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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2015
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-36647
JP ENERGY PARTNERS LP
(Exact name of registrant as specified in its charter)
Delaware |
|
27-2504700 |
(State or other jurisdiction of organization) |
|
(I.R.S. Employer Identification No.) |
600 East Las Colinas Blvd
Suite 2000
Irving, Texas 75039
(Address of principal executive offices) (Zip Code)
(Registrants telephone number, including area code): (972) 444-0300
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
|
Accelerated filer o |
|
|
|
Non-accelerated filer x (Do not check if a smaller reporting company) |
|
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO x
At May 7, 2015, there were 18,197,651 common units and 18,148,898 subordinated units outstanding.
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PART I FINANCIAL INFORMATION
Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q (this report or this Form 10-Q) to JP Energy Partners, the Partnership, we, our, us or like terms refer to JP Energy Partners LP and its subsidiaries, and references to our general partner refer to JP Energy GP II LLC, our general partner. References to our sponsor or Lonestar refer to Lonestar Midstream Holdings, LLC, which, together with JP Energy GP LLC, CB Capital Holdings II, LLC and the Greg Alan Arnold Separate Property Trust, entities owned by certain members of our management, owns and controls our general partner. References to ArcLight Capital refer to ArcLight Capital Partners, LLC and references to ArcLight Fund V refer to ArcLight Energy Partners Fund V, L.P. References to ArcLight refer collectively to ArcLight Capital and ArcLight Fund V. ArcLight Capital manages ArcLight Fund V, which controls our general partner through its ownership and control of Lonestar.
Forward-Looking Statements
Certain statements and information in this Form 10-Q may constitute forward-looking statements. The words believe, expect, anticipate, plan, intend, foresee, should, would, could or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:
· the price of, and the demand for, crude oil, refined products and natural gas liquids (NGLs) in the markets we serve;
· the volumes of crude oil that we gather, transport and store, the throughput volumes at our refined products terminals and our NGL sales volumes;
· the fees we receive for the crude oil, refined products and NGL volumes we handle;
· pressures from our competitors, some of which may have significantly greater resources than us;
· the cost of propane that we buy for resale, including due to disruptions in its supply, and whether we are able to pass along cost increases to our customers;
· competitive pressures from other energy sources such as natural gas, which could reduce existing demand for propane;
· the risk of contract cancellation, non-renewal or failure to perform by our customers, and our inability to replace such contracts and/or customers;
· leaks or releases of hydrocarbons into the environment that result in significant costs and liabilities;
· the level of our operating, maintenance and general and administrative expenses;
· regulatory action affecting our existing contracts, our operating costs or our operating flexibility;
· failure to secure or maintain contracts with our largest customers, or non-performance of any of those customers under the applicable contract;
· competitive conditions in our industry;
· changes in the long-term supply of and demand for oil and natural gas;
· volatility of fuel prices;
· actions taken by our customers, competitors and third-party operators;
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· our ability to complete growth projects on time and on budget;
· inclement or hazardous weather conditions, including flooding, and the physical impacts of climate change;
· environmental hazards;
· industrial accidents;
· changes in laws and regulations (or the interpretation thereof) related to the transportation, storage or terminaling of crude oil and refined products or the distribution and sales of NGLs;
· fires, explosions or other accidents;
· the effects of future litigation; and
· other factors discussed elsewhere in this Form 10-Q.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.
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Item 1. Financial Statements
JP ENERGY PARTNERS LP
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
March 31, |
|
December 31, |
|
|
|
2015 |
|
2014 |
|
|
|
(in thousands, except unit data) |
|
ASSETS |
|
|
|
|
|
Current assets |
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,152 |
|
$ |
3,325 |
|
Restricted cash |
|
600 |
|
600 |
|
Accounts receivable, net |
|
84,915 |
|
108,725 |
|
Receivables from related parties |
|
8,497 |
|
10,548 |
|
Inventory |
|
30,938 |
|
20,826 |
|
Prepaid expenses and other current assets |
|
11,659 |
|
4,915 |
|
Total Current Assets |
|
138,761 |
|
148,939 |
|
|
|
|
|
|
|
Non-current assets |
|
|
|
|
|
Property, plant and equipment, net |
|
272,645 |
|
262,148 |
|
Goodwill |
|
248,721 |
|
248,721 |
|
Intangible assets, net |
|
143,979 |
|
148,311 |
|
Deferred financing costs and other assets, net |
|
4,848 |
|
5,054 |
|
Total Non-Current Assets |
|
670,193 |
|
664,234 |
|
Total Assets |
|
$ |
808,954 |
|
$ |
813,173 |
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS CAPITAL |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
Accounts payable |
|
$ |
73,468 |
|
$ |
88,052 |
|
Accrued liabilities |
|
24,773 |
|
28,971 |
|
Capital leases and short-term debt |
|
305 |
|
229 |
|
Customer deposits and advances |
|
2,255 |
|
5,050 |
|
Current portion of long-term debt |
|
386 |
|
383 |
|
Total Current Liabilities |
|
101,187 |
|
122,685 |
|
|
|
|
|
|
|
Non-current liabilities |
|
|
|
|
|
Long-term debt |
|
110,995 |
|
84,125 |
|
Other long-term liabilities |
|
4,868 |
|
5,683 |
|
Total Liabilities |
|
217,050 |
|
212,493 |
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
|
|
Partners capital |
|
|
|
|
|
General Partner |
|
1,350 |
|
|
|
Common units (21,852,219 units authorized; 18,198,894 and 18,209,519 units issued and outstanding as of March 31, 2015 and December 31, 2014, respectively) |
|
310,488 |
|
315,630 |
|
Subordinated units (18,197,249 units authorized; 18,153,897 and 18,197,249 units issued and outstanding as of March 31, 2015 and December 31, 2014, respectively) |
|
280,066 |
|
285,050 |
|
Total Partners Capital |
|
591,904 |
|
600,680 |
|
Total Liabilities and Partners Capital |
|
$ |
808,954 |
|
$ |
813,173 |
|
See accompanying notes to condensed consolidated financial statements.
