USD Partners LP (USDP) on Q4 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by and welcome to the USD Partners LP Fourth Quarter 2021 Results Conference Call. At this time, all participants have been placed in a listen-only mode. The floor will be open for your questions following the prepared remarks. . It is now my pleasure to turn the call over to Jennifer Waller, Director of Financial Reporting and Investor Relations for opening remarks. Please go ahead.
Jennifer Waller: Thank you. Good morning and thank you for joining us. Welcome to our fourth quarter 2021 earnings call. With me today are Dan Borgen, our Chief Executive Officer; Adam Altsuler, our Chief Financial Officer; Brad Sanders, our Chief Commercial Officer; Josh Ruple, our Chief Operating Officer; as well as several other members of our senior management team. Yesterday evening, we issued a press release announcing results for the 3 months and year ended December 31, 2021. If you’d like a copy of the press release, you can find one on our website at usdpartners.com. Before you proceed, please note that the Safe Harbor disclosure statement regarding forward-looking statements in last night’s press release applies to the statements of management on this call. Also, please note that information presented on today’s call speaks only as of today, March 3, 2022. 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 and thank you for joining us on the call today. 2021 was a momentous year for the partnership as well as for our sponsor. And I would like to start off by covering a few highlights from the year. Our terminals continue to perform safely and reliably throughout the year. The partnership continued to generate a significant amount of free cash flow, which continued to be supported by our strong contract structure and high-quality investment grade customers. Our sponsor and its joint venture partner declared the DRU to be fully operational and we commenced shipment of DRUbit by Rail in December. As a brief reminder, our DRUbit by Rail network has already enhanced the sustainability and quality of the partnership’s cash flows by significantly increasing the tenor of approximately 32% of the Hardisty terminals capacity through 2031. We announced a new five-year renewable diesel throughput agreement underpinned by investment grade rated refining customer at the partnership's West Colton terminal. And we also announced the five-year agreement that became effective January 1, 2022, with our ethanol customer at the West Colton terminal that replaced our legacy short-term agreement. This new agreement is expected to generate higher cash flows for the partnership as compared to the previous agreement. And last but not least, our sponsor formed a new subsidiary, USD Clean Fuels LLC, which is focused on providing production and logistic solutions to the growing market for clean energy transportation fuels. We are committed to the transition into sustainable fuels and look forward to future announcements related to USD Clean Fuels. Turning back to the fourth quarter, the partnership increased its quarterly distribution with respect to the fourth quarter by approximately 2.1% relative to the third quarter of 2021, which was in line with our previously announced distribution guidance. We hope to continue our momentum in 2022 and are encouraged about the future as we engage with our customers regarding the second phase of the DRU and the partnership's growth. Accordingly, management intends to recommend to the Board of Directors of its general partner to remain on its current distribution growth trajectory of increasing its quarterly cash distribution per unit by an additional quarter of a cent per quarter for the first, second, third and fourth quarters in 2022. As previously mentioned construction of both the DRU and PAT projects was completed and both are now fully operational and throughput volumes are consistent with contractual obligations and our customers' expectations. As a reminder our DRUbit by Rail network consists of the DRU and a Port Arthur Destination Terminal or PAT. The DRU was constructed along with USD's strong JV partner Gibson and is located adjacent to the Partnership's Hardisty terminal. Our DRUbit by Rail network also benefits Partnership by providing longer term take-or-pay revenues at its Hardisty terminal, while providing transportation safety and environmental benefits to its customers. We look forward to sharing future announcements with the market about the next phase of growth at the DRU. Next, Adam is going to give us an update on the partnership latest financial results and our liquidity position. Then we'll jump back into the recent market and commercial developments. With that, Adam, please go ahead.
