Q2 2020 USD Partners LP Earnings Call

[music], ladies and gentlemen, thank you for standing by welcome to the U.S.P. Partners LP second quarter 2020.

He results conference call.

At this time, all participants have been placed in a listen only mode.

The board will be open for questions following the prepared remarks.

Mike asked the question at that time Press Star one on your telephone keypad.

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It is now my pleasure to turn the call a richer for Waller director of financial reporting an investor relations for opening remarks. Please go ahead.

Thank you.

Morning, and thank you for joining us.

Welcome to our second quarter 2020 earnings call.

With me today, our Dan Borgen, our Chief Executive Officer, Adams Outdoor Chief Financial Officer, Bad Sanders, our Chief commercial officer as well several other members of our senior management team.

Yesterday evening, we issued a press release announcing results for the three and six months ended June Thirtyth 2020.

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

Before we 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 the information presented on today's call speak only as of today August six 2020.

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

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

Please see last night's press release for reconciliations to the most comparable GAAP financial measures and with that I'll turn the call over to damp Oregon.

Thank you Jennifer and good morning, everyone.

Thanks for joining the call today and as always we appreciate your support and we hope everyone is staying healthy and sites during these challenging times.

Second quarter was another solid quarter for the partnership channels continue to perform well under our long term take or pay contracts.

We've referenced in previous calls our strong contract structure and counterparty credit profile continued to provide the foundation for our business.

We continue to generate a significant amount of free cash flow in our business.

Last quarter the board of directors made the proactive decision to strengthen the partnership's financial position.

Reducing its quarterly distribution and redeploying certain free cash flow to pay down debt and enhance our liquidity position.

And during the second quarter, we did just that.

The partnership paid down 6 million on our revolver, which is consistent with our intent to de lever My 20 to 25 million on an annual basis.

As we have previously stated the decision to reduce the distribution was not driven by any material deterioration in the performance or the partnership's underlying business.

Rather represents a conscious effort to enhance long term value for unitholders.

Also we continue to be excited about our sponsors previously announced deal you want recovery units were de are you project, which we expect will be placed into service in the second quarter 2021.

The partnership sponsor has secured the necessary financing.

Obtained all material permits and entered into fixed price construction contracts regarding the construction project.

In addition, we're currently in discussions with existing and new customers at Hardisty to secure additional long term take or pay agreements to support future expansions at the de are you.

As a reminder, while the D or you project is out the sponsor the longer term contracts at the D or you benefit the partnership because those contracts will be matched up with the Terminaling services agreement at the Partnership's Hardisty terminal.

Upon successful construction completion of the D or you approximately 32% of you get partnerships Hardisty terminal capacity will be automatically extended on a long term committed agreement through mid 2031.

Additionally, U.S. DNR partner Gibson.

And meaningful commercial discussions with other potential producer and refiner customers to secure additional long term take or pay agreements to support future expansions.

Capacity at the D or you and extend the associated contracted cash flows at the partnership's hard to see asset.

The de are you is also critical part of our sustainability and yes, She initiative, which remain a key focus of our business as we continue to deliver innovative solutions for our customers.

As a reminder, good drew bid.

That our customers intend to transport in the future does not fall under U.S., the OTI hazardous materials regulation, nor Canada's transport of dangerous goods regulations, and therefore can be documented for rail shipments as a non regulated commodity.

We look forward to update in the market about the progress of our de are you project over the next several months as we expected. The are you do have in material impact on the long term sustainability of our business and specifically our long term operating cash flows.

No I'm just gonna starts off with an update on the partnership's latest financial results in our liquidity position.

Then we'll jump back on and talk about recent marketing commercial developments with Brett centers. Adam. Please go ahead.

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

Yesterday afternoon, we issued our second quarter 2020 results.

Which included the details of our operating and financial results for the quarter.

And it's short second quarter 10-Q, with additional details I suppose market today.

For the second quarter, we reported net income of 1.2 million net cash provided by operating activity to 5.4 million adjusted EBITDA of 12.8 million distributable cash flow of 9.79.

The partnership's operating results for the second quarter 2020 relative to the same quarter in 2018, primarily influenced by higher revenue at its hardisty terminal associated with contracted three sets of exceeded the partnership existing capacity, it's probably see terminal and increased rates on a portion of the Terminaling services agreement that became effective lifers to tease out Tonight.

Okay.

Additionally, in the third quarter 2019 partnership entered into a Terminaling services agreement Argosy Sioux Falls facility owned by the partnership sponsor.

Provide terminaling services for the contracted three sets that exceeded the hardisty terminal synthetic default.

