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USD Partners LP (NYSE:USDP)
Q4 2019 Earnings Call
Mar 5, 2020, 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 Q4 2019 Earnings Call. [Operator Instructions]

I will now turn the call over to Jennifer Waller, Associate Director of Financial Reporting and Investor Relations. Please go ahead.

Jennifer Waller -- Associate Director, Financial Reporting and Investor Relations

Thank you. Good morning and thank you for joining us. Welcome to our fourth quarter 2019 earnings call. With me today are Dan Borgen, our Chief Executive Officer; Adam Altsuler, our Chief Financial Officer; Brad Sanders, our Chief Commercial Officer; and 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 and 12 months ended December 31, 2019. 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 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 5, 2020. 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 will turn the call over to Dan Borgen.

Dan Borgen -- Chairman, Chief Executive Officer and President

Thank you, Jennifer. Good morning everybody, and thanks for joining us on the call today. We are proud to announce another positive year at the Partnership and our 19th consecutive quarterly distribution increase. We are pleased about our recent contract renewals at the Partnership's Hardisty and Stroud terminals as well as our Sponsor's recent joint venture project to build our Diluent Recovery Unit or DRU at Hardisty which will create long-term sustainable takeaway solutions for the industry and enhance the cash flow profile of the Partnership.

Today, we have renewed and extended 100% of the capacity at Hardisty terminal through mid-2022 with approximately 73% extended through mid-2023 under multi-year take-or-pay investment grade agreements. In addition, upon the successful completion of our Sponsor's DRU project, approximately 32% of the Hardisty terminals capacity will be automatically extended through mid-2031, which will continue to materially enhance the sustainability and quality of the Partnership's cash flow. Also, we are currently in discussions with existing and new customers to secure additional long-term take-or-pay agreements to support future expansions of capacity at the DRU, and therefore extending the Partnership's cash flows.

We are currently fully contracted at Stroud, as this is a destination terminal for one of our larger customers at Hardisty. And we continue to explore new opportunities at the facility due to its strategic location and connection to the Cushing hub. Also, we continue to be positive about our hub strategy at our Casper terminal. As discussed last quarter, we recently completed our connection to a nearby terminal, which we believe could lead to future opportunities around egress solutions out of Hardisty.

Adam, is going to start us off with an update on the Partnership's latest financial results and our liquidity position. Then we'll jump back into the recent market and commercial developments. Adam?

Adam Altsuler -- Senior Vice President, Chief Financial Officer

Thank you, Dan, and thank you for joining us on the call this morning. Yesterday afternoon we issued our fourth quarter and full year 2019 results, which included the details of our operating and financial results for the quarter. And we plan to issue our 2019 full year 10-K with additional details after close of market today.

For the fourth quarter, we reported net income of $2.1 million, net cash provided by operating activities of $4.3 million, adjusted EBITDA of $12.8 million and distributable cash flow of $9.5 million. The Partnership's operating results for the fourth quarter of 2019 relative to the same quarter in 2018 were primarily influenced by higher revenue at our Hardisty terminal due to increased rates on a portion of the terminalling services agreements that became effective July 1, 2019, resulting from the Partnership's successful recontracting efforts.

In addition, the Partnership experienced higher revenue during the quarter associated with contracted throughput that exceeded the Partnership's existing capacity at its Hardisty terminal. The Partnership entered into a terminalling services agreement with the Hardisty South facility owned by our sponsor to provide terminalling services for the contracted throughput that exceeded the Hardisty terminals transloading capacity. Under this arrangement, the Partnership incurred operating costs payable to our sponsor representing the same rate on a per barrel basis that the Partnership received in revenue for such contracted throughput.

Lower revenue at the Partnership's Casper terminal resulting from the conclusion of customer agreements in December 2018 and August 2019 partially offset the higher revenue at Hardisty during the quarter. Net income for the quarter increased as compared to the fourth quarter of 2018, primarily as a result of the operating factors discussed above, coupled with the non-cash gain associated with the five-year interest rate derivative instrument that the Partnership entered into in November 2017, and lower interest expense incurred resulting from lower interest rates during the quarter, partially offset by a higher weighted average balance of debt outstanding in the fourth quarter of 2019.

