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USD Partners LP  (NYSE:USDP)
Q4 2018 Earnings Conference Call
March 07, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the USD Partners LP Fourth Quarter 2018 Results Conference Call. (Operator Instructions)

It is now my pleasure to turn the call over to Jennifer Waller, Associate Director of Financial Reporting and Investor Relations for opening remarks. Please go ahead.

Jennifer Waller -- National Reporting Manager

Thank you, Christy. Good morning, and thank you for joining us. Welcome to our fourth quarter 2018 earnings call. With me today are Dan Borgen, our Chief Executive Officer; Adam Altsuler, our Chief Financial Officer; Brad Sanders, our Chief Commercial Officer; Josh Ruple, our Chief Operating Officer, as well as several other members of our senior management team.

Yesterday evening, we issued a press release announcing results for the three months and year ended December 31, 2018. 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 7, 2019. Any time-sensitive information provided may no longer be accurate at the time of any webcast replay or reading of the transcript.

Finally, today's call will include discussion of non-GAAP financial measures. Please see last night's press release for reconciliations to the most comparable GAAP financial measures.

And with that, I'll turn the call over to Dan Borgen.

Dan Borgen -- Chairman, President and Chief Executive Officer

Thank you, Jennifer. Good morning, everybody. We are pleased to announce another positive quarter at the Partnership and continued momentum in our recontracting efforts at our Hardisty terminal. 2018 was a very successful year for the Partnership. Over the last 12 months, we've accomplished a great deal. We've recontracted approximately 80% of the Hardisty terminal's cash flows on an annualized basis at meaningful higher terminal rates.

Also, we are in discussion with our Stroud customer for early renewal over the next multi-years. We refinanced and extended our revolving credit facility with the support of our strong bank group. We've grown our quarterly distribution consistent with our previous guidance and we announced an accretive growth project at our Casper terminal advancing our hub strategy and potentially gaining access to new refiner customers.

In addition, our sponsor has completed the construction of the Hardisty South expansion and we are excited to see that facility go into service in January of this year. In addition, in the first quarter of 2019, our sponsor executed a new multi-year take-or-pay terminalling services agreement with the Alberta Petroleum Marketing Commission referred to as APMC, an agent of the Government of Alberta. The agreement is for transloading capacity at the Hardisty rail terminal starting in January 2020 and contains take-or-pay terms with minimum monthly payments.

The agreement will support further growth at USDG's Hardisty South expansion and will provide additional capacity beyond the APMC commitment. This expansion will be funded by our sponsor pursuant to its development rights at the Hardisty terminal. All of these opportunities at our sponsor could be possible dropdown candidates for the Partnership in the future. Given our recent momentum and the fact that we project our cash flows to reflect the higher recontracted terminal rates starting in July of 2019, we expect to deliver annualized mid-single digit distribution growth for the full year 2019 relative to the full year 2018, subject to the successful recontracting of our remaining Hardisty and Stroud capacity and the successful execution of our previously announced organic growth project at Casper.

Adam is going to start us off with an update on the Partnership's latest financial results, our distribution coverage, our liquidity position; then we'll jump back into the recent market and commercial developments. With that, Adam, go ahead.

Adam Altsule -- Chief Financial Officer

Thank you, Dan, and thank you for joining us on the call this morning. Yesterday afternoon, we issued our fourth quarter 2018 earnings release, which included the details of our operating and financial results for the quarter and for the full year. And we plan to issue our 2018 10-K with additional details after the close of market today. For the fourth quarter, we reported net income of $1.9 million, net cash provided by operating activities of $12.9 million, adjusted EBITDA of $13.7 million and distributable cash flow of $10.9 million.

Partnership ended the quarter with distribution coverage of approximately 1.1 times and 1.2 times for the full year of 2018. The Partnership's results during the fourth quarter of 2018 relative to the same quarter in 2017 were primarily influenced by additional revenues and costs at our Stroud terminal due to additional contracts that were executed in March and April of 2018. The Casper terminal also generated additional cash flow during the fourth quarter of '18 associated with the three-year agreement that became effective September '18.

In addition, as a result of a substantial increase in the customer activity at our Hardisty terminal, the partnership incurred incremental operating cost during the fourth quarter of 2018, as compared to 2017. Net cash provided by operating activities increased by 26% relative to the fourth quarter of 2017 due to higher cash flows from the Stroud and Casper terminals. As a result, adjusted EBITDA increased by 8% and distributable cash flow increased by 9% relative to the fourth quarter of '17.

Net income for the quarter decreased by 20%, primarily as a result of a non-cash loss associated with an interest rate derivative instrument that we entered into in November, 2017 and additional interest expense we incurred as a result of higher interest rates during the fourth quarter of '18.

