Q3 2021 USD Partners LP Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the USD Partners L. P third quarter 2021 results conference call at.
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It is now my pleasure to turn the call over to Jennifer Waller director of financial reporting and Investor Relations for opening remarks. Please go ahead.
Good morning, and thank you for joining US welcome to our third quarter 2021 earnings call.
With me today are Dan Borgen, our Chief Executive Officer, Adam <unk>, Our Chief Financial Officer, Brad Sanders, Our Chief Commercial Officer, Josh Ruple, our Chief operating officer as well as several other members of our senior management team yes.
Yesterday evening, we issued a press release announcing results for the three and nine months ended September 30th 2021.
If you'd like a copy of the press release, you can find one on our website at USD partners Dotcom before.
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 that information presented on today's call speaks only as of today November three 2021.
Any time sensitive information provided may no longer be accurate at the time of any webcast replay or reading of the transcript.
Finally, today's call will include discussion of non-GAAP financial measures. Please see last night's press.
Plus release for reconciliations to the most comparable GAAP financial measures and with that I'll turn the call over to Dan Borgen.
Jennifer Good morning, everyone. Thank you for joining us today.
For Adam, Texas through the partnerships third quarter results.
Like to start off by covering some of our key developments during the quarter.
For the quarter the partnership increased its quarterly distribution by approximately 2.2% relative to the second quarter of 2021.
Which was in line with our previously announced distribution guidance.
Additionally, subsequent to the end of the third quarter, the partnership amended and extended its existing revolving credit agreement extending the maturity date by one year to November 'twenty 'twenty three.
Which Adam will discuss in more detail in a moment.
I'd like to give you a quick update on the status of our drill bit by rail network, which Josh and Brad will elaborate more on later in the call.
As a reminder, our drill bit by rail network consists of the D. R U and the Port Arthur destination terminal four P. T D.
The D. R. U was constructed along with USD strong JV partner Gibson and is located adjacent to the partnership's Hardisty terminal.
Construction of both the D. R U N P. A T projects is complete and both are now operating in the startup phase.
And throughput volumes are consistent with contractual obligations and our customers' expectations.
<unk> is currently capable of receiving product by rail and Dale you want <unk> blend stocks from the newly constructed pipeline as well as by barge at the terminal.
The terminal can facilitate the blending of the product's onsite through newly constructed storage tanks and deliver the blended product back through the pipeline or via barge to the marine facility to U S Gulf Coast refineries.
Additionally, our debate by rail network also benefits the partnership by providing longer term take or pay revenues at its hardest she terminal, while providing transportation safety and environmental benefits to its customers.
Specifically the partnerships existing take or pay contract with Conocophillips at its hardisty terminal converted to a 10 year contract effective for August.
Accounts for approximately 32% of the hardest these terminals capacity today.
This enhances the sustainability and predictability of the partnership's cash flows and provides a solid baseline for growth.
Today, USA and our partner Gibson are very focused on commercial discussions with our potential producer and refiner customers to secure additional long term take or pay agreements to support future expansions of capacity at the D. R U and further extend the associated contracted cash flows at the partnerships.
C terminal.
And we look forward to sharing future announcements with the market about the next phase of growth at the D. R U.
As previously discussed our drill bit by rail network remains a critical part of our sustainability and ESG initiatives, which are key focus of our business as we continue to deliver innovative and sustainable industry solutions to our customers.
As discussed last quarter USD clean fuels is a newly created entity formed by our sponsor to focus on providing production and logistics solutions to the growing market for clean energy transportation fuels.
During the second quarter, the partnership announced a new five year Terminalling services agreement at its West Colton terminal that is supported by minimum throughput commitment to USD clean fuels from an investment grade rated refining customer commencing December one of this year.
The process of modifying the West Colton terminal is substantially complete and the terminal now how has the capability to trans load renewable diesel in addition to the ethanol that it is currently handling.
Finally, as previously as previously announced the partnership sponsor is also making progress on its project to expand expand the downstream connectivity at the Stroud terminal by adding a pipeline connection to a second storage tank at a third party facility at the Cushing crude oil hub.
The expanded connectivity is expected to facilitate incremental rail to pipeline shipments of crude oil to the Cushing hub by giving the terminal better capability to service multiple customers and multiple grades of crude oil simultaneously.
The expansion is expected to be completed in the first quarter of 2022 and will be paid for by the sponsor pursuant to its development rights at Stroud.
And we look forward to keeping you updated on its progress.
Next Adam is going to give an update on the partnership's latest financial results and our liquidity position.
And then we'll jump back into the recent market and commercial developments Adam. Please go ahead.
Thank you Dan and thank you for joining us on the call. This morning.
Yesterday afternoon, we issued our third quarter earnings release, which included the details of our operating and financial results for the third quarter of 2021.
