USD Partners LP
Q3 2016 Earnings Call Transcript

Published: 6 Nov 2016

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the USD Partners LP Third Quarter 2016 Results Conference Call. At this time, all participants have been placed on a listen-only mode. The floor will be open for your questions following the prepared remarks. [Operator Instructions] It is now my pleasure to turn the call over to 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 third quarter 2016 earnings call. With me today are Dan Borgen, our Chief Executive Officer; Adam Altsuler, our Chief Financial Officer; Brad Sanders, our Chief Commercial Officer, as well as several other members of our senior management team. Yesterday evening, we issued a press release announcing results for the three and nine months ended September 30, 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 statements in last night's press release applies to the statements of management on this call. Also, please note that information presented on today's call speaks only as of today, November 3, 2016. 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 a 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. Good morning and thank you for joining us to discuss our third-quarter results. We’re very pleased to announce another strong quarter at USDP, delivering over 100% increases in, both, net income and distributable cash flow, our sixth consecutive distribution increase, and 1.9 times distribution coverage. We’re particularly proud of these achievements, given the continued headwinds slowing new developments across the industry. The Partnership's third-quarter results continue to demonstrate the value of structuring our business with highly-contracted cash flows from primarily investment-grade customers, and preserving adequate financial flexibility to pursue growth, such as our Casper terminal acquisition. As we've discussed before, we like this strategic positioning of our assets, which are in some of the key growth markets across North America. In terms of Western Canada, third parties are increasingly endorsing our long-held view that rail will be an integral part of the takeaway solution for growing volumes from long-planned, large-scale oil sands projects. We have identified up to 750,000 barrels of production that we believe is pointed towards the Hardisty Hub. Given the current level of apportionment on pipelines, additional physical barrels should eventually impact prices to incent demand for growing rail takeaway. Our Hardisty and Casper terminals are highly scalable and positioned to meet these upcoming needs, which has been reinforced by recent activity by our partners. In the last few months, Gibson commissioned a nearly 50% increase in their Hardisty storage capacity, which was ahead of schedule, and they were successful in securing short-term contracts to utilize that capacity until the longer-term take-or-pay contracts begin. We have the only unit train-capable terminal connected to the Hardisty hub, and we are the exclusive rail takeaway provider from Gibson's Hardisty storage terminal, and we have recently begun preliminary groundwork in order to be able to meet customer needs for additional capacity on a timely basis. In October, Spectra placed into service an enhanced project on the Express Pipeline, which connects barrels at Hardisty directly with our Casper terminal, and is currently conducting an open season. We are working with potential customers to bring additional volumes to our Casper terminal if they are successful in the open season. On the destination side, our Texas Deepwater development is uniquely positioned to provide new storage, blending and export solutions for growing production, not only from Western Canada but also from West Texas and other producing regions. The Gulf Coast is one of the largest refining centers in North America and an established consumer of heavy feedstock historically, from Mexico and Venezuela, which Western Canada should continue to displace. Additionally, the Permian, which is the most efficient and prolific crude-producing region in the United States today, is seeing meaningful increases in activity, and those barrels will likely seek export optionality, which we are capable of providing. Needless to say, we remain actively engaged with our customers to develop flexible