USD Partners LP
Q4 2017 Earnings Call Transcript

Published: 9 Mar 2018

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the USD Partners LP Fourth Quarter 2017 Results Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the prepared remarks. [Operator Instructions] It is now my pleasure to turn the call over to Ashley Zavala, Senior Director of Finance and Investor Relations for opening remarks. Please go ahead.

[Ashley Zavala:]

Good morning, and thank you for joining us. Welcome to our fourth quarter 2017 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, 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 and 12 months ended December 31, 2017. 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, March 9, 2018. 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, Ashley, I appreciate it. Good morning, everybody. It looks like we got a good crowd on the call, so I appreciate everybody being here. Let me– Adam is going to touch on the quarter, but let me just make an opening comment on that and that Q4 2017 was a transitional quarter for us. The demand is on. We’re ramping up since January and continue to build and we’ll get into more detail about, but this is what is fun to be in our business. The – we’ve been talking about this demand story coming for a bit, and we’re glad it’s here. Obviously, I’m sure you all are as well and our investors are as well. It’s – the phones are ringing off the hook. The customers and new customers are at the table for all of the obvious reasons that we’ve talked about. If you’re following the curve data out there on the WCS to Cushing or WCS Houston, it’s continuing to widen in the mid-20s, low-20s to 30 on both at the short-term and then over a five-year period. So this demand is multi-year. It’s – we’re confident in our assets and where we are and we feel very good that – in the position that we’re in, working hard with customers, we’ll talk about the railroad issues here in a bit and bring up to speed on kind of where we are there and how that’s ramping up. But we feel a – we feel very good to be where we are. Obviously, rail offers scalable timely solution for the takeaway needs and it’s critical given the uncertainty around the future large-scale infrastructure developments, plus the ability to preserve the specific quality of the product as you know. As a reminder, we have ready capacity available at Casper and Stroud today, and we are fully permitted to add another unit train per day of capacity at Hardisty. Josh is here, our COO, and he took about our timing on that as appropriate. We think that we can bring that on before the end of this year, and we feel very strong that that be in high-demand as we have multiple customers seeking that space today. Our network is strategically positioned to key hubs and was purposely designed to meet the needs of the market that we’re in today. So 2018 is going to be a very important year for the Partnership. We see a lot of growth in it. We look forward to reviewing with you today several opportunities for both contract extensions, new customer agreements, as well as potential expansion – expansions across the terminal network by our sponsor and at the Partnership. Last night, as we said, we issued a press release that included the details of our financial results. We plan to issue our 10-K with additional details after the close tomorrow. And Adam is going to start us off talking about in more detail around the results for the quarter and this transitional quarter. Adam?

[Adam Altsuler:]

Thank you, Dan, and thank you for joining us on a call this morning. For the fourth quarter, we reported net cash provided by operating activities of $9.5 million, adjusted EBITDA of $12.5 million and distributable cash flow of $9.8 million. Relative to the fourth quarter 2016, net cash provided by operating activities decreased by 41%, while adjusted EBITDA and distributable cash flow decreased by 26% and 39%, respectively. Net income for the quarter decreased by 44%, as compared to the fourth quarter of 2016. The Partnership results during the fourth quarter 2017 relative to the same quarter in 2016 were primarily influenced by the conclusion of a customer contract at our Casper terminal and the decommissioning of our San Antonio ethanol terminal, partially offset by additional cash flow associated with commencement of operations at our Stroud terminal. The Partnership has spent approximately $200,000 during the fourth quarter on the decommissioning of its San Antonio terminal. And at this point, we do not expect to spend material cost in the future. In addition, the Partnership incurred high operating cost to support a substantial increase in customer activity at Hardisty terminal during the quarter. During the fourth quarter of 2016, the Partnership benefited from the receipt of a tax refund totaling $1.3 million, whereas we did not receive a refund nor pay cash taxes during the fourth quarter of 2017. Partially offsetting the items previously discussed, the Partnership recorded a lower provision for income and withholding taxes of approximately $200,000 in the fourth quarter of 2017 versus $1.1 million in the same quarter of the previous year. The Partnership estimates its net cash taxes paid for the full-year 2018 to be in the range of $750,000 to $1 million. Taking a step back and, as Dan mentioned, the fourth quarter of 2017 was somewhat of a transition quarter for the Partnership, as we are very excited about 2018 in the recent market and commercial developments. Dan will comment more on these in his prepared remarks, but we think it is important to note the following highlights going into the year. Customer activity at our Hardisty terminal has increased substantially over the last several months. Current market demand for our terminal services exceeds the available capacity, and substantially all the terminals capacity was previously contracted for by customers under multi-year agreements through mid-2019, mid-2020. As a result, the Partnership’s sponsor is evaluating a potential expansion to meet near-term demand. The Partnership is also actively negotiating with current customers to extend the terms of its existing take-or-pay contracts. As we previously announced, the Stroud terminal successfully commenced operations on October 1, 2017. Concurrent with the Stroud acquisition, the Partnership entered into a multi-year, take-or-pay terminalling services agreement with an investment-grade rated, multi-national energy company for use of approximately 50% of the Stroud’s available capacity through June 2020. Per the original agreement, the contracted take-or-pay volumes with the Stroud customer increased to 30,000 barrels a day on January 1, 2018, up from 20,000 barrels a day during the fourth quarter of 2017. So we will see that increase in the first quarter of this year. This increased volume supports our initial guidance of approximately $10 million of annual adjusted EBITDA of the terminal. Our sponsor is currently negotiating with potential customers for both the remaining capacity of Stroud, as well as potential expansion capacity. And these initiatives could grow the terminals baseline adjusted EBITDA by somewhere between 20% and 25%, assuming the terminal was fully contracted. During the first quarter of 2018, the Partnership has supported spot shipments for a large international oil and gas company, as well as for a local producer’s heavy sour crude production at its Casper terminal. Based on currently scheduled shipments, we estimate additional spot revenues of approximately $500,000 in the first quarter. The Partnership is actively pursuing term agreements with these spot customers for ongoing use of the Casper terminal as well. Additionally, the Partnership is exploring other potential growth opportunities at Casper, including additional connectivity options and additional tanks to accommodate its customer’s need. As of December 31, the Partnership had net leverage of three times LTM adjusted EBITDA, including pro forma adjustments for the Stroud acquisition and total available liquidity of approximately $206 million, including approximately $8 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $198 million on its $400 million senior secured credit facility subject to continued compliance with financial covenants. The Partnership is in compliance with its financial covenants and has no maturities under a senior secured credit facility until October 2019. On February 1, we declared a quarterly cash distribution of $0.35 per unit, or $1.40 per unit on an annualized basis, which represents growth of 1.4% relative to the third quarter of 2017 and 6.1% relative to the fourth quarter of 2016. The distribution was paid on February 16 to unitholders of record as of February 12. In addition, the Partnership maintained distribution coverage of approximately 1.1 times for the quarter and average 1.3 times for the full-year 2017. And with that, I will turn the call back to Dan.

