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Edited Transcript of USDP earnings conference call or presentation 6-Aug-19 3:00pm GMT

Q2 2019 USD Partners LP Earnings Call

Houston Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of USD Partners LP earnings conference call or presentation Tuesday, August 6, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam K. Altsuler

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

* Brad Sanders

USD Partners LP - Director of USD Partners GP LLC

* 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

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Conference Call Participants

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* Derek Bryant Walker

BofA Merrill Lynch, Research Division - VP

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the USD Partners LP Second 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.

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

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Good morning, and thank you for joining us. Welcome to our second 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 as well as several other members of our senior management team.

Yesterday evening, we issued a press release announcing results for the 3 and 6 months ended June 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, August 6, 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.

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

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Thank you, Jennifer, and good morning, everybody. Thanks for joining us today. We are pleased to announce another positive quarter at the Partnership and our 17th consecutive quarterly distribution increase. Let me say that again, our 17th consecutive quarterly distribution increase, which is consistent with our previously stated 2019 distribution guidance.

Also, we are excited to announce this quarter the successful execution of multi-year contract extensions at both our Hardisty and Stroud terminals with one of the Partnership's investment-grade customers.

As of today, we are 100% contracted at Hardisty and have renewed our first phase of our remaining customer. We expect the higher rates associated with these renewed contracts to begin showing up in the next quarter's financial results.

We look forward to reporting more on the continued momentum from these recontracting efforts in the near future.

Adam, as usual, is going to start off -- start us off with an update on the Partnership's latest financial results and our liquidity position. Then we'll jump back into the recent market and commercial developments. Adam, go ahead and take it?

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

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Thank you, Dan, and thank you for joining us on the call this morning. Yesterday afternoon, we issued our second quarter 2019 earnings release, which included the details of our operating and financial results for the quarter. And we plan to issue our second quarter 10-Q with additional details after the close of market today.

For the second quarter, we reported net income of $1 million, net cash provided by operating activities of $9.3 million, adjusted EBITDA of $12.2 million and distributable cash flow of $8.8 million. The Partnership's results during the second quarter relative to the same quarter in the 2018 were primarily influenced by the lower revenues at its Casper terminal, resulting from the conclusion of a customer agreement at the end of 2018. Partially offsetting this reduction in revenues were higher revenues at the Stroud terminal due to rate escalations. Additionally, the partnership experienced high variable operating cost at its Hardisty and Stroud terminals associated with higher volumes during the quarter, which were partially offset by a reduction in pipeline fees.

Net income for the quarter decreased as compared to the second quarter of 2018, primarily as a result of the operating factors already mentioned, coupled with the noncash loss associated with the 5-year interest rate derivative instrument that the Partnership entered into in November of 2017 and higher interest expense resulting from higher interest rates as well as a higher weighted average balance of debt outstanding during the quarter.

Net cash provided by operating activities and adjusted EBITDA both decreased by 19%, relative to the second quarter of 2018 as a result of the operating factors already mentioned. And also distributable cash flow decreased by 28% relative to the second quarter of 2018 as a result of higher cash paid for interest associated with higher interest rates during the quarter.

As of June 30, the partnership had a net leverage of 3.8x LTM adjusted EBITDA based on its financial covenants and available liquidity of approximately $175 million, including $7 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $168 million on its $385 million senior secured credit facility, subject to continued compliance with financial covenants. The partnership is in compliance with its financial covenants.

On July 24, the Partnership declared a quarterly cash distribution of $0.365 actually per unit or $1.46 per unit on an annualized basis, which represents growth of 0.7% over the prior quarter and 2.8% over the second quarter of 2019. The distribution is payable on August 14 to unitholders of record at the close of business today, August 6.

As Dan mentioned, we are pleased to announce our 17th conservative quarterly distribution increase this quarter, which is consistent with our previously stated 2019 distribution guidance. We're also pleased to announce a successful execution of a multi-year extension at both our Hardisty and Stroud terminals with one of our -- one of the Partnership's investment-grade customers.

The renewal contains take-or-pay arrangements that are generally consistent with the original agreements and monthly payments and fees that are slightly higher. Partnership expects to service the contract by using a limited remaining capacity available at its Hardisty terminal as well as by subletting excess capacity from our sponsor's Hardisty South expansion.

As a quick update regarding our previously announced organic growth project at Casper, we continue to move forward and expect to complete the construction of the outbound pipeline connection by the end of November this year. 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. To-date, the partnership has spent approximately $10.8 million on the outbound pipeline connection.

