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OILT > SEC Filings for OILT > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for OILTANKING PARTNERS, L.P.

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


7-Aug-2014

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, 2013 ("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 forecast 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 (the "SEC"). Actual results may vary materially from such forward-looking statements. You are cautioned not to place undue reliance on any forward-looking statements.

Specific 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 ("LPG") 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 growth-oriented Delaware limited partnership formed by Oiltanking Holding Americas, Inc. ("OTA") on March 14, 2011, to engage 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.

OTA owns and controls our general partner, OTLP GP, LLC (our "general partner"). Through our wholly owned subsidiaries, Oiltanking Houston, L.P. ("OTH") and Oiltanking Beaumont Partners, L.P. ("OTB"), we own and operate 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 Finance B.V. ("OT Finance"), a wholly owned finance company of Oiltanking GmbH, serves as the global financing division for the Oiltanking Group's terminal holdings, including us, and arranges loans and notes at market rates and terms for approved terminal construction projects. 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


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and its subsidiaries unless the context indicates otherwise. All references to unit and per unit amounts in this document and related disclosures have been adjusted for all periods presented to reflect a two-for-one unit split completed in July 2014, as discussed below under "Recent Developments - Unit Split."

On July 19, 2011, we completed our initial public offering of 23,000,000 common units, including 3,000,000 common units issued in connection with the underwriters' exercise of their over-allotment option, at a price of $10.75 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 15,899,802 common units and 38,899,802 subordinated units to OTA and its affiliates, and issued incentive distribution rights ("IDRs") to our general partner. At June 30, 2014, OTA owned our general partner, 15,899,802 common units and 38,899,802 subordinated units. At June 30, 2014, we had outstanding (i) 44,099,802 common units and 38,899,802 subordinated units representing limited partner interests, (ii) a 2.0% general partner interest and (iii) IDRs.

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 June 30, 2014, we had approximately 23.6 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 June 30, 2014, this facility had an aggregate active storage capacity of approximately 18.1 million barrels. Our Beaumont terminal serves as a regional hub for refined petroleum products for refineries located in the Gulf Coast region. At June 30, 2014, this facility had an aggregate active storage capacity of approximately 5.5 million barrels.

Recent Developments

LPG Export Terminal Agreement

In January 2014, we announced a further expansion of our terminal service agreement with Enterprise Products Partners, L.P. ("Enterprise") to handle increased volumes of LPG exports at our Houston terminal. Under the amended agreement, the primary contract term was extended to 50 years from the February 1, 2014 effective date, and the exclusivity provisions relating to the Houston Ship Channel in the prior agreement were expanded to cover all of the U.S. Gulf Coast. The throughput rates and margin sharing provisions in the amended agreement remain unchanged from the prior terminal service agreement.

Expansion Projects and Assets Placed Into Service

In January 2014, we completed the previously announced "Appelt I" project by placing into service the last storage tank with a total capacity of 210,000 barrels. The Appelt I expansion project was a $104.0 million project to construct approximately 3.2 million barrels of new crude oil storage capacity at our Houston terminals. As part of this project, we placed into service the other nine new crude oil storage tanks with a total capacity of approximately 3.0 million barrels during 2013.

In May and June 2014, we placed into service five new crude oil storage tanks with a total capacity of 1.8 million barrels as part of our "Appelt II" project. In July 2014, we placed into service an additional new crude oil storage tank with a total capacity of 210,000 barrels as part of this project. The Appelt II expansion project is a $70.0 million project


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to construct approximately 3.3 million barrels of new crude oil storage capacity at our Houston terminals. The remaining storage capacity is expected to be placed into service during the third and fourth quarters of 2014.

