Q2 2022 USD Partners LP Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the USD Partners L. P second 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 Ma'am. Please go ahead.
Thank you good morning, and thank you for joining us.
Welcome to our second quarter 2022 earnings call.
With me today are Dan Borgen, our Chief Executive Officer, Adam <unk>, our Chief Financial Officer.
Sanders, our chief commercial officer as well as 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 30th 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 apply to the statements of management on this call.
Also please note that information presented on today's call speaks only as of today August four 2022.
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 release for a reconciliation to the most comparable GAAP financial measures and with that I'll turn the call over to Dan Borgen.
Thank you Jennifer good morning, and thank you for joining us on the call today and for your continued support of the partnership.
The beginning of the second quarter, we closed the acquisition of the hardest T cells.
From our sponsor as well as simplified the partnership's financial structure by eliminating its I D R's.
We feel that this was an appropriate step to maintain our momentum into the second half of 2022.
In 2003, respectively. As we continue to have detailed discussions regarding our drill bit by rail network with new and existing customers to provide safer and economically competitive transportation options.
The acquisition of that.
T South terminal increases the size and scale.
And growth capacity partnerships asset base, well optimizing operational and commercial synergies at Hardisty.
The partnerships combined Hardisty terminal now has it.
Takeaway capacity of three and a half unit trains per day were approximately 262500 barrels per day.
Well positioned to benefit from the potential future growth associated with the tours are you program.
As a reminder, <unk> by rail network benefits the partnership by providing opportunities for longer term take or pay revenues at hardesty, while providing transportation safety and environmental benefits to our customers.
We did have some contracts reach maturity at the end of June .
As Brad will discuss later on the call. We are fully engaged with our existing customers and potential new customers and management is focused on renewing extending or replacing a head of expired at hardisty and Stroud and.
Additionally.
We are currently in advanced negotiations to expand.
Our existing commercial agreements with Conoco Phillips guarding our drill bit by rail network.
During the second quarter our terminals.
Them safely and reliably and we are very pleased with.
Both the sponsors D. R U N port Arthur terminals, we continue to exceed expectations at both facilities and continued to deliver significant value to our <unk> customer.
To me to our update on sustainability.
We have refreshed our sustainability webpage and issued our inaugural USD sustainability report as well as additional information on our sustainability program and capabilities we have.
<unk> you to visit our website at <unk>.
W. Dot U S D G dot com.
Take a further look.
As always we look forward to sharing future announcements with the market about the next phase of growth at the D. R. U R. USD clean fuels initiatives. We are confident that our assets are strategically located to benefit our customers as certain market signals continue to reveal the potential for increased demand for our services.
Next Adam is going to give an update on the partnership's latest financial.
And our liquidity position.
And then we will 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 second quarter earnings release, which included the details of our operating and financial results for the second quarter and we plan to issue our 10-Q with additional details after close of market today.
The partnership reported net income of $3 8 million net cash provided by operating activities of $6 2 million adjusted EBITDA of $11 6 million and distributable cash flow of $10 2 million.
Adjusted EBITDA was negatively impacted by approximately $2 6 million of transaction costs associated with our acquisition of the harvest yourself terminal and the elimination of our sponsored <unk>.
We anticipate minimum minimal costs associated with this transaction going forward.
The acquisition of the Odyssey, South terminal from USD group and the elimination of our sponsors <unk> close effective April one of this year.
Total consideration for the transaction was $75 million in cash and approximately 575 million common units.
Cash portion of the transaction was funded with borrowings under the partnership's $275 million senior secured credit facility.
As Dan mentioned the acquisition of the harvest yourself terminal increases the size scale and growth capacity as the partnership's asset base.
Optimizing operational and commercial synergies at the Hershey terminal in order to capitalize on the growth benefits associated with our sponsors DRG program.
And now I'll go into the details from the quarter.
Before I do let me explain the impact of the harsh south acquisition on our historical financial statements.
<unk> South was deemed an entity under common control with the partnership.
We are required to recast our historical financial statements to include harsh sales results of operations.
