USD Partners LP

Ladies and gentlemen, thank you for standing by and welcome to the USD Partners LP fourth quarter 2021 results conference call. At this time, all participants have been placed in a listen-only mode. The floor will be open for your questions following the prepared remarks. If you would like to ask a question at that time, please press star one. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. When asking a question, We ask that you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star zero. 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.

Thank you. Good morning, and thank you for joining us. Welcome to our fourth quarter 2021 earnings call. With me today are Dan Borgen, our Chief Executive Officer, Adam Altshuler, our Chief Financial Officer, Brad Sanders, our Chief Commercial Officer, Josh Ruppel, 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 31st, 2021. 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 the safe harbor disclosure statement regarding forward-looking statements in last night's press release applies to the statements of management on this call. Also, please note that information presented on today's call speaks only as of today, March 3, 2022. Any time-sensitive information provided may no longer be accurate, at the time of any webcast replay or reading of the transcript. Finally, today's call will include discussion of non-GAAP financial measures. Please see last night's press release for reconciliations to the most comparable GAAP financial measures. And with that, I'll turn the call over to Dan Borgen.

Thank you, Jennifer, and good morning, and thank you for joining us on the call today. 2021 was a momentous year for the partnership as well as for our sponsors. and I would like to start off by covering a few highlights from the year. Our terminals continue to perform safely and reliably throughout the year. The partnership continued to generate a significant amount of free cash flow, which continues to be supported by our strong contract structure and high-quality investment-grade customers. Our sponsor and its joint venture partner declared the DRU to be fully operational, and we commenced shipment of Drewbit by rail in December. As a brief reminder, our Drew Bit by Rail network has already enhanced the sustainability and quality of the partnership's cash flows by significantly increasing the tenor of approximately 32% of the Harder C Terminal's capacity through 2031. We announced a new five-year renewable diesel throughput agreement underpinned by an investment-grade rated refining customer at the partnership's West Colton terminal. And we also announced a five-year agreement that became effective January 1, 2022, with our ethanol customer at the West Colton Terminal that replaced our legacy short-term agreement. This new agreement is expected to generate higher cash flows for the partnership as compared to the previous agreement. And last but not least, our sponsor formed a new subsidiary, USD Clean Fuels, LLC, which is focused on providing production and logistics solutions to the growing market for clean energy transportation fuels. We are committed to the transition into sustainable fuels and look forward to future announcements related to USD clean fuels. Turning back to the fourth quarter, the partnership increased its quarterly distribution with respect to the fourth quarter by approximately 2.1% relative through the third quarter of 2021, which was in line with our previously announced distribution guidance. We hope to continue our momentum in 2022 and are encouraged about the future as we engage with our customers regarding the second phase of the DRU and the partnership's growth. Accordingly, management intends to recommend to the Board of Directors of its general partner to remain on its current distribution growth trajectory of increasing its quarterly CAS distribution per unit by an additional quarter of a cent per quarter for the first, second, third, and fourth quarters in 2022. As previously mentioned, construction of both the DRU and PAT projects was completed and both are now fully operational and throughput volumes are consistent with contractual obligations and our customers' expectations. As a reminder, our Drew Bit by Rail network consists of the DRU and the Port Arthur Destination Terminal, or PAT. The DRU was constructed along with USC's strong JV partner, Gibson, and is located adjacent to the partnership's Harder C terminal. Our Drew Bit by Rail network also benefits the partnership by providing longer-term, take or pay revenues at its Harder C terminal, while providing transportation safety and environmental benefits to its customers. We look forward to sharing future announcements with the market about the next phase of growth at the DRU. Next, Adam is going to give us an update on the partnership's latest financial results and our liquidity position. Then we'll jump back into the recent market and commercial developments. Without Adam, please go ahead.

