NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
USD Partners LP and its consolidated subsidiaries, collectively referred to herein as we, us, our, the Partnership and USDP, is a fee-based, growth-oriented master limited partnership formed in 2014 by US Development Group, LLC, or USD, through its wholly-owned subsidiary, USD Group LLC, or USDG. We were formed 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 facilitate the transportation of heavy crude oil from Western Canada to key demand centers across North America. Our operations include railcar loading and unloading, storage and blending in onsite tanks, inbound and outbound pipeline connectivity, truck transloading, as well as other related logistics services. We also provide our customers with leased railcars and fleet services to facilitate the transportation of liquid hydrocarbons by rail. We do not generally 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 such arrangements to be at fixed prices where we do not take commodity price exposure.
A substantial amount of the operating cash flows related to the terminal services that we provide are generated from take-or-pay contracts with minimum monthly commitment fees 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.
On April 6, 2022, we completed the acquisition of 100% of the entities owning the Hardisty South Terminal assets from USDG, exchanged our sponsor’s economic general partner interest in us for a non-economic general partner interest and eliminated our sponsor’s incentive distribution rights, or IDRs, for a total consideration of $75 million in cash and 5,751,136 common units, that was made effective as of April 1, 2022. The acquisition was determined to be a business combination of entities under common control. Refer to Note 3. Hardisty South Terminal Acquisition for more information. The entities acquired in the Hardisty South acquisition have been included in our Terminalling Services segment. Basis of Presentation
Our accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for interim consolidated financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and disclosures required by GAAP for complete consolidated financial statements.
Our unaudited interim consolidated financial statements and related notes have been retrospectively recast to include the pre-acquisition results of the Hardisty South Terminal acquisition because the acquisition represented a business combination between entities under common control. We recorded the assets and liabilities acquired in the acquisition at their historical carrying amounts.
In the opinion of our management, our unaudited interim consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, which our management considers necessary to present fairly our financial position as of September 30, 2022 and December 31, 2021, our results of operations for the three and nine months ended September 30, 2022 and 2021, and our cash flows for the nine months ended September 30, 2022 and 2021. Our results of operations for the three and nine months ended September 30, 2022
and 2021 should not be taken as indicative of the results to be expected for the full year due to fluctuations in the supply of and demand for crude oil and biofuels, timing and completion of acquisitions, if any, changes in the fair market value of our derivative instruments and the impact of fluctuations in foreign currency exchange rates. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto presented in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Going Concern
We evaluate at each annual and interim period whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. Our evaluation is based on relevant conditions and events that are known and reasonably knowable at the date that the consolidated financial statements are issued. The maturity date of our Credit Agreement (as defined below) is November 2, 2023. As a result of the maturity date being within 12 months after the date that these financial statements were issued, the amounts due under our Credit Agreement have been included in our going concern assessment. Our ability to continue as a going concern is dependent on the refinancing or the extension of the maturity date of our Credit Agreement. If we are unable to refinance or extend the maturity date of our Credit Agreement, the Company likely would not have sufficient cash on hand or available liquidity to repay the maturing credit facility debt as it becomes due.
In addition to the above, there is uncertainty in our ability to remain in compliance with the covenants contained in our Credit Agreement for a period of 12 months after the date these financials were issued. Although we continue to focus on renewing, extending or replacing expired or expiring customer agreements at the Hardisty and Stroud Terminals, unless we are able to renew, extend or replace such agreements more quickly than we currently expect as of the date of this report, the pricing environment improves relative to our current expectations or we sell non-core assets for cash, we are uncertain that we will be able to remain in compliance with the total leverage ratio covenant in the Credit Agreement for the second quarter of 2023. If we fail to comply with such covenant in the Credit Agreement, we would be in default under the terms of the Credit Agreement, which would entitle our lenders to declare all outstanding indebtedness thereunder to be immediately due and payable. The Company is currently not projected to have sufficient cash on hand or available liquidity to repay the Credit Agreement should the lenders not provide a waiver or amendment and declare all outstanding indebtedness thereunder to be immediately due and payable.
The conditions described above raise substantial doubt about our ability to continue as a going concern for the next 12 months.
We are currently in negotiations with our lenders regarding our ability to remain in compliance with the covenants in our Credit Agreement, and we are also pursuing plans to refinance our Credit Agreement or extend and amend the current obligations under the Credit Agreement, however we cannot make assurances that we will be successful in these efforts, or that any covenant waiver or refinancing or extension would be on terms favorable to us. Moreover, our ability to obtain covenant waivers, refinance our outstanding indebtedness or extend the maturity date of our Credit Agreement may be negatively impacted to the extent we are unable to renew, extend or replace our customer agreements at the Hardisty and Stroud Terminals or experience prolonged delays in doing so.
These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty, nor do they include adjustments to reflect the possible future effects of the recoverability and classification of recorded asset amounts and classifications of liabilities that might be necessary should we be unable to continue as a going concern.
Foreign Currency Translation
We conduct a substantial portion of our operations in Canada, which we account for in the local currency, the Canadian dollar. We translate most Canadian dollar denominated balance sheet accounts into our reporting currency, the U.S. dollar, at the end of period exchange rate, while most accounts in our statement of operations accounts are translated into our reporting currency based on the average exchange rate for each monthly period. Fluctuations in
the exchange rates between the Canadian dollar and the U.S. dollar can create variability in the amounts we translate and report in U.S. dollars.
Within these consolidated financial statements, we denote amounts denominated in Canadian dollars with “C$” immediately prior to the stated amount.
US Development Group, LLC
USD and its affiliates are engaged in designing, developing, owning and managing large-scale multi-modal logistics centers and energy-related infrastructure across North America. USD is the indirect owner of our general partner through its direct ownership of USDG and is currently owned by Energy Capital Partners, Goldman Sachs and certain of USD’s management team.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements Not Yet Adopted
Liabilities — Supplier Finance Programs (ASU 2022-04)
In September 2022, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2022-04, or ASU 2022-04, which amends Accounting Standards Codification Topic 405 to require that a buyer in a supplier finance program disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. To achieve that objective, the buyer should disclose qualitative and quantitative information about its supplier finance programs. In each annual reporting period, the buyer should disclose the key terms of the program, including a description of the payment terms and assets pledged as security or other forms of guarantees provided for the committed payment to the finance provider or intermediary. For the obligations that the buyer has confirmed as valid to the finance provider or intermediary the amount outstanding that remains unpaid by the buyer as of the end of the annual period, a description of where those obligations are presented in the balance sheet and a rollforward of those obligations during the annual period, including the amount of obligations confirmed and the amount of obligations subsequently paid should be disclosed. In each interim reporting period, the buyer should disclose the amount of obligations outstanding that the buyer has confirmed as valid to the finance provider or intermediary as of the end of the interim period.
The pronouncement is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. We do not expect to early adopt the provisions of this standard, nor do we anticipate that our adoption of this standard will have a material impact on our financial statements.
3. HARDISTY SOUTH TERMINAL ACQUISITION
On April 6, 2022, we completed the acquisition of 100% of the entities owning the Hardisty South Terminal assets from USDG, exchanged our sponsor’s economic general partner interest in us for a non-economic general partner interest and eliminated our sponsor’s incentive distribution rights, or IDRs, for a total consideration of $75 million in cash and 5,751,136 common units representing non-cash consideration, that was made effective as of April 1, 2022. The cash portion was funded with borrowings from our Credit Agreement. The Hardisty South Terminal, which commenced operations in January 2019, primarily consists of railcar loading facilities with capacity of one and one-half 120-railcar unit trains of transloading capacity per day, or approximately 112,500 barrels per day, of takeaway capacity.
We accounted for our acquisition of the Hardisty South Terminal as a business combination under common control, whereby we recognized the acquisition of identifiable assets at historical costs and recast our prior financial statements for all periods presented. The following tables show the adjustments and resulting balance for each affected line item in our consolidated statements of operations for the periods indicated:
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| Three Months Ended September 30, 2021 |
| USD Partners LP (1) | | Hardisty South Acquisition | | Eliminations (2) | | Consolidated Results |
| (in thousands) |
| Revenues | | | | | | | |
| Terminalling services | $ | 28,070 | | | $ | 5,681 | | | $ | — | | | $ | 33,751 | |
| Terminalling services — related party | 313 | | | 1,874 | | | (1,874) | | | 313 | |
| | | | | | | |
| | | | | | | |
| Fleet leases — related party | 984 | | | — | | | — | | | 984 | |
| Fleet services | — | | | — | | | — | | | — | |
| Fleet services — related party | 227 | | | — | | | — | | | 227 | |
| Freight and other reimbursables | 170 | | | 3 | | | — | | | 173 | |
| | | | | | | |
| Total revenues | 29,764 | | | 7,558 | | | (1,874) | | | 35,448 | |
| Operating costs | | | | | | | |
| Subcontracted rail services | 3,693 | | | 949 | | | — | | | 4,642 | |
| Pipeline fees | 6,031 | | | 2,400 | | | — | | | 8,431 | |
| Freight and other reimbursables | 170 | | | 3 | | | — | | | 173 | |
| Operating and maintenance | 2,538 | | | 129 | | | — | | | 2,667 | |
| Operating and maintenance — related party | 1,959 | | | — | | | (1,874) | | | 85 | |
| Selling, general and administrative | 2,596 | | | 195 | | | — | | | 2,791 | |
| Selling, general and administrative — related party | 1,649 | | | 3,522 | | | | | 5,171 | |
| | | | | | | |
| Depreciation and amortization | 5,604 | | | 265 | | | — | | | 5,869 | |
| Total operating costs | 24,240 | | | 7,463 | | | (1,874) | | | 29,829 | |
| Operating income | 5,524 | | | 95 | | | — | | | 5,619 | |
| Interest expense | 1,480 | | | 87 | | | — | | | 1,567 | |
| Gain associated with derivative instruments | (110) | | | — | | | — | | | (110) | |
| Foreign currency transaction loss (gain) | 294 | | | (348) | | | — | | | (54) | |
| Other expense, net | 3 | | | 1 | | | — | | | 4 | |
| Income before income taxes | 3,857 | | | 355 | | | — | | | 4,212 | |
| Provision for income taxes | 49 | | | 30 | | | — | | | 79 | |
| Net income | $ | 3,808 | | | $ | 325 | | | $ | — | | | $ | 4,133 | |
| | | | | | | |
| | | | | | | |
(1)As previously reported in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021.
