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USD Partners LP (USDP -5.50%)
Q2 2020 Earnings Call
Aug 6, 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 Second Quarter 2020 Results Conference Call. [Operator Instructions] 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 -- Director, Financial Reporting and Investor Relations
Thank you. Good morning and thank you for joining us. Welcome to our second quarter 2020 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 six months ended June 30, 2020. 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, August 6, 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'll turn the call over to Dan Borgen.
Dan Borgen -- Chairman, Chief Executive Officer and President
Thank you, Jennifer, and good morning, everyone. Thanks for joining the call today. And as always, we appreciate your support, and we hope everyone is staying healthy and safe during these challenging times.
Second quarter was another solid quarter for the Partnership as our terminals continue to perform well under our long term take-or-pay contracts. As we have referenced in previous calls, our strong contract structure and counterparty credit profile continue to provide the foundation for our business. And we continue to generate a significant amount of free cash flow in our business.
Last quarter, the Board of Directors made the proactive decision to strengthen the Partnership's financial position by reducing its quarterly distribution and redeploying certain free cash flow to pay down debt and enhance our liquidity position. And during the second quarter, we did just that. The Partnership paid down $6 million on our revolver, which is consistent with our intent to delever by $20 million to $25 million on an annual basis. As we have previously stated, the decision to reduce the distribution was not driven by any material deterioration in the performance of the Partnership's underlying business, but rather represents a conscious effort to enhance long term value for our unitholders.
Also, we continue to be excited about our sponsor's previously announced Diluent Recovery Unit, or DRU, project, which we expect will be placed into service in the second quarter of 2021. The Partnership's sponsor has secured the necessary financing, obtained all material permits and entered into fixed price construction contracts regarding the construction of the project.
In addition, we are currently in discussions with existing and new customers at Hardisty to secure additional long term take-or-pay agreements to support future expansions at the DRU. As a reminder, while the DRU project is at the sponsor, the longer-term contracts at the DRU benefit the Partnership because those contracts will be matched up with the terminalling services agreement at the Partnership's Hardisty terminal. Upon successful construction and completion of the DRU, approximately 32% of the Partnership's Hardisty terminal capacity will be automatically extended on a long term committed agreement through mid-2031.
Additionally, USD and our partner, Gibson, are in meaningful commercial discussions with other potential producer and refiner customers to secure additional long term take-or-pay agreements to support future expansions of capacity at the DRU and extend the associated contracted cash flows at the Partnership's Hardisty asset. The DRU is also a critical part of our sustainability and ESG initiative, which remain a key focus of our business as we continue to deliver innovative solutions for our customers.
As a reminder, the DRUbit, that our customers intend to transport in the future, does not fall under U.S. DoT Hazardous Materials Regulation nor Canada's Transport of Dangerous Goods Regulations, and therefore, can be documented for rail shipment as a non-regulated commodity. We look forward to updating the market about the progress of our DRU project over the next several months as we expect the DRU to have a material impact on the long term sustainability of our business and specifically, our long term operating cash flows.
Now 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 on and talk about recent market and commercial developments with Brad Sanders. Adam, please go ahead.
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 second quarter 2020 results, which included the details of our operating and financial results for the quarter. We plan to issue our second quarter 10-Q with additional details after the close of market today.
For the second quarter, we reported net income of $1.2 million, net cash provided by operating activities of $5.4 million, adjusted EBITDA of $12.8 million and distributable cash flow of $9.7 million. The Partnership's operating results for the second quarter of 2020 relative to the same quarter in 2019 were primarily influenced by higher revenue at its Hardisty terminal, associated with contracted throughput that exceeded the Partnership's existing capacity at its Hardisty terminal and increased rates on a portion of the terminalling services agreements that became effective July 1, 2019.
Additionally, in the third quarter of 2019, the Partnership entered into a terminalling services agreement with the Hardisty South facility, owned by the Partnership's sponsor, to provide terminalling services for the contracted throughput that exceeded the Hardisty terminal's transloading capacity. Under this arrangement, the Partnership incurred operating costs payable to the Partnership's 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 a customer agreement in August 2019 partially offset the higher revenue at Hardisty during the quarter.
Net income for the quarter increased as compared to the second quarter of 2019, primarily as a result of the operating factors already discussed, coupled with the lower interest expense incurred, resulting from lower interest rates during the quarter, and partially offset by a higher weighted average balance of debt outstanding in the second quarter of 2020. The Partnership also had a smaller non-cash loss associated with our five-year interest rate derivative instrument that the Partnership entered into in November 2017. These increases in net income were partially offset by higher foreign currency transaction losses.