[Dan Borgen:]

All right. Thank you, Adam. Let me make one follow-up comment to Adam’s statement regarding the customer, refiner customer who didn’t renew at Casper. I think that customer is probably kicking themselves right now, because this is exactly the market that Casper was built for a, cheap feedstock, discounted access to that feedstock. And I think, they are at the table back with us on a supply agreement that we’re working with them on. And there has been considerable loss of value from that standpoint for that refiner simply, because they don’t have access to that at the rate that they could have had. So once again, these steps not only prove the – or these market shifts not only prove the success and location of our assets, but the opportunities that they provide, both our producers and our refiner customers, who are in this market refiners are claiming for cheaper feed. This is exactly the market opportunity that these assets were contemplated, designed for and built for. We’ll always talk about the physical need of delivery for these assets, but also the market reach that they provide. This is exactly the timeframe and the market demand that these assets were built for to fully capture that. So with that, obviously, we’ve had a meaningful shift in the market demand for these assets. And as we do and we’re kind of unique, I think, maybe in this approach, but we’re going to ask ourselves some questions that we hope will answer some of the things that you all will want to know. And one of those, I’m going to have Brad answer is, given this market demand shift, what does that mean to us? Why is it here? How long is it going to be, some of those important things that are meaningful to the Partnership. Brad?

[Brad Sanders:]

Yes. Thank you, Dan. And – so couple of things, couple of meaningful things have happened here beginning at the end of last year. One is from a supply standpoint, we’ve seen the production that was disrupted as a function of the upgraded going down return. So we saw more supply from existing production fields returned, and then additionally, we saw production show up from new projects like Fort Hills and Horizon. And so we had a supply story that was increasing. This is something that we’ve been sharing with you over time. But we also saw a, excuse me, significant demand event during this period of time. One of the largest export pipelines had issues and had a period of time where they weren’t running and were de-rated. All that led to a significant and immediate imbalance between supply and takeaway capacity. As we have talked about, once that happens, the major signal that we watch that indicates that, in fact, is true is what happens with pipelines in apportionment levels. As the marketplace with less takeaway capacity and more supply available to them, attempted to compete for pipeline takeaway capacity, apportionment levels on those pipelines then rose to historical levels. And, in fact, in March, we saw levels as high as 51%. So what that means basically, is producers now have stranded barrels. They cannot ship the barrels that had hope to buyback and barrels are stranded. The net debt becomes the catalyst and for prices to begin to discount to seek new tiers of demand. In the first tier of demand, they seek a storage. So prices for WCS at Hardisty will discount to a level, where storage providers are incentivized to buy and store crude. And that is reflected in the data that is now current, which is we’ve seen inventory levels then grow to historic levels at all places, where it can in Alberta, but specifically at Hardisty to historical levels, where essentially full now in storage. Once you could had these kind of storage levels, the next catalyst is for price to discount to incentivize a new tier of demand and/or takeaway by rail, which is essentially where we are today. And that’s reflected in some of the comments that Dan made, where we’re seeing, at least, spot discounts as high as $30 for WCS relative to WTI. As such, our activity at Hardisty terminal has picked up substantially, the demand for the terminal is now. And we’re working with our railroad partners to reach full operational capacity during the second quarter. So as Dan said, we want the – excuse me, we want the demand on period and it’s the logic of why we’re here is pretty consistent with things that we’ve talked about in the past, and the logic as to why is – it will continue – is consistent with the story of too much supply relative to takeaway capacity.

