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OILT > SEC Filings for OILT > Form 10-K on 25-Feb-2014All Recent SEC Filings

Show all filings for OILTANKING PARTNERS, L.P.

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


25-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with our consolidated financial statements and our accompanying notes thereto included in "Item 8. Financial Statements and Supplementary Data" of this Report. Our discussion and analysis includes the following:

Overview of Business;

General Outlook for 2014;

         2013 Developments and Updates - discusses major items impacting our
          results in 2013;


         Results of Operations - discusses material year-to-year variances in
          the consolidated statements of income;


         Liquidity and Capital Resources - addresses available sources of
          liquidity and capital resources and includes a discussion of our
          capital spending;


         Critical Accounting Policies and Estimates - presents accounting
          policies and estimates that are among the most critical to the
          presentation of our financial position and results of operations; and


         Other Considerations - includes information related to contractual
          obligations, off-balance sheet arrangements and related party
          transactions.

This discussion contains forward-looking statements based on current expectations that are subject to risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results and the timing of events could differ materially from those anticipated or implied by the forward-looking statements discussed in this Report as a result of various factors, including, among others, those set forth under "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" herein. 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,"


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"us," and "our" and similar terms refer to OILT and its subsidiaries, where applicable, unless the context indicates otherwise.

Overview of Business
We are a growth-oriented limited partnership engaged in the independent terminaling, storage and transportation of crude oil, refined petroleum products and LPG. We provide services to major integrated oil companies, distributors, marketers and chemical and petrochemical companies, typically under long-term commercial agreements that include minimum volume commitments and inflation escalators. We do not take ownership of the crude oil, refined products or LPG that we terminal, store or transport nor do we engage in any marketing or trading of commodities.

Our primary business objectives are to generate stable and predictable cash flows to enable us to pay quarterly distributions to our unitholders and to increase our quarterly cash distributions per unit over time. We intend to achieve these objectives by anticipating long-term infrastructure needs in the areas we serve and by growing our tank terminals and pipeline networks through construction in new markets, the expansion of existing facilities and strategic acquisitions.

At December 31, 2013, we had nearly 22 million barrels of total active storage capacity at our Houston and Beaumont facilities. These integrated facilities are strategically located and directly connected to 23 key refining, production and storage facilities along the Gulf Coast and the Cushing, Oklahoma storage interchange through dedicated and common carrier pipelines. In addition, our facilities provide our customers deep-water access and international distribution capabilities.

Our Houston terminals serve as a regional hub for crude oil and other feedstocks for refineries and petrochemical facilities located in the Gulf Coast region and also serve as important export facilities for LPG and other refined petroleum products. At December 31, 2013, this facility had an aggregate active storage capacity of approximately 16.2 million barrels. Our Beaumont terminal serves as a regional hub for refined petroleum products for refineries located in the Gulf Coast region. At December 31, 2013, this facility had an aggregate active storage capacity of approximately 5.5 million barrels.

General Outlook for 2014

We believe there will continue to be growth in North American crude oil, natural gas and natural gas liquid ("NGL") production in 2014 due to shale drilling and advances in drilling technology. In particular, we expect sustained growth in onshore domestic crude oil production from the Permian, Eagle Ford, Bakken and other shale plays, and increasing offshore production from the Gulf of Mexico.

Announced and completed pipeline expansion projects are expected to result in a significant increase in crude oil supplies to the Gulf Coast. Although the crude oil being produced and imported to the U.S. consists of many different grades and blends, the majority of Gulf Coast refiners have invested significantly in infrastructure to process heavy crudes as a primary feedstock. A substantial proportion of new production volumes being shipped to the Gulf Coast market has been medium and light sweet crudes and condensates. As a result, regional supply and demand imbalances have arisen and are expected to persist. These imbalances create incremental demand for crude oil to be staged, batched or segregated to allow our customers to optimize the revenues received for their products. The ability to export crude by water to the extent permitted under the current regulatory environment also provides potential outlets to more attractive markets. Handling the diversity of crude types often necessitates additional fee-based services, such as blending and heating. The changing crude oil logistics landscape should continue to drive increased demand for our storage and transportation services and create opportunities for us to use our existing assets and to develop additional infrastructure to meet the growing needs of our customers.

