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.
The financial information for the three months ended
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 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
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 a diluent recovery unit, or
DRU, at the
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Casper Terminal Divestiture
On
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. According to the Canadian Energy Regulator, or
CER, the Canadian production forecast for 2023 is projected to grow which
indicates another year of growth for Canadian production. Additionally, in
In the fourth quarter of 2022, TC Energy had a pipeline outage on the entire
Keystone pipeline system. The entire pipeline was offline for a significant
amount of time, which led to inventory builds in
Additionally, the
Given the supply and demand events discussed above, and based on the forecasted
production increases in
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reducing agent usage and favorable pipeline summer blending ratio requirements. The extent and duration of any increases in apportionment or inventory levels are difficult to predict, if such increases occur at all.
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
Our Hardisty terminal, with established capacity and scalable designs, is
well-positioned as strategic outlets to meet takeaway needs when 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.
Our combined
Our
Our
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Bernardino and Riverside County-Inland Empire region of
Fleet Services
We provide one of our customers with leased railcars and fleet services related
to the transportation of liquid hydrocarbons by rail on 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 our customer 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 terminalling services. Our wholly-owned subsidiary
How We Evaluate Our Operations
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 14. 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:
•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.
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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 (used in) operating activities," the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted EBITDA and DCF:
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