[Dan Borgen:]

Good. Thank you, Brad. Let me ask the next question. Many have seen railroad comments primarily in Canada about seeming unwillingness to support a growing crude demand in their market. So what does that mean to our business? How are they addressing it? And what are we doing at the Partnership to address that? So let me jump to answer that. So first of all, after meeting with senior leadership of the railroads, both in Canada and the U.S., obviously, it’s important to our business that we have a sustainable rail takeaway program out of Canada. Let me tell you that I’ve been told by senior management at both railroads that they will support our business, that they want to support our business and – but that – they need a ramp-up period to take it to the point, where we’re at full capacity. The challenge for the railroads and I’m not here to defend them, I’m just here to relay facts that I believe are accurate and are descriptive of the situation that they find themselves in. One, coming out of the holiday period is always a difficult period at the end of the year, it’s always slow to ramp back up. So that’s one issue. Two is, extremely cold winter in the northern states and then the territories and provinces in Canada. That drives freezing brake lines, which means slower speeds, which means lower velocity across the railroad, which means less efficiency and you have to have more power to move same type of commodities. Additionally to that is, you had a high – higher than expected grain crop. The difference between Canada and United States is, Canada has a regulated grain freight business. So meaning, that the railroads are required to haul grain timely and efficiently out of Canada. So you combine all of those things high, finally, with the high grain crop is something that the railroads were – are struggling with. Now they’re coming out of that and they hope to be out of it in April, growing to meet a – our full demand that we will have and continuing to ramp up with our growth by the end of the year. Reminder of what that is, is that 60 trains a month coming out of Hardisty growing to – up to 90 trains a month coming out of Hardisty. The railroads are committed to support that volume. So we feel we’re understanding of it. We are not finger pointing, blaming, I get the fax. I’ve lived through these cycles before I understand it. Yes, we have liked for everyone to be ready sooner than later certainly, but it’s – sometimes that just doesn’t happen. As you know, we’ve been talking about this event for sometime. We’ve been talking about with customers for sometime, not only we’re railroads caught maybe a little bit short for some of the things that we talked about, but the producers who know their forecasts, know their production, know their takeaway options better than most have been caught off guard by this as well. So obviously, that’s what it has transitioned into a very large demand for our business and multi-year term for that. As evidence, as Brad said, by the five-year curve that’s out there that cal 22, 23 is a calendar trade year for that is looking at in the strong 20s for $20 spreads. So this is not a short-term phenomenon. This is something that is a multi-year phenomenon and that’s good for everybody. Now in addition to that, what that means is that the railroad has ramped up to meet demand. They want to know that customers are going to be at the table and sustainable. And so, they hire new crews, bring on new locomotives to support the business just like anybody would, they would like to know that customers are going to be there at the table. They have asked the customers to sign multi-year agreements. Customers know their profiles. They know that they have a need for multi-years. And so they’re at the table with the railroad right now, executing on those agreements and for multi-year take-or-pay agreements with railroad. As you recall, we did that very same thing at Stroud, multi-year freight, multi-year railcar, multi-year terminalling agreement, all in a package that makes the most sense for our customers and the railroads. Now you have a dependable, ratable, sustainable program that will carry this over the next few years, that’s important to everybody. At the end of the day, producers, refiners, railroads, terminalling owners, they want sustainability and ratability. That comes with those types of agreements. Sometimes it’s a little bit harder to do, it’s not unique grain does it, potash does it, coal does it, other high-volume commodities do it, it’s time for crude to do the same and it’s being done. So we look forward to that. Now a comment on that is that, this isn’t for the full value of the freight loads, just to clarify that. This is for a lower amount that basically will pay the costs of additional crew and locomotive, if on a month-over-month basis, they don’t ship as much. There’re still protection in there for the railroad. So, we don’t think it’s fair. The railroads have not asked for that for full volume, full freight dollar volume on a per car basis for their MBCs [ph]. So they’re being reasonable, customers are being reasonable, and I think we’ll come out with a much more sustainable, delivered, ratable efficient product to the market. So we, as I said, the timing of that is, we’ll see ramping up in what we’re saying is second quarter – early second quarter to mid second quarter to full volume capability out of our origination assets. So the next thing, I’d like to talk about is, given all of this demand, what are the growth opportunities look like and what does that mean for the Partnership? So as I said, demand at Hardisty currently exceeds our available capacity. We don’t have the spots for sale today. We have people in line for the spots that we would have for sale. But our existing customers as a reminder and Adam touched on it, is through 2019 and through 2020. We have customers looking to – they have needs beyond that period of time, both existing customers and new customers who are willing to step in and wrap the – those primary customers or our first customers at the terminals today – at the origination terminals today. We’re working with them. Obviously, they’re trying to get their freight agreements done first. They do not have to do anything on renewal today, because they have current capacity at our origination terminals. However, they – we’re in discussions with them right now about renewing and extending those simply, because they’re going to need more space through the next foreseeable few years. And if they don’t renew and extend, we will be forced to go ahead and give that to an additional customer who wants that new customer who is at the gate needing capacity and are willing to take it even at the end of 2019 or even 2020. So good strong customer demand, but working closely with them to our existing customers to determine their needs and where they’re going. I think, you can read publicly, CEO’s from a lot of those customers are saying, they plan on using all of their rail capacity in more to be able to meet their demand of growing production. You’ve also probably seen growing production announcement in the market. So even in then these, I’ll say, tight takeaway timeframes, the renewed consolidated customer base up there on a producer standpoint is looking to grow and add additional barrels. That in some cases was not even contemplated in the forecast up there in recent times. So we’ve moved into a, obviously a better negotiating environment than we’ve experienced over in some of the more down years. This is a great time to engage with both the existing customers about their transportation needs beyond their original term and find new opportunities for customers there. As we said in the past, we can expand the Hardisty terminal from two trains a day to three trains a day from 60 trains a month to 90 trains per month in less than a year. I’m going to ask Josh right now. Josh, what’s our updated timeframe on delivering a Hardisty expanded third train?

[Josh Ruple:]

Considering that we’re fully permitted in our procurement plan is already in place. We can deliver that project within seven months.

