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OILT > SEC Filings for OILT > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for OILTANKING PARTNERS, L.P.

Form 10-Q for OILTANKING PARTNERS, L.P.


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included in this report as well as the consolidated financial statements and related notes, together with our discussion and analysis of financial condition and results of operations, included in our Annual Report on Form 10-K for the year ended December 31, 2011 ("Annual Report").

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain "forward-looking statements." Forward-looking statements provide our current expectations, contain projections of results of operations or of financial condition, or forecasts of future events. Words such as "may," "assume," "forecast," "position," "predict," "strategy," "expect," "intend," "plan," "estimate," "anticipate," "believe," "project," "budget," "potential," or "continue," and similar expressions are used to identify forward-looking statements. Forward-looking statements can be affected by assumptions used or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Quarterly Report and in our Annual Report and other filings with the U.S. Securities and Exchange Commission. Actual results may vary materially from such forward-looking statements. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties.

Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include but are not limited to: (i) changes in general economic conditions; (ii) competitive conditions in our industry; (iii) changes in the long-term supply and demand of crude oil, refined petroleum products and liquefied petroleum gas in the markets in which we operate; (iv) actions taken by our customers, competitors and third-party operators; (v) changes in the availability and cost of capital; (vi) operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control; (vii) the effects of existing and future laws and governmental regulations; and (viii) the effects of future litigation. These and other risks are described in this Quarterly Report and our Annual Report. In addition, we may be subject to unforeseen risks that may have a materially adverse effect on us. Accordingly, no assurances can be given that the actual events and results will not be materially different than the anticipated results described in the forward-looking statements. The forward-looking statements speak only as of the date made, and, other than as required by federal and state securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements.

Overview of Business and Recent Developments

Oiltanking Partners, L.P. ("OILT") is a Delaware limited partnership formed by Oiltanking Holding Americas, Inc. ("OTA") on March 14, 2011 to engage in the storage, terminaling and transportation of crude oil, refined petroleum products and liquefied petroleum gas. OTA owns and controls OILT's general partner, OTLP GP, LLC (our "general partner"). Through its wholly owned subsidiaries, Oiltanking Houston, L.P. ("OTH") and Oiltanking Beaumont Partners, L.P. ("OTB"), OILT owns and operates storage and terminaling assets located along the Gulf Coast of the United States on the Houston, Texas Ship Channel and in Beaumont, Texas. We report in one reportable business segment.

OTA is a wholly owned subsidiary of Oiltanking GmbH. Oiltanking GmbH and its subsidiaries, other than OILT and its subsidiaries, are collectively referred to herein as the "Oiltanking Group." As used in this document, the terms "we," "us," and "our" and similar terms refer to OILT and its subsidiaries unless the context indicates otherwise.

On July 19, 2011, we completed our initial public offering ("IPO") of 11,500,000 common units, including 1,500,000 common units issued in connection with the underwriters' exercise of their over-allotment option, at a price of $21.50 per unit. Through July 18, 2011, OTH and OTB were wholly owned subsidiaries of OTA. OTA and its affiliates contributed all of their equity interests in OTH and OTB to us on July 19, 2011, and in exchange, we issued


Table of Contents

an aggregate of 7,949,901 common units and 19,449,901 subordinated units to OTA and its affiliates and incentive distribution rights to our general partner. At September 30, 2012, OTA owned our general partner, 7,949,901 common units and 19,449,901 subordinated units.

Our primary business objective is to generate stable cash flows to enable us to pay quarterly distributions to our unitholders and to increase our quarterly cash distributions over time. We intend to achieve this objective by anticipating long-term infrastructure needs in the areas we serve and by growing our tank terminal network and pipelines through construction in new markets, the expansion of existing facilities and strategic acquisitions.

We operate crude oil and refined petroleum products terminals on the Houston, Texas Ship Channel. At September 30, 2012, our Houston facility has an aggregate active storage capacity of approximately 12.1 million barrels and provides integrated terminaling services to a variety of customers, including major integrated oil companies, marketers, distributors and chemical companies.

