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USD Partners LP (NYSE:USDP)
Q3 2020 Earnings Call
Nov 6, 2020, 8:00 p.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 Third 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 third 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 nine-months ended September 30th, 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, November 5th, 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 reconciliation 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. Good morning, and thank you all for joining us on the call today. We appreciate your support as always, and we hope everyone is staying healthy and safe during these challenging times. The Partnership had a strong third quarter, 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 our customers' investment grade credit profile, continue to provide the foundation for our business. As a result, we continue to generate a significant amount of free cash flow at the Partnership.

In addition, we have been successful in optimizing our operations over the last few quarters and we have seen some benefits from that in our recent quarterly earnings. During the first quarter, the Board of Directors made the proactive decision to strengthen the Partnership's financial position by reducing its quarterly distribution and redeploy certain free cash flow to pay down debt and enhance our liquidity position. Since then, we've done just that. Since the announcement to reducing the distribution, as of today The Partnership has paid down $19 million on our revolver, which is trending higher than our previously stated guidance to delever by approximately $20 million to $25 million on an annualized 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 unit holders.

Also, we continue to make progress on 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. 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 agreements at the Partnership's Hardisty terminal. Upon the successful construction and completion of Phase 1 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 our 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, is considered a non-regulated commodity and is not considered hazardous, does not fall under U.S. DoT Hazardous Materials Regulation and Canada's Transport of Dangerous Goods Regulations. 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 operating cash flows.

Adam is going to start us off with an update on the Partnership's strong, latest financial results and our liquidity position. Then we'll jump back into the 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 third quarter 2020 results, which included the details of our operating and financial results for the quarter. We plan to issue our third quarter 10-Q with additional details after close of market today.

With our take-or-pay contracts with primarily investment grade customers the Partnership had a strong third quarter. For the quarter, we reported net income of $6.2 million, net cash provided by operating activities of $16.6 million, adjusted EBITDA of $15.6 million, and distributable cash flow of $13.6 million.

The Partnership's operating results for the third quarter of 2020 relative to the same quarter in 2019 were primarily influenced by higher revenue at its Stroud terminal during the quarter, due to higher rates that are based on crude oil index pricing differentials, and higher revenue at its Hardisty terminal associated with increased rates in some of the Partnership's contracts.

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 Stroud and Hardisty during the quarter. The Partnership also experienced lower operating cost during the quarter, as compared to the third quarter of 2019, primarily due to lower subcontracted rail services costs associated with lower throughput at our terminals.

Net income for the quarter increased as compared to the third quarter of '19, primarily as a result of the operating factors already discussed, coupled with lower interest expense incurred, resulting from lower interest rates during the quarter, and foreign currency transaction gain. This was partially offset by, a higher non-cash loss associated with the Partnership's interest rate derivative instrument.

During the third quarter, the Partnership terminated its existing interest rate filed and simultaneously entered into a new interest rate swap that was made effective as of August 2020. The new interest rate swap is a five-year contract with $150 million notional value that fixes the Partnership's one month LIBOR 0.84% instead of the variable rate that the Partnership pays under its credit agreement. The swap settles monthly through the termination date in August 2025.

Net cash provided by operating activities for the quarter increased by 14% relative to the third quarter of 2019, primarily due to the 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 increased by 12% and 29%, respectively, for the quarter relative to the third quarter of '19. And this increase in adjusted EBITDA was primarily a result of the operating factors discussed. DCF was also impacted by a decrease in cash paid for interest, income taxes, and maintenance CapEx during the quarter.

As of September 30th, the Partnership had approximately $7 million of unrestricted cash and cash equivalents, and undrawn borrowing capacity of $176 million on a $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 our Credit Agreement. As suck, the Partnership's available borrowings under the senior secured credit facility included unrestricted cash and cash equivalents, was approximately $44 million as of September 30th. Partnership was in compliance with its financial covenants as of September 30th.

On October 22nd, the Partnership declared a quarterly cash distribution of $11.1 per unit or $44.4 per unit on an annualized basis. The same amount as distributed in the prior quarter. The distribution is payable on November 13 to unit holders of record at the close of business on November 3rd.