Adam Altsuler: Thank you, Dan, and thank you for joining us on the call this morning. Yesterday afternoon we issued our fourth quarter earnings release which included the details of our operating and financial results for the fourth quarter and full year 2021. We plan to issue our full year 2021 10k with additional details after closing market today. Partnership reported net income of $3.6 million, net cash provided by operating activities of 9.4 million, adjusted EBITDA of 11.9 million and distributable cash flow of 10.7 million. Since the end of the first quarter of 2020, the partnership has reduced the outstanding balance of its revolving credit facility by $56 million using excess cash flow from operating activities. As Dan mentioned, management is encouraged by our recent discussions with our customers and our improved outlook for our business along with the Partnership's enhanced liquidity position, all of which supported our recommendation to the Board to increase our quarterly distribution by 2.1% relative to the third quarter of 2021. This recommendation was in line with our previous guidance. The distribution was paid on February 18 to unitholders of record at the close of business on February 9. Our take-or-pay contracts continue to support strong free cash flow generation at the partnership, as evidenced by our strong DCF coverage of greater than 3.0x for both the third and fourth quarters. As a result, management intends to recommend to the Board of Directors of a general partner to remain on its current distribution growth trajectory of increasing its quarterly cash distribution per unit by an additional quarter of a cent per quarter for the first, second, third and fourth quarters in 2022. And now I'll go into the details from the quarter. The partnerships operating results for the fourth quarter of 2021 relative to the same quarter in 2020 were primarily influenced by lower revenue at its Stroud terminal during the quarter associated with the existing DRU customer, electing to reduce its contracted volume commitments by 1/3rd of its previous commitment, effective August 21, which was primarily driven by the successful commencement of the DRU. The partnership experienced higher operating costs during the fourth quarter of 2021 as compared to the fourth quarter of 2020. Primarily attributable to an increase in subcontracted rail service costs due to increase throughput. Net income decreased in the fourth quarter of 2021 as compared to the fourth quarter of 2020, primarily because of the operating factors already discussed, coupled with a non-cash foreign currency transaction loss in the fourth quarter of 2021 as compared to a gain recognized in the 2020 comparative period. Partially offsetting was lower interest expense incurred during 2021 resulting from lower interest rates and lower weighted average balance of debt outstanding and a larger non-cash gain associated with the partnerships interest rate derivatives during the fourth quarter of 2021 as compared to the same period in 2020. Net cash provided by operating activities for the quarter decreased 22% relative to the fourth quarter of 2020. Primarily due to the same operating factors already discussed, and the general timing of receipts and payments of accounts receivable, accounts payable and deferred revenue balances. Adjusted EBITDA and distributable cash flow decreased by 20% and 18% respectively, for the quarter relative to the fourth quarter of 2020. The decrease in adjusted EBITDA and DCF was primarily a result the operating factors already discussed. Partially offsetting the decrease in DCF was a decrease in the cash paid for interest in taxes during the quarter. As of December 31, 2021, the Partnership had approximately $3.7 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of 107 million on its $275 million senior secured credit facility, subject to the partnerships continued compliance with financial covenants. As of the end of the fourth quarter of 2021, the partnership had borrowings of $168 million outstanding and its revolving credit facility and was in compliance with its financial covenants. Pursuant to the terms of the partnerships senior secured credit facility, as recently amended, the partnerships borrowing capacity continues to be limited to 4.5x its trailing 12-month consolidated EBITDA. As such, the Partnership's available borrowings under the senior secured credit facility, including unrestricted cash and cash equivalents was approximately $83.7 million as of December 31. We continue to be excited to work with our customers and our bank group in the future to grow the Partnership around some of our and our sponsors new growth initiatives. Specifically, we're very focused on the growth prospects that currently exist around the sponsors DRU and Port Arthur projects, as well as the USD Clean Fuels initiatives. And as always, we continue to be focused on enhancing the long-term value for our unitholders. With that, I would now like to turn the call back over to Dan.
Dan Borgen: Thank you, Adam and I’m going to ask Josh to give a quick update on the DRUbit by Rail program. And then Brad will give us a detailed update on Western Canada select market, recent market updates and an update on our commercial activities. Josh?
Josh Ruple: Thanks, Dan. Let me let me start first with DRU. We've been fully operational for over 60 days, and the DRU unit is performing extremely well. We're operating per plan with regards to unit performance and operating cost. Currently, we're exceeding our operational throughput levels are achieving our product specification goals for DRUbit and exceeding our non-hazardous flashpoint targets. And finally, with regards to DRU, our diluent return system continues to deliver a ratable solution through our partner Gibson's terminal for our customer. At Port Arthur as with DRU, we continue to see really good operating performance with those assets. Our rail turn times are pre-planned and under 24 hours per train. We're seeing strong performance from the Canadian Pacific and the KCS Railroads with regards to their overall network cycle times on their rail routes for both loads and empties. Our blending operation continues to add value for our customer at Port Arthur. And finally at Port Arthur, our pipeline and marine base connectivity options are providing competitive market access to our customer and their downstream customers, again, per plan. All-in-all, very pleased with the team and the asset performance in the field today to both DRU and Hardisty and at Port Arthur. We've had some extremely cold temperatures in Hardisty this winter, but with our partner Gibson's have managed through those temperatures nicely, and now remain focused on growth at both locations. As a reminder for the folks on the call today. We're fully permitted for incremental DRU development at both Hardisty and Port Arthur, and with the interest we're seeing in our DRU program, our DRUbit by Rail program, we're excited for the prospect of that growth. And with that, Brad, I'll hand it over to you for market and commercial updates.
