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spk05: Ladies and gentlemen, thank you for standing by and welcome to the USD Partners LP fourth quarter 2022 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 1. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. 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 0. It is now my pleasure to turn the call over to Jennifer Waller, Senior Director of Financial Reporting and Investor Relations for opening remarks. Please go ahead.
spk04: Good morning, and thank you for joining us. Welcome to our fourth quarter 2022 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, 2022. 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 Statements regarding forward-looking statements and last night's press release applies to the statements and management on this call. Also, please note that information presented on today's call speaks only as of today, March 2, 2023. Any time-sensitive information may no longer be accurate at the time of any webcast replay or reading of the transcripts. Finally, today's call will include discussions on 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.
spk02: Thank you, Jennifer, and good morning. And thank you all for joining us on the call today and for your continued support of the partnership. The partnership had a challenging year in 2022 due primarily to market conditions surrounding the Canadian heavy crude oil macro. However, despite the challenging macro story, the underlying economics for moving Drewbit from Hardesty to the Gulf Coast were positive in full year 2022 and improved significantly in the fourth quarter of 2022. The positive and improving economics for Drewbit is evidenced by the BRU operating above nameplate capacity and our Drewbit customer continuing to exceed its minimum volume commitment at the partnership's Hardesty rail terminal. To date, we've moved over 20 million barrels through our Drewbit by rail network, which includes the Hardesty rail terminal. As a reminder, given the challenges of all transportation modes, our Drewbit network offers a unique, competitive, reliable, and safer method of delivering heavier barrels to destination markets. And DrewBid creates new markets, blending opportunities, and better net back opportunities for our customers with a lower carbon footprint. Finally, DrewBid is non-hazardous and non-climbable, which allows the partnership to be further aligned with its customers as it pertains to safety and reliability. And we are pleased to see the Drew Bit by Rail network benefit the communities our customers and rail partners serve. We continue to have detailed discussions with new and existing customers to provide safer and economically beneficial Canadian crew transportation options. And we remain focused on converting the partnership's Dill Bit capacity to our longer-term, sustainable Drew Bit program, which, as a reminder, is supported by longer tenure with 10-year contracts. As always, we are constantly updating our market point of view on where crude oil markets are today, but also where crude markets are headed in the future. And we do our best to rely on facts and observable market indicators to help drive strategy and priorities. We remain focused on growing our core business and are always evaluating options to maximize the value that our strategic network provides to our customers and unit holders. With Canadian storage utilization levels currently at the high end of the historical averages and the industry's expectations around production growth in Canadian oil sands in 2023 and 2024, we continue to see the potential for future heavy crude oil production exceeding the availability of existing egress, alternatives driving the need for egress by rail. As previously announced, in order to support the partnership's liquidity position during this recontracting cycle, the partnership's sponsor decided to waive its right to the fourth quarter distribution on its 17.3 million units without impacting the distribution to the remaining unit holders. Management believes this was the prudent thing to do given recent momentum around expanding our DrewBit program as well as recent discussions we are having around our Stroud terminal. Next, Adam is going to give 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, please go ahead.