The following is a summary of new storage capacity that has been placed into service by quarter from June 30, 2013 through June 30, 2014:

                                      Aggregate
                       Number of       Capacity
  In-Service Date        tanks       (in barrels)                     Project

Third Quarter 2013            1          275,000     Crude Expansion (announced November 2011)
Third Quarter 2013            3        1,170,000     Appelt I
Fourth Quarter 2013           6        1,800,000     Appelt I
First Quarter 2014            1          210,000     Appelt I
Second Quarter 2014           5        1,770,000     Appelt II
                             16        5,225,000

Beaumont Expansion Project

In June 2014, we announced the approval of an expansion project to construct new crude storage, pipelines and dock infrastructure at our Beaumont terminal. The multi-phase crude expansion is expected to have a total capacity of up to 6.2 million barrels of storage at a total cost of approximately $340.0 million when all currently planned phases have been completed. The first phase includes pipeline connections and manifold infrastructure and the construction of a new finger pier with two new deep-water docks. The new docks will be configured to load and unload crude and feedstocks at high rates to accommodate both the announced crude expansions and other growth opportunities. The first tanks are expected to be placed into service during the third quarter of 2015. Upon completion of the announced crude storage expansions, the Beaumont terminal is expected to have approximately 11.7 million barrels of total capacity.

Leases with the Port of Houston

In April 2014, we exercised an option to lease approximately 58 acres of undeveloped property adjacent to our Houston terminal from the Port of Houston Authority of Harris County, Texas (the "Port of Houston"). Under the terms of the lease, we will pay the Port of Houston monthly rental fees commencing May 1, 2014 until the expiration of the lease on October 31, 2038. We also leased an additional 30 acres from the Port of Houston beginning May 1, 2014 through April 30, 2017, which is contiguous to the 58 acres mentioned above. We are evaluating a number of potential expansion projects that would be located on the leased property.

Unit Split

On July 14, 2014, we completed a two-for-one unit split by distributing one additional limited partner unit for each issued and outstanding limited partner unit to all unitholders of record as of July 7, 2014. All references to unit and per unit amounts in this document and related disclosures have been adjusted to reflect the effect of the unit split for all periods presented.

In connection with the two-for-one unit split, our general partner executed Amendment No.1 to our First Amended and Restated Agreement of Limited Partnership on July 14, 2014. The amendment provides, among other things, for the proportionate adjustment of the minimum quarterly distribution and target distributions.


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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          Six Months Ended
                                                   June 30,                   June 30,
                                              2014          2013         2014          2013

Revenues                                   $  69,073     $ 52,079     $ 129,026     $ 92,265
Costs and expenses:
Operating                                     13,978       10,979        27,760       20,444
Selling, general and administrative            6,264        4,741        12,042        9,738
Depreciation and amortization                  5,540        4,981        10,979        9,471
Gain on disposal of fixed assets                 (88 )          -           (88 )          -
Total costs and expenses                      25,694       20,701        50,693       39,653
Operating income                              43,379       31,378        78,333       52,612
Other income (expense):
Interest expense                                (757 )     (1,759 )      (2,202 )     (2,651 )
Interest income                                   36            -            88            3
Other income                                       1           17             5           19
Total other expense, net                        (720 )     (1,742 )      (2,109 )     (2,629 )
Income before income tax expense              42,659       29,636        76,224       49,983
Income tax expense                              (408 )       (160 )        (717 )       (315 )
Net income                                 $  42,251     $ 29,476     $  75,507     $ 49,668

Earnings per common unit - basic and
  diluted                                  $    0.37     $   0.31     $    0.69     $   0.55
Earnings per subordinated unit - basic and
  diluted                                  $    0.37     $   0.31     $    0.69     $   0.55

Adjusted EBITDA

We define Adjusted EBITDA as net income before net interest expense, income tax expense, depreciation and amortization expense and other income, as further adjusted to exclude gains and losses on disposal of fixed assets and property casualty indemnification. 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 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         Six Months Ended
                                               June 30,                  June 30,
                                          2014          2013         2014         2013