As of December 31, the Partnership had net leverage of 3.4 times, trailing 12 months adjusted EBITDA based on its financial covenants and total available liquidity of $182 million,, including 6 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $175 million on its $385 million senior secured credit facility, subject to continued compliance with financial covenants. The Partnership is in compliance with its financial covenants.

On January 31 of this year, we declared a quarterly cash distribution of $0.36 per unit or $1.44 per unit on an annualized basis, which represents growth of 0.7% over the prior quarter and 4% for the full year 2018. The distribution was paid on February 19 to unitholders of record at the close of business on February 11.

As Dan mentioned, given the success we've seen with our recontracting at Hardisty at significantly higher terminal rates, we expect to deliver mid-single digit distribution growth on an annualized basis for the full year 2019 relative to the full year 2018, subject to the successful recontracting of our remaining Hardisty and Stroud capacity and the successful execution of our previously announced organic growth project at Casper.

Given where spreads are today, the first half of 2019 to be somewhat of a transition period for the partnership, with lower distribution coverage than we've typically experienced, we expect to see growth in our cash flows and distribution coverage in the second half of 2018 as a result of the newly recontracted terminal rates kicking in, in July of 2019.

And with that, I'd now like to turn the call back over to Dan.

Dan Borgen -- Chairman, President and Chief Executive Officer

Thanks, Adam. Now I'd like to ask Brad to give us an update on some of the key things that have happened in the Western Canadian crude oil market and I'm sure you would be interested in hearing from that. So, Brad?

Brad Sanders -- Chief Commercial Officer

Thanks, Dan. So the overall Western Canadian macro continues to provides support for our business and specifically for our terminalling assets. We continue to see apportionment levels on export pipelines at the higher end of the range, greater than 40% currently and we also continue to see inventory levels at historical high levels, closer to 36 million barrels in total and utilization rates greater than 60%.

Since the beginning of the year, the WCS to WTI crude oil spread has narrowed primarily as a function of the Alberta Government's announcement in December to curtail crude oil and bitumen production by 325,000 barrels a day. The objective of the government was twofold; one is to improve netbacks to producers and for the Canadian government and to drive inventory levels lower so that those netbacks were sustainable and the leverage by producers improved.

As I said prior to this is that unfortunately, we haven't seen any change in the inventories at this time. That's primarily driven by the incentives remain tight as a function of these changes. So with the government changes we've seen the spot market traded differentials that are closer to $10 to $11 under. So WCS trading at a discount WTI at those kind of levels. That's historically very strong. In the fourth quarter of last year we saw differentials that average closer to $40 and at its peak, the differential was $50. So when the market was left to do its thing, it was clear that supply was greater than takeaway capacity at that point in time.

While the narrowed spread resulting from this curtailment has caused some crude by rail facilities in Canada to see reduced shipments, the Partnership continues to see strong demand for capacity at Hardisty terminal. This is given our strength as a third party industry solution for both producers and our customers who are focused on long-term solutions for takeaway constraints out of the region, such as refiners. So we have not seen the impact of narrowing spreads impacting our utilization at our facility.

Production from the well remind everybody that production from the oil sands in Western Canada is projected to continue to grow and the expected timing of the proposed export pipeline additions remain uncertain. Forward curves currently reflect this uncertainty and you can see that in the second half of 2019 spreads are $21. So we spot our $10 to $11 under. Just the second half of 2019 there are $21 and then when you look out forward to 2020 through 2023, the differentials are $21.

So the demand for takeaway remains high. As Dan mentioned with our Hardisty South expansion, we are creating capacity to meet that need and we are actively pursuing commercial opportunities relative to that.

Dan Borgen -- Chairman, President and Chief Executive Officer

Okay. Thank you, Brad. Now I'd like to shift gears and talk about our two key development projects at the parent and what we're doing to give you a status update on that. So I'll ask Brad and Josh to cover those two points, starting with Texas Deepwater and then our Mexico update.

Brad Sanders -- Chief Commercial Officer

And if OK, Dan, I'd like to make a couple of comments about Casper.

Dan Borgen -- Chairman, President and Chief Executive Officer

Sure.

Brad Sanders -- Chief Commercial Officer

We've got couple initiatives there that we're very excited about. You mentioned one which is the pipeline connection. It's creating new opportunities, new access to markets and potential customers and sustainable and efficient solutions for those customers. In addition, that's working with Enbridge. In addition, we're working with Enbridge on their announced project to try to increase throughput on their Express pipeline by adding a DRA, which is a drag resistance agent of some sort, right. Josh can speak to that in a second, but that would add capacity to express and add demand for our Casper terminal, not only from a rail takeaway standpoint, but from a pipeline enhancement standpoint, given the work that we're doing. Josh, you got anything to add to that?

