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OILT > SEC Filings for OILT > Form 10-Q on 9-May-2013All Recent SEC Filings

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


9-May-2013

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, 2012 ("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
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 ("LPG"). 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 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 an aggregate of 7,949,901 common units and 19,449,901 subordinated units to OTA and its affiliates, and issued incentive distribution


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rights to our general partner. At March 31, 2013, 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 and in Beaumont, Texas. Our Beaumont terminal serves as a regional hub for refined petroleum products for refineries located in the Gulf Coast region. At March 31, 2013, our Houston facility has an aggregate active storage capacity of approximately 12.9 million barrels and provides integrated terminaling services to a variety of customers, including major integrated oil companies, marketers, distributors and chemical companies. At March 31, 2013, our Beaumont facility has an aggregate active storage capacity of approximately 5.6 million barrels and provides integrated terminaling services to a variety of customers, including major integrated oil companies, distributors, marketers and chemical and petrochemical companies.

Recent Developments

Expansion Projects and Assets Placed Into Service

In November 2011, we announced approval of 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 new 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. During January 2013, we placed this pipeline expansion project into service. In addition, in February 2013, we placed three new crude oil storage tanks with a total capacity of 825,000 barrels into service at our Houston terminal. The final 275,000 barrel tank of this four tank expansion project is expected to be placed into service in the second quarter of 2013. In Beaumont, during the first quarter of 2013, we completed construction on and placed into service two new refined products storage tanks with total capacity of 325,000 barrels.

Dock Expansion Project

In March 2013, we announced an expansion of our relationship with Enterprise Products Partners L.P. ("Enterprise") and plans to increase our ability to import and export LPG at our terminal on the Houston Ship Channel. In connection with the agreement with Enterprise, we will construct a new vessel dock and add infrastructure to existing docks with the capability of handling substantially more LPG vessels at multiple docks. During the term of the agreement, we have also agreed to provide vessel-based LPG import and export services on the Houston Ship Channel exclusively to Enterprise, and Enterprise has agreed to exclusively use our facility for its vessel-based imports and exports of LPG on the Houston Ship Channel. The estimated $44.0 million expansion project is expected to be completed by the end of the fourth quarter of 2014.

Management Changes

On March 15, 2013, Edward J. O'Neal, Jr. was appointed by the board of directors of our general partner to serve as Vice President of Human Resources.

Distribution Declaration

On April 22, 2013, the board of directors of our general partner declared a cash distribution to our unitholders of $0.405 per unit and a corresponding distribution on our general partner's interest, payable on May 14, 2013 to unitholders of record at the close of business on May 3, 2013.


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Results of Operations
Our operating results were as follows for the periods indicated (in thousands,
except per unit amounts):
                                              Three Months Ended
                                                  March 31,
                                              2013          2012

Revenues                                   $  40,186     $ 34,286
Costs and expenses:
Operating                                      9,465        9,627
Selling, general and administrative            4,997        4,488
Depreciation and amortization                  4,490        3,966
Loss on disposal of fixed assets                   -           13
Total costs and expenses                      18,952       18,094
Operating income                              21,234       16,192
Other income (expense):
Interest expense                                (892 )       (207 )
Interest income                                    3           20
Other income                                       2           14
Total other expense, net                        (887 )       (173 )
Income before income tax expense              20,347       16,019
Income tax expense                              (155 )        (80 )
Net income                                 $  20,192     $ 15,939

Earnings per common unit - basic and
  diluted                                  $    0.48     $   0.40
Earnings per subordinated unit - basic and
  diluted                                  $    0.48     $   0.40

Adjusted EBITDA

We define Adjusted EBITDA as net income (loss) before net interest expense, income tax (expense) benefit, depreciation and amortization expense and other income, as further adjusted to exclude certain other non-cash and non-recurring items, which included gains and losses on disposal of fixed assets for the three months ended March 31, 2012. Adjusted EBITDA is not a presentation made in accordance with 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 that 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 that affect 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.


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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
                                                          March 31,
                                                      2013          2012

Reconciliation of Adjusted EBITDA from net income:
Net income                                         $  20,192     $ 15,939
Depreciation and amortization                          4,490        3,966
Income tax expense                                       155           80
Interest expense, net                                    889          187
Loss on disposal of fixed assets                           -           13
Other income                                              (2 )        (14 )
Adjusted EBITDA                                    $  25,724     $ 20,171

Operating Data

The following table presents operating data for the periods indicated:
                                                     Three Months Ended
                                                         March 31,
                                                       2013           2012

Storage capacity, end of period (mmbbls) (1) (3)      18.5            17.3
Storage capacity, average (mmbbls) (3)                18.2            17.3
Terminal throughput (mbpd) (2)                       881.3           846.2
Vessels per period                                     194             229
Barges per period                                      831             773
Trucks per period                                    5,238           2,751
Rail cars per period                                 1,638           2,288


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

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

(3) During the first quarter of 2013, we placed into service net storage capacity of approximately 0.9 million barrels.

