USD Partners LP Announces Third Quarter 2018 Results and Recent Commercial Developments

USD Partners LP (NYSE: USDP) (the Partnership) announced today its operating and financial results for the three and nine months ended September 30, 2018. Financial highlights with respect to the third quarter of 2018 include the following:

  • Generated Net Cash Provided by Operating Activities of $12.6 million, Adjusted EBITDA of $14.5 million and Distributable Cash Flow of $11.6 million
  • Reported Net Income of $5.9 million
  • Increased quarterly cash distribution to $0.3575 per unit ($1.43 per unit on an annualized basis), representing an increase of 3.6% over the third quarter of 2017
  • Ended the quarter with $206.4 million of available liquidity and distribution coverage of approximately 1.2x

We are pleased to announce another positive quarter at the Partnership and our fourteenth consecutive quarterly distribution increase, supported by strong distribution coverage of approximately 1.2x, said Dan Borgen, the Partnerships Chief Executive Officer. We are also pleased to announce continued support in the form of another material contract extension at our Hardisty terminal. With $40 to $50 differentials between a Western Canadian Select and a West Texas Intermediate barrel of crude oil existing today, and forward curves indicating a continued imbalance between supply and takeaway capacity in Western Canada, we remain excited about our strategically located network of assets and we look forward to communicating more positive news in the future.

The Partnership also announced it has successfully renewed and extended its senior secured credit facility with a slight improvement in pricing, said Adam Altsuler, the Partnerships Chief Financial Officer. The success of the refinancing was largely due to our strong and supportive bank group, our conservative liquidity and leverage position, and the positive market outlook for our strategically located assets.

Recent Commercial Developments

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Hardisty Terminal

Today, the Partnership announced that it has entered into a four-year extension with a Canadian-based, oil infrastructure focused company at its Hardisty terminal. The customer has significantly increased its position by more than doubling its contracted capacity at the terminal. The extension contains consistent take-or-pay terms with average minimum monthly payments and rates that exceed those of the original terminalling services agreement (TSA) with this customer.

On September 26, 2018, the Partnership announced that it had entered into a four-year extension with Cenovus Energy Inc., significantly increasing its previous position from 7% to 25% of the Hardisty terminals capacity. The extension contains consistent take-or-pay terms with average minimum monthly payments and rates that exceed those of the original TSA with this customer.

To date, the Partnership has renewed and extended approximately 65% of the capacity at its Hardisty terminal through mid-2022, with approximately 42% extended through mid-2023. These contract renewals will generate meaningful increases in revenue for the Partnership and are estimated to replace approximately 80% of the Hardisty terminals current cash flows, on an annualized basis, over the next three years starting in July 2019.

Additionally, USD Group LLC (USDG) confirmed, pursuant to its development rights at the Hardisty terminal, that it is moving forward with the Hardisty South expansion (Hardisty South). The existing Hardisty terminal, which is owned by the Partnership, has designed capacity for two unit trains per day, or approximately 150,000 barrels per day. Hardisty South, which is owned by USDG, will add one unit train per day, or approximately 75,000 barrels per day, of takeaway capacity to the terminal by modifying the existing loading rack and building additional infrastructure and trackage. The project is expected to be in-service by January 1, 2019. To date, approximately 67% of Hardisty Souths capacity has been commercialized through take-or-pay agreements with minimum volume commitments, which are expected to generate an average of approximately $11.1 million of cash flow over the next four years for USDG.

Third Quarter 2018 Liquidity, Operational and Financial Results

Substantially all of the Partnerships cash flows are generated from multi-year, take-or-pay terminalling services agreements related to its crude oil terminals, which include minimum monthly commitment fees. The Partnerships customers include major integrated oil companies, refiners and marketers, the majority of which are investment-grade rated.

The Partnerships results during the third quarter of 2018 relative to the same quarter in 2017 were primarily influenced by additional revenues and costs related to the commencement of operations at the Stroud terminal in October 2017 and the conclusion of a customer agreement at the Partnerships Casper terminal in August 2017. In addition, as a result of a substantial increase in customer activity at its Hardisty terminal, the Partnership incurred incremental operating costs during the third quarter of 2018.