Dan and Brad will take more about the exciting developments around Casper and the potential growth associated with that new connection.

Also as previously communicated, given where spreads are today, we expected the first half of this year to be somewhat of a transition period for the Partnership with lower distribution coverage than we had typically experienced. That is still the case, however, given that the spread between WCS and WTI barrel of crude oil has remained narrower than expected for a longer period of time, this transition period could extend through the end of the third quarter and possibly the fourth quarter.

That being said, the forward curves today continue to suggest increased incentives for our customers to utilize our terminals on both spot and a contracted basis.

And with that, I'll turn the call back over to Dan.

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

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I appreciate it, Adam. I'll ask Brad now to give us a quick commercial update on the current market and some of our successes we've had here of late. Brad?

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Brad Sanders, USD Partners LP - Director of USD Partners GP LLC [6]

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Yes, thanks, Dan. So current market conditions, spreads between Hardisty and Houston remained in the $12 to $14 level. This is consistent with what those levels have been since the beginning of the year. The current drivers are the same as well, which is the government curtailment program and now that we are in summer and the summer blends create a less of the supply story than the market is -- has remained narrow. Our expectation going forward is, as curtailment levels continued to reduce as we move through the balance of the year, and we move into winter blends and the likelihood of turnarounds from a demand standpoint. So refiners in the U.S., go through their turnaround periods in the fall. Our expectations would be that the spreads will widen from here as we move into to fall and winter.

As a matter of record at $12 to $14, which is the current spread, and we remain near capacity from a utilization standpoint at our Hardisty facility. So we continue to perform strongly as an industry solution for egress out of Canada.

Moving on to commercial discussions and specifically around Hardisty and Stroud, it's already been mentioned. But I'll say it again, in July of this year, the Partnership renewed and extended capacity with one of our remaining investment-grade customers at the Hardisty rail terminal. The renewal was executed with consistent take-or-pay terms and at fees that are higher than the previous contracts. Additionally, we continue to work with this remaining customer to renew and extend the balance of the slots at Hardisty and Stroud, which come due in February and July of next year.

We look forward to reporting more on this in the future as we have updated progress that we can share. Regarding APMC, that's been certainly a headline out of Canada here recently. As we have previously discussed, our sponsor executed a multi-year take-or-pay terminalling service agreement with the Alberta Petroleum Marketing Commission or APMC. This agreement is for transloading capacity at the Hardisty rail terminal, starting in January of 2020. The agreement will support further growth at USDG's Hardisty South expansion and will be funded by our sponsor, pursuant to its development rights at the Hardisty terminal.

Last month, the Alberta government announced that they have engaged CIBC Capital Markets to help oversee the divestment of this group by rail program, and its transition to the private sector. This open season is currently in process and the Alberta government expects this to be completed by fall of this year. At this point, we do not anticipate any negative impact from an economic value standpoint as relates to this agreement to USDG.

Finally, moving on to Casper. Enbridge recently announced a program to increase the capacity of Express pipeline by up to an additional 50,000 barrels a day with the use of a drag-reducing agent and the addition of incremental pump stations. This open season is currently active and is expected to be concluded in late August. We anticipate that some, if not most, of the additional volumes resulting from the increased capacity could be delivered to the Partnership's Casper terminal in the first quarter of 2020 as outbound pipeline connections from the Express pipeline and nearby terminals are at or near full capacity. So we are excited about that development and expect our rail terminal at Casper to benefit, and we'll share the news as we get that here some time, hopefully, second half of August.

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

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Brad, thanks. Could you now talk about a few of the commercial updates at the sponsor? And what those -- the status for those are, please?

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Brad Sanders, USD Partners LP - Director of USD Partners GP LLC [8]

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Yes, I'll talk about our Houston Ship Channel facility. We're -- as we talk about Canada, and we've said this before, as we think about what Express is doing in potentially creating additional egress capacity of 50,000 barrels a day that we will have to seek rail takeaway when we talk about the new APMC volumes, which are reported at 120,000 barrels a day in total, of which Hardisty has got a lion share of that, that throughput. All of those volumes will have to seek -- as they seek origin CBR or crude by rail takeaway, all of those will need destinations.

The U.S. Gulf Coast is the most logical destination given the refineries in the Gulf Coast and their complexity and ability to upgrade heavy sour crude. So we are very purposed about solving for a Dilbit and potential future DRUBIT and we'll talk a bit about that here in a second.

But for any bitumen-related production out of Canada to solve as a destination at our -- by rail at our Houston Ship Channel facility. So we're progressing nicely with customers, who control the barrel at origin. We're excited about the potential of that. The industrial logic is real. The demand is now and we're hopeful to share updates on that sooner than later.

