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Edited Transcript of USDP earnings conference call or presentation 7-May-19 3:00pm GMT

Q1 2019 USD Partners LP Earnings Call

Houston May 13, 2019 (Thomson StreetEvents) -- Edited Transcript of USD Partners LP earnings conference call or presentation Tuesday, May 7, 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

* Joshua Dean Ruple

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

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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 First 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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Thank you, Brandy. Good morning, and thank you for joining us. Welcome to our first 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 months ended March 31, 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, May 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.

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

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Thanks, Jennifer, and good morning, everyone. Thanks for being on the call today. We are pleased to announce another positive quarter at the Partnership and our 16th consecutive quarterly distribution increase, which is consistent with our previously stated 2019 distribution guidance.

We continue to see momentum out of terminals and have seen a material ramp-up in recent nominations due to current and projected spreads widening to levels that should incentivize our customers to fully utilize the capacity at our terminals.

As we mentioned on our fourth quarter earnings call, we view the first half of 2019 as somewhat of a transition period for the Partnership, and we look forward to transition to the second half of this year when the higher rates from our recently extended terminal services agreement with Hardisty kick in.

We also continue to see increased momentum at our sponsor. As previously mentioned, during the first quarter, our sponsor executed a new multiyear take-or-pay Terminalling services agreement with the Alberta Petroleum Marketing Commission, or APMC, an agent of the government of Alberta. The agreement is for transloading capacity at the Hardisty rail terminal starting in January 2020 and contains take-or-pay terms with minimum monthly payments. The agreement will further support growth at USDG's Hardisty South expansion and will provide additional capacity beyond the APMC commitment. This expansion will be funded by our sponsor pursuant to its development rights at the Hardisty terminal.

As we've discussed in the past, this opportunity along with other opportunities at our sponsor could be possible drop-down candidates for the Partnership in the future.

Adam is 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 the recent market and commercial developments. Adam?

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

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

For the first quarter, we reported net income of $1.3 million, net cash provided by operating activities of $10.2 million, adjusted EBITDA of $11.5 million and distributable cash flow of $8.4 million. The Partnership's results during the first quarter of 2019 relative to the same quarter in 2018 were primarily influenced by lower revenues at our Casper terminal, resulting from the conclusion of a customer agreement at the end of 2018, which were partially offset by higher revenues at our Stroud terminal associated with additional contracts that were executed in March and April of 2018.

Additionally, the Partnership experienced higher variable operating costs at our Hardisty and Stroud terminals, which we incurred with the anticipation of higher volumes during the quarter as well as high operations and maintenance costs at our Stroud terminal, which were partially offset by a reduction in pipeline fees and a decrease in depreciation expense.

Net cash provided by operating activities increased by 26% relative to the first quarter of 2018 primarily due to the timing of receipts and payments on accounts receivables, accounts payable and deferred revenue balances.

Adjusted EBITDA increased by 15 -- or decreased by 15% and distributable cash flow decreased by 24% relative to the first quarter of 2018. The decrease in adjusted EBITDA was primarily a result of operating factors previously discussed, and DCF was also impacted by higher cash paid for interest associated with higher interest rates during the first quarter of 2019 as compared to the first quarter of 2018.

Net income for the quarter decreased as compared to the first quarter of '18, primarily as a result of the operating factors already discussed, coupled with a noncash loss associated with the 5-year interest rate derivative instrument at the Partnership entered into in November of 2017.

As of March 31, the Partnership had a net leverage of 3.5x LTM adjusted EBITDA based on its financial covenants and total available liquidity of $181 million, including $3 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $177 million on its $385 million senior secured credit facility, subject to continuous compliance with financial covenants. The Partnership is in compliance with its financial covenants.

On April 26, the Partnership declared a quarterly cash distribution of $36.25 per unit or $1.45 per unit on an annualized basis, which represents growth of 0.7% over the prior quarter and 2.8% over the first quarter of 2018. The distribution is payable on May 15 to unitholders of record at the close of business on May 7.