Net Cash Provided by Operating Activities decreased by 17% relative to the third quarter of 2017, primarily due to the conclusion of a customer agreement at the Partnerships Casper terminal in August 2017 and the timing of receipts and payments on accounts receivable, accounts payable and deferred revenue balances.

Adjusted EBITDA increased by 9% and Distributable Cash Flow (DCF) decreased by 14% relative to the third quarter of 2017. The increase in Adjusted EBITDA was primarily a result of the commencement of operations at the Stroud terminal in October 2017. The decrease in DCF was due primarily to a cash refund of approximately $2.6 million that the Partnership received during the third quarter of 2017 in connection with Canadian income tax returns for 2016 that were filed in 2017, versus cash paid for taxes of approximately $0.2 million during the third quarter of 2018.

Net income for the quarter increased by 12% as compared to the third quarter of 2017, primarily as a result of the operating factors discussed above coupled with a non-cash gain associated with the five-year interest rate derivative instrument that the Partnership entered into in November 2017, partially offset by increased interest expense incurred associated with higher interest rates during the third quarter of 2018.

As of September 30, 2018, the Partnership had total available liquidity of $206.4 million, including $7.4 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $199.0 million on its $400.0 million senior secured credit facility, subject to continued compliance with financial covenants. The Partnership is in compliance with its financial covenants.

On November 2, 2018, the Partnership amended and restated its senior secured credit facility with a syndicate of lenders. The new senior secured credit facility is a four-year committed facility that matures in November 2022, with a borrowing capacity of $385 million, subject to the limits set forth therein. The new agreement includes a reduction of 25 basis points to the applicable margin the Partnership is charged on LIBOR-based borrowings to a range of 2.00% to 3.00% which is based on the Partnerships net leverage ratio. The new agreement also provides the Partnership with the ability to request two one-year maturity date extensions, subject to the satisfaction of certain conditions, and allows the Partnership the option to increase the maximum amount of credit available up to a total facility size of $500 million, subject to receiving increased commitments from lenders and satisfaction of certain conditions.

On October 25, 2018, the Partnership declared a quarterly cash distribution of $0.3575 per unit ($1.43 per unit on an annualized basis), which represents growth of 0.7% over the prior quarter and 3.6% over the third quarter of 2017. The distribution is payable on November 14, 2018, to unitholders of record at the close of business on November 6, 2018.

Effective January 1, 2018, the Partnership adopted the requirements of Accounting Standards Update 2014-09, or ASC 606, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The Partnership adopted ASC 606 by applying the full retrospective approach, resulting in the restatement of prior period financial statements to comply with the new standard.

Third Quarter 2018 Conference Call Information

The Partnership will host a conference call and webcast regarding third quarter 2018 results at 11:00 a.m. Eastern Time (10:00 a.m. Central Time) on Tuesday, November 6, 2018.

To listen live over the Internet, participants are advised to log on to the Partnerships website at www.usdpartners.com and select the Events & Presentations sub-tab under the Investors tab. To join via telephone, participants may dial (877) 266-7551 domestically or +1 (339) 368-5209 internationally, conference ID 1777877. Participants are advised to dial in at least five minutes prior to the call.

An audio replay of the conference call will be available for thirty days by dialing (800) 585-8367 domestically or +1 (404) 537-3406 internationally, conference ID 1777877. In addition, a replay of the audio webcast will be available by accessing the Partnership’s website after the call is concluded.

About USD Partners LP

USD Partners LP is a fee-based, growth-oriented master limited partnership formed in 2014 by US Development Group, LLC (USDG) to acquire, develop and operate midstream infrastructure and complementary logistics solutions for crude oil, biofuels and other energy-related products. The Partnership generates substantially all of its operating cash flows from multi-year, take-or-pay contracts with primarily investment grade customers, including major integrated oil companies and refiners. The Partnerships principal assets include a network of crude oil terminals that facilitate the transportation of heavy crude oil from Western Canada to key demand centers across North America. The Partnerships operations include railcar loading and unloading, storage and blending in on-site tanks, inbound and outbound pipeline connectivity, truck transloading, as well as other related logistics services. In addition, the Partnership provides customers with leased railcars and fleet services to facilitate the transportation of liquid hydrocarbons and biofuels by rail.