(2)Represents business transactions between USDP and Hardisty South, whereby Hardisty South provided terminalling services for a third-party customer of USDP for contracted capacity that exceeded the transloading capacity that was available.
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| Nine Months Ended September 30, 2021 |
| USD Partners LP (1) | | Hardisty South Acquisition | | Eliminations (2) | | Consolidated Results |
| (in thousands) |
| Revenues | | | | | | | |
| Terminalling services | $ | 87,167 | | | $ | 76,696 | | | $ | — | | | $ | 163,863 | |
| Terminalling services — related party | 2,527 | | | 6,065 | | | (6,065) | | | 2,527 | |
| | | | | | | |
| | | | | | | |
| Fleet leases — related party | 2,951 | | | — | | | — | | | 2,951 | |
| Fleet services | 24 | | | — | | | — | | | 24 | |
| Fleet services — related party | 682 | | | — | | | — | | | 682 | |
| Freight and other reimbursables | 533 | | | 8 | | | — | | | 541 | |
| | | | | | | |
| Total revenues | 93,884 | | | 82,769 | | | (6,065) | | | 170,588 | |
| Operating costs | | | | | | | |
| Subcontracted rail services | 10,357 | | | 3,163 | | | — | | | 13,520 | |
| Pipeline fees | 18,475 | | | 27,522 | | | — | | | 45,997 | |
| Freight and other reimbursables | 533 | | | 8 | | | — | | | 541 | |
| Operating and maintenance | 7,972 | | | 678 | | | — | | | 8,650 | |
| Operating and maintenance — related party | 6,150 | | | — | | | (6,065) | | | 85 | |
| Selling, general and administrative | 8,063 | | | 706 | | | — | | | 8,769 | |
| Selling, general and administrative — related party | 4,951 | | | 49,590 | | | | | 54,541 | |
| | | | | | | |
| Depreciation and amortization | 16,575 | | | 803 | | | — | | | 17,378 | |
| Total operating costs | 73,076 | | | 82,470 | | | (6,065) | | | 149,481 | |
| Operating income | 20,808 | | | 299 | | | — | | | 21,107 | |
| Interest expense | 4,806 | | | 422 | | | — | | | 5,228 | |
| Gain associated with derivative instruments | (2,468) | | | — | | | — | | | (2,468) | |
| Foreign currency transaction loss (gain) | 192 | | | (1,035) | | | — | | | (843) | |
| Other expense (income), net | (13) | | | 1 | | | — | | | (12) | |
| Income before income taxes | 18,291 | | | 911 | | | — | | | 19,202 | |
| Provision for income taxes | 439 | | | 220 | | | — | | | 659 | |
| Net income | $ | 17,852 | | | $ | 691 | | | $ | — | | | $ | 18,543 | |
| | | | | | | |
| | | | | | | |
(1)As previously reported in our Quarterly Report on Form 10-Q for the nine months ended September 30, 2021.
(2)Represents business transactions between USDP and Hardisty South, whereby Hardisty South provided terminalling services for a third-party customer of USDP for contracted capacity that exceeded the transloading capacity that was available.
We recorded a cumulative adjustment totaling $2.3 million to the January 1, 2021 opening balance of our General Partner’s capital account associated with the recast of our financial statements due to our acquisition of the Hardisty South terminal entities.
4. NET INCOME PER LIMITED PARTNER INTEREST
Our net income is attributed to limited partners, in accordance with their respective ownership percentages. For periods prior to the cancellation of the IDRs and conversion of the General Partner units to a non-economic General Partner interest that resulted from the acquisition of the Hardisty South entities that became effective April 1, 2022, we used the two-class method when calculating the net income per unit applicable to limited partners, because we had more than one type of participating securities. For the prior periods, the classes of participating securities included Common Units, General Partner Units and IDRs. Prior to the acquisition, our net earnings were
allocated between the limited and general partners in accordance with our partnership agreement. As a result of the Hardisty South Terminal acquisition, the general partner units no longer participate in earnings or distributions, including IDRs. Our recast net income includes earnings related to the Hardisty South entities prior to our acquisition, which have been allocated to the General Partner.
We determined basic and diluted net income per limited partner unit as set forth in the following tables:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, 2022 |
| | Common
Units | | | | | | General
Partner
Units | | Total |
| | (in thousands, except per unit amounts) |
| Net loss attributable to limited partner interests in USD Partners LP | | $ | (69,353) | | | | | | | $ | — | | | $ | (69,353) | |
Less: Distributable earnings (1) | | 4,292 | | | | | | | — | | | 4,292 | |
| Distributions in excess of earnings | | $ | (73,645) | | | | | | | $ | — | | | $ | (73,645) | |
Weighted average units outstanding (2) | | 33,380 | | | | | | | — | | | 33,380 | |
Distributable earnings per unit (3) | | $ | 0.13 | | | | | | | | | |
Overdistributed earnings per unit (4) | | (2.21) | | | | | | | | | |
Net loss per limited partner unit (basic and diluted) (5) | | $ | (2.08) | | | | | | | | | |
(1) Represents the distributions payable for the period based upon the quarterly distribution amounts of $0.1235 per unit or $0.494 per unit on an annualized basis. Amounts presented for each class of units include a proportionate amount of the $169 thousand distributable to holders of the Equity classified Phantom Units pursuant to the distribution equivalent rights granted under the USD Partners LP 2014 Amended and Restated Long-Term Incentive Plan.
(2) Represents the weighted average units outstanding for the period.
(3) Represents the total distributable earnings divided by the weighted average number of units outstanding for the period.
(4) Represents the distributions in excess of earnings divided by the weighted average number of units outstanding.
(5) Our computation of net loss per limited partner unit excludes the effects of 1,368,372 equity-classified phantom unit awards outstanding as they were anti-dilutive for the period presented.
.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, 2021 |
| | Common
Units | | | | | | General
Partner
Units | | Total |
| | (in thousands, except per unit amounts) |
Net income attributable to general and limited partner interests in USD Partners LP (1) | | $ | 3,744 | | | | | | | $ | 389 | | | $ | 4,133 | |
Less: Distributable earnings (2) | | 3,387 | | | | | | | 58 | | | 3,445 | |
| Excess net income | | $ | 357 | | | | | | | $ | 331 | | | $ | 688 | |
Weighted average units outstanding (3) | | 27,225 | | | | | | | 461 | | | 27,686 | |
Distributable earnings per unit (4) | | $ | 0.12 | | | | | | | | | |
Underdistributed earnings per unit (5) | | 0.01 | | | | | | | | | |
Net income per limited partner unit (basic and diluted) (6) | | $ | 0.13 | | | | | | | | | |
(1)Represents net income allocated to each class of units based on the actual ownership of the Partnership during the period.
(2)Represents the distributions paid for the period based upon the quarterly distribution amount of $0.1185 per unit or $0.474 per unit on an annualized basis. Amounts presented for each class of units include a proportionate amount of the $164 thousand distributed to holders of the Equity classified Phantom Units pursuant to the distribution equivalent rights granted under the USD Partners LP 2014 Amended and Restated Long-Term Incentive Plan.
(3)Represents the weighted average units outstanding for the period.
(4)Represents the total distributable earnings divided by the weighted average number of units outstanding for the period.
(5)Represents the additional amount per unit necessary to distribute the excess net income for the period among our limited partners and our general partners according to the distribution formula for available cash as set forth in our partnership agreement.
(6)Our computation of net income per limited partner unit excludes the effects of 1,409,713 equity-classified phantom unit awards outstanding as they were anti-dilutive for the period presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, 2022 |
| | Common
Units | | | | | | General
Partner
Units | | Total |
| | (in thousands, except per unit amounts) |
Net loss attributable to general and limited partner interests in USD Partners LP (1) | | $ | (56,706) | | | | | | | $ | (1,369) | | | $ | (58,075) | |
Less: Distributable earnings (2) | | 12,217 | | | | | | | 3 | | | 12,220 | |
| Distributions in excess of earnings | | $ | (68,923) | | | | | | | $ | (1,372) | | | $ | (70,295) | |
Weighted average units outstanding (3) | | 31,421 | | | | | | | 152 | | | 31,573 | |
Distributable earnings per unit (4) | | $ | 0.39 | | | | | | | | | |
Overdistributed earnings per unit (5) | | (2.19) | | | | | | | | | |
Net loss per limited partner unit (basic and diluted) (6) | | $ | (1.80) | | | | | | | | | |
(1)Represents net loss allocated to each class of units based on the actual ownership of the Partnership during the period.
(2)Represents the per unit distribution paid of $0.1235 per unit for both the three months ended March 31, 2022 and June 30, 2022, and the $0.1235 distributable for the three months ended September 30, 2022. Amounts presented for each class of units include a proportionate amount of the $337 thousand distributed and $169 thousand distributable to holders of the Equity classified Phantom Units pursuant to the distribution equivalent rights granted under the USD Partners LP 2014 Amended and Restated Long-Term Incentive Plan.
(3)Represents the weighted average units outstanding for the period.
(4)Represents the total distributable earnings divided by the weighted average number of units outstanding for the period.
(5)Represents the distributions in excess of earnings divided by the weighted average number of units outstanding.
(6)Our computation of net loss per limited partner unit excludes the effects of 1,368,372 equity-classified phantom unit awards outstanding as they were anti-dilutive for the period presented.
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| | For the Nine Months Ended September 30, 2021 |
| | Common
Units | | | | | | General
Partner
Units | | Total |
| | (in thousands, except per unit amounts) |
Net income attributable to general and limited partner interests in USD Partners LP (1) | | $ | 17,553 | | | | | | | $ | 990 | | | $ | 18,543 | |
Less: Distributable earnings (2) | | 9,955 | | | | | | | 168 | | | 10,123 | |
| Excess net income | | $ | 7,598 | | | | | | | $ | 822 | | | $ | 8,420 | |
Weighted average units outstanding (3) | | 27,161 | | | | | | | 461 | | | 27,622 | |
Distributable earnings per unit (4) | | $ | 0.37 | | | | | | | | | |
Underdistributed earnings per unit (5) | | 0.28 | | | | | | | | | |
Net income per limited partner unit (basic and diluted)(6) | | $ | 0.65 | | | | | | | | | |
(1)Represents net income allocated to each class of units based on the actual ownership of the Partnership during the period.
