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

Show all filings for WESTERN REFINING LOGISTICS, LP

Form 10-Q for WESTERN REFINING LOGISTICS, LP


7-Aug-2014

Quarterly Report


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

Overview
WNRL is a fee-based growth-oriented, Delaware master limited partnership formed by Western Refining Logistics GP, LLC ("WRGP"), our general partner which holds all of the non­economic general partner interests in WNRL and is owned 100% by Western Refining, Inc. ("Western"). WNRL was formed to own, operate, develop and acquire terminals, storage tanks, pipelines and other related businesses. WNRL filed a registration statement on Form S-1 related to our initial public offering (the "Offering") with the SEC that was declared effective on October 9, 2013. On October 10, 2013, WNRL's common units began trading on the New York Stock Exchange under the symbol "WNRL". On October 16, 2013, WNRL completed the Offering of 15,812,500 common units representing limited partner interests. We generate substantially all of our revenues under fee-based agreements with Western. These contracts should generate stable and predictable cash flows and limit our direct exposure to commodity price fluctuations to the loss allowance provisions in such commercial agreements. As a result of our fee-based arrangements with Western, we generally do not have exposure to variability in the prices of the hydrocarbons and other products we handle, although these risks indirectly influence our activities and results of operations over the long term.
The financial results presented and related discussion and analysis include, for periods prior to October 16, 2013, the consolidated financial position, results of operations and cash flow information of Western Refining Logistics, LP Predecessor, our predecessor for accounting purposes. The Predecessor did not historically operate its assets for the purpose of generating revenues independent of other Western businesses that it supports. Effective October 16, 2013, concurrent with the closing of the Offering, we entered into fee-based commercial and service agreements with Western under which we operate pipeline, terminal, storage and transportation assets for the purpose of generating fee-based revenues.
Major Influences on Results of Operations Supply and Demand for Crude Oil and Refined Products. Our terminal throughput volumes depend primarily on the volume of refined and other products produced at Western's refineries that, in turn, are ultimately dependent on Western's ability to operate their refineries at planned rates. Our throughput volumes could be impacted by Western's operational performance and also by the refining margin environment.
Organic Growth. We expect our revenues and distributable cash flow to grow as a result of increased volumes through our existing assets and through the expansion of our existing assets. In connection with the Offering, we have retained cash on the balance sheet to fund projects in order to achieve this desired growth. This growth is somewhat dependent on the expected crude oil production growth in the areas in which we operate. Our results will be impacted by our ability to develop organic growth projects as well as actual crude oil production growth in the future.
Acquisition Opportunities. We may acquire additional logistics assets and other related businesses from Western, its affiliates or third parties. Under our omnibus agreement with Western, subject to certain exceptions, we have rights of first offer on certain logistics assets owned by Western to the extent Western decides to sell, transfer or otherwise dispose of any of those assets. We also have rights of first offer to acquire additional logistics assets in the Permian Basin or the Four Corners area that Western may construct or acquire in the future.
Identifying and executing acquisitions is a key part of our strategy, and we plan to pursue strategic asset acquisitions from third parties to the extent such acquisitions complement our or Western's existing asset base or provide attractive potential returns in new areas within our geographic footprint. We believe that we are well-positioned to acquire logistics assets from Western and third parties as opportunities arise. If we are unable to identify economically acceptable acquisitions, our future growth may be limited. Additionally, assets that we acquire may potentially reduce, rather than increase, our cash available for distribution. These acquisitions could also affect the comparability of our results from period to period. We expect to fund future growth capital expenditures primarily from a combination of cash-on-hand, borrowings under our revolving credit facility and the issuance of additional equity or debt securities. To the extent we issue additional partnership units to fund future acquisitions or discretionary capital expenditures, the payments of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level.