During 2011, we commenced an expansion project at our Houston terminal involving the construction of three new storage tanks with an aggregate of approximately one million barrels of storage capacity supported by multi-year contracts with two customers. Two of the tanks, with an aggregate 655,000 barrels of storage capacity, were placed into service at the end of 2011, and the remaining 390,000 barrel storage tank was placed into service in April 2012.

Our Beaumont terminal serves as a regional hub for refined petroleum products for refineries located in the Gulf Coast region. At September 30, 2012, this facility has an aggregate active storage capacity of approximately 5.5 million barrels and provides integrated terminaling services to a variety of customers, including major integrated oil companies, distributors, marketers and chemical and petrochemical companies. During 2011, we also completed the construction of and placed into service a new barge dock at our Beaumont terminal.

Expansion Projects

On November 8, 2011, we announced that the board of directors of our general partner approved expansion projects of approximately $85.0 million to construct two new crude oil pipelines along the Houston Ship Channel and approximately one million barrels of additional crude oil storage capacity at our Houston terminal. During the first quarter of 2012, the board of directors approved an additional $11.0 million of spending to extend the pipeline expansion into a third-party terminal in Houston. This connection will enable our pipeline system and Houston terminal to receive additional crude oil from the Eagle Ford shale and the Mid-Continent. We expect to complete construction of the pipelines and new crude oil storage capacity in January 2013.

On April 16, 2012, we announced that the board of directors of our general partner approved an expansion project of approximately $104.0 million to construct approximately 3.2 million barrels of new crude oil storage capacity near our Houston terminal. The project included the purchase of 95 acres of nearby land on which the new capacity is being constructed. All of the storage capacity from this expansion project has been fully contracted at an average term of approximately 6.3 years. We expect to complete construction of the new crude oil storage capacity during the fourth quarter of 2013.

On September 4, 2012, we announced that the board of directors of our general partner approved an expansion project of approximately $70.0 million to construct approximately 3.3 million barrels of new crude oil storage capacity near our Houston terminal. We anticipate commencing construction by the beginning of the second quarter of 2013 when all relevant permits are in place. The additional storage capacity is expected to be placed into service during the third and fourth quarters of 2014.

Once complete, the system expansion projects will bring total active storage capacity to approximately 25.0 million barrels by the end of 2014. We anticipate funding the expansion projects primarily with long-term borrowings from Oiltanking Finance B.V.


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Loan Agreement

On May 16, 2012, OTH entered into a ten-year $125.0 million unsecured loan agreement with Oiltanking Finance B.V. (the "Loan Agreement") for the purpose of financing the purchase of property, plant and equipment, through which borrowings are available from May 15, 2012 through December 15, 2012 (the "Availability Period"), with a maturity date of December 15, 2022. At the end of the Availability Period, any unused amounts under the Loan Agreement will be canceled. At September 30, 2012, OTH had $35.0 million of outstanding borrowings under the Loan Agreement. See Note 7 in the Notes to Unaudited Condensed Consolidated Financial Statements for further information.

In October 2012, OTH agreed to fix the interest rate applicable to borrowings under the Loan Agreement after the Availability Period at 4.55% per annum (calculated as the USD Swap Rate for ten years as of the date of determination of 1.85% plus a margin of 2.70%). In connection therewith, OTH intends to have drawn the full available amount under the Loan Agreement of $125.0 million at or before the end of the Availability Period, which borrowings will mature on December 15, 2022.

Management Changes

On November 6, 2012, we announced that Anne-Marie Ainsworth had been selected to serve as President and Chief Executive Officer of our general partner, effective as of November 26, 2012. Ms. Ainsworth will also serve as a member of the board of directors of our general partner, as of November 26, 2012. Ms. Ainsworth will replace our general partner's outgoing President and Chief Executive Officer, Carlin Conner, who has assumed the role of Managing Director of Oiltanking GmbH and joined the Executive Board of Marquard & Bahls AG. Mr. Conner will continue to serve as Chairman of the board of directors of our general partner.

On September 1, 2012, Brian C. Brantley was appointed by the board of directors of our general partner to serve as Vice President, General Counsel and Secretary.