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JP ENERGY PARTNERS LP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended March 31, |
|
|
|
2015 |
|
2014 |
|
|
|
(in thousands, except unit and per unit data) |
|
REVENUES |
|
|
|
|
|
Crude oil sales |
|
$ |
231,917 |
|
$ |
341,005 |
|
Gathering, transportation and storage fees |
|
6,951 |
|
8,096 |
|
NGL and refined product sales (including sales to related parties of $5,011 in the three months ended March 31, 2014) |
|
54,185 |
|
63,801 |
|
Refined products terminals and storage fees (including sales to related parties of $1,370 in the three months ended March 31, 2014) |
|
3,108 |
|
2,663 |
|
Other revenues |
|
3,125 |
|
3,102 |
|
Total revenues |
|
299,286 |
|
418,667 |
|
|
|
|
|
|
|
COSTS AND EXPENSES |
|
|
|
|
|
Cost of sales, excluding depreciation and amortization |
|
254,890 |
|
382,889 |
|
Operating expense |
|
16,611 |
|
16,153 |
|
General and administrative |
|
14,475 |
|
12,633 |
|
Depreciation and amortization |
|
11,339 |
|
10,094 |
|
Loss on disposal of assets, net |
|
130 |
|
356 |
|
Total costs and expenses |
|
297,445 |
|
422,125 |
|
|
|
|
|
|
|
OPERATING INCOME (LOSS) |
|
1,841 |
|
(3,458 |
) |
|
|
|
|
|
|
OTHER INCOME (EXPENSE) |
|
|
|
|
|
Interest expense |
|
(1,173 |
) |
(3,259 |
) |
Loss on extinguishment of debt |
|
|
|
(1,634 |
) |
Other income, net |
|
19 |
|
111 |
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
|
687 |
|
(8,240 |
) |
|
|
|
|
|
|
Income tax (expense) benefit |
|
(22 |
) |
57 |
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS |
|
665 |
|
(8,183 |
) |
|
|
|
|
|
|
DISCONTINUED OPERATIONS |
|
|
|
|
|
Net loss from discontinued operations |
|
|
|
(405 |
) |
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
665 |
|
$ |
(8,588 |
) |
|
|
|
|
|
|
Basic and diluted income per unit |
|
|
|
|
|
Net income allocated to common units |
|
$ |
342 |
|
|
|
Weighted average number of common units outstanding - basic |
|
18,206,669 |
|
|
|
Weighted average number of common units outstanding - diluted |
|
18,224,336 |
|
|
|
Basic and diluted income per common unit |
|
$ |
0.02 |
|
|
|
|
|
|
|
|
|
Net income allocated to subordinated units |
|
$ |
323 |
|
|
|
Weighted average number of subordinated units outstanding - basic and diluted |
|
18,185,621 |
|
|
|
Basic and diluted income per subordinated unit |
|
$ |
0.02 |
|
|
|
|
|
|
|
|
|
Distribution declared per common and subordinated unit |
|
$ |
0.325 |
|
|
|
See accompanying notes to condensed consolidated financial statements.
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JP ENERGY PARTNERS LP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three Months Ended March 31, |
|
|
|
2015 |
|
2014 |
|
|
|
(in thousands) |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
Net Income (loss) |
|
$ |
665 |
|
$ |
(8,588 |
) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities including discontinued operations: |
|
|
|
|
|
Depreciation and amortization |
|
11,339 |
|
10,812 |
|
Derivative valuation changes |
|
(4,008 |
) |
572 |
|
Amortization of deferred financing costs |
|
227 |
|
249 |
|
Unit-based compensation expenses |
|
431 |
|
282 |
|
Loss on disposal of assets |
|
130 |
|
82 |
|
Bad debt expense |
|
467 |
|
222 |
|
Loss on extinguishment of debt |
|
|
|
1,634 |
|
Other non-cash items |
|
71 |
|
55 |
|
Changes in working capital, net of acquired assets and liabilities: |
|
|
|
|
|
Accounts receivable |
|
23,344 |
|
30,960 |
|
Receivables from related parties |
|
2,052 |
|
(3,807 |
) |
Inventory |
|
(10,112 |
) |
(9,879 |
) |
Prepaid expenses and other current assets |
|
(5,479 |
) |
(6,051 |
) |
Accounts payable and other accrued liabilities |
|
(12,885 |
) |
(6,033 |
) |
Payables to related parties |
|
|
|
(1,464 |
) |
Customer deposits and advances |
|
(2,795 |
) |
(733 |
) |
Changes in other assets and liabilities |
|
(7 |
) |
24 |
|
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
3,440 |
|
8,337 |
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
Capital expenditures |
|
(20,625 |
) |
(6,505 |
) |
Proceeds received from sale of assets |
|
334 |
|
365 |
|
Change in restricted cash |
|
|
|
(600 |
) |
NET CASH USED IN INVESTING ACTIVITIES |
|
(20,291 |
) |
(6,740 |
) |
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
Proceeds from revolving line of credit |
|
34,000 |
|
241,800 |
|
Payments on revolving line of credit |
|
(7,000 |
) |
(236,857 |
) |
Payments on long-term debt |
|
(143 |
) |
(4,269 |
) |
Payment of related party note payable |
|
|
|
(1,000 |
) |
Payments on capital leases |
|
(34 |
) |
(33 |
) |
Change in cash overdraft |
|
77 |
|
409 |
|
Payments on financed insurance premium |
|
|
|
(15 |
) |
Debt issuance costs |
|
|
|
(2,797 |
) |
Distributions to unitholders |
|
(11,104 |
) |
|
|
Issuance of Series D preferred units |
|
|
|
40,000 |
|
Issuance of common units, net of issuance costs |
|
|
|
8,000 |
|
Common control acquisition |
|
|
|
(52,000 |
) |
Contributions from the Predecessor |
|
|
|
4,321 |
|
Tax withholding on unit-based vesting |
|
(22 |
) |
|
|
Other |
|
(96 |
) |
(171 |
) |
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
|
15,678 |
|
(2,612 |
) |
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
(1,173 |
) |
(1,015 |
) |
Cash and cash equivalents, beginning of year |
|
3,325 |
|
3,234 |
|
Cash and cash equivalents, end of year |
|
$ |
2,152 |
|
$ |
2,219 |
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES: |
|
|
|
|
|
Non-cash investing and financing transactions: |
|
|
|
|
|
Accrued capital expenditures |
|
$ |
1,037 |
|
$ |
412 |
|
See accompanying notes to condensed consolidated financial statements.
