USD Partners LP
Q1 2019 Earnings Call Transcript

Published: 7 May 2019

[Operator:]

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.

[Jennifer Waller:]

Thank you, Brandi. 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 three 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 and last night's press release applies to 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'll turn the call over to Dan Borgen.

[Dan Borgen:]

Thank you, 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 at our 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 of 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 agreements at Hardisty kick in. We also continue to see increased momentum at our sponsors previously mentioned, during the first quarter, our sponsor executed a new multi-year 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 translating 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 USDGs 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 dropdown candidates for the partnership in the future. Adam is going to start us off with an update on the partnerships latest financial results and our liquidity position. Then we'll jump back into the recent market and commercial developments. Adam

[Adam Altsuler:]

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 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 decreased by 15% and distributed 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 result of the operating factors already discussed, coupled with a non-cash loss associated with the five year interest rate derivative instrument, as a partnership entered into in November of 2017. As of March 31, the partnership had a net leverage of 3.5 times 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 continue 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 and a quarter cents per unit or $1 45 per unit on an annualized basis, which represents growth of point 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 ASE 842 that requires balance sheet recognition of leased assets and 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 expected the first half of 2019 to be somewhat of a transition period for the partnership with lower distribution coverage than we've 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 WTF barrel of crude oil incentivize our customers to utilize more of their contracts capacity our terminals, as suggested by the forward curves today. With that, I'd like to turn the call back over to Dan.

[Dan Borgen:]

Thank you, Adam. Now, we'll shift to our commercial update. I'll ask Brad Sanders to give us an overview and update.

[Brad Sanders:]

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've 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 in building inventory levels. This indicates that we continue to have an imbalance between supply and take away capacity and the need for crude by rail specifically. Late last week, we began 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 and a quarter and given that the values in Houston, which are trading at a premium to WTI currently to 50 a barrel, then there's $18, approximately $18.50 worth of incentive for people who are moving 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 take away capacity. We expect to be able to announce progress on that prior to our next earnings call. As it relates to Casper specifically, we're very excited about two 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 the capacity on their Express line, which will lead to direct demand for crude by rail off take at Casper. Josh, you want to give us an update on both of those?

[Josh Ruple:]

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 away acquisition and we will deliver that project on time and within budget. Our goal right now is 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.

[Dan Borgen:]

Thank you. Alright, so as we look at our expansion opportunities upstairs at the sponsor, I'll ask Brad to talk a little bit about our Texas Deepwater and our Mexico update where we spend a lot of energy.

[Brad Sanders:]

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 doc. So naturally, given the story up in Canada, we are very excited about building destination capability for crude by rail. For every barrel that 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 what's going on in Mexico specifically, there is a need for building bulk on like 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 supportive 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 like product, export and distribution solution. So we're very, very excited about that. Josh, you want to just talk about Texas Deepwater generally.

[Josh Ruple:]

Yeah, I think that the additions to make and just to remind folks on the call is all of those opportunities are supported by our pass permitting efforts. We are 100% shovel-ready at Texas Deepwater and are able to move quite quickly into the planning, scoping phases of project development, and have very aggressive delivery timelines for all of the projects you mentioned, whether it be crude by rail on loading capability and then the connectivity to the Houston, the Houston hub, export options for the live 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.

[Brad Sanders:]

Thanks, Josh. Specific to Mexico, we currently as a reminder have two operating terminals down there at Querétaro and Cuauhtémoc. Cuauhtémoc is just outside of Chihuahua. Both of those are our 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, very purpose and specific take on taking our success at these two terminals and growing logically to create a network of additional terminals. So taking the learnings from our specific first two terminals and using that to grow a network. And then finally, as Josh and I have talked about is we'll leverage both of those into a Texas Deepwater solution, which is basically rail origin, like 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 purposeful about how we grow, how we size those bets, and how we leverage success into new opportunities.

[Dan Borgen:]

Thank you, Brad. Just additional comment on that, many of you may have seen we announced at our sponsor at Texas Deepwater, a new agreement with Shell on 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 moving to West Texas and into Mexico. So that's within look for future development as that ties further into our Texas Deepwater development, but we look forward to sharing more about that, but we're excited about that opportunity, and obviously is 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.

[Operator:]

Thank you. The floor is open for questions. [Operator Instructions] First question comes from Derek Walker of Bank of America.

[Dan Borgen:]

Good morning, Derek.

[Derek Walker:]

Hey, good morning.

[Brad Sanders:]

Look forward to seeing you next week.

[Derek Walker:]

Yeah, for sure, definitely and a new venue too, so it'll be nice.

[Brad Sanders:]

Yeah, that's right.