And we plan to issue our third quarter 10-Q, with additional details after close of market today.
The partnership had a good quarter reporting net income of $33 8 million.
Net cash provided by operating activities of $11 million.
Adjusted EBITDA was $12 3 million and distributable cash flow of $10 $7 million.
So at the end of the first quarter of 2020, the partnership has reduced the outstanding balance of its revolving credit facility by $50 million.
As of September 30th 2021.
Management has improved outlook for our business along with the partnerships enhance liquidity position supported our recommendation to the board to increase our quarterly distribution by two 2% relative to the second quarter of 2021, which is in line with our previous guidance.
The third quarter distribution is payable on November 12 to unitholders of record at the close of business on November 3rd.
Our take or pay contracts continue to support strong free cash flow generation at the partnership as evidenced by our strong DCF coverage of greater than three point O times for the third quarter.
As previously mentioned management expects to continue to have strong distribution coverage for the remainder of the year.
And now I will go into the details from the quarter.
The partnership's operating results for the third quarter of 2021 relative to the same quarter in 2020, but primarily influenced by lower revenue at Stroud terminal associated with the existing Dear you customer electing to reduce its contracted volume commitments by one third of their previous commitment effective August 2021.
This was primarily driven by the successful commencement of the day are you.
These factors were partially offset by slightly higher revenue at the Hardesty terminal in the third quarter of 2021 relative to the third quarter of 2020 due to a favorable variance from resulting from the change in the Canadian foreign exchange rate associated with the partnerships Canadian dollar denominated contracts.
The partnership experienced higher operating cost during the third quarter of 2021 relative to the third quarter of 2020, primarily attributable to an increase in subcontracted rail services.
Costs due to increased throughput.
Net income decreased in the third quarter of 2021 as compared to the third quarter of 2020, primarily because of the operating factors already discussed coupled with a non cash foreign currency transaction loss in the third quarter of 2021.
Partially offsetting was lower interest expense incurred during the comparative 2021 period, resulting from lower interest rates and a lower weighted average balance of debt outstanding and a small noncash gain associated with the partnerships interest rate derivatives during the third quarter of 2021.
Net cash provided by operating activities for the quarter decreased 34% relative to the third quarter of 2020, primarily due to the same factors already mentioned and the general timing of receipts and payments of accounts receivable accounts payable and deferred revenue balances.
Adjusted EBITDA and distributable cash flow decreased by 21% and 24% respectively for the quarter relative to the third quarter of 2020.
The decrease in adjusted EBITDA was primarily result of the operating factors already discussed and DCF was also impacted by an increase in cash paid for income taxes and higher maintenance capital expenditures incurred during the quarter.
Which included technology upgrades and safety maintenance at the partnership's Hardisty and Stroud terminals.
Partially offsetting was a decrease in cash paid for interest during the quarter.
As of September 30, the partnership had approximately $4 4 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $211 million on a $385 million senior secured credit facility subject to the partnership's continued compliance with financial covenants.
As at the end of the third quarter of 2021, the partnership had borrowings of $174 million.
Outstanding under the revolving credit study and was in compliance with its financial covenants.
On October 29th the partnership entered into an amendment and extended its credit agreement with its bank group among.
Among other things the amendment extends the maturity date by one year to November 2023, and decreases the aggregate revolving commitments as a lender group for 300 385 million to $275 million.
After giving effect to the amendment the partnership has the ability to request one additional one year maturity date extension subject to the satisfaction of certain conditions.
The terms and conditions of the amendment and extension are substantially similar to the previous credit agreement with the minor exception that the amended credit agreement sets forth provisions for replacing LIBOR with an alternative benchmark rate.
Pursuant to the terms of our extended credit agreement.
Partnerships borrowing capacity continues to be limited to four five times, our trailing 12 month consolidated EBITDA.
Which equated to approximately $87 million of borrowing capacity available at September 30th 2021.
The success of our extension was largely data are supportive bank group, our strong contracted cash flows and conservative leverage position.
And the positive market outlook for our strategically located assets we.
We are excited to work with our bank group in the future to grow the partnership around some of our and our sponsors new growth initiatives. Specifically, we're very focused on the growth prospects that currently exist around our sponsor's D. R U and port Arthur projects as well as the USD clean fuels initiatives.
And as always we continue to be focused on enhancing the long term value for our unit holders.
That I would now like to turn the call back over to Dan.
Thanks, Adam now I'll ask Josh to give us a further update on the dru bit by rail program and then Brad will give us a detailed update on the western Canada select blend market recent market events and an update on our commercial activities.
Josh.
Thanks, Dan.