[Dan Borgen:]

Okay, great. So we’re – obviously, we can deliver that market we have. We’re in negotiations with customers now to take all of that space. Our plan is to announce something soon and that could be a dropdown for later this year after we’ve – as our customers derisk it, term it, build it, bring it online and then that’s a potential droppable asset into the MLP later this year. Clearly it’s our objective to extend the term of our existing contracts and well – as well, and it is a priority for us. There, as I said, there are multiple customers at Hardisty today that are a great fit for our Stroud terminal destination terminal. Remember, everyone of these origination barrels need to go somewhere. They’re going to go to an East Coast refiner, they’re going to go to a West Coast refiner or to a preferred better netback into the Stroud Cushing market and the Gulf Coast. So that lends itself for additional growth, additional volume, additional capabilities for the remainder of our Stroud terminal, and we’re a bit unique. USD Partners were nichey, but we’re unique and there’s qualities around that that are important to understand. One is that, with every origination barrel coming out of one of our terminals on the origination side moving to a destination, we can control both of those. We – and that makes it very easy for our customers, because they say, in many cases, we not only need origination, we need destination. We can offer them both and we can – and that’s a benefit to the Partnership, to the sponsor and to the Partnership as well. So we’re working very closely with our customers to do that. We’re also, as I said, in discussions with our Gulf Coast destination customers that want to move. And as we’ve talked about before, the sponsor has – at USDG has the existing facilities to be able to handle expanding rail delivery into the Houston Gulf Coast Ship Channel market, which we’re aggressively on now. We have over 600 railcar spots on site today and capable to ramping up to meet future demand for these destination customers. All of which could be – let’s talk about Stroud. Stroud, the other half of it, we look to be able to make announcements soon around completing the full capacity at that Stroud asset and again, could be a dropdown into the Partnership mid-year. So we look forward to talking more about that. So to summarize that kind of portion extremely bullish about being able to wrap all this up quickly and capture the market opportunities that are in front of us and we feel very, very good about that. As we talked about Casper, and I didn’t mean to beat up too much on the refiner customer that didn’t renew. But again, that – this customer is at the table today on wanting that supply, because it’s cheapy. Remember, we talked about these markets in the past. In these high-demand markets where there’s blowout curves and arbitrage available to the extent that it is. That’s a perfect environment for producer to reach further down the supply chain or distribution chain to deliver that product to a market, where they can get the best price. Additionally, to this, this is the great opportunity and the high demand for refiners reaching further up to buy that barrel at a – at its dislocated price and discounted price at the origination point. And so at that – and we’re seeing all of that happen right now. Some of our drivers for our expansion space is refiner-driven expansion, who wants and needs that on a long-term basis to tie that up, where they can properly hedge that and know what they’ve got in terms of cheaper feed into the refiners. The Casper terminal is perfectly set to be able to handle that, that growing demand, both on, as Adam said, on local demand, which is tied to WCS, which is also discounted in that market. And they would love to clear that marketing and go to additional destination markets, where there’s a better price. These new Casper customers are some of the world’s largest integrated refiners. And we have handled numerous batches for them already and are looking to term that up and we should be able make some future announcements around that. So not only at Hardisty, but Casper as well and seeing high demand for all of those assets and, and we look forward to talking more about that. So let me shift again and ask a question, is it logical to assume that we can get multi-year agreements and what kind of rate should we expect during these cycles? I’m going to ask Brad to comment on that as well. So Brad, can you talk about that?

[Brad Sanders:]

You bet, Dan. So we talked about the logic of where we are today from a spot standpoint, new supply coming on, no new takeaway, leading to historical high, apportionment levels and inventory levels thus we discount to rail, what we call, rail parity, what is best described as the logic to use rail as a takeaway option. What’s equally important, as we think about determining rate to support a recontracting efforts at Hardisty or recontracting efforts at CCR and our development efforts at Hardisty, Stroud and TexasDeepwater. It’s not only what’s happening in the front of the market, but what are the curves indicating in the back of the market, because that will be the determinant of not only what that rate might be, but it’s also indicating from the marketplace how long they expect the uncertainty to last. So what we observed today is, we said we’ve seen discounts in the front of $25 to $30 a barrel. And as Dan just mentioned, if you look out forward and you see what the curves are through the next four to six years, the discounts forward are somewhere between $19 and $22. So what does that mean? What that means is, one is the marketplace is, at least, pricing forward five years out minimally to incentivize rail takeaway during that period in time. So the uncertainty is clear by the participants in the marketplace, both refiners, marketers and producers. The price activity out there is indicating uncertainty and the need for rail takeaway. So when Dan says, our expectation is, we can do multi-year, it’s defined not only by our discussions that we’re having and the quality of the discussions. But the price curves, the discounts in the future are the lead indicator of our ability to get term. And given the level of discounts, they’re the lead indicator of our ability to get rates at existing levels or high. So it’s simply defines our expectations on a go-forward basis.

[Dan Borgen:]