Effective January 1, 2019, the Partnership adopted the requirements of Accounting Standards Update 2016-02 or ASC 842 that requires balance sheet recognition of leased assets at leased liabilities by lessees for those leases classified as operating leases.

As Dan mentioned, we are pleased to announce our 16th consecutive quarterly distribution increase this quarter, which is consistent with our previously stated 2019 distribution guidance. And as we previously had mentioned, we expect the first-- we expected the first half of 2019 to be somewhat of a transition period for the Partnership with lower distribution coverage than we have typically experienced. We look forward to transitioning into the second half of this year when the higher rates from our recently extended terminalling services agreements at Hardisty will begin to show up in our financial results and the spread between WCS and WTI barrel of crude oil incentivize our customers to utilize more of their contracting capacity at our terminals as suggested by the forward curve today.

With that, I'd like to 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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Thank you, Adam. Now we'll shift to our commercial update. I'll ask Brad Sanders to give us an overview and update on the market.

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

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Thanks, Dan. So given the government mandate production cuts that began in December of last year, we've seen strengthening prices, higher net backs for producers out of Canada. So they achieved their primary objective. Despite those cuts, though, we continue to see high apportionment levels for all export pipelines as well as high inventory levels -- and building inventory levels. This indicates that we continue to have an imbalance between supply and takeaway capacity and a need for crude by rail specifically.

Late last week, we'd begun to see changes on prices at the origin, where we've seen weakening values on WCS relative to WTI. This morning, values are as wide as 16 to 16.25. And given that the values in Houston, which are trading at a premium to WTI currently $2.50 a barrel, then there's $18 -- approximately $18.50 worth of incentive for people who are moving by crude by rail. So given that, we are obviously busy at our facility and operating at very high utilization rates, which is clearly indicative of our role as an industry solution provider for Canadian producers and customers who need egress opportunities.

Specifically to our commercial activity at Hardisty and Stroud, in addition to the work that Dan mentioned with APMC, we are working on our final -- or with our final existing customer to renew and extend both at Hardisty and Stroud. So that's a pretty good indication of the success we've had commercially as we've gone through this period of supply greater than takeaway capacity. We expect to be able to announce progress on that prior to our next earning call.

As it relates to Casper specifically, we're very excited about 2 investment opportunities that we're specifically working on there. One is the pipeline connection that provides optionality and more solutions for our refining customers who are currently on the express system. But also we're working with Enbridge to improve their capacity on their express line, which would lead to direct demand for crude by rail offtake at Casper. Josh, you want to give us an update on both of those?

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Joshua Dean Ruple, USD Partners LP - Senior VP & COO of USD Partners GP LLC [7]

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Absolutely. In regards to the organic growth project at Casper, the work activity associated with the pipeline connection is working per plan. We're deep down the path in engineering procurement, right-of-way acquisition, and we will deliver that project on time and within budget. Goal right now is the -- to be substantially complete in November.

And Brad, as you mentioned the project associated with Enbridge and the Express Pipeline, we also are working quite closely with the Enbridge folks and have a lot of creative solutions where Casper becomes an integral part of that overall solution. So excited about both, and both are going well.

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

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Thank you.

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

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All right. So as we look at our expansion opportunities upstairs at the sponsor, I'll ask Brad to talk a little bit about the -- our Texas Deepwater and our Mexico update, where we spent a lot of energy.

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Brad Sanders, USD Partners LP - Director of USD Partners GP LLC [10]

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You bet, Dan. So Texas Deepwater, as a reminder, is on the Houston Ship Channel and provides access and connectivity to both water and local refiners as a function of pipe and dock. So naturally, given the story up in Canada, we are very excited about building destination capability for crude by rail. For every barrel that seeks exit out of or egress out of Canada, you need a destination to match that demand. And naturally, we are uniquely situated with connectivity to the Canadian heavy hub here in Houston that provides not only a destination but access to multiple refiners in the Houston Ship Channel. So we're excited about that, and that's a critical priority currently.