Similarly, the dynamics of what's going on in Mexico, in particular, and their need for imports of light products by rail, we continue to work hard to create an origin solution at our Texas Deepwater or our Houston Ship Channel facility to help build bulk, create rail solutions that are competitive and sustainable from a delivery and export from the U.S., import into Mexico to meet Mexico's needs for incremental volume.

Finally, at our Houston Ship Channel, we continue to work with potential customers on export opportunities for all things crude oil, all things NGLs, all things petrochemicals, for reasons that we've talked to you before on this phone call. Every new production of crude oil and/or nat gas and/or liquids associated with nat gas have to in some form or fashion find export egress options to support that production. So we continue to work closely with customers on that and again, are far enough along that we're excited about the potential of sharing announcements here sooner than later.

Quick update on Mexico. Clearly, our build-bulk strategy in our Houston Ship Channel is supported by our rail terminal, destination terminals that we currently have in Mexico and/or developed in Mexico. We have 2 that we currently have. Our strategy there is to keep them full and to incrementally grow those, and then we are currently in various levels of final development on 3 other terminals, that include throughput, storage and switching. So we're excited about our growth opportunity, specific to Mexico; but uniquely, how it interfaces and supports our Texas Deepwater or Houston Ship Channel type of activity.

I mentioned DRUBIT, DRU, lots of information, lots of folks talking about DRUs. We continue to work with our partners on the diluent recovery unit value and opportunity and look forward to reporting more on this in the near future.

Dan, you got more to add on that?

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

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Yes. Thanks, Brad. Just to remind you on the DRU, we currently hold 3 patents on our DRU process. We are proud to say we've got that completed. We hold the trademark for DRUBIT, and as Brad said, we have very highest level of momentum on that project than we've ever had. We look forward to, as we previously stated, talking about that more, I will say, late summer and early fall, announcing some similar positive steps there. We still believe that the DRU is the best solution for the heavy barrel coming out of Canada to relieve some of the pipeline pressure, allow the lighter crude to flow through the pipes, take the heavies through a DRU system. And as Brad said, deliver those to strategic markets in the Gulf Coast and perhaps other places. But we feel as good as we've ever been about that and are in very deep conversations with existing customers around that.

So with that, I'll open it up for questions and be happy to entertain any now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And first question will come from Derek Walker with Bank of America.

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Derek Bryant Walker, BofA Merrill Lynch, Research Division - VP [2]

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Just a couple from me, Dan. Maybe just starting with the Hardisty contracting. It sounds like the lease rates were a little bit higher than the prior contract, how's that compared to the other renewals at Hardisty? And can you get a little more granular to sort of how the leasing agreement works between the sponsor and USDP?

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

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Yes. So as far as the renewals, you're right, Derek, they are, I would say, more than a little bit higher in both term and price. So we feel very good about that. Obviously, as you heard brad say, we're at and trending towards full capacity at those. So obviously, with that, it's a good time for renewals and extensions because of the ongoing demand that we have for the assets.

We currently have a good line of activity around the growth of that assets. We feel very good about that. I think as it -- as we look at -- and I'll have Adam comment more on the passthrough nature of the agreement. But obviously, that just shows the increased demand and the capacity that we have with the Partnership assets, and we look forward to that continuing basis the continued commitments that we are getting, and the renewal and extensions that we're getting. Adam, do you want to speak to the passthrough?

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

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Yes, you bet. So Derek, really just based on the timing of some of these renewals and during this renewal cycle, the initial customers in some cases increase their commitment to the terminal. And in doing so, basically, got to full capacity as of today. And so -- as some of these, the remaining renewals we have with the 1 Stroud customer as those -- as we sign those, those actually are now overflowing to Hardisty South. And so -- in order to service those Hardisty 1 at the Partnership is really just subletting spots from Hardisty South and it's a passthrough nature. But when and if there is capacity that becomes available at Hardisty 1, then those slots will revert back to the Partnership.

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Brad Sanders, USD Partners LP - Director of USD Partners GP LLC [5]

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You're going to build schedule?

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Adam K. Altsuler, USD Partners LP - Senior VP & CFO of USD Partners GP LLC [6]

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Yes, and we're also -- thanks, Brad. We also plan on going to the Citibank MLP Conference next week, and we will update our contract summary to try to simplify that in our investor presentation.