I will conclude my comments with a few notable items for the quarter. First, as Dan mentioned, the Partnership's terminals continue to perform well under our long-term take-or-pay contract. And we continue to see, significant amount of free cash flow as evidenced by our strong DCF coverage of over four times during the quarter. During the second and third quarters, the Partnership paid down $15 million on its revolving credit facility. Also, we paid down an additional $4 million since September 30th, which will show up in our fourth quarter disclosures along with any additional payments we make through the end of the year.

All in, we have paid down $19 million since cutting our distribution in the first quarter of this year. This has created additional liquidity for the Partnership and is trending higher than our previous guidance, that we intend to pay down $20 million to $25 million on an annualized basis. We continue to be excited about the future and are happy to see our efforts to strengthen our liquidity position bearing fruit. And we continue to believe our efforts will enhance long-term value for our stakeholders.

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. Thanks for the strong quarter. Now, I'll ask Brad to give us a quick commercial update regarding the Western Canada select market and the impact of the recent market events. Brad?

Brad Sanders -- Executive Vice President and Chief Commercial Officer

Thank you, Dan. Before I provide an update, I'd like to reiterate your message and Adam's message, that our core business is sound, our customer credit profiles have remained strong. And as a reminder, our contract structure consists primarily of multi-year take-or-pay contracts with minimum monthly commitment fees with primarily investment grade customers. So we're very, very fortunate.

As we think about COVID-19 and the implications to the Canadian market, we're going to start with early COVID days. So in the first -- late in the first quarter and into the second quarter of 2020, demand for crude oil decreased materially as a result of the COVID-19 pandemic. The slower demand led to lower prices and the eventual shut-in of production. It's estimated that 2 million -- approximately 2 million barrels a day in the U.S. and 1 million barrels a day of Canadian production were shut-in. However, recent efforts to reopen the economy have led to increases in the demand for crude oil and petroleum products, which has resulted in a recovery and the stabilization of oil prices during the quarter.

Current prices for West Texas Intermediate, or WTI, on a spot basis are approximately $38 per barrel. But more importantly, the future prices for WTI are reflecting prices of $40 to $45 per barrel. From a demand standpoint, it appears the new normal until we break out of this COVID situation has gasoline demand down year-on-year approximately 12%, distillates down approximately 9%, and jet materially down approximately 40%.

Starting in early 3Q, producers in Canada and the U.S. have started to bring back temporary shut-in production from the first quarter of 2020, given these current price levels and future price levels, I just shared with you. Specific to Canada, based on public announcements and discussions with our current and potential customers, and more importantly or equally important, given the recent announcement from the Alberta government to lift the production curtailments beginning December of 2020. It is our expectation that production in Canada is returning at a rate that total production is likely to reach pre-COVID levels by the end of the year and/or early next year.

As a quick reminder, it was during Q1 of 2020 that incentives to export crude by rail were deeply in the money, which is to say, the cost to move oil from Hardisty to a destination market was less than the spread or the incentive to do so. And at that time, our Hardisty terminal was approaching throughput levels of a 180,000 barrels a day. So as we move back to these levels, the need for crude by rail export capacity from our terminals is expected to also increase. Our discussions with our customers continue to indicate and confirm the growing need for CBR that started in late 3Q and is expected to continue into the fourth quarter timeframe and into early 2021.

Now I'd like to provide a couple of key highlights on our commercial activity starting with Hardisty. But first and foremost, given the macro transition that I just outlined, as activity picks up, our key focus will be on servicing our existing customers. We also believe commercially we will be able to identify opportunities to execute on spot activity and commercializing the remaining seven rail slots available at our Hardisty South, which is the sponsor's expansion of the Partnership's Hardisty terminal.

Finally and most importantly, we will work with existing and new customers to transition to a DRU solution. With that I'd like to give a quick update on the DRU. In coordination with our customer, the railroads and our partner Gibson, our DRU project is tracking per plan. As we have mentioned before, we are fully permitted and we have commenced construction at both the DRU in Hardisty and at our terminal in Port Arthur with civil activities under way. Both projects are on budget and progressing per our planned schedule with substantial completion planned second quarter of 2021.

