDA as defined in the credit agreement.

The partnership which in compliance with its financial covenants as at March 31st.

On April 23rd the partnership declared a quarterly cash distribution of 11 cents per unit.

The 44 cents per unit on annualized basis, representing a 70% decrease.

From the park water distribution distribution is payable on may 15th to unit holders of record at the close of business on basis.

As Dan mentioned, given the current uncertainty in the energy industry. The board of directors made a proactive decision to strengthen the partnership's financial position by reducing its quarterly distribution redeploying free cash flow towards paying down debt.

Decision to reduce the quarterly distribution was not written by any material deterioration that performance you. The partnership underlying business rather represents a conscious effort to enhance long term value by proactively strikes me the partnership's balance sheet.

We estimate this reduction will free up approximately $20 million to $25 million free cash flow per year, which we intend to use to opportunistically de lever.

Management will continue to monitor its financial condition operations customers and workforce intends to continue to a set just liquidity position and distribution policy over time.

That I would now like turn the call back over there.

Thank you Adam now ask Brad to give us a quick commercial update regarding they western Canada select market.

And the impact of recent market events our assets Brad.

Thank you Dan we are definitely an unprecedented times and an unprecedented challenges for customers primarily.

Our producing in refining customers at a high level.

The the pandemic induced economic slowdown this call's refineries to reduce their throughputs by approximately 30 pot I'm, sorry, 30%, which is.

A historically low run rate level of approximately 70%.

This was done.

Two.

In attempt to balance their outputs relative to declining demand primarily gasoline jet.

Most recent data shows gasoline demand is down 44% year on year.

And jets, 70%, so the challenges or material in response to that all producers, including Canadian producers have been challenge to find new sources of demand and door.

Rationalize their supply to match the decline in refinery Throughputs.

Actively they have accomplished both inventories or.

Looking at rates in two levels never seen before.

In production has been temporarily shut in.

Up to levels approaching tuna half million barrels a day between the U.S. in Canada.

And I say temporary shut in because that is effectively the wave producer participates in contango storage just the value in the future.

It is worth more than its to their benefit to two stores accrued in the ground.

So these are very uncertain times and most folks are hunkered down waiting for.

Greater clarity of outcome.

Decide.

Where they want to prioritize next steps.

Fortunately for the partnership.

And as Dan mentioned, our core business is sound and our customer profile strong.

As a reminder contract structure consists primarily of multiyear take or pay contracts with minimal multi commitment fees.

Or customers include major integrated oil companies refiners and mark or do.

All of which the majority are investment grade rated so the partnership's turn terminals continued to perform well under our long term take or pay contracts.

Additionally, though during these times on certain uncertainty and and working with our current and new customers.

We've also found ways to create incremental new value.

At our assets. An example of is that CCR since you've heard on previous calls Weve invested.

To support what we think Oh is a strong.

<unk> value proposition by improving our connectivity CCR and creating what we call.

Strategy.

And during these periods, we've had an opportunity to store stage and redistribute crude both sweet and sour.

With shippers on express with refiners in Salt Lake.

And with refiners and and mid continent. So we've we've had an opportunity to test.

This hub value proposition and it's it's Oh performed well this will also service while.

Later this summer win win Enbridge.

Increases their capacity on their express pipeline.

Which is an export pipeline out of hardisty.

That will export crude directly into Casper and rely on our.

And our connectivity Casper to create a distribution solutions for that incremental volume, which we estimate to be somewhere between 25 and 30000 barrels with it. So we look forward to working with Enbridge and making that reality.

Another example is is that our Strauss facility and I'll remind folks on the phone that are Strauss facility is connected to the Cushing terminal in Oklahoma.

Which is the largest above ground storage facility in the world.

And where most of the oil seeks to.

To get to score storage purposes, we've been working with our current customer.

To help them maximize their value.

At that asset by providing through put options for them that include sweet crude not just sour crudes, so as crude production competes for.

Contango and Stuart's opportunities.

Our desire to get to Cushing intensifies, and we're providing a solution to make that happen. So.

So lots of new stuff clever stuff being down to two tried to maximize the value with our customers.

And create new value and do customers.

As it relates to activities at the parent Oh, Dan mentioned that we've broken ground at the D.R. you, we've broken ground that are destination terminal.

Yes, the port Arthur I, just want to to reiterate his point that we are in.

Advanced discussions during these periods and times during these uncertain Kurt sometimes.

To expand that facility, both at the D or you and that.

Port Arthur So we're excited about that and that's really a tribute to the merits of the de are you.

<unk> cost savings and value enhancement standpoint so.

I'm more excited about.

Our ability to continue to grow that asset.

Finally, I wanted to just comment on our core asset in the Houston ship channel and start with reminding the folks on the phone that that.

We have existing core activities, there the storage and handling of railcars in the disposal.

Of dredge spoils in during these difficult times, we've actually been able to grow our cash flows and returns that are so we're excited about that.

But secondly, and more importantly, this was as I said or is there a demand led to that that has caused the turmoil in the uncertainty that we're in today it will likely be a demand led to that.

That returns us to normal.

That is evident by the fact that we continue to.

Advanced discussions with multiple parties.

Specifically around.

Export opportunities, both rail and by water.

Oh products that will lead this return to normalcy things like gasoline things like diesel things like.

Oh jet and things like Ngls so.

It it it's simply substantiates the value proposition the opportunity Oh.

Texas deepwater its position in the Houston check ship channel and its ability to service.

Refiners in there and in NGL companies and their needs to to export the products internationally to where the demand growth wise. So.

Tough times, but we stay very very busy as David mentioned and and we look forward to.

Returned to normal looks like because we're confident that we've already seen as an example.

Oh improvements in gasoline demand a month on month up to 10% to 15% so.

As folks start reengaging back into the economy, we expect to see the pace. So you can get more to normal thing.

Two.

Accelerated as well.

So all I had Dan thank you.

Thanks, Brad appreciate that.

To echo a bit of what Brad said the.

We do remain extremely busy and focused on creating a cash flow with our with our foundation principles of strong counterparties take or pay fee based agreements.

To create both cash flow and.

Long term value.

So we're very busy with that continue to do that in our blessed to be able to have the quality of customers and engagement with future customers that meet that.

We continue to to work hard on our D.R., you and I and bringing that with our strong partner.

Gibson energy.

Couldn't ask for a better partner and Gibson.

We really work well together and not have a common focus on on bringing.

This project to bear and should be.

A very useful mode of transportation men and new product type that meets both safe rail safer rail transportation as well as meeting I better netback for customers.

We've historically always been able to manage through this downturn.

And other downturns.

In business and long time, we've learned we learned something to every downturn down cycle, but the industry goes through we've been able to grow to those and I have no doubt that we expect the same here to continue to grow based upon our conservative principles on.

And how we work with our customers to continue to grow projects that make sense for them.

And therefore their investment in the projects from take or pay perspective.

We'll continue to keep you updated and look forward to the additional announcements regarding our Ah D. R. U progress in the future. We many exciting things to talk about as we bring on additional.

Customers to that.

And with that you know I think that we look forward to the.

The end to coming sooner of this down cycle, we see a stronger demand on coming back on as states are turning back on the to their first year of the economy, we'll call it.

And seeing more consumption and leading to should start leading to inventory draws of refined product and then a greater refinery runs and then a greater call on on crude.

So with that thanks again, thanks for all the support thanks for the the kind notes of support from investors are all over and we appreciate you taking the time to be on the call today.

So again.

Once again, we'd like to thank you for participating on today's conference call you may now disconnect.

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