All right. Very good, Brad. I appreciate you bringing us up to speed on that. The – so as we talk about what the ultimate solution is here for this market, you’ve heard us talk about before our diluent recovery unit, our DRU bit barrel. This is exactly the market conditions that drive those kinds of future expansions. And so, in all – at the end of this call, I’m not going to walk us through what our vision is, again, just so you make sure that everybody is on the same page about where expectations are. But as we talk about a DRU bit barrel, remember, when – for every 100,000 barrels that you put into a diluent recovery unit and create a DRU bit barrel, you’re freeing up 100,000 barrels of pipeline – existing pipeline capacity and moving it into a 70,000 barrel DRU bit, which delivered to the Gulf Coast, which the refiners want and elsewhere delivers you the best in that back then putting that barrel into a pipeline. The numbers are in, it’s solid, it’s – there has been a lot of work done on this. And we’re happy to announce that we have joint ventured with to build the DRU with a great company in Canada who happens to be one of the largest diluent providers in that market with Pembina. So we’re happy with the relationship. There’s great need to respect between the parties. We’re working with customers. We’ve got new customers at the table wanting that option, wanting that and then we simply just move the diluent within Canada, recirculate it back to the producer who needs it to blend it. And then what does it do from a rail terminalling perspective? Well, one, it creates a permit [ph] DRU bit barrel that is safer, because it’s nonflammable, non-hazardous. What does that drive? Once it goes into that heavy state and that heavy barrel of approximately 97% bitumen, it’s it’s obviously not pipeline of all at that point. So the sustainability of rail will drive these agreements into that 10-plus-year environment, which will deliver the best netback and safest netback to the customer to the producing customer. In addition to that, to our refining community, who is desperately looking for new sources of heavy barrel why? Because Venezuelan barrels being cut back, Maya is on. The Mexican Maya A Heavy and others are on decline. And if you look at the export numbers, it’s not the heavy barrel that’s leaving the market and being exploited through the U.S. Gulf Coast and elsewhere, it’s the light sweet barrel. so again, the DRU bit barrel, in our opinion, and opinion of customer and opinion of our joint venture partner, is to deliver a long-term sustainable barrel that moves our assets into the long-term 10-year-plus type of format. So we feel very good about that. And we feel, we have customers at the table that understand that this is what this DRU bit barrel creates for them and frees up existing pipeline space for additional growth that they have. Our timeframe and I’ll ask Josh, again, from a build standpoint what are we seeing in the building of that DRU?

[Josh Ruple:]

So DRU projects, well, simple. Our longer-term projects than a standard rail terminal, that said there’s still very reasonable in execution and with the level of planning that we have with our partner Pembina, we believe that we’re in good position to deliver a project in a 100,000 barrel a day size range in about two years.

[Dan Borgen:]

Okay.

[Josh Ruple:]

So we’re well down the path on planning and the engineering and again, feel real confident in that timeline.

[Dan Borgen:]

Great. Appreciate that. All right. So let me shift to the specific issues around distribution growth. There has been a lot of talk we’ve gone to a lot of different conferences and that’s always a question made by you all on the phone, what’s the distribution growth going to look like? Where are we going? What are we doing? Obviously, you’ve heard from us that we’ve got a lot of growth ahead of us in the Partnership. And so we want to be timely around that, but we also get and understand the need around – guidance around distribution growth. So I’ll ask Adam to touch on that. Adam?

[Adam Altsuler:]

Sure. Thanks, Dan. So yesterday, we issued guidance of mid single-digit distribution growth in 2018, and that basically reflects our expectations that we will be able to execute on a lot of the attractive opportunities that we’ve talked about on the call today. In short, we feel that we can grow our base business in the next 12 months either organically, but also through featured dropdowns from the sponsor. And that being said, we also remain committed to maintaining a conservative financial profile. We – we’re still targeting 1.1 times distribution coverage and we’ll always target net leverage at or below 3.5 times. And keep in mind, our net leverage today is about 3 times. So as always, we evaluate this every quarter with our Board. To the extent, these opportunities don’t play out. We reassess every quarter and communicate our intentions to the market. But right now we feel good with the market tailwinds behind us and with the potential growth opportunities we have.

[Dan Borgen:]

Okay. Thanks, Adam. Next question – seen – I’ve seen the MLP talk about TexasDeepwater. I’ve seen recent announcements as early as yesterday of additional expanding network in the Mexico. How does that fit? Are the MLP qualified? Well, the answer to that is yes. Do they – how do they fit the business and tell us about those? So Brad, can you walk us through those two exciting developments for us.

[Brad Sanders:]

Yes, I’d be happy to. So we’ve talked a lot today about the industrial logic of Hardisty recontracting growth, CCR recontracting and Stroud growth, given the current heavy situation. TexasDeepwater is also an opportunity as a function of what’s going on in Canada and the industrial logic as it relates to every Canadian being delivered to the U.S. Gulf Coast and specifically again delivered into the Houston community. And TexasDeepwater uniquely is positioned to provide that solution, given the existing rail facilities we have and the potential connectivity directly to the Canadian heavy hub plus directly to the refiner. So the logic of TexasDeepwater and the logic of the network that originates at Hardisty and Casper gets us very excited about the potential. And then the – as we talked about earlier, when we look at the forward curves and the industry indicating the need for these kind of sustainable solutions over a five-year period then we can get very excited about the potential and likely outcome at TexasDeepwater in support of our heavy oil franchise. So we’re excited about that. Additionally, the industrial logic of Mexico as an importer of, I’ll just call, energy products generally, because it’s more than just traditional-like products is material. Takes our vision for TexasDeepwater as a – an original – origination point to support those type of exports. And as part of our network of destination terminals across Mexico is exciting because of this underlying macro storing in industrial logic, we expect our first terminal in Querétaro to commence operations later this month. As a reminder, Querétaro itself is – demographically includes over 1 million people, 1 million residents and is located less than 150 miles from Mexico City. So as a location and growth story, we’re excited about Querétaro. And also as a reminder, this initial development is supported by a multi-year take-or-pay contract with an established operator in the area Bravo Energy. And we’re excited about that, because there is industrial logic to supporting their business from a supply and off-take standpoint and proprietary platform for economic, efficient and timely growth as opportunities present themselves. So Querétaro is an exciting accomplishment that’s supposed to happen later this month or mid-April. So we’re excited about getting started and getting our activity in Mexico going and growing. Additionally, yesterday we issued a press release announcing our next two terminals in the Central to Hawaii area. The first terminal is in the city of [indiscernible] that will include NFS rail and truck loading capabilities with room for expansion as needed. So we’re excited about that opportunity and we plan to be operational later this year. And then finally, our second plant terminal with at unit train and tank storage capabilities in the greater Hawaii area, given its market size and demand and need for generally-like product. So we’re making great progress on Mexico. The underlined macro and industrial logic is exciting. It connects to our current platform and development opportunities at TexasDeepwater, and we expect that to be a growth story. So early days, but we look forward to talking more about this in the future as we ramp up operations.

