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PDH > SEC Filings for PDH > Form 10-Q on 6-Nov-2012All Recent SEC Filings

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Quarterly Report




Unless the context otherwise requires, references in this report to the "Predecessor," "we," "our," "us" or like terms, when used for periods prior to the closing of our initial public offering (the Offering) on May 9, 2012, refer to PL Propylene LLC, our Predecessor for accounting purposes. References in this report to "PetroLogistics LP," "the Partnership," "we," "our," "us" or like terms used for periods after the Offering, refer to PetroLogistics LP. References in this report to our "Sponsors" refer to Lindsay Goldberg LLC (Lindsay Goldberg) and York Capital Management, which, as of May 9, 2012, collectively and indirectly own 84% of PetroLogistics GP (our General Partner) and directly and indirectly own 63% of our common units. See Note 3 to our consolidated financial statements for information regarding the Offering.

You should read the following discussion of the financial condition and results of operations for the Partnership in conjunction with the historical financial statements and notes thereto of PL Propylene LLC (PL Propylene) and PetroLogistics LP and the unaudited pro forma consolidated financial statements for PetroLogistics LP included in our prospectus dated May 3, 2012, as filed with the Securities and Exchange Commission (SEC) on May 7, 2012. Among other things, those historical financial statements and pro forma consolidated financial statements include more detailed information regarding the basis of presentation for the following information.

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, contains "forward-looking statements" as defined by the SEC. Such statements are those concerning contemplated transactions and strategic plans, expectations and objectives for future operations. These include, without limitation:

statements, other than statements of historical fact, that address activities, events or developments that we expect, believe or anticipate will or may occur in the future;

statements relating to future financial performance, future capital sources and other matters; and

any other statements preceded by, followed by or that include the words "anticipates," "believes," "expects," "plans," "intends," "estimates," "projects," "could," "should," "may" or similar expressions.

Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Quarterly Report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. These statements are based on assumptions made by us based on our experience and perception of historical trends, current conditions, expected future developments and other factors that we believe are appropriate in the circumstances. Such statements are subject to a number of risks and uncertainties, many of which are beyond our control. You are cautioned that any such statements are not guarantees of future performance, and actual results or developments may differ materially from those projected in the forward-looking statements as a result of various factors, including but not limited to those set forth under "Risk Factors" in our Prospectus dated May 3, 2012, and filed with the SEC on May 7, 2012. Such factors include, among others:

          our ability to make cash distributions on our common units;

          the volatile nature of our business and the variable nature of our

          the ability of our General Partner to modify or revoke our
distribution policy at any time;

          our ability to forecast our future financial condition or results of
operations and our future sales and expenses;

          the cyclical nature of our business;

          intense competition from other propylene producers;

          our reliance on propane that we purchase from Enterprise Products
Operating LLC;

          our reliance on other third-party suppliers;

          the demand and price level of propylene;

          the supply and price level of propane;

          the risk of a material decline in production at our propane
dehydrogenation facility;

          potential operating hazards from accidents, fire, severe weather,
floods or other natural disasters;

          the risk associated with governmental policies affecting the
petrochemical industry;

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capital expenditures and potential liabilities arising from environmental laws and regulations;

our potential inability to obtain or renew permits;

existing and proposed environmental laws and regulations, including those relating to climate change, alternative energy or fuel sources, and on the end-use and application of propylene;

new regulations concerning the transportation of hazardous chemicals, risks of terrorism and the security of propane processing facilities;

          our lack of asset diversification;

          our dependence on significant customers;

          our ability to comply with employee safety laws and regulations;

          potential disruptions in the global or U.S. capital and credit

          our potential inability to successfully implement our business

strategies, including the completion of significant capital expenditure projects;

additional risks, compliance costs and liabilities from expansions or acquisitions;

our reliance on certain members of our senior management team and other key personnel of our General Partner;

the potential for development of integrated propylene facilities by our current customers to displace us as suppliers;

          the potential shortage of skilled labor or loss of key personnel;

          our ability to continue to license the technology used in our

          our ability to secure appropriate and adequate debt facilities at a
reasonable cost of capital;

          restrictions in our debt agreements;

          the dependence on our subsidiary for cash to meet our debt

          our limited operating history;

          potential increases in costs and distraction of management resulting
from the requirements of being a publicly traded partnership;

          exemptions we will rely on in connection with New York Stock Exchange
(NYSE) corporate governance requirements;

          risks relating to evaluations of internal controls required by
Section 404 of the Sarbanes-Oxley Act;

          risks relating to our relationships with our Sponsors;

          control of our General Partner by our Sponsors;

          limitations on the fiduciary duties owed by our General Partner which
are included in the Partnership Agreement; and

          changes in our treatment as a partnership for U.S. income or state
tax purposes.