Currently, as Dan mentioned, we are in active and detailed discussions with current and new customers to commercialize the DRU beyond the current 50,000 barrels a day announced with our current customer. As a reminder, the benefits of the DRU are material and provide a competitive and potentially advantage solution to egress alternatives and I'd like to list what those are quickly. First and foremost, as Dan provided, a DRU provides a safer egress solution. We are exporting a material that is non-hazardous, non-flammable. In addition, you reduce the role and more importantly, the cost of diluent in the value chain. Thirdly, you reduce the cost of freight on the bitumen related basis in the value chain. And fourthly, improve the value of the product that you deliver to your customers in the case of pure bitumen, which gives the market the opportunity to custom blend and not be burdened with a DRUbit blend. And then finally, and possibly most importantly, it provides scalability advantages. During these periods of high uncertainty for customers to have the opportunity to create egress solutions that are sized to their needs and timed when they need it most is a real advantage and provides less balance sheet burden. So we're excited about as we roll into 2021 and the macro environment, I just described. We think the opportunity to grow our customer base at DRU and ultimately at Port Arthur is really material.

Finally, I'd like to give some high level updates on our Texas Deepwater asset, which is the Sponsor's asset and -- on the Houston Ship Channel. First and foremost, we remain very purposed about growing our two critical, what we call, run it [Phonetic] businesses that drive material cash flow and opportunities for growth at Texas Deepwater. The first one is, what we call our surplus business, which is our storage in transit type business which targets rail storage, staging, switching services, transloading and railcar support services. Given our current infrastructure at Texas Deepwater, this is a material and growing business and we're excited about the opportunities not only at Texas Deepwater but elsewhere.

And then secondly, we have our dredge business, which is our ability to handle dredge spoils at Texas Deepwater, which is accessible to most of the Houston Ship Channel and services, primarily maintenance and new dark construction. That also is a business that we feel has got a lot of growth potential and certainly business that's ongoing.

Finally, from a development perspective, we continue to leverage our existing connectivity, rail infrastructure and access to the Houston ship Channel to drive meaningful and ongoing detailed discussions with Houston area producers, consumers of crude oil light products, petrochemicals and NGLs to uniquely solve their distribution and export needs.

In closing, in a period of time where there's high uncertainty, we are really excited about the quality of these discussions, the depth and breadth of these discussions and look forward to announcing real opportunity here soon in the future.

With that, I'll hand it over to Dan.

Dan Borgen -- Chairman, Chief Executive Officer and President

Thank you, Brad. I appreciate the update, market update and other. We appreciate everyone listening to the call today. And with that we'll open it up for any questions.

Questions and Answers:

Operator

[Operator Instructions] We do have a question from Greg [Indecipherable]. Please go ahead.

Greg -- Analyst

Hi. A quick question, as far as the DRU when it comes online, will you be getting a premium on any of the existing contracts with that service being available?

Dan Borgen -- Chairman, Chief Executive Officer and President

That's a great question, Greg and I appreciate that. Certainly, we will, as we have calculated our commercial agreements with that we will get some premium over our our our current present value, related value of the Hardisty Rail assets. Obviously, as you look at what all is considered in that pricing, we're certainly trying to take full advantage of the opportunities that we exist, but we also share those with our customers and our partners on that. As a reminder, obviously, railroad, tank customer partner at Gibson Energy and then certainly synergistic benefits back to the customer. But, certainly it delivers a positive additional value to the underlying partnership assets and certainly sustainability over a 10-plus year period of time with investment-grade counter-parties, which I don't need to tell you. But obviously in these markets, that's was sustains you through challenging times like what we've been going through. Does that help Greg?

Greg -- Analyst

Yes. And then currently hard to the see 33%, is that correct? That's the 33% is the capacity that's being used at currently, so there is -- the 67% available?

Dan Borgen -- Chairman, Chief Executive Officer and President

Yeah, as you think about that, understand that we have current utilization of the of the asset, the underlying partnership assets now, as we then elongate those and pari-passu to the commercial DRU agreements, then you'll see those extend beyond that. So for instance, the next customer that we bring on, unless you say it's a 50,000 barrel a day customer, then we will have -- we will then be up to approximately two-thirds of the underlying asset, rail asset and extending that beyond in those 50,000 barrel increments, just using that as an example, it could be more than that. And certainly as we've said for some time, the extension of those contracts with the DRU brings about those long-term committed values and cash flows into the underlying partnership assets, because you can't do one without the other. So they're linked and that's the important thing. That was our design and our plan to do that all along was to convert what we felt like was an inefficient diluent model or dilbit model and move it into a more sustainable long-term dilbit model, which brings both producer, refiner, railroad's, communities and certainly the environment more advantages and therefore why customers are willing to commit long-term.