In your earlier comments in regards to construction activities at D. R. U N port Arthur I'm proud to report that we are complete with the projects. We have been in operations since third quarter early third quarter of this year and our operational throughput activities are meeting expectations. Currently are work James are closing out the project activities in the paperwork associate.
With project Closeout, and we continue to optimize our operations at both origin and destination with our customer.
Our partner Gibson and the CP railroad as we sit right now the team is transitioning all of their efforts towards growth activities as both Dan and Adam mentioned and I just would remind this group that we're fully permitted for the next phase of development for D. R U and facilities at Port Arthur.
And with that I'll hand, it over to you Brad for commercial.
Got it thank you and congratulations again to you and your team for the great work that you've just reported on.
Greatly appreciate it.
I will give a brief market update given that it's very similar to updates we've provided in the past.
With the demand story.
<unk> continues to trend higher and trending towards pre COVID-19 levels, the one exception and surprise.
Has been.
The demand growth and return to normal the pace of play internationally is as has been <unk>.
Surprising.
And given the fact that that the.
The level of Capex spending in our space has been low.
This is driven.
Prices in the energy space higher.
With higher prices, we've also seen higher prices.
The spot market or the front end of the market relative to the back end of the market. This is a price curve that is considered are described as backward.
Which is very indicative of supply being less than demand overall, we're seeing that kind of price relationship.
Crude light products and Ngls Nat gas. So so clearly we have a a dislocation growing from that pace.
Pace of manned returning relative to the pace of supply returning.
Naturally with higher prices than U S and Canadian producers are responding accordingly, and announcing capex spend to grow.
Production across the value chain spin.
Specific to Canada.
Canadian producer.
Responded pretty quickly.
To higher prices and better net backs and have returned to minimally pre COVID-19 levels from a production standpoint and are poised to grow in 2022.
With this growth and given the current.
Situation in Canada, we still see inventory levels growing in the higher end of the range, we still see a portion that levels as people attempt to.
To get control.
Type space, so that they can ship their supply from Canada to consuming markets, we see those levels high end.
The historical high levels, both continue to indicate that supply is greater than pipeline takeaway capacity. So our expectations are that that given the growth story that.
Shared with you earlier that we're going to see.
Demand for crude by rail egress in 2022 to grow.
From a commercial commercialization update I'm going to focus on on group It and Port Arthur first.
And as Dan and Josh you've mentioned our startup transition is it's moving forward nicely from a commercialization standpoint naturally the industry is poised to see how the kit performs to see if yes.
I assume values.
That come with the Dru.
<unk> solution or use dilution in the port Arthur destination.
Realize.
At a high level.
Throughput has exceeded our contract obligations and customer expectation.
Our expectations, which is a significant accomplishment.
And from a value standpoint.
Our thesis on value for Condi Port Arthur.
Crude blending are being validated.
Even though we're only in effectively month three in operating the asset.
Seeing.
Condi benefits as a function of quality reveal themselves we.
We've seen the blend value as a function of.
Throughput as a blend component and the ability to custom blend.
We're seeing benefits for that or from that.
Activity that are exceeding expectations.
And finally, we're seeing the benefit that port Arthur provides as a location.
Its benefits are starting to reveal themselves as as we've seen demand from.
If I understand Houston, we've seen demand from refiners locally of course.
We've seen demand from refiners in the lower Louisiana, Eastern Louisiana region.
And finally here recently, we're starting to see international demand and the reason for all of that is that the <unk> products.
Our product provides a costing blend option, which is critical to refiners.
Finally from a clean fuels update.
So Dan shared that West Colton West Colton terminal.
It comes online in November to be able to handle renewable diesel and we're happy and excited too.
Sure that we're maximizing throughput from an ethanol and renewable diesel standpoint. So it's it's this model and what we plan to pursue on a network basis both.
Renewable diesel from a growth standpoint is again, it's been validated by the.
But what's happening and it was cold and the role of Boral. So we're excited about that from a growth standpoint, then we continue to work closely with the railroads.
Jointly identify opportunities.
That are available current or currently in <unk>.
S markets and those markets that are transitioning to L. CFS.
We're excited about that railroads.
Are critical to our our value proposition.
Our partnership is greatly valued and we work hard to two.
Collectively identify what's important and why.
Ultimately, we're not just working on demand solution. So it sounds like we might be we think there is opportunity in this space to participate in that not only in and destination solutions, but origin solutions and in production.
Potential as well in.
And finally, not only for renewable diesel, but but for <unk>.
Improved C I ethanol and for sustainable.
Joe as well so we're really excited about.
The potential is in this space.
Look forward to sharing.
More with you as things develop in the future.
With that I'll, Josh I'll pass it off to you in and you could give a update on our commercial world development initiatives. Thanks.
Thanks, Brad on the commercial real development front again for this group were talking about first last mile rail solutions with class, one and short line rail partners.
