Q4 2021 USD Partners LP Earnings Call
Yes.
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Finally, today's call will include discussion of non-GAAP financial measures. 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 Dan Borgen.
Thank you Jennifer and good morning, and thank you for joining us on the call today.
121 was a momentous year for the partnership as well as for our sponsor.
And I would like to start off by covering a few highlights from the year.
Our terminals continue to perform safely and reliably throughout the year.
Partnership continued to generate a significant amount of free cash flow, which continues to be supported by our strong contract structure and high quality investment grade customers.
Our sponsor and its joint venture partner declared the Dr. Yu to be fully operational and we commenced shipments of drew bit by rail in December .
As a brief reminder, our dru bit by rail network has already enhanced the sustainability and quality of the partnership's cash flows by significantly increasing the tenor of approximately 32% of the hardesty terminals capacity through 2031.
We announced a new five year renewable diesel group.
Throughput agreement underpinned by investment grade rated refining customer at the partnerships West Colton terminal.
And we also announced a five year agreement that became effective January one 2022, with our ethanol customer at the West Coast and terminal that replaced our legacy short term agreement.
This new agreement is expected to generate higher cash flows for the partnership as compared to the previous agreement.
And last but not least our sponsor formed a new subsidiary U S. D clean fuels, LLC, which is focused on providing production and logistics solutions to the growing market for clean energy transportation fuels.
We are committed to the transit transition into sustainable fuels and look forward to future announcements related to USD clean fuels.
Turning back to the fourth quarter the partnership increased its quarterly distribution with respect to the fourth quarter by approximately two 1% relative to the third quarter of 2021.
Which was in line with our previously announced distribution guidance.
We hope to continue our momentum in 2022 and are encouraged about the future as we engage with our customers regarding the second phase of the Dr. Yu and the partnerships growth.
Accordingly management intends to recommend to the board of directors of its general partner to remaining on its current distribution growth trajectory of increasing its quarterly cash.
Distribution per unit by an additional quarter of a cent per quarter for the first.
And third and fourth quarters in 2022.
As previously mentioned construction of both the <unk> <unk>.
<unk> projects.
It was completed and both are now fully operational and throughput volumes are consistent with contractual obligations and our customers' expectations.
As a reminder, our drill bit by rail network consists of the <unk> and the port Arthur destination terminal or <unk>.
The <unk> was constructed along with USC strong JV partner Gibson and is located adjacent to the partnership's Hardisty terminal.
Are driven by rail network also benefits the partnership by providing longer term Baker pay revenues at its hardisty terminal.
While providing transportation safety and environmental benefits to its customers.
We look forward to sharing future announcements with the market about the next phase of growth at the <unk>.
Adam is going to give us 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 without Adam. Please go ahead.
Thank you Dan and thank you for joining us on the call. This morning.
Yesterday afternoon, we issued our fourth quarter earnings release, which included the details of our operating and financial results for the fourth quarter and full year 2021 and.
And we plan to issue our full year 2021, 10-K with additional details after close of market today.
Partnership reported net income of $3 $6 million.
Net cash provided by operating activities of $9 4 million adjusted EBITDA of $11 9 million and distributable cash flow of $10 7 million.
Since the end of the first quarter of 2020, the partnership has reduced the outstanding balance of its revolving credit facility by $56 million using excess cash flow from operating activities.
As Dan mentioned management is encouraged by our recent discussions with our customers and our improvement and our improved outlook for our business along with the partnerships enhance liquidity position all of which supported our recommendation to the board to increase our quarterly distribution by two 1% relative to the third quarter of 2021.
This recommendation was in line with our previous guidance the.
The distribution was paid on February 18th to unit holders of record at the close of business on February 9th.
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 3.0 times for both the third and the fourth quarters.
As a result management intends to recommend to the board of directors of its general partner to remain on its current distribution growth trajectory of increasing its quarterly cash distribution per unit by an additional quarter of a cent per quarter for the first second third and fourth quarters in 2022.
And now I will go into the details from the quarter.
The partnership's operating results for the fourth quarter of 2021 relative to the same quarter. In 2020 were primarily influenced by lower revenue at Stroud terminal during the quarter associated with the existing <unk> customer electing to reduce its contracted volume commitments by one third of its previous commitment effective August 21.
Which was primarily driven by the successful commencement of the <unk>.
The partnership experienced higher operating costs during the fourth quarter of 2021 as compared to the fourth quarter of 2020, primarily attributable to an increase in subcontracted rail service costs due to increased throughput.