Adam Altsuler -- Senior Vice President, Chief Financial Officer

Hey, Greg, it's Adam. Just address that last question. So, we actually don't publish the utilization at our terminals. But the 33% that we referenced was once DRU is in place, 33% of the Hardisty capacity will be extended to 10 from basically three to five-year contracts to 10-year contracts to 2031. So that's not the current utilization. That's what we were projecting once we get the DRU in place and operational, one of our existing customer's contracts will flip to a 10-year contract, and that'll be about a third of the Hardisty capacity.

Greg -- Analyst

Yeah, I figured out that that was proprietary. Just one last quick question, and thank you for the answers. You know percentage wise what the difference in -- what the refiners are paying for the oil as far as DRU versus non-DRU oil. Has that been calculated yet by Gibson?

Brad Sanders -- Executive Vice President and Chief Commercial Officer

This is -- excuse me, sorry, this is Brad. So the DRU bit material will be -- to answer your question specifically, I don't know, but uniquely depending on the input of the material into the DRU will determine the quality and price of the output at that point in time. The benefit is not necessarily in the price of the bitumen, the benefit is in the ability to take bitumen and uniquely plan to the needs of the consumer likely the refiner, in which case, couple of things happen. One is, your throughput rates improved significantly, and then secondly, you get yields that meet the needs specifically for your refinery and the customers that you service. So it's mostly a value-type value proposition. The bitumen price is less important than the value that it creates for either the blender or the consumer.

Greg -- Analyst

Understood. And then just to second that, so basically the fact that the DRU will create a non-hazardous material. Obviously, I'm assuming that creates savings which the partner with any of the -- which any of the partners are obviously going to take advantage of. Do you have any idea, what the difference in the cost or the savings, are there on a percentage or any sort of dollar term basis that they would save by not having to deal with whatever environmental and or transportation regulations apply to hazardous materials?

Brad Sanders -- Executive Vice President and Chief Commercial Officer

Yeah, so let me try real quick to answer that at a high level, because I'm not certain specifics will help you here. We had one objective and our objective was to compete with pipeline alternatives favorably from a cost standpoint and to create incremental value, and part of that value is what I just described. So if you broadly consider that rail on a dilbit related basis is 53rd -- 25% to 50% higher than pipeline economics. Effectively, the DRU closes that gap entirely.

Greg -- Analyst

Okay.

Brad Sanders -- Executive Vice President and Chief Commercial Officer

We are -- that's the whole beauty of the DRU. The simplicity of it, as Dan mentioned, eliminating the costly need to acquire and blend DRU early in the process, we're just -- we're eliminating all those costs and we're creating incremental value for our customers, the producers, in the case of non-haz, non-flam, our railroad's that's obviously one of the most important things for them is safety of the communities that they service and have business through, and then finally our end user and customer.

Greg -- Analyst

Okay.

Dan Borgen -- Chairman, Chief Executive Officer and President

Yeah, further to that briefly, obviously the benefits across, let's just say our railroad partners is that as they handle a non-hazardous material then they can take more efficient routing systems through areas on and taking the most efficient route system down to market, which cuts time, crude time, fuel, a variety of different cost centers out of that, which they have been investing into the rate structure. So therefore, creating a better net back. So when I said earlier, that it is a benefit to all the players, it certainly is. I mean from a railroad perspective, it gives them a long-term sustainable business that they can build a operating case around, therefore creating more efficiency, not having any start-stops like sometimes a dilbit business can have. So it really -- the intent, of course, was was to give the market a industry solution that creates the best netback for the producer, that creates the most efficient environmentally safe product for the railroads to move and then gives our refining customers a destination, the best base blend component that they have to be able to then add and create the most preferred blend to create the best netbacks for them on that end. So, and we've been able to achieve that and we're thankful for doing that and we appreciate all participation from all the partners that it takes to make this happen.

Greg -- Analyst

Great, thank you.

