Ladies and gentlemen, thank you for standing by, and welcome to the USD Partners LP second 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 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, Senior Director of Financial Reporting and Investor Relations for opening remarks. Ma'am, please go ahead.
Thank you. Good morning, and thank you for joining us. Welcome to our second quarter 2022 earnings call. With me today are Dan Borgen, our Chief Executive Officer, Adam Altsuler, our Chief Financial Officer, Brad Sanders, our Chief Commercial Officer, as well as several other members of our senior management team. Yesterday evening, we issued a press release announcing results for the three and six months ended June 30, 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 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, August 4, 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 discussions of non-GAAP financial measures. Please see last night's press release for reconciliations to the most comparable GAAP financial measures. With that, I'll turn the call over to Dan Borgen.
Thank you, Jennifer. Morning, and thank you for joining us on the call today and for your continued support of the partnership. Beginning of the second quarter, we closed the acquisition of the Hardisty South terminal from our sponsor, as well as simplified the partnership's financial structure by eliminating its IDRs. We feel that this was an appropriate step to maintain a momentum into the second half of 2022 and 2023 respectively, as we continue to have detailed discussions regarding our DRUbit by Rail network with new and existing customers to provide safer and economically competitive transportation options. The acquisition of the Hardisty South terminal increases the size, scale, and growth capacity of the partnership's asset base while optimizing operational and commercial synergies at Hardisty.
The partnership's combined Hardisty terminal now has a designed takeaway capacity of 3.5 unit trains per day or approximately 262,500 barrels per day and is well positioned to benefit from the potential future growth associated with the sponsor's DRU program. As a reminder, DRUbit by Rail network benefits the partnership by providing opportunities for longer-term take-or-pay revenues at Hardisty while providing transportation safety and environmental benefits to our customers. We did have some contracts reach maturity at the end of June, but as Brad will discuss later on the call, we are fully engaged with our existing customers and potential new customers, and management is focused on renewing, extending, or replacing agreements that have expired at Hardisty and Stroud.
In addition, we are currently in advanced negotiations to expand and extend our existing commercial agreements with ConocoPhillips regarding our DRUbit by Rail network. In the second quarter, our terminals continued to perform safely and reliably, and we are very pleased with our performance at both the sponsor's DRU and Port Arthur terminals. We continue to exceed expectations at both facilities and continue to deliver significant value to our DRUbit customer, which brings me to our update on sustainability. We've refreshed our sustainability webpage and issued our inaugural USD Sustainability Report, as well as additional information on our sustainability program and capabilities. We encourage you to visit our website at www.usdg.com to take a further look. As always, we look forward to sharing future announcements with the market about the next phase of growth at the DRU and our USD Clean Fuels initiatives.
We are confident that our assets are strategically located to benefit our customers as certain market signals continue to reveal the potential for increased demand for our services. Next, Adam is going to give an update on the partnership's latest financial results and our liquidity position. We'll jump back into the recent market and commercial developments. Adam, please go ahead.
Thank you, Dan, and thank you for joining us on the call this morning. Yesterday afternoon, we issued our second quarter earnings release, which included the details of our operating and financial results for the second quarter. We plan to issue our 10-Q with additional details after close of market today. The partnership reported net income of $3.8 million, net cash provided by operating activities of $6.2 million, adjusted EBITDA of $11.6 million, and distributable cash flow of $10.2 million. Our adjusted EBITDA was negatively impacted by approximately $2.6 million of transaction costs associated with our acquisition of the Hardisty South terminal and the elimination of our sponsor's IDRs.
We anticipate minimal costs associated with this transaction going forward. The acquisition of the Hardisty South Terminal from USD Group and the elimination of our sponsor's IDRs closed effective April first of this year. Total consideration for the transaction was $75 million in cash and approximately 5.75 million common units. The cash portion of the transaction was funded with borrowings under the partnership's $275 million senior secured credit facility. As Dan mentioned, the acquisition of the Hardisty South Terminal increases the size, scale, and growth capacity of the partnership's asset base while optimizing operational and commercial synergies of the Hardisty terminal in order to capitalize on the growth benefits associated with our sponsor's DRU program. Now I'll go into the details from the quarter.
