Q1 2022 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. First quarter 2022 results conference call.
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It is now my pleasure to turn the call over to Jennifer Waller Senior director of financial reporting and Investor Relations for opening remarks. Please go ahead.
Good morning, and thank you for joining US welcome to our first quarter 2022 earnings call.
With me today are Dan Borgen, our Chief Executive Officer, Adam <unk>, Our Chief Financial Officer, Brian 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 months ended March 31st 2022.
If you would like a copy of the press release, you can find one on our website at USD 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 that information presented on today's call speaks only as of today May said 2022.
Any time sensitive information may no longer be accurate at the time of any webcast replay or reading of the transcript.
Finally, today's call will include discussions 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 Dan Borgen.
Thank you Jennifer and good morning, and thank you for joining us on the call today, we're pleased to announce another eventful quarter partnership.
During the first quarter, we announced the acquisition of the Hardesty South terminal from our sponsor as well as the simplification of the partnership's financial structure.
Eliminating its I D ours, we feel that this was an appropriate step to maintain our momentum in 2022 as we continue to see opportunities for drew bit by rail network to provide safer and more economic benefits to our customers.
Also simplifying the partnership structure was critical to our growth strategy and further aligning our interest with our unit holders.
We expect the acquisition of Hardesty South to provide the partnership with a growth platform by which it can realize the accretion and additional long term commitments that are drew drew bit by rail network is able to support.
And we are encouraged about the future as we engage with our customers regarding the second phase of the D. R U and the partnerships growth.
As a reminder, our drill bit by rail network consists of the D are you the partnership's Hardisty rail terminal and our sponsors port Arthur destination terminal or P. T.
The D. R. U S constructed along with USD strong JV partner Gibson and is located adjacent to the partnership's Hardisty terminal.
Our drill bit by rail network also benefits the partnership by providing opportunities for longer term take or pay revenues at the hardest seat rail terminal, while providing transportation safety and environmental benefits to our customers.
Consistent with our expectations from the transaction.
The Partnership's board approved another increase to our quarterly cash distribution with respect to the fourth first quarter of a quarter of a cent.
Per unit.
In addition, during the quarter, our terminals performed safely and reliably.
The 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.
We are fully operational under our new five year renewable diesel throughput agreement underpinned by an investment grade rated refining customer at the partnerships West Colton terminal.
This is just the first of hopefully many new opportunities being developed under our USD clean fuels initiative.
We look forward to sharing future announcements with the market about the next phase of growth at the Dr. Yu and our USD clean fuels initiative.
Adam is going to give an update on the partnership's latest financial results and our liquidity position.
Then we will get back into the call and discuss recent market and commercial developments Adam. Please go ahead.
Yeah.
Thank you Dan and thank you for joining us on the call. This morning.
Yesterday afternoon, we issued our first quarter earnings release, which included the details of our operating and financial results for the first quarter.
We plan to issue our first quarter 10-Q with additional details after close of market today.
The partnership reported net income of $9 million net cash provided by operating activities of $10 7 million adjusted EBITDA of 10 million and distributable cash flow of $8 $4 million.
Our adjusted EBITDA included the impact of approximately $500000 legal and consulting costs associated with that acquisition and the harsh south terminal and elimination of our sponsors I D R's.
And we anticipate additional transaction costs of approximately two to two and a half million to impact our second quarter financials, which we obviously view as one time expenses we.
We will share more details on that when we report our Q2 2022 earnings in early August of this year.
On April six the partnership closed the acquisition of the harsh yourself terminal from USD group LLC and eliminated our sponsors <unk> for total consideration of $75 million.
Cash and approximately $5 75 million common units the cash portion of the transaction was funded with borrowings under the partnership's $275 million senior secured credit facility.
Today, the partnerships combined Hardesty terminal has designed takeaway capacity of three and a half unit trains per day or approximately 262500 barrels per day and as Dan mentioned the acquisition of the harsh yourself terminal increases the size scale and growth capacity of the partnership's asset base optimizing operational and commercial center.
<unk> is a harsh terminal in order to capitalize on growth benefits associated with the sponsors D argue program.
The transaction was approved by the board of directors of the general partner of the partnership based on the approval and recommendation of its conflicts committee, which consists entirely of independent directors.
During the first quarter, 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 two times.
As a result, the partnership declared a quarterly cash distribution of $12 35 per unit or <unk> 49.4, SaaS per unit on an annualized basis, representing an increase of a quarter of a cent or two 1% over the distribution declared for the fourth quarter of 2021.