USDG, which owns the general partner of USD Partners LP, is engaged in designing, developing, owning, and managing large-scale multi-modal logistics centers and energy-related infrastructure across North America. USDG solutions create flexible market access for customers in significant growth areas and key demand centers, including Western Canada, the U.S. Gulf Coast and Mexico. Among other projects, USDG is currently pursuing the development of a premier energy logistics terminal on the Houston Ship Channel with capacity for substantial tank storage, multiple docks (including barge and deepwater), inbound and outbound pipeline connectivity, as well as a rail terminal with unit train capabilities. For additional information, please visit texasdeepwater.com.

Non-GAAP Financial Measures

The Partnership defines Adjusted EBITDA as Net Cash Provided by Operating Activities adjusted for changes in working capital items, interest, income taxes, foreign currency transaction gains and losses, and other items which do not affect the underlying cash flows produced by the Partnerships businesses. Adjusted EBITDA is a non-GAAP, supplemental financial measure used by management and external users of the Partnerships financial statements, such as investors and commercial banks, to assess:

  • the Partnerships liquidity and the ability of the Partnerships businesses to produce sufficient cash flows to make distributions to the Partnerships unitholders; and
  • the Partnerships ability to incur and service debt and fund capital expenditures.

The Partnership defines Distributable Cash Flow, or DCF, as Adjusted EBITDA less net cash paid for interest, income taxes and maintenance capital expenditures. DCF does not reflect changes in working capital balances. DCF is a non-GAAP, supplemental financial measure used by management and by external users of the Partnerships financial statements, such as investors and commercial banks, to assess:

  • the amount of cash available for making distributions to the Partnerships unitholders;
  • the excess cash flow being retained for use in enhancing the Partnerships existing business; and
  • the sustainability of the Partnerships current distribution rate per unit.

The Partnership believes that the presentation of Adjusted EBITDA and DCF in this press release provides information that enhances an investor’s understanding of the Partnerships ability to generate cash for payment of distributions and other purposes. The GAAP measure most directly comparable to Adjusted EBITDA and DCF is Net Cash Provided by Operating Activities. Adjusted EBITDA and DCF should not be considered alternatives to Net Cash Provided by Operating Activities or any other measure of liquidity presented in accordance with GAAP. Adjusted EBITDA and DCF exclude some, but not all, items that affect Net Cash Provided by Operating Activities and these measures may vary among other companies. As a result, Adjusted EBITDA and DCF may not be comparable to similarly titled measures of other companies.

Cautionary Note Regarding Forward-Looking Statements

This press release contains forward-looking statements within the meaning of U.S. federal securities laws, including statements with respect to the amount and timing of the Partnerships third quarter 2018 cash distribution, as well as statements regarding production growth in Western Canada, demand for rail takeaway capacity in Western Canada and the Partnerships ability to meet that demand, the Partnerships ability to achieve long-term contracts and contract renewals and the ability of the Partnerships Sponsor to commercialize and develop expansion capacity at the Hardisty terminal. Words and phrases such as is expected, is planned, believes, projects, and similar expressions are used to identify such forward-looking statements. However, the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements relating to the Partnership are based on managements expectations, estimates and projections about the Partnership, its interests and the energy industry in general on the date this press release was issued. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. Factors that could cause actual results or events to differ materially from those described in the forward-looking statements include those as set forth under the heading Risk Factors in the Partnerships most recent Annual Report on Form 10-K and in our subsequent filings with the Securities and Exchange Commission. The Partnership is under no obligation (and expressly disclaims any such obligation) to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.