Before I do, let me explain the impact of the Hardisty South acquisition on our historical financial statements. Because Hardisty South was deemed an entity under common control with the partnership, we were required to recast our historical financial statements to include Hardisty South's results of operations. Because of this, our financial statements for prior periods no longer match our previously published results for those periods. While we exclude Hardisty South's results from our adjusted EBITDA calculations for all periods prior to our acquisition, the ability to compare our Q2 GAAP liquidity and results of operations against the prior year period is impacted by this. The partnership's GAAP revenues for the second quarter of 2022 were significantly lower.
The primary contributing factor for this was an early contract cancellation payment received by Hardisty South in the second quarter of 2021, which has not been part of the partnership. This caused revenue to be significantly higher in 2021 on a recast basis with no similar occurrence in 2022. In addition, revenue at the Stroud Terminal was lower in the second quarter of 2022 as a result of a decrease in contracted volume commitments at the terminal that became effective August 2021. The partnership also had lower storage revenue generated at its Casper Terminal associated with the end of one of its customers' contracts that occurred in September 2021, coupled with lower throughput volumes at the terminal.
Partially offsetting these decreases in revenue was higher revenue at the partnership's West Colton terminal resulting from the commencement of a renewable diesel contract that occurred in December 2021. The partnership experienced lower operating costs during the second quarter of 2022 as compared to the second quarter of 2021, primarily attributable to a decrease in SG&A costs associated with the Hardisty South entities as well as a decrease in the pipeline fee expenses. The lower pipeline fee expense is directly attributable to the relative decrease in Hardisty South's revenue previously discussed as compared to the second quarter of 2021. In addition, subcontracted rail services costs were lower due to decreased throughput at the terminals.
Partially offsetting the decreases already mentioned were higher operating and maintenance costs at the Hardisty and Hardisty South terminals for increased operational supplies, fuel, and utility costs, primarily due to increased inflation rates. The second quarter 2021 SG&A cost includes services fees paid by Hardisty South to our sponsor related to a services agreement that was in place prior to the partnership's acquisition of Hardisty South. Upon the partnership's acquisition of Hardisty South, the services agreement between the acquired entities and the partnership sponsor was terminated, and a similar agreement was established between those entities and the partnership. This results in the service fee income being allocated to the partnership and therefore offsetting the expense in Hardisty South for periods subsequent to the acquisition date of April 1.
Partially offsetting this decrease were higher corporate SG&A costs incurred in the second quarter of 2022 for legal and consulting fees related to the acquisition of Hardisty South of approximately $2.6 million. Net income decreased in the second quarter of 2022 as compared to the second quarter of 2021, primarily because of the operating factors already discussed, coupled with higher interest expense incurred during the second quarter of 2022, resulting from higher interest rates and a higher balance of debt outstanding during the quarter, partially offset by a decrease in commitment fees. Partially offsetting the decrease was a non-cash gain associated with the partnership's interest rate derivatives recognized in the second quarter of 2022 as compared to a non-cash loss recognized during the same period of 2021.
Net cash provided by operating activities for the quarter decreased 74% relative to the second quarter of 2021, primarily due to the 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 both decreased by 29% for the quarter relative to the second quarter of 2021. The decrease in adjusted EBITDA and DCF was primarily a result of the factors already discussed, including the impact from $2.6 million of transaction expenses incurred during the second quarter. Additionally, DCF was positively impacted by lower cash paid for interest, taxes, and maintenance CapEx during the quarter. At the end of June 2022, contracts representing approximately 26% of the combined Hardisty Terminal's capacity expired.
In addition, the remaining contracted capacity at the Stroud Terminal also expired at the end of 2022. As Dan mentioned, management is focused on renewing, extending, or replacing the agreements that have expired or are set to expire at the Hardisty and Stroud terminals in mid-2022 and mid-2023 with new multiyear take-or-pay commitments and is actively engaged with current and new customers. Given current and expected market conditions, the partnership's estimates for future heavy crude oil production in Western Canada and the current availability of egress alternatives, management believes that the partnership will have the opportunity to renew and extend or replace the agreements that recently expired during the second half of this year or early in 2023.