This increase is in line with our previously stated guidance and the distribution is payable on may 13th to unitholders of record at the close of business on May 4th.
And now I'll go into the details from the quarter.
The partnership's operating results for the first quarter of 2022 relative to the same quarter. In 2021 were primarily influenced by lower revenues at Stroud terminal. This lower revenue was associated with decrease in contracted volume commitments at the terminal that became effective August 2021.
Partially offset by recognizing previously deferred revenue in the quarter.
Associated with the makeup right options granted to our customers as compared to a deferral of revenue in the prior year period associated with the makeup right options.
Ownership also had lower storage revenue generated at Casper terminal associated with the end of one of our customer's contracts.
In September 2021.
Partially offsetting these decreases was higher revenue at our West Coast terminal, resulting from the commencement of the renewable diesel contract in December 2021.
Partnership experience higher operating cost during the first quarter of 2022 as compared to the first quarter of 2021, primarily attributable to an increase in operating and maintenance costs at the Hardisty terminal for increased operational supplies and utilities costs, resulting from increased throughput and higher fuel costs.
As mentioned the partnership also experienced higher selling general and administrative costs during the first quarter as compared to the first quarter of 2021, mainly due to approximately $500000 legal and consulting fees incurred related to the previously mentioned acquisition of the hardest yourself terminal.
Net income increased in the first quarter of 2022 as compared to the first quarter of 2021.
The impact of the operating factors already discussed.
Were offset by a larger noncash gain associated with the partnerships interest rate derivatives and lower interest expense incurred during the first quarter 'twenty to <unk>.
<unk> from a lower interest rates and a lower weighted average balance of debt outstanding during the quarter as compared to the first quarter of 2021.
Related to the dropdown transaction.
Our ship rolled its existing interest rate swap into a new interest rate swap on April 11.
Interest rate swap with a five year contract with $175 million of notional value that fixes the secured overnight financing rate or sofa.
It's a 157% for the notional value of the swap agreement instead of the variable rate that we pay under our credit agreement.
The swap settles monthly through its termination date in March 2027.
Turning back to the quarter net cash provided by operating activities for the quarter decreased 15% relative to the first quarter of 2021.
Due to the 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 31%, 33%, respectively for the quarter relative to the first quarter of 2021.
Decreases were primarily result of the factors already discussed.
Including the impact of the $500000 of transaction expenses related to the acquisition of the hardest tunnel.
She starts are up.
Additionally, DCF was impacted by higher cash paid for taxes, partially offset by a decrease in cash paid for interest and maintenance capital expenditures during the quarter.
As of March 31, the partnership had approximately $4 $5 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $112 million on its $275 million senior secured credit facility subject to the partnership's continued compliance with financial covenants as.
As of the end of the first quarter of 2022, the partnership had borrowings of $163 million outstanding under its revolving credit facility and the partnership was in compliance with its financial covenants as of March 30, <unk> 2022.
Subsequent to March 31, the partnership borrowed an additional $75 million under the senior secured credit facility to finance the cash portion of the hardest south acquisition as.
As such the partnership had outstanding borrowings of $238 million as of May 2nd and available.
Borrowing capacity under its senior secured credit facility of $37 million.
Subject to continued compliance with its financial covenants.
Our acquisition of hardest yourself is treated as a material acquisition under the terms of our credit senior secured credit facility and as a result, our borrowing capacity will be limited to five times, our 12 months trailing consolidated EBITDA through December 31, 2022 I.
At which point or revert back to four five times, our 12 months trailing consolidated EBITDA.
As Dan mentioned, we are excited about our recent acquisition of the Odyssey South terminal as well as our simplification of the partnership's financial structure. We are extremely focused on our growth initiatives at the D. R U as well as USD clean fuels and we look forward to sharing more updates with you in the future.
I'll now turn the call back over to Dan.
Thanks, and now I'll ask Brad to give us a detailed update on the WCS market recent market events and an update on our commercial activities Brad.
Thank you Dan and Adam.
Let me start with a macro update and there are three critical things that are currently driving current volatility and price actions one of course.
Is the Russia, Ukraine conflict everybody's aware of that and the disruptions, it's creating not only from a supply standpoint, but getting molecules, where they need to be on time.
But in addition, we've had a extended period of Underinvestment.
In the fossil fuels space and that is becoming evident.
Because we're now seeing a global demand despite the.
China, Covid uncertainties global demand returning to to pre COVID-19 levels and higher so the.