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JP ENERGY PARTNERS LP
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS CAPITAL
(Unaudited)
|
|
Units |
|
|
|
Common |
|
Subordinated |
|
Total |
|
|
|
|
|
|
|
|
|
Balance - December 31, 2014 |
|
18,209,519 |
|
18,197,249 |
|
36,406,768 |
|
|
|
|
|
|
|
|
|
Forfeiture of units under LTIP |
|
(10,625 |
) |
(43,352 |
) |
(53,977 |
) |
|
|
|
|
|
|
|
|
Balance - March 31, 2015 |
|
18,198,894 |
|
18,153,897 |
|
36,352,791 |
|
|
|
Common |
|
Subordinated |
|
General Partner |
|
Total |
|
|
|
(in thousands) |
|
Balance - December 31, 2014 |
|
$ |
315,630 |
|
$ |
285,050 |
|
$ |
|
|
$ |
600,680 |
|
|
|
|
|
|
|
|
|
|
|
Unit-based compensation |
|
161 |
|
270 |
|
|
|
431 |
|
Issuance costs, forfeitures and tax withholdings |
|
(100 |
) |
(18 |
) |
|
|
(118 |
) |
Distributions to unitholders |
|
(5,545 |
) |
(5,559 |
) |
|
|
(11,104 |
) |
Contributions from general partner |
|
|
|
|
|
1,350 |
|
1,350 |
|
Net income |
|
342 |
|
323 |
|
|
|
665 |
|
|
|
|
|
|
|
|
|
|
|
Balance - March 31, 2015 |
|
$ |
310,488 |
|
$ |
280,066 |
|
$ |
1,350 |
|
$ |
591,904 |
|
See accompanying notes to condensed consolidated financial statements.
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JP ENERGY PARTNERS LP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business and Basis of Presentation
Business. The unaudited condensed consolidated financial statements presented herein contain the results of JP Energy Partners LP, a Delaware limited partnership, and its subsidiaries. All expressions of the Partnership, JPE, us, we, our, and all similar expressions are references to JP Energy Partners LP and our consolidated, wholly-owned subsidiaries, unless otherwise expressly stated or the context requires otherwise. We were formed in May 2010 by members of management and were further capitalized by ArcLight Capital Partners, LLC (ArcLight) to own, operate, develop and acquire a diversified portfolio of midstream energy assets. Our operations currently consist of: (i) crude oil pipelines and storage; (ii) crude oil supply and logistics; (iii) refined products terminals and storage; and (iv) natural gas liquid (NGL) distribution and sales, which together provide midstream infrastructure solutions for the growing supply of crude oil, refined products and NGLs in the United States. JP Energy GP II LLC (GP II) is our general partner.
Initial Public Offering. On October 7, 2014, we completed our initial public offering (IPO) of 13,750,000 common units representing a 37.7% interest in us. In connection with the IPO, we entered into a Third Amended and Restated Agreement of Limited Partnership (the Amended Partnership Agreement) on October 7, 2014. The Amended Partnership Agreement requires that, within 45 days after the end of each quarter, beginning with the quarter ending December 31, 2014, we distribute all of our available cash (as defined in our Amended Partnership Agreement) to unitholders of record on the applicable record date, subject to certain terms and conditions.
Common Control Acquisition between JPE and JP Development. On July 12, 2012, ArcLight and the owners of JPE formed JP Energy Development LP, a Delaware limited partnership (JP Development), for the express purpose of supporting JPEs growth. Since its formation, JP Development has acquired a portfolio of midstream assets that have been developed for eventual sale to JPE. JPE and JP Development are under common control because a majority of the equity interests in each entity and their general partners are owned by ArcLight. On February 12, 2014, pursuant to a Membership Interest and Asset Purchase Agreement, we acquired certain midstream assets (the Dropdown Assets) from JP Development for an aggregate purchase price of approximately $319.1 million (the Common Control Acquisition), which was comprised of 12,561,934 JPE Class A Common Units and $52.0 million in cash. We financed the cash portion of the purchase price through borrowings under our revolving credit facility. The total purchase price from the Common Control Acquisition exceeded the book value of the assets acquired. As a result, the excess of the total purchase price over the book value of the assets acquired of $12.7 million was considered a deemed distribution by our general partner.