(2)Represents the per unit distribution paid of $0.1135 per unit for the three months ended March 31, 2021, the per unit distribution paid of $0.116 per unit for the three months ended June 30, 2021 and the per unit distribution paid of $0.1185 for the three months ended September 30, 2021. Amounts presented for each class of units include a proportionate amount of the $489 thousand distributed to holders of the Equity-classified Phantom Units pursuant to the distribution equivalent rights granted under the USD Partners LP 2014 Amended and Restated Long-Term Incentive Plan.
(3)Represents the weighted average units outstanding for the period.
(4)Represents the total distributable earnings divided by the weighted average number of units outstanding for the period.
(5)Represents the additional amount per unit necessary to distribute the excess net income for the period among our limited partners and our general partners according to the distribution formula for cash as set forth in our partnership agreement.
(6)Our computation of net income per limited partner unit excludes the effects of 1,409,713 equity-classified phantom unit awards outstanding as they were anti-dilutive for the period presented.
5. REVENUES
Disaggregated Revenues
We manage our business in two reportable segments: Terminalling services and Fleet services. Our segments offer different services and are managed accordingly. Our chief operating decision maker, or CODM, regularly reviews financial information about both segments in order to allocate resources and evaluate performance. As such, we have concluded that disaggregating revenue by reporting segments appropriately depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Refer to Note 14. Segment Reporting for our disaggregated revenues by segment. Additionally, the below tables summarize the geographic data for our revenues: | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
| U.S. | | Canada | | Total |
| (in thousands) |
Third party | $ | 2,505 | | | $ | 17,094 | | | $ | 19,599 | |
Related party | $ | 1,880 | | | $ | — | | | $ | 1,880 | |
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2021 |
| U.S. | | Canada | | Total |
| (in thousands) |
Third party | $ | 7,814 | | | $ | 26,110 | | | $ | 33,924 | |
Related party | $ | 1,524 | | | $ | — | | | $ | 1,524 | |
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| U.S. | | Canada | | Total |
| (in thousands) |
Third party | $ | 15,812 | | | $ | 69,574 | | | $ | 85,386 | |
Related party | $ | 5,620 | | | $ | — | | | $ | 5,620 | |
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 |
| U.S. | | Canada | | Total |
| (in thousands) |
Third party | $ | 25,306 | | | $ | 139,122 | | | $ | 164,428 | |
Related party | $ | 6,160 | | | $ | — | | | $ | 6,160 | |
Remaining Performance Obligations
The transaction price allocated to the remaining performance obligations associated with our Terminal and Fleet services agreements as of September 30, 2022 are as follows for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ending December 31, 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total |
| (in thousands) |
Terminalling Services (1) (2) | $ | 18,576 | | | $ | 55,731 | | | $ | 24,552 | | | $ | 23,345 | | | 23,345 | | | $ | 89,609 | | | $ | 235,158 | |
| Fleet Services | 299 | | | — | | | — | | | — | | | — | | | — | | | 299 | |
| Total | $ | 18,875 | | | $ | 55,731 | | | $ | 24,552 | | | $ | 23,345 | | | $ | 23,345 | | | $ | 89,609 | | | $ | 235,457 | |
(1)A significant portion of our terminal services agreements are denominated in Canadian dollars. We have converted the remaining performance obligations associated with these Canadian dollar-denominated contracts using the year-to-date average exchange rate of 0.7798 U.S. dollars for each Canadian dollar at September 30, 2022.
(2)Includes fixed monthly minimum commitment fees per contracts and excludes constrained estimates of variable consideration for rate-escalations associated with an index, such as the consumer price index, as well as any incremental revenue associated with volume activity above the minimum volumes set forth within the contracts.
We have applied the practical expedient that allows us to exclude disclosure of performance obligations that are part of a contract that has an expected duration of one year or less.
Deferred Revenue
Our deferred revenue is a form of a contract liability and consists of amounts collected in advance from customers associated with their terminal and fleet services agreements and deferred revenues associated with make-up rights, which will be recognized as revenue when earned pursuant to the terms of our contractual arrangements. We currently recognize substantially all of the amounts we receive for minimum volume commitments as revenue when collected, since breakage associated with these make-up rights is currently approximately 99% based on our expectations around usage of these options. Accordingly, we had $0.3 million deferred revenues at September 30, 2022 for estimated breakage associated with the make-up rights options we granted to our customers. In addition, we had $1.4 million deferred revenues associated with make-up rights at December 31, 2021.
We also have deferred revenue that represents cumulative revenue that has been deferred due to tiered billing provisions. In such arrangements, revenue is recognized using a blended rate based on the billing tiers of the agreement, as the services are consistently provided throughout the duration of the contractual arrangement, which we included in “Other current liabilities” and “Other non-current liabilities” on our consolidated balance sheets.
The following table presents the amounts outstanding on our consolidated balance sheets and changes associated with the balance of our deferred revenue for the nine months ended September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | Cash Additions for Customer Prepayments | | Balance Sheet Reclassification | | Revenue Recognized | | September 30, 2022 |
| | (in thousands) |
Deferred revenue (1) | | $ | 7,575 | | | $ | 3,482 | | | $ | — | | | $ | (7,575) | | | $ | 3,482 | |
| | | | | | | | | | |
Other current liabilities (2) | | $ | 6,755 | | | $ | — | | | $ | 5,168 | | | $ | (4,553) | | | $ | 7,370 | |
Other non-current liabilities (2) | | $ | 9,482 | | | $ | 88 | | | $ | (5,168) | | | $ | — | | | $ | 4,402 | |
(1) Includes deferred revenue of $0.3 million and $1.4 million at September 30, 2022 and December 31, 2021, respectively, for estimated breakage associated with the make-up right options we granted our customers as discussed above.
(2) Includes cumulative revenue that has been deferred due to tiered billing provisions included in certain of our Canadian dollar-denominated contracts, as discussed above. As such, the change in “Other current liabilities” has been decreased by $512 thousand and “Other non-current liabilities” presented has been decreased by $719 thousand due to the impact of the change in the end of period exchange rate between September 30, 2022 and December 31, 2021.
Deferred Revenue — Fleet Leases
Our deferred revenue also includes advance payments from customers of our Fleet services business, which will be recognized as Fleet leases revenue when earned pursuant to the terms of our contractual arrangements. We have included $0.4 million at September 30, 2022, in “Deferred revenue — related party” on our consolidated balance sheets associated with customer prepayments for our fleet lease agreements. We had no amounts at December 31, 2021. Refer to Note 8. Leases for additional discussion of our lease revenues. 6. RESTRICTED CASH
We include in restricted cash amounts representing a cash account for which the use of funds is restricted by a facilities connection agreement among us and Gibson Energy Inc., or Gibson, that we entered into during 2014 in connection with the development of our Hardisty Terminal. The collaborative arrangement is further discussed in Note 11. Collaborative Arrangement.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within our consolidated balance sheets to the amounts shown in our consolidated statements of cash flows for the specified periods: | | | | | | | | | | | |
| September 30, |
| 2022 | | 2021 |
| (in thousands) |
| Cash and cash equivalents | $ | 4,766 | | | $ | 5,708 | |
| Restricted Cash | 4,041 | | | 8,086 | |
| Total cash, cash equivalents and restricted cash | $ | 8,807 | | | $ | 13,794 | |
7. PROPERTY AND EQUIPMENT
Our property and equipment is comprised of the following asset classifications as of the dates indicated: | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 | Estimated
Useful Lives
(Years) |
| (in thousands) |
| Land | $ | 10,070 | | | $ | 10,298 | | N/A |
| Trackage and facilities | 106,959 | | | 147,810 | | 10-30 |
| Pipeline | 12,759 | | | 32,735 | | 20-30 |
| Equipment | 21,925 | | | 27,014 | | 3-20 |
| | | | |
| Furniture | 83 | | | 89 | | 5-10 |
| Total property and equipment | 151,796 | | | 217,946 | | |
| Accumulated depreciation | (44,911) | | | (60,953) | | |
Construction in progress (1) | 701 | | | 861 | | |
| Property and equipment, net | $ | 107,586 | | | $ | 157,854 | | |
(1)The amounts classified as “Construction in progress” are excluded from amounts being depreciated. These amounts represent property that has not been placed into productive service as of the respective consolidated balance sheet date.
Depreciation expense associated with property and equipment totaled $2.6 million and $2.7 million for the three months ended September 30, 2022 and 2021, respectively, and $7.9 million, for each of the nine months ended September 30, 2022 and 2021.
Stroud Terminal
We determined the expiration of a customer contract for terminal services at our Stroud Terminal was an event that required us to evaluate our Stroud Terminal asset group for impairment. Our projections of the undiscounted cash flows expected to be derived from the operation and disposition of the Stroud terminal asset group exceeded the carrying value of the asset group as of June 30, 2022, the date of our evaluation, indicating cash flows were expected to be sufficient to recover the carrying value of the Stroud Terminal asset group. We have not observed any events or circumstances subsequent to our analysis that would suggest the fair value of our Stroud Terminal is below the carrying amount as of September 30, 2022.
Casper Terminal
In September 2022, we determined that recurring periods where cash flow projections were not met due to adverse market conditions at our Casper Terminal was an event that required us to evaluate our Casper Terminal asset group for impairment.
We measured the fair value of our Casper terminal asset group by primarily relying on the cost approach. The income approach was considered in the context of our economic obsolescence analysis as part of the application of the cost approach. The sales comparison or market approach was used as the most appropriate methodology to derive the fair value of the land associated with the Casper terminal asset group. Our estimate of fair value required
us to use significant unobservable inputs representative of a Level 3 fair value measurement, including those discussed below.