Making good commercial progress on several different initiatives and I'll give a brief update on those now.
Houston on company owned land, both in the Bay area and North South of Houston ship Channel, we're making good progress on two warehousing opportunities those opportunities focus mainly on on water to truck to rail and or rail to truck to water base moves in Houston, we've got them.
Multimodal logistics hub, we're working on a Chicago.
That play is very rail to truck centric moving products into that region, just outside of Chicago with a short line partner and then finally I'll mention our LPG network that we're working on with one of the Canadian class ones a host of facilities in the Midwest working towards the northeast.
And we're making really really good progress commercially there I'm hopeful we'll be in a position to communicate more on the commercial front within the next two quarters and with that I think that finishes up the commercial update Dan So I'll hand, it back to you.
Thank you, Josh and Brad and with that we'll open the call up for any additional questions.
At this time, if you would like to ask a question. Please press the star and one on your Touchtone phone.
Remove yourself from the queue at any time by pressing pelkey. Once again that is star one if you would like to ask a question.
And we will take our first question from Steve for Zini Citadel. Your line is open.
Yeah.
That's very informative wanted to get your take on timing of filling those those available slots at Stroud and whether that.
Will it require the investment you're making now in the pipeline or what you're getting from some feedback in terms of marketing the available slots Stroud.
Great question Sam.
Yeah, why don't you take it Brad I was just going to pitch it to yourself.
Okay I'm sorry, yeah. It is great question and.
A couple of things that that.
Investment gives us the options to to do things differently.
Bringing the second customer a second grade so that's pretty critical as we move forward as we stated.
On the call. We think we're moving into a period in time in 2022 were.
<unk> four.
Egress by rail will be high and then secondly is as you've probably followed and we talked about a little bit and you know what.
With the market values and the fraud, so high relative to prices in the back that.
That curve, which I described as backward inventory draws, particularly in Cushing have been extraordinary in and have been going on now for well over a year. So the values at Cushing are are such that they're trying to attract new barrels. So the combination of all of that.
We feel really really good about the potential and the likelihood of being able to direct.
Barrels that want.
Egress from Canada by rail into.
For better net backs than what they would likely provide them in the U S. Gulf coast. So we feel good about it.
Any sense on the investment you're making in terms of the pipeline in terms of getting that completed early 2022 is that really the timeline to filling those slots.
It is and that's also the timeline when we think we're actually seeing spreads blow out this month spreads.
Closed last night at it that'd be for WCS at Hardisty at a $20 discount to WTS. So we're starting to see this and balance reveal itself and we we've yet to get into return to full normal on production that was in maintenance. So.
Yeah, I'd say the timing from a market standpoint, and certainly a timing from a creating optionality, it's rob with this ability to handle the second customer will happen in Q1.
And then on West coast in terms with the new customer and the ramp up.
Would you think you're at full.
Throughput by the end of this quarter or how should we think about the ramp there no customer.
Yeah.
They will start delivering this month and there'll be a full delivery in December.
So thanks, so much.
Both both for ethanol and for for what I Hope will do so.
And how are you. This is Adam at the spend on that is substantially done for west Colton.
Okay great.
And once again that is start Antoine if he would like to ask a question.
We'll pause for just a moment to allow additional questions to queue.
And we have no further questions on the line at this time I will turn the program back over to the important for any additional or closing remarks. Thank you Brittany appreciate it Steve great questions.
I appreciate your support here and.
I would first like to say thanks to the USD team they've worked extremely hard in and.
Pretty challenging conditions over the last year or so it goes without saying, but we've accomplished a great deal.
And the partnership.
<unk> is seeing the benefits of that so bringing on the D. R. U obviously getting it financed putting bringing it on and and.
Seeing it at full capacity and higher demand for the product that we're producing as a is a great thing. It's a great thing for the partnership and we look forward to further announcements again about the next customer, which we believe will be soon.
As always we appreciate the support and where as you can tell hopefully in my voice. We are excited about the future as we enter into the next phase of the partnerships growth story.
Around the D R U and clean fuels.
Remember, we're not only just.
Delivering a and egress out of Canada, but where where we're delivering an entirely new market area. So not just in origination, but a destination new refiner refinery connections and that's.
That's a wonderful thing for drew bad coming out of Canada, and helping to move more barrels out.
We're progressing on the drill bit by rail program believe our strategically located terminals are well positioned to support a safe and sustainable growth story for transporting.
And creating new markets for the heavy crude out of Western Canada.
So I will say with that I'll conclude and I'll say, thanks again for dialing into the call.
We'll continue to keep you updated.
And I look forward to additional announcements around the success of the programs and the new platforms that we're building. Thanks again.
Yeah.
This does conclude today's program. Thank you for your participation you may disconnect at any time and have a wonderful day.
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