Josh Ruple -- Chief Operating Officer

Sure. Only thing I would add is, we're -- to Brad's point, we're actively involved with Enbridge in regards to the DRA project, the scope associated with that project is reasonable and on our side of the fence, we are poised today to receive the additional volumes that are expected coming out of Express.

Relative to the connection to Enbridge, as I've mentioned on past calls, we're deep down the path of the planning activities. All of the associated activities with development of that new pipeline connection are well on their way and expected to be delivered per plan, which is to be completed sometime the back end of third quarter this year.

Brad Sanders -- Chief Commercial Officer

Josh thanks, on Texas Deepwater then, I would say one of our obvious one of our primary focus areas or priorities is we've talked about all the demand for takeaway capability out of Canada for heavy crude. All that for every barrel that finds a solution from a takeaway standpoint also needs to find a solution from a destination standpoint.

So, we're excited about our asset at Texas Deepwater, the current infrastructure we have, the current connectivity that we have and our ability to provide a CBR destination crude by rail destination solution for any and all Canadian CBR offtakers and I would say that our focus is creating a hub solution for those potential customers, which provides them the greatest opportunity to maximize netback or for the producer of the heavy Canadian, Josh you got anything to add to that?

Josh Ruple -- Chief Operating Officer

Again just reinforcing basis on the quality of the commercial activities, we're well on our way and development on site. We have physical construction ongoing today. We have a large power facility that's under development. Marine activities that are under development and rail activities that are under development. All of which, as we've mentioned in the past are fully permitted and again projects are progressing per plan.

Dan Borgen -- Chairman, President and Chief Executive Officer

And those are not only supporting CBR as we know. They're also supporting the other initiatives that we feel very good about and where we are held to complete confidence on the progress of those, but I think we can share consistent with the macro story in the US, we are very purposed about opportunities that range from pet cams to crude to NGLs. So we're very excited about the potential of those developments.

Nothing to add. Okay, on Mexico, real quick, you've heard us talk about our two destination terminals previously. We've delivered on both of those. We're commercially viable at both of those. We are a 100% full at both of those and we're looking for growth opportunities. Our plan going forward is take the learnings and the success that we've had there and the relationships that we've built and being successful with these two terminals and we have two to four additional terminals that we're pursuing to provide the same industry solution, which is light products by rail. So we're excited about that. Josh?

Josh Ruple -- Chief Operating Officer

The additions there, Brad, that I would add for the two operational facilities that we have in Mexico, you mentioned growth. We are today working on plans to double the capacity at each of those facilities and we have options to do that in a very accretive way, relative to the two to four facilities where we're developing assets, all of those are in the permitting process. All of those are in the pre-procurement process and again all per plan from an execution perspective. Thank you.

Dan Borgen -- Chairman, President and Chief Executive Officer

All right. So with that, just one additional thing to add at Texas Deepwater, the fourth component of that is our refined products position there and so we're looking for that to feed and we'll be announcing some additional things coming along there that will help feed our Mexico network as well as other destination markets. So both by rail and by water. So we'll look forward to discussing more of those very soon.

So with that, I will open up the call for questions for anybody on the call.

Questions and Answers:

Operator

(Operator Instructions) And your first question is from Derek Walker of Bank of America..

Derek Walker -- Bank of America -- Analyst

Hi, good morning, guys.

Dan Borgen -- Chairman, President and Chief Executive Officer

Hi, good morning, Derek.

Brad Sanders -- Chief Commercial Officer

Hey, Derek.

Derek Walker -- Bank of America -- Analyst

Dan, maybe just a quick one. It sounds like, and from Adam's remark, the first half of '19 sort of a transition period with cash flows increasing in the second half. You mentioned, you provided some initial 2019 kind of distribution growth rate subject to some contracts of an organic growth. So I guess given some of those moving parts there, I guess how are you thinking about I guess dropdowns for 2019 sort of whether it's incremental interest, the funding, the timing of it, just any sort of color, how you're thinking about that?

Dan Borgen -- Chairman, President and Chief Executive Officer

Sure. And I appreciate the question. So, yes, so we're always looking at those dropdowns. I know in the past, we've talked about certain projects at the parent at the sponsor. We've been successful in commercializing the majority of those, but the first goal would be to fully commercialize those and once that's done, we feel like they'd be attractive candidates to drop down.

Obviously, we've tried to do everything at Partnership we could by increasing our distribution, maintaining attractive leverage and delivering on all things we said and the market is still somewhat challenged. And so I would say, once we do commercialize those opportunities, we'd be vocal about at the parent. Like I've always said, we have the flexibility because we've been able to build these at relatively low multiples to look at different ranges of dropdown multiple.

