U.S. Markets open in 9 hrs 5 mins

Edited Transcript of USDP earnings conference call or presentation 7-Nov-19 4:00pm GMT

Q3 2019 USD Partners LP Earnings Call

Houston Nov 16, 2019 (Thomson StreetEvents) -- Edited Transcript of USD Partners LP earnings conference call or presentation Thursday, November 7, 2019 at 4:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Adam K. Altsuler

USD Partners LP - Senior VP & CFO of USD Partners GP LLC

* Brad Sanders;Chief Commercial Officer

* Daniel K. Borgen

USD Partners LP - Chairman, CEO & President of USD Partners GP LLC

* Jennifer Waller

USD Partners LP - Associate Director of Financial Reporting and IR

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by and welcome to the USD Partners LP Third Quarter 2019 Results Conference Call. (Operator Instructions) It is now my pleasure to turn the call over to Jennifer Waller, Associate Director of Financial Reporting and Investor Relations for opening remarks. Please go ahead.

--------------------------------------------------------------------------------

Jennifer Waller, USD Partners LP - Associate Director of Financial Reporting and IR [2]

--------------------------------------------------------------------------------

Thank you. Good morning, and thank you for joining us. Welcome to our third quarter 2019 earnings call. With me today are Dan Borgen, our Chief Executive Officer; Adam Altsuler, 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. Yesterday evening, we issued a press release announcing results for the 3 and 9 months ended September 30, 2019. If you would like a copy of the press release, you can find one on our website at usdpartners.com. 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 7, 2019. 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 reconciliations to the most comparable GAAP financial measures. And with that, I would like to turn the call over to Dan Borgen.

--------------------------------------------------------------------------------

Daniel K. Borgen, USD Partners LP - Chairman, CEO & President of USD Partners GP LLC [3]

--------------------------------------------------------------------------------

Thank you, Jennifer. Good morning, everybody, and thanks for being on the call with us today. We're pleased to announce another positive quarter at the partnership and our 18th consecutive quarterly distribution increase, which has been consistent with our previously stated 2019 distribution guidance. We're excited to see the higher rates at which we've renewed a good majority of our cash flows at our Hardisty terminal, and those take effect this quarter. With the new higher rates, our distribution coverage for the third quarter was approximately 1.04. As we have mentioned on previous calls, we continue to work with our remaining customer at Hardisty and Stroud on renewing and extending its commitments, which come due in 2020. Given the current lack of infrastructure supporting egress out of Western Canada, we continue to be optimistic about our recontracting efforts and our ability to create long-term, sustainable solutions that include diluent recovery units or DRU for our customers. We look forward to reporting more on the continued momentum for -- from these recontracting efforts and the DRU in the near future. We do feel very confident working with our good partner, Gibson's, at Hardisty that we're nearing completion of the commercial stage and we look forward to talking more about that. As a reminder, that is upstairs at the parent. What that means to the partnership is elongated revenues of 10-plus years, buying through the partnership on an exclusive relationship to the DRU and its rail support. Adam is now going to start us off with an update on the partnership's latest financial results and our liquidity position, then we'll jump back into recent market and commercial developments with Brad. Adam, go ahead.

--------------------------------------------------------------------------------

Adam K. Altsuler, USD Partners LP - Senior VP & CFO of USD Partners GP LLC [4]

--------------------------------------------------------------------------------

Thank you, Dan, and thank you for joining us on the call this morning. Yesterday afternoon, we issued our third quarter 2019 earnings release, which included the details of our operating and financial results for the quarter, and we plan to issue our third quarter 10-Q with additional details sometime in the next few days. For the third quarter, we reported net income of $2.1 million, net cash provided by operating activities of $14.6 million, adjusted EBITDA of $14 million and distributable cash flow of $10.5 million. The partnership results during the third quarter relative to the same quarter in 2018 were primarily influenced by higher revenue at its Hardisty Terminal as a result of higher rates on a portion of the terminaling services agreements that became effective July 1, 2019, resulting from the partnership's successful recontracting efforts. In addition, the partnership experienced higher revenue during the quarter associated with contracted throughput that exceeded the partnership's existing capacity at its Hardisty terminal. The partnership entered into a terminaling services agreement with the Hardisty South facility owned by our sponsor to provide terminaling services for the contracted throughput that exceeded the Hardisty Terminal's transloading capacity. Under this arrangement, the partnership incurred operating costs payable to our sponsor at the same rate on a per barrel basis that the partnership is receiving from its customer. Lower revenue at the Casper terminal resulting from the conclusion of a customer agreement at the end of 2018 and in August of 2019 offset the higher revenue at Hardisty during the quarter. Net income for the quarter decreased as compared to the third quarter of 2018 primarily as a result of the operating factors already discussed, coupled with the non-cash loss associated with the 5-year interest rate derivative instrument that the partnership entered into in November of 2017. And slightly higher interest expense incurred resulting from higher interest rates as well as -- as a higher weighted average balance of debt outstanding in the third quarter of 2019. Net cash provided by operating activities for the quarter increased by 16% relative to the third quarter of 2018 primarily due to the higher rates at Hardisty already mentioned, offset by the conclusion of customer agreements at the Partnership's Casper terminal at the end of 2018 and in August of '19. Cash flows were also affected by the general timing of receipts and payments of accounts receivable, accounts payable and deferred revenue balances. As of September 30, the partnership had net leverage of 3.7x LTM adjusted EBITDA based on its financial covenants and available liquidity of approximately $176 million, including approximately $7 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $169 million on its senior secured credit facility, subject to continued compliance with financial covenants. Pursuant to the terms of the partnership's credit agreement, the partnership's borrowing capacity is currently limited to 4.5x its trailing 12-month consolidated EBITDA, as defined in the credit agreement. As of September 30, the partnership was in compliance with its financial covenants. On October 24, the partnership declared a quarterly cash distribution of $0.3675 per unit or $1.47 per unit on an annualized basis, which represents growth of 0.7% over the prior quarter and 2.8% over the third quarter of 2018. The distribution is payable on November 14 to unitholders of record at the close of business on November 4. As Dan mentioned, we were pleased to announce our 18th consecutive quarterly distribution increase this quarter, which is consistent with our previously stated 2019 distribution guidance. Our distribution coverage for the quarter was approximately 1.04. As a quick update, we continue to move forward with our previously announced organic growth project to construct an outbound pipeline connection to Casper and expect completion within the next several weeks. Once completed, we believe the connection will increase the terminal's access to additional pipeline networks and refineries, ultimately enhancing the sustainability of Casper's cash flows. Dan and Brad will talk more about the exciting developments around Casper and the potential growth associated with that new connection.