In addition, we anticipate the unprecedented growth in NGL production as result of crude oil and natural gas production to continue. This growth has contributed to significant capital investments in the natural gas processing and fractionating sectors. NGL supply has exceeded domestic demand, creating a surplus of LPG, particularly in the Gulf Coast. LPG exports have helped balance U.S. supply and demand. We expect continued strong demand for the handling and export of LPG from our Houston terminal over the next several years.


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We believe our stable asset base, long-term contract profile, conservative financial leverage and economically attractive expansion projects should enable us to continue to grow our cash flows for the next several years. We also believe we are reasonably well positioned to pursue and consummate acquisitions. There can be no assurance that these opportunities will come to fruition or our acquisition and expansion efforts will be successful.

We believe that cash on hand, proceeds expected to be received on our short-term notes receivable, cash flow in excess of distributions, as well as borrowings under our undrawn Credit Agreement or other long-term debt agreements with OT Finance will enable us to fund our currently anticipated expansion activities for the next several years. However, funding of additional expansion activities or acquisitions may require us to access additional capital resources, which we intend to fund with a balanced combination of equity and debt capital. Although we believe that equity and debt markets will be available to us on reasonable terms based on current market conditions, there can be no assurance that future market conditions will permit us to access capital to fund future acquisition and expansion activities. See "Item 1A. Risk Factors - Risks Inherent in Our Business."

2013 Developments and Updates

Significant financial highlights during the year ended December 31, 2013,
included the following:

         On June 26, 2013, OTH entered into the $50.0 million Loan Agreement for
          the purpose of financing the purchase of property, plant and equipment,
          with a maturity date of June 30, 2023. At December 31, 2013, OTH had
          $50.0 million of outstanding borrowings under this loan agreement at a
          fixed interest rate of 5.435% per annum.


         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 from $15.1 million 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. The fee increase was effective as of July 1, 2013.


         On November 22, 2013, we completed a public offering of 2,600,000
          common units at a price to the public of $61.65 per unit. The proceeds
          from the offering, net of underwriting discounts and other offering
          expenses, totaled approximately $154.3 million. In connection with the
          offering, our general partner contributed an additional $3.3 million to
          us to maintain its 2.0% general partner interest in us. We used $56.0
          million of the proceeds to repay the balance outstanding under our
          Credit Agreement.


         We increased our quarterly distribution to $0.47 per unit for the
          fourth quarter of 2013, representing a 20.5% increase over the
          distribution for the fourth quarter of 2012, and our ninth consecutive
          quarterly increase since becoming a public company in the third quarter
          of 2011.

Significant operational highlights during the year ended December 31, 2013, included the following:

         During January 2013, we placed into service a pipeline expansion
          project in Houston announced in November 2011.


         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.


         During the first quarter of 2013, we completed construction and placed
          into service two new refined products storage tanks in Beaumont, with a
          total capacity of 320,000 barrels.


         In March 2013, we announced an expansion of our relationship with
          Enterprise and plans to increase our ability to export LPG at our
          terminal on the Houston Ship Channel. In connection with the agreement
          with Enterprise, we are constructing a new vessel dock and adding
          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 were initially entitled to participate in margin
          sharing with Enterprise on only a portion of the customer vessels
          loaded at our Houston facility; however, in July 2013, we triggered a
          contractual provision that entitled us to participate in margin sharing
          on all customer vessels loaded at our Houston facility after January
          2014. In January


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2014, we announced another expansion of this agreement, which is described under "Item 1. Business - 2013 and Recent Developments - LPG Export Terminal Agreement and Dock Expansion Project."
During 2013, as part of our Appelt I expansion, we placed into service nine new crude oil storage tanks with a total capacity of 2,970,000 barrels. In January 2014, we completed the Appelt I project by placing the remaining storage tank with a total capacity of 210,000 barrels into service.

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 to be connected to the Appelt I and Appelt II manifolds that is expected to be completed by the end of 2014. 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 3.1 million barrel Appelt III project would include a new manifold, and, upon completion, would bring total storage capacity at our Appelt property to approximately 10.0 million barrels. 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.

In November 2013, we announced approval of expansion projects of approximately $98.0 million to construct two new crude oil pipelines connecting our Houston facility with Crossroads Junction, which is the termination point of the Houston lateral of TransCanada Corporation's Gulf Coast Pipeline from Cushing and the origination point of Shell Pipeline's HoHo Pipeline. The expansion projects include a new 24-inch pipeline and a new 36-inch pipeline. 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.