spk03: 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 2022. We plan to issue our 2022 10K additional details sometime in the next few days. Partnership reported a net loss of $3.2 million, net cash provided by operating activities of $8.3 million, adjusted EBITDA of $13.3 million, and distributable cash of $9.6 million. As a brief reminder, an RDC South terminal acquisition, which occurred in the second quarter of 2022, represented a business combination between entities under common control. As a result, the partnership's financial statements have been retrospectively recast to include the pre-acquisition results of Hardesty South. And now for details from the quarter. Partnerships revenues for the fourth quarter of 2022 relative to the same quarter in 2021 were lowered primarily due to a reduction in contracted capacity at the Hardesty Terminal that was affected July 1, 2022. Revenues were also lowered at the Hardesty Terminal due to an unfavorable variance in the Canadian exchange rate on the partnership's Canadian dollar-denominated contracts during the fourth quarter of 2022 as compared to the fourth quarter of 2021. Revenue was lower at the Stroud terminal due to the conclusion of the partnership's service contracts with its sole customer affected July 1, 2022. Also impacting the variance in revenues at the Stroud terminal was the deferral of revenues associated with make-up right options that occurred during the fourth quarter of 2021 with no similar occurrence in the fourth quarter of 2022. Partnership also had lower revenue generated at its Casper terminal associated with lower throughput volumes. Partially offsetting these decreases in revenue was higher revenue at the partnership's West Colton terminal resulting from the commencement of the renewable diesel contract in December 2021. Partnership experienced lower operating costs during the fourth quarter of 2022 as compared to the fourth quarter of 2021. The partnership experienced lower pipeline fee expense, which is directly attributable to the associated decrease in the hard-to-see terminal revenues previously discussed as compared to the fourth quarter of 2021. In addition, subcontracted rail service costs were lowered due to decreased throughput at the terminals. Appreciation and amortization expenses were lower in the fourth quarter of 2022 primarily due to the decrease in the carrying value of the assets at the Casper Terminal resulting from the impairment that was recognized in September 2022. The partnership had a net loss of $3.2 million in the fourth quarter of 2022 as compared to net income of $4.3 million in the fourth quarter of 2021. The decrease is primarily due to operating factors already discussed coupled with higher interest expense incurred during the fourth quarter of 2022 resulting from higher interest rates and higher debt balance outstanding during the quarter, partially offset by a decrease in the commitment fees as compared to the fourth quarter of 2021. Partnership also had higher non-cash losses associated with the partnership's interest rate derivatives, recognized in the fourth quarter of 2022, that were partially offset by the cash proceeds from the settlement of the partnership's interest rate derivatives in October 2022. Net cash provided by operating activities for the quarter decreased 33% relative to the fourth quarter of 2021. The decrease in the partnership's operating cash flow resulting from the conclusion of some of the partnership's terminating agreements was partially offset by the previously mentioned cash settlement of the partnership's interest rate derivative in October. Net cash provided by operating activities was also impacted by the general timing of receipts and payments of accounts receivable, accounts payable, and deferred revenue balances. Adjusted EBITDA after the fourth quarter of 2022 increased by 12% when compared to the same period in 2021 and includes the impact of the aforementioned settlement of the partnership's interest rate derivative that occurred in October. Distributable cash flow decreased by 10% for the current quarter relative to the fourth quarter of 2021 due to higher cash paid for interest and taxes during the quarter. As of December 31st, 2022, The partnership had approximately $2.5 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $60 million on its $275 million senior secured credit facility, subject to the partnership's continued compliance with financial governance. As of the end of the fourth quarter of 2022, the partnership had borrowings of $215 million outstanding under its revolving credit facility. The borrowing capacity and available borrowings under the senior secured credit facility including unrestricted cash and cash equivalents, was approximately $55.5 million as of December 31st. The partnership was in compliance with its financial covenants as of December 31st, 2022. In January 2023, the partnership entered into an amendment to its senior secured credit facility. Among other things, the amendment provides the partnership with relief from compliance with the senior secured credit facility's maximum consolidated leverage ratio and minimum consolidated coverage ratio through the Senior Secured Credit Facility's current maturity date, as management works to obtain renewals, extensions, or replacements of commercial agreements. Additional details regarding the amendment are included in the partnership's current report on Form 8-K filed on February 6th of this year. The partnership's Senior Secured Credit Facility expires on November 2nd, 2023, and the partnership is in active discussions with the administrative agent and other banks within the lender group as well as other potential financing sources regarding the possible extension, renewal, or replacement of the senior secured credit facility. On January 26th, the partnership declared a quarterly cash distribution of 12.35 cents per unit, or 49.4 cents per unit on an annualized basis, the same as the amount distributed in the prior quarter. The distribution was paid on February 17th to unit holders of record that had to close the business on February 8th. Partnerships Board determined to keep the distribution unchanged from the prior quarter and to evaluate the distribution on a quarterly basis going forward and will take into consideration updated commercial progress, including the partnership's ability to renew, send, or replace its customer agreements at the hardest-to-install terminals, firm market conditions, and management's expectations regarding future performance. As Dan mentioned, we remain focused on converting the partnership's deal-bid capacity to our longer-term sustainable 3BIT program. As always, we look forward to sharing more updates with you on that in the future. With that, I would now like to turn the call back over to Dan.
spk02: Thanks, Adam. Now I'll ask Brad to give us a detailed update on the WCSB market, recent market events, and an update on our commercial activities. Brad?