and timely solutions for the industry, not just in Western Canada and in Houston, but anywhere we can create solutions to move customer barrels more efficiently and cost-effectively. We also continue to evaluate a number of M&A opportunities, both at the sponsor and at the Partnership. We’re well-capitalized and ready to execute where we identify assets that are either immediately accretive to our unit-holders or, with additional development, could provide attractive drop-down opportunities, and are otherwise complementary to our network, and consistent with our vision and strategy. With that, I'll turn the call over to Adam to provide more detail on 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 third-quarter earnings release yesterday afternoon. In addition, we intend to file our third-quarter 10-Q after market close today, which will be accessible on the SEC's website at www.sec.gov. For the third quarter, we reported net cash provided by operating activities of $14.5 million, adjusted EBITDA of $16.2 million, and distributable cash flow of $14.4 million. Our results reflect the stable and predictable nature of our cash flows from primarily investment-grade customers, with approximately 96% of our adjusted EBITDA, before corporate expenses, generated from take-or-pay contract. The Partnership achieved substantial growth during the third quarter of 2016 relative to the third quarter of 2015. Specifically, net income and net cash provided by operating activities increased by 103% and 32%, respectively, while adjusted EBITDA and distributable cash flow increased by 66% and 111%, respectively. This growth was primarily attributable to the Partnerships acquisition of the Casper terminal in November 2015, and was partially offset by higher interest expense on additional borrowings used to fund the acquisition, as well as additional operating costs associated with managing and operating the terminal. Distributable cash flow for the third quarter of 2016 also benefited from a partial tax refund with respect to 2015 for approximately $1.4 million. This refund resulted from a study completed by the Partnership and its external advisors to evaluate the appropriate return attributable to the activities of its foreign subsidiaries, based on the performance of risk management and other functions provided by the Partnership. The Partnership anticipates receiving additional refunds totaling approximately CAD3.9 million over the next several months. With regard to future payments, the Partnership expects to pay approximately CAD1.35 million in Canadian income taxes in the fourth quarter of 2016, and approximately CAD4.5 million in 2017. These estimates for income taxes are based on the Partnership's current operations, and are subject to fluctuations in the operating results of the Partnership's foreign subsidiaries, and the exchange rate between the U.S. dollar and the Canadian dollar, among other factors. On October 27, the Partnership declared a quarterly cash distribution of $0.3225 per unit, or $1.29 on an annualized basis, which represents growth of 2.4% relative to the second quarter of 2016 and 10.3% relative to the third quarter of 2015. The distribution is payable on November 14 to unit-holders of record as of November 7. As of September 30, the Partnership had total leverage of 3.5 times trailing 12-month adjusted EBITDA, pro forma for the Casper acquisition, which is in line with our previous guidance for the year. At the end of the quarter, the Partnership had available liquidity of approximately $181 million, including approximately $10 million of unrestricted cash and cash equivalents, and undrawn borrowing capacity of $171 million on its $400 million senior secured credit facility, subject to continued compliance with financial covenants. The Partnership had approximately $229 million of debt outstanding as of September 30, consisting of $220 million on its revolver and approximately $20 million remaining on its Canadian term loan. In summary, we’re pleased with our strong liquidity position and strong distribution coverage for the quarter, and believe we have the flexibility to pursue growth opportunities as they may arise in the future. And with that, I would now like to open up the call for questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Mike Gyure with Janney.