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Results of Operations
Our operating results were as follows for the periods indicated (in thousands, except per unit amounts):

                                                   Year Ended December 31,
                                              2013          2012          2011

Revenues                                   $ 210,950     $ 135,497     $ 117,377
Costs and expenses:
Operating                                     43,910        36,025        31,862
Selling, general and administrative           21,765        18,856        17,985
Depreciation and amortization                 20,407        15,901        15,676
(Gain) loss on disposal of fixed assets         (329 )          13           544
Gain on property casualty indemnification       (303 )           -          (928 )
Total costs and expenses                      85,450        70,795        65,139
Operating income                             125,500        64,702        52,238
Other income (expense):
Interest expense                              (7,393 )      (1,654 )      (5,438 )
Loss on early extinguishment of debt               -             -        (6,382 )
Interest income                                   30            33            42
Other income                                      13           140           431
Total other expense, net                      (7,350 )      (1,481 )     (11,347 )
Income before income tax (expense) benefit   118,150        63,221        40,891
Income tax (expense) benefit                  (1,087 )        (576 )      21,506
Net income                                 $ 117,063     $  62,645     $  62,397

Earnings per common unit - basic and
  diluted (1)                              $    2.45     $    1.57     $    0.60
Earnings per subordinated unit - basic and
  diluted (1)                              $    2.40     $    1.57     $    0.60


______________


(1) Amounts attributable to 2011 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, 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, property casualty indemnification and early extinguishment of debt for the periods presented above. Adjusted EBITDA is a non-GAAP supplemental financial performance measure management and other third parties, such as industry analysts, investors, lenders and rating agencies, may use to assess: (i) our financial performance as compared to our peers, without regard to historical cost basis or financing methods, (ii) the viability of proposed projects and acquisitions and (iii) the 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 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


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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):

                                                          Year Ended December 31,
                                                      2013          2012         2011

Reconciliation of Adjusted EBITDA from net income:
Net income                                         $ 117,063     $ 62,645     $ 62,397
Depreciation and amortization                         20,407       15,901       15,676
Income tax expense (benefit)                           1,087          576      (21,506 )
Interest expense, net                                  7,363        1,621        5,396
Loss on early extinguishment of debt                       -            -        6,382
(Gain) loss on disposal of fixed assets                 (329 )         13          544
Gain on property casualty indemnification               (303 )          -         (928 )
Other income                                             (13 )       (140 )       (431 )
Adjusted EBITDA                                    $ 145,275     $ 80,616     $ 67,530

Operating Data

The following table presents operating data for the periods indicated:
                                                     Year Ended December 31,
                                                     2013         2012      2011

Storage capacity, end of period (mmbbls) (1) (3)      21.7         17.7     17.3
Storage capacity, average (mmbbls) (3)                19.3         17.6     16.8
Terminal throughput (mbpd) (2)                     1,064.3        822.2    771.9
Vessels per period                                     914          879      823
Barges per period                                    3,228        3,233    2,509
Trucks per period                                   30,910       11,307    5,158
Rail cars per period                                 4,914        7,979      702


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

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

(3) Amounts do not reflect approximately 210,000 barrels of storage capacity placed into service in January 2014.

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Adjusted EBITDA. Adjusted EBITDA for the year ended December 31, 2013 increased by $64.7 million, or 80.2%, to $145.3 million from $80.6 million for the year ended December 31, 2012. The increase in Adjusted EBITDA was primarily attributable to a $75.5 million increase in revenues, partially offset by a $7.9 million increase in operating expenses and a $2.9 million increase in selling, general and administrative expenses ("SG&A expenses").

Revenues. Revenues for the year ended December 31, 2013 increased by $75.5 million, or 55.7%, to $211.0 million from $135.5 million for the year ended December 31, 2012, primarily attributable to an increase in storage service fee revenues of $22.7 million, an increase in throughput fee revenue of $50.6 million and an increase in ancillary services fee revenue of $2.2 million. Increased storage service fee revenues were attributable to additional revenues from approximately 4.1 million barrels of new storage capacity placed into service in the first, third and fourth quarters of 2013, an increase of 22.6% in storage capacity, and, to a lesser extent, due to an escalation of storage fees under our contracts. Increased throughput fee revenue was attributable to an increase in fees related to LPG exports at our Houston


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terminal, which included approximately $30.9 million received under a margin sharing arrangement with our customer that was in addition to volume-based throughput fees and, to a lesser extent, fees generated on pipelines placed into service in the first quarter of 2013.

