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OILT > SEC Filings for OILT > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for OILTANKING PARTNERS, L.P.

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


7-Nov-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.

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 in our Annual Report. In addition, we may be subject to unforeseen risks that may have a materially adverse effect on us and risks we presently deem immaterial may turn out to be material. 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 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 September 30, 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 Ship Channel and in Beaumont, Texas. Our Houston terminal serves as a regional hub for crude oil and other feedstocks for refineries and petrochemical facilities located in the Gulf Coast region and also serves as an important import and export facility for LPGs and other refined petroleum products. At September 30, 2013, our Houston facility has an aggregate active storage capacity of approximately 14.4 million barrels and provides integrated terminaling services to a variety of customers, including major integrated oil companies, marketers, distributors and chemical companies. Our Beaumont terminal serves as a regional hub for refined petroleum products for refineries located in the Gulf Coast region. At September 30, 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 of our general partner 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 into service three new crude oil storage tanks with a total capacity of 825,000 barrels at our Houston terminal. The final 275,000 barrel tank of that four tank expansion project was placed into service in July 2013. In Beaumont, during the first quarter of 2013, we completed construction on and placed into service two new refined products storage tanks with a total capacity of 320,000 barrels.

Appelt Expansion Projects

In April 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 at our Appelt property. In July 2013, we placed into service three new crude oil storage tanks with a total capacity of 1.2 million barrels. In October 2013, we placed into service two new crude oil storage tanks with a total capacity of 0.8 million barrels. The remaining storage capacity of 1.2 million barrels is expected to be placed into service by the end of 2013.

In November 2013, we announced approval of expansion projects of approximately $101.0 million to construct approximately 3.5 million barrels of additional crude oil storage capacity near our Houston terminal at our Appelt property. One of these projects includes a new 390,000 barrel storage tank expected to be completed by the end of 2014. We have received all necessary construction permits in connection with this storage tank and anticipate commencing construction during the fourth quarter of 2013. The remaining additional storage capacity of approximately 3.1 million barrels consists of nine tanks to be constructed on 26 acres of land adjacent to our ongoing "Appelt II" expansion. The project, which we refer to as "Appelt III," will include a new manifold, and, upon completion, will bring total storage capacity at our Appelt property to approximately 10.0 million barrels. We anticipate commencing construction on this project during the third quarter of 2014 when all relevant permits are in place. The new storage capacity at Appelt III is expected to be placed into service during the fourth quarter of 2015 and first quarter of 2016.


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Pipeline Expansion Projects

In November 2013, we announced approval of expansion projects of approximately $98.0 million to construct two new crude oil pipelines connecting our Houston terminal with Crossroads Junction, which is the termination point of TransCanada Corporation's Gulf Coast Pipeline from Cushing and the origination point of Shell Pipeline's Houston-to-Houma pipeline (the "HoHo Pipeline"). The expansion projects include a new 24-inch pipeline that will give our terminal customers direct access to the origination point of the HoHo Pipeline, which is expected to transport crude oil from the Houston area eastbound to refining centers in Texas and Louisiana. The expansion projects also include a new 36-inch pipeline that will give our terminal customers access to the termination point of TransCanada Corporation's Gulf Coast Pipeline, which is expected to connect to the Keystone XL pipeline if approved and constructed. The 24-inch pipeline is expected to be completed by the end of 2014, and the 36-inch pipeline is expected to be completed by the end of the first quarter of 2015.

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. The estimated $44.0 million expansion project is expected to be completed by the end of 2014. Pursuant to this agreement, we currently are entitled to participate in margin sharing with Enterprise on a portion of the customer vessels loaded at our Houston facility. 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. In addition, in July 2013, we triggered a contractual provision that will entitle us to participate in margin sharing with Enterprise on all customer vessels loaded at our Houston facility beginning in January 2014.

Loan Agreement

On June 26, 2013, OTH entered into a ten-year $50.0 million unsecured loan agreement (the "$50.0 million Loan Agreement") with Oiltanking Finance B.V. ("OT Finance") for the purpose of financing the purchase of property, plant and equipment, through which borrowings were available from May 31, 2013 through August 31, 2013 (the "Availability Period"), with a maturity date of June 30, 2023 (the "Maturity Date"). In July 2013, OTH borrowed $50.0 million under this loan agreement, and the proceeds were used to repay outstanding balances under the revolving line of credit agreement. At September 30, 2013, OTH had $50.0 million of outstanding borrowings under this loan agreement at a fixed interest rate of 5.435% per annum. See Note 6 in the Notes to Unaudited Condensed Consolidated Financial Statements for further information.