Because of this our financial statements for prior periods no longer match, our previously published results for those periods.
While we exclude RCC sales results from our adjusted EBITDA calculations for all periods prior to our acquisition the ability to compare our Q2.
GAAP liquidity and results of operations against the prior year period is impacted by this.
The partnership's GAAP revenues for the second quarter of 2022 were significantly lower.
Primary contributing factor to this with an early contract cancellation payment received by harsh you sell in the second quarter of 2021, which has not been part of the partnership.
This caused revenue to be significantly higher 2021 on a recast basis with no similar occurrence in 2022.
In addition revenue at the Stroud terminal was lower in the second quarter of 2022 as a result of a decrease in contracted volume commitments at the terminal that became effective August 2021.
The partnership also had lower storage revenue generated at it's gastro terminal associated with the end of one of its customers contracts that occurred in September 2021, coupled with lower throughput volumes at the terminal.
Partially offsetting these decreases in revenue was higher revenue at the partnership's West Colton terminal, resulting from the commencement of our renewable diesel contract that occurred in December 2021.
The partnership experience experienced lower operating costs during the second quarter of 2022 as compared to the second quarter of 2021, primarily attributable to a decrease in SG&A costs associated with the hardest yourself entities as well as a decrease in the pipeline fee expenses.
Lower pipeline fee expense is directly attributable to the relative decrease in harsh yourself revenue previously discussed.
As compared to the second quarter of 2021.
In addition, subcontracted rail services costs were lower due to decreased throughput at the terminals.
Partially offsetting the decrease has already mentioned were higher operating and maintenance costs at the harvesting and harsh yourself terminals for increased operational supplies fuel and utility costs, primarily due to increased inflation rates.
The second quarter 2021, SG&A cost includes services fees paid by harsh yourself to our sponsor related to a services agreement that was in place prior to the partnerships acquisition of harsh yourself.
Upon the partnership's acquisition of ours yourself the services agreement between the acquired entities and the partnership sponsor was terminated and a similar agreement was established between those entities and the partnership.
Partially offsetting this decrease.
Were higher corporate SG&A costs incurred in the second quarter of 2022 for legal and consulting fees related to the acquisition of harsh south of approximately $2 $6 million.
Offsetting the decrease was a noncash gain associated with the partnerships interest rate derivatives recognized in the second quarter of 2022 as compared to a noncash loss recognized during the same period of 2021.
Net cash provided by operating activities for the quarter decreased 74% relative to the second quarter of 2021, primarily 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 both decreased by 29% for the quarter relative to the second quarter of 2021.
The decrease in adjusted EBITDA and DCF was primarily a result of the factors already discussed, including the impact of the $2 $6 million of transaction expenses incurred during the second quarter.
Additionally, DCF was positively impacted by lower cash paid for interest taxes and maintenance capex during the quarter.
At the end of June 2022 contracts, representing approximately 26% as a combined hardisty terminals capacity expired.
In addition, the remaining contracted capacity at Stroud terminal also expired at the end of 2022.
As Dan mentioned management is focused on renewing extending or replacing the agreements that have expired or are set to expire at the hardisty and Stroud terminals in mid 2022, and mid 2023 with new multiyear take or pay commitments and is actively engaged with current and new customers.
Given current and expected market conditions, the partnership's estimates for future heavy crude oil production in Western Canada.
Current availability of egress alternatives.
Management believes that the partnership will have the opportunity to renew and extend or replace the agreements that recently expired during the second half of this year or early in 2023.
As of June 30, the partnership had approximately $4 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $43 million on a $275 million senior secured credit facility.
Subject to the partnership's continued compliance with financial covenants.
As at the end of the second quarter. The partnership had borrowings of $232 million under its revolving credit facility and the partnership was in compliance with its financial covenants as of June 30.
The partnership's acquisition of harsh yourself is treated as a material acquisition under the terms of its senior secured credit facility and as a result of the partnership's borrowing capacity will be limited to five times. Its 12 month trailing consolidated EBITDA through December 31 2022.