And with that, I would now like to turn the call back over to Dan.

--------------------------------------------------------------------------------

Daniel K. Borgen, USD Partners LP - Chairman, CEO & President of USD Partners GP LLC [5]

--------------------------------------------------------------------------------

Thank you, Adam. Appreciate the good results there. Brad, I'll turn it over to you to give us a quick commercial update on all the things we've got going on. Brad?

--------------------------------------------------------------------------------

Brad Sanders;Chief Commercial Officer, [6]

--------------------------------------------------------------------------------

You bet. So we've got 2 significant events in the Canadian market here recently that are worth talking about. First was the unfortunate incident late last week with the pipeline leak in North Dakota. That pipeline remains shut down. The Keystone line is one of 3 major export pipelines for our Canadian producers. Just yesterday, they were asked by the state to remain shut down until they can provide a restart and return to service plan that's acceptable. As a reminder, the capacity of this line is 590,000 barrels a day. That's materially significant. Two things will happen because of this. We'll begin to see production back up in Canada, prices will reflect that. They will discount to incent storage. So our expectation is we'll start to see inventories grow in Canada. And then secondly, of course, prices will discount to ensure rail egress, to maximize rail egress. Prior to this event, spreads between Hardisty and Houston for Canadian heavy were trading somewhere between $11 and $12. Currently, they're at $19 to $20. So our expectations are that our facility, all facilities will see an uptick in throughput and activity. The second material event involves the curtailment plan by the Alberta government. As a reminder, current production levels as part of the curtailment plan in Canada are approximately 3.8 million barrels a day that then solves to a curtailment level of approximately 75,000 to 100,000 barrels a day. The Alberta government recently announced a special production allowance whereby beginning with the December 2019 production month, producers will be allowed to produce above their curtailment order as long as this extra production is shipped out of Alberta through additional rail capacity. So this event and the incentives associated with this effective curtailment credit as a function of rail egress and the event with the Keystone pipeline. Both of these are creating maximum demand for rail egress. So lots of challenges on a go-forward basis based on that.

Commercially, as we previously discussed, in July of 2019, the partnership renewed approximately 15% of its capacity at the Hardisty Rail Terminal for a multi-year extension with one of its investment-grade customers. We continue to work with basically our remaining strategic customer to renew and extend the balance of the slots at Hardisty and Stroud, which come due in February and July of 2020. We've made significant progress, and we look forward to reporting more on this in the future. Finally, as we've previously discussed, our sponsor executed a multiyear take-or-pay terminaling service agreement with the Alberta Petroleum Marketing Commission or APMC, which is an agent of the government of Alberta. The agreement is for transloading capacity at the Hardisty Rail Terminal starting in January 2020. It supports our further growth at USDG's Hardisty South expansion and will be funded by our sponsor pursuant to its development rights at the Hardisty Terminal. The Alberta government is currently in the process of divesting this commitment to the private sector. Our expectation was/is that we will hear exactly how they plan to do that and who they plan to do that with. We thought this week, but soon, for sure, given the January start on some of these -- most of these commitments sooner than later would be helpful, necessary -- needed given the normal scheduling process. So we look forward to hearing what those answers are. We don't expect any kind of economic impact to our current deal with the APMC or the Alberta government.