[Dan Borgen:]

Great, Brad. I appreciate it. I think now we’ll – we covered a lot of material. I’m sure you all have questions. Happy to open up the call for those and we’ll try to answer them as best we can.

[Operator:]

[Operator Instructions] Our first question comes from the line of Robert Balsamo of B. Riley FBR.

[Robert Balsamo:]

How are you doing?

[Dan Borgen:]

Good morning. How are you doing?

[Robert Balsamo:]

Good morning. Well, some housekeeping questions. When I think about just the quarter and obviously, this sounds like more and more like a transition story and some of the good – lots of opportunities for growth. When I look at – I noticed the expenses related to Stroud coming online, so you talked about going up to 30,000 barrels by next quarter by this quarter. Are we going to see comparable raise in OpEx, or is that going to stay relatively flat?

[Adam Altsuler:]

Yes, basically there’s a slight uptick going from 20,000 to 30,000. But as of January 1, 2018, keep in mind, it’s a take-or-pay MVC contract. So you’ll – that the $10 million of adjusted EBITDA we guided to when we announced the acquisition, that’s what you’ll see. That’s basically the EBITDA margin. So that’s net of OpEx, so revenues will go up along with some OpEx with utilization.

[Robert Balsamo:]

Okay, great. And then I think, you alluded to this a bit. But with Casper, you talked about the refiner customer not extending and now basically, they’re back to the table. So does that imply that we could expect higher tariffs or higher rates at that terminal? And what’s your thoughts on timing? I know you gave a lot of color on Hardisty, I wasn’t sure if you had an expectation for timing on Casper?

[Dan Borgen:]

Yes. Let me try –Dan here. Great question. So yes, I think that in these market demand periods, these are opportunities for higher values -- sustainable and higher values for market pricing in and around our assets, including Casper. I think that -- and I’ll ask Brad to chime in here as well. But the customers that we have at the table and the market opportunities that are here are not looking to discount, but are looking strongly at capacity and gaining that capacity as quickly as they can. For obvious reasons, right, the macro story is in. The demand is proven, they – every day that goes by or barrels that -- and profit and/or cost-cutting for – on their benefit depending upon either the producer or refiner who needs the product. Brad, other comments there?

[Brad Sanders:]

The only thing I would add is the logic of Casper in support of what’s happening at Hardisty because of its connectivity by pipe with express pipeline. We’ve talked about that a lot. And to your point Dan, it makes logic, given the discounting that’s going on and people seeking access to those barrels. But in addition, the Wyoming sour market is also indexed or priced off WCS. So why is that significant? There’s a significant amount of production simply in Wyoming that is also dealing with these big discounts in WCS. So people are seeking access to those barrels as well. And those barrels do get gathered into the Platte terminal, which we access by pipe into our CCR or Casper terminal. So it’s just not Canadian barrels that are looking for the optionality that CCR provides, but it’s also Canadian sour producers who are looking to access CCR as a viable option to improve netbacks.

[Robert Balsamo:]

Great. Thank you very much.

[Dan Borgen:]

You bet. Good questions. Thanks.

[Operator:]

Your next question comes from the line of Mirek Zak of Citigroup.

[Mirek Zak:]

Hi, good morning, everyone.

[Dan Borgen:]

Hey, Mirek.

[Adam Altsuler:]

Hey, Mirek.

[Mirek Zak:]

Hey, can you provide any information or more information around the JV with Pembina sort of the capital investment requirements there, which I assume is at USDG expected returns or any other details you can to shed some light on that project?

[Dan Borgen:]

Yes. You know us Mirek, we don’t share capital costs. The relationship is a strong one between the parties. They are a – obviously, one of probably the best and most well-respected in this space in Canada, great partner, as we look to expand in this area. We don’t provide the capital costs. They are not probably – let me give you a little bit of guidance around that though. They are not what – this isn’t a refinery build, right? This is a bit of off-the-shelf. This isn’t rocket science. So we’re not – you’ve seen maybe others in the market have talked about additional upgrading or refining upgrading, which starts with the B, billions, this is not that. Josh, can you add a little bit more color on that.

[Josh Ruple:]

Sure. So Dan, as Dan mentioned, historical projects have indeed been measured with Bs, in billions of dollars similar to the costs associated with pipeline builds. These assets that we’re talking about are fairly simple in nature. As Dan mentioned, they’re off-the-shelf assets. They’re not new assets that need to be developed, and so costs …

[Dan Borgen:]

Not new technologies, our new assets.

[Josh Ruple:]

They are new assets, but it isn’t new technology.

[Dan Borgen:]

Right.

[Josh Ruple:]

The reality around the cost associated with our DRU units is really related to its location. And we have visions to build DRUs at many locations, the cost structure changes as our scope changes. But we’re talking about numbers that are in the millions and not excessive numbers that are enable – our customers and us to commercialize with terms that are very favorable and extremely competitive when you look at the commercial environment today.

[Dan Borgen:]

Additional color on that….

[Brad Sanders:]

So this is….

[Dan Borgen:]

Go ahead.

[Brad Sanders:]

I’m sorry.

[Dan Borgen:]

Go ahead.