The critical assumptions used in our cost approach impairment analysis include the following:
1) a range of 5 to 45 years to estimate the valuation useful life of the assets; and
2) a hold factor ranging from 3% to 20% representing estimated appraisal depreciation floors that were used to establish a minimal value for assets remaining in use.
As a result of the impairment analysis discussed above, we determined that the carrying value of the Casper Terminal asset group exceeded the fair value of the Casper terminal as of September 30, 2022, the date of our evaluation. As a result we have recognized a non-cash impairment loss of $36.0 million for the three and nine months ended September 30, 2022, to write down the property, plant and equipment of the terminal to its fair market value, the charge for which we have included in “Impairment of intangibles and long-lived assets” within our consolidated statements of operations. The Casper Terminal is included in our Terminalling services segment as reported in our segment results included in Note 14. Segment Reporting. 8. LEASES
Lessee
We have noncancellable operating leases for railcars, buildings, storage tanks, offices, railroad tracks, and land. | | | | | | | | | |
| | | Nine Months Ended September 30, 2022 |
Weighted-average discount rate | | | 5.3 | % |
Weighted average remaining lease term in years | | | 3.71 |
Our total lease cost consisted of the following items for the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands) |
| | | | | | | | |
Operating lease cost | | $ | 1,375 | | | $ | 1,514 | | | $ | 4,280 | | | $ | 4,501 | |
Short term lease cost | | 131 | | | 45 | | | 292 | | | 137 | |
Variable lease cost | | 4 | | | 7 | | | 35 | | | 34 | |
Sublease income | | (1,280) | | | (1,347) | | | (3,842) | | | (4,043) | |
Total | | $ | 230 | | | $ | 219 | | | $ | 765 | | | $ | 629 | |
The maturity analysis below presents the undiscounted cash payments we expect to make each period for property that we lease from others under noncancellable operating leases as of September 30, 2022 (in thousands):
| | | | | |
| 2022 | $ | 1,420 | |
| 2023 | 145 | |
| 2024 | 114 | |
| 2025 | 114 | |
| 2026 | 117 | |
Thereafter | 505 | |
Total lease payments | $ | 2,415 | |
Less: imputed interest | (227) | |
Present value of lease liabilities | $ | 2,188 | |
Lessor
We serve as an intermediary to assist our customers with obtaining railcars. In connection with our leasing of railcars from third parties, we simultaneously enter into lease agreements with our customers for noncancellable terms that are designed to recover our costs associated with leasing the railcars plus a fee for providing this service. In addition to these leases we also have lease income from storage tanks and lease income from our related party terminal services agreement associated with transloading renewable diesel at our West Colton Terminal that commenced in December 2021. Refer to Note 12. Transactions with Related Parties for additional discussion. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (in thousands, except weighted average term) |
Lease income (1) | | $ | 2,501 | | | $ | 2,078 | | | $ | 7,481 | | | $ | 6,432 | |
Weighted average remaining lease term in years | | | | | | | | 3.63 |
(1)Lease income presented above includes lease income from related parties. Refer to Note 12. Transactions with Related Parties for additional discussion of lease income from a related party. In addition, lease income as discussed above totaling $1.6 million and $1.1 million for the three months ended September 30, 2022 and 2021, and $4.7 million and $3.5 million for the nine months ended September 30, 2022 and 2021, respectively, is included in “Terminalling services” and “Terminalling services — related party” revenues on our consolidated statements of operations.
The maturity analysis below presents the undiscounted future minimum lease payments we expect to receive from customers each period for property they lease from us under noncancellable operating leases as of September 30, 2022 (in thousands):
| | | | | |
| 2022 | $ | 2,411 | |
| 2023 | 2,659 | |
| 2024 | 2,663 | |
| 2025 | 2,656 | |
| 2026 | 2,430 | |
| |
Total | $ | 12,819 | |
9. INTANGIBLE ASSETS
The composition, gross carrying amount and accumulated amortization of our identifiable intangible assets are as follows as of the dates indicated:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| (in thousands) |
| Carrying amount: | | | |
| Customer service agreements | $ | 3,832 | | | $ | 125,960 | |
| Other | — | | | 106 | |
| Total carrying amount | 3,832 | | | 126,066 | |
| Accumulated amortization: | | | |
| Customer service agreements | — | | | (77,115) | |
| Other | — | | | (65) | |
| Total accumulated amortization | — | | | (77,180) | |
| Total intangible assets, net | $ | 3,832 | | | $ | 48,886 | |
Amortization expense associated with intangible assets totaled $3.2 million for the three months ended September 30, 2022 and 2021, and $9.5 million for each of the nine months ended September 30, 2022 and 2021.
As previously discussed in Note 7. Property and Equipment, at September 30, 2022 we tested our Casper Terminal asset group for impairment due to recurring periods where cash flow projections were not met due to adverse market conditions at our Casper Terminal, which we determined was a triggering event that required us to evaluate our Casper Terminal asset group for impairment. Our estimate of fair value required us to use significant unobservable inputs representative of a Level 3 fair value measurement. We measured the fair value of our Casper Terminal asset group by primarily relying on the cost approach and allocated a portion of that impairment to intangible assets. We determined that the carrying amount of our Casper terminal reporting unit exceeded its fair value at September 30, 2022. Accordingly, we recognized an impairment loss of $35.6 million in our intangible assets and included this charge in “Impairment of intangibles and long-lived assets” within our consolidated statements of operations for the three and nine months ended September 30, 2022. At September 30, 2022, we had a remaining intangible asset balance of $3.8 million in our consolidated balance sheet.
10. DEBT
In November 2018, we amended and restated our revolving senior secured credit agreement, which we originally established in October 2014. We refer to the amended and restated senior secured credit agreement executed in November 2018, and as amended as described below, as the Credit Agreement and the original senior secured credit agreement as the Previous Credit Agreement. Our Credit Agreement amended and restated in its entirety our Previous Credit Agreement.
On October 29, 2021, we entered into an amendment to our Credit Agreement, with a syndicate of lenders. The amendment extends the maturity date of the agreement by one year. The aggregate borrowing capacity of the facility is $275 million and reflects the resignation of Citibank, N.A. as administrative agent and swing line lender under the facility and the appointment of Bank of Montreal as the successor administrative agent and swing line lender under the facility.
Our Credit Agreement matures on November 2, 2023. Our Credit Agreement provides us with the ability to request an additional one-year maturity date extension, subject to the satisfaction of certain conditions including consent of the lenders, and allows us the option to increase the maximum amount of credit available up to a total facility size of $390 million, subject to receiving increased commitments from lenders and satisfaction of certain conditions. The Credit Agreement includes financial covenants.
Our Credit Agreement and any issuances of letters of credit are available for working capital, capital expenditures, general partnership purposes and continue the indebtedness outstanding under the Previous Credit Agreement. The Credit Agreement includes an aggregate $20 million sublimit for standby letters of credit and a $20 million sublimit for swingline loans. Obligations under the Credit Agreement are guaranteed by our restricted subsidiaries (as such term is defined therein) and are secured by a first priority lien on our assets and those of our restricted subsidiaries, other than certain excluded assets.
In addition, prior to our acquisition, the Hardisty South entities had a Construction Loan Agreement and a corresponding Promissory Note, referred to collectively as the CLA, with BOKF, NA, dba Bank of Oklahoma which was originally established in September 2018. At December 31, 2021, the amended CLA had a maximum principal amount of $16.1 million and an interest rate of 3.25%. In March 2022, the agreement was amended to allow a related party subsidiary of our Sponsor, USD North America LP, to assume the outstanding obligations of the Hardisty South entities to BOK by becoming a co-borrower. As a result, the debt was transferred by the Hardisty South entities to USD North America LP in March 2022.
Our long-term debt balances included the following components as of the specified dates:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| (in thousands) |
Construction loan agreement - Bank of Oklahoma | $ | — | | | $ | 5,701 | |
| Credit Agreement | $ | 222,000 | | | $ | 168,000 | |
Less: Deferred financing costs, net | (1,180) | | | (2,080) | |
| Less: Long-term debt, current portion | — | | | (4,251) | |
| Total long-term debt, net | $ | 220,820 | | | $ | 167,370 | |
We determined the capacity available to us under the terms of our Credit Agreement was as follows as of the specified dates:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| (in millions) |
| Aggregate borrowing capacity under Credit Agreement | $ | 275.0 | | | $ | 275.0 | |
| Less: Amounts outstanding under the Credit Agreement | 222.0 | | | 168.0 | |
| | | |
| Available under the Credit Agreement based on capacity | $ | 53.0 | | | $ | 107.0 | |
Available under the Credit Agreement based on covenants (1) | $ | 53.0 | | | $ | 80.0 | |
(1) Pursuant to the terms of our Credit Agreement our borrowing capacity is limited to 4.5 times (5.0 times for the two quarters following a material acquisition) our trailing 12-month consolidated EBITDA, which equates to $56.6 million and $80.0 million of borrowing capacity available based on our covenants at September 30, 2022 and December 31, 2021, respectively. Our acquisition of Hardisty South, which was completed in April 2022, is treated as a material acquisition under the terms of our Credit Agreement. As a result, our borrowing capacity will be limited to 5.0 times our 12-month trailing consolidated EBITDA through December 31, 2022. However, at September 30, 2022, our available borrowings are limited by the capacity available under our Credit Agreement of $53.0 million, which is reflected in the table above.
The weighted average interest rate on our outstanding indebtedness was 5.31% and 2.39% at September 30, 2022 and December 31, 2021, respectively, without consideration to the effect of our derivative contracts. In addition to the interest we incur on our outstanding indebtedness, we paid commitment fees of 0.5% on unused commitments at September 30, 2022, which rate will vary based on our consolidated net leverage ratio, as defined in our Credit Agreement. At September 30, 2022, we were in compliance with the covenants set forth in our Credit Agreement.
Interest expense associated with our outstanding indebtedness was as follows for the specified periods: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands) |
| Interest expense on the Credit Agreement | $ | 2,855 | | | $ | 1,333 | | | $ | 5,826 | | | $ | 4,530 | |
| | | | | | | |
| Amortization of deferred financing costs | 271 | | | 234 | | | 899 | | | 698 | |
| Total interest expense | $ | 3,126 | | | $ | 1,567 | | | $ | 6,725 | | | $ | 5,228 | |
We had a interest payable of $1.0 million and $0.1 million at September 30, 2022 and December 31, 2021, respectively, recorded in “Other current liabilities” in our consolidated balance sheets.