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Derek Bryant Walker, BofA Merrill Lynch, Research Division - VP [7]

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Maybe just a little bit on just around the transition. Coverage was sort of around 0.9x and you've done a great job recontracting. So I guess how should we think about coverage in the second half with Hardisty, as mentioned, now fully recontracted?

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Daniel K. Borgen, USD Partners LP - Chairman, CEO & President of USD Partners GP LLC [8]

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Yes, I think there's a couple of things to discuss there. One is the higher rates kick in Q3, so you will see an impact there. And that will, I would say, kind of push the distribution coverage to trend back towards kind of our target of 1.15x as well as Q4. And then, as Brad mentioned, with regard to Casper, the open season on Express, we still have a lot of confidence in that, and it's been publicly announced. It’s really more of just a push in time, and it's going to be in January of next year. So we still believe that's going to happen, it's just going to happen a little bit later. So that will also help towards -- trend back towards a 1.15x coverage.

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Brad Sanders, USD Partners LP - Director of USD Partners GP LLC [9]

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Fall spreads and winter spreads should help with throughout at our various terminals and certainly Casper.

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Daniel K. Borgen, USD Partners LP - Chairman, CEO & President of USD Partners GP LLC [10]

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Did that answer for you, Derek?

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Derek Bryant Walker, BofA Merrill Lynch, Research Division - VP [11]

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Yes, it did, Dan. Maybe just another follow-up from me just around the AP -- the government...

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Daniel K. Borgen, USD Partners LP - Chairman, CEO & President of USD Partners GP LLC [12]

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APMC?

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Derek Bryant Walker, BofA Merrill Lynch, Research Division - VP [13]

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The Alberta government -- yes, the Alberta government contract. I know that still -- the process is still ongoing, but do you have any evolvement in that as far as how that contract may transition? It sounds like there won't be any negative impact on your side, but just how -- just what's your evolvement in that process? And so how you think of that will...

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Daniel K. Borgen, USD Partners LP - Chairman, CEO & President of USD Partners GP LLC [14]

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Let me help you there, Derek. Good question. So APMC, obviously, there was a government change, new Premier, Premier Kenney has voiced his willingness to transfer that and desire to transfer that and get government out of the market, if you will, and transition those into the private sector. I think you've seen that there has been public announcements by many of our existing customers and some that are not our customers today, that are very interested in those spots and those slots that we have contacted multi-year with the government.

Just a reminder, our contract with the government is backed by the full faith of the crown as well. And as part of that agreement, we have approval rights for whoever that goes to. So the government and CIBC have acknowledged that and are working closely with us through their process. So in terms of approving who those slots go to in whole or in part, we have those approval rights to see those transition -- so transition to the private sector.

Also as stated publicly by the government and through their process, the government continues to stand behind those. We have -- our rates were a market rate with the government, so we have very little concern, if any, that there would be any change in the economic results to the Partnership. And certainly, the government has also said publicly that they would be standing behind those agreements as those transfer over to the private sector.

There's multiple parts of those agreements. We are just one of those. There's a railcar component. There's a rail freight component. There's a terminalling agreement. There's a number of different pieces to that. So it's multifaceted, not necessarily complex but multifaceted. I think what you've seen publicly from the industry's comments is being able to utilize the slots to dip in further into the curtailed barrels that were set by the government and allowing them to move more barrels.

The energy minister and others at the government have voiced their positiveness around that. Doesn't say that, that's going to happen, but I would say that, that makes sense because that was the intent of those rail slots to move additional barrels out of and clear additional barrels out of the market.

So all that said, we remain very bullish and strong around that agreement. APMC, the government has been extremely forward leaning about their intent around those agreements acting in full -- as a full customer of ours all the way through this process, whether it'd be railcar or on terminalling activities. And so we remain very, very, again, bullish around those agreements and look forward to working with existing customers and new customers to see a successful transfer of those into the private sector and hopefully, that helps the overall egress of the barrel out of Canada.

Does that help with that, Derek?

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Derek Bryant Walker, BofA Merrill Lynch, Research Division - VP [15]

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It does, Dan. And maybe just last one from me. I appreciate the update on the DRU. But maybe perhaps just give a little color around sort of how some of those conversations have gone with potential customers? Do you see potential FID in the second half of this year? Do you have a better sense of what the scope of a potential project could look like? Any thoughts there will be helpful?