Distribution Declaration

On October 18, 2012, the board of directors of our general partner declared a cash distribution to our unitholders of $0.375 per unit and a corresponding distribution on our general partner's interest, payable on November 14, 2012 to unitholders of record at the close of business on November 2, 2012.

Amendment to the Credit Agreement

On November 7, 2012, OILT entered into Addendum No. 2 to the Credit Agreement with Oiltanking Finance B.V. (as amended, the "Credit Agreement") to increase the amount of the revolving credit commitment to $150.0 million (the "Amendment"). From time to time upon OILT's written request and in the sole determination of Oiltanking Finance B.V., the revolving credit commitment can be increased up to an additional $75.0 million, for a maximum revolving credit commitment of $225.0 million. Borrowings bear interest at LIBOR plus a margin ranging from 1.65% to 2.50% depending upon a leverage based grid and any unused portion of the revolving line of credit is subject to a commitment fee of 0.35% per annum. OILT will pay an arrangement fee of $0.5 million to Oiltanking Finance B.V. in connection with the Amendment, which will be deferred and amortized over the life of the Credit Agreement. The maturity date of the amended Credit Agreement is November 30, 2017. The Financial Parameters (as such term is defined in the Amendment) remain the same as they existed prior to the Amendment.


Results of Operations
Our operating results were as follows for the periods indicated (in thousands,
except per unit amounts):
                                              Three Months Ended         Nine Months Ended
                                                September 30,              September 30,
                                              2012          2011         2012          2011

Revenues                                   $  33,327     $ 28,867     $ 101,436     $ 88,476
Costs and expenses:
Operating                                      8,993        6,907        26,639       23,542
Selling, general and administrative            4,824        3,907        14,015       13,258
Depreciation and amortization                  4,039        3,843        12,073       11,795
Loss on disposal of fixed assets                   -            -            13          544
Gain on property casualty indemnification          -         (681 )           -         (928 )
Total costs and expenses                      17,856       13,976        52,740       48,211
Operating income                              15,471       14,891        48,696       40,265
Other income (expense):
Interest expense                                (487 )       (614 )      (1,094 )     (5,202 )
Loss on early extinguishment of debt               -       (6,382 )           -       (6,382 )
Interest income                                    2            7            31           31
Other income                                       1          290            74          431
Total other expense, net                        (484 )     (6,699 )        (989 )    (11,122 )
Income before income tax (expense) benefit    14,987        8,192        47,707       29,143
Income tax (expense) benefit                     (80 )     27,118          (240 )     21,403
Net income                                 $  14,907     $ 35,310     $  47,467     $ 50,546

Earnings per common unit - basic and
  diluted (1)                              $    0.38     $   0.30     $    1.19     $   0.30
Earnings per subordinated unit - basic and
  diluted (1)                              $    0.38     $   0.30     $    1.19     $   0.30


______________


(1) Amounts attributable to the 2011 periods are reflective of general and limited partner interest in net income subsequent to the closing of our IPO on July 19, 2011.

Adjusted EBITDA

We define Adjusted EBITDA as net income (loss) before net interest expense, income tax (expense) benefit and depreciation and amortization expense, as further adjusted to exclude certain other non-cash and non-recurring items, such as gains and losses on disposal of fixed assets, property casualty indemnification and early extinguishment of debt. Adjusted EBITDA is not a presentation made in accordance with U.S. generally accepted accounting principles ("GAAP"). Adjusted EBITDA is a non-GAAP supplemental financial performance measure that management and external users of our consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess: (i) our financial performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or financing methods, (ii) the viability of proposed projects and acquisitions and (iii) the overall rates of return on investment in various opportunities. Accordingly, we believe the presentation of Adjusted EBITDA provides useful information to investors in assessing our results of operations.

The GAAP measure most directly comparable to Adjusted EBITDA is net income. Our non-GAAP financial measure of Adjusted EBITDA should not be considered as an alternative to GAAP measures, such as net income, operating income, cash flow from operating activities or any other GAAP measure of financial performance. Adjusted EBITDA has important limitations as an analytical tool because it excludes some but not all items affecting net income. You should not consider Adjusted EBITDA in isolation or as a substitute for analysis of our results as reported under


GAAP. Because Adjusted EBITDA may be defined differently by other companies in our industry, our definition of Adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.