Dan Borgen -- Chairman, Chief Executive Officer and President

Sure.

Operator

The next question will come from Paul Berghaus with Cornerstone Assets. Please go ahead.

Paul Berghaus -- Cornerstone Assets -- Analyst

Yes, I'm really encouraged by today's quarterly report that you announced, and I'm assuming that you are too. Going forward, would there be any chance that the Board would consider increasing the quarterly distribution rate, especially with the 4.5% cash flow coverage and you're moving it to the high end of debt reduction in that $25 million range. And if not within the next six months, what would be the parameters that you would be looking for in order to begin increasing your quarterly distribution rate as you once did in the past?

Adam Altsuler -- Senior Vice President, Chief Financial Officer

Hey, Paul. This is Adam. Thanks for the question. Yes, it's a good question. And we had a great quarter. We have -- we do evaluate our distribution every quarter with the Board and we did give public guidance that we intended to pay down debt with any free cash flow that we generate. And I think right now, I think our view is continue to stick to our guidance, pay down debt with free cash flow. Basically we've given a guidance that was $20 million to $25 million on an annualized basis, we're trending a bit higher than that. So I think once we hit that and once we get a little bit more clarity in the market and obviously with the election and things that are going on today with COVID, we get more clarity and kind of predictability in the market, I think the Board will reevaluate and look at the strength of our business and make a determination then.

As far as metrics, I would say we're constantly looking to push our leverage ratio down. I think we've, in the past we said, we were kind of targeting 3.5 times leverage, today, we're a little bit higher than that, but trending toward that. And so I think that would always be something that the Board would consider. As far as distribution coverage, obviously, we're pretty high right now.

Paul Berghaus -- Cornerstone Assets -- Analyst

Okay, thank you very much. That's it for me.

Operator

[Operator Instructions] The next question is from Greg Vineet, who is a Private Investor. Please go ahead.

Greg Vineet -- Private Investor -- Analyst

Good morning. Thanks for the great results. Question for you, I'm from DC, so I understand how the -- somewhat of how the government works. What are the chances of you guys building this thing out and then having some group come out and say, it's flammable or it's dangerous or in America, as far asphalt go by railroad, is that the equivalent of the product? Are you certain that some government agency is not going to come out and say, you can't do this?

Dan Borgen -- Chairman, Chief Executive Officer and President

Yeah, it's great question, Greg. And thanks for being on the call and we appreciate you being an investor. And I don't know whether to apologize that you live in the DC area right now or not, but I understand that you could become your own state up there. So maybe congrats on that. But anyway the, it's a great question. I think certainly with the election and whether you're a Trump supporter or Biden supporter, depending upon that they both have different views, certainly. To answer your first question around asphalt, and that's a fairly reasonable comparison here. Asphalt has moved just about every day across the railroad and is done very safely and sustainably. We don't think that this product would be challenged by any adverse reaction from the market. Again, it's non-hazardous, non flammable. It's not even a Class III product. So it doesn't even fall on any of the charts, so it's -- we feel very confident of that.

Are we soothsayers? Can we know the future? Obviously, we can't. But it has not been impacted historically through different administrations. And so, we would feel confident that it would continue to run. And certainly if you viewed the administration going left and seeing perhaps less pipeline egress coming out of Canada there would be more and more demand for this type of product as it goes through. Obviously, we've been able to do this program and this project for under a more conservative administration, and so our customers and refiners and railroad partners believe that the viability of that certainly in a conservative government works well and have made commitments and leaned in on that.

I think that as we see additional clarity around this, this is the type of product that that I think we can all be proud of, because it's environmentally sound. It gives the best netbacks to the parties and and that was our intent going in and it creates efficiencies that we all want. Historically, we've been always been able to build these types of what we call industry solutions that really meet that true challenge or the problem that the market faces and they continue to be sustainable, as we look back over the last 25 years. So we see no difference here, and we have been able to meet those needs and be well supported by either side, either administration. We are constantly, we are always looking at ways that we can become more efficient, more environmentally safe of that kind of thing. But I think this is a, as one of the railroad CEO said, this is a true game changer in terms of the way this product is transported.

Greg Vineet -- Private Investor -- Analyst

Okay. Yeah, I mean it's, -- anyway it's predictable. We'll see what happens with -- well, I think a new administration.