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Adjusted EBITDA. Adjusted EBITDA for the three months ended March 31, 2013 increased by $5.6 million, or 27.5%, to $25.7 million from $20.2 million for the three months ended March 31, 2012. The increase in Adjusted EBITDA was primarily attributable to increased revenues of $5.9 million and decreased operating expenses of $0.2 million, partially offset by increased selling, general and administrative expenses ("SG&A expenses") of $0.5 million.

Revenues. Revenues for the three months ended March 31, 2013 increased by $5.9 million, or 17.2%, to $40.2 million from $34.3 million for the three months ended March 31, 2012, primarily attributable to an increase in storage service fee revenues of $3.7 million and higher throughput fee revenue of $3.6 million, partially offset by a decrease in ancillary services fee revenue of $1.4 million. Increased storage service fee revenues were attributable to additional revenues from new storage capacity placed into service in April 2012 and in the first quarter of 2013 and an escalation in the average storage fee charged. Increased throughput fee revenue was primarily attributable to revenues of approximately $1.9 million generated on our pipelines recently placed into service, increased LPG exports during the 2013 period which increased revenues by approximately $1.5 million and revenues from our new revenue arrangement


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with Enterprise. Ancillary service fee revenue in the 2012 period included approximately $1.4 million of revenues from a pipeline-related construction project for a customer that was completed and recognized during the 2012 period.

Operating Expenses. Operating expenses for the three months ended March 31, 2013 decreased by $0.2 million, or 1.7%, to $9.5 million from $9.6 million for the three months ended March 31, 2012. The decrease in operating expenses was primarily due to a decrease of $1.4 million in expenses associated with the pipeline-related construction project which occurred in the 2012 period discussed above, a decrease of $0.2 million in rental expense due to the purchase of previously leased land for our expansion projects and a decrease of $0.1 million in power and fuel costs due to re-negotiated power rates at a lower rate. These decreases in operating expenses were partially offset by an increase of $0.5 million in operations employee-related costs incurred by OTA and charged to us under the Services Agreement due to increases in benefit costs and higher operational labor in the 2013 period, an increase of $0.4 million in repairs and maintenance costs, an increase of $0.3 million in property taxes resulting from increased property values, an increase of $0.2 million in legal, engineering and permitting and licensing fees and an increase of $0.1 million in insurance costs.

Selling, General and Administrative Expenses. SG&A expenses for the three months ended March 31, 2013 increased by $0.5 million, or 11.3%, to $5.0 million from $4.5 million for the three months ended March 31, 2012. The increase in SG&A expenses in the 2013 period was primarily due to higher accounting, auditing and professional fees.

Depreciation Expense. Depreciation expense for the three months ended March 31, 2013 increased by $0.5 million, or 13.2%, to $4.5 million from $4.0 million for the three months ended March 31, 2012, primarily due to assets placed in service in 2012 and in the 2013 period.

Loss on Disposal of Fixed Assets. During the three months ended March 31, 2013, we did not recognize any losses on the disposal of fixed assets. During the three months ended March 31, 2012, we recognized losses of less than $0.1 million on the disposal of certain dismantled terminal assets.

Interest Expense. Interest expense for the three months ended March 31, 2013 increased by $0.7 million, or 330.9%, to $0.9 million from $0.2 million for the three months ended March 31, 2012, primarily due to higher outstanding borrowings as a result of the increased construction activity, partially offset by higher interest capitalized on construction projects.

Income Tax Expense. Income tax expense for the three months ended March 31, 2013 increased by $0.1 million, or 93.8%, to $0.2 million from $0.1 million for the three months ended March 31, 2012, due to an increase in accruals for Texas margin tax.

Liquidity and Capital Resources
Liquidity
Our principal liquidity requirements are to finance current operations, fund capital expenditures, including acquisitions from time to time, service our debt and pay distributions to our partners. Our sources of liquidity may include cash generated by our operations, borrowings under our revolving line of credit and issuances of equity and debt securities. We believe cash generated from these sources will be sufficient to meet our obligations as they come due.

During the three months ended March 31, 2013, we paid cash distributions totaling $15.5 million, or $0.39 per unit, and corresponding distributions on our general partner's interest and incentive distribution rights, to unitholders. On April 22, 2013, the board of directors of our general partner declared a cash distribution to our unitholders of $0.405 per unit for the first quarter of 2013, and a corresponding distribution on our general partner's interest and incentive distribution rights. The first quarter 2013 cash distribution totaling approximately $16.2 million is expected to be paid on May 14, 2013 to unitholders of record at the close of business on May 3, 2013. The first quarter 2013 cash distribution represents a 3.8% increase over the fourth quarter 2012 cash distribution of $0.39 per unit and a 15.7% increase over


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the first quarter of 2012 cash distribution of $0.35 per unit. We intend to continue to pay a quarterly distribution based on the number of common and subordinated units and the general partner interest outstanding to the extent we have sufficient cash from our operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates.