Thank you, Dan, and thank you for joining us on the call this morning. Yesterday afternoon, we issued our fourth quarter earnings release, which included the details of our operating and financial results for the fourth quarter and full year 2021. We plan to issue our full year 2021 10K with additional details after close of market today. Partnership reported net income of $3.6 million, net cash provided by operating activities of $9.4 million, adjusted EBITDA of $11.9 million, and distributable cash flow of $10.7 million. Since the end of the first quarter of 2020, the partnership has reduced the outstanding balance of its revolving credit facility by $56 million using excess cash flow from operating activities. As Dan mentioned, management is encouraged by our recent discussions with our customers and our improved outlook for our business along with the partnership's enhanced liquidity position. all of which supported our recommendation to the board to increase our quarterly distribution by 2.1% relative to the third quarter of 2021. This recommendation was in line with our previous guidance. The distribution was paid on February 18th to unit holders of record at the close of business on February 9th. Our take or pay contracts continue to support strong free cash flow generation at the partnership, as evidenced by our strong DCF coverage of greater than 3.0 times for both the third and the fourth quarters. As a result, management intends to recommend to the Board of Directors of its general partner to remain on its current distribution growth trajectory of increasing its quarterly cash distribution per unit by an additional quarter of a cent per quarter for the first, second, third, and fourth quarters in 2022. And now I will go into the details from the quarter. The partnership's operating results for the fourth quarter of 2021 relative to the same quarter in 2020 were primarily influenced by lower revenue at its Stroud terminal during the quarter associated with the existing DRU customer electing to reduce its contracted volume commitments by one-third of its previous commitment, effective August 21st, which was primarily driven by the successful commencement of the DRU. The partnership experienced higher operating costs during the fourth quarter of 2021 as compared to the fourth quarter of 2020, primarily attributable to an increase in subcontracted rail service costs due to increased throughput. Net income decreased in the fourth quarter of 2021 as compared to the fourth quarter of 2020, primarily because of the operating factors already discussed, coupled with a non-cash foreign currency transaction loss in the fourth quarter of 2021 as compared to a gain recognized in the 2020 comparative period. Partially offsetting was lower interest expense incurred during 2021, resulting from lower interest rates and lower weighted average balance of debt outstanding and a larger non-cash gain associated with the partnership's interest rate derivatives during the fourth quarter of 2021 as compared to the same period in 2020. Net cash provided by operating activities for the quarter decreased 22% relative to the fourth quarter of 2020, primarily due to the same operating factors already discussed and the general timing of receipts and payments of accounts receivable, accounts payable, and deferred revenue balances. Adjusted EBITDA and distributable cash flow decreased by 20% and 18% respectively for the quarter relative to the fourth quarter of 2020. The decrease in adjusted EBITDA in DCF was primarily a result of the operating factors already discussed. Partially offsetting the decrease in DCF was a decrease in the cash paid for interest in taxes during the quarter. As of December 31st, 2021, The partnership had approximately $3.7 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $107 million on its $275 million senior secured credit facility. Subject to the partnership's continued compliance with financial covenants. As of the end of the fourth quarter of 2021, the partnership had borrowings of $168 million outstanding under its revolving credit facility and was in compliance with its financial covenants. Pursuant to the terms of the partnership's senior secured credit facility, as recently amended, the partnership's borrowing capacity continues to be limited to 4.5 times its trailing 12-month consolidated EBITDA. As such, the partnership's available borrowings under the senior secured credit facility, including unrestricted cash and cash equivalents, was approximately $83.7 million as of December 31st. We continue to be excited to work with our customers and our bank group in the future to grow the partnership around some of our and our sponsors' new growth initiatives. Specifically, we are very focused on the growth prospects that currently exist around the sponsors' DRU and Port Arthur projects, as well as the USD Clean Fuels initiatives. And as always, we continue to be focused on enhancing the value, the long-term value, for our unit holders. With that, I would now like to turn the call back over to Dan.

Thank you, Adam, and now I'll ask Josh to give us a quick update on the Truebit by rail program, and then Brad will give us a detailed update on the Western Canada Select Market, recent market updates, and an update on our commercial activities. Josh?

Thanks, Dan. Let me start first with DRU. We've been fully operational for over 60 days, and the DRU unit is performing extremely well. We're operating per plan with regards to unit performance and operating cost. Currently, we're exceeding our operational throughput levels, are achieving our product specification goals for Drewbit, and exceeding our non-hazardous flashpoint targets. And finally, with regards to DRU, our daily return system continues to deliver a rateable solution through our partner, Gibson's Terminal, for our customer. At Port Arthur, As with DRU, we continue to see really good operating performance with those assets. Our rail turn times are per plan at under 24 hours per train. We're seeing strong performance from the Canadian Pacific and the KCS railroads with regards to their overall network cycle times on their rail routes for both loads and empties. Our blending operation continues to add value for our customer at Port Arthur. And finally, at Port Arthur, our pipeline and marine-based connectivity options are providing competitive market access to our customer and their downstream customers, again, per plan. All in all, very pleased with the team and the asset performance in the field to date at both DRU and Hardesty and at Port Arthur. We've had some extremely cold temperatures in Hardesty this winter, but with our partner, Gibsons, have managed through those temperatures nicely and now remain focused on growth at both locations. As a reminder for the folks on the call today, we're fully permitted for incremental DRU development at both Hardesty and Port Arthur. And with the interest we're seeing in our DRU program, our Drewbit by rail program, we're excited for the prospect of that growth. And with that, Brad, I'll hand it over to you for market and commercial updates.