Basis of Presentation. Because JPE and JP Development are under common control, we are required under generally accepted accounting principles in the United States (GAAP) to account for the Common Control Acquisition in a manner similar to the pooling of interests method of accounting. Under this method of accounting, our balance sheet reflected JP Developments historical carryover net basis in the Dropdown Assets instead of reflecting the fair market value of assets and liabilities of the Dropdown Assets. We also retrospectively recast our financial statements to include the operating results of the Dropdown Assets from the dates these assets were originally acquired by JP Development (the dates upon which common control began). Our recast historical consolidated financial statements include all revenues, costs, expenses, assets and liabilities directly attributable to the Dropdown Assets, as well as allocations that include certain expenses for services, including, but not limited to, general corporate expenses related to finance, legal, information technology, shared services, employee benefits and incentives and insurance. These expenses have been allocated based on the most relevant allocation method to the services provided, primarily on the relative percentage of revenue, relative percentage of headcount, or specific identification. Management believes the assumptions underlying the combined financial statements are reasonable. However, the combined financial statements, which include the Dropdown Assets, do not fully reflect what our balance sheet, results of operations and cash flows would have been, had the Dropdown Assets been under JPE management during the periods presented. As a result, historical financial information is not necessarily indicative of what our balance sheet, results of operations and cash flows will be in the future.
JP Development has a centralized cash management that covers all of its subsidiaries. The net amounts due from or to JP Development by the Dropdown Assets relate to a variety of intercompany transactions including the collection of trade receivables, payment of accounts payable and accrued liabilities, charges of allocated corporate expenses and payments by JP Development on behalf of the Dropdown Assets. Such amounts have been treated as deemed contributions from or deemed distributions to JP Development for the three months ended March 31, 2014. The total net effect of the deemed contributions is reflected as contribution from the predecessor in the statements of cash flows as a financing activity. The net balances due to us from the Dropdown Assets were settled in cash based on the outstanding balances at the effective date of the Common Control Acquisition.
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The results of operations for the three months ended March 31, 2015 and 2014 are not necessarily indicative of results expected for the full year. In our opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments consisting of normal recurring accruals necessary for fair presentation of the financial position and results of operations for such interim periods in accordance with GAAP. Although we believe the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). These unaudited condensed consolidated interim financial statements and the notes thereto should be read in conjunction with our audited consolidated financial statements and the related notes for the year ended December 31, 2014 included in our Annual Report on Form 10-K filed with the SEC on March 11, 2015.
2. Summary of Significant Accounting Policies
Principles of Consolidation. Our unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information. All intercompany accounts and transactions have been eliminated in the preparation of the accompanying unaudited condensed consolidated financial statements.
Reclassification. Certain previously reported amounts have been reclassified to conform to the current year presentation.
Use of Estimates. The unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, which includes the use of estimates and assumptions made by management that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities that exist at the date of the condensed consolidated financial statements. Although these estimates are based on managements available knowledge of current and expected future events, actual results could be different from those estimates.
Fair value measurement. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. We determine fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1 InputsUnadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 InputsOther than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 InputsUnobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
The fair value of our derivatives (see Note 7) was estimated using industry standard valuation models using market-based observable inputs, including commodity pricing and interest rate curves (Level 2). We do not have any other assets or liabilities measured at fair value on a recurring basis.
Our other financial instruments consist primarily of cash and cash equivalents and long-term debt. The fair value of long-term debt approximates the carrying value as the underlying instruments are at rates similar to current rates offered to us for debt with the same remaining maturities.
Restricted Cash. Restricted cash consists of cash balances that are restricted as to withdrawal or usage and include cash to secure crude oil production taxes payable to the applicable taxing authorities.
Accounts Receivable. Accounts receivable are reported net of the allowance for doubtful accounts. The allowance for doubtful accounts is based on specific identification and expectation of collecting considering historical collection results. Account balances considered to be uncollectible are recorded to the allowance for doubtful accounts and charged to bad debt expense, which is included in general and administrative expenses in the condensed consolidated statements of operations. The allowance for doubtful accounts was $1,499,000 and $1,134,000 as of March 31, 2015 and December 31, 2014, respectively.
9
Table of Contents
Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred and/or services have been rendered, the sellers price to the buyer is fixed and determinable and collectability is reasonably assured.
Revenue-related taxes collected from customers and remitted to taxing authorities, principally sales taxes, are presented on a net basis within the consolidated statements of operations.
Crude Oil Pipelines and Storage. The crude oil pipelines and storage segment mainly generates revenues through crude oil sales and pipeline transportation and storage fees. Crude oil sales revenues are generated through outright purchase and sale contracts as well as crude oil pipeline transportation arrangements. Revenues for crude oil pipeline transportation services are recognized upon delivery of the product, and when payment has either been received or collection is reasonably assured. Our crude oil pipeline transportation arrangements are structured such that we purchase crude oil from a producer or supplier at a designated receipt point at an index price less a transportation fee, and sell at a designated delivery point, thereby locking in an amount that is, in effect, economically equivalent to a transportation fee. Any transportation costs we incur are included in the price of the product sold to customers, and are included within crude oil sales revenues and costs of sales, excluding depreciation and amortization. For our crude oil pipeline transportation arrangements, we enter into purchase and sale contracts with the same counterparty or different counterparties. In each case, we assess the indicators associated with agent and principal considerations for the arrangement to determine whether revenue should be recorded on a gross basis versus net basis. For the three months ended March 31, 2014, we reclassified $2,150,000 from gathering, transportation and storage fees to crude oil sales to conform to the current year presentation.