Net cash provided by operating activities for the quarter decreased by 67% relative to the fourth quarter of 2018, primarily due to the general timing of receipts and payments of accounts receivable, accounts payable and deferred revenue balances and the conclusion of customer agreements at the Partnership's Casper terminal in December 2018 and in August 2019. As of December 31, the Partnership had net leverage of 3.9 times LTM adjusted EBITDA based on its financial covenants and available liquidity of approximately $168 million, including $3 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $165 million on its $385 million senior secured credit facility, subject to the Partnership's continued compliance with financial covenants. Pursuant to the terms of the Partnership's Credit Agreement, the Partnership's borrowing capacity is currently limited to 4.5 times its trailing 12 month consolidated EBITDA, as defined in the Credit Agreement. The Partnership was in compliance with its financial covenants as of December 31.

On January 30, the Partnership declared a quarterly cash distribution of $0.37 per unit or $1.48 per unit on an annualized basis, which represents growth of 0.7% over the prior quarter and 2.8% over the fourth quarter of 2018. The distribution was paid on February 19th to unitholders of record at the close of business on February 10th. As Dan mentioned, we were pleased to announce our 19th consecutive quarterly distribution increase this quarter, which was consistent with our previously stated 2019 distribution guidance. We feel good about our current distribution level and plan on evaluating future increases in our distribution coverage on a quarterly basis. As always, this will be subject to the Board's discretion in the future.

And with that I would now like to turn the call back over to Dan.

Dan Borgen -- Chairman, Chief Executive Officer and President

Thank you, Adam. I'll ask Brad to give us a update on Western Canada markets and other pertinent issues. Brad?

Brad Sanders -- Chief Commercial Officer

Thank you, Dan. I'll do just a couple of quick comments, if OK. Regarding the Western Canadian select market, the Alberta production curtailments remain in effect, but at this point the levels are relatively low, we estimate somewhere around 75,000 barrels a day of curtailment. More importantly, despite these curtailment efforts, incentives to move crude oil volumes remain high. This is evidenced by the high utilization of and demand for our terminalling services at our Hardisty terminal where we currently are nearly 100% fully utilized. So we remain busy. We've valid -- we had validated with these type of utilization rates during these tough periods that Hardisty and the Rail solution that we provide is an industry solution and is fully utilized for that reason. So, thank you.

Dan Borgen -- Chairman, Chief Executive Officer and President

Okay. Thank you Brad. Let me continue on with an update on our DRU because it is so transformational I think to the business and the industry. So, in December, our sponsor and Gibson jointly announced an agreement to construct and operate a DRU near Hardisty. ConocoPhillips has contracted for 50,000 barrels per day of inlet bitumen blend at the DRU to be shipped by Canadian Pacific Railway and Kansas City Southern Railway Company to the US Gulf Coast. As we mentioned on our previous calls, USD is patented DRU process separates the diluent that has been added to the raw bitumen in the production process, which meets two important market needs. First, it returns recovery diluent for reuse in the Alberta market reducing delivered cost for diluent. And it creates DRUbit, a USD trademarked product name, proprietary heavy Canadian crude oil specifically designed for Rail transportation.

DRUbit is effectively crude oil or bitumen that is more heavily concentrated and it's classified as non-hazardous, non-flammable commodity when transported by Rail in Canada and the US. DRUbit is a market access solution that will satisfy demand for heavy Canadian crude oil on the US Gulf Coast and in other markets at a cost that is economically competitive due to the crude oil that is transported by pipeline today.

In addition, the Partnership's Sponsor is continuing to expand our destination network by constructing a new destination terminal in Port Arthur, Texas for the DRUbit that will be trans loaded and originated at the Hardisty terminal. The Port Arthur terminal will have the capability for rail unloading, large dock loading and unloading, tank storage and blending and will be pipeline connected to Phillips 66 Beaumont terminal providing customers access to a large network of refining and marine facilities.