Thank you, Josh. From a market update standpoint, as Josh mentioned, in the fourth quarter, we had some extremely low temperatures up in Canada, and that caused some critical production disruptions for our producers and potential customers up there. And given that, inventories over the second half of the fourth quarter and into early this year, we saw inventory draws from historical high levels to levels today that are considered historical historically low levels. The good news is in the fourth quarter and certainly prior to all the disruptions that we're seeing internationally with Ukraine and Russia, prices were at historically high levels, certainly high levels relative to recent history, with prices for WTI in the range of $90 to $95. And given the inventory levels I just described, our producers, our potential customers in Canada are experiencing some of the best netbacks that they have ever experienced. So consequently, in 2022, our expectation is we will see incremental production or supply growth relative to 2021. Our expectations or we could see as much as 300,000 to 300,000 barrels a day of increased supply 2022 versus 2021. Our expectations then will be that we will see inventories return to the levels we saw in early 4Q of 2021, which, as I stated, were at the higher end of the range. And then finally, we continue to see headwinds as it relates to pipeline egress challenges. Most recently, there were announcements by TMX Pipe of their overruns, challenges, and delays that they're experiencing bringing that pipe on or into service. So, our expectation is naturally that we're moving into a period in time certainly in the second half of 2022 where development opportunities should be rich up in Canada. With that, I'll move on to a couple of highlights on our commercial updates, starting with the DRU. Given the success of the DRU startup, as Dan and Josh both described, Our focus on a go-forward basis is to transition 100% of our capacity at Hardesty Rail Terminal to support the future development of the DRU. As a reminder, the DRU plus our Hardesty Terminal and our railroad partnerships and our Advantage Destination at Port Arthur supports the delivery of the most competitive egress solution for Canadian producers. Key drivers for that are the non-haz and non-flammable nature of the product that we have spoken to before previously. It's an attractive solution that has competitive emissions profile relative to pipelines as it relates to greenhouse gas emissions. There are cost reduction benefits due to the savings and the diluent return value proposition, which after you separate the diluent, it is returned locally to markets and customers who can then re-blend it. And then there are cost reductions associated with the railroad support as a function of the safety features we described as non-haz and non-flam. And then finally, from a net back standpoint, our customer are experiencing blend value incentives that have exceeded expectations when we originally worked through the potential economics of the DRU. So when you combine all of these benefits, then our analysis shows that there are potentials for $2 to $4 a barrel of savings on a movement from Hardesty to the U.S. Gulf Coast. So given that, we're currently in discussions and term sheet development-type discussions with multiple customers, including producers and refiners, and we're very excited about the support that the The story up in Canada provides and supports as we move those discussions forward in 2022. From a clean fuel standpoint, Dan mentioned that West Colton rail terminal asset is currently supporting long-term contracts with the investment-grade counterparties, delivering not only renewable diesel into Southern California, but also the lowest carbon intensity ethanol that is produced in the U.S. into Southern California as well. So we're very proud of the development progress we have made in Southern California, specifically at West Colton. And we use that as a model for future development opportunities as we look at not only increasing demand for product in California, given its low carbon fuel standard policies, but also the growth of policy into the Pac Northwest, Canada, and other areas. So our continued focus, again, working with our railroad partners, will be on development opportunities supporting the changing renewable fuels landscape, with focus on renewable diesel, ethanol, aviation fuel, and strategic feedstock, both in infrastructure and production. So, we're excited about the opportunities that are before us, not only in clean fuels, but as relates to DRU, and look forward to providing updates in future earning calls.

Dan, I'll hand it back to you. All right.

Thank you both, Josh and Brad. Great updates. Always appreciate the information. With that, we'll open up the call for any additional questions.

At this time, if you would like to ask a question, please press star 1 on your telephone keypad. Again, that is star 1 now on your telephone keypad. We'll take a question from Steve Ferrazani of Sidoti & Company.

Good morning, everyone. Appreciate all the detail on the call. I want to dig in a little bit on the sequential change in terminaling services revenue. It sounds like what you were saying is that that was now a full quarter with the Stroud volume out versus there being some in the previous quarter. Is that the right way of thinking about that? Now we've seen the full quarter without that volume that moved to Port Arthur.

That's correct. This is Adam. Hey, Steve. That's correct.

And then did we see any benefits yet from the renewable diesel contract? I think that didn't start until December. Is that right?

That's right. It's running and it's fully operational, but we saw minimal impact in Q4 because of the start date of December. So we'll see more of that in a full run rate starting in Q1.

So it's reasonable to think, and obviously we're two months into the quarter, more than that. When we think about, you know, Stroud would have seen that without any of that in the quarter. Then we think about the renewable diesel contract, and we think about the renewed ethanol contract. It's reasonable to think we're trending up on terminal link services revenue to Q1. Is that right?