Net income decreased in the fourth quarter of 2021 as compared to the fourth quarter of 2020, primarily because of the operating factors already discussed coupled with a noncash foreign currency transaction loss in the fourth quarter of 2021 as compared to a gain recognized in the 2020 comparative period.
Partially offsetting was lower interest expense incurred during 2021, resulting from lower interest rates and lower weighted average balance of debt outstanding and a larger noncash gain associated with the partnerships interest rate derivatives during the fourth quarter of 2021 as compared to the same period in 2020.
Net cash provided by operating activities for the quarter decreased 22% relative to the fourth quarter of 2020.
Primarily due to the same operating factors already discussed 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 20% and 18% respectively for the quarter relative to the fourth quarter of 2020.
The decrease in adjusted EBITDA and DCF was primarily a result of the operating factors already discussed.
Partially offsetting the decrease in DCF was a decrease in the cash paid for interest and taxes during the quarter.
As of December 31, 2021, the partnership had approximately $3 7 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $107 million on its $275 million senior secured credit facility.
Subject to the partnership's continued compliance with financial covenants.
As of the end of the fourth quarter of 2021, the partnership had borrowings of $168 million.
Outstanding under its revolving credit facility and was in compliance with its financial covenants.
Pursuant to the terms of the partnerships senior secured credit facility as recently amended the partnership's borrowing capacity continues to be limited to four five times its trailing 12 month consolidated EBITDA.
As such the partnership's available borrowings under the senior secured credit facility, including unrestricted cash and cash equivalents was approximately $83 7 million as of December 31.
We continue to be excited to work with our customers and our bank group in the future to grow the partnership around some of our and our sponsors new growth initiatives.
Typically we're very focused on the growth prospects that currently exist around the sponsors <unk> in port Arthur projects as well as the USD clean fuels initiatives.
And as always we continue to be focused on enhancing the value the long term value for our unit holders.
With that I would now like to turn the call back over to Dan.
Thank you Adam.
I'll ask Josh to give us a quick update on <unk> by rail program.
And then Brad will give us a detailed update on the Western Canada select.
Market recent market update and an update on our commercial activities.
Gosh.
Thanks, Dan Let me, let me start first with D. R U.
We've been fully operational for over 60 days and the <unk> unit is performing extremely well we're operating per plan with regards to unit performance and operating cost currently we're exceeding our operational throughput levels are achieving our product specification goals for <unk> and exceeding our non hazardous flash.
Point targets and finally with regards to <unk>, our Dalian return system continues to deliver a ratable solution through our our partner Gibson is terminal for our customer.
At Port Arthur.
As with <unk>, we continue to see really good operating performance with those assets are rail turn times or per plan at under 24 hours per train, we're seeing strong performance from the Canadian Pacific and the case, yes railroads with regards to their overall network cycle times on their rail routes for both loads and empties or blending operation continues to add value.
Q4, our customer at Port Arthur and finally at Port Arthur a pipe our pipeline and marine based connectivity options are providing competitive market access to our customer and their downstream customers again per plan.
All in all very pleased with the team and the asset performance in the field today to both Dr. Yu and hardesty and at Port Arthur We have had some extremely cold temperatures in hardesty this winter, but with our partner Gibsons have managed through those temperatures nicely and now remain focused on growth at both locations as a reminder for the folks on.
On the call today, we're fully permitted for incremental <unk> development at both Hardesty and Port Arthur and with the interest we're seeing in our <unk> program. Our <unk> by rail program. We're excited for the prospect of of that growth and with that Brad I'll hand, it over to you for a market in commercial updates.
Thank you Josh.
From a market update standpoint, as Josh mentioned.
In the fourth quarter, we had some extremely low temperatures up in Canada and that caused some some critical production disruptions for our producers and potential customers up there and given that.
Inventories over the second half of.
The fourth quarter and into early this year.
We saw inventory draws from historical high levels to levels today that are considered historical.
Historically low levels.
The good news is in the fourth quarter and certainly prior to all the disruptions that we're seeing.
Internationally with with Ukraine, and Russia prices were at.
Historically high levels, certainly high levels relative to recent history with prices.
For WTS.
In the range of 90 to $95.
And given the inventory levels I just described.
Our producers are potential customers.
In Canada are experiencing some of the best netback that they have.
Ever experience so consequently.
Finally in 2022, our expectation is we will see.
Incremental production.
Or supply growth relative to 2021, our expectations are we could see as much as 300 to 300000 barrels a day of increased supply 2022 versus 2021.