At which point it will revert back to four five times, the partnership's 12 month trailing consolidated EBITDA consolidated EBITDA.
As such the borrowing capacity on our senior secured credit facility, including the unrestricted cash and cash equivalents was approximately $47 million as of June 30th.
Subsequent to the quarter end on July 27, the partnership the partnership.
Thats existing interest rate swap for proceeds of $7 $7 million.
The partnership plans to use the proceeds from the settlement to pay down outstanding debt on our senior secured credit facility.
The partnership's simultaneously entered into a new interest rate swap that was made effective as of August 17.
And the new interest rate swap has a five year contract with the same $175 million notion notional value that fixes the secured overnight financing rate or sofa to approximately two 7% for the notional value of the swap agreement instead of the variable rate that the partnership pays under its senior secured credit facility.
For the second quarter, the partnership declared a quarterly cash distribution.
$12 35 per unit or <unk> $49.04 per unit on an annualized basis.
Same as the amount distributed in the prior quarter.
Distribute the distribution is payable on August 12 to unit holders of record at the close of business on August start.
The partnership's board determined to keep the distribution unchanged from the prior quarter and to evaluate the distribution on a quarterly basis going forward and we will take into consideration updated commercial progress, including the partnership's ability to renew extend to replace its existing customer agreements at the harvesting Stroud terminals as well as recent changes to the market.
As Dan mentioned, we are extremely focused on extending or renewing our commercial agreements at our terminals as well as our current growth initiatives at.
At the <unk> in USD clean fuels.
And we look forward to sharing more updates with you in the future.
That I would now like to turn the call back over to Dan.
Thanks, Adam.
I had to give us a detailed update on the WC.
SB market recent market events and an update on our commercial.
Right.
And thank you I'll start with a market update on.
Canadian fundamentals or it's a couple of headwinds.
That are negatively impacting WCS values currently.
One headline of course is the SPR release, the strategic petroleum reserve release totaling approximately $200 million.
Barrels.
Which was announced beginning November 21 of last year and.
Whoa.
There'll be where leases through October of this year.
Equates to an additional $765 million or 1000 barrels a day of supply in the U S. Gulf Coast. So naturally there are competing alternatives for Canadian heavy in the Gulf Coast and that has driven.
The replacement costs for.
Heavy alternatives and ultimately WCS values in the Gulf Coast lower.
Naturally impacts.
The cost of or the value of WCS at hardesty as well so current values or WCS minus 21, 21, and a half at hardest C and nine nine and a half discounted to <unk> in the U S. Gulf Coast. So again thats simply because there are.
The release of SCR barrels created competitive alternatives, but.
But additionally, high net gas prices and hydrogen prices make upgrading heavy sour grades more expensive.
So this translates to cheaper WCS values to ensure upgrading margins are positive and WCS is competitive for.
For upgrading purposes.
In addition, we see the Canadian market and transition earlier this year.
The Tories are at historical low levels due primarily to the shutting of production. There is a function of the extremely cold temperatures during winter.
Since the beginning of this year inventories have begun to build and thats driven by that production coming back online, but more importantly.
Production, new production that was announced to come on in 2022 is now revealing itself. So inventories now are in normal type levels.
And heading into the second half of the year, our expectation is that inventories will build from here.
Additionally in August apportionment on the two major export pipelines were announced.
And our expectation is is given this new supply.
That's coming online and given the egress options that are available that we will see apportionment continue through the balance of the year.
To remind folks on the phone win win barrels are apportionment of effectively a percent of the production in Canada is stranded.
In Canada, and that ultimately leads to price discounting and inventory builds until <unk>.
Inventories get to a level where prices have to discount to incent crude by rail activity. So this pattern of supply eventually exceeding pipe takeaway capacity in.
Driving the demand for a.
Crude by rail egress solution has been part of Canadian history, and ultimately has led to.
The investment in assets like the USPS, it's at Hardisty, and Stroud to simply ensure barrels don't get stranded and.