spk01: Thank you, Dan. Let me start with a brief market update. Canadian inventories finished a year at the higher end of the range, and specifically heavy sour inventories finished at approximately 35 million barrels, which, if you look at history, represents tank tops. So that is a significant event that happened at year end. The key driver was simply the shutdown of the Keystone Pipeline. was shut down for approximately two weeks and significantly derated for an additional week, simply to repair some operational issues. This led to stranded barrels at origin and ultimately the need to build in for boys. So why does this matter? As we've discussed previously on this call and in and in our discussions with potential investors, the single biggest driver for the Canadian market to transition to a need for egress by rail is simply inventories at tank tops with no incremental capacity to build. This ultimately drives demand for rail egress. As Dan mentioned in his opening remarks, Canadian production is expected to grow year on year, so higher in 2023 versus 2022. And given these current inventory levels, this growth in production could be the catalyst to transition to higher demand for rail egress. As we think about our hard to see in Stroud assets, specifically, both of these assets will benefit from this transition and therefore we remain in constant contact with producers, refiners, and railroads in anticipation of this potential transition in demand for origin and destination rail assets. Let's transition now to our DRU growth plans, our phase two commercialization efforts. First and foremost, as a reminder, the DRU development is not dependent on the Canadian macro story as I just described. Instead, given its cost competitiveness, its low carbon footprint and safety features, and unique value creation opportunities at destinations, things like custom blending, access to all Gulf Coast domestic refiners, and the ability to export It is the most advantaged egress solution for producers and refiners. And therefore, and naturally, we are purposed to transition all our current business to a DRU solution and are confident in our ability to commercialize our phase two. Given our current discussions and negotiations, in fact, we look forward to updating you soon on its progress. Finally, I'd like to transition to an update on our clean fuels efforts. As a reminder, in January of this year, USD Clean Fuels announced its intention to build a new biofuels terminal in National City, California, that will have the capability to transload renewable diesel, biodiesel, ethanol, and sustainable aviation fuels. Terminal will be served by the BNSF Railroad and give us access to Midwest and U.S. Gulf Coast origin advanced clean fuels. And our expectation is that the terminal will become operational by early 2024. This terminal will be the second terminal of a growing network of clean fuels terminals that USD Clean Fuels anticipates will ultimately include California, Oregon, Washington, Canada, and the Texas Gulf Coast, solely based on strong customer and railroad interests. These terminals are expected to provide needed infrastructure that will make the downstream logistics of advanced biofuel production and feedstocks more efficient. So we're very excited about the progress we've made. We're very excited about the potential in this space. And, again, look forward to providing updates as appropriate. Dan?
spk02: Thank you, Brad. And with that, we'll open up the call for any additional questions.
spk05: Thank you. At this time, if you would like to ask a question, please press the star and 1 on your touch-tone phone. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star and 1 to ask a question. We will pause for a moment to allow questions to queue. And we will take our first question from Steve Ferenczani with Sidoti.
spk00: morning everyone i appreciate the detail on the call i know you're maneuvering through some challenging conditions right now i don't know if you can give me a lot of color on this but i'll i'll start with it anyway because i think it's on everyone's mind in terms of the uh the credit agreement and your ability to refinance right now are you in sort of a wait and see mode in terms of your ability to refinance is really dependent on your ability to announce uh new rail agreements
spk03: You know, hey, Steve, it's Adam. We're constantly in contact with the banks, having a lot of discussions with them, and they've been very supportive, as evidenced by the credit agreement amendment. They understand where we are in the macro and where we are with our story. And also, we're actually always looking at strategic alternatives to manage our ability to manage our liquidity. Um, one thing that I would, I would add is, uh, you know, as you'll see in our, in our 10 K as it comes out, uh, in the next day or two, um, we did get board approval to, uh, sell our Casper terminal. Um, and so that's a potential, uh, source of liquidity. And, uh, that's it. That'll be a subsequent event in our 10 K that you'll see. So, uh, I wouldn't say we're in wait and see, I would say we're more kind of directly communicating with our customers and our banks. and we're being as proactive as possible.
spk00: Understood. Thank you. In terms of the covenants now, do you think you've gotten enough relief to get you through? I mean, is there anything pending you think violations in the next couple of quarters, barring additional agreements, or is the relief enough on the covenants?
spk03: You know, we're always looking at our projections, and this set of covenants was, you know, what we negotiated with the banks. really to address our near-term liquidity issues, as well as just kind of the commercial negotiations and to really get us through this recontracting period.
