The following discussion and analysis of our financial condition and results of
operations is based on and should be read in conjunction with the unaudited
consolidated financial statements and accompanying notes in "Item 1. Financial
Statements" contained herein and our audited consolidated financial statements
and accompanying notes included in "Item 8. Financial Statements and
Supplementary Data" in our Annual Report on Form 10-K for the fiscal year ended
We denote amounts denominated in Canadian dollars with "C$" immediately prior to the stated amount.
Overview
We are a fee-based, growth-oriented master limited partnership formed by our
sponsor, USD, to acquire, develop and operate midstream infrastructure and
complementary logistics solutions for crude oil, biofuels and other
energy-related products. We generate substantially all of our operating cash
flows from multi-year, take-or-pay contracts with primarily investment grade
customers, including major integrated oil companies, refiners and marketers. Our
network of crude oil terminals facilitates the transportation of heavy crude oil
from
We generally do not take ownership of the products that we handle nor do we receive any payments from our customers based on the value of such products. We may on occasion enter into buy-sell arrangements in which we take temporary title to commodities while in our terminals. We expect any such arrangements to be at fixed prices where we do not take any exposure to changes in commodity prices.
We believe rail will continue as an important transportation option for energy producers, refiners and marketers due to its unique advantages relative to other transportation means. Specifically, rail transportation of energy-related products provides flexible access to key demand centers on a relatively low fixed-cost basis with faster physical delivery, while preserving the specific quality of customer products over long distances.
USDG, a wholly-owned subsidiary of USD, and the sole owner of our general
partner, is engaged in designing, developing, owning, and managing large-scale
multi-modal logistics centers and energy-related infrastructure across
USDG completed an expansion project in
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associated with the Sponsor's Diluent Recovery Unit, or DRU, program. For more
information on our drop down acquisition of the
USD's Diluent Recovery Unit and Port Arthur Terminal Projects
During 2021, USD, along with its joint venture partner, Gibson, successfully
completed construction on and placed into service the DRU at the
Recent Developments
Market Update
Substantially all of our operating cash flows are generated from take-or-pay contracts and, as a result, are not directly related to actual throughput volumes at our crude oil terminals. Throughput volumes at our terminals are primarily influenced by the difference in price between Western Canadian Select, or WCS, and other grades of crude oil, commonly referred to as spreads, rather than absolute price levels. WCS spreads are influenced by several market factors, including the availability of supplies relative to the level of demand from refiners and other end users, the price and availability of alternative grades of crude oil, the availability of takeaway capacity, as well as transportation costs from supply areas to demand centers.
Impact of Current Market Events
Given that crude oil prices have recovered and are higher than pre-COVID levels,
Canadian production that was temporarily shut-in due to COVID-19 has also
returned to pre-COVID levels. Additionally, in
However, recent events have led to lower than anticipated Canadian production
levels including recent extreme cold weather events in
Despite the events discussed above and based on the forecasted production
increases in
Another factor that may contribute to the demand for a crude by rail egress
solution is the significant regulatory and legal obstacles that pipeline
projects and existing pipelines experience in the
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Canadian government does not plan to be the long-term owner of the pipeline and expects to launch a sale process in due course. As environmental, regulatory and political challenges to increase pipeline export capacity remain, crude by rail exports will remain a valuable egress solution.
In the long-term, as stated above, we expect demand for rail capacity at our
terminals to continue to increase over the next several years and potentially
longer if proposed pipeline developments do not meet currently planned timelines
and regulatory or other challenges to pipeline projects persist. Our Hardisty
and Casper terminals, with established capacity and scalable designs, are
well-positioned as strategic outlets to meet takeaway needs as Western Canadian
crude oil supplies continue to exceed available pipeline takeaway capacity.
Also, as previously discussed, USD along with its partner, successfully
completed construction of and placed into service a diluent recovery unit, or
DRU, at the
How We Generate Revenue
We conduct our business through two distinct reporting segments: Terminalling services and Fleet services. We have established these reporting segments as strategic business units to facilitate the achievement of our long-term objectives, to assist in resource allocation decisions and to assess operational performance.
Terminalling Services
The terminalling services segment includes a network of strategically-located terminals that provide customers with railcar loading and/or unloading capacity, as well as related logistics services, for crude oil and biofuels. Substantially all of our cash flows are generated under multi-year, take-or-pay terminal services agreements that include minimum monthly commitment fees. We generally have no direct commodity price exposure, although fluctuating commodity prices could indirectly influence our activities and results of operations over the long term. We may on occasion enter into buy-sell arrangements in which we take temporary title to commodities while in our terminals. We expect any such agreements to be at fixed prices where we do not take commodity price exposure.
Our
Our
Our
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Our
Fleet Services
We provide one of our customers with leased railcars and fleet services related
to the transportation of liquid hydrocarbons by rail on multi-year, take-or-pay
terms under a master fleet services agreement. We do not own any railcars. As of
Under the master fleet services agreement, we provide customers with railcar-specific fleet services, which may include, among other things, the provision of relevant administrative and billing services, the repair and maintenance of railcars in accordance with standard industry practice and applicable law, the management and tracking of the movement of railcars, the regulatory and administrative reporting and compliance as required in connection with the movement of railcars, and the negotiation for and sourcing of railcars. Our customer typically pays us and our assignees monthly fees per railcar for these services, which include a component for fleet services.
Historically, we contracted with railroads on behalf of some of our customers to arrange for the movement of railcars from our terminals to the destinations selected by our customers. We were the contracting party with the railroads for those shipments and were responsible to the railroads for the related fees charged by the railroads, for which we were reimbursed by our customers. Both the fees charged by the railroads to us and the reimbursement of these fees by our customers are included in our consolidated statements of operations in the revenues and operating costs line items entitled "Freight and other reimbursables."
Also, we have historically assisted our customers with procuring railcars to
facilitate their use of our terminal services. Our wholly-owned subsidiary
Our management uses a variety of financial and operating metrics to evaluate our operations. When we evaluate our consolidated operations and related liquidity, we consider these metrics to be significant factors in assessing our ability to generate cash and pay distributions and include: (i) Adjusted EBITDA and DCF; (ii) operating costs; and (iii) volumes. We define Adjusted EBITDA and DCF below. When evaluating our operations at the segment level, we evaluate using Segment Adjusted EBITDA. Refer to Part I. Item 1. Financial Statements, Note 12. Segment Reporting of this Quarterly Report.
Adjusted EBITDA and Distributable Cash Flow
We define 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 our businesses. Adjusted EBITDA is a non-GAAP, supplemental financial measure used by management and external users of our financial statements, such as investors and commercial banks, to assess:
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•our liquidity and the ability of our business to produce sufficient cash flow to make distributions to our unitholders; and
•our ability to incur and service debt and fund capital expenditures.
We define 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 our financial statements, such as investors and commercial banks, to assess:
•the amount of cash available for making distributions to our unitholders;
•the excess cash flow being retained for use in enhancing our existing business; and
•the sustainability of our current distribution rate per unit.
We believe that the presentation of Adjusted EBITDA and DCF in this Report provides information that enhances an investor's understanding of our 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.
The following table sets forth a reconciliation of "Net cash provided by operating activities," the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted EBITDA and DCF:
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