USD Partners LP
Q1 2016 Earnings Call Transcript

Published: 6 May 2016

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the USD Partners LP First Quarter 2016 Results Conference Call. At this time all participants have been placed in a listen only mode. [Operator Instructions] It is now my pleasure to turn the call over Ashley Means, Director of Finance and Investor Relations for opening remarks. Please go ahead.

[Ashley Means:]

Good morning and thank you for joining us. Welcome to our first quarter 2016 earnings' call. With me today are Dan Borgen, our Chief Executive Officer; Adam Altsuler, our Chief Financial Officer; Brand Sanders, our Chief Commercial Officer, as well as several other members of our senior management team. Yesterday evening, we issued a press release announcing results for the three months ended March 31, 2016. If you would like a copy of the press release, you can find one on our website at usdpartners.com. Before Dan and Adam proceed with the prepared remarks please note that the Safe Harbor disclosure statement regarding forward looking statement and last night's press release applies to the statements of the management on this call. Also, please note that information presented on today's call speaks only as of today May 6, 2016. Any time sensitive information provided may no longer be accurate at the time of any webcast reply 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 reconciliation to the most comparable GAAP financial measures and with that I will turn the call over to Dan Borgen.

[Dan Borgen:]

Thank you Ashley, welcome everyone to our first quarter call. First I wanted to mention that our thoughts and prayers are with our customers and partners in residence that are impacted by the horrible fires up near Fort McMurray and Alberta. We look forward to working with the Red Cross and others to help support the redevelopment up there in any way that we can help. So with that obviously transitions to safety. Safety is always important issue for us. We take it very seriously and as such we would like to assure you that we do not expect any impact or any terminal operations from this fire which is approximately 400 miles south of Fort McMurray. During the first quarter we again operated all of our terminals without incidents, for 2016 year-to-date our total recordable injury rate is 0, we are proud of that. Turning to the partnerships, first quarter financial results, we are also proud to achieve year-over-year 40% for adjusted EBITDA and 17% for distributable cash flow. We are particularly pleased with this result in the market that, has proved pure growth opportunities for the sector. This meaningful growth was primarily driven by the addition of high quality contracting cash flows from our cash per terminal acquisition which is now fully integrated into the USD network. With a full quarter contribution from Casper our take or pay contracts contributed 96% of adjusted EBITDA before corporate expenses. Achieving our goal continually raising our committed take or pay primarily investment backed business. We also delivered on our guidance to grow the quarterly distribution. Now at 30.75 cents per unit or $1.23 on an annualized basis, while still maintaining over 1.5 times distribution coverage. Our distribution, this quarter represents a 7% year-over-year in our fourth consecutive quarterly distribution increase. Our conservative centered around developing strategic infrastructure solutions underpinned by contracting cash flows large primarily investment grade customers has enabled us to continue to deliver steady distribution growth for unit holders. Now turning to our development efforts at the parent. We continue to be encouraged and excited about our Houston Ship channel property. We have received significant interest from major participants across the energy value chain including refiners, producers, markers and even other infrastructure companies. Commercial discussions are well under way and we continue to work to various possibilities in an effort to maximize the long term value of that opportunity. As we have sad before preliminary master planning suggest the property could ultimately support up to 10 million barrels of storage. Multiple docks with barge and deep water capabilities as well as multiple unit train per day rail terminal capabilities. Of course we expect to build out the terminal in phases as we normally do and specific plans naturally evolve to meet customer demands as any large terminal begins operation. Based on commercial discussions, to-date the first phase is likely to include storage tanks and dock capacity which once operating should provide contracted cash flows on a long term basis and an attractive drop down opportunity for the partnership. We look forward to announcing more specific developments later this year. With respect to Western Canada, we feel like we are approaching an inflection point where the industry will recognize our long-health position to solve take away constraints for approaching production growth. Our existing producers of customers have been some of the most active through the downturn having driven down cost substantially, pursued acquisitions and strengthened their balance sheets in order to position themselves to capture the long term value that oil sands production provides. Our partner at heart is Steve Gibson is currently developing $2.9 million of new capacity at the heart of sea stores terminal, a nearly 50% increase to accommodate new production in the 2016-2017 timeframe and has said publicly that they are in discussions with customers for 2018 through 2020, infrastructure requirements due to production growth. As a reminder we USDP have an exclusive unit train relationship with Gibson and they are a value partner of ours. We have scalable terminals in place today both, Hardisty and Casper so we would like the position we are in and expect to be able to offer our customer competitive and timely take away solutions that uniquely can protect the quality of their product as new production begins ramping up later this year and next. Finally the parent is well capitalized with no debt and has a support of long standing bank group as well as energy capital partners who is ready to put capital to work with us. With that I will turn over the call to Adam to review our financial results.