11. COLLABORATIVE ARRANGEMENT
We entered into a facilities connection agreement in 2014 with Gibson under which Gibson developed, constructed and operates a pipeline and related facilities connected to our Hardisty Terminal. Gibson’s storage terminal is the exclusive means by which our Hardisty Terminal receives crude oil. Subject to certain limited exceptions regarding manifest train facilities, our Hardisty Terminal is the exclusive means by which crude oil from Gibson’s Hardisty storage terminal may be transported by rail. We remit pipeline fees to Gibson for the transportation of crude oil to our Hardisty Terminal based on a predetermined formula. Pursuant to our arrangement with Gibson, we incurred pipeline fees of $5.7 million and $8.4 million for the three months ended September 30, 2022 and 2021, respectively, and $22.6 million and $46.0 million for the nine months ended September 30, 2022 and 2021, respectively, which are presented as “Pipeline fees” in our consolidated statements of operations.
12. TRANSACTIONS WITH RELATED PARTIES
Nature of Relationship with Related Parties
USD is engaged in designing, developing, owning and managing large-scale multi-modal logistics centers and other energy-related infrastructure across North America. USD is also the sole owner of USDG and the ultimate parent of our general partner. USD is owned by Energy Capital Partners, Goldman Sachs and certain members of its management.
USDG is the sole owner of our general partner and at September 30, 2022, owns 17,308,226 of our common units representing a 51.9% limited partner interest in us. As of September 30, 2022, a value of up to $10.0 million of these common units were subject to a negative pledge supporting USDG’s revolving line of credit for working capital. USDG also provides us with general and administrative support services necessary for the operation and management of our business.
USD Partners GP LLC, our general partner, pursuant to our partnership agreement, is responsible for our overall governance and operations. However, our general partner has no obligation to, does not intend to and has not implied that it would, provide financial support to or fund cash flow deficits of the Partnership.
USD Marketing LLC, or USDM, is a wholly-owned subsidiary of USDG organized to promote contracting for services provided by our terminals and to facilitate the marketing of customer products.
USD Clean Fuels LLC, or USDCF, is a newly formed subsidiary of USD organized for the purpose of providing production and logistics solutions to the growing market for clean energy transportation fuels.
Omnibus Agreement
We are party to an omnibus agreement with USD, USDG and certain of their subsidiaries, or the Omnibus Agreement, including our general partner, pursuant to which we obtain and make payments for specified services provided to us and for out-of-pocket costs incurred on our behalf. We pay USDG, in equal monthly installments, the
annual amount USDG estimates will be payable by us during the calendar year for providing services for our benefit. The Omnibus Agreement provides that this amount may be adjusted annually to reflect, among other things, changes in the scope of the general and administrative services provided to us due to a contribution, acquisition or disposition of assets by us or our subsidiaries, or for changes in any law, rule or regulation applicable to us, which affects the cost of providing the general and administrative services. We also reimburse USDG for any out-of-pocket costs and expenses incurred on our behalf in providing general and administrative services to us. This reimbursement is in addition to the amounts we pay to reimburse our general partner and its affiliates for certain costs and expenses incurred on our behalf for managing our business and operations, as required by our partnership agreement.
The total amounts charged to us under the Omnibus Agreement for the three months ended September 30, 2022 and 2021 was $2.3 million and $1.6 million, respectively, and for the nine months ended September 30, 2022 and 2021 was $6.9 million and $5.0 million, respectively, which amounts are included in “Selling, general and administrative — related party” in our consolidated statements of operations. We had a payable balance of $0.5 million and $1.4 million with respect to these costs at September 30, 2022 and December 31, 2021, respectively, included in “Accounts payable and accrued expenses — related party” in our consolidated balance sheets.
USD Services Agreement
Prior to our acquisition of the Hardisty South entities, USD and the Hardisty South entities entered into a services agreement for the provision of services related to the management and operation of transloading assets. Services provided consisted of financial and administrative, information technology, legal, management, human resources, and tax, among other services. The Hardisty South entities incurred $3.2 million pursuant to the agreement for the nine months ended September 30, 2022 and $3.4 million and $49.3 million of expense for the three and nine months ended September 30, 2021, respectively, and these amounts are included in “Selling, general, and administrative — related party” in our consolidated statements of operations. There was no associated expense for the three months ended September 30, 2022 related to the agreement. Upon our acquisition of the Hardisty South entities effective April 1, 2022, this services agreement was cancelled and a similar agreement was established with us.
Marketing Services Agreement - Stroud Terminal
In connection with our purchase of the Stroud Terminal, we entered into a Marketing Services Agreement with USDM, or the Stroud Terminal MSA, in May 2017, whereby we granted USDM the right to market the capacity at the Stroud Terminal in excess of the original capacity of our initial customer in exchange for a nominal per barrel fee. USDM is obligated to fund any related capital costs associated with increasing the throughput or efficiency of the terminal to handle additional throughput. Upon expiration of our contract with the initial Stroud customer in June 2020, the same marketing rights now apply to all throughput at the Stroud Terminal in excess of the throughput necessary for the Stroud Terminal to generate Adjusted EBITDA that is at least equal to the average monthly Adjusted EBITDA derived from the initial Stroud customer during the 12 months prior to expiration. We also granted USDG the right to develop other projects at the Stroud Terminal in exchange for the payment to us of market-based compensation for the use of our property for such development projects. Any such development projects would be wholly-owned by USDG and would be subject to our existing right of first offer, or ROFO, with respect to midstream projects developed by USDG. Payments made under the Stroud Terminal MSA during the periods presented in this Report are discussed below under the heading “Related Party Revenue and Deferred Revenue.”
Marketing Services Agreement - West Colton Terminal
In June 2021, we entered into a new Terminal Services Agreement with USDCF that is supported by a minimum throughput commitment to USDCF from an investment-grade rated, refining customer as well as a performance guaranty from USD. The Terminal Services Agreement provides for the inbound shipment of renewable diesel on rail at our West Colton Terminal and the outbound shipment of the product on tank trucks to local consumers. The new Terminal Services Agreement has an initial term of five years and commenced on
December 1, 2021. We have modified our existing West Colton Terminal so that it now has the capability to transload renewable diesel in addition to the ethanol that it has been transloading.
In exchange for the new Terminal Services Agreement at our West Colton Terminal with USDCF discussed above, we also entered into a Marketing Services Agreement in June 2021, or the West Colton MSA, with USDCF pursuant to which we agreed to grant USDCF marketing and development rights pertaining to future renewable diesel opportunities associated with the West Colton Terminal in excess of the initial renewable diesel Terminal Services Agreement simultaneously executed in June 2021 between us and USDCF. These rights entitle USDCF to market all additional renewable diesel opportunities at the West Colton Terminal during the initial term of the USDCF agreement, and following the initial term of that agreement, all renewable diesel opportunities at the West Colton Terminal in excess of the throughput necessary to generate Adjusted EBITDA for the West Colton Terminal that is at least equal to the average monthly Adjusted EBITDA derived from the initial USDCF agreement during the 12 months prior to expiration of that agreement’s initial five-year term. Pursuant to the West Colton MSA, USDCF will fund any related capital costs associated with increasing the throughput or efficiency of the terminal to handle additional renewable diesel opportunities. In addition, we granted USDCF the right to develop other renewable diesel projects at the West Colton Terminal in exchange for a per barrel fee covering our associated operating costs. Any such development projects would be wholly-owned by USD and would be subject to the ROFO with respect to midstream infrastructure developed by USD. There have been no payments made under the West Colton MSA during the periods presented in this Report.
Contribution Agreement
On March 27, 2022, we entered into a Contribution, Conveyance and Assumption agreement, or the Contribution Agreement, with our sponsor to acquire 100% of the entities owning the Hardisty South Terminal assets from USDG as well as eliminate the IDRs and economic general partner interest of our Sponsor for a total consideration of $75.0 million in cash and 5,751,136 common units representing limited partner interests in us. We completed the transaction on April 6, 2022 with an effective date of April 1, 2022. Refer to Note 3. Hardisty South Terminal Acquisition for more information. Related Party Revenue and Deferred Revenue
We have agreements to provide terminal and fleet services for USDM with respect to our Hardisty Terminal and terminal services with respect to our Stroud Terminal, which also include reimbursement to us for certain out-of-pocket expenses we incur, discussed in more detail below. Additionally, as previously discussed, we also entered into a new Terminal Services Agreement at our West Colton Terminal with USDCF that became effective December 31, 2021.
In connection with our purchase of the Stroud Terminal, we also entered into a Marketing Services Agreement with USDM, as discussed above. Pursuant to the terms of the agreement, we receive a fixed amount per barrel from USDM in exchange for marketing the additional capacity available at the Stroud Terminal. Effective August 2021, upon the commencement of the contract changes associated with the successful completion of the DRU project, the existing customer elected to fully terminate the volume commitments attributable to USDM at the Stroud Terminal, and therefore effective August 2021, we are no longer receiving a fixed fee payment from USDM. However, the Marketing Services Agreement is still effective for any future customer contracts obtained by USDM at the Stroud Terminal.
We include amounts received pursuant to these arrangements as revenue in the table below under “Terminalling services — related party” in our consolidated statements of operations.
Additionally, we received revenue from USDM for the lease of 200 railcars pursuant to the terms of an existing agreement with us, which is included in the table below under “Fleet leases — related party” and “Fleet services — related party” and in our consolidated statements of operations.