As of June 30, the partnership had approximately $4 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $43 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 second quarter, the partnership had borrowings of $232 million under its revolving credit facility, and the partnership was in compliance with its financial covenants as of June 30. The partnership's acquisition of Hardisty South is treated as a material acquisition under the terms of its senior secured credit facility, and as a result, the partnership's borrowing capacity will be limited to 5x its 12-month trailing consolidated EBITDA through December 31, 2022, at which point it will revert back to 4.5x the partnership's 12-month trailing consolidated EBITDA.
As such, the borrowing capacity on the senior secured credit facility, including the unrestricted cash and cash equivalents, was approximately $47 million as of June 30. Subsequent to the quarter end, on July 27, the partnership settled its existing interest rate swap for proceeds of $7.7 million. The partnership plans to use the proceeds from this settlement to pay down outstanding debt on its senior secured credit facility. The partnership simultaneously entered into a new interest rate swap that was made effective as of August 17, and the new interest rate swap is a five-year contract with the same $175 million notional value that fixes the secured overnight financing rate, or SOFR, to approximately 2.7% for the notional value of the swap agreement instead of the variable rate that the partnership pays under its senior secured credit facility.
For the second quarter, the partnership declared a quarterly cash distribution of $0.1235 per unit, or $0.494 per unit on an annualized basis, the same as the amount distributed in the prior quarter. The distribution is payable on August twelfth to unitholders of record at the close of business on August third. The partnership's 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, extend or replace its existing customer agreements at the Hardisty and Stroud terminals, as well as recent changes to the market.
As Dan mentioned, we're extremely focused on extending or renewing our commercial agreements at our terminals as well as our current growth initiatives at the DRU and USD Clean Fuels, and we look forward to sharing more updates with you in the future. With that, I'd like to turn the call back over to Dan.
Thanks, Adam. Now I'll allow Brad to give us a detailed update on the WCSB market, recent market events, and an update on our commercials. Brad?
Dan, thank you. I'll start with a market update on Canadian fundamentals. There's a couple of headwinds that are negatively impacting WCS values currently. One headline, of course, is the SPR release, the Strategic Petroleum Reserve release, totaling approximately 200 million barrels, which was announced beginning November 21 of last year and will be released through October of this year. This equates to an additional 765 thousand barrels a day of supply in the U.S. Gulf Coast. Naturally, there are competing alternatives for Canadian heavy in the Gulf Coast, and that has driven replacement costs for heavy alternatives and ultimately WCS values in the Gulf Coast lower. That naturally impacts the cost or the value of WCS at Hardisty as well.
Current values are WCS minus $21-$21.5 at Hardisty and $9-$9.5 discounted to WTI in the U.S. Gulf Coast. Again, that's simply because the release of SPR barrels created competitive alternatives. Additionally, high nat gas prices and hydrogen prices make upgrading heavy sour grades more expensive. This translates to cheaper WCS values to ensure upgrading margins are positive and WCS is competitive for upgrading purposes. In addition, we see the Canadian market in transition. Earlier this year, inventories were at historical low levels due primarily to the shut-in of production as a function of extremely cold temperatures during winter.
Since the beginning of this year, inventories have begun to build, and that's driven by that production coming back online, but more importantly, new production that was announced to come on in 2022 is now revealing itself. Inventories now are in normal type levels, and heading into the second half of the year, our expectation is that inventories will build from here. Additionally, in August, apportionment on the two major export pipelines were announced, and our expectation is that given this new supply, that's coming online, and given the egress options that are available that we will see apportionment continue through the balance of the year.
To remind folks on the phone when barrels are apportioned, effectively a percent of the production in Canada is stranded in Canada, and that ultimately leads to price discounting and inventory builds until inventories get to a level where prices have to discount to incent crude by rail activity. This pattern of supply eventually exceeding pipe takeaway capacity and driving the demand for a crude by rail egress solution has been part of Canadian history and ultimately has led to the investment in assets like the USD assets at Hardisty and Stroud to simply ensure barrels don't get stranded and that the industry in total avoids the extreme price discounts that can reveal themselves during these macro periods.