[Adam Altsuler:]

Thank you Dan, and thank you for joining us on the call this morning. Please note that we issued our first quarter earnings release yesterday afternoon along with our first quarter 10-Q which can be found at the SECs website at www.sec.gov. In addition, we filed a universal self-registration statement this morning which can also be found on the SECs website. As most of you know USD Partners went public back in October of 2014, so now that we have passed our 12 month anniversary of being a public partnership and that certain trading's are fold, we are eligible to file a registration statement. We do not to intend to issue any public activity or debt in the near term and simply felt that this was a prudent measure for the future and good for financial housekeeping. Taking a look at the numbers, for the first quarter we reported adjusted EBITDA of $14.4 million, distributable cash flow $10.9 million and net income of approximately $2.2 million. Our results reflect the state of unpredictable nature of our cash flows and primarily investment grade customers and as Dan mentioned include the first full quarter contribution from our cash from terminal acquisition which closed in November of last year. Adjusted EBITDA attributable to the Hardisty terminal which counted for approximately 54% of the partnerships adjusted EBITDA before corporate expenses was negatively impacted by the lower average value of the Canadian Dollar relative to the US Dollar during the quarter as compared to the fourth quarter 2015. This was partially offset by approximately $500,000 received from the settlement of derivative contracts partnerships put in place to reduce the impacts of fluctuations in foreign exchange rates. Adjusted EBITDA attributable to the Casper terminal which accounted for approximately 39% of the partnerships of adjusted EBITDA during the quarter was approximately $6.3 million. In addition the partnership incurred approximately $250,000 of one time charges for repairs and maintenance, materials and training expenses and approximately $400,000 of non-recurring administrative and legal expenses both of which were associated with the integration of the Casper terminal and to the USDP network. We do not anticipate material integration cost associated with Casper terminal in the future. On April 28 the partnership announced its first quarter distribution at 30.75 cents per unit or $1.23 per unit on an annualized basis and total distribution coverage of 1.5 times the quarter. The distribution represents an increase of three quarters of a cent per unit or 2.5% of the prior quarter to be paid on May 13 to unit holders of record as of the close of business on May 9. As of March 31 the partnership had net leverage of 3.5 times trailing 12-month adjusted EBITDA pro forma for the cash acquisition, and the available liquidity of approximately $167 million including $8.6 million of unrestricted cash and undrawn foreign capacity of approximately $159 million on its $400 million senior credit facility subject to continued compliance with the financial governance. The partnership had approximately $241 million of total debt outstanding as of March 31. And with that I would like to now open up the call for questions.

[Operator:]

Thank you [Operator Instructions] Your first question comes from Mike Gera of Jenney [ph].

[Unidentified Analyst:]

Yes, good morning guys, could you talk a little bit about the Casper Terminal and the performance I guess versus your original expectations, maybe original guidance? And what you think you are maybe a quarter into it? Do you see that growing as far as new customers, maybe better worse costs parameters?

[Adam Altsuler:]

Sure, hey Mike its Adam. We had initially given guidance of about $26 million for the adjusted EBITDA of the Casper terminal and so this quarter we reported $6.3 million of adjusted EBITDA and we had a onetime charge of about $200,000. So if you take the $6.3 million and add the $200,000 you get to about $6.5 million. Multiply that time 4 and you get to the $26 million of adjusted EBITDA that is currently sitting with our guidance so I would say it's in line with our guidance and with regards to commercialization I think I can let Brad or Dan talk to that because I know they were having these discussions every day.

[Brad Sanders:]

Mike, this is Brad Sanders. Commercially the terminal has been on a relative basis one of our most active terminals or very active on a relative basis and that's driven by a number of things. One is its customer based, it’s primarily as we have talked about previously, it’s primarily refiners who represent our customers there. They have been very active and leveraging the heavy opportunities there given the advantage freight economics from the standpoint to the Gull Coast primarily so we have been pleased with the activity even during periods of tightening differentials.