The combination of all three of these have naturally.
Driven global inventories in all commodities crude and light products too.
To historical low levels and prices have gone up to reflect that.
If you look at changes in prices since the conflict began.
Crude is is up.
Effectively $10 a barrel since that period, but more importantly gasoline is up 30 30.
$30 a barrel.
And distillate, it's almost $46 a barrel since the conflict we can't.
So naturally this is a demand led event.
So the combination of a growing international demand and supply disruptions.
<unk> is creating this high volatility high price and high margin business for refinery so.
Oh. This is naturally then leading with these higher prices to higher net backs to our our Canadian potential customers and producers.
So our expectation there is that we will see.
Production levels increase as a function of this we will see production levels increase as a function of previous announcements.
Of Canadian producers pursuing.
New production in 2022 relative to 2021 and.
And given that inventories are now in the lower end of the five year average up in Canada. Our expectations are that we will see those inventories began to build and.
Ultimately.
Demand for crude by rail egress solutions.
Will reveal themselves in the second half of 2022.
With that I'd like to provide a quick update commercially on on primarily three activities that we're focused on Dan and add them both.
Mentioned R R.
Our success in and running our D. R. U R. D. R. U network. So naturally we are focused on transitioning.
100%.
<unk>.
Our current real capacity to support the growth in R. R.
Are you a person in the network efforts and this is driven for the reasons that we've shared with you in the past primarily.
There is a a a.
Safety story in ESG story that is critical.
With the rail dru bit egress solution.
And there our greenhouse gases and environmental issues that are are positive and competitive in and relative to egress alternatives.
Equally important there are conduit savings.
There are transportation savings and they're accustomed blend value upgrade opportunities.
As our customers.
Deal with a dru bid product at origin through transportation and as they commercialize.
Their sale of bitumen indoor custom blend in the U S Gulf Coast.
So we naturally are in detailed in and meaningful because our discussions and negotiations with both producers.
And refiners as we pursue not only a second with a potential for a third customer to.
To support the D are you in a R. D are you network, which includes not only the Gulf coast and our.
Port Arthur facility, but the potential for a facility in the mid continent at Cushing.
Which is called our Stroud facility. So we're we're we're pleased with the progress of our current operations and and equally pleased and with the the.
A natural discussions that has driven with with new customers.
As we pursue growth opportunities.
Secondly, we have our existing businesses that that.
A R.
<unk> had periods where contracts run their course, we have a number of contracts or contracts with spirit, specifically that end.
By the end of I believe it's June 30th and we're in detailed discussions to renew and extend.
Those contracts and to transition those contract too.
Two a D or use solution over time, so given the point of view that I shared with you earlier that we expect.
Production to exceed our 2020 levels. The second half of 2022 and that inventories will build our expectation is we'll be able to renew and extend those contracts in the second half of 2022.
And then finally, Dan and Adam mentioned.
About our our progress in the clean fuels business.
Clearly the efforts I'm, sorry efforts to Decarbonize and substitute traditional transportation fuels is creating.
A number of opportunities in this space.
And it includes not only the traditional.
Molecules or or opportunities in and ethanol, which is the substitution.
Product, but also in renewable diesel.
<unk> strategic or or sustainable aviation fuel.
Feedstocks to.
Two producers of renewable diesel who had been traditional.
Refiners, who now or are looking for non traditional feedstocks and needed infrastructure to support that.
And then second order effects that that effect feed and protein solutions.
That required logistical solutions just to support.
The the deep carbonates C carbonization efforts and substitution effort. So we're really excited about what those opportunities are and they change constantly which makes this space.
Pretty unique and we've we've and in response to the two.
The value that we think we see in this space, we've made investments in our organization and created a mix of capabilities and resources that our experience in <unk> and in this space and had relationships in the space with not only traditional counterparties.
But with the railroads, who will support solutions to ensure that that the required logistics.
<unk> invested in and supported.
To make these solutions happened so we're.
We're very excited about the next steps in this space and the growth opportunities that we see.
With that I'll turn it back over to Jennifer Thank you.
Thank you Brad with that well open up the call for any additional questions.
At this time, if you would like to ask a question. Please press star one now on your telephone keypad again that is star one on your telephone keypad.
We'll take a question from Steve Farris Zani of Sidoti Your line is open.
Yeah.
Everyone. Appreciate all the color on the call.
I did want to ask about you know you saw the sequential revenue improvement.
Just on the West coast and deals.