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Factors Affecting the Comparability of Our Financial Results Our results of operations may not be comparable to our historical results of operations for the reasons described below:
Revenues. There are differences in the way our Predecessor recorded revenues and the way we record revenues. Prior to the Offering, our assets were part of the integrated operations of Western and the Predecessor generally recognized only the costs and did not record revenue associated with the transportation, terminalling or storage services provided to Western on an intercompany basis. Accordingly, the revenues in our Predecessor's historical consolidated financial statements (which are our financial statements for periods prior to October 16, 2013) relate only to amounts received from third parties for these services and minimum amounts required to be recorded for Western. We generate revenues through the commercial agreements we entered into with Western at the closing of the Offering and through existing third-party contracts. Under these commercial agreements, Western pays us fees for gathering, transporting and storing crude oil on our pipeline systems and storing and terminalling refined and other products at our terminals. These contracts contain minimum volume commitments and fees that are indexed for inflation in accordance with either the Federal Energy Regulatory Commission ("FERC") indexing methodology for pipelines or the U.S. Producer Price Index for all other fees.
Maintenance Costs. Our terminal facilities are subject to routine maintenance for normal wear and related maintenance costs are generally consistent from period to period. When a change in service of a storage tank occurs, maintenance costs will generally be greater due to increased costs of tank cleaning and hazardous material disposal. Our routine service cycle for tank inspections and maintenance at our storage facilities is generally every 10 years. Our pipelines are also subject to routine periodic inspections and maintenance. The cost of our maintenance is dependent upon the level of repairs deemed necessary as a result of the inspection of the specific asset.
General and Administrative Expenses. Our general and administrative expenses included direct and indirect charges for the management and operation of our logistics assets and certain expenses allocated by Western for general corporate services, such as treasury, accounting and legal services. Prior to the Offering, Western charged or allocated costs and expenses to the Predecessor based on the nature of the services and our proportionate share of employee time and headcount. Following the closing of the Offering, under our omnibus and services agreements, Western charges us a combination of direct and allocated charges for administrative and operational services that is comparable to those charged to the Predecessor prior to the Offering.
Financing. There are differences in the way we finance our operations as compared to the way our Predecessor financed its operations. Historically, Western financed our Predecessor's operations as part of its integrated operations and our Predecessor did not record any separate costs associated with this financing. Additionally, we largely relied on internally generated cash flows and capital contributions from Western to satisfy the Predecessor's capital expenditure requirements. Based on the terms of our cash distribution policy, we will distribute most of the cash generated by our operations to our unitholders, including Western. As a result, we expect to fund future growth capital expenditures primarily from a combination of the cash retained from the Offering, borrowings under our revolving credit facility and the issuance of additional equity or debt securities.
Delaware Basin System. The Predecessor's historical results of operations do not include the Delaware Basin system that includes approximately 38 miles of 10-inch and 12-inch mainlines. These mainlines are located in Southeast New Mexico and West Texas and handle crude oil produced in the Delaware Basin area of the Permian Basin. The Main 12-inch and the East 10-inch pipelines were placed into service in July 2013. The West 10-inch pipeline was placed into service in August 2013. The Delaware Basin system is designed to handle up to 138,000 barrels per day ("bpd"), comprised of a mainline capacity of 100,000 bpd and truck unloading capacity of 38,000 bpd.
Assets Retained by Western. The Predecessor's historical results of operations include revenues, expenses and other items related to certain assets that were retained by Western and not contributed to us in connection with the Offering. These assets include Western's Jal NGL terminal and certain inactive portions of the TexNew Mex 16" pipeline.
Critical Accounting Policies and Estimates We prepare our financial statements in conformity with U.S. generally accepted accounting principles ("GAAP"). In order to apply these principles, we must make judgments, assumptions and estimates based on the best available information at the time. Actual results may differ based on the continuing development of the information utilized and subsequent events, some of which we may have little or no control over. Our critical accounting policies could materially affect the amounts recorded in our financial statements. Our critical accounting policies, estimates and recent accounting pronouncements that potentially impact us are discussed in detail under Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2013 Form 10-K. Recent Accounting Pronouncements. From time to time, new accounting pronouncements are issued by various standard setting bodies that may have an impact on our accounting and reporting. We believe that recently issued accounting pronouncements and other authoritative guidance for which the effective date is in the future either will not have a significant


impact on our accounting or reporting or that such impact will not be material to our financial position, results of operations and cash flows when implemented.
The accounting provisions covering the recognition and reporting of revenues were amended to remove inconsistencies in revenue requirements and to provide a more complete framework for addressing revenue issues across a broad range of industries and transaction types. The revised standard's core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. These provisions are effective for the first interim or annual period beginning after December 15, 2016, and are to be applied retrospectively, with early adoption not permitted. We do not expect the adoption of this guidance to materially affect our financial position, results of operations or cash flows. How We Evaluate Our Operations
Our management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include but are not limited to pipeline throughput and terminal volumes, revenues, operating and maintenance expenses, EBITDA and distributable cash flow.
Volumes. The amount of revenue we generate depends on the volumes of crude oil and refined and other products that we handle with our pipeline and gathering operations and our terminalling, transportation and storage assets. Primary factors impacting these volumes include supply and demand for crude oil, refined products and asphalt in the regions that we serve. Although Western has committed to minimum volumes under our commercial agreements, we expect over time that Western will ship volumes in excess of its minimum volume commitment on our pipeline and gathering systems and will terminal volumes in excess of its minimum volume commitments at our terminals. Our results of operations will be impacted by whether Western ships and stores such incremental volumes and by the amount of volumes we handle for third parties.
Revenues. We generate revenues from the commercial agreements that we entered into with Western and other third­party contracts. Under the commercial agreements with Western, Western pays us fees for gathering, transporting and storing crude oil on our pipeline systems and storing and terminalling refined and other products at our terminals. These contracts contain minimum volume commitments and fees that are indexed for inflation in accordance with either the FERC indexing methodology for pipelines or the U.S. Producer Price Index for all other fees. The incremental volumes that Western and other third-parties ship and store with us will directly impact our revenues and our results of operations.
Operating and Maintenance Expenses. Our management seeks to maximize the profitability of our operations by effectively managing operating and maintenance expenses. These expenses primarily consist of labor expenses, lease costs, utility costs, insurance premiums, repairs and maintenance expenses and related property taxes. These expenses generally remain relatively stable across broad ranges of throughput volumes but can fluctuate from period to period depending on the mix of activities performed during that period and the timing of such expenses. We intend to manage maintenance expenditures on our pipelines and terminals by scheduling maintenance over time to avoid significant variability and minimize impact on our cash flows.