spk00: Gotcha. Okay. In terms of the expectations that Western Canadian production is rising, you talked about the obviously lack of, at least in the next several, this year, additional egress options. Where are you in terms of agreements and how much closely will that tie to the ramping of production as well as the threat of additional SPR releases, which was a problem last year?
spk03: I'm going to let Dan and Brad take that question. That's a commercial question.
spk01: I'm happy to respond, and Dan, you can add if it makes sense. I think at the end of the day is you just look at The period when we built these assets and then grew those assets five years later, five years ago, the catalyst for all of that was the market going into what we call CBR parity, which means the prices actually did all the work and the producers were feeling the pain And then within a very short period in time, contracts were lined up, signed, and activity began. So I think they're very reactive in this regard. We're aware of that. It's to our benefit to then just be patient as well, trying to step in early and create incentives for people to participate too early is long-term, likely not a good thing for us and our investors. So, at this point, we're actually pretty comfortable and realize that the market has to do the work, and our expectations are if the production reveals itself like we expect and the facts say it should, then that there's a high potential for that here soon.
spk02: Steve, Dan here. cycles before. And, you know, when the, I'll call it the ARB, when the ARB is there and egress is limited and production grows, you know, it's very responsive. Customers are very responsive to the need. Customers understand, you know, on a fact-based scenario that it's coming. Obviously, that's why we've had good discussions with the banks because this is fact-based, right? This is you know, add and subtraction, if you will, in terms of, uh, the production bills, the egress, what's going on. Obviously if SPR, uh, hadn't occurred, you know, we, we wouldn't have had some of the deep discounting in the Gulf. So, uh, uh, kind of a complete political manipulation of the market, which I don't think is good for anybody, personal opinion, but, but it's, um, uh, certainly we, we look forward, been here before, look forward to re-upping it as Brad, uh, As Brad further said, our DRU program really has nothing to do with that market dynamic. It's more about just the net back, but it's a very large commitment, 10-year-plus commitment. But we are excited about we hope to be able to give a fact-based, detailed announcement later this month on our DRU expansion program. So we're very bullish about that. Excellent.
spk00: Look forward to the update on that, Dan. We're two months into Q1. In terms of operationally, would we expect to see anything significantly different, anything in Q1 versus Q4? I mean, when I'm looking at cash flow this quarter, obviously the settlement of the interest rate derivative was the primary factor. driver of cash flow. Anything that should be significantly different Q4 to Q1, excluding the settlement?
spk03: No, Steve, nothing, you know, no extreme weather or anything like that. We would have reported any kind of anomalies like that. But I guess I would just say we're still in pretty heavy negotiations at Hardesty and Stroud. But operationally, it's been pretty smooth.
spk00: Was there any thought – I know the sponsor waived the right to the distribution. Had there been any thought to suspending the distribution now?
spk03: You know, this is something we look at every quarter, and we've done a pretty significant amount of analysis around that, and we do every quarter with the board. You know, taking into a lot of different things when we make those decisions – You know, always looking at the commercial activity, the market, the macro, the heavy crude oil macro, and where we are with recontracting. So I would say, you know, we're always evaluating that through the same lens and with a lot of variables, I guess, is my best answer for that because that decision is really subject to the board.
spk00: Of course. Understood. Okay. Thanks, everyone. I appreciate the responses on the call this morning.
spk03: Thank you. Thank you.
spk05: It appears that we have no further questions at this time. I will now turn the program back over to Dan Borden for closing remarks.
spk02: Thank you. Obviously, we appreciate the support and, you know, dialing in this morning. I mean, you know, we're, as you've heard us discuss, we're focused on the renewal. We've been here before. We're focused on the growth of the DREU, which takes the underlying assets long-term, the underlying rail assets as well, and puts them in investment grade hands, takes the cyclical nature a bit out of the business, which, uh, has been our purpose, uh, since we started the DRU and one of the benefits of the DRU. And, uh, it's still our intent, as I said earlier, to convert all of our deal bit capacity, the blended capacity, the 70, 30 capacity, uh, to drew bit. Uh, we're moving further along that. We look forward, as I said, to, um, a detailed announcement around that. You know, help all the issues that we've been talking about. So, you know, with that, I'll say thanks again. We appreciate the support. We're working hard to, you know, grow this business for us all. And we look forward to future announcements. Thank you.
spk05: That concludes today's teleconference. Thank you for your participation. You may now disconnect.
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