[Mike Gyure:]

Yes, good morning guys. Can you talk a little bit about the Hardisty potential expansion up there, kind of how long it would take you to - I guess from maybe the time you would negotiate a contract with the customer to the time you drop a shovel in the ground, how long that would take to sort of expand that facility?

[Josh Ruple:]

Yes, Mike, this is Josh Ruple. It’s a great question. The actual construction timeline to - for in-the-ground work is actually fairly short. We've done a lot of work to put ourselves in position to be very efficient in that constructive cycle. High-level, to give you a rough order of magnitude, the actual construction activity itself is about 8 to 10 months.

[Mike Gyure:]

Okay. And that would primarily be just expanding the other side of the facility, if I remember right?

[Josh Ruple:]

It actually consists of doing a little bit of track work, and the addition of the second side of the rack. It's actually fairly straightforward construction activity, and it all stays within the existing footprint of our Hardisty terminal.

[Mike Gyure:]

Okay, great. And then maybe on the Casper facility, you talked a little bit about the Spectra, I guess, work going on there. Can you talk a little bit about, I guess, the cost related to that? And kind of what you're looking to achieve from a volume standpoint, maybe some kind of magnitude as far as increases or what you're looking at there?

[Brad Sanders:]

Well, we wouldn't know, Mike, what the, this is Brad, by the way. Nice hearing your voice and visiting with you. But we wouldn't know what that cost would be. What we do know is that they are fully subscribed as a pipeline, and we do know that this incremental open season is small relative to total capacity. But we are hopeful that those that desire that capacity, it will provide opportunity for us to create new relationships and opportunities at Casper, it should.

[Mike Gyure:]

Okay, great. And then maybe lastly, kind of on your Houston prospects and kind of what's going on down there, can you talk a little bit more about, I guess, what you're seeing in the marketplace as far as maybe exports or potential exports and kind of what you are thinking down there may be the next year or so?

[Dan Borgen:]

Sure, Mike, Dan here. I think the best way to approach that is, we've had a strong interest and several strong commercial investment-grade customers at the table discussing exactly that. So what we believe, what we’re seeing and what we are getting confirmed is that export capacity, dock capacity, and associated tank capacity is in short supply for crude and for refined products. We are positioned and permitting for both of those. And so, we have two distinct parts of the terminal, if you well, to achieve both tankage, blending on the crude side, dock space to support large vessel movements, to meet the growing export demand, obviously. And whether that, be from a West Texas increase or whether that be from a Canadian increase that's coming online, most of it wants to head to the most optional place that they can go. Certainly, the Houston Gulf Coast with its strong refining pull and demand for the intermediate to heavy coming out of Canada, and then being able to have a strong supply of high-quality light sweet that they can either blend and export, blend neat, I mean, sorry, export neat; create local supply points for refinery demand, that's what this is being built for. And a truly third-party service-provided terminal. So, that's on the crude side. On the refined product side, obviously, looking to export more and more growing demand for gasoline export, whether it be RIN-driven, whether it be demand pull coming abroad, whether it be the opening of Mexico and continued hold on market share there for U.S. providers, all of which needs tanks and associated docks to be able to meet that in a timely manner. As well as rail, we believe there is a strong interest. And we have people at the table from a rail takeaway into Mexico to supply their deregulated energy economy, I'll call it. So we remain extremely confident and very bullish around the development of those assets. And the strength of the customers at the table, I think the market will be very pleased.

[Mike Gyure:]

Great. Appreciate that, Dan.

[Dan Borgen:]

Sure.

[Operator:]

[Operator Instructions]. At this time, there are no further questions in queue. This concludes…

[Dan Borgen:]

Yes, let me just close real quick then. And I certainly appreciate those on the call. I know there's lot of other calls going on at the same time, and we appreciate you all being on this call. Just a few takeaways that I think are important to remember here, is that we've begun the site work at Hardisty to meet the demand, as Josh had said. We’re extremely confident, basis the information that we gathered from customers, their demand needs, their timeliness of that, the speed to market that we can bring it, Josh said 8 to 10 months. We're trying to get ahead of the winter. We get heavy winters up there, so we are trying to get ahead of the winter to be prepared to be able to handle that, and handle that growing volume that's coming. We've got continued apportionment of existing pipelines there, in the 15% to 20% apportionment, so continuing signaling that the existing takeaway is getting pinched. We've got tanks completed. We have customers, both existing customers and new potential customers that have voted with their pocketbook and are spending money on tanks to take their growing production. The majority; a strong majority of those Hardisty tanks are at our partner Gibson, and we are connected to them exclusively from a rail takeaway position. So we’re highly encouraged by that. And the existing Hardisty origination pipeline capacity on, open seasons are relatively small to the growing demand that is coming online. And we’re in commercial discussions with both existing and new customers. So it's a good group of high-quality investment-grade customers, and I think the market again will be very pleased with the addition of some new potential customers as well as maintaining our existing customer relationships. We are obviously pleased to deliver another quarter of substantial growth. We've worked very hard in that, to both remain conservative but still being a strong development company. And we’re focused on building on the attractive business that we have today in order to continue increasing distributions to our unit-holders for the years ahead. So, with that, I'll close. Appreciate everybody being on the call. Everybody have a great weekend. Thank you.

[Operator:]

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