Naturally, this environment is supportive for our efforts to renew, extend, and replace agreements that have expired at Hardisty and Stroud, not only with our existing customer but with potentially new customers. Our expectation is that over the balance of this year that our negotiations with these customers will likely lead to renew and extend and/or replacement contracts. From a DRU commercialization standpoint, I mean, not recently. I would say over the last six months, we've accomplished two key milestones. One is, the DRU and PAT capability and performance are exceeding original plan. Then secondly, from a commercial standpoint, the value that we had theorized would drive the investments of the DRU and PAT have also exceeded or met original plans.
As a reminder, that is the diluent cost savings at origin, the competitive rates with the railroads as a function of safety and environmental benefits, and then the destination value that our customer is seeing as a function of customer blending benefits. Given these milestones and potential advantages relative to egress alternatives, we are focused on transitioning 100% of our rail capacity to support the growth of our DRUbit by Rail network. As mentioned by both Dan and Adam, we're in advanced negotiations with our current customer to grow and extend our existing agreement, and we're in similar type negotiations and discussions with new customers given DRUbit by Rail's advantaged egress economics relative to pipe alternatives.
We look forward to making announcements hopefully soon on advancing both of those. Finally, moving on to our efforts from a USD Clean Fuels standpoint and development standpoint. Recently the Inflation Reduction Act, which was introduced into Congress, highlights the type of tailwinds that are driving the continued need for advanced biofuels growth and solutions. In particular, this new proposal will invest approximately $370 billion in energy security and climate change programs over the next 10 years. The objective of this program is to lower energy costs, increase cleaner production, and reduce carbon emissions. They do this by providing grant funding for biofuel logistics, providing and introducing sustainable aviation fuel credits, which are new, extending the blender tax credits for renewable diesel and biodiesel, and clean fuel production credits.
Maybe more importantly, the agreement calls for comprehensive permitting reform, with the objective of unlocking domestic energy projects that reduce costs for consumers and help our long-term emissions goal here in the U.S. As we know and part of our vision is policy drives incentives, as I've stated above, and then incentives drive investment. As clean fuels policies transition, this will continue to drive demand for advanced biofuels. In that regard, we are in a number of advanced negotiations with existing and potential new customers in support of building infrastructure solutions that support renewable diesel, biodiesel, sustainable aviation fuel, ethanol, and renewable diesel feeds in geographic areas that support current and future
Policy and incentives. We are very excited about the potential of this space. As I mentioned in our last quarterly, we have uniquely organized to pursue these, and we look forward to sharing future announcements on progress in this area. Dan? That's it.
Thanks, Brad. With that, we'll open the call up. Ladies and gentlemen, this is the operator asking you to please remain online. You are still connected to your conference call. We will resume momentarily. Thank you. Please remain online. Ladies and gentlemen, at this time, if you would like to submit a question, simply press. Ladies and gentlemen, we apologize for the noise interruption. At this time, if you would have a question, please press star and one on your telephone keypad. Pressing star and one will place your line into the queue. Also, a friendly reminder that if you're joining us today on a speakerphone, please return to your handset. Ladies and gentlemen, this is the operator. We apologize for the noise interruption. At this time, if you would like to ask a question, simply press star and one on your telephone keypad.
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We'll take our first question from Steve Ferazani with Sidoti. Your line is open.
Good morning, everyone. Hopefully we can get these questions in. Wanted to ask about the expected financial impact of the non-renewals into 3Q. I mean, if I walk through the volumes you're talking about, looks like that accounts for about $4 million of EBITDA in Q1, if I look at your page 44 of your slide deck. Is that reasonable to think that that's $4 million coming out of 3Q, given where things stand right now?
Hey, Steve, it's Adam. Thanks for bearing with us through that. Not sure what happened there. Appreciate you paying attention to the details. You know, as we mentioned, about 26% of the combined Hardisty terminals capacity expired on June thirtieth, and the remaining contracted capacity of Stroud expired on June thirtieth. We can't give exact amounts of adjusted EBITDA because by doing so, we would be sharing some commercially sensitive information with regard to our customers. I think directionally, the percentages that we've given are a reasonable starting point to calculate the loss of EBITDA. I think by using the investor presentation, using the percentages, I think that's a good way to approach it.