In February 2020, USD and Gibson announced the receipt of all required regulatory approvals from the government of Alberta to proceed with the construction of the DRU. Initial construction has started with full ramp-up of the DRU expected to begin in April 2020 and the DRU is scheduled to be placed into service in the second quarter of 2021. As mentioned, we are currently in commercial discussions with other potential producer and refine our customers to secure additional long-term take-or-pay agreements to support future expansions of capacity at the DRU. We are very excited about the DRU and as we believe it will materially change the sustainability of the Partnership's cash flow and act as a permanent industry solution for transporting heavy bitumen to the Gulf Coast with the potential to grow to more than 200,000 barrels per day of throughput.

With that, I'll turn it back to Brad, and he will discuss some of the other developments across the network. Brad?

Brad Sanders -- Chief Commercial Officer

Thank you, Dan. It's appropriate given the exciting news that you could share there regarding the DRU, DRUbit and the Port Arthur development to also remind folks, that in addition, we continue to work closely with producers, refiners and midstream companies to provide an advantage destination solution to the Houston market. Texas deep water is uniquely located and competitively set up with its connectivity to provide additional solutions in the Gulf Coast, as described by Dan at Port Arthur. Houston -- the Houston market and the Port Arthur markets are the two largest heavy consumer markets in the US Gulf Coast. So we're excited about the ability to create a network to provide solutions for Houston refiners.

Additionally, given the continued macro need for distribution and export solutions for all energy products and commodities in the Houston Gulf Coast region, we are pleased to share that we are in advanced discussions for development opportunities in the petchem, NGLs and light product space, and look forward to making further announcements on those when appropriate.

I like to make a couple of comments in closing on Mexico. In Mexico, we continue to see opportunities and challenges, and so in that regard, we are focused on two key initiatives. The first one is, given our current assets we currently operate three terminals there. We are very purposed about maximizing the service to our customers and the value that those terminals generate, so that we are very focused on delivering on both of those two key initiatives.

Strategically, we continue to grow those businesses and identify new opportunities by aligning with the important needs of Mexico, the macro story of Mexico which is material and significant with the appropriate railroads and Tier 1 customers to effectively grow opportunities and solutions, and to do that in such a way where we can align with our origin opportunities which we just described at Port Arthur and Texas deep water, which not only provide the potential for solutions at local markets for refiners, but also provide export opportunities for things like light products by water and/or rail. So we're excited to mirror up the Mexico opportunities with the development opportunities we're providing in the Gulf Coast. Thank you, Dan.

Dan Borgen -- Chairman, Chief Executive Officer and President

Thank you, Brad. I appreciate that. I see in the queue that we don't have any questions. As always, if anyone has a follow-up question feel free to reach out to us directly, we're happy to entertain those at any time.

So I'll just move to a few summary closing comments here. Obviously, we feel very strongly about the opportunities that we've discussed on the call today. Our Sponsor is focused on successfully delivering the DRU project with a strong partner Gibson to bring much needed long-term sustainable takeaway solutions to the industry. And let me say, Gibson has been an outstanding partner for several years since the beginning of the -- of our asset development in Canada and we look forward to continuing to grow with them.

As we have previously discussed, we currently have several operating cash flow projects at the Sponsor level today, that could be possible dropdown candidates for the Partnership in the future. But we also fully acknowledge the challenges that the MLP market faces today. We will continue to keep you posted and look forward to additional announcements regarding our progress in the future. Thanks again, and we appreciate you taking the time to be on the call today and for your continued support. Thanks again.

Operator

[Operator Closing Remarks]

Questions and Answers:

Duration: 18 minutes

Call participants:

Jennifer Waller -- Associate Director, Financial Reporting and Investor Relations

Dan Borgen -- Chairman, Chief Executive Officer and President

Adam Altsuler -- Senior Vice President, Chief Financial Officer

Brad Sanders -- Chief Commercial Officer

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