Operating Expenses. Operating expenses for the year ended December 31, 2013 increased by $7.9 million, or 21.9%, to $43.9 million from $36.0 million for the year ended December 31, 2012. The increase in operating expenses was primarily due to an increase of $2.9 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 $2.5 million in property taxes resulting from an increased property base and increased property values, an increase of $2.0 million in repairs and maintenance costs, an increase of $1.2 million in power and fuel costs due to higher fuel usage, an increase of $0.9 million in insurance costs due to policy renewals with higher premiums and an increase of $0.1 million in legal, permitting and licensing fees. These increases in operating expenses were partially offset by a decrease of $1.4 million in expenses associated with a pipeline-related construction project which was completed in 2012 and 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. SG&A expenses for the year ended December 31, 2013 increased by $2.9 million, or 15.4%, to $21.8 million from $18.9 million for the year ended December 31, 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 3 in the Notes to Consolidated Financial Statements. SG&A expenses also increased as a result of higher legal, accounting and professional fees in 2013.

Depreciation and Amortization Expense. Depreciation and amortization expense for the year ended December 31, 2013 increased by $4.5 million, or 28.3%, to $20.4 million from $15.9 million for the year ended December 31, 2012, primarily due to assets placed in service in 2012 and 2013.

(Gain) Loss on Disposal of Fixed Assets. During the year ended December 31, 2013, we recognized a gain of $0.3 million on the dismantling and disposal of terminal assets, which were not part of our active storage capacity. During the year ended December 31, 2012, we recognized a loss of less than $0.1 million on the disposal of certain dismantled terminal assets.

Gain on Property Casualty Indemnification. During the year ended December 31, 2013, we recognized a gain of $0.3 million from proceeds received for an insurance claim related to damages sustained during a hurricane in 2008.

Interest Expense. Interest expense for the year ended December 31, 2013 increased by $5.7 million, or 347.0%, to $7.4 million from $1.7 million for the year ended December 31, 2012, primarily due to higher outstanding borrowings during 2013 under our long-term debt agreements driven by increased construction activity, partially offset by higher capitalized interest on construction projects.

Income Tax Expense. Income tax expense for the year ended December 31, 2013 increased by $0.5 million, or 88.7%, to $1.1 million from $0.6 million for the year ended December 31, 2012, due to an increase in accruals for Texas margin tax. 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 Texas margin tax.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Adjusted EBITDA. Adjusted EBITDA for the year ended December 31, 2012 increased by $13.1 million, or 19.4%, to $80.6 million from $67.5 million for the year ended December 31, 2011. The increase in Adjusted EBITDA was primarily attributable to an $18.1 million increase in revenues, partially offset by a $4.2 million increase in operating expenses and a $0.9 million increase in SG&A expenses.

Revenues. Revenues for the year ended December 31, 2012 increased by $18.1 million, or 15.4%, to $135.5 million from $117.4 million for the year ended December 31, 2011. The increase in revenues was primarily attributable to additional revenues from the new storage capacity placed into service in December 2011 and in April 2012 and an


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escalation in storage fees, resulting in an increase in storage revenues of $9.8 million, higher throughput fee revenue of $5.1 million, primarily attributable to increased LPG exports during 2012 and an increase in ancillary services fee revenue of $3.2 million, approximately $1.4 million of which relates to revenues from a pipeline-related construction project for a customer that was completed and recognized during 2012.

Operating Expenses. Operating expenses for the year ended December 31, 2012 increased by $4.2 million, or 13.1%, to $36.0 million from $31.9 million for the year ended December 31, 2011. The increase in operating expenses was primarily due to an increase of $2.3 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 2012 period, an increase of $1.9 million in legal, engineering and permitting and licensing fees, an increase of $1.4 million in expenses associated with the pipeline-related construction project discussed above and an increase of $0.3 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 a lower rate and a decrease of $0.5 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 year ended December 31, 2012 increased by $0.9 million, or 4.8%, to $18.9 million from $18.0 million for the year ended December 31, 2011. The increase in SG&A . . .

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