Reconciliation of Adjusted EBITDA from
  net income:
Net income                             $  42,251     $ 29,476     $ 75,507     $ 49,668
Depreciation and amortization              5,540        4,981       10,979        9,471
Income tax expense                           408          160          717          315
Interest expense, net                        721        1,759        2,114        2,648
Gain on disposal of fixed assets             (88 )          -          (88 )          -
Other income                                  (1 )        (17 )         (5 )        (19 )
Adjusted EBITDA                        $  48,831     $ 36,359     $ 89,224     $ 62,083

Operating Data

The following table presents operating data for the periods indicated:
                                         Three Months Ended            Six Months Ended
                                              June 30,                     June 30,
                                         2014           2013          2014          2013

Storage capacity, end of period
(mmbbls) (1) (3)                          23.6            18.5          23.6          18.5
Storage capacity, average (mmbbls)
(3)                                       23.5            18.5          22.3          18.3
Terminal throughput (mbpd) (2)         1,256.2         1,135.7       1,158.4       1,008.5
Vessels per period                         261             225           487           419
Barges per period                          772             788         1,449         1,619
Trucks per period                       16,750           6,900        29,779        12,138
Rail cars per period                        98           1,950           148         3,588


_______________________


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

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

(3) During the second quarter of 2014, we placed into service approximately 1.8 million barrels of storage capacity. Amounts do not reflect approximately 210,000 barrels of storage capacity placed into service in July 2014.

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Adjusted EBITDA. Adjusted EBITDA for the three months ended June 30, 2014 increased by $12.5 million, or 34.3%, to $48.8 million from $36.4 million for the three months ended June 30, 2013. The increase in Adjusted EBITDA was primarily attributable to a $17.0 million increase in revenues, partially offset by a $3.0 million increase in operating expenses and a $1.5 million increase in selling, general and administrative expenses ("SG&A expenses").

Revenues. Revenues for the three months ended June 30, 2014 increased by $17.0 million, or 32.6%, to $69.1 million from $52.1 million for the three months ended June 30, 2013, primarily attributable to an increase in storage service fee revenues of $6.8 million, an increase in throughput fee revenue of $8.9 million and an increase in ancillary services fee revenue of $1.4 million. Increased storage service fee revenues were attributable to additional revenues associated with the addition of approximately 5.2 million barrels of new storage capacity, a 28.4% increase, since June 30, 2013, partially offset by lost storage service fee revenues due to tanks temporarily taken out of service for inspections, repairs and maintenance. Increased throughput fee revenue was attributable to fees related to pipeline throughput and


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in-terminal sales, fees related to LPG exports at our Houston terminal and customer deficiency charges recognized in the current period.

Operating Expenses. Operating expenses for the three months ended June 30, 2014 increased by $3.0 million, or 27.3%, to $14.0 million from $11.0 million for the three months ended June 30, 2013. The increase in operating expenses was primarily due to an increase of $1.5 million in operations employee-related costs including benefit costs and operational labor costs, an increase of $0.5 million in rental expense due to new land leases, an increase of $0.4 million in legal, permitting and licensing fees, an increase of $0.2 million in power and fuel costs due to higher fuel usage, 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 insurance costs due to policy renewals with higher premiums.

Selling, General and Administrative Expenses. SG&A expenses for the three months ended June 30, 2014 increased by $1.5 million, or 32.1%, to $6.3 million from $4.7 million for the three months ended June 30, 2013. The increase in SG&A expenses was primarily due to an increase of $0.9 million in the quarterly fixed fee under the Services Agreement, which was amended 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 and professional fees in the 2014 period.

Depreciation and Amortization Expense. Depreciation and amortization expense for the three months ended June 30, 2014 increased by $0.6 million, or 11.2%, to $5.5 million from $5.0 million for the three months ended June 30, 2013, primarily due to assets placed in service in late 2013 and in the first and second quarters of 2014.

Gain on Disposal of Fixed Assets. During the three months ended June 30, 2014, we recognized a gain of $0.1 million on the dismantling and disposal of terminal assets, which were not part of our active storage capacity. During the three months ended June 30, 2013, we did not recognize any gains or losses on the disposal of assets.