You saw costs up a little bit, but not you know not huge when.
When I think about the distributable cash flow it looks like primarily there might've been some issues on the working capital front can you walk through that a little bit.
Yes.
Primarily around that on the the decrease would have been around the revenue around our.
Our Casper terminal and then also around slight decreases around Stroud.
I would also say.
There have been as Youll see in the Q when we file. It later today there were some some rates that have decreased and that is part of the contracted arrangements.
It took into effect.
Late last year and so that's the primary reason between between I guess the primary reason for the decrease in revenue you see.
No, but what I'm asking is the sequential change, which was positive but everything looks positive on the quarter sequentially.
In cat distributable cash flow and that looks like primarily a working capital issue or maybe I'm missing something.
Yeah.
It's.
I would say it's.
The timing of those payments.
Sometimes you see.
Some seasonality there in Q1.
But otherwise, yes, I mean, the operations are pretty consistent as far as the how we receive the take or pay revenue in the opex. So.
Nothing nothing really on the color around the working capital from our end, we typically get the.
They usually work out over time with regard to a PMA or nothing.
Nothing major at any comment on there great.
Great. Thanks.
In terms of Casper, which I guess, we haven't talked about a lot, but with the extra capacity.
On the expressway unexpected maybe some opportunities there or is that not developing.
This is Brad.
Yeah.
It hasn't yet.
And Casper uniquely is sensitive to the market relationships that we speak to.
Other words need market spreads that create incentives for for folks to.
Not only use express but have the intention to use rail for egress.
So we're hopeful that in the second half of this year that that we will see.
Throughput increase there's a number of commercial solutions that are soft through Casper.
That had different incentives so we.
We do feel current differentials.
Looked like in the second half will drive higher throughput and depending on where we end up with those differentials it could.
I have the potential to lead to some.
Contract discussion. So we're we're we're hopeful that the market is going to support further throughput in the second half.
Great. Thanks for that and then on to touch on Stroud, where are you with the investments around the additional storage tank in.
And progress on adding that infrastructure.
Yeah, that's correct.
Second.
Go ahead go ahead Brad.
Yeah, I was just going to say quickly that.
The second tank becomes available July one.
And so that gives us the opportunity to carry or to handle a number of grades.
Through our Stroud terminal and we're in discussions with Counterparties now about that.
Their interests and the benefits associated with uniquely with the Stroud terminal.
Right, Okay, Great and then last one Matt the only thing I would add to that is we're on time on budget relative to the project.
Fantastic.
Last one I want to ask about is you sound very positive on conversations you're having around the Dr. You Understandably just trying to get a sense if you do get.
Our customer either.
Trance transition to argue that you already have or even a new one.
What's the timing in terms of infrastructure and he wants to lock in a new customer under under a long term agreement.
I'll answer that.
So if you think about our D. R U rail network as a whole you've got origin improvements at AR at Hardesty relative to the D. R. U and then some infrastructure improvements at Port Arthur.
In particular, but also some retrofitting of Stroud as an option as well.
Both of those projects.
At origin and destination are around 16 month build times and as a reminder, we've shared in past calls our permitting activities for both origin and destination are already completed and and ultimately we're shovel ready.
To support that growth, so really it's 16 month construction timeline a bit.
Long lead items, we were actively involved in that process now are planning for growth and we don't see anything out there that puts that kind of timeline at risk.
Great. Thanks for all the color.
Thanks, Dave.
At this time I'd be happy to return the call to Dan Borgen for any concluding remarks.
Thank you Steve Thank you Leo I appreciate that.
We appreciate the support and are excited about the future as we enter into the next phase of the partnership's growth story.
The.
Dr Yu and the clean fuel strategy continues to be our main focus we're highly encouraged with that customer is off the table for all the right reasons and we can really feel good about that.
In this environment to be able to pun intended when we can lower the.
The cost on the environment as we are doing with our <unk> program. It means a lot to us to be able to do that and while still being able to create a higher netback to our customers.
Moving a non has non flammable product.
We are.
Well with our clean fuels business again being able to deliver some of the lowest carbon intensity product to the west coast and continuing to grow that platform. Obviously in this in this environment again plan intended where really.
Encouraged by that and have several meaningful discussions going on with customers around that so again, thanks again for dialing in and we'll continue to keep updated on what we're doing.
Before to future announcements regarding the success. Thank you.
This does conclude today's USD P Q1, 2022 earnings call and webcast you may now disconnect and everyone have a great day.
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Yeah.