In addition, and we'll talk a little bit about this, given the -- what's going on in Mexico specifically, there is a need for building bulk on light products to maximize real values into Mexico, and we have the natural origin for that to make that happen. As we talked through Mexico, you'll see the connectivity and how that makes industrial logic.

And then finally, in support of all things seeking distribution and export opportunities in Houston, we're at various levels of discussions and details for crude NGLs, pet cams and light product export and distribution solutions. So we're very, very excited about that. Josh, do you want to just talk about Texas Deepwater generally?

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Joshua Dean Ruple, USD Partners LP - Senior VP & COO of USD Partners GP LLC [11]

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Yes. I think the additions to make, and just to remind folks on the call, is all of those opportunities are supported by our past permitting efforts. We are 100% shovel-ready at Texas Deepwater and are able to move quickly into the planning, scoping phases of project development and have very aggressive delivery time lines for all of the projects you mentioned, whether it be crude by rail, unloading capability and then the connectivity to the Houston hub; export options for the light barrels as we've been talking about for a while now; and then also the refined product story as an origin to a critical network of destinations that we're developing in Mexico. We're at various levels of the development stage in each of those projects. Some pretty far down the path. Others, we're just beginning the work. All in all, though, things are going well and our cost competitiveness at this point is quite good.

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Brad Sanders, USD Partners LP - Director of USD Partners GP LLC [12]

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So specific -- thanks, Josh. Specific to Mexico, we currently, as a reminder, have 2 operating terminals down there, at Queretaro and Cuauhtémoc. Cuauhtémoc is just outside of Chihuahua. Both of those are operating today. Both have been successful. And our first priority is growing both of those assets with our existing customers. So our customers have had success. They're comfortable with the logic of those terminals and want to grow them.

With that then, we're very purposed and specific on taking our success at these 2 terminals and growing logically to create a network of additional terminals. So taking the learnings from our specific first 2 terminals and using that to grow a network.

And then finally as we, Josh and I, have talked about is we'll leverage both of those into a Texas Deepwater solution, which is basically rail origin, light products rail origin, which makes economic sense as people will work towards creating a better origin solution, specifically unit train solution, which we can provide at our facility. So we're excited about our Mexico growth, and we're very purposed about how we grow, how we size those beds and how we leverage success into new opportunities.

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Daniel K. Borgen, USD Partners LP - Chairman, CEO & President of USD Partners GP LLC [13]

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Thank you, Brad. Just additional comment on that. Maybe you may have seen we announced our -- at our sponsor at Texas Deepwater, a new agreement with Shell on a redeveloping an idle fuel rack that we had originally built with Shell some years ago and putting that back into service and are in process to do that with a completion date very soon. That will have the capacity to move up to approximately 40,000 barrels a day of diesel, which will be moved into West Texas and then to Mexico. So that's -- we'll then look for future development as that ties further into our Texas Deepwater development. But we look forward to sharing more about that. We're excited about that opportunity, and obviously it's a first leg of getting additional product moving to Mexico and West Texas to meet the demand needs out there.

So with that, we'll turn it over for questions and happy to talk to it.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Derek Walker of Bank of America.

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

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Just a couple of quick ones, Dan. You mentioned last quarter and this quarter this sort of transition period, from the first half to the second half. And given where coverage came in this quarter, I guess, how should we kind of think about the cadence of how you're thinking about coverage improving? And you also have a couple of products coming on line in the second half as well, and I think you're also reiterating sort of that distribution growth for the year. So I guess just sort of kind of walk me through the thought process there and how I should think about sort of the cadence for the year.

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Adam K. Altsuler, USD Partners LP - Senior VP & CFO of USD Partners GP LLC [3]

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Yes. That's right, Derek. This is Adam. And I'll tell you, our coverage this quarter was primarily a result of lower spot volumes at Casper. So the production -- by the Alberta government did have an impact on the spreads, as you well know, and on spot business. However, the forward curves suggest increased business and increased demand at Casper and actually at Hardisty for that matter starting with the second of this year. And actually I think they strengthened this morning. So we are seeing the spreads widen, which we do think will support future business, both spot and it will help with our renegotiations and our renewal discussions at Hardisty.