Our related party revenues from USD and affiliates are presented below in the following table for the indicated periods:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands) |
| Terminalling services — related party | $ | 670 | | | $ | 313 | | | $ | 1,987 | | | $ | 2,527 | |
| Fleet leases — related party | 912 | | | 984 | | | 2,737 | | | 2,951 | |
| Fleet services — related party | 298 | | | 227 | | | 896 | | | 682 | |
| | | | | | | |
| $ | 1,880 | | | $ | 1,524 | | | $ | 5,620 | | | $ | 6,160 | |
We had the following amounts outstanding with USD and affiliates on our consolidated balance sheets as presented below in the following table for the indicated periods:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| (in thousands) |
Accounts receivable — related party | $ | 362 | | | $ | 2,051 | |
Accounts payable and accrued expenses — related party (1) | $ | 377 | | | $ | 12,707 | |
| | | |
Other current liabilities — related party (2) | $ | 16 | | | $ | 64 | |
| | | |
(1)Does not include amounts payable to related parties associated with the Omnibus Agreement, as discussed above. In addition, the recasted balance at December 31, 2021, includes $12.6 million of payables to related parties attributable to the Hardisty South entities prior to our acquisition.
(2)Represents a contract liability associated with a lease agreement with USDM and cumulative revenue that has been deferred due to tiered billing provisions.
Cash Distributions
We paid the following aggregate cash distributions to USDG as a holder of our common units and to USD Partners GP LLC as sole holder of our general partner interest and IDRs.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Distribution Declaration Date | | Record Date | | Distribution
Payment Date | | Amount Paid to
USDG | | Amount Paid to
USD Partners GP LLC |
| | | | | | (in thousands) |
| January 26, 2022 | | February 9, 2022 | | February 18, 2022 | | $ | 1,398 | | | $ | 56 | |
| April 21, 2022 | | May 4, 2022 | | May 13, 2022 | | $ | 1,484 | | | $ | — | |
| July 20, 2022 | | August 3, 2022 | | August 12, 2022 | | $ | 2,138 | | | $ | — | |
13. COMMITMENTS AND CONTINGENCIES
From time to time, we may be involved in legal, tax, regulatory and other proceedings in the ordinary course of business. We do not believe that we are currently a party to any such proceedings that will have a material adverse impact on our financial condition or results of operations.
14. SEGMENT REPORTING
We manage our business in two reportable segments: Terminalling services and Fleet services. The Terminalling services segment charges minimum monthly commitment fees under multi-year take-or-pay contracts to load and unload various grades of crude oil into and from railcars, as well as fixed fees per gallon to transload ethanol and renewable diesel from railcars, including related logistics services. We also facilitate rail-to-pipeline shipments of crude oil. Our Terminalling services segment also charges minimum monthly fees to store crude oil in tanks that are leased to our customers. The Fleet services segment provides customers with railcars and fleet services
related to the transportation of liquid hydrocarbons under multi-year, take-or-pay contracts. Corporate activities are not considered a reportable segment, but are included to present shared services and financing activities which are not allocated to our established reporting segments.
Our segments offer different services and are managed accordingly. Our CODM regularly reviews financial information about both segments in order to allocate resources and evaluate performance. Our CODM assesses segment performance based on the cash flows produced by our established reporting segments using Segment Adjusted EBITDA. Segment Adjusted EBITDA is a measure calculated in accordance with GAAP. We define Segment Adjusted EBITDA as “Net income (loss)” of each segment adjusted for depreciation and amortization, interest, income taxes, changes in contract assets and liabilities, deferred revenues, foreign currency transaction gains and losses and other items which do not affect the underlying cash flows produced by our businesses. As such, we have concluded that disaggregating revenue by reporting segments appropriately depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
| Terminalling
services | | Fleet
services | | Corporate | | Total |
| (in thousands) |
| Revenues | | | | | | | |
| Terminalling services | $ | 19,345 | | | $ | — | | | $ | — | | | $ | 19,345 | |
| Terminalling services — related party | 670 | | | — | | | — | | | 670 | |
| | | | | | | |
Fleet leases — related party | — | | | 912 | | | — | | | 912 | |
Fleet services | — | | | — | | | — | | | — | |
| Fleet services — related party | — | | | 298 | | | — | | | 298 | |
Freight and other reimbursables | 254 | | | — | | | — | | | 254 | |
| | | | | | | |
Total revenues | 20,269 | | | 1,210 | | | — | | | 21,479 | |
Operating costs | | | | | | | |
Subcontracted rail services | 2,742 | | | — | | | — | | | 2,742 | |
| Pipeline fees | 5,735 | | | — | | | — | | | 5,735 | |
Freight and other reimbursables | 254 | | | — | | | — | | | 254 | |
Operating and maintenance | 1,919 | | | 969 | | | — | | | 2,888 | |
Selling, general and administrative | 1,653 | | | 36 | | | 3,262 | | | 4,951 | |
| Impairment of intangibles and long-lived assets | 71,612 | | | — | | | — | | | 71,612 | |
Depreciation and amortization | 5,758 | | | — | | | — | | | 5,758 | |
Total operating costs | 89,673 | | | 1,005 | | | 3,262 | | | 93,940 | |
Operating income (loss) | (69,404) | | | 205 | | | (3,262) | | | (72,461) | |
Interest expense | 4 | | | — | | | 3,122 | | | 3,126 | |
| Gain associated with derivative instruments | — | | | — | | | (6,904) | | | (6,904) | |
Foreign currency transaction loss | 97 | | | 1 | | | 54 | | | 152 | |
Other income, net | (23) | | | (1) | | | (4) | | | (28) | |
Provision for income taxes | 473 | | | 73 | | | — | | | 546 | |
| Net income (loss) | $ | (69,955) | | | $ | 132 | | | $ | 470 | | | $ | (69,353) | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2021 |
| Terminalling
services | | Fleet
services | | Corporate | | Total |
| (in thousands) |
Revenues | | | | | | | |
| Terminalling services | $ | 33,751 | | | $ | — | | | $ | — | | | $ | 33,751 | |
| Terminalling services — related party | 313 | | | — | | | — | | | 313 | |
| | | | | | | |
Fleet leases — related party | — | | | 984 | | | — | | | 984 | |
Fleet services | — | | | — | | | — | | | — | |
| Fleet services — related party | — | | | 227 | | | — | | | 227 | |
Freight and other reimbursables | 138 | | | 35 | | | — | | | 173 | |
| Freight and other reimbursables — related party | — | | | — | | | — | | | — | |
Total revenues | 34,202 | | | 1,246 | | | — | | | 35,448 | |
Operating costs | | | | | | | |
Subcontracted rail services | 4,642 | | | — | | | — | | | 4,642 | |
| Pipeline fees | 8,431 | | | — | | | — | | | 8,431 | |
Freight and other reimbursables | 138 | | | 35 | | | — | | | 173 | |
Operating and maintenance | 1,759 | | | 993 | | | — | | | 2,752 | |
Selling, general and administrative | 4,922 | | | 63 | | | 2,977 | | | 7,962 | |
Impairment of intangibles and long-lived assets | — | | | — | | | — | | | — | |
Depreciation and amortization | 5,869 | | | — | | | — | | | 5,869 | |
Total operating costs | 25,761 | | | 1,091 | | | 2,977 | | | 29,829 | |
Operating income (loss) | 8,441 | | | 155 | | | (2,977) | | | 5,619 | |
Interest expense | 87 | | | — | | | 1,480 | | | 1,567 | |
| Gain associated with derivative instruments | — | | | — | | | (110) | | | (110) | |
Foreign currency transaction loss (gain) | (289) | | | (1) | | | 236 | | | (54) | |
Other expense (income), net | 5 | | | — | | | (1) | | | 4 | |
Provision for income taxes | 61 | | | 18 | | | — | | | 79 | |
| Net income (loss) | $ | 8,577 | | | $ | 138 | | | $ | (4,582) | | | $ | 4,133 | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| Terminalling
services | | Fleet
services | | Corporate | | Total |
| (in thousands) |
Revenues | | | | | | | |
| Terminalling services | $ | 84,872 | | | $ | — | | | $ | — | | | $ | 84,872 | |
| Terminalling services — related party | 1,987 | | | — | | | — | | | 1,987 | |
| | | | | | | |
Fleet leases — related party | — | | | 2,737 | | | — | | | 2,737 | |
Fleet services | — | | | — | | | — | | | — | |
| Fleet services — related party | — | | | 896 | | | — | | | 896 | |
Freight and other reimbursables | 514 | | | — | | | — | | | 514 | |
| | | | | | | |
Total revenues | 87,373 | | | 3,633 | | | — | | | 91,006 | |
Operating costs | | | | | | | |
Subcontracted rail services | 10,337 | | | — | | | — | | | 10,337 | |
| Pipeline fees | 22,625 | | | — | | | — | | | 22,625 | |
Freight and other reimbursables | 514 | | | — | | | — | | | 514 | |
Operating and maintenance | 6,788 | | | 2,934 | | | — | | | 9,722 | |
Selling, general and administrative | 8,090 | | | 126 | | | 12,876 | | | 21,092 | |
Impairment of intangibles and long-lived assets | 71,612 | | | — | | | — | | | 71,612 | |
Depreciation and amortization | 17,362 | | | — | | | — | | | 17,362 | |
Total operating costs | 137,328 | | | 3,060 | | | 12,876 | | | 153,264 | |
Operating income (loss) | (49,955) | | | 573 | | | (12,876) | | | (62,258) | |
Interest expense | 122 | | | — | | | 6,603 | | | 6,725 | |
| Gain associated with derivative instruments | — | | | — | | | (13,800) | | | (13,800) | |
Foreign currency transaction loss | 1,836 | | | 2 | | | 104 | | | 1,942 | |
Other income, net | (47) | | | (3) | | | (5) | | | (55) | |
Provision for income taxes | 884 | | | 121 | | | — | | | 1,005 | |
| Net income (loss) | $ | (52,750) | | | $ | 453 | | | $ | (5,778) | | | $ | (58,075) | |
| | | | | | | |
Total assets | $ | 126,669 | | | $ | 1,787 | | | $ | 10,219 | | | $ | 138,675 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 |
| Terminalling
services | | Fleet
services | | Corporate | | Total |
| (in thousands) |
Revenues | | | | | | | |
| Terminalling services | $ | 163,863 | | | $ | — | | | $ | — | | | $ | 163,863 | |
| Terminalling services — related party | 2,527 | | | — | | | — | | | 2,527 | |
| | | | | | | |
Fleet leases — related party | — | | | 2,951 | | | — | | | 2,951 | |
Fleet services | — | | | 24 | | | — | | | 24 | |
| Fleet services — related party | — | | | 682 | | | — | | | 682 | |
Freight and other reimbursables | 443 | | | 98 | | | — | | | 541 | |
| | | | | | | |
Total revenues | 166,833 | | | 3,755 | | | — | | | 170,588 | |
Operating costs | | | | | | | |
Subcontracted rail services | 13,520 | | | — | | | — | | | 13,520 | |
| Pipeline fees | 45,997 | | | — | | | — | | | 45,997 | |
Freight and other reimbursables | 443 | | | 98 | | | — | | | 541 | |
Operating and maintenance | 5,751 | | | 2,984 | | | — | | | 8,735 | |
Selling, general and administrative | 53,575 | | | 228 | | | 9,507 | | | 63,310 | |
Impairment of intangibles and long-lived assets | — | | | — | | | — | | | — | |
Depreciation and amortization | 17,378 | | | — | | | — | | | 17,378 | |
Total operating costs | 136,664 | | | 3,310 | | | 9,507 | | | 149,481 | |
Operating income (loss) | 30,169 | | | 445 | | | (9,507) | | | 21,107 | |
Interest expense | 422 | | | — | | | 4,806 | | | 5,228 | |
| Gain associated with derivative instruments | — | | | — | | | (2,468) | | | (2,468) | |