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Daniel K. Borgen, USD Partners LP - Chairman, CEO & President of USD Partners GP LLC [16]

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Sure. Let me say, we are in sensitive discussions with customers today. I would say that there is -- as I said earlier, in my comments, there is a very strong and multilevel discussions going on with customers, existing customers and new customers, around the success of the DRU, the implementation of the DRU. And certainly, the customers are engaged at very senior levels. Obviously, a project like this would take multi-years. I'll call it 10-plus year commitment. Those types of commitments generally take the most senior level sign-offs of authority. We are in active discussions with various customers around those multiple levels and are finalizing agreements as it relates to that. We -- our publicly stated build time for the project is approximately 28 months. We have covered a lot of ground over the last couple of years around that from an engineering standpoint and putting that -- starting that project and getting that done.

With that said, we also need to finalize their commercial agreements to underpin the commercial success of the DRU. A reminder, the first phase of the DRU that we are looking to build would be a 100,000 barrels of Dilbit in and a 70,000 barrel a day out, which would obviously free up 100,000 barrels a day out of an existing pipeline. So if you are a customer and you need more pipe capacity, and you can free that up and put that into a DRU and into a DRUBIT barrel and then have that DRUBIT barrel go to market and have that be the most efficient move from a new pipeline build, it's -- that makes -- that just makes all kinds of industrial logic.

We have been talking about this for some time and anytime you plow new ground, it takes some time and the right market conditions for that to happen. But I think during these multiple cycles that we've had in the industry, you see a lot of customers who are saying, we've got to take control of our own destiny a bit more. We've got to strategically invest in our future takeaway opportunities that create the best netbacks for our produced barrel. And we've gained tremendous success in the commercialization of that, and as we've stated prior, we look forward to announcing a completion of those commercial discussions late summer, early fall. And we feel as good as we have ever felt, Derek, around where we are in those discussions with again at multi-levels with customer. Does that help with that?

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Derek Bryant Walker, BofA Merrill Lynch, Research Division - VP [17]

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It does.

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Operator [18]

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And at this time, there are no further questions. I would like to turn the conference back over to Dan Borgen for any closing comments.

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Daniel K. Borgen, USD Partners LP - Chairman, CEO & President of USD Partners GP LLC [19]

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Okay. Thanks. Appreciate it. As usual, Derek, has great questions and again appreciate the support. Our contract renewal discussion at Hardisty and Stroud have been very successful to date, and with our recent announcement representing the first phase of our completed renewal of the last remaining customer. We have been able to do that at multi-year terms in higher rates and so again, evidencing the strong support for our assets and where that's heading.

In addition, we've previously discussed several operating cash flows, projects at our sponsor. Today, there could be possible drop-down candidates for the partnership in the future. We covered many of them from our Mexico business and let me just add to that, the tenor and scope of the agreements that we are seeing down there from investment-grade dollar-based globals or North American nationals that underpin both storage distribution in that -- those selected markets, continue to remain really bullish. And we are getting those agreements done at rates that are commercially successful. We also have the activity at the Houston Ship Channel, as Brad mentioned that we are gaining greater ground on that. And again, for every barrel that leaves Canada needs a destination, and the biggest consumption point that we have in North America for those barrels are in the U.S. Gulf Coast for the heavy barrel. And so we continue to see the demand -- high demand for that and look forward to announcing things around that in the very near future.

Short-term, we've got good momentum on that and good agreements. Obviously, that type of asset does not happen overnight. And I know it's -- I'm weary talking about it as well, but we are -- it is a major asset. It's strategic. The connectivity -- we have gotten connectivity agreements completed in there. We've got -- we've done a lot of work to get that to the point where we now can continue to expand the cash flow. A reminder, we have cash flow positive at day 1 since we've owned that asset and continue to feel very strong about its strategic nature, and we're seeing that confirmed with the commercial agreements that we're getting from customers.

In addition to that we hope to announce those kinds of things in the next couple of months. And let me just say this, we remain extremely diligent on our efforts for dropping down contracted assets into the Partnership. As our assets continue to trend to full-contracted utilization, and as you have heard we are at or full capacity in the Partnership assets and certainly, upstairs at the sponsorship and trending to that. We are looking for those opportunities. We want to be able to efficiently grow the partnership as appropriate. We are going to do it with contracted, long-term, mid to long-term cash flows by our investment-grade counterparties, and we feel very strongly about that. We've got huge momentum in the business today, more so than we've ever had with our renewal extensions, or DRU activities, our growth at the sponsor, Deepwater, Mexico and elsewhere, and we look forward to announcing those things very, very soon.

So with that, I'll say thanks again for the time on the call. I know people are busy, and we look forward to talking with you all soon and announcing some very exciting new developments in the business. Thank you.

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Operator [20]

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Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.