Initial Public Offering

On May 4, 2012, our common units began trading on the NYSE under the symbol "PDH." On May 9, 2012, we completed our Offering of 35,000,000 common units representing limited partner interests. Pursuant to a Registration Statement on Form S-1, as amended through the date of its effectiveness, we sold 1,500,000 common units, and Propylene Holdings LLC sold 33,500,000 common units at a price to the public of $17.00 per common unit ($15.98 per common unit, net of underwriting discounts). Immediately prior to the Offering, the outstanding limited partner interests in the Partnership were recapitalized into 139,000,000 common units pursuant to an amended and restated limited partnership agreement. We received net proceeds of approximately $24.0 million from the sale of the common units, after deducting underwriting discounts.

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We currently own and operate the only U.S. propane dehydrogenation (PDH) facility (the Facility) producing propylene from propane. Propylene is one of the basic building blocks for petrochemicals that is utilized in the production of a variety of end uses including paints, coatings, building materials, clothing, automotive parts, packaging and a range of other consumer and industrial products. Our Facility has an annual production capacity of approximately 1.4 billion pounds of propylene. We commenced operations in October 2010 and, after an approximately year-long start-up and plant optimization phase, achieved production rates at or near current capacity beginning in December 2011.

We currently have multi-year contracts for the sale of our propylene with The Dow Chemical Company, Total Petrochemicals USA, Inc., BASF Corporation and INEOS Olefins and Polymers USA that expire between 2013 and 2018 and a one-year contract with LyondellBasell Industries N.V. that ends in December 2012. The contracts provide for minimum and maximum offtake volumes, with the minimum customer-contracted volumes representing approximately 75% of our current Facility capacity and the maximum reflecting approximately 100% of our current Facility capacity. For the three and nine months ended September 30, 2012, four of our customers accounted for 92% and 91%, respectively, of our total sales. Each of our customer contracts contains pricing terms based upon market rates. We have supplied and will continue to opportunistically supply other propylene consumers on a spot basis when permitted by both operational and market conditions.

In addition to propylene, we also produce commercial quantities of hydrogen and C4 mix/C5+ streams. These products represented approximately 3% to 4% of total sales in the three and nine months ended September 30, 2012, and do not represent a material part of our production.

Factors Affecting the Comparability of Future Results

Our historical results of operations and cash flows are not indicative of results of operations and cash flows to be expected in the future, principally for the following reasons:

Our PDH Facility did not generate sales until we commenced operations in October 2010. We commenced operations in October 2010 and, after an approximately year-long startup and plant optimization phase, achieved production rates at or near current capacity beginning in December 2011. Accordingly, our financial statements for the three and nine months ended September 30, 2011, reflect limited operations.

Our historical results of operations reflect equity-based compensation expense that may not be indicative of future equity-based compensation expense. Our historical results of operations reflect equity-based compensation expense for both our employees and certain employees of affiliated entities, who are treated for accounting purposes as non-employees. As of January 1, 2012, all PetroLogistics Company LLC employees became employees of our General Partner and are treated as employees for accounting purposes. Equity-based awards granted to non-employees are subject to periodic fair value adjustments as the awards vest. The changes in fair value are recognized in our statement of comprehensive income (loss) during the period the related services are rendered, resulting in greater

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volatility of our results of operations. Because certain members of our senior management were treated as non-employees for accounting purposes prior to January 1, 2012, these fair value adjustments have significantly affected our historical results of operations. The equity-based awards outstanding at the time of the Offering became fully vested as of the completion of the Offering, and we recorded equity-based compensation expense of $43.7 million in the second quarter of 2012. No additional expense related to these awards was recorded during the third quarter of 2012 or will be recorded in the future. However, we intend to make future equity-based compensation awards pursuant to our long-term incentive plan, which will again require us to record equity-based compensation expense.

We will incur additional general and administrative expenses as a publicly traded partnership. We expect we will incur additional general and administrative expenses as a publicly traded limited partnership that we have not previously incurred, including costs associated with compliance under the Exchange Act, annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, investor relations, registrar and transfer agent fees, audit fees, incremental director and officer liability insurance costs and directors' compensation. In addition, we will incur incremental expenses associated with the initial implementation of our Sarbanes-Oxley Section 404 internal control reviews and testing as well as the costs associated with a change in our accounting information systems.