Dan Borgen -- Chairman, Chief Executive Officer and President

Yeah.

Greg Vineet -- Private Investor -- Analyst

On the Hardisty in the call, you mentioned Hardisty was -- the general partner was expanding spots by I think six or seven something like that, and that's the general partner level. Is that -- and that's going to be ready next year. Is that correct?

Dan Borgen -- Chairman, Chief Executive Officer and President

You broke up there a little bit. Maybe, Adam, did you hear that question?

Adam Altsuler -- Senior Vice President, Chief Financial Officer

I did. Yeah, so, Greg, basically those are extra slots that we have at Hardisty South, at the parent. So it's not an expansion, it's existing capacity that exists today. And I think Brad was making a reference that we're looking to commercialize those and fully utilize those as well. Hardisty South is similarly positioned with the -- we take-or-pay contracts and primarily investment-grade customers, and it's -- as far as revenue, it's almost at full capacity, but we do have some additional capacity that we're looking to commercialize as well.

Brad Sanders -- Executive Vice President and Chief Commercial Officer

Yeah. This is Brad. I'm sorry, go ahead.

Greg Vineet -- Private Investor -- Analyst

Yeah, I guess my question was, I mean, I like the delevering idea, but let's say you're $25 million, is that a potential drop into the limited partnership? And I have no idea about the size or what the cost of that asset would be, but is that the most likely thing to be dropped down for growth for the limited partners in the next year?

Adam Altsuler -- Senior Vice President, Chief Financial Officer

So we've got expansion at Hardisty South or we have the Hardisty South terminal basically, and then we also had the expansion at Stroud, so those are two potential drop-downs in the future. I think with regard to dropdowns right now, we do talk about that on a quarterly basis with our Board, we'll continue to evaluate the market and I think it kind of falls in the same category, where we're going to always evaluate those things, make sure that it makes sense with regard to -- kind of pro forma capital structure going forward. But as of right now, those are operating and cash flowing and they're basically kind of adjacent to our existing assets. So, I think to answer your question, they would be the most likely dropdown. I think the only caveat to that would just be, given that we have to evaluate market conditions.

Brad Sanders -- Executive Vice President and Chief Commercial Officer

Greg, it's a great question. Our attempt always has been to to take as much risk out of any of the business before we would drop it into the partnership. And so as we would look to expand and grow the DRU business and elongate those revenues, and certainly, that's been our plan. We've talked about that for some time. Obviously, market conditions, as Adam said, need to help dictate that. But we're -- we would look forward to the day when we could get a market condition where we could do that, and truly give the partnership, even though some MLPs have been, maybe missed the mark on that, but continue to drop down high-quality assets that give investment-grade long-term committed fee-based revenue that can stand the test of time and deliver to our investors the kinds of things that you guys want. Remember, we own approximately -- the sponsor owns approximately 50% of the partnership. So we're truly partnered in this together. And so we would never do something to mistreat you or ourselves, and we want to do that in the most efficient way and make it as accretive as we possibly can, because we all benefit from that.

Greg Vineet -- Private Investor -- Analyst

Yeah, I understand. I mean the equity market is not rewarding you. So you can't offer equity. I guess maybe my question is, whatever the value of that asset you will have delevered, I'm going to guess by $25 million, sometime in the next six months, maybe even more, is it affordable -- is the value of drop down, if you just write a check or back or you borrow $25 million to have that drop down, is that possible? I mean can you just...

Dan Borgen -- Chairman, Chief Executive Officer and President

Yeah.

Greg Vineet -- Private Investor -- Analyst

It is?

Brad Sanders -- Executive Vice President and Chief Commercial Officer

Well, I was just going to your question, I think we have availability on the revolver now. And we do get credit for pro forma cash flow when we do acquisitions. So I think the answer your question is, yes, it's definitely possible. I think we were always going to monitor what the capital structure looks like. And we've always kind of given guidance around leverage at 3.5 times. So we'd be looking for an attractive deal that would delever the partnership or that would have reducing leverage in it's -- in the projections in the future. And I think the last thing I'd say is that, our sponsor has a lot of experience -- as Dan mentioned has a lot of experience building these terminals. And so we can build these things at relatively low build multiples. So we would always look for a sweet spot that would work for the partnership and also work for the sponsor as well.