Results of Operations
A discussion and analysis of the factors contributing to our results of operations is presented below. The accompanying condensed consolidated financial information for the three and six months ended June 30, 2013, represent our Predecessor's results of operations, while the condensed consolidated financial information for the three and six months ended June 30, 2014, represent the results of operations for WNRL. The financial information, together with the accompanying analysis, are intended to provide investors with a reasonable basis for assessing our historical operations, but should not serve as the only criteria for predicting our future performance.
We define EBITDA as earnings before interest expense and other financing costs, provision for income taxes and depreciation and amortization. We define Distributable Cash Flow as EBITDA plus the change in deferred revenues, less net cash interest paid, income taxes paid and maintenance capital expenditures. EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
• EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

• EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt;

• EBITDA does not reflect changes in, or cash requirements for, our working capital needs; and


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• EBITDA, as we calculate it, may differ from the EBITDA calculations of our affiliates or other companies in our industry, thereby limiting its usefulness as a comparative measure.

EBITDA and Distributable Cash Flow are used as supplemental financial measures by management and by external users of our financial statements, such as investors and commercial banks, to assess:
• our operating performance as compared to those of other companies in the midstream energy industry, without regard to financial methods, historical cost basis or capital structure;

• the ability of our assets to generate sufficient cash to make distributions to our unitholders;

• our ability to incur and service debt and fund capital expenditures; and

• the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.

Distributable Cash Flow is also a quantitative standard used by the investment community with respect to publicly traded partnerships because the value of a partnership unit is, in part, measured by its yield. Yield is based on the amount of cash distributions a partnership can pay to a unitholder. We believe that the presentation of these non-GAAP measures provides useful information to investors in assessing our financial condition and results of operations. The GAAP measure most directly comparable to EBITDA and Distributable Cash Flow is net income (loss). These non-GAAP measures should not be considered as alternatives to net income (loss) or any other measure of financial performance presented in accordance with GAAP. EBITDA excludes some, but not all, items that affect net income (loss). These non-GAAP measures may vary from those of other companies. As a result, EBITDA and Distributable Cash Flow as presented herein may not be comparable to similarly titled measures of other companies.
The following tables summarize our financial data and key operating statistics for the three and six months ended June 30, 2014 and 2013, respectively. The following data should be read in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere in this quarterly report.
Three Months Ended June 30, 2014, Compared to the Three Months Ended June 30,

2013
                                                      Three Months Ended
                                                           June 30,
                                              2014            2013
                                            Successor     Predecessor       Change
                                                        (In thousands)
Revenues:
Affiliate                                  $  34,324     $      1,007     $ 33,317
Third-party                                      657              292          365
Total revenues                                34,981            1,299       33,682
Operating costs and expenses:
Operating and maintenance expenses            17,954           18,505         (551 )
General and administrative expenses            2,143            1,149          994
Depreciation and amortization                  3,467            2,886          581
Total operating costs and expenses            23,564           22,540        1,024
Operating income (loss)                       11,417          (21,241 )     32,658
Other income (expense):
Interest expense and other financing costs      (227 )              -         (227 )
Amortization of loan fees                       (130 )              -         (130 )
Other, net                                         -                4           (4 )
Income (loss) before income taxes             11,060          (21,237 )     32,297
Provision for income taxes                       (85 )              -          (85 )
Net income (loss)                          $  10,975     $    (21,237 )   $ 32,212