Our historical results of operations reflect allocated administrative costs that may not be indicative of future administrative costs. Our 2011 combined financial statements included certain costs of a formerly affiliated company that were incurred on our behalf. Historically, these costs, which are reflected in general and administrative expense, have been billed to us pursuant to a services agreement entered into in 2008 (the former services agreement). Our financial statements, therefore, include certain expenses incurred which may include, but are not necessarily limited to, executive management and employee salaries and benefits, travel and entertainment expenses, rent and other general and administrative expenses. Such expenses were allocated to us based upon certain assumptions and estimates that were made in order to allocate a reasonable share of such expenses from the formerly affiliated company to us so that our financial statements would reflect substantially all the costs of conducting our business. The former services agreement terminated at the end of 2011. We entered into a services agreement with our General Partner on January 1, 2012, pursuant to which the General Partner provides certain operational, managerial and general administrative services to us. All employees of PL Propylene and the formerly affiliated company became employees of our General Partner on January 1, 2012. We reimburse the General Partner for all direct and indirect expenses the General Partner incurs or payments the General Partner makes on our behalf including, without limitation, salary, bonus, incentive cash compensation and employee benefits. The amounts we pay the General Partner for these services are reported in the statements of comprehensive income (loss) in the line item to which the expense relates. The amounts charged or allocated to us under the former and current services agreements are not necessarily indicative of the costs that we will incur going forward.

We will periodically experience planned and unplanned downtime. Safe and reliable operations at our Facility are critical to our performance and financial results. As such, we expect future periods of major maintenance. We do not expect to undergo a major maintenance project until the second half of 2013, at which time the most significant activity will be to replace the reactor catalyst, which is required approximately every three years based on facilities of similar design. We expect these catalyst change-out projects will typically last approximately four weeks. In addition to the triennial maintenance projects, more significant maintenance projects will be undertaken approximately every nine years and will include change-out of the reactor catalyst and overhauls of selected pieces of equipment. We anticipate these projects to take approximately six weeks. Additionally, we may undertake capital projects in connection with major maintenance projects. If we elect to undertake such projects, these capital projects will require additional time and expense.

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In addition to planned downtime for major maintenance projects, we may experience periods of unplanned downtime. We expect to be able to mitigate the financial and operational impact of unplanned downtime through a targeted program of routine maintenance and diligent monitoring of our systems. Downtime, whether planned or unplanned, will result in lost sales and margin, increased capital and maintenance expenditures and/or working capital changes.

We may enter into different financing arrangements. Our current financing arrangement may not be representative of the arrangements we will enter into in the future. For descriptions of our current financing arrangements, see "-Liquidity and Capital Resources."

Factors Affecting Results

We believe key factors that influence our business and impact our operating results are (1) the propane-to-propylene spread, (2) our Facility's production capacity utilization and sales volume as a percentage of capacity and (3) our propane-to-propylene conversion factor.

Propane-to-Propylene Spread

The price spread between propane, our sole feedstock, and propylene, our primary product, largely determines our gross margin and is the key driver of our profitability.

Propylene sales constitute substantially all of our sales. Propylene is a commodity, and its price can be cyclical and highly volatile. The price of propylene depends on a number of factors, including general economic conditions, cyclical trends in end-user markets and supply and demand imbalances. The customers under our propylene sales contracts, (Dow, Total, BASF, INEOS and LyondellBasell) each pay market-based prices for propylene, and a significant decrease in propylene prices would have a material adverse effect on sales generated from these customers. In addition, a decrease in the price of propylene would result in decreased sales from any sales of propylene on the spot market.

Propane is the sole feedstock in our production process, and the cost of propane represents a substantial portion of our cost of sales. Enterprise supplies 100% of our required propane feedstock volume under a multi-year contract at market-based prices, which prices are subject to fluctuations in response to changes in supply, demand, market uncertainties and a variety of additional factors beyond our control. The contract with Enterprise expires in 2015. See "-Quantitative and Qualitative Disclosures about Market Risk."

The propane-to-propylene spread is calculated as (PGP Contract Benchmark Price (/lb ) - 1.2* (Propane Price (/gl)/4.2)). This calculation assumes it takes approximately 1.2 pounds of propane to make 1.0 pound of propylene and one gallon of propylene weighs approximately 4.2 pounds.

Capacity Utilization

Our Facility has a current annual production capacity of approximately 1.4 billion pounds of propylene. Actual annual production will vary based on a number of factors, including the amount of downtime for planned and unplanned maintenance on the Facility and the amount of demand from our customers. Any significant planned or unplanned downtime will affect not only production, but also capital expenditures and direct operating expenses, primarily maintenance expenses, and fuel and utilities. Unplanned downtime may also affect our sales, and demand from our customers will affect our sales volume as a percentage of capacity.

Propane-to-Propylene Conversion Factor (Monomer Factor)

An important contributor to profitability is our propane-to-propylene conversion factor, which is a ratio that indicates how much propane is used to produce one pound of propylene. We expect to have an average monthly propane-to-propylene

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conversion factor of 1.0 pound of propylene for each 1.2 pounds of propane used. This important statistic reflects our Facility's operating efficiency.

How We Evaluate Our Performance

In addition to utilizing the key factors affecting our operating results described above to evaluate our performance, our management uses certain additional financial and operational measures as well. These measures include Adjusted EBITDA and health, safety and environmental performance.