[Brad Sanders:]

I was just going to mention – yes, I was just going to mention – this is Brad. I was just going to mention, remember, the logic of the DRU is to be competitive long-term with new build pipeline economics. So it needs to be cost competitive. We need partners. It’s very thoughtful as to who’s a partner and why, so that we can make sure that we are efficient with our capital and efficient with our solutions, because again the long-term objective is to be able to be sustainable, because we favorably compete from a cost standpoint with new build pipeline economics.

[Mirek Zak:]

Okay, great. And regarding the announced Mexico projects, what are your expectations there on volume ramp, or kind of set another way, when do you think those asset cash flows would be mature enough to consider dropping into your Partnership?

[Dan Borgen:]

So let me take a first stab at that. So as we said, we’re ramping up those assets. The first that will be online in March. We are already designing the expansion of that asset supported by a strong investment-grade counterparty. As we always will do is derisk the asset before it’s potentially droppable into the MLP. It is qualifiable. There are multi-year. It could be as early as this year in terms of a dropdown on that on the first one and the expansion of that as well. The second terminal and third terminal are – will be more midyear construction timeframe, again, backed by multi-year investment-grade U.S. – paid in U.S. dollars. All of our business here is U.S. dollar, so we don’t have currency issues. We don’t have getting paid issues. These are all paid by U.S. strong investment-grade counterparties, who obviously are looking at refined product delivery through a grown – through our growing network down there. So, we see that opportunity probably would be a late this year early 2019 potential drop into the MLP, again, as it’s derisked and fully materialized. The third and fourth asset build down there would be then more into the 2019 timeframe, backed again by strong investment-grade multi-year counterparties, higher volumes, as we ramp up the volumes – higher volumes, but we don’t want to also outsize the MLP. So we want to be able to keep that and the right pieces. It doesn’t mean, it wouldn’t be a part of the asset or part of it and kind of feed in a friendly market-based way the MLP as we continue to grow together. So long answer, hopefully, Mirek, Dan answered kind of the question.

[Mirek Zak:]

Okay, great. And then just one more quick one, if I may.

[Dan Borgen:]

Sure.

[Mirek Zak:]

What are your views on Alberta’s proposal to invest into bitumen upgrading? And how do you think that positions itself with DRU barrel rail and your plans on moving to DRU bit?

[Dan Borgen:]

Yes. So great question. And I will say that we’ve had recent discussions within the last several days with senior leadership of government, because they are obviously very interested in this technology and the quick reaction. Remember, in Canada, for those of us who don’t know, Canada OWN is a strong royalty owner in Canada, whereas in the United States, it’s owned by various individuals. The majority of the royalty in Canada is own by the sovereign. So provincially and federally, they have a huge impact and even take barrels in kind and have developed a marketing company in Canada to market their barrels. So they are not only speaking as a sovereign, but they are also speaking as an asset owner in the royalty and they are being punched because of the disadvantage in price and the inability for takeaway. They too, obviously, by their own announcements, see the benefit of upgrading to a heavier bitumen and a better netback for them. It’s not just us that are saying, we can build the infrastructure. We’re in discussions to build that infrastructure. I would say, there is support, obviously, from government to be able to to build that. We see it as a very positive development and we applaud and encourage. And we are – have already set other meetings with the gov – with government to ramp up those discussions and ramp up the delivery times of this new DRU bit barrel, which achieves the desires of government, as well as non-government producers.

[Mirek Zak:]

Okay, great. Thanks. Thanks for the time. That’s all from me.

[Dan Borgen:]

Great, Mirek. I appreciate it.

[Operator:]

Your next question comes from the line of Mike Gyure of Janney.

[Dan Borgen:]

Mike, good morning.

[Mike Gyure:]

Good morning, guys, and appreciator all the commentary on the growth development projects. That’s great.

[Dan Borgen:]

Good.

[Mike Gyure:]

Can you shift gears maybe a little bit and talk about the cost side of things kind of the two largest sort of expenses you guys have with the contracted rail in the pipeline fees. Can you talk about the economics may be going on there? And what happens with some of these things if you do undertake kind of significant development of Hardisty? And kind of directionally, which way we should be thinking about the cost for those move? I assume they’re moving higher?

[Adam Altsuler:]

Yes. No, thanks, Mike. This is Adam. So on the OpEx side at Hardisty, so as we continue to ramp up utilization, the OpEx will continue to ramp up along with that. We think it will flatten out around kind of May, June of this year. But as you pointed out, it’s really a lot of that is subcontracted rail services, which is just the crews to support the movements. And that was one of the main reasons of kind of the Q4 results as we’ve started to build that to support our customer’s needs. And the pipeline fee is simply a function of revenue. So at Hardisty – at the existing Hardisty facility is – actually that won’t change too much. The only thing that will impact that is really the deficiency credits. But that’s we try to do the best we can and we’re counting on that over time. But that is – that’s just a percentage of revenue and that’s percentage to our pipeline connection agreements with Gibson.

[Mike Gyure:]

Okay.

[Dan Borgen:]

Strong – yes, and just on that point, strong demand eliminates efficiency credit.

[Mike Gyure:]

Exactly.

[Dan Borgen:]

So….

[Mike Gyure:]

It will recognize revenue, which will be more pipeline fees.

[Dan Borgen:]

That’s right. Okay, Josh, any comments on OpEx then?

[Josh Ruple:]

No, you spot on.

[Dan Borgen:]

Okay. Very good. Does that answer your question, Mike?

[Mike Gyure:]

It does very much. Thanks, guys.

[Dan Borgen:]

Sure.

[Operator:]

Your next question comes from the line of Derek Walker of Bank of America.

[Dan Borgen:]

Hi, Derek.

[Derek Walker:]

Hey, good morning, guys.