And that the industry in total avoids the extreme price discounts that can reveal themselves during these macro periods.
Truly this environment is supportive for our efforts.
To renew extend and replace agreements that have expired at hardisty and Stroud.
Not only with our existing customer.
Potentially new customers so.
Our expectation is that over the balance of this year that.
Our negotiations with these customers will will.
Likely lead to to renew and extend <unk> replacement contracts.
From a <unk> commercialization.
<unk> standpoint.
<unk> not.
Recently, I would say over the last six months, we've accomplished two key milestones one is.
The D R U and <unk> capabilities.
And performance are exceeding.
Original plan.
And then secondly from a commercial standpoint.
The value that we had.
Theorize, what would drive the investments of the Tru <unk> beauty of also exceeded or met original plans and as a reminder, that as the diluent cost savings at origin.
The competitive rates.
With the railroads as a function of safety and environmental benefits.
And then the destination value that our customer is seen as a customer sorry is it a function of customer blending.
Benefits.
Given these these milestones.
And potential advantages relative to Chris' alternatives, we are focused on transitioning our 100% of our rail capacity to support the growth of our throughput by rail network.
As mentioned by both Dan and Adam we're in advanced negotiations with our current customer to grow and extend our existing agreements and we're in similar.
Type negotiations and discussions with new customers given group it by rails advantage egress economics relative to alternatives and we look forward to making announcements hopefully soon on advancing both of those.
Finally, moving on to our efforts from a U S D clean fuels standpoint, and development standpoint recently the.
The inflation reduction Act, which was was introduced into Congress.
Highlights the type of tail winds.
That are driving the continued need for advanced Biofuels growth in solutions in particular this new proposal will invest approximately $370 billion in energy security and climate change programs over the next 10 years.
The objective.
This program is to lower energy cost increase cleaner production and reduce carbon emissions.
They do this by providing grant funding for biofuel logistics.
Providing an introducing sustainable aviation fuel credits, which are new extending the blender tax credits for renewable diesel and biodiesel.
And clean fuel production credits, but maybe more importantly, the agreement calls for comprehensive permitting reform.
With the objective of <unk>.
Locking domestic energy projects that reduce costs for consumers and.
Help our long term emission school here in the U S.
And as we know and part of our vision as policy drives incentives.
Stated above and incentives drive investment.
And as clean fuels policies transition. This will continue to drive demand for advanced Biofuels and in that regard.
We are in.
A number of advanced negotiations with existing and potential new customers.
In support of building infrastructure solutions that support renewable diesel biodiesel.
Sustainable aviation fuel.
Stefano and renewable diesel feeds in geographic areas that support.
Current and future.
Policy and incentives so we are.
Very excited about the potential of this space.
As I mentioned in our last quarterly we have uniquely.
Organize to pursue these and we look forward to two.
Sharing.
Future announcements on progress in this area.
Dan.
I would say that.
And with that we'll open the call up for any other.
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We'll take our first question from.
This is Barry with Dougherty Your line is open.
Good morning, everyone, hopefully hopefully we can get these questions in.
Wanted to ask about the expected financial impact of the non renewals into three Q I mean, if I walk through the volumes you're talking about it looks like that accounts for about $4 million of EBITDA in Q1, if I look at your page 44 of your slide deck is that reasonable to think that thats $4 million.
Out of three Q, given where things stand right now.
Hey, Steve it's Adam Thanks for bearing with us through that not sure what happened there.
So I appreciate you paying attention to the details.
As we mentioned about 26% of the combined Harsha terminals capacity expired on June 30, and the remaining contracts capacity at Stroud expired on June 30th.
We can't give exact amounts of adjusted EBITDA because by doing so we would be sharing some commercially sensitive information with regard to our customers.
I think directionally the percentages.
We've given a reasonable starting point to calculate the loss EBITDA. So I think by using the investor presentation.
Using the percentages I think thats, a good way to approach it.
When I think about the impact of the.
Yes.
Hardesty sulfur on the quarter.