                       
USD Partners LP Consolidated Statements of Income For the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)
 
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2018 2017 2018 2017
(in thousands)
 
Terminalling services $ 21,728 $ 19,805 $ 65,560 $ 65,463
Terminalling services related party 5,715 4,737 15,414 9,091
Fleet leases 643 1,929
Fleet leases related party 984 1,013 2,951 2,794
Fleet services 80 470 505 1,405
Fleet services related party 227 218 682 776
Freight and other reimbursables 852 118 3,780 483
Freight and other reimbursables related party           4     1  
Total revenues   29,586     27,004     88,896     81,942  
Operating costs
Subcontracted rail services 3,674 2,340 10,047 6,148
Pipeline fees 5,267 5,973 16,109 16,802
Fleet leases 984 1,656 2,961 4,723
Freight and other reimbursables 852 118 3,784 484
Operating and maintenance 1,360 749 3,553 2,050
Selling, general and administrative 2,463 2,221 7,912 6,898
Selling, general and administrative related party 1,893 1,477 5,640 4,305
Depreciation and amortization   5,271     5,254     15,807     15,164  
Total operating costs   21,764     19,788     65,813     56,574  
Operating income 7,822 7,216 23,083 25,368
Interest expense 2,827 2,388 8,025 7,508
Loss (gain) associated with derivative instruments (413 ) 667 (1,823 ) 1,279
Foreign currency transaction gain (89 ) (457 ) (183 ) (527 )
Other expense (income), net   (1 )   (52 )   71     (65 )
Income before income taxes 5,498 4,670 16,993 17,173
Benefit from income taxes   (430 )   (605 )   (2,247 )   (1,806 )
Net income $ 5,928   $ 5,275   $ 19,240   $ 18,979  
                       
USD Partners LP Consolidated Statements of Cash Flows For the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)
 
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2018 2017 2018 2017
Cash flows from operating activities: (in thousands)
Net income $ 5,928 $ 5,275 $ 19,240 $ 18,979
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 5,271 5,254 15,807 15,164
Loss (gain) associated with derivative instruments (413 ) 667 (1,823 ) 1,279
Settlement of derivative contracts (148 ) (38 ) 242
Unit based compensation expense 1,438 946 4,333 2,962
Deferred income taxes (731 ) (647 ) (3,269 ) (293 )
Other 216 216 719 664
Changes in operating assets and liabilities:
Accounts receivable (845 ) 691 (3,459 ) 267
Accounts receivable “ related party 3,830 (403 ) 2,450 (224 )
Prepaid expenses and other assets 2,832 2,534 372 1,469
Other assets “ related party 19 59
Accounts payable and accrued expenses (593 ) 2,306 272 990
Accounts payable and accrued expenses “ related party (4,174 ) (273 ) (2,061 ) (43 )
Deferred revenue and other liabilities (142 ) (1,195 ) (403 ) (4,861 )
Deferred revenue “ related party   (8 )   19     17     948  
Net cash provided by operating activities   12,628     15,242     32,216     37,543  
Cash flows from investing activities:
Additions of property and equipment (241 ) (935 ) (443 ) (26,708 )
Proceeds from the sale of assets           236      
Net cash used in investing activities   (241 )   (935 )   (207 )   (26,708 )
Cash flows from financing activities:
Distributions (9,980 ) (9,390 ) (29,573 ) (25,532 )
Vested phantom units used for payment of participant taxes (4 ) (1,350 ) (1,072 )
Net proceeds from issuance of common units 33,700
Proceeds from long-term debt 2,000 4,000 20,000 44,000
Repayments of long-term debt   (6,000 )   (9,000 )   (21,000 )   (66,342 )
Net cash used in financing activities   (13,984 )   (14,390 )   (31,923 )   (15,246 )
Effect of exchange rates on cash   174     (5 )   (679 )   242  
Net change in cash, cash equivalents and restricted cash (1,423 ) (88 ) (593 ) (4,169 )
Cash, cash equivalents and restricted cash “ beginning of period   14,618     13,057     13,788     17,138  
Cash, cash equivalents and restricted cash “ end of period $ 13,195   $ 12,969   $ 13,195   $ 12,969  
           