Interest Expense. Interest expense for the three months ended June 30, 2014 decreased by $1.0 million, or 57.0%, to $0.8 million from $1.8 million for the three months ended June 30, 2013, primarily due to an increase of $1.4 million in interest capitalized on construction projects, partially offset by higher outstanding borrowings in the 2014 period under our long-term debt agreements to fund increased construction activity.

Income Tax Expense. Income tax expense for the three months ended June 30, 2014 increased by $0.2 million, or 155.0%, to $0.4 million from $0.2 million for the three months ended June 30, 2013, 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 other than the Texas margin tax.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Adjusted EBITDA. Adjusted EBITDA for the six months ended June 30, 2014 increased by $27.1 million, or 43.7%, to $89.2 million from $62.1 million for the six months ended June 30, 2013. The increase in Adjusted EBITDA was primarily attributable to a $36.8 million increase in revenues, partially offset by a $7.3 million increase in operating expenses and a $2.3 million increase in SG&A expenses.

Revenues. Revenues for the six months ended June 30, 2014 increased by $36.8 million, or 39.8%, to $129.0 million from $92.3 million for the six months ended June 30, 2013, primarily attributable to an increase in storage service fee revenues of $12.8 million, an increase in throughput fee revenue of $21.7 million and an increase in ancillary services fee revenue of $2.3 million. Increased storage service fee revenues were attributable to additional revenues from the new storage capacity as discussed above, partially offset by lost storage service fee revenues due to tanks temporarily taken out of service for inspections, repairs and maintenance. Increased throughput fee revenue was attributable to fees related to pipeline throughput and in-terminal sales, fees related to LPG exports at our Houston terminal and customer deficiency charges recognized in the current period.

Operating Expenses. Operating expenses for the six months ended June 30, 2014 increased by $7.3 million, or 35.8%, to $27.8 million from $20.4 million for the six months ended June 30, 2013. The increase in operating expenses


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was primarily due to an increase of $2.5 million in operations employee-related costs including benefit costs and operational labor costs, an increase of $1.5 million in repairs and maintenance costs, an increase of $0.8 million in power and fuel costs due to higher fuel usage, an increase of $0.8 million in legal, permitting and licensing fees, an increase of $0.7 million in property taxes resulting from an increased property base and increased property values, an increase of $0.5 million in rental expense due to new land leases, and an increase of $0.5 million in insurance costs due to policy renewals with higher premiums.

Selling, General and Administrative Expenses. SG&A expenses for the six months ended June 30, 2014 increased by $2.3 million, or 23.7%, to $12.0 million from $9.7 million for the six months ended June 30, 2013. The increase in SG&A expenses was primarily due to an increase of $0.9 million in the quarterly fixed fee under the Services Agreement, which was amended 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 and professional fees in the 2014 period.

Depreciation and Amortization Expense. Depreciation and amortization expense for the six months ended June 30, 2014 increased by $1.5 million, or 15.9%, to $11.0 million from $9.5 million for the six months ended June 30, 2013, primarily due to assets placed in service in late 2013 and in the first and second quarters of 2014.

Gain on Disposal of Fixed Assets. During the six months ended June 30, 2014, we recognized a gain of $0.1 million on the dismantling and disposal of terminal assets, which were not part of our active storage capacity. During the six months ended June 30, 2013, we did not recognize any gains or losses on the disposal of assets.

Interest Expense. Interest expense for the six months ended June 30, 2014 decreased by $0.4 million, or 16.9%, to $2.2 million from $2.7 million for the six months ended June 30, 2013, primarily due to an increase of $1.5 million in interest capitalized on construction projects, partially offset by higher outstanding borrowings in the 2014 period under our long-term debt agreements to fund increased construction activity.

Income Tax Expense. Income tax expense for the six months ended June 30, 2014 . . .

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