[Dan Borgen:]

Good morning.

[Adam Altsuler:]

Good morning.

[Derek Walker:]

Just a quick one on – clarification on the Stroud commentary. I believe you mentioned some of the contracting such growth there would be 20%, 25%, assuming full – assuming it was fully contracted. So I think, the $10 million that you referenced, I think is for the 50%. So I was trying to get, is the associated growth there, if I can do the math there is sort like a $4 type of number with the associated expansions and you mentioned a midyear dropdown. So I didn’t know it’s just the expansions, would it be expecting the fully – the other contracted part of that? I guess, just a color around how you’re thinking about the drop?

[Dan Borgen:]

Sure. And so there’s a couple of nuances here. But basically, the expansion at Stroud, the development rights are held by the parent and the sponsor. So as they develop that when we bought that asset, the marketing service agreement we signed with the parent as MLP gets a fee for every incremental barrel of throughput. And so the 20% to 25% increase is really on the 10% – $10 million of adjusted EBITDA. So kind of talking about $2 million to $3 million of adjusted EBITDA on top of the $10 million a year. And so the balance of the – of that growth is held with the sponsor. And so what we would – when we talk about dropdown opportunities, we’re talking about the sponsor dropping in that contract, the remaining piece of that contract to the MLP.

[Derek Walker:]

Got it. Okay, that’s helpful. And then just to get a better sense on the Hardisty expansion, you mentioned that kind of a seven-month sort of delivery. And that was also potential dropdown maybe this – later this year. So – and it’s also sort of a caveat too with the freight agreements needing to be done first. So, like really over the next couple of months here, should we be expecting an announcement or whether that third train is going forward?

[Dan Borgen:]

I think, we’re in deep commercial discussions about it. And I think we’ll keep the market posted, but yes, it’s some – certainly, something we’re talking about now, hope – and to see as an actionable item this year.

[Derek Walker:]

Okay, great. Thanks, guys. That’s it from me.

[Dan Borgen:]

Yes. from a market demand and a price point, I think that you would see equal to or stronger levels of commercial success there on the third train slot, if that helps you. It won’t be discounted, let me put it that way.

[Operator:]

At this time, there are no further questions. I’ll now turn the call over to Dan Borgen, CEO, for any additional or closing remarks.

[Dan Borgen:]

Okay. So, hey, I really appreciate the time today. I know everybody is busy and I appreciate everybody be on the call and the attendance today. And – but let me take this time just to kind of reassert the vision. Just so everyone is clear about what USD Partners are about, all right. So we are Canadian-focused, heavy long-term, because these are sustainable long-term 30-plus, 40-year non-declining flows of production. We love that, right? We love that people are looking long-term in terms of our production needs and not trying to keep up with these somewhat seasonable shale swings, which are obviously important to the industry. But our focus is up there as it relates to our Canadian growth story. As you heard, Brad say, that’s primarily at Hardisty, so we’ll see expansion in Hardisty. We’ll see – tanks are full, apportionment is on, we’ll see that continued growth. At Casper, we’ve got not only just Hardisty growth to express and through there, but also local collection and delivery to our truck rack system into tanks and loading trains and moving out to get that same discounted barrel moving. Now again, now moving that to into our Stroud and destination markets, obviously, Stroud at Cushing and through our pipeline system there delivers the kind of in-games that our customers want. That’s why we were able to do that last year pre-demand, before the demand was totally on, because some of our customers were more strategic and saw this coming as well and wanted to position properly. They are reaping the benefits for that today. And so that – then that continues to move towards our growing receiving center in the Houston Gulf Coast on the Houston Ship Channel with 12 million barrels of permitted capacity that is ready to be built to support that, with existing rail in position, with growing barge and deep water capabilities there to be able to support that, with inbound connectivity to offer them a blend barrel coming both out of the systems that exist today and our connectivity there to be able to bring those light suite barrels into blend and/or export, because remember, it’s the light suite barrel and liquids that are being exported today and are seeking further export as that surge continues to grow. Then as we land out there, TexasDeepwater will expand into a blending hub as well to be able to blend that heavy barrel with the preferred light suite barrel, that makes a better netback for our refining customers. And so we’ll provide that blend capability there at TexasDeepwater. We will then take refined product and components into that. So from a distillate market, growing distillate export, growing distillate export not only in the- our growing Mexico network, but also abroad and be able to export that distillate barrel to emerging markets around the world. So we’re bringing those to bear and then, as I said, the Mexico market ties into that. So you see a common theme here of a heavy barrel to the Gulf through Stroud, through TexasDeepwater, through Casper then creating a blend market into that, that’s already exist, but meeting the demands of what the blend market needs and distributing that to our refining customers in the market feeding that refined product then into – from an export standpoint by rail and by water into the growing Mexico and abroad markets. So very focused, hopefully, it makes a lot of sense. As part of that then transitioning that heavy short-term WCS barrel into over the next, I’ll say, two to five years of – from a starting point pursuant to what Josh said, of transitioning that barrel into a DRU bit barrel into a more sustainable. So taking five-year committed agreements and moving those into 10-plus-year agreements, not only on infrastructure, but on freight agreements and supply agreements coming into that, that delivers the ultimate end result to our producing and refining customers. So with that we’re humbly appreciative of our investors who have hung in with us, who have believed in the vision, who have believed in where this market is going. The market is right, it’s in our backyard. We’re well-positioned to handle it and we’re excited about the growth. Thanks again for everybody being on the call, and we look forward to delivering on what we’ve said and we look forward to making announcements soon. Thank you.

[Operator:]

Thank you. That does conclude the USD Partners LP fourth quarter 2017 results conference call. You may now disconnect.