The following table presents a reconciliation of Adjusted EBITDA from net income, the most directly comparable GAAP financial measure, for the periods indicated (in thousands):

                                             Three Months Ended         Nine Months Ended
                                               September 30,              September 30,
                                             2012          2011         2012         2011

Reconciliation of Adjusted EBITDA from
  net income:
Net income                                $  14,907     $ 35,310     $ 47,467     $ 50,546
Depreciation and amortization                 4,039        3,843       12,073       11,795
Income tax expense (benefit)                     80      (27,118 )        240      (21,403 )
Interest expense, net                           485          607        1,063        5,171
Loss on early extinguishment of debt              -        6,382            -        6,382
Loss on disposal of fixed assets                  -            -           13          544
Gain on property casualty indemnification         -         (681 )          -         (928 )
Other income                                     (1 )       (290 )        (74 )       (431 )
Adjusted EBITDA                           $  19,510     $ 18,053     $ 60,782     $ 51,676

Operating Data

The following table presents operating data for the periods indicated:
                                           Three Months Ended                Nine Months Ended
                                              September 30,                    September 30,
                                           2012             2011             2012            2011

Storage capacity, end of period
(mmbbls) (1)                              17.7                16.7          17.7               16.7
Storage capacity, average (mmbbls)        17.7                16.7          17.6               16.7
Terminal throughput (mbpd) (2)           787.0               762.3         821.9              793.1
Vessels per period                         229                 205           679                614
Barges per period                          793                 587         2,346              1,878
Trucks per period (3)                    2,613               1,371         7,981              1,704
Rail cars per period (4)                 1,701                   -         6,589                  -


_______________________


(1) Represents million barrels ("mmbbls").

(2) Represents thousands of barrels per day ("mbpd").

(3) Beginning in June 2011, one of our customers began unloading product by truck.

(4) Beginning in November 2011, one of our customers began unloading product by rail car.

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Adjusted EBITDA. Adjusted EBITDA for the three months ended September 30, 2012 increased by $1.5 million, or 8.1%, to $19.5 million from $18.1 million for the three months ended September 30, 2011. The increase in Adjusted EBITDA was primarily attributable to increased revenues of $4.5 million, partially offset by increased operating expenses of $2.1 million and increased selling, general and administrative expenses of $0.9 million.

Revenues. Revenues for the three months ended September 30, 2012 increased by $4.5 million, or 15.5%, to $33.3 million from $28.9 million for the three months ended September 30, 2011. The increase in revenues was primarily


attributable to additional revenues from the new crude storage capacity placed into service in December 2011 and in April 2012 and to an escalation in storage fees, resulting in an increase in storage revenues of $2.2 million, higher throughput fee revenue of $1.4 million, primarily attributable to increased liquefied petroleum gas exports during the 2012 period, and an increase in ancillary services fee revenue of $0.8 million.

Operating Expenses. Operating expenses for the three months ended September 30, 2012 increased by $2.1 million, or 30.2%, to $9.0 million from $6.9 million for the three months ended September 30, 2011. The increase in operating expenses was primarily due to an increase of $1.1 million in property taxes resulting partially from increased property values in the 2012 period and a refund of property taxes in the the 2011 period, an increase of $1.0 million in employee-related costs due to increases in benefit costs and higher operational labor in the 2012 period and an increase of $0.6 million in legal, engineering and permitting and licensing fees. These increases in operating expenses were partially offset by a decrease of $0.3 million in power and fuel costs due to re-negotiated power rates at lower rates and a decrease of $0.2 million in rental expense due to the purchase of previously leased land for our expansion projects.

Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A expenses") for the three months ended September 30, 2012 increased by $0.9 million, or 23.5%, to $4.8 million from $3.9 million for the three months ended September 30, 2011. The increase in SG&A expenses in the 2012 period was primarily due to additional costs of operating as a publicly traded partnership, which were incurred for the full three months ended September 30, 2012 compared to only a portion of the three months ended September 30, 2011.