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                                                                          Three Months Ended
                                                                               June 30,
                                                            2014                  2013
                                                          Successor            Predecessor            Change
                                                       (In thousands, except total barrels and barrels per day)
Key Operating Statistics
Pipeline and gathering (bpd):
Mainline movements:
Permian/Delaware Basin system                                  24,196                    -               24,196
Four Corners system (1)                                        35,837               38,790               (2,953 )
Gathering (truck offloading):
Permian/Delaware Basin system                                  26,178                6,589               19,589
Four Corners system                                            11,188                8,240                2,948
Pipeline Storage (barrels or bbls) (2)                        578,167              566,449               11,718
Terminalling, transportation and storage (bpd):
Shipments into and out of storage (includes asphalt)          406,881              377,968               28,913
Terminal storage (bbls) (2)                                 7,355,432            7,037,084              318,348

Cash Flow Data
Net cash provided by (used in):
Operating activities                                 $         12,789       $      (19,068 )     $       31,857
Investing activities                                           (2,773 )            (13,680 )             10,907
Financing activities                                          (13,572 )             32,748              (46,320 )

Other Data
EBITDA (3)                                           $         14,884       $      (18,351 )     $       33,235
Distributable cash flow (3)                                    14,361                    -               14,361
Capital expenditures                                            2,773               13,680              (10,907 )


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(1) Some barrels of crude oil in route to Western's Gallup Refinery are transported on more than one of our mainlines. Mainline movements for the Four Corners system include each barrel transported on each mainline.

(2) Pipeline and terminal storage shell capacities represent weighted-average capacities for the periods presented.


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(3) The following table reconciles net income (loss) to EBITDA for the periods presented and Distributable Cash Flow for the three months ended June 30, 2014:

                                                      Three Months Ended
                                                           June 30,
                                              2014            2013
                                            Successor     Predecessor      Change
                                                        (In thousands)
Net income (loss)                          $  10,975     $    (21,237 )   $ 32,212
Interest expense and other financing costs       227                -          227
Amortization of loan fees                        130                -          130
Provision for income taxes                        85                -           85
Depreciation and amortization                  3,467            2,886          581
EBITDA                                        14,884     $    (18,351 )   $ 33,235

Change in deferred revenues                      637
Cash interest paid                              (228 )
Income taxes paid                                  -
Maintenance capital expenditures                (932 )
Distributable cash flow                    $  14,361

Minimum quarterly distribution             $  13,116

Revenues. Prior to the Offering, our assets were a part of the integrated operations of Western. The Predecessor generally recognized only the costs and did not record revenues associated with the transportation, terminalling or storage services provided to Western on an intercompany basis. Accordingly, the revenues in the Predecessor's historical consolidated financial statements relate only to amounts received from third parties for these services and minimum amounts required to be recorded for Western for regulatory purposes. Following the closing of the Offering, our revenues were generated by existing third-party contracts and from commercial agreements with Western. The commercial agreements with Western coupled with increased operations generated from our Permian Basin assets resulted in significantly higher revenues following the Offering.
Operating and Maintenance Expenses. The decrease in operating and maintenance expenses resulted from a decrease in maintenance expenses ($1.7 million) that was primarily the result of the timing of the performance of the maintenance during the second quarter of 2014 versus the second quarter of 2013. Maintenance expense for the three months ended June 30, 2014, was $8.6 million compared to $10.2 million for the same period in 2013. The decrease was partially offset by increases in energy and chemical costs ($1.1 million) and employee expenses ($0.4 million) related to increased headcount and wage rates for Western employee services compared to 2013 primarily due to operating our Permian Basin assets.
General and Administrative Expenses. General and administrative expenses increased quarter over quarter due to an increase in professional and legal services ($0.5 million) and public company costs ($0.3 million).
Depreciation and Amortization. Depreciation increased quarter over quarter due to the ongoing expansion of our Delaware Basin logistics system. Operating Income (Loss). Operating income increased quarter over quarter primarily due to increased revenue, partially offset by higher general and administrative expenses and depreciation and amortization.


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

                                                       Six Months Ended
                                                           June 30,
                                              2014            2013
                                            Successor     Predecessor       Change
                                                        (In thousands)
Revenues:
Affiliate                                  $  66,380     $      1,919     $ 64,461
Third-party                                    1,358              519          839
Total revenues                                67,738            2,438       65,300
Operating costs and expenses:
Operating and maintenance expenses            34,089           34,072           17
General and administrative expenses            4,118            2,190        1,928
Depreciation and amortization                  6,711            5,816          895
Total operating costs and expenses            44,918           42,078        2,840
Operating income (loss)                       22,820          (39,640 )     62,460
Other income (expense):
Interest expense and other financing costs      (452 )              -         (452 )
Amortization of loan fees                       (259 )              -         (259 )
Other, net                                         3                6           (3 )
Income (loss) before income taxes             22,112          (39,634 )     61,746
. . .
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