Under this arrangement partnership occurred operating cost payable to the partnership sponsor.

Presenting the same rate on a per barrel basis at the partnership achieving revenue for such contracted throughput.

Lower revenue at the Partnership's Casper terminal, resulting from the conclusion of the customer agreements in August 2019, partially offset the higher revenue harvesting during the quarter.

Net income for the quarter increased as compared to the second quarter 2019, primarily as a result at the operating factors already discussed.

Coupled with the lower interest expense incurred.

I think from lower interest rates during the quarter.

Partially offset by higher weighted average balances debt outstanding.

Quarter of 2020.

The partnership also had a smaller non cash losses associated with our five year interest rate derivative instruments at the partnership entered into in November 2017.

These increases in net income were partially offset by higher foreign currency transaction losses.

Net cash provided by operating activities for the quarter decreased about 42% relative to the second quarter 2018, primarily due to the general timing have receipts and payments and accounts receivable accounts payable deferred revenue balances.

Adjusted EBITDA and distributable cash flow increased by five and 10% respectively for the quarter relative to second quarter 2019.

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

DCF was also impacted by decrease in cash paid for interest income taxes during the course.

As of June Thirtyth, the partnership at approximately 3 million of unrestricted cash and cash equivalents undrawn borrowing capacity of 167 million on a $385 million senior secured credit facility.

To the partners continue to Blodgett financial covenants.

Pursuant to the terms of the patent she started agreement partnerships borrowing capacity is currently limited to 4.5 times, it's trailing 12 month consolidated EBITDA as defined in the credit agreement.

That's actually partnerships available borrowings under the senior secured credit facility, including unrestricted cash cash equivalents and approximately 29 billion as of June Thirtyth.

In addition, the partnership was in compliance with its name for cabinets as of June Thirtyth.

On July 23rd the partnership declared a quarterly cash distribution of approximately 11 cents per units were approximately 44 cents per unit on an annualized basis.

Same amount that's distributed in the prior quarter.

The distribution is payable on August 14th to unit holders of record at the close of business on all the sport.

I will conclude my comments would do you notable items from the quarter.

First as Dan mentioned, the partnership's terminals continued to perform well above our long term take or pay contracts. We continue to generate a significant amount of free cash flow as evidenced by a strong distributable cash flow coverage of over three times, we point out during the quarter.

During the second quarter, Unfortunately about $6 million on its revolving credit facility.

Inline with our previous guidance regarding our ability to de lever.

Actually 20 to 25 million on annualized basis.

In addition, since the end of second quarter of a partnership pay down an additional $3 million a dead and this piece will obviously show up in our third quarter disclosures along with any additional payments we make during the quarter.

In short we're excited about the future in are happy to see our efforts to strengthen our balance sheet bearing fruit. We continue to believe our efforts will enhance long term value for all of our stakeholders.

With that I'll turn the call back over to Dan.

Thank you Adam for the positive report appreciate it I will turn to Brad Sanderson, let him give us a commercial up that right.

Yeah. Thank you Dan appreciate I'll start with an update on cobot, 19, and and its implications to the Canadian market.

As has been well documented demands for war and the prices of crude oil decreased late in the first quarter and into the second quarter of 2020 as a result of the cope with 19 and dynamic.

Early on in a that period overall demand was estimated to be down by as much as 50% the slower demand led to obviously lower prices.

And then the eventual decision by producers to shut in production and its estimated today that approximately 2 million barrels a day, it's been shut in U.S. a million barrels a day in Canada.

[noise] recently however.

For us to reopen economy has led to increases in demand.

Which has resulted in modest recovery in crude oil prices current prices for W. Two higher or approximately $43 a barrel.

Yea reports that gasoline demand is down year on year now only 9%.

It's material but.

Quite an improvement from where we were initially diesel demand down approximately 9% and the laggard judge is still down approximately 43% as folks are good.

A careful not to get back on airplanes fly given this improvement a price.

Starting in late two Q.

Do Susan Canada, and U.S. began the process of bringing back temporary shut in production from the first quarter 2020.

And that stayed at their intentions to continue to do so through the balance of the year.

Our expectations are that this increase in supply will drive the need for CBR.

Well export or crude by rail export capacity from our.

Terminals in the discussions that we have with our customers indicate confirm the growing need for.

<unk> crude take away solution again, starting in late Threeq to Fourq you time frame.

Now I'd like to move to an update on current market and current market outlook.

Currently the prices are in Canada have strengthened relative to the.

You esmark or west, Texas intermediate or W.P.I.

Oh, the narrowing of.

The the.

Vcs two W. <unk> crude oil spread as a direct result of the supply rationalization mentioned previously.