Casper. Let's move on to that, Dan or Adam had mentioned that we're in the final stages of completion of our pipeline project, which creates advantage connectivity and effectively establishes CCR as a hub to support the refining sector primarily in the Montana, Wyoming, Utah, Colorado regions. So we're excited about that. Additionally, Enbridge announced a program to increase the capacity of their express pipeline by up to an additional 50,000 barrels a day with the use of a drag-reducing agent and incremental pump capacity. That's expected to be in service in Q1 of 2020, and we anticipate that a majority of this volume will be looking for solutions at CCR. So as we learn more, we'll be happy to update folks. Obviously, given the current market conditions, I just went over at a high level, that should also drive demand for Express egress and CCR Rail takeaway given the Keystone and other issues up in Canada.

--------------------------------------------------------------------------------

Daniel K. Borgen, USD Partners LP - Chairman, CEO & President of USD Partners GP LLC [7]

--------------------------------------------------------------------------------

All right, Brad. Thanks. Can you give us a quick update on what all we've got going on at the key things at the parent, please?

--------------------------------------------------------------------------------

Brad Sanders;Chief Commercial Officer, [8]

--------------------------------------------------------------------------------

Yes. So with our Houston ship channel property, our Texas Deepwater property, we call it TDWP, we've worked really hard to create advantage crude connectivity options. We are effectively done on that. And given that we're leveraging those connectivity options in Canadian heavy macro story that I just went over with the group here to commercialize Texas Deepwater as a heavy crude destination. So as an example, APMC, they're about to commercialize 120,000 barrels a day of crude by rail, egress origin out of Canada. Well, all of that egress origin barrels have to find a destination. So given our developments from a connectivity standpoint, being connected with the heavy hub and the Houston Ship Channel, we feel really good about our ability to commercialize Texas Deepwater and create a solution, not only for our producer customers but our refiner customers here in the Houston Ship Channel.

Additionally, we have positioned ourselves at Texas Deepwater as a clean products hub for blending, storage, rail and waterborne transport. So one of the critical edges that we provide is the rail egress option. As we know, Mexico, and we'll talk a little bit about Mexico, but Mexico, in particular, is a big consumer of U.S. exported light products. And rail plays a significant role in that. So we're excited about our ability to meet the options of not just waterborne, but rail as well as blending and storage. We're doing the same in the NGL space for the same macro reasons. NGLs have the same challenges that light products do that crude does, that petchems do. So we're excited about the opportunities that are in that space. And let me say this, we're in advanced discussions, and in some cases, advanced negotiations in creating solutions in each one of these. So we are very much looking forward to the time that we can share specifics about the progress we're making in that area.

As it relates to Mexico, we're pretty focused. We're focused on the 3 assets that we own. We own one at Queretaro, one at Cuauhtémoc right outside of Chihuahua and one at Celaya. And all 3 of these are up and running. We're purposed about one, running them well; and two, incrementally growing those, and we're excited about that. Finally, or secondarily, we then want to leverage not only those assets and those learnings but partner with the railroads and those critical customers to grow in a very purposeful way, new terminals, terminals that fit a network that makes sense for the Mexico market demand. And finally, we want to leverage that with our Texas Deepwater position that I've referenced here. And given the export nature of the Houston Ship Channel and given the import nature of Mexico, we think we're uniquely positioned to take full advantage of that.

Dan, you mentioned the DRU. And as you mentioned, we continue to work with our partners on the DRU value proposition and look forward to reporting more on that in the near future as well.

--------------------------------------------------------------------------------

Daniel K. Borgen, USD Partners LP - Chairman, CEO & President of USD Partners GP LLC [9]

--------------------------------------------------------------------------------

Great. I appreciate that. So with that, I'll go ahead and move to closing comments. Our contract renewal discussions at Hardisty and Stroud have been very successful to date. As a reminder, we've contracted 100% of our capacity at Hardisty through June 2020, and we continue to be actively engaged with the Stroud customer who represents the balance of our renewals. As we have previously discussed, we have several operating cash flow projects at the sponsor -- at our sponsor today that could be possible drop-down candidates for the partnership in the future. But we also fully acknowledge the challenges the MLP market faces today, but our commitment is to always look to do what is best for our public shareholders and create additional values where we can. We'll continue to keep you updated and look forward to additional DRU announcements, as I had mentioned earlier, and as you heard Brad say. We are excited about that. We are extremely confident about nearing completion of that, working closely with our partner at Gibson's to develop a state-of-the-art facility that will offer unique opportunities for our customers to clear a safer, nonhazardous, nonflammable barrel from Canada to various markets in the U.S., heavy markets in the U.S. And as you heard Brad say, we always look to develop our network to meet the needs of our customers, whether it be heavy, whether it be a blended barrel, whether it be a light sweet barrel, whether it be a liquids, we always look to connect both create profit centers at the individual terminals, but also look to uniquely provide a network opportunity that optimizes the movement for our customers and our railroad partners. In addition to that, being able to then leverage that into distribution out of the Gulf into Mexico and fully utilizing those terminals for refined products as we continue to expand there.

So with that, I will wind up the call, say thank you very much. Thank you for your patience. We continue to make our distributions. We've continued to exceed the Alerian Index. And we look forward to sharing other very positive news with you in the very near term. Thank you again, and have a great weekend.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.