USD Partners LP Consolidated Balance Sheets (unaudited)
 
September 30, December 31,
2018 2017
ASSETS (in thousands)
Current assets
Cash and cash equivalents $ 7,361 $ 7,874
Restricted cash 5,834 5,914
Accounts receivable, net 7,601 4,171
Accounts receivable related party 903 410
Prepaid expenses 1,848 2,545
Other current assets 172 43
Other current assets related party   79     79  
Total current assets 23,798 21,036
Property and equipment, net 142,117 146,573
Intangible assets, net 89,857 99,312
Goodwill 33,589 33,589
Other non-current assets 2,364 328
Other non-current assets related party   114     174  
Total assets $ 291,839   $ 301,012  
 
LIABILITIES AND PARTNERS CAPITAL
Current liabilities
Accounts payable and accrued expenses $ 2,995 $ 2,670
Accounts payable and accrued expenses related party 795 244
Deferred revenue 3,071 3,291
Deferred revenue related party 1,968 1,986
Other current liabilities   2,491     2,339  
Total current liabilities 11,320 10,530
Long-term debt, net 200,247 200,627
Deferred income tax liabilities, net 1,107 4,490
Other non-current liabilities   386     475  
Total liabilities   213,060     216,122  
Commitments and contingencies
Partners capital
Common units 112,782 136,645
Class A units 987 1,468
Subordinated units (38,436 ) (55,237 )
General partner units 3,403 180
Accumulated other comprehensive income   43     1,834  
Total partners capital   78,779     84,890  
Total liabilities and partners capital $ 291,839   $ 301,012  
                       
USD Partners LP GAAP to Non-GAAP Reconciliations For the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)
 
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2018 2017 2018 2017
(in thousands)
 
Net cash provided by operating activities $ 12,628 $ 15,242 $ 32,216 $ 37,543
Add (deduct):
Amortization of deferred financing costs (216 ) (216 ) (646 ) (646 )
Deferred income taxes 731 647 3,269 293
Changes in accounts receivable and other assets (5,836 ) (2,822 ) 578 (1,512 )
Changes in accounts payable and accrued expenses 4,767 (2,033 ) 1,789 (947 )
Changes in deferred revenue and other liabilities 150 1,176 386 3,913
Interest expense, net 2,827 2,384 8,025 7,500
Benefit from income taxes (430 ) (605 ) (2,247 ) (1,806 )
Foreign currency transaction gain (1) (89 ) (457 ) (183 ) (527 )
Other income (4 ) (25 )
Non-cash contract asset (2)   (51 )       (154 )    
Adjusted EBITDA 14,481 13,312 43,033 43,786
Add (deduct):
Cash received (paid) for income taxes (3) (177 ) 2,664 (626 ) 1,250
Cash paid for interest (2,678 ) (2,165 ) (7,499 ) (7,102 )
Maintenance capital expenditures   (18 )   (274 )   (98 )   (472 )

Distributable cash flow

$ 11,608   $ 13,537   $ 34,810   $ 37,462  

_________________________

(1)   Represents foreign exchange transaction amounts associated with activities between the Partnership’s U.S. and Canadian subsidiaries.
(2) Represents the change in non-cash contract assets associated with revenue recognized in advance at blended rates based on the escalation clauses in certain of the Partnership’s agreements.
(3) Includes a partial refund of $2.6 million (representing C$3.4 million) received in the three and nine months ended September 30, 2017, for the Partnership’s 2016 foreign income taxes. Also includes a partial refund of $0.7 million (representing C$0.9 million) received in the nine months ended September 30, 2017, for the Partnership’s 2015 foreign income taxes.

USD Partners LP
Adam Altsuler, (281) 291-3995
Senior Vice
President, Chief Financial Officer
[email protected]
or
Jennifer
Waller, (832) 991-8383
Associate Director, Financial Reporting and
Investor Relations
[email protected]

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