Because that rationalization grades that balance excuse me a balanced market between supply supply and pipeline takeaway capacity so spreads today between Canadian heavy in Hardisty.

In Canadian heavy in.

In Houston effectively reflect the cost of pipeline transportation again.

Rationalization drove supply into.

Hey level Oh.

Oh volume equal to <unk>.

Pipeline take away and that's what drove those prices.

Accordingly, a portion of levels decrease during the second quarter's and and movements by rail decline.

As.

Mentioned previously, though given the recent movement by producers production.

Apportionment levels have started to increase again, starting in July we've seen some some portion of the movement higher.

And this is an indication that the market now is moving back to where it was pretty cope <unk>, which is supply greater than pipeline take away capacity.

And the need potentially for war rail takeaway solutions.

Finally, and this has been well documented a key concern for current customers and all Canadian producers generally.

Is the fact that projects to increase pipeline export capacity continued to face major challenges as do current pipeline operators.

And yeah from regulatory and environmental concerns. So given these realities given these concerned in there as producers start to bring back production, we expect demand for and utilization of our terminal will increases through the balance of the year.

I mean now moved to an update if I could on commercial activities relative to hardisty specifically.

As markets dictate.

So activity picks up we will first and foremost be focus on servicing our existing customers.

Commercially will focus on that the identifying any spot opportunities that we can find and commercial commercializing the remaining.

Slots that we have available for term commercialization.

Yes.

And with customers, we feel like as we moved into 2021, one of them up to do so.

Okay.

Dance provided one.

But in coordination with our customer the railroads and our partner Gibson.

Yeah.

Okay.

[laughter].

Yeah.

Yes.

Okay.

Well it seems like we've got a communication problem on a.

On on Brad's ran at this point so oh.

All of US can you hear me now communicate yeah got you're not Brad go ahead.

Okay, So where did you lose me Dan.

Talk starting to talk about Gibson, you Youre talking about yeah talking at or near you.

Okay.

Yes.

Rabid wash again there.

All right I'll take I'll take it over here, Brad and finish up on comments around around Doug Gibson and what we're working on the D or you we were getting a as I said earlier mine.

Prepared remarks, we've we've had tremendous progress and.

In discussions even in these challenging times with dealing with our.

You know the dealing with customers and and we really are really appreciate their commitment we're having almost weekly conversations regarding the.

New expansion of video or use so we look forward to continuing those discussions have more to report on that.

As we as going forward, obviously, I think roll accustomed to some of these challenging communication issues that we have Ah Ah with folks working out of the office and so we are we ask for your.

Ah that's you know patients on that today and I'm not as all of it always we're open for additional questions.

As you after the call you can call then we'll be happy to spend time with you on the phone to answer any questions or.

Further define what we're talking about here so.

As we as we move a into kind of closing the call. This morning, Let me just talked about a few things when you realize that were busy.

You hear from my comments from all of US. We are we're blessed with with great customers, great take or pay made good long term agreements, which continue to allow us to weather the down cycles in the business. We continue to build cash continue to throw off quite a bit of cash and because of those type of.

Agreements that we have.

We're also busy on great projects and expansion projects and certainly focused on or de are you, which is so meaningful to the partnership which we've talked about for some time that's been our strategy since we started and and so we're thrilled to see that were getting that completed and.

And moving.

Moving into a an op start in Q2 next year.

The we've been able to manage through these down cycles because of a again the quality of our customers. The a in the strength of our team and our vendor partners Railroad partners and others, who allow us to continue to fight through these very difficult.

Times that we find ourselves.

We'll continue to keep you updated on on things as we as we develop a continued progress a announcements around the deal are you but were.

Slightly ahead of schedule.

On budget and feel good about all of those things at this point you don't the challenging times, we face today. There are many things that we can't control, but I can tell ya at U.S.D., we're focused on our business, we're focused on creating value for customers and our unit holders.

And I'm so proud of the team that we have in and you should be too.

We're accomplishing objectives, we set out even in the most difficult to of times you know obviously you see communication is not.

What we once had done and so it takes extra effort as I know all of you all know a to be focused on sustain your business and.

And create value. So we're oh I'm very proud of the team and I really feel good about where we're headed.

And with that.

I will close the call and just say as we always do we really appreciate your support.

We appreciate your commitment to the partnership and we look forward to.

Coming out of this down cycle, and and more and more favorable results. Thank you again and I have a great rest to weaken weekend.

At this time, if he would like to ask a question you may do so my first thing.

This does conclude todays conference call with experience, especially last that you. Please disconnect your line.

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