Crude Oil Supply and Logistics. The crude oil supply and logistics segment mainly generates revenues through crude oil sales. We enter into outright purchase and sales contracts as well as buy/sell contracts with counterparties, under which contracts we gather, transport and blend different types of crude oil and eventually sell the blended crude oil to either the same counterparty or different counterparties. We account for such revenue arrangements on a gross basis. Occasionally, we enter into crude oil inventory exchange arrangements with the same counterparty which the purchase and sale of inventory are considered in contemplation of each other. Revenues from such inventory exchange arrangements are recorded on a net basis. In addition, we also provide crude oil transportation services to third party customers.
Refined Products Terminals and Storage. We generate fee-based revenues for terminal and storage services with longstanding customers under contracts that, consistent with industry practice, typically contain evergreen provisions after an initial term of six months to two years. Such fee-based revenues are recognized when services are proved upon delivery of the products to customers. Revenues are also generated by selling excess refined products that result from blending, additization and inventory control processes.
NGLs Distribution and Sales. Revenues from the NGL distribution and sales segment are mainly generated from NGL and refined product sales, sales of the related parts and equipment and through gathering and transportation fees.
Comprehensive Income. For the three months ended March 31, 2015 and 2014, comprehensive income (loss) was equal to net income (loss).
Recent Accounting Pronouncements. In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-06, Earnings Per Share (Topic 260): Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions. ASU 2015-06 provides guidance on calculating and reporting historical earnings per unit under the two-class method following dropdown transactions between entities under common control. Under ASU 2015-06, the earnings (losses) of a transferred business before the date of a dropdown transaction should be allocated entirely to the general partner. Additionally, the previously reported earnings per unit of the limited partners for periods before the date of the dropdown transaction would not change as a result of the dropdown transaction. ASU 2015-06 is effective for interim and annual periods beginning after December 15, 2015, and should be applied retrospectively for all financial statements presented. Early adoption of this ASU is permitted. We plan to early adopt ASU 2015-06 in the second quarter of 2015 and do not expect the adoption to have a material impact on our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Cost. ASU 2015-03 changes the requirements for presenting debt issuance costs and requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this amendment. ASU 2015-03 is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted. The adoption of ASU 2015-03 involves presentation and disclosure and therefore is not expected to have a material impact on our consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 provides amended guidance on the consolidation evaluation for reporting entities that are required to evaluate whether they should consolidate certain legal entities, including limited partnerships. ASU 2015-02 is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted. The adoption of ASU 2015-02 is not expected to have a material impact on our financial statements.
In June 2014, the FASB issued ASU No. 2014-12, Compensation - Stock Compensation, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 provides explicit guidance on accounting for share-based payments requiring a specific performance target to be achieved in order for employees to become eligible to vest in the awards when that performance target may be achieved after the requisite service period for the award. The ASU requires that such performance targets be treated as a performance condition, and should not be reflected in the estimate of the grant-date fair value of the award. Instead, compensation cost should be recognized in the period in which it becomes probable the performance target will be achieved. ASU 2014-12 is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted. The adoption of ASU 2014-12 is not expected to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes the existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2016 using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). Early adoption is not permitted. We are currently evaluating the impact of the adoption of ASU 2014-09, but do not anticipate a material impact to our consolidated financial statements.
3. Discontinued Operations
On June 30, 2014, we entered into and simultaneously closed an asset purchase agreement pursuant to which we sold all of our trucking and related assets and activities in North Dakota, Montana and Wyoming (the Bakken Business) for a purchase price of $9,100,000.
The results of operations for the Bakken Business are presented as discontinued operations for all periods in the condensed consolidated statements of operations. Prior to the classification as discontinued operations, we reported the Bakken Business in our crude oil supply and logistics segment. The following table summarizes selected financial information related to the Bakken Businesss operations for the three months ended March 31, 2014.
|
|
Three months ended March 31, 2014 |
|
|
|
(in thousands) |
|
Revenues from discontinued operations |
|
$ |
4,033 |
|
Net loss of discontinued operations |
|
(405 |
) |
|
|
|
|
|
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4. Net Income per Unit
Net income per unit applicable to limited partner common units and to limited partner subordinated units is computed by dividing the respective limited partners interest in net income for the period subsequent to the IPO by the weighted-average number of common units and subordinated units outstanding for the period. Income per limited partner unit is calculated in accordance with the two-class method for determining income per unit for master limited partnerships (MLPs) when incentive distribution rights (IDRs) and other participating securities are present. The two-class method requires that income per limited partner unit be calculated as if all earnings for the period were distributed as cash, and allocated by applying the provisions of the partnership agreement, and requires a separate calculation for each quarter and year-to-date period. Under the two-class method, any excess of distributions declared over net income is allocated to the partners based on their respective sharing of income specified in the partnership agreement. Diluted net income per unit includes the effects of potentially dilutive units on our common units, consisting of unvested phantom units. Basic and diluted net income per unit applicable to limited partners holding subordinated units are the same because there are no potentially dilutive subordinated units outstanding.