Brad Sanders: Thank you, Josh. From a market update standpoint, as Josh mentioned, in the fourth quarter, we had some extremely low temperatures up in Canada and that caused some critical production disruptions for our producers and potential customers up there. And given that inventories over the second half of the fourth quarter and into early this year, we saw inventory draws from historical high levels to levels today that are considered historically low levels. The good news is in the fourth quarter and certainly prior to all the disruptions that we're seeing internationally with Ukraine and Russia prices were at historically high levels, certainly high levels relative to recent history with prices for WTI in the range of $90 to $95. And given the inventory levels I just described, our producers, our potential customers in Canada are experiencing some of the best netbacks that they have ever experienced. So consequently, in 2022, our expectation is, we will see incremental production or supply growth relative to 2021. Our expectations are, we could see as much as 300 to 300,000 barrels a day of increased supply 2022 versus 2021. Our expectations then will be that we will see inventories returned to the levels we saw in early 4Q of 2021, which, as I stated were at the higher end of the range. And then finally, we continue to see headwinds as it relates to pipeline egress challenges. Most recently there were announcements by TMX pipe of their overruns, challenges and delays that they're experiencing bringing that pipe on or into service. So our expectation is naturally that we're moving into a period in time, certainly in the second half of 2022 where development opportunities should be rich up in Canada. With that, I'll move on to a couple of highlights on our commercial updates starting with the DRU, given the success of the DRU startup as Dan and Josh both described our focus on a go forward basis is to transition 100% of our capacity at Hardisty rail terminal to support the future development of the DRU. As a reminder, the DRU plus, our Hardisty terminal and our railroad partnerships and our vantage destination at Port Arthur supports the delivery of the most competitive egress solution for Canadian producers. Key drivers for that are the non-haz, nonflammable nature of the product that we have spoken to before previously. It's an attractive solution that has competitive emissions profile relative to pipelines as it relates to greenhouse gas emissions. There are cost reduction benefits due to the savings and diluent return value proposition which after you separate the diluent it is returned locally to markets and customers who can then reblend it. And then their cost reductions associated with the railroad support as a function of the safety features we described as non-haz and non-flam. And then, finally, from a netback standpoint, our customer are experiencing lend value incentives that have exceeded expectations when we originally work through the potential economics of the DRU. So when you combine all of these benefits, then our analysis shows that there are potentials for $2 to $4 a barrel of savings on a movement from Hardisty to the U.S. Gulf Coast. So given that we're currently in discussions and term sheet development type discussions with multiple customers, including producers and refiners and we're very excited about the support that the story up in Canada provides and supports as we move those discussions forward in 2022. From a clean fuel standpoint, Dan mentioned that our West Colton rail terminal asset is currently supporting long-term contracts with the investment grade counterparties. Delivering not only renewable diesel into Southern California but also the lowest carbon intensity ethanol that is produced in the U.S. into Southern California as well. So we're very proud of the development progress we have made in Southern California specifically at West Colton. And we use that as a model for future development opportunities as we look at not only increasing demand for product in California given its low carbon fuel standard policies, but also the growth of policy into the pack, northwest, Canada, and other areas. So our continued focus, again working with our railroad partners will be on development opportunities supporting the changing renewable fuels landscape with focus on renewable diesel, ethanol, aviation fuel and strategic feedstock, both in infrastructure and production. So we're excited about the opportunities that are before us not only in clean fuels, but as it relates to DRU and look forward to providing updates in future earning calls. Dan, I hand it back to you.
Dan Borgen: All right. Thank you both, Josh and Brad, great updates, always appreciate the information. With that, we will open up the call for any additional questions.
Operator: We will take a question from Steve Ferazani of Sidoti and Company.
Steve Ferazani: Good morning, everyone appreciate all the detail on the call. I want to dig in a little bit on the sequential change in terminalling services revenue. That sounds like what you were saying is that that was now a full quarter without the Stroud volume out versus there being some in the previous quarter. Is that the right way of thinking about that now we've seen the full quarter without that volume that moved to Port Arthur?
Adam Altsuler: That's correct. This is Adam. Hi, Steve. That's correct.
Steve Ferazani: And then, did we see any benefits yet from the renewable diesel contract? I think that didn't start till December. Is that right?
Adam Altsuler: That's right. We didn't -- it's running. It's fully operational. But we saw minimal impact in Q4, is the start date of December. So we'll see more of that and a full run rate starting in Q1.
Steve Ferazani: So it's reasonable to think and obviously, we're two months into the quarter more than that. When we think about -- Stroud we've seen that without any of that in the quarter, then we think about the renewable diesel contract. When we think about the renewed ethanol contract, it's reasonable to think we're trending up on terminalling services revenue to Q1, is that right?
Adam Altsuler: That's exactly right. The change in the ethanol contract at West Colton plus the new business, the incremental business associated with renewable diesel at West Colton will add to Terminal Services, revenue and Q1 and going forward.