Depreciation Expense. Depreciation expense for the three months ended September 30, 2012 increased by $0.2 million, or 5.1%, to $4.0 million from $3.8 million for the three months ended September 30, 2011 primarily due to assets placed in service in late 2011 and in 2012.

Gain on Property Casualty Indemnification. During the three months ended September 30, 2011, we recognized a gain of $0.7 million from proceeds received under an insurance contract related to damages sustained during a hurricane in 2008.

Interest Expense. Interest expense for the three months ended September 30, 2012 decreased by $0.1 million, or 20.7%, to $0.5 million from $0.6 million for the three months ended September 30, 2011, primarily due to higher interest capitalized on construction projects, partially offset by higher outstanding borrowings under our Loan Agreement.

Loss on Early Extinguishment of Debt. In July 2011, in connection with our IPO, we repaid $119.5 million of outstanding amounts under our notes payable, affiliate. We also reimbursed Oiltanking Finance B.V. for approximately $6.4 million in fees incurred in connection with the repayment of such indebtedness.

Income Tax (Expense) Benefit. Income taxes for the three months ended September 30, 2012 increased by $27.2 million to expense of less than $0.1 million from a benefit of $27.1 million for the three months ended September 30, 2011, primarily attributable to the change in the tax status of OTH in connection with our IPO in July 2011. Prior to our IPO, in July 2011, OTH elected to be treated as a disregarded entity for U.S. federal income tax purposes. Upon the change in tax status of OTH, we recognized a non-recurring income tax benefit of $27.3 million related to the elimination of the deferred tax account balances. Due to our status as a partnership, we and our subsidiaries are not subject to U.S. federal or state income taxes, with the exception of the Texas margin tax.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Adjusted EBITDA. Adjusted EBITDA for the nine months ended September 30, 2012 increased by $9.1 million, or 17.6%, to $60.8 million from $51.7 million for the nine months ended September 30, 2011. The increase in Adjusted EBITDA was primarily attributable to increased revenues of $13.0 million, partially offset by increased operating expenses of $3.1 million and increased SG&A expenses of $0.8 million.

Revenues. Revenues for the nine months ended September 30, 2012 increased by $13.0 million, or 14.6%, to $101.4 million from $88.5 million for the nine months ended September 30, 2011. The increase in revenues was


primarily attributable to additional revenues from the new crude storage capacity placed into service in December 2011 and in April 2012 and to an escalation in storage fees, resulting in an increase in storage revenues of $6.9 million, higher throughput fee revenue of $3.2 million, primarily attributable to increased liquefied petroleum gas exports during the 2012 period and an increase in ancillary services fee revenue of $2.8 million, approximately $1.4 million of which relates to revenue from a pipeline-related construction project for a customer that was completed and recognized during the 2012 period.

Operating Expenses. Operating expenses for the nine months ended September 30, 2012 increased by $3.1 million, or 13.2%, to $26.6 million from $23.5 million for the nine months ended September 30, 2011. The increase in operating expenses was primarily due to an increase of $1.6 million in employee-related costs due to increases in benefit costs and higher operational labor in the 2012 period, an increase of $1.4 million in expenses associated with the pipeline-related construction project discussed above, an increase of $0.7 million in legal, engineering and permitting and licensing fees, an increase of $0.7 million in property taxes resulting partially from increased property values in the 2012 period and a refund of property taxes in the the 2011 period and an increase of $0.1 million in insurance costs. These increases in operating expenses were partially offset by a decrease of $1.2 million in power and fuel costs due to re-negotiated power rates at lower rates and a decrease of $0.3 million in rental expense due to the purchase of previously leased land for our expansion projects.

Selling, General and Administrative Expenses. SG&A expenses for the nine months ended September 30, 2012 increased by $0.8 million, or 5.7%, to $14.0 million from $13.3 million for the nine months ended September 30, 2011. The increase in SG&A expenses in the 2012 period was primarily due to additional costs of operating as a publicly traded partnership for the full nine month period in 2012, as compared to only a portion of the nine months ended September 30, 2011.

Depreciation Expense. Depreciation expense for the nine months ended September 30, 2012 increased by $0.3 million, or 2.4%, to $12.1 million from $11.8 million for the nine months ended September 30, 2011 primarily due to . . .

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