At Casper, we've also talked about -- Josh gave an update on the outbound pipeline connection. And as Brad said, we think that will open up a new pool of customers to talk to about spot and term business going forward. It's a structural change that we think will enhance the sustainability of that assets -- that asset. And we will be sure to keep the market updated on any progress there, but we are scheduled to complete that in November, and we are already in discussions with new customers about that.

So our view is in the second half of this year, along with what I just said but also the new contract rates kicking in from the Hardisty renegotiations and the extensions will kick in, in July. So that, coupled with the connection at Casper, coupled with the widening spreads, we feel like that we'll see an increase in our distribution coverage and we'll continue to target 1.15x.

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Derek Bryant Walker, BofA Merrill Lynch, Research Division - VP [4]

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Maybe if I could just kind of elaborate or just get a little more color around some of that. So is it fair for next quarter we should be expecting a similar sort of coverage for 1Q and with most of the improvement starting in 3Q, 4Q for the factors that you mentioned? And then maybe a derivative to that would be you mentioned kind of the lower spot rate. Obviously, a lot of this is backed by MBCs on your contract. So where EBITDA came in today, is that really just the MBCs or -- and would you need the spot to kind of get you to sort of the 1x coverage for the quarter? Just trying to understand some of the moving parts there.

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Adam K. Altsuler, USD Partners LP - Senior VP & CFO of USD Partners GP LLC [5]

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Sure. I think that the spot always helps. We've got some agreements at Casper that have commitment fees associated with tank usage. But then we get a throughput fee as they utilize the terminal. So I think they're paying these reservation fees really to utilize the terminal when the spreads are in the money. So we do see that kind of ramping up in Q2, and then we feel like we'll be above 1x in Q3 and Q4 and for the average for the year. So those things are all kind of in the new contracts we've got that we've signed at Casper, especially the one that we talked about that supports the -- and basically underwrote the pipeline connection. With regard to the MBC, the MBCs are always getting paid kind of per the contract rates. To your point, those don't change much. The only change there would be an escalation and any kind of foreign exchange exposure we have there, but that's been relatively steady over the last 12 months.

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Daniel K. Borgen, USD Partners LP - Chairman, CEO & President of USD Partners GP LLC [6]

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Which we're seeing an increase in the MBCs under the new contracts starting.

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Adam K. Altsuler, USD Partners LP - Senior VP & CFO of USD Partners GP LLC [7]

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Yes. And then -- but then obviously, any new contract that kicks in, in July, those are the new rates that aren't based on escalations. Those are based on new, higher rates that we try to give a little bit color to over the past 36 months.

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

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So we have good definition around that cash flow coming in, in July with increased revenues that we've got and increased price points. Remember, somewhere around 38% increase over our base agreements on our first 5 now rolling into our renewals at approximately 38% increase. So we feel very bullish about that and feel confident about our ability to continue with our guidance.

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Derek Bryant Walker, BofA Merrill Lynch, Research Division - VP [9]

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Maybe just one last one for me. You mentioned that there's opportunities for additional contracting beyond, I guess, the agreement with the Canadian government at the Hardisty South expansion or project. Is that fully contracted, the Hardisty South, at this point? And then what type of scale are we talking about for the additional capacity that might be kind of beyond that agreement? And then maybe stepping into sort of the more broader question, Dan, just sort of how you think about drop-downs for USDP and kind of -- there's a lot of moving parts for this year, so I don't know if you want to kind of get that under your belt first before kind of seeing or executing as far as drop-downs.