The table below shows the weighted average common units outstanding used to compute net income per common unit for the three months ended March 31, 2015.
|
|
Three months ended March 31, 2015 |
|
Weighted average limited partner common unitsbasic |
|
18,206,669 |
|
Dilutive effect of unvested phantom units |
|
17,667 |
|
Weighted average limited partner common unitsdiluted |
|
18,224,336 |
|
On April 28, 2015, the Board of Directors of our general partner declared a cash distribution for the first quarter of 2015 of $0.325 per common unit and subordinated unit. The distribution will be paid on May 14, 2015 to unitholders of record as of May 7, 2015.
|
|
Three months ended March 31, 2015 |
|
|
|
Common Units |
|
Subordinated Units |
|
Total |
|
|
|
(in thousands except for unit and per unit data) |
|
Net income attributable to the limited partners: |
|
|
|
|
|
|
|
Distribution declared |
|
$ |
5,922 |
|
$ |
5,896 |
|
$ |
11,818 |
|
Distributions in excess of net income |
|
(5,580 |
) |
(5,573 |
) |
(11,153 |
) |
Net income attributable to the limited partners |
|
$ |
342 |
|
$ |
323 |
|
$ |
665 |
|
|
|
|
|
|
|
|
|
Weighted average units outstanding: |
|
|
|
|
|
|
|
Basic |
|
18,206,669 |
|
18,185,621 |
|
36,392,290 |
|
Diluted |
|
18,224,336 |
|
18,185,621 |
|
36,409,957 |
|
Net income per unit: |
|
|
|
|
|
|
|
Basic |
|
$ |
0.02 |
|
$ |
0.02 |
|
$ |
0.02 |
|
Diluted |
|
$ |
0.02 |
|
$ |
0.02 |
|
$ |
0.02 |
|
5. Inventory
Inventory consists of the following as of March 31, 2015 and December 31, 2014:
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Table of Contents
|
|
March 31, |
|
December 31, |
|
|
|
2015 |
|
2014 |
|
|
|
(in thousands) |
|
Crude oil |
|
$ |
25,877 |
|
$ |
15,311 |
|
NGLs |
|
3,032 |
|
3,342 |
|
Diesel |
|
239 |
|
266 |
|
Materials, supplies and equipment |
|
1,790 |
|
1,907 |
|
Total inventory |
|
$ |
30,938 |
|
$ |
20,826 |
|
6. Long-Term Debt
Long-term debt consists of the following at March 31, 2015 and December 31, 2014:
|
|
March 31, |
|
December 31, |
|
|
|
2015 |
|
2014 |
|
|
|
(in thousands) |
|
Bank of America revolving loan |
|
$ |
110,000 |
|
$ |
83,000 |
|
HBH note payable |
|
1,149 |
|
1,277 |
|
Noncompete notes payable |
|
232 |
|
231 |
|
Total long-term debt |
|
$ |
111,381 |
|
$ |
84,508 |
|
Less: Current maturities |
|
(386 |
) |
(383 |
) |
Total long-term debt, net of current maturities |
|
$ |
110,995 |
|
$ |
84,125 |
|
Bank of America Credit Agreement. We have a $275,000,000 revolving loan with Bank of America, N.A. (the BOA Credit Agreement) that matures on February 12, 2019. As of March 31, 2015, the unused balance of the BOA Credit Agreement was $148,385,000. Issued and outstanding letters of credit, which reduced available borrowings under the BOA Credit Agreement, totaled $16,615,000 at March 31, 2015. The BOA Credit Agreement contains various restrictive covenants and compliance requirements. We were in compliance with all covenants as of March 31, 2015.
7. Derivative Instruments
We are exposed to certain market risks related to the volatility of commodity prices and changes in interest rates. To monitor and manage these market risks, we have established comprehensive risk management policies and procedures. We do not enter into derivative instruments for any purpose other than hedging commodity price risk and interest rate risk. That is, we do not speculate using derivative instruments.
Commodity Price Risk. Our normal business activities expose us to risks associated with changes in the market price of crude oil and propane, among other commodities. Management believes it is prudent to limit our exposure to these risks, which include our (i) propane purchases, (ii) pre-existing or anticipated physical crude oil sales and (iii) certain crude oil held in inventory. To meet this objective, we use a combination of fixed price swap and forward contracts. Our forward contracts that qualify for the Normal Purchase Normal Sale (NPNS) exception under GAAP are recognized when the underlying physical transaction is delivered. While these contracts are considered derivative financial instruments under ASC 815, they are not recorded at fair value, but on an accrual basis of accounting. If it is determined that a transaction designated as NPNS no longer meets the scope exception, the fair value of the related contract is recorded on the balance sheet and immediately recognized through earnings. The following table summarizes the net notional volume buy/(sell) of our outstanding commodity-related derivatives, excluding those derivatives that qualified for the NPNS exception as of March 31, 2015 and December 31, 2014, none of which were designated as hedges for accounting purposes.
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Table of Contents
|
|
March 31, 2015 |
|
December 31, 2014 |
|
|
|
Notional Volume |
|
Maturity |
|
Notional Volume |
|
Maturity |
|
|
|
|
|
|
|
|
|
|
|
Fixed Price Swaps: |
|
|
|
|
|
|
|
|
|
Propane (Gallons) |
|
23,798,979 |
|
Apr 2015 - Apr 2017 |
|
27,958,302 |
|
Jan 2015 - Dec 2016 |
|
Crude Oil (Barrels) |
|
(230,000 |
) |
May 2015 - Nov 2015 |
|
|
|
|
|
Fixed Price Forward Contracts: |
|
|
|
|
|
|
|
|
|
Crude Oil (Barrels) |
|
(325,000 |
) |
Sept 2015 - Jul 2016 |
|
|
|
|
|
Interest Rate Risk. We are exposed to variable interest rate risk as a result of variable-rate borrowings under our revolving credit facilities. Management believes it is prudent to limit the variability of a portion of our interest payments. To meet this objective, we entered into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk on a portion of our debt with a variable-rate component. These swaps change the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of the interest rate swaps, we receive variable interest rate payments and make fixed interest rate payments, thereby creating the equivalent of fixed-rate debt for the portion of the debt that is swapped. As of March 31, 2015 and December 31, 2014, our outstanding interest rate swap contracts contained a notional amount of $75,000,000, with maturity dates ranging from July 2015 through September 2015.