Steve Ferazani: Great, that's helpful. And then, you talked on previous calls about investments you would be making into Stroud, basically, to make that more accommodating to potentially a wider, wider group of customers. Can you tell us where we're at with that? And what are you thinking about, filling that last volume at Stroud at some point in '22?
Adam Altsuler: Sure. I might hand that one off to Brad and Josh just take that one.
Brad Sanders: Yes, I'll take. Thank you. This is Brad. Good question. So our expectation is, we'll have a second tanking service beginning second half of 2022. Effectively, what that does is allow us to handle multiple qualities or multiple grades at Stroud. Currently, we're limited to one grade and historically we've had one customer because of that. On a go forward basis, then we have the option now to add a second customer. As it relates to market and the update I gave earlier, our expectation is with the production changes year-on-year that we will return to high inventory levels, high apportionment levels. And the role of crude by rail as an egress solution in the second half should have happen from a market standpoint. And then, specifically as it relates to Cushing. Cushing are at historically low inventory levels, and over the last year and a half has been extremely higher value, is all I'm trying to say, higher valued relative to market alternatives. From a destination standpoint, our expectation is, it'll continue to carry a premium. So naturally, as volumes move by rail, the first netback -- highest netback point will be Cushing. So our expectation is, we'll see some of that activity in the second half of 2022.
Steve Ferazani: Great, that's fair. Thanks for that. Last one for me, before I turn it over, may be I will get back in the queue. In terms of how you're thinking about the distribution and uses of cash. Clearly, you've had a lot of positive announcements over the last six months. Cash flow model should be growing next year. Seems like you have got leverage back to a reasonable and I don't know if your target ratio as well below that. How are you thinking about the distribution giving all the positives you've announced over the last six months?
Dan Borgen: Yes, that's a good question, Steve. I think the way we're thinking about it, it's just to maintain a good balance of growth, but also have a good distribution coverage. Going forward, we've had a pretty strong distribution over the last two to four quarters. And we're also projecting a strong distribution coverage in 2022. We kind of take it year-by-year. But at this point, we'll have a DCF surplus going forward, which we'll use to pay down debt or look at strategic initiatives, either on the organic side or on the M&A side.
Steve Ferazani: What's your target leverage now? Has it changed?
Dan Borgen: In the past, we set it's about 3.5x. So we're below that. We feel good about where we are right now. And we'll just continue to monitor that.
Steve Ferazani: Great. Thanks for all the detail, folks.
Operator: And it appears that we have no further questions at this time. I'd be happy to return the call to Dan. Actually, we do have a question from Darren McCammon of Cash Flow Kingdom. Your line is open.
Darren McCammon: Hi, guys, thanks for taking my call. I'm trying to get my head around something that I just don't understand. Your AR, AP rail, subcontracting expense and a variety of other lines all indicate growth. But the revenue doesn't. Now I understand 1/3rd of Stroud is going out, but I'm thinking, all those other things are growing, your revenue growth should have been commensurate? Can you help me understand this is a revenue recognition thing going on, delay going on or something like that?
Adam Altsuler: We can get into the details offline. But this really has to do with, I would say, the way our contracts work and with deficiency credits, but it's the revenue itself is always going to be based on MVC. There might be some movements in the way that we recognize revenue with the deficiency credits, but the revenue itself is always going to be based on MVC, unless they exceed their MVC. I’m happy to drill down into the line item with you offline.
Darren McCammon: That'd be great. Just real quick, what is MVC?
Adam Altsuler: Sorry, minimum volume commitment. And that's, primarily all of our terminalling contracts are based on minimum volume commitments. Meaning, if they're using the terminal or not, they're still paying us the same amount of revenue. And in some cases, where they exceed the MVC, the revenue will be higher. But for the most part that's really where our revenue comes from.
Darren McCammon: Okay. I'll take it offline with you, because I still understand. Thank you.
Operator: . And at this time, I will return the call to Dan Borgen, for any closing remarks.
Dan Borgen: I appreciate it. And thanks for all the great questions today. Really appreciate that always a knowledgeable group. And Adam will follow up on that and get the detail for you. So obviously, we're very encouraged about 2022 and what's happening. We always take a more conservative view in terms of our distribution policy, but we're very encouraged about it. Our coverages is good and we want to try to continue to review that distribution policy and continue to grow as we can. Again, as we look to our DRU growth, and our Clean Fuel strategy and its growth and the momentum that we have behind those primary . So, thanks again, everyone on the phone, and we appreciate all the support and look forward to continuing updates soon. Thank you.
Operator: This does conclude the USD Partners LP fourth quarter 2021 results conference call and webcast. You may now disconnect and everyone have a great day.