That's exactly right. The change in the ethanol contract at West Colton plus the new business, the incremental business associated with renewable diesel at West Colton, we'll add to terminal services revenue in Q1 and going forward.

Great. Great. That's helpful. And then you had talked on previous calls about investments you would be making in Stroud basically to make that more accommodating to potentially a wider group of customers. Can you tell us where we're at with that and what you're thinking about, you know, filling that lost volume at Stroud at some point in 2022?

Sure, I might hand that one off to Brad and Josh, if you guys want to take that one.

Yeah, I'll take that. Thank you. This is Brad. Good question. So our expectation is we'll have a second tank in service beginning second half of 2022. Effectively, what that does is allow us to handle multiple qualities or multiple grades at Stroud. Currently, we're limited to one grade, and historically, we've had one customer because of that. on a go-forward basis, then we have the option now to add a second customer. As it relates to market in the update I gave earlier, our expectation is with the production changes year on year that we will return to high inventory levels, high apportionment levels, and the role of crude by rail as an egress solution in the second half should happen from a market standpoint. And then specifically as it relates to Cushing, Cushing are at historically low inventory levels and over the last year and a half has been extremely higher valued is all I'm trying to say, higher valued relative to market alternatives from a destination standpoint. Our expectation is it will continue to carry a premium. So naturally, as volumes move by rail, the first highest netback point will be Cushing. So our expectation is we'll see some of that activity in the second half of 2022. Great.

That's fair. Thanks for that. Last one for me before I turn it over, and maybe I'll get back in the queue. In terms of how you're thinking about the distribution and uses of cash, clearly you've had a lot of positive announcements over the last six months. Cash flow and power models should be growing next year. Seems like you've got leverage back to a reasonable, and I don't know if your target ratio is well below that. How are you thinking about the distribution, given all the positives you've announced over the last six months?

Yeah, that's a good question, Steve. I think the way we're thinking about it is just to maintain a good balance of growth, but also have a good distribution coverage going forward. We've had a pretty strong distribution coverage over the last two to four quarters, and we're also projecting a strong distribution coverage in 2022. We kind of take it year by year, but at this point, we'll have a DCF surplus going forward. which we'll use to pay down debt or look at strategic initiatives, either on the organic side or on the M&A side.

What's your target leverage now? Has it changed?

In the past, we've said it's about three and a half times, so we're below that. We feel good about where we are right now, and we'll just continue to monitor that.

Great. Thanks for all the detail, folks. Thanks.

And once again, that is star one on your telephone keypad.

One moment while we queue.

And it appears that we have no further questions at this time. I'd be happy to return the call to Dan. Actually, we do have a question from Darren McCammon of Cashflow Kingdom. Your line is open.

Hi, guys. Thanks for taking my call. I'm trying to get my head around something that I just don't understand. Your ARAP rail subcontracting expense and a variety of other lines all indicate growth, but the revenue doesn't. Now, I understand one-third of Stroud is going out, but I'm thinking if all those other things are growing, your revenue growth should have been commensurate. Can you help me understand this? Is there a revenue recognition thing going on, delay going on, or something like that?

You know, we can get into the details offline, but this really has to do with, I would say, the way our contracts work and with deficiency credits.

But the revenue itself is always going to be based on MVC. There might be some movements in the way that we recognize revenue with the deficiency credits, but the revenue itself is always going to be based on MVC unless they exceed their MVC.

But I'm happy to drill down into the line item with you, you know, offline.

That'd be great. Just real quick, what is MVC?

Sorry, minimum volume commitment. And that's primarily all of our term line contracts are based on minimum volume commitments.

meaning if they're using the terminal or not, they're still paying us the same amount of revenue. And in some cases where they exceed the MVC, the revenue will be higher.

But for the most part, that's really where our revenue comes from.

Okay. I'll take it offline with you because I still don't understand. Thank you.

And once again, that is star 1. And at this time, I will return the call to Dan Borgen for any closing remarks.

I appreciate it. And thanks for all the great questions today. You know, really appreciate that. Always a knowledgeable group. So and Adam will follow up on that and get the detail for you. So obviously, we're very encouraged about 2022 and what's happening. You know, we're we always take a more conservative view in terms of the of our distribution policy, but we're very encouraged about it. Our coverage is good, and we want to try to continue to review that distribution policy and continue to grow it as we can. Again, as we look to our DRU growth and our clean fuels strategy and its growth and the momentum that we have behind those two primary areas, Very encouraging. So thanks again, everyone on the phone. And we appreciate all the support and look forward to continuing updates soon.

Thank you.

This does conclude the USD Partners LP fourth quarter 2021 results conference call and webcast. You may now disconnect. And everyone, have a great day.