Credit Risk. By using derivative instruments to economically hedge exposures to changes in commodity prices and interest rates, we are exposed to counterparty credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, we do not possess credit risk. We minimize the credit risk in derivative instruments by entering into transactions with high-quality counterparties. We have entered into master netting agreements, including Master International Swap Dealers Association (ISDA) Agreements, which allow for netting of contract receivables and payables in the event of default by either party.
Fair Value of Derivative Instruments. We measure derivative instruments at fair value using the income approach, which discounts the future net cash settlements expected under the derivative contracts to a present value. These valuations utilize primarily observable (level 2) inputs, including contractual terms, commodity prices, interest rates and yield curves observable at commonly quoted intervals. None of our derivative contracts are designated as hedging instruments. The following table summarizes the fair values of our derivative contracts included in the condensed consolidated balance sheets as of March 31, 2015 and December 31, 2014 on a gross basis without regard to same-counterparty netting.
|
|
|
|
Asset Derivatives |
|
Liability Derivatives |
|
|
|
Balance Sheet Location |
|
March 31, 2015 |
|
December 31, 2014 |
|
March 31, 2015 |
|
December 31, 2014 |
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts (swaps) |
|
Prepaid expenses and other current assets |
|
$ |
130 |
|
$ |
|
|
$ |
|
|
$ |
|
|
Commodity contracts (swaps) |
|
Accrued liabilities |
|
|
|
|
|
(6,437 |
) |
(8,941 |
) |
Commodity contracts (swaps) |
|
Other long-term liabilities |
|
|
|
|
|
(2,542 |
) |
(3,251 |
) |
Commodity contracts (forwards) |
|
Prepaid expenses and other current assets |
|
1,249 |
|
|
|
|
|
|
|
Commodity contracts (forwards) |
|
Other long-term liabilities |
|
|
|
|
|
(630 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap Contracts |
|
Accrued Liabilities |
|
|
|
|
|
(113 |
) |
(158 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the fair value of our recognized derivative assets and liabilities on a gross basis and amounts offset in the condensed consolidated balance sheet as of March 31, 2015 that are subject to enforceable master netting arrangements.
|
|
As of March 31, 2015 |
|
|
|
Gross Amount Recognized |
|
Gross Amounts Offset |
|
Net Amounts Presented in the Balance Sheet |
|
Financial Collateral |
|
Net Amount |
|
|
|
(in thousands) |
|
Derivative Assets: |
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts - current |
|
$ |
1,379 |
|
$ |
(130 |
) |
$ |
1,249 |
|
$ |
|
|
$ |
1,249 |
|
Derivative Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts - current |
|
$ |
6,550 |
|
$ |
(130 |
) |
$ |
6,420 |
|
$ |
|
|
$ |
6,420 |
|
Derivative contracts - noncurrent |
|
3,172 |
|
|
|
3,172 |
|
|
|
3,172 |
|
As of December 31, 2014, the fair value of our recognized current and non-current derivative assets and liabilities presented on a gross basis equaled the presentation on a net basis.
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Table of Contents
The following table summarizes the amounts recognized with respect to our derivative instruments within the condensed consolidated statements of operations. None of our derivatives are designated as hedges for accounting purposes.
|
|
Location of Gain(Loss) Recognized in Income on Derivatives |
|
Amount of Gain(Loss) Recognized in Income on Derivatives |
|
|
|
|
|
Three months ended |
|
|
|
|
|
March 31, 2015 |
|
March 31, 2014 |
|
|
|
|
|
(in thousands) |
|
Commodity derivatives (forwards) |
|
Crude oil sales |
|
$ |
619 |
|
$ |
|
|
Commodity derivatives (swaps) |
|
Cost of sales |
|
152 |
|
135 |
|
Interest rate swaps |
|
Interest expense |
|
(22 |
) |
(137 |
) |
|
|
|
|
|
|
|
|
|
|
In the condensed consolidated statements of cash flows, the effects of settlements of derivative instruments are classified as operating activities, consistent with the related transactions.
8. Partners Capital and Distributions
Distributions. Our Amended Partnership Agreement requires that within 45 days after the end of each quarter, we distribute all of our available cash to unitholders of record on the applicable record date, subject to certain terms and conditions. The following tables shows the distributions declared by us subsequent to December 31, 2014:
Quarter Ended |
|
Record Date |
|
Payment Date |
|
Cash Distributions (per unit) |
|
December 31, 2014 |
|
February 6, 2015 |
|
February 13, 2015 |
|
$ |
0.3038 |
(1) |
March 31, 2015 |
|
May 7, 2015 |
|
May 14, 2015 |
|
$ |
0.3250 |
|
(1) Represents a prorated amount of our minimum quarterly distribution of $0.325 per common unit, based on the number of days between the closing of the IPO on October 7, 2014 to December 31, 2014.
9. Commitments and Contingencies
Legal Matters. We are involved in legal proceedings and litigation in the ordinary course of business. In the opinion of management, the outcome of such matters will not have a material adverse effect on our condensed consolidated financial position, results of operations, or liquidity.