Services Agreement Fee Adjustment

In August 2013, the Conflicts Committee of the board of directors of our general partner approved a requested increase to the fixed fee charged to us under the services agreement with Oiltanking North America, LLC and our general partner (the "Services Agreement") to $18.8 million on an annualized basis to reflect higher selling, general and administrative expenses associated with expansion projects placed in service in 2013. These expansion projects include the Houston crude oil storage and pipeline expansion, the first phase of our Appelt storage facility and related pipeline connections, and incremental refined petroleum products storage at our Beaumont terminal. The fee increase was effective as of July 1, 2013. See Note 2 in the Notes to Unaudited Condensed Consolidated Financial Statements for further information.

Management Changes

On July 1, 2013, Jonathan Z. Ackerman was appointed by the board of directors of our general partner to serve as Vice President and Chief Financial Officer of our general partner. Kenneth F. Owen, the previous Vice President and


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Chief Financial Officer, was named Terminal Manager of our expanding Houston complex and has been responsible for managing the Houston facilities since September 1, 2013.

Distribution Declaration

On October 21, 2013, the board of directors of our general partner declared a cash distribution to our unitholders of $0.445 per unit and a distribution on our general partner's interest, payable on November 14, 2013 to unitholders of record at the close of business on November 1, 2013. The $0.445 distribution per unit for the third quarter of 2013 represents a 4.7% increase over the second quarter 2013 cash distribution of $0.425 per unit and an 18.7% increase over the third quarter of 2012 cash distribution of $0.375 per unit.

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,
                                                 2013          2012         2013          2012

Revenues                                      $  58,531     $ 33,327     $ 150,796     $ 101,436
Costs and expenses:
Operating                                        11,339        8,993        31,783        26,639
Selling, general and administrative               6,235        4,824        15,973        14,015
Depreciation and amortization                     5,336        4,039        14,807        12,073
(Gain) loss on disposal of fixed assets            (153 )          -          (153 )          13
Total costs and expenses                         22,757       17,856        62,410        52,740
Operating income                                 35,774       15,471        88,386        48,696
Other income (expense):
Interest expense                                 (2,496 )       (487 )      (5,147 )      (1,094 )
Interest income                                       1            2             4            31
Other income (expense)                               (7 )          1            12            74
Total other expense, net                         (2,502 )       (484 )      (5,131 )        (989 )
Income before income tax expense                 33,272       14,987        83,255        47,707
Income tax expense                                 (389 )        (80 )        (704 )        (240 )
Net income                                    $  32,883     $ 14,907     $  82,551     $  47,467

Earnings per common unit - basic and
  diluted                                     $    0.65     $   0.38     $    1.75     $    1.19
Earnings per subordinated unit - basic and
  diluted                                     $    0.65     $   0.38     $    1.75     $    1.19

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 includes gains and losses on disposal of fixed assets for the periods presented above. Adjusted EBITDA is not a presentation made in accordance with GAAP. Adjusted EBITDA is a non-GAAP supplemental financial performance measure 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.


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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,
                                                      2013          2012         2013          2012

Reconciliation of Adjusted EBITDA from net income:
Net income                                         $  32,883     $ 14,907     $  82,551     $ 47,467
Depreciation and amortization                          5,336        4,039        14,807       12,073
Income tax expense                                       389           80           704          240
Interest expense, net                                  2,495          485         5,143        1,063
(Gain) loss on disposal of fixed assets                 (153 )          -          (153 )         13
Other (income) expense                                     7           (1 )         (12 )        (74 )
Adjusted EBITDA                                    $  40,957     $ 19,510     $ 103,040     $ 60,782

Operating Data

The following table presents operating data for the periods indicated:
                                                      Three Months Ended             Nine Months Ended
                                                        September 30,                  September 30,
                                                       2013           2012           2013           2012

Storage capacity, end of period (mmbbls) (1) (3)       19.9            17.7           19.9           17.7
Storage capacity, average (mmbbls) (3)                 19.6            17.7           19.5           17.6
Terminal throughput (mbpd) (2)                      1,095.2           787.0        1,037.6          821.9
Vessels per period                                      250             229            669            679
Barges per period                                       879             793          2,498          2,346
Trucks per period                                     9,411           2,613         21,549          7,981
Rail cars per period                                  1,170           1,701          4,758          6,589


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

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

(3) During the first and third quarters of 2013, we placed into service net storage capacity of approximately 0.9 million barrels and 1.4 million barrels, respectively. Amounts do not reflect approximately 0.8 million barrels of storage capacity placed into service in October 2013.

Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

Adjusted EBITDA. Adjusted EBITDA for the three months ended September 30, 2013 increased by $21.4 million, or 109.9%, to $41.0 million from $19.5 million for the three months ended September 30, 2012. The increase in Adjusted EBITDA was primarily attributable to a $25.2 million increase in revenues, partially offset by a $2.3 million increase in operating expenses and a $1.4 million increase in selling, general and administrative expenses.


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Revenues. Revenues for the three months ended September 30, 2013 increased by $25.2 million, or 75.6%, to $58.5 million from $33.3 million for the three months ended September 30, 2012, primarily attributable to an increase in storage service fee revenues of $6.3 million, an increase in throughput fee revenue of $17.5 million and an increase in ancillary services fee revenue of $1.5 million. Increased storage service fee revenues were attributable to additional revenues from new storage capacity placed into service in the first and third quarters of 2013 and, to a lesser extent, due to contract escalation of storage fees. Increased throughput fee revenue was attributable to fees generated on pipelines placed into service in the first quarter of 2013, and, to a greater extent, due to an increase in fees related to LPG exports at our Houston terminal. A significant proportion of the increase in throughput fees was attributable to amounts we received under a margin sharing arrangement with a customer; the margin sharing fees received were in addition to the volume-based throughput fees we earned under that arrangement.

Operating Expenses. Operating expenses for the three months ended September 30, 2013 increased by $2.3 million, or 26.1%, to $11.3 million from $9.0 million for the three months ended September 30, 2012. The increase in operating expenses was primarily due to an increase of $0.9 million in repairs and maintenance costs, an increase of $0.4 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 costs in the 2013 period, an increase of $0.3 million in power and fuel costs due to higher fuel usage, an increase of $0.3 million in insurance costs due to policy renewals with higher premiums, an increase of $0.2 million in property taxes resulting from an increased property base and increased property values and an increase of $0.2 million in legal, permitting and licensing fees.

Selling, General and Administrative Expenses ("SG&A expenses"). SG&A expenses for the three months ended September 30, 2013 increased by $1.4 million, or 29.2%, to $6.2 million from $4.8 million for the three months ended September 30, 2012. The increase in SG&A expenses was primarily due to an increase of $0.9 million in the quarterly fixed fee under an amendment to the Services Agreement effective July 1, 2013 (see Note 2 in the Notes to Unaudited Condensed Consolidated Financial Statements). SG&A expenses also increased as a result of higher legal, accounting and professional fees in the 2013 period.

Depreciation and Amortization Expense. Depreciation and amortization expense for the three months ended September 30, 2013 increased by $1.3 million, or 32.1%, to $5.3 million from $4.0 million for the three months ended September 30, 2012, primarily due to assets placed in service in the 2012 and 2013 periods.

Gain on Disposal of Fixed Assets. During the three months ended September 30, 2013, we recognized a gain of $0.2 million on the dismantling and disposal of terminal assets, which were not part of our active storage capacity. During the three months ended September 30, 2012, we did not recognize any gains or losses on the disposal of assets.

Interest Expense. Interest expense for the three months ended September 30, 2013 increased by $2.0 million, or 412.5%, to $2.5 million from $0.5 million for the three months ended September 30, 2012, primarily due to higher outstanding borrowings under our long-term debt agreements driven by increased construction activity. Higher interest expense from higher borrowings under our long-term debt agreements was partially offset by lower interest capitalized on construction projects due to lower interest rates on our long-term borrowings and the completion of construction projects as assets are placed into service.

Income Tax Expense. Income tax expense for the three months ended September 30, 2013 increased by $0.3 million, or 386.3%, to $0.4 million from $0.1 million for the three months ended September 30, 2012, due to an increase in accruals for Texas margin tax.

Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

Adjusted EBITDA. Adjusted EBITDA for the nine months ended September 30, 2013 increased by $42.3 million, or 69.5%, to $103.0 million from $60.8 million for the nine months ended September 30, 2012. The increase in Adjusted EBITDA was primarily attributable to a $49.4 million increase in revenues, partially offset by a $5.1 million increase in operating expenses and a $2.0 million increase in SG&A expenses.


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Revenues. Revenues for the nine months ended September 30, 2013 increased by $49.4 million, or 48.7%, to $150.8 million from $101.4 million for the nine months ended September 30, 2012, primarily attributable to an increase in storage service fee revenues of $13.6 million, an increase in throughput fee revenue of $35.3 million and an increase in ancillary services fee revenue of $0.5 million. Increased storage service fee revenues were attributable to additional revenues from new storage capacity placed into service in the first and third quarters of 2013 and, to a lesser extent, due to contract escalation of storage fees. Increased throughput fee revenue was attributable to fees generated on pipelines placed into service in the first quarter of 2013, and, to a greater extent, due to an increase in fees related to LPG exports at our . . .

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