[Derek Walker:]

Just a couple quick ones Dan, you mentioned last quarter and this quarter the sort of the 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 they also have a couple of products coming in line second half as well. And I think you're also reiterating sort of that distribution growth for the year. So I guess, so sort of kind of walk me through the thought process there and how I should think about sort of the cadence for the year.

[Adam Altsuler:]

Yeah. No, that's right, Derry, this is Adam. And I'd say our coverage this quarter was primarily result of lower spot volumes at Casper. So the production cuts implemented by the Alberta government did have an impact on the spread 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 half 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 of spot and it'll help with our renegotiations and our new discussions at Hardisty. At Casper, we've also talked about, Josh gave an update on the on the outbound pipeline connection. And as Brad said, we think that'll 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 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 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 1.15 times.

[Derek Walker:]

Thanks for that Adam. Maybe if I could just kind of elaborate or just get some 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, lots of this is backed by MBC on your contract so is - where EBITDA came in today is that really just the MBCs and would you need a spot to kind of get you to sort of a onetime coverage for the quarter. Just try to understand some of the moving parts there.

[Adam Altsuler:]

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 it's - then we get a throughput fee as they utilize the terminal. So I think they're paying these reservation fees really to utilize a terminal when the spreads are in the money. So we do see that kind of ramping up in Q2 and then we feel like will be above one times 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 signed at Casper, especially the one that we talked about that supports the - and basically underwrote the pipeline connection. With regards to 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 in any kind of foreign exchange exposure we have there, but that's been relatively steady over the last 12 months.

[Dan Borgen:]

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

[Adam Altsuler:]

Yeah. And within obviously, any new contract that kicks in July, those are the new rates that are based on escalations, those are based on new higher rates that we've tried to get a little bit of color to over the past 36 months.

[Dan Borgen:]

So we have good definition around that cash flow coming in, in July, with increased revenues that we've got an increased price points, remember somewhere around 38% increase over our base agreements on our first five, 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.

[Derek Walker:]

Thanks, Dan. Thanks, Adam. Maybe just one last one for me, hey, 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 we're 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. Is this sort of how you're think about drop downs for USDP and kind of 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 sort of dropdowns?

[Brad Sanders:]

Okay, Derek, this is Brad. As it relates to Hardisty South, 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 four to seven slots per month. So we find that to be material. Given the spread 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 of 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 n 2020. 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 in demand for those slots and utilization of our facilities to grow. In the spot activity at Casper that will be a windfall. That's all that is, it's simply windfall given our design and capacity there, we always have excess capacity for spot activity. Adam?

[Adam Altsuler:]

Yeah and Derek, I'll take the dropdown question. So with regard to Stroud, the Stroud expansion and Hardisty South, I think our goal really there is to finish up with the re-contracting, 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 is at the parent and then we would evaluate the dropdowns. We constantly evaluate these things in our board meetings and then kind of our day to day, but the goal is always been to get them full, get them commercialized and de-risk and then we'd really do a true evaluation of the dropdown and look at the capital markets obvious as well.

[Dan Borgen:]

Yeah, 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 - that's what we signed up to do was 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.

[Derek Walker:]

Got it, I appreciate it. Look forward to see you guys next week.

[Adam Altsuler:]

Hey, Derek keep your eye out for - well it looks like we're going to update our Investor Presentation hopefully publish that early next week to help before the conference.

[Derek Walker:]

Excellent, thanks.

[Adam Altsuler:]

Thanks.

[Dan Borgen:]

Thanks, Derek.

[Operator:]

[Operator Instructions] Your next question comes from Roger young, a private investor.

[Roger Young:]

Thank you. Regarding the Texas Deepwater is there an opportunity for LPG exports with your assets whereas the primary focus crude and product.

[Dan Borgen:]

Yeah. Roger, hi, Good to talk to you and thanks for being an investor. We've designed the facility to be in four kind of areas, right, so one would be crude, both blending heavy destination for Canadian business as well as tying into a light suite to be able to create a blend stock for our refining customers. So that's part of it. Second, of course is with the LNG export side.

[Roger Young:]

LPG.

[Dan Borgen:]

Sorry, LPG. Thank you. And which we have an earnest discussion going on with folks around that. And so to answer your question 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 just like spots as well as our chemical side and component side.

[Roger Young:]

Thank you.

[Dan Borgen:]

Sure.

[Operator:]

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

[Dan Borgen:]

Okay, thank you Brandi, I appreciate it. Obviously, as we said our contract negotiations at Hardisty have been very successful today with the substantial amount of the terminals capacity extended through 2022 and 2023 respectively. As a reminder, we've contract 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 customers every day and for our shareholders. And we look forward to sharing more with you. Thanks again.

[Operator:]

Thank you. That does conclude today's conference call. You may now disconnect.