Net cash provided by operating activities for the quarter decreased by 42% relative to the second quarter of 2019, primarily due to the general timing of receipts and payments of accounts receivable, accounts payable and deferred revenue balances.
Adjusted EBITDA and distributable cash flow increased by 5% and 10%, respectively, for the quarter, relative to the second quarter of 2019. The increase in adjusted EBITDA was primarily a result of the operating factors already discussed. DCF was also impacted by a decrease in cash paid for interest and income taxes during the quarter.
As of June 30, the Partnership had approximately $3 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $167 million on its $385 million senior secured credit facility, subject to the Partner'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. As such, the Partnership's available borrowings under the senior secured credit facility, including unrestricted cash and cash equivalents, was approximately $29 million as of June 30. In addition, the Partnership was in compliance with its financial covenants as of June 30.
On July 23, the Partnership declared a quarterly cash distribution of approximately $0.11 per unit or approximately $0.44 per unit on annualized basis, the same amount as distributed in the prior quarter. The distribution is payable on August 14 to unitholders of record at the close of business on August 4.
I will conclude my comments with a few notable items from the quarter. First, as Dan mentioned, the Partnership's terminals continue to perform well under our long term take-or-pay contracts, and we continue to generate a significant amount of free cash flow, as evidenced by our strong distributable cash flow coverage of over 3 times, 3.0, during the quarter.
During the second quarter, the Partnership paid down $6 million on its revolving credit facility, which is in line with our previous guidance regarding our ability to delever by approximately $20 million to $25 million on an annualized basis. In addition, since the end of the second quarter, the Partnership paid down an additional $3 million of debt, and this piece will obviously show up in our third quarter disclosures, along with any additional payments we make during the quarter.
In short, we are excited about the future and are happy to see our efforts to strengthen our balance sheet bearing fruit. We continue to believe our efforts will enhance long term value for all of our stakeholders.
And with that, I'll turn the call back over to Dan.
Dan Borgen -- Chairman, Chief Executive Officer and President
Thank you, Adam, for the positive report. Appreciate it. Now, we'll turn to Brad Sanders and let him give us a commercial update. Brad?
Brad Sanders -- Executive Vice President and Chief Commercial Officer, USD Group
Yeah. Thank you, Dan. I appreciate it. I'll start with an update on COVID-19 and its implications to the Canadian market. As has been well-documented, demand for work and the prices of crude oil decreased late in the first quarter and into the second quarter of 2020 as a result of the COVID-19 pandemic. Early on in that period, overall demand was estimated to be down by as much as 50%. This lower demand led to obviously lower prices and then the eventual decision by producers to shut-in production, and it's estimated today that approximately 2 million barrels a day has been shut-in in the U.S. and 1 million barrels a day in Canada.
Recently, however, efforts to reopen the economy have led to increases in demand, which has resulted in a modest recovery in crude oil prices. Current prices for WTI are at approximately $43 a barrel. EIA reports that gasoline demand is down year-on-year, now only 9%. It's material, but quite an improvement from where we were initially. Diesel demand down approximately 9%, and the laggard jet is still down approximately 43% as folks are -- have been careful not to get back on airplanes and fly.
Given this improvement in price, starting in late 2Q, producers in Canada and U.S. began the process of bringing back temporary shut-in production from the first quarter of 2020 and has stated their intentions to continue to do so through the balance of the year. Our expectations are that this increase in supply will drive the need for CBR rail export or crude-by-rail export capacity from our terminals and the discussions that we have with our customers indicate and confirm the growing need for a crude takeaway solution again starting in late 3Q, 4Q timeframe.
Now, I'd like to move to an update on current market and current market outlook. Currently, the prices in Canada have strengthened relative to the U.S. market West Texas Intermediate or WTI. The narrowing of the the WCS to WTI crude oil spread is a direct result of the supply rationalization mentioned previously, because that rationalization created a balanced -- excuse me, a balanced market between supply and pipeline takeaway capacity. So spreads today between Canadian heavy in Hardisty and Canadian heavy in Houston effectively reflect the cost of pipeline transportation. Again, the rationalization drove supply into a level of volume equal to pipeline takeaway. And that's what drove those prices. Accordingly apportionment levels decreased during the second quarter and movements by rail declined.
As mentioned previously, though, given the recent movement by producers to add production, apportionment levels have started to increase again. Starting in July, we've seen some apportionment level movement higher and this is an indication that the market now is moving back to where it was pre-COVID, which is supply greater than pipeline takeaway capacity and the need, potentially, for rail takeaway egress solutions.