[Unidentified Analyst:]

Great and then maybe on Hardisty, what you're thinking as far as utilization and where you at today versus the plans for Gibson, their expansion plans. How long do you think it will take before you guys run out of capacity, where you are and where would you have to start doing some expansion up there?

[Brad Sanders:]

This is Brad again. There is a number of drivers that come into trying to estimate when that timing might be. One of course is when the production shows up and there a number of sources that are available to the public today that represent over the next year, year and a half we will see as much as $500,000 barrels a day increase of which most of that will gather into the Hardisty hub so in theory over the next year and half we should fill the pinch point in terms of takeaway capacity relative to demand. Second part of that which is really critical is you need the customer to be motivated attached on that. Some will do that in our discussions today. some are more pro-active than others and those who are re-acted will basically respond to the net back incentives that they are receiving so differentials will matter and as a result on today's environment with the fires that are occurring up in Alberta, the differentials had narrowed this week by up to $2 to $3 a barrel. So differentials matter and we can't get ahead of ourselves, we will just have to stay in front of our customers and as they are incentivized to transact we are prepared to do that same.

[Unidentified Analyst:]

Okay. Thanks very much.

[Operator:]

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

[Derrick Walker:]

Good morning guys. Just a couple for me. I guess the first one just - how do you think about the competition in the channel there, I know it's a little bit early when I talked about it being down to capacity and capability but just - you are mentioning you are in conversation with multiple types of customers; so how is this conversation going?

[Dan Borgen:]

Yes, this is Dan. We would say that what we bring to the market is scale, what we are finding is customers are looking to maybe consolidate, grow, new footprint, new bolt-on positions for both actual storage, blending as well as both on the crude side and the refined product side. Also, with the lift of the export ban we are seeing shipping, deep water access becoming more and more prevalent in the discussions as well as barge equipment's. So as we said earlier, across the board we have a strong interest moving into commercial discussions, moving into negotiated documents to try to get, fulfill the needs of those customers. Some of them want more water access, some want more dock capacity, obviously docks and tanks go hand in hand and certainly as its standalone value as its own terminal, it also has a network value a destination for heavy product coming out of Canada, so it would bolt on well with our Hardisty terminal destination and other origination opportunities in Canada to move heavy down there. Will we have the capability to provide 6 unit trains a day in the facility, in out planning and we look forward to embracing all of those so that's really where the customers are pushing towards. As a reminder we are, Derrick as you know, a third party service provider, we don't run our trade book, we don't do anything like that, and we feel like the customers appreciate that. They want to be able to bolt on to a third party provider that meets their needs and they can grow with.

[Derrick Walker:]

Got it, thanks Dan. And for the turn two as far as the dropdowns are concerned and obviously you are in development here on both Houston Ship channel and commercial conversation with the Hardisty, with the Shell filing it's been a bit of housekeeping. How are you thinking about these dropdowns going forward? Are you looking to do more on the equity side for the next acquisition or is it just too early to think about?

[Adam Altsuler:]

No, I think over the long term our target is 50% debt and 50% equity, debt to Cap ratio. Basically that's always been our long term goal, we have gotten another $100 million on accordion on credit facility so we have the capacity there. We have got some room under our convenience so I think we would always look at it as a 50-50 of corporate finance at this point.

[Derrick Walker:]

Thanks Adam.

[Operator:]

Thank you. [Operator Instructions] And there are no further questions at this time.

[Dan Borgen:]

Yes, thank you. Just a few closing remarks. I was just sitting here thinking about, I really like where we are from our asset positions. We have got growing production in Canada that we have been talking about. It's finally coming to fruition. It is very focused capital spend barred customers and producers up there. We are seeing those barrels confirmed by discussions to expand capacity and we are working well with our railroad partners up there to continue to offer a competitive solution. We like what our assets are in the ship channel and the robustness of the conversations that we are having there, truly meeting the needs strategically of the customers and their growth. And so we remain focused on that. We think we have got, we have been conservative, capital discipline, and these markets certainly as every market should. But we really like where we are. We are working hard to try to achieve results and we want to be one of those that when you look at a year or two from now, we performed, we done all the things we are going to do. We have increased our distributions through our guidance and someone that you can trust in the marketplace so we appreciate the time today. And wouldn't want to miss saying Happy Mother's Day to all the moms and what a special day that is and so we look forward to sharing that with our families this weekend. So everybody have a great weekend. Thanks so much for joining the call.

[Operator:]

Thank you this concludes today's conference call. Thank you for your participation. You may now disconnect.