Foreign currency transaction gain | (786) | | | — | | | (57) | | | (843) | |
Other income, net | (10) | | | — | | | (2) | | | (12) | |
Provision for income taxes | 593 | | | 66 | | | — | | | 659 | |
| Net income (loss) | $ | 29,950 | | | $ | 379 | | | $ | (11,786) | | | $ | 18,543 | |
| | | | | | | |
Total assets | $ | 240,897 | | | $ | 5,548 | | | $ | 1,499 | | | $ | 247,944 | |
| | | | | | | |
Segment Adjusted EBITDA
The following tables present the computation of Segment Adjusted EBITDA, which is a measure determined in accordance with GAAP, for each of our segments for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| Terminalling Services Segment | 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands) |
| Net income (loss) | $ | (69,955) | | | $ | 8,577 | | | $ | (52,750) | | | $ | 29,950 | |
| | | | | | | |
Interest expense (income), net (1) | (18) | | | 87 | | | 97 | | | 421 | |
| Depreciation and amortization | 5,758 | | | 5,869 | | | 17,362 | | | 17,378 | |
| Provision for income taxes | 473 | | | 61 | | | 884 | | | 593 | |
Foreign currency transaction loss (gain) (2) | 97 | | | (289) | | | 1,836 | | | (786) | |
| Loss associated with disposal of assets | — | | | 6 | | | 3 | | | 11 | |
| | | | | | | |
| | | | | | | |
| Impairment of intangibles and long-lived assets | 71,612 | | | — | | | 71,612 | | | — | |
Non-cash deferred amounts (3) | (1,475) | | | (165) | | | (3,361) | | | 2,033 | |
Segment Adjusted EBITDA attributable to Hardisty South entities prior to acquisition (4) | — | | | (76) | | | (258) | | | (790) | |
| Segment Adjusted EBITDA | $ | 6,492 | | | $ | 14,070 | | | $ | 35,425 | | | $ | 48,810 | |
(1) Represents interest expense associated with the construction loan agreement that existed prior to our acquisition of the Hardisty South Terminal entities and interest income associated with our Terminalling Services segment that is included in “Other expense (income), net” in our consolidated statements of operations.
(2) Represents foreign exchange transaction amounts associated with activities between our U.S. and Canadian subsidiaries.
(3) Represents the change in non-cash contract assets and liabilities associated with revenue recognized at blended rates based on tiered rate structures in certain of our customer contracts and deferred revenue associated with deficiency credits that are expected to be used in the future prior to their expiration. Amounts presented are net of the corresponding prepaid Gibson pipeline fee that will be recognized as expense concurrently with the recognition of revenue.
(4) Segment adjusted EBITDA attributable to the Hardisty South entities for the three months ended March 31, 2022 and the three and nine months ended September 30, 2021 was excluded from the Terminalling Services Segment Adjusted EBITDA, as these amounts were generated by the Hardisty South entities prior to the Partnership’s acquisition.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| Fleet Services Segment | 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands) |
| Net income | $ | 132 | | | $ | 138 | | | $ | 453 | | | $ | 379 | |
| Provision for income taxes | 73 | | | 18 | | | 121 | | | 66 | |
Interest income (1) | (1) | | | — | | | (3) | | | — | |
Foreign currency transaction loss (gain) (2) | 1 | | | (1) | | | 2 | | | — | |
| Segment Adjusted EBITDA | $ | 205 | | | $ | 155 | | | $ | 573 | | | $ | 445 | |
| | | | | | | |
(1) Represents interest income associated with our Fleet Services segment that is included in “Other expense (income), net” in our consolidated statements of operations.
(2) Represents foreign exchange transaction amounts associated with activities between our U.S. and Canadian subsidiaries.
15. DERIVATIVE FINANCIAL INSTRUMENTS
Our net income, or loss, and cash flows are subject to fluctuations resulting from changes in interest rates on our variable rate debt obligations and from changes in foreign currency exchange rates, particularly with respect to the U.S. dollar and the Canadian dollar. We use interest rate derivative instruments, specifically swaps, on our
variable rate debt and to manage the risks associated with market fluctuations in interest rates to reduce volatility in our cash flows. We have not historically designated, nor do we expect to designate, our derivative financial instruments as hedges of the underlying risk exposure. All of our financial instruments are employed in connection with an underlying asset, liability and/or forecasted transaction and are not entered into for speculative purposes.
Interest Rate Derivatives
In September 2020, we entered into an interest rate swap that was made effective as of August 2020. The interest rate swap was a five-year contract with a $150.0 million notional value that fixed our one-month LIBOR to 0.84% for the notional value of the swap agreement instead of the variable rate that we pay under our Credit Agreement. The swap settled monthly through the termination date, as discussed below.
As a result of our acquisition of the Hardisty South Terminal and the associated additional borrowings under our Credit Agreement that occurred to finance the acquisition, in April 2022, we terminated our existing interest rate swap discussed above and simultaneously entered into a new interest rate swap. In lieu of settling the asset value of the existing interest rate swap agreement of $9.2 million that existed at the time the agreement was terminated, the value of the asset was rolled into the new fixed interest rate swap to reduce the interest rate. The new interest rate swap was a five-year contract with a $175.0 million notional value that fixed the secured overnight financing rate, or SOFR, to 1.57% for the notional value of the swap agreement instead of the variable rate that we pay under our Credit Agreement. The swap settled monthly through the termination date, as discussed below.
On July 27, 2022, we terminated and settled the existing interest rate swap for cash proceeds of $7.7 million. We used the proceeds from this settlement to pay down outstanding debt on our Credit Agreement. We simultaneously entered into a new interest rate swap that was made effective as of August 17, 2022. The new interest rate swap is a five-year contract with a $175.0 million notional value that fixes SOFR to 2.686% for the notional value of the swap agreement instead of the variable rate that we pay under our Credit Agreement. The swap settles monthly through the termination date in July 2027.
Subsequent to September 30, 2022, we settled the interest rate swap discussed above for cash proceeds and simultaneously entered into a new interest rate swap agreement. Refer to Note. 19 Subsequent Events for more information. Derivative Positions
We record all of our derivative financial instruments at their fair values in the line items specified below within our consolidated balance sheets, the amounts of which were as follows at the dates indicated:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| (in thousands) |
| Other current assets | $ | 2,569 | | | $ | — | |
| Other non-current assets | 5,614 | | | 1,995 | |
| Other current liabilities | — | | | (583) | |
| | | |
| $ | 8,183 | | | $ | 1,412 | |
We have not designated our derivative financial instruments as hedges of our interest rate exposure. As a result, changes in the fair value of these derivatives are recorded as “Gain associated with derivative instruments” in our consolidated statements of operations. The gains or losses associated with changes in the fair value of our derivative contracts do not affect our cash flows until the underlying contract is settled by making or receiving a
payment to or from the counterparty. In connection with our derivative activities, we recognized the following amounts during the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands) |
| Gain associated with derivative instruments | $ | (6,904) | | | $ | (110) | | | $ | (13,800) | | | $ | (2,468) | |
We determine the fair value of our derivative financial instruments using third party pricing information that is derived from observable market inputs, which we classify as level 2 with respect to the fair value hierarchy.
The following table presents summarized information about the fair values of our outstanding interest rate contracts for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | September 30, 2022 | | December 31, 2021 |
| | Notional | | Interest Rate Parameters | | Fair Value | | Fair Value |
| | | | | | (in thousands) |
| Swap Agreements | | | | | | | | |
| Swap maturing August 2025 | | $ | 150,000,000 | | | 0.84 | % | | $ | — | | | $ | 1,412 | |
| Swap maturing July 2027 | | $ | 175,000,000 | | | 2.686 | % | | $ | 8,183 | | | $ | — | |
16. PARTNERS’ CAPITAL
Our common units represent limited partner interests in us. The holders of common units are entitled to participate in partnership distributions and to exercise the rights and privileges available to limited partners under our partnership agreement.
Effective April 1, 2022 our sponsor’s general partner interest in us was exchanged for a non-economic general partner interest in us. We issued 5,751,136 common units to our sponsor in connection with our acquisition of the Hardisty South Terminal. Refer to Note 3. Hardisty South Terminal Acquisition for more information. Pursuant to the terms of the USD Partners LP Amended and Restated 2014 Long-Term Incentive Plan, which we refer to as the A/R LTIP, our phantom unit awards, or Phantom Units, granted to directors and employees of our general partner and its affiliates, which are classified as equity, are converted into our common units upon vesting. Equity-classified Phantom Units totaling 548,294 vested during the first nine months in 2022, of which 361,173 were converted into our common units after 187,121 Phantom Units were withheld from participants for the payment of applicable employment-related withholding taxes. The conversion of these Phantom Units did not have any economic impact on Partners’ Capital, since the economic impact is recognized over the vesting period. Additional information and discussion regarding our unit based compensation plans is included below in Note 17. Unit Based Compensation. The board of directors of our general partner has adopted a cash distribution policy pursuant to which we intend to distribute at least the minimum quarterly distribution of $0.2875 per unit ($1.15 per unit on an annualized basis) on all of our units to the extent we have sufficient available cash after the establishment of cash reserves and the payment of our expenses, including payments to our general partner and its affiliates. The board of directors of our general partner may change our distribution policy at any time and from time to time. Our partnership agreement does not require us to pay cash distributions on a quarterly or other basis. The amount of distributions we pay under our cash distribution policy and the decision to make any distribution are determined by our general partner. For the quarter ended September 30, 2022, the board of directors of our general partner determined that we had sufficient available cash after the establishment of cash reserves and the payment of our expenses to distribute $0.1235 per unit on all of our units.