On April 16, 2012, we announced approval of 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. The additional storage capacity is expected to be placed into service during the fourth quarter of 2013.

On September 4, 2012, we announced approval of 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. The additional storage capacity is expected to be placed into service during the third and fourth quarters of 2014.

In March 2013, we announced an expansion of our relationship with Enterprise and plans to increase our ability to import and export LPG at our terminal on the Houston Ship Channel. In connection with the agreement with Enterprise, we will construct a new vessel dock and add infrastructure to existing docks with the capability of handling substantially more LPG vessels at multiple docks. During the term of the agreement, we have also agreed to provide vessel-based LPG import and export services on the Houston Ship Channel exclusively to Enterprise, and Enterprise has agreed to exclusively use our facility for its vessel-based imports and exports of LPG on the Houston Ship Channel. The estimated $44.0 million expansion project is expected to be completed by the end of the fourth quarter of 2014.

We anticipate funding these projects primarily with cash on hand and long-term borrowings from Oiltanking Finance B.V.

OILT Credit Agreement
Our credit agreement with Oiltanking Finance B.V., which we amended in November 2012, is a $150.0 million credit agreement with a maturity date of November 30, 2017 ("Credit Agreement"). From time to time upon our 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. Any unused portion of the revolving line of credit is subject to a commitment fee of 0.35% per annum. As of March 31, 2013, we had $24.0 million of borrowings outstanding under the Credit Agreement at a weighted average interest rate of 2.18% per annum.

OTH Loan Agreement

OTH has 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 were available through December 15, 2012, with a maturity date of December 15, 2022. At March 31, 2013, OTH had $125.0 million of outstanding borrowings under the Loan Agreement at a fixed interest rate of 4.55% per annum.


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Cash Flows from Operating, Investing and Financing Activities

The following table summarizes our cash flows from operating, investing and
financing activities for the periods indicated (in thousands):
                               Three Months Ended
                                   March 31,
                               2013          2012
Cash provided by (used in):
Operating activities        $  15,440     $ 10,700
Investing activities           (9,301 )     (8,690 )
Financing activities            1,708      (14,474 )

Operating Activities

Net cash flows provided by operating activities for the three months ended March 31, 2013 increased by $4.7 million, or 44.3%, to $15.4 million from $10.7 million for the three months ended March 31, 2012. The increase was primarily attributable to an increase in storage service fee revenues and throughput fee revenues, partially offset by a decrease in ancillary service fee revenues and increased SG&A expenses.

Investing Activities

Net cash flows used in investing activities for the three months ended March 31, 2013 increased by $0.6 million, or 7.0%, to $9.3 million from $8.7 million for the three months ended March 31, 2012. The increase is primarily attributable to an increase in fixed asset purchases of $30.3 million, partially offset by an increase of $13.7 million in the collections of notes receivable from Oiltanking Finance B.V. and an increase of $16.0 million in the issuance of notes receivable from Oiltanking Finance B.V.

Cash paid for capital expenditures were as follows for the periods indicated (in thousands):

                                     Three Months Ended
                                          March 31,
                                       2013           2012

Maintenance capital expenditures $       735        $   755
Expansion expenditures                36,566          6,235
  Total capital expenditures     $    37,301        $ 6,990

Maintenance capital expenditures are those capital expenditures required to maintain our long-term operating capacity. Expansion capital expenditures are those capital expenditures that we expect will increase our operating capacity over the long-term. During the three months ended March 31, 2013, we spent $36.6 million of expansion capital primarily for the continuing construction of the new storage capacity at our Houston area terminals and associated crude oil pipeline infrastructure investments. During the three months ended March 31, 2012, we spent $6.2 million of expansion capital primarily for the continuing construction of the new storage capacity at our Houston terminal and associated crude oil pipeline infrastructure investments.

In 2013, we expect to spend approximately $135.0 million to $145.0 million for capital expenditures, of which approximately $8.0 million is expected to relate to maintenance capital expenditures. A majority of the expansion project spending projected for 2013 relates to the crude oil pipelines and storage capacity projects at our Houston area terminals (see "-Recent Developments" above).

We anticipate the above mentioned capital expenditures will be funded primarily with cash on hand and long-term borrowings from Oiltanking Finance B.V.


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We believe we have sufficient liquid assets, cash flow from operations and borrowing capacity under the Credit Agreement to meet our financial commitments, . . .

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