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Brad Sanders, USD Partners LP - Director of USD Partners GP LLC [10]

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Okay. Derek, this is Brad. As it relates to Hardisty South, we are -- the extra capacity that was referenced is really driven primarily to the good work that Josh and the railroads are doing to work together and create efficiencies around our planned capacity. That means that extra capacity is somewhere in the 4 to 7 slots per month. So we find that to be material. Given the spreads where they are today and given the timing of when those would be available, we've been very patient about marketing that capacity, but we know a pent-up demand at Hardisty that will very much want to participate in those slots when the market differentials return. And remember, if you look at spreads out forward, we see basically spreads between $21 and $22 starting in 2020. So -- and as we spoke earlier, we've seen spreads already widen as wide as $18.50 in the spot. So we're expecting to see spreads widen and demand for those for slots and utilization at our facilities to grow. And the spot activity at Casper, that will be a windfall. That's all that is. It's simply a windfall given our design and capacity there. We always have excess capacity for spot activity. Adam?

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Adam K. Altsuler, USD Partners LP - Senior VP & CFO of USD Partners GP LLC [11]

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Yes. Derek, I'll take the drop-down question. So with regard to Stroud, the Stroud expansion and Hardisty South, I think our goal really there is to finish up with the recontracting, get them to full capacity, de-risk them and de-risk any kind of construction risk that the MLP would have to take, so de-risk it at the parent, and then we would evaluate the drop-downs. We constantly evaluate these things at our Board meetings and then kind of our day-to-day. But the goal has always been to get them full, get them commercialized and de-risked and then we'd really do a true valuation of the drop down and look at the capital markets obviously as well.

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

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Yes. We take great pride in our ability to continue to give positive guidance around our distribution increase. And we've done that now for 16 straight quarters, and maybe that's unique in the business, but we feel very good about that. That's what we've signed up to do, to be able to grow our business and do it conservatively, fee-based, investment-grade-backed, high-quality revenue streams, which allow us to be able to guide through troubled waters and be able to meet our guidance, and we've always done that. So we see no change in that. We feel very good about where we are and with our new contracts coming online. But I think Adam said it well. We want to make sure that, that happens and get that all done, which we -- again, we feel very good about.

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Adam K. Altsuler, USD Partners LP - Senior VP & CFO of USD Partners GP LLC [13]

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Derek, we're -- keep your eye out for -- it looks we're going to update our investor presentation. Hopefully to publish that early next week to help, before the conference.

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Operator [14]

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(Operator Instructions) Your next question is from [Roger Young], a private investor.

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Unidentified Participant, [15]

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Regarding Texas Deepwater, is there an opportunity for LPG exports with your assets? Or is it, the primary focus, crude in product?

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

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Yes, Roger, good to talk to you and thanks for being an investor. The -- we have designed the facility to be in for kind of various, right? So one would be crude, both blending heavy destination for our Canadian business as well as tying into a light sweet to be able to create a blend stock for our refining customers. So that's part of it. Second, of course, is in the LNG exports side.

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Brad Sanders, USD Partners LP - Director of USD Partners GP LLC [17]

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LPG.

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Daniel K. Borgen, USD Partners LP - Chairman, CEO & President of USD Partners GP LLC [18]

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Sorry, LPG. Thank you. And which we have an earnest discussion going on with folks around that. And so to answer questions specifically, yes. Then third is refined products and then components. We talked about the refined products both to originate to go to West Texas as well as Mexico and additional exports as well as our chemical side and components side.

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Operator [19]

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Thank you. There are no further questions at this time. I will now turn the floor over to Dan Borgen for any additional or closing comments.

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Daniel K. Borgen, USD Partners LP - Chairman, CEO & President of USD Partners GP LLC [20]

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Okay. Thank you, Brandy. Appreciate it. Obviously, as we said, our contract negotiations at Hardisty have been very successful to date, with a substantial amount of the terminals' capacity extended through 2022 and 2023, respectively. As a reminder, we've contracted substantially all of our capacity at Hardisty through the end of this year, and we'll continue to be actively engaged with our Stroud customer. And as Brad said earlier, we look to announce something there before our next earnings call. We'll continue to keep you updated and look forward to additional announcements regarding the progress that we're making. And as usual, we appreciate your commitment to USDP and the USDG. We're working hard to create value for our customers every day and for our shareholders, and we look forward to sharing more with you. Thanks again.

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Operator [21]

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Thank you. This concludes today's conference call. You may now disconnect.