So these are things we're constantly evaluating, talking about with our Board and we'll always look to do that and maximize value for the shareholders. So I'd say it's a possibility in '19, but try to get fully commercialized first and really try to do everything we can to get our cost of capital lower.

Derek Walker -- Bank of America -- Analyst

Thanks, Adam. And maybe just a follow-up. Can you just spread a little more color around the contracting with the Alberta Government? Did they come to you and are those rates comparable to existing contracts either at Hardisty South or the Pace Hardisty and did you mentioned the capacity that was actually signed up for?

Dan Borgen -- Chairman, President and Chief Executive Officer

Yes, so Derek, they approached us and we are a -- and let me just say this, we're a free market believer, but we also believe it's important for us to deliver on opportunities for our shareholders. And so as the government came to us and needed, we thought it was a well thought-out strategy in terms of what they were trying to do, shorten inventory and have their numbers in line to do that. I think that as with any terminal, the last barrel available, generally is a higher price that was true on this particular case and so, I think that we saw continued confirmation. The demand for the asset and that prices were driven further up by that, which is a good thing for us.

I think that as we continue to work with the government and associated railroads that serve our facility, we'll continue to move product and clear product out of Canada, which is what is important for the province and for the country and so we have a good relationship with the government and we look forward to continuing to grow that and help us we can including our customers, but at no time would it be a priority over our customer barrels and so we want to continue to enforce that we have sound operating strategy to maintain and run our business in a way that supports our existing customers as well as onboarding new customers both APMC and other new demand that we have with the additional capacity that we're building with this project.

Brad Sanders -- Chief Commercial Officer

Hey, Derek, this is Brad. In addition, the government, their objective was actually to try to drive effectively two unit trains a day of takeaway capacity by rail. So we think we've -- they've achieved most of that, if not all of it. The good news and the point I'm bringing that up is and that is that's very supportive of our renew and extend efforts at Stroud and development efforts at both Stroud and Texas Deepwater's destination, because the marketplace was not contemplating an additional two unit trains of takeaway capacity. So it's very supportive of our current assets and future assets.

Dan Borgen -- Chairman, President and Chief Executive Officer

Did that answer that for you, Derek?

Derek Walker -- Bank of America -- Analyst

I think so. Maybe just a follow-up on that. So the two unit trains, that's just a -- that's a more of a broader statement right? It's not exactly what was contracted?

Dan Borgen -- Chairman, President and Chief Executive Officer

Yes.

Derek Walker -- Bank of America -- Analyst

Or it sounds right?

Dan Borgen -- Chairman, President and Chief Executive Officer

That's a broader statement and that's a volumetric statement more than I probably shouldn't state it that way, but that's how we think about as railroad or so. Effectively they wanted to sign up and create capacity for takeaway effectively 120,000 barrels a day.

Derek Walker -- Bank of America -- Analyst

Got it.

Dan Borgen -- Chairman, President and Chief Executive Officer

And so just to further that Derek, to help you, we're -- I would say that we have a significant portion of that that would be running through our assets, but not the totality of that.

Derek Walker -- Bank of America -- Analyst

Got it. Thanks Dan, Brad. I appreciate it.

Dan Borgen -- Chairman, President and Chief Executive Officer

You bet. Thank you.

Operator

Thank you. (Operator Instructions) And we have no further questions at this time, I will turn the floor back over to Dan Borgen for any additional or closing remarks.

Dan Borgen -- Chairman, President and Chief Executive Officer

Thank you, Christy, and let me just say, I'm really proud of our team and what we've accomplished over this timeframe. It's been -- we've been extremely busy. We've been successful and our contract renegotiations at higher prices. We've extended -- the substantial capacity is extended into mid 2023. We are very bullish, we feel strongly where we're going to renew the existing customer that we have for their full volume and we're in early renewal discussions there. They don't have to renew now, but they are in discussions with us to go ahead and renew further volume.

The Western Canada, sorry, Western Canadian market dynamics and the forward curves and macro support, clearly what we're doing as evidenced by the market curves and we look forward to the additional announcements in the near term, both at USDP and that our sponsor about the development activities that we share. And with that, we really appreciate everyone on the call, Derek, especially to you. Thank you and we appreciate the time spending with us today.

Operator

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

Duration: 27 minutes

Call participants:

Jennifer Waller -- National Reporting Manager

Dan Borgen -- Chairman, President and Chief Executive Officer

Adam Altsule -- Chief Financial Officer

Brad Sanders -- Chief Commercial Officer

Josh Ruple -- Chief Operating Officer

Derek Walker -- Bank of America -- Analyst

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