Obviously sequentially your EBITA was op and DCF was up even with the $2 6 million in one time costs.
We looked at when you announced the deal you guided for 2023, EBITDA and you gave a pretty wide range of 14 to 18 million TV can you give any kind of sense of where you are on a run rate now or any kind of color I know you.
Contractually its challenging but can you give us any kind of sense of the contra near term contribution for those added assets.
Sure. That's a good question I mean as far as so that guidance was given with regard to 2023, so as far as 2023, we still feel very good about the macro as Brad mentioned.
We feel good about the direction it's going.
And I think it's safe to say, we feel good about our strategically located assets and how they fit into the larger picture in 2023.
The underlying macro supports supports.
Directionally, where we think will be.
We're not giving guidance for 2023 at this point or a run rate.
With regard to 2022, I think just based on.
The information we shared on the percentages of the volumes around hardisty and the remaining capacity at Stroud.
I think again Directionally I think that's the right way to approach is to take a look at our investor presentation I'd look at the percentages.
I will also say.
I think keep in mind Q3 will be a little bit noisy as well because we did unwind the interest rate swap and we received about $7 7 million of proceeds and that will be Canada's adjusted EBITDA next quarter.
But other than that I think.
I think we feel good about 'twenty three I think we're going to continue to evaluate this on a quarterly basis.
Based on further commercial progress and where the market sits at the time and we will continue to give you updates and hopefully as much guidance as we can.
Okay, and then I get one more in about the distribution, which had but you had been raising it pretty consistently you still have a very high coverage ratio. Obviously there is some some added near term uncertainty into when youre thinking about the distribution and reasons to not raise it how much of that was.
Obviously, you want to start repaying that debt and deleverage pretty quickly out of that acquisition also you want to start replacing some of these or get renewals on these contracts is it a bit of both one or the other and what would get you back on track to raising the distributions again.
Yeah, I think I think our general view is Directionally, we still think we're in a good place.
The timing with some one off events that have happened around the world as Brad mentioned has impacted spreads and have impacted kind of the timing and the speed at which we are increasing the distribution. So at this time, we're just going to take it quarter by quarter and it's up to the board's discretion as it always is and so to answer your question I think.
Obviously further commercial progress will be will help dictate how we manage the distribution policy going forward.
Okay Fair enough. Thanks, Adam Thanks, Dan you bet. Thank you.
We have no further questions on the line at this time I will turn the program back over to Mr. Dan Borgen for any additional or closing remarks.
I appreciate everybody on the call today and Steve. Thanks, So much for your questions as always very thoughtful answer.
Michael So.
Just a reminder, we've.
Been through the renewal and extend.
And some of these contracts two or three times and so we feel confident while we'd like going into the renewal cycle.
With.
The strongest macro and end market drivers that we can and so we're seeing that building now with inventory builds in Canada.
With the arb widening.
We've got as Brad said, the headwinds around the SPR releases, but.
That will be adjusted into it and we will start to see more and more aggressive spreads and therefore as we see those then we have a real kind of driver for renew and extend.
The customers that we've had.
For the most part all renewed and extended previously.
Previously and so we look forward to being able to do that would we like to have them today certainly.
Are we going to have them next week, probably not but.
We will look for them as the market continues to drive that to our strategically located assets as Brad had mentioned so we feel we feel very good about that been there done that before and we look forward to continue to keep the market updated as we as we renew and extend those we are very bullish about our D. R U.
And our plan of renewing and converting a lot of our deal bit.
To our <unk> program, obviously longer term 10 year plus agreements pipeline competitive.
Environmentally.
Beneficial.
Lowering the Ci carbon intensity by over 30%. So we feel good about that as well.
Moving into our clean fuels business and transitioning more into our cleaner side of the business, we really feel good about that growth strategy, and where we're headed there and our customers the investment grade customers that we have.
For that program so.
Anyway, I just wanted to reiterate that.
Summarize that at the end of the call here so.
We appreciate everybody on the call. We appreciate the market support and we look forward to announcements.
In the short term thanks again.
Okay.
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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