17. UNIT BASED COMPENSATION
Long-term Incentive Plan
In 2022 and 2021, the board of directors of our general partner, acting in its capacity as our general partner, approved the grant of 625,732 and 669,043 Phantom Units, respectively, to directors and employees of our general partner and its affiliates under our A/R LTIP. At September 30, 2022, we had 146,216 Phantom Units remaining available for issuance. The Phantom Units are subject to all of the terms and conditions of the A/R LTIP and the Phantom Unit award agreements, which are collectively referred to as the Award Agreements. Award amounts for each of the grants are generally determined by reference to a specified dollar amount based on an allocation formula which included a percentage multiplier of the grantee’s base salary, among other factors, converted to a number of units based on the closing price of one of our common units preceding the grant date, as determined by the board of directors of our general partner and quoted on the NYSE.
Phantom Unit awards generally represent rights to receive our common units upon vesting. However, with respect to the awards granted to directors and employees of our general partner and its affiliates domiciled in Canada, for each Phantom Unit that vests, a participant is entitled to receive cash for an amount equivalent to the closing market price of one of our common units on the vesting date. Each Phantom Unit granted under the Award Agreements includes an accompanying distribution equivalent right, or DER, which entitles each participant to receive payments at a per unit rate equal in amount to the per unit rate for any distributions we make with respect to our common units. The Award Agreements granted to employees of our general partner and its affiliates generally contemplate that the individual grants of Phantom Units will vest in four equal annual installments based on the grantee’s continued employment through the vesting dates specified in the Award Agreements, subject to acceleration upon the grantee’s death or disability, or involuntary termination in connection with a change in control of the Partnership or our general partner. Awards to independent directors of the board of our general partner and an independent consultant typically vest over a one year period following the grant date.
The following tables present the award activity for our Equity-classified Phantom Units:
| | | | | | | | | | | | | | | | | |
| Director and Independent Consultant Phantom Units | | Employee Phantom Units | | Weighted-Average Grant Date Fair Value Per Phantom Unit |
Phantom Unit awards at December 31, 2021 | 26,272 | | | 1,317,493 | | | $ | 8.21 | |
| Granted | 39,408 | | | 536,729 | | | $ | 5.85 | |
| Vested | (26,272) | | | (522,022) | | | $ | 9.00 | |
| Forfeited | — | | | (3,236) | | | $ | 6.21 | |
Phantom Unit awards at September 30, 2022 | 39,408 | | | 1,328,964 | | | $ | 6.91 | |
| | | | | | | | | | | | | | | | | |
| Director and Independent Consultant Phantom Units | | Employee Phantom Units | | Weighted-Average Grant Date Fair Value Per Phantom Unit |
Phantom Unit awards at December 31, 2020 | 40,065 | | | 1,324,837 | | | $ | 10.98 | |
| Granted | 40,065 | | | 573,204 | | | $ | 4.82 | |
| Vested | (40,065) | | | (518,389) | | | $ | 11.33 | |
| Forfeited | — | | | (10,004) | | | $ | 8.27 | |
Phantom Unit awards at September 30, 2021 | 40,065 | | | 1,369,648 | | | $ | 8.18 | |
The following tables present the award activity for our Liability-classified Phantom Units:
| | | | | | | | | | | | | | | | | |
| Director and Independent Consultant Phantom Units | | Employee Phantom Units | | Weighted-Average Grant Date Fair Value Per Phantom Unit |
Phantom Unit awards at December 31, 2021 | 13,136 | | | 63,730 | | | $ | 7.26 | |
| Granted | 13,136 | | | 36,459 | | | $ | 5.85 | |
| Vested | (13,136) | | | — | | | $ | 4.82 | |
| | | | | |
Phantom Unit awards at September 30, 2022 | 13,136 | | | 100,189 | | | $ | 6.92 | |
| | | | | | | | | | | | | | | | | |
| Director and Independent Consultant Phantom Units | | Employee Phantom Units | | Weighted-Average Grant Date Fair Value Per Phantom Unit |
Phantom Unit awards at December 31, 2020 | 13,136 | | | 59,284 | | | $ | 10.58 | |
| Granted | 13,136 | | | 41,138 | | | $ | 4.82 | |
| Vested | (13,136) | | | — | | | $ | 10.15 | |
| | | | | |
Phantom Unit awards at September 30, 2021 | 13,136 | | | 100,422 | | | $ | 7.88 | |
The fair value of each Phantom Unit on the grant date is equal to the closing market price of our common units on the grant date. We account for the Phantom Unit grants to independent directors and employees of our general partner and its affiliates domiciled in Canada that are paid out in cash upon vesting, throughout the requisite vesting period, by revaluing the unvested Phantom Units outstanding at the end of each reporting period and recording a charge to compensation expense in “Selling, general and administrative” in our consolidated statements of operations and recognizing a liability in “Other current liabilities” in our consolidated balance sheets. With respect to the Phantom Units granted to consultants, independent directors and employees of our general partner and its affiliates domiciled in the United States, we amortize the initial grant date fair value over the requisite service period using the straight-line method with a charge to compensation expense in “Selling, general and administrative” in our consolidated statements of operations, with an offset to common units within the Partners’ Capital section of our consolidated balance sheet.
For the three months ended September 30, 2022 and 2021, we recognized $1.2 million and $1.3 million, respectively, and for the nine months ended September 30, 2022 and 2021, we recognized $3.7 million and $4.3 million, respectively, of compensation expense associated with outstanding Phantom Units. As of September 30, 2022, we have unrecognized compensation expense associated with our outstanding Phantom Units totaling $7.0 million, which we expect to recognize over a weighted average period of 2.30 years. We have elected to account for actual forfeitures as they occur rather than using an estimated forfeiture rate to determine the number of awards we expect to vest.
We made payments to holders of the Phantom Units pursuant to the associated DERs we granted to them under the Award Agreements as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands) |
Equity-classified Phantom Units (1) | $ | 170 | | | $ | 164 | | | $ | 500 | | | $ | 477 | |
| Liability-classified Phantom Units | 14 | | | 13 | | | 37 | | | 34 | |
| Total | $ | 184 | | | $ | 177 | | | $ | 537 | | | $ | 511 | |
(1) We reclassified $2 thousand to unit based compensation expense for DERs paid in relation to Phantom Units that have been forfeited for the three and nine months ended September 30, 2022. We reclassified $1 thousand and $8 thousand for the three and nine months ended September 30, 2021, respectively, for forfeitures.
18. SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides supplemental cash flow information for the periods indicated: | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
| (in thousands) |
Cash paid for income taxes, net (1) | $ | 866 | | | $ | 843 | |
| Cash paid for interest | $ | 4,873 | | | $ | 4,682 | |
| Cash paid for operating leases | $ | 4,892 | | | $ | 4,637 | |
(1) Includes the net effect of tax refunds of $84 thousand received in the second quarter of 2022 associated with carrying back U.S. net operating losses incurred during 2020 and prior periods allowed for by the provisions of the CARES Act. Also includes the net effect of tax refunds of $31 thousand received in the third quarter of 2022 associated with prior period Canadian taxes.
Non-cash Investing Activities
For the nine months ended September 30, 2022 and 2021, we had non-cash investing activities for capital expenditures for property and equipment that were financed through “Accounts payable and accrued expenses” and “Accounts Payable and accrued expenses — related party” and an accrued reimbursement associated with our collaborative arrangement included in “Accounts receivable, net” as presented in the table below for the periods indicated:
| | | | | | | | | | | | |
| | Nine months ended September 30, |
| | 2022 | | 2021 |
| | (in thousands) |
| Property and equipment financed through accounts payable and accrued expenses | | $ | 250 | | | $ | (708) | |
| Accrued reimbursement of property and equipment | | $ | (139) | | | $ | — | |
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We recorded $0.7 million and $1.6 million of right-of-use lease assets and the associated liabilities on our consolidated balance sheet as of September 30, 2022 and 2021, respectively, representing non-cash activities resulting from new, extended, cancelled or declassified lease agreements. See Note 8. Leases for further discussion. Non-cash contribution to Hardisty South Entities
Prior to our acquisition, the Hardisty South entities had non-cash activities associated with related party accounts payable and equity balances. The Hardisty South entities received a non-cash contribution of $18.2 million from USD North America LP, a wholly-owned subsidiary of our Sponsor, in exchange for its assumption of an aggregate amount of related party debt.
19. SUBSEQUENT EVENTS
Distribution to Partners
On October 20, 2022, the board of directors of USD Partners GP LLC, acting in its capacity as our general partner, declared a quarterly cash distribution payable of $0.1235 per unit, or $0.494 per unit on an annualized basis, for the three months ended September 30, 2022. The distribution will be paid on November 14, 2022, to unitholders of record at the close of business on November 2, 2022. The distribution will include payment of $2.0 million to our public common unitholders and $2.1 million to USDG as a holder of our common units.
Derivative Financial Instrument Settlement
On October 12, 2022, we terminated and settled our existing interest rate swap for cash proceeds of $9.0 million. We plan to use the proceeds from this settlement to pay down outstanding debt on the Credit Agreement and fund our ongoing working capital needs. We simultaneously entered into a new interest rate swap that was made effective as of October 17, 2022. The new interest rate swap is a five-year contract with a $175.0 million notional value that fixes SOFR to 3.956% for the notional value of the swap agreement instead of the variable rate that we pay under our Credit Agreement. The swap settles monthly through the termination date in October 2027.