Greg Vineet -- Private Investor -- Analyst

The partner want to transfer that over for basically what their cost sales or?

Brad Sanders -- Executive Vice President and Chief Commercial Officer

Yeah, I think the flexibility we have for our experience and having a low build multiples is always helpful, but obviously those are things that are subject to the Board and we always have to evaluate that on a quarterly basis and with our conflicts committee as well.

Greg Vineet -- Private Investor -- Analyst

Okay. Final question on the contract. Your contracts are take-or-pay, but then you mentioned about spot market. If one of your customers does not use the capacity and somebody else wants to use it, that's a net gain for revenue that -- in that period. Is that correct?

Brad Sanders -- Executive Vice President and Chief Commercial Officer

This, -- go ahead, Dan.

Dan Borgen -- Chairman, Chief Executive Officer and President

No, go ahead. Brad, you.

Brad Sanders -- Executive Vice President and Chief Commercial Officer

I was just going to clarify the fact that, the spot activity, I was describing would be to pursue spot activity and utilize the seven slides that are currently not commercialized. So that's what I was referencing.

Greg Vineet -- Private Investor -- Analyst

Okay.

Dan Borgen -- Chairman, Chief Executive Officer and President

Greg, as you think about spot-related business, and you heard Adam talk a bit about that. We have floors in our take-or-pay agreements, which allow us then to participate in some of the upside of the market under certain conditions. And so, as the market supported that, obviously we participated in that. But we have base for agreements in that. Some conditions where we have something and the nominations are available to us, then we would always look to optimize the assets with the customer support to do that. And so we're always looking at how we can optimize that, but we're never -- so we're never opposed to that, but we certainly want to make sure that our customers are taking care of and they have, and a lot of times its existing customers who need additional volume that which we try to offer to first to be able to meet their needs.

Greg Vineet -- Private Investor -- Analyst

Okay, thank you very much. Great job, guys.

Dan Borgen -- Chairman, Chief Executive Officer and President

Thank you, Greg. Really appreciate the positive comments. And I'll -- I think that's the last of questions, so I'll go ahead and transition just a few kind of closing thoughts and comments. And obviously I appreciate the questions, great questions. Appreciate the positive comments. This has been a great quarter. I'm really proud of our team, and I think every investor should be as well. This has been -- probably is one the most challenging times in my career. Our team has remained very focused. We've always been able to fight through challenging times. And we've always not only managed through them, but we've always grown through them, just like we're doing now.

We've accomplished tremendous financing, refinancing, project financing on a large-scale and we've been able to keep on track on budget on the expansion of these things that really create both long-term cash flows and sustainable value to the investors. And so we really are thankful for that and that really, and I'd again be remiss if I didn't applaud our team for all the hard work and dedication that they've been doing through to all of this.

As we, as we continue to grow with our great partner at Gibson Energy and and grow these opportunities, we'll continue to talk about those and announce those. We hope to be able to, as Brad said, we're in deep discussions with the second customer coming into that -- into the DRU. We look forward to being able to talk more about that as soon as we can, and excited to be able to announce that. And again, depending upon which way elections go, there could be even more demand for our product, even more so when we could be -- we look forward to be able to grow even the underlying rail assets to be able to support that -- in lockstep with the DRU as we continue to do that. I think that, we hope that we can get some some quick -- relatively quick solution or resolution to the elections. So we can kind of get on and get focused on -- remain focused and growth with our customers on the next phase of our business and then get some clarity in the markets. I think everybody is looking for that and we are as well. But know that we are working every day to try to create the value that you've seen in this quarter and that we trust will be there on an ongoing basis. But we'll continue to do that and it's really because of the quality of our projects and the quality of our customers. In our opinion when you truly create solutions to a market, you get sustainability, you get long-term value, you get long-term investment-grade customers, which is what we are striving to do so.

We appreciate everybody again. Thanks for all the great questions and we trust everyone will remain safe and healthy through all of this. And we thank you all again for joining the call. Thank you.

Operator

[Operator Closing Remarks]

Duration: 49 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

Greg -- Analyst

Paul Berghaus -- Cornerstone Assets -- Analyst

Greg Vineet -- Private Investor -- Analyst

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