Our expectations, then we will be that we will see inventories return to the levels. We saw in early <unk> of 2021, which as I stated we are at the higher end of that range.
And then finally, we continued to see headwinds as it relates to pipeline egress challenges. Most recently there were announcements by.
<unk> pi of their overruns challenges and delays that they're experiencing bringing that pipe.
On or into service. So so our expectation is naturally that that we're moving into a period in time.
Certainly in the second half of 2022.
Where development opportunities should be rich up in Canada.
With that I'll move on to two a couple of <unk>.
Highlights on commercial updates starting with the D are you given the success of the <unk> startup as Dan and Josh. Both described our focus on a go forward basis is to transition a 100% of our capacity at Hardisty rail terminal to support the future does.
<unk>.
Dr Yu.
As a reminder, the <unk> plus our hardest seat terminal and our railroad partnerships and our advantage destination Port Arthur supports the delivery of the most competitive egress solution for Canadian producers.
Key drivers for that are.
The.
On the non has nonflammable nature of the product that we have spoken to before previously.
It is an attractive solution that has competitive emissions profile relative to pipeline. So as it relates to greenhouse gas emissions.
There are cost reduction benefits due to the savings and the diluent return value proposition, which after you separate the diluent. It has returned locally to two markets and customers who can then re blended.
And then the cost reductions associated with with the railroads support as a function of.
The safety features we would describe as non has an non flamm.
And then finally from a netback standpoint.
Our customer.
And are experiencing blend value incentives that have exceeded expectations. When we originally.
Work through the potential economics of the deal are you. So when you combine all.
All of these benefits then.
Our analysis shows that there are potentials for two to $4 a barrel.
Savings.
On a movement from hardisty to the U S Gulf Coast.
So given that we are currently in discussions.
Term sheet development type discussions with multiple customers, including producers and refiners and we're very excited about.
To support that.
<unk>.
The story up and Canada provides and supports as we move those discussions forward.
In 2022.
From a clean fuel standpoint.
Dan mentioned that.
West Colton rail terminal asset is currently supporting long term contracts with investment grade counterparties delivering not only renewable diesel.
Into southern California, but also the lowest.
Carbon intensity ethanol that has produced in the U S into southern California, as well so we're very proud of.
The development progress we have made.
<unk>.
Southern California, specifically at West Colton.
And we use that as a model for future development opportunities.
As we look at not only.
Increasing demand for product in California, given its low carbon fuel standard.
Policies, but also the the growth of policy and to the Pac northwest.
<unk>.
In other areas. So our continued focus again working with our railroad.
Railroad partners.
Beyond development opportunities supporting the changing renewable fuels landscape with focus on renewable diesel ethanol.
Aviation fuel and strategic feedstock both in infrastructure and production. So we're excited about the opportunities that are before us not only in clean fuels, but as it relates to <unk> and look forward to providing.
Dates in future, earning calls.
100 back to you.
Alright, Thank you, both Josh and Brad Great updates.
Always appreciate the information with that we'll open up the call for any additional questions.
At this time, if you would like to ask a question. Please press star one on your telephone keypad again that is star one now on your telephone keypad.
We'll take a question from Steve <unk> of Sidoti <unk> Company.
Good morning, everyone I appreciate all the detail on the call.
I wanted to dig in a little bit on the sequential change in Terminalling services revenue.
It sounds like what you are saying is that that was now a full quarter without the.
The Stroud volume out versus there being some in the previous quarter is that the right way of thinking about that now were seeing the full quarter without that.
Volume that move to Port Arthur.
That's correct. This is Adam Hey, Steve.
Correct.
And then we see did we see any benefits yet from the renewable diesel contracts I think that didn't start till December is that right.
That's right we didn't wait.
Running is fully operational but we saw minimal impact in Q4 as the start date of December So we'll see more of that full run rate starting in Q1.
So it's reasonable to think and obviously, we're two months into the quarter more than that when we think about you have.
<unk>, we've seen that.
Without any of that in the quarter. Then we think about the renewable diesel contract and we think about the renewed ethanol contract. It's reasonable to think we're trending up on Terminalling services revenue into Q1 is that right.
Exactly right and the change in the ethanol contracted west Colton plus.
The new business, the incremental business associated with renewable diesel at West Colton will add <unk> terminal services revenue in Q1 and going forward.
Great Great. That's helpful. And then you had talked on previous calls about investments you might be making in Stroud basically to make that more.