Finally, and this has been well-documented, a key concern for our current customers in all Canadian producers generally is the fact that projects to increase pipeline export capacity continue to face major challenges, as do current pipeline operators, and from regulatory and environmental concerns. So, given these realities, given these concerned, and as producers start to bring back production, we expect demand for and utilization of our terminals will increase as we move through the balance of the year.
Let me now move to an update, if I could, on commercial activities relative to Hardisty, specifically. As markets dictate and as activity picks up, we will, first and foremost, be focused on servicing our existing customers. Commercially, we'll be focused on identifying any spot opportunities that we can find and commercializing the remaining slots that we have available for term commercialization with [Technical Issues] with customers. We feel like as we move into 2021, we'll have an opportunity to do so. [Technical Issues] Dan has provided one, but in coordination with our customer, the railroads and our partner Gibson [Technical Issues]
Dan Borgen -- Chairman, Chief Executive Officer and President
Well, It seems like we've got a communication problem on Brad's end at this point. So, all of us...
Brad Sanders -- Executive Vice President and Chief Commercial Officer, USD Group
Can you hear me now?
Dan Borgen -- Chairman, Chief Executive Officer and President
Yeah. Got you now, Brad. Go ahead.
Brad Sanders -- Executive Vice President and Chief Commercial Officer, USD Group
Okay. So, where did you lose me, Dan?
Dan Borgen -- Chairman, Chief Executive Officer and President
Starting to talk about Gibson...
Brad Sanders -- Executive Vice President and Chief Commercial Officer, USD Group
DRU?
Dan Borgen -- Chairman, Chief Executive Officer and President
Yeah, talking about our DRU.
Brad Sanders -- Executive Vice President and Chief Commercial Officer, USD Group
Okay.
Dan Borgen -- Chairman, Chief Executive Officer and President
Brad, we lost you again there. All right, I'll take it over here, Brad, and finish up on comments around Gibson and what we're working on the DRU. We're getting -- as I said earlier in my prepared remarks, we've had tremendous progress in discussions, even in these challenging times, with dealing with our -- dealing with customers, and we really appreciate their commitment. We're having almost weekly conversations regarding the new expansion of the DRU. So we look forward to continuing those discussions, have more to report on that as we move forward.
Obviously, I think we're all accustomed to some of these challenging communication issues that we have with folks working out of the office, and so we ask for your patience on that today. And as always, we're open for additional questions as you -- after the call. You can call, and we'll be happy to spend time with you on the phone to answer any questions or further define what we're talking about here.
So as we move into kind of closing the call this morning, let me just talk about a few things. One, you realize that we're busy. You hear from the comments from all of us, we are blessed with great customers, great take-or-pay mid-to-long term agreements, which continue to allow us to weather the down cycles in the business. We continue to build cash, continue to throw off quite a bit of cash and because of those type of agreements that we have. We're also busy on great projects and expansion of projects and certainly focused on our DRU, which is so meaningful to the Partnership, which we've talked about for sometime. That's been our strategy since we started, and so we're thrilled to see that we're getting that completed and moving into an op start in Q2 of next year.
The -- we've been able to manage through these down cycles because of, again, the quality of our customers, the -- and the strength of our team and our vendor partners, railroad partners and others, who allow us to continue to fight through these very difficult times that we find ourselves in. We'll continue to keep you updated on things as we develop and continue progress announcements around the DRU, but we're slightly ahead of schedule on budget and feel good about all of those things at this point.
In the challenging times we face today, there are many things that we can't control. But I can tell you, at USD, we're focused on our business. We're focused on creating value for our customers and our unitholders. And I'm so proud of the team that we have, and you should be too, for accomplishing the objectives we set out even in the most difficult of times. Obviously, you see communication is not what we once had, and so it takes extra effort, as I know all of you all know, to be focused and sustain your business and create value. So we're -- I'm very proud of the team and really feel good about where we're headed.
And with that, I will close the call, and just say, as we always do, we really appreciate your support. We appreciate your commitment to the Partnership, and we look forward to coming out of this down cycle and more and more favorable results. Thank you, again, and have a great rest of the week and weekend.
Operator
[Operator Closing Remarks]
Questions and Answers:
Duration: 22 minutes
Call participants:
Jennifer Waller -- Director, Financial Reporting and Investor Relations
Dan Borgen -- Chairman, Chief Executive Officer and President
Adam Altsuler -- Senior Vice President, Chief Financial Officer
Brad Sanders -- Executive Vice President and Chief Commercial Officer, USD Group