Adjusted EBITDA

We define Adjusted EBITDA as net income (loss) plus interest expense and amortization of deferred financing costs (including loss on early extinguishment of debt), income tax expense, depreciation, amortization and accretion, equity-based compensation expense, unrealized loss on derivatives and, effective May 9, 2012, realized gains and losses on derivative contracts. Pursuant to an Omnibus Agreement among our General Partner, the Partnership, Propylene Holdings LLC (Propylene Holdings), PL Propylene, and PL Manufacturing LLC (PL Manufacturing) (the Omnibus Agreement) to the extent we make payments on our commodity derivative contracts (the Propane Swaps), PL Manufacturing and the PL Manufacturing Members, through our General Partner, will be responsible for making quarterly capital contributions to us in an amount equal to the sum of all payments we make under such Propane Swaps during the applicable fiscal quarter or that we owe at the end of the quarter resulting in a capital contribution to us and a zero net effect on cash and partners' capital. Adjusted EBITDA is a non-U.S. GAAP financial measure that may be used by our management and by external users of our financial statements, such as industry analysts, investors, lenders and rating agencies, to assess:

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

evaluate the financial performance of our assets without regard to financing methods, capital structure, or historical cost basis; and

determine our ability to incur and service debt and fund capital expenditures.

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We view Adjusted EBITDA as an important indicator of cash flow generation. Adjusted EBITDA is principally affected by our sales volumes, the propane-to-propylene spread, capacity utilization, propane-to-propylene conversion factors and, to a lesser extent, the prices of natural gas and our by-products. Other than the cost of propane and natural gas, production-related expenses generally remain stable across broad ranges of throughput volumes, but can fluctuate significantly depending on the planned and unplanned maintenance performed during a specific period. Our Adjusted EBITDA and available cash may not always correlate to each other.

Adjusted EBITDA should not be considered an alternative to net income (loss), operating income (loss), cash flows from operating activities or any other measure of financial performance presented in accordance with U.S. GAAP. Our Adjusted EBITDA may not be comparable to Adjusted EBITDA or similarly titled measures of other entities, as other entities may not calculate Adjusted EBITDA in the same manner as we do. Our management compensates for the limitations of Adjusted EBITDA as an analytical tool by reviewing the comparable U.S. GAAP measures, understanding the differences between the measures and incorporating this knowledge into management's decision-making processes. Adjusted EBITDA should not be viewed as indicative of the actual amount we have available for distributions or that we plan to distribute for a given period, nor should it be equated with "available cash" as defined in our Partnership Agreement.

The following table reconciles net income (loss) to Adjusted EBITDA for the periods indicated (in thousands):

                                                                        Nine Months
                                          Three Months Ended               Ended
                                             September 30,             September 30,
                                           2012          2011        2012         2011
                                              (Unaudited)               (Unaudited)
Net income (loss)                       $       647    $ 24,084    $ (82,576 )  $  48,874
Interest expense and amortization of
deferred financing costs                      7,373       4,362       18,989       13,696
Loss on early extinguishment of debt              -           -        7,018            -
Income tax expense                              221         432          269        1,480
Depreciation, amortization and
accretion                                     8,369       9,838       25,208       26,039
Equity-based compensation expense               777       4,961       56,434       47,246
Unrealized (gain) loss on
derivatives                                  (9,912 )         -       90,670            -
Realized loss on derivatives (1)             31,026           -       46,984            -
Adjusted EBITDA                         $    38,501    $ 43,677    $ 162,996    $ 137,335

The following table reconciles net cash provided by operations to Adjusted EBITDA (in thousands):

                                          Three Months Ended         Nine Months Ended
                                             September 30,             September 30,
                                           2012          2011        2012         2011
                                              (Unaudited)               (Unaudited)
Net cash provided by operations         $    12,488    $  8,556    $  97,053    $  69,901
Changes in current assets and
current liabilities                         (11,687 )    31,097        1,489       54,770
Deferred income tax benefit
(expense)                                         -           -          832         (172 )
Amortization of deferred financing
costs and loan discount                        (920 )      (780 )     (2,620 )     (2,340 )
Interest expense                              7,373       4,362       18,989       13,696
Income tax expense                              221         432          269        1,480
Realized loss on derivatives (1)             31,026           -       46,984            -
Adjusted EBITDA                         $    38,501    $ 43,667    $ 162,996    $ 137,335

(1) Effective May 9, 2012, pursuant to the Omnibus Agreement, to the extent that we make payments for realized losses under the Propane Swaps, PL Manufacturing and the PL Manufacturing Members, through our General Partner, will be responsible for making quarterly capital contributions to us in an amount equal to the sum of all payments we make under such Propane Swaps during the applicable fiscal quarter or that we owe at the end of the quarter. The amount of realized loss on derivatives shown as an adjustment for EBITDA represents the . . .
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