Accommodating to potentially a wider wider group of customers can you tell us where we're at with that and what you're thinking about filling that lost volume at Stroud at some point in 'twenty two.
Sure I might hand that one off to Brad Josh If you guys want to take that one yeah I'll take that thank you.
This is Brad good question. So our expectation is we'll have a second tank in service.
Beginning second half of 2022, effectively what that does is allow us to handle multiple qualities or multiple grades at Stroud currently were limited to one grade and historically, we've had one customer because of that on a go forward basis. Then we have the option now that is.
Second customer as it relates to market in the update I gave earlier our expectation is with the production changes year on year that we will return to high inventory levels high apportionment levels.
The role of <unk>.
<unk>.
Crude by rail is an <unk> solution in the second half should should.
Happen from a market standpoint, and then specifically as it relates to Cushing.
Cushing are at are at historically low inventory levels and over the last year and a half is.
<unk> been extremely.
Higher valued is all I'm trying to say higher valued relative to market alternatives from a destination standpoint, our expectation is it will continue to carry a premium so naturally as as volumes move by rail.
First netback highest netback point won't be Cushing, so our expectation is as.
As we will see some of that activity in the second half of.
2022.
Alright, that's fair. Thanks, Thanks for that last one for me before I turn it off Brian maybe I'll get back in the queue.
So how youre thinking about the distribution and uses of cash clearly you've had a lot of positive announcements over the last six months.
Cash flow empower model should be growing next year. It seems like you've got leverage back to a reasonable and I don't know if your target ratio is well below that how are you thinking about the distribution, giving all the positives.
Over the last six months.
Yes, that's a good question, Steve I think the way we're thinking about it is to maintain a good balance.
Growth.
But also have a good distribution coverage.
Going forward.
<unk> had a pretty strong and you should cover over the last two.
Two to four quarters and we're also projecting.
Our strong distribution coverage in 2022, what we kind of take it year by year, but at this point, we will have a DCF surplus going forward, which we'll use to pay down debt or look at strategic initiatives either on the organic side or on the M&A side.
What's your target leverage now has it changed.
In the past we've said it's about three.
Three five times. So we're below that we feel good about where we are right now and.
And we'll just continue to monitor that.
Great. Thanks for all the detail folks.
Okay.
And once again that is star one on your telephone keypad, one moment, while we queue.
And it appears that we have no further questions at this time I'd be happy to return the call to Dan actually we do have a question from Darren Mccammon of cash flow Kingdom. Your line is open.
Hi, guys. Thanks for taking my call.
I'm trying to get my hand head around something that I, just don't understand your AP rail subcontracting expense in a variety of other line.
All indicate growth.
But the revenue doesn't I understand one third of Stroud is going out, but I'm thinking while those other things are growing your revenue growth should have been commenced can you help me understand this is a revenue recognition thing going on delay going on or something like that.
Yes.
We can get into the details offline, but this really has to do with.
I would say.
The way our contracts work and with that with deficiency credits.
But the revenue itself is always going to be based on NBC.
There might be some movements in the way that we recognize revenue with the deficiency credits, but the revenue itself is always going to be based on NBC unless they exceed their RBC.
But as you drill down into that line item with you offline.
That'd be great just real quick.
NBC.
Sorry minimum volume commitment.
And Thats, primarily all of our Terminalling contact contracts are based on minimum volume commitments, meaning.
Meaning if they if they are using the terminal or not they're still paying us the same amount of revenue.
And in some cases, where they exceed the MVC the revenue will be higher.
For the most part that's really where our revenue comes from.
Okay.
I'll take it offline with you because I still understand thank you.
That was my.
And once again that is star one.
And at this time I will return the call to Dan Borgen for any closing remarks.
Okay.
Alright.
And thanks for all the great questions today.
Appreciate that always knowledgeable group so.
And Adam will follow up on that and get the detailed for you. So obviously, we're very encouraged about 2022 and what's happening.
We always take a more conservative view in terms of the.
Our distribution policy, but.
But we're very encouraged about it our coverages.
Coverages is good and we want to try to continue to.
To review that distribution policy and continue to grow it as we can.
Again, as we look to our D. R U.
Growth in our clean fuels strategy in its growth and the momentum that we have behind those.
Primary.
So thanks again, everyone on the phone.
We appreciate all the support and look forward to continuing update soon thank you.
This does conclude the USD partners LP fourth quarter 2021 results conference call and webcast. You may now disconnect and everyone have a great day.
Yeah.
Yeah.
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