When I think about the impact of Hardisty South on the quarter, obviously, sequentially, your EBITDA was up and DCF was up even with the $2.6 million in one-time costs. When we look at, you know, when you announced the deal, you guided for 2023 EBITDA, and you gave a pretty wide range of $14 million-$18 million. Can you give any kind of sense of where you are on a run rate now or any kind of color? I know you're contractually, it's challenging, but can you give us any kind of sense of the near-term contribution for those added assets?
Sure. That's a good question. I mean, as far as that guidance was given with regard to 2023. As far as 2023, we still feel very good about the macro, as Brad mentioned. We feel good about the direction it's going. I think it's safe to say we feel good about our strategically located assets and how they fit into the larger picture in 2023. The underlying macro supports you know, directionally where we think we'll be. We're not giving guidance for 2023 at this point or a run rate.
With regard to 2022, I think, you know, just based on the information we shared on the percentages of the volumes around Hardisty and the remaining capacity at Stroud, you know, I think again, directionally, I think that's the right way to approach this. Take a look at our investor presentation or look at the percentages. I will also say, you know, I think keep in mind, Q3 will be a little bit noisy as well, because we did unwind the interest rate swap, and we received about $7.7 million of proceeds, and that will be counted as adjusted EBITDA next quarter. Other than that, I think we feel good about 2023.
I think we're gonna continue to evaluate this on a quarterly basis, you know, based on further commercial progress and where the market sits at the time, and we'll continue to give you updates and hopefully as much guidance as we can.
Okay. Then I get one more in about the distribution, which you had, but you had been raising it pretty consistently. You still have a very high coverage ratio. Obviously, there's some added near-term uncertainty. When you're thinking about the distribution and reasons to not raise it, how much of that was. Obviously, you wanna start repaying that debt and deleverage pretty quickly out of that acquisition. Also, you wanna start replacing some of these or get renewals on these contracts. Is it a bit of both, one or the other, and what would get you back on track to raising the distributions again?
Yeah, I think, you know, our general view is directionally, we still think we're in a good place. You know, the timing with some one-off events that have happened around the world, you know, as Brad mentioned, have impacted certain spreads and have impacted kind of the timing and the speed at which we're increasing the distribution. So at this time, we're just gonna take it quarter by quarter, and it's up to the board's discretion as it always is. To answer your question, I think, you know, obviously, further commercial progress will help dictate how we manage the distribution policy going forward.
Okay, fair enough. Thanks, Adam. Thanks, Dan.
You bet. Thank you.
We have no further questions on the line at this time. I will turn the program back over to Mr. Dan Borgen for any additional or closing remarks.
I appreciate everybody on the call today. Steve, thanks so much for your questions. Always very thoughtful and insightful. Just a reminder, you know, we've been through the renewal and extend in some of these contracts two or three times, and so we feel confident. We always like going into the renewal cycle with obviously the strongest macro and market drivers that we can. We're seeing that building now with inventory builds in Canada with spreads widening. You know, we've got the, as Brad said, the headlines around the SPR releases, but that'll be adjusted into it, and we'll start to see more and more aggressive spreads. Therefore, as we see those, then we have a real kinda driver for renew and extend.
The customers that we've had have, for the most part, all renewed and extended previously, and so we look forward to being able to do that. Would we like to have them today? Certainly. Are we gonna have them next week? Probably not. We will look for them as the market continues to drive that to our strategically located assets, as Brad had mentioned. We feel very good about that. Been there, done that before, and we look forward to continue to keep the market updated as we renew and extend those. We are very bullish about our DRU and our plan of renewing and converting a lot of our DilBit to our DRUbit program.
Obviously, longer term, 10-year+ agreements, pipeline competitive, environmentally beneficial, lowering the CI carbon intensity by over 30%. We feel good about that as well. Moving into our clean fuels business and transitioning more into our cleaner side of the business, we really feel good about that growth strategy and where we're headed there and the customers, the investment-grade customers that we have for that program. Anyway, I just wanted to reiterate that and summarize that at the end of the call here. We appreciate everybody on the call. We appreciate the market support, and we look forward to announcements in the short term. Thanks again.
This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful day.