Environmental Matters. We are subject to various federal, state and local laws and regulations relating to the protection of the environment. Such environmental laws and regulations impose numerous obligations, including the acquisition of permits to conduct regulated activities, the incurrence of capital expenditures to comply with applicable laws and restrictions on the generation, handling, treatment, storage, disposal and transportation of certain materials and wastes.
Failure to comply with such environmental laws and regulations can result in the assessment of substantial administrative, civil and criminal penalties, the imposition of remedial liabilities and even the issuance of injunctions restricting or prohibiting the Partnerships activities. We have established procedures for the ongoing evaluation of its operations, to identify potential environmental exposures and to comply with regulatory policies and procedures.
We account for environmental contingencies in accordance with Accounting Standards Codifications (ASC) Topic 410 related to accounting for contingencies. Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments and/or clean-ups are probable, and the costs can be reasonably estimated. At March 31, 2015 and December 31, 2014, we had no material environmental matters.
10. Reportable Segments
Our operations are located in the United States and are organized into four reportable segments: crude oil pipelines and storage; crude oil supply and logistics; refined products terminals and storage; and NGL distribution and sales.
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Table of Contents
Crude oil pipelines and storage. The crude oil pipelines and storage segment consists of a crude oil pipeline operation and a crude oil storage facility. The crude oil pipeline operates in the Permian Basin consisting of approximately 96 miles of high-pressure steel pipeline with throughput capacity of approximately 130,000 barrels per day and a related system of truck terminals, LACT bay facilities, crude oil receipt points and crude oil storage facilities with an aggregate of 110,000 barrels of storage capacity. We also own a crude oil storage facility that has an aggregate storage capacity of approximately 3,000,000 barrels in Cushing, Oklahoma.
Crude oil supply and logistics. The crude oil supply and logistics segment consists of crude oil supply activities and a fleet of crude oil gathering and transportation trucks. We conduct crude oil supply activities by purchasing crude oil for our own account from producers, aggregators and traders and selling crude oil to traders and refiners. We own a fleet of crude oil gathering and transportation trucks operating in and around high-growth drilling areas such as the Mid-Continent, the Eagle Ford shale and the Permian Basin. We also lease crude oil storage tanks in Cushing, Oklahoma with a shell capacity of approximately 700,000 barrels pursuant to a long-term lease with a third party.
Refined products terminals and storage. The refined products terminals and storage segment has aggregate storage capacity of 1.3 million barrels from two refined products terminals located in North Little Rock, Arkansas and Caddo Mills, Texas. The North Little Rock terminal has storage capacity of 550,000 barrels from 11 tanks and has eight loading lanes with automated truck loading equipment. The Caddo Mills terminal consists of 10 storage tanks with an aggregate capacity of approximately 770,000 barrels and has five loading lanes with automated truck loading equipment. The North Little Rock terminal and the Caddo Mills terminal are primarily served by the Enterprise TE Products Pipeline Company LLC and the Explorer Pipeline, respectively.
NGL distribution and sales. The NGL distribution and sales segment consists of three businesses: (i) portable cylinder tank exchange, (ii) NGL sales through our retail, commercial and wholesale distribution business and (iii) NGL gathering and transportation business. Currently, the cylinder exchange network covers 48 states through a network of over 21,100 locations, which includes grocery chains, pharmacies, convenience stores and hardware stores. Additionally, in seven states in the southwest region of the United States, we sell NGLs to retailers, wholesalers, industrial end-users and commercial and residential customers. We also own a fleet of NGL gathering and transportation operations trucks operating in the Eagle Ford shale and the Permian Basin.
Corporate and other. Corporate and other includes general partnership expenses associated with managing all of our reportable segments.
We account for intersegment revenues as if the revenues were to third parties.
Our chief operating decision maker evaluates the segments operating performance based on Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) plus (minus) interest expense (income), income tax expense (benefit), depreciation and amortization expense, asset impairments, (gains) losses on asset sales, certain non-cash charges such as non-cash equity compensation, non-cash vacation expense, non-cash (gains) losses on commodity derivative contracts (total (gain) loss on commodity derivatives less net cash flow associated with commodity derivatives settled during the period), and selected (gains) charges and transaction costs that are unusual or non-recurring.
The following tables reflect certain financial data for each reportable segment for the three months ended March 31, 2015 and 2014.
15
Table of Contents
|
|
Three months ended March 31, |
|
|
|
2015 |
|
2014 |
|
|
|
(in thousands) |
|
External Revenues: |
|
|
|
|
|
Crude oil pipelines and storage |
|
$ |
7,348 |
|
$ |
15,619 |
|
Crude oil supply and logistics |
|
229,571 |
|
332,531 |
|
Refined products terminals and storage |
|
5,508 |
|
8,989 |
|
NGLs distribution and sales |
|
56,240 |
|
61,528 |
|
Amounts not included in segment Adjusted EBITDA |
|
619 |
|
|
|
Total revenues |
|
$ |
299,286 |
|
$ |
418,667 |
|
|
|
|
|
|
|
Intersegment Revenues: |
|
|
|
|
|
Crude oil pipelines and storage |
|
$ |
576 |
|
$ |
|
|
Crude oil supply and logistics |
|
1,792 |
|
8,740 |
|
Refined products terminals and storage |
|
|
|
|
|
NGLs distribution and sales |
|
73 |
|
|
|
Intersegment eliminations |
|
(2,441 |
) |
(8,740 |
) |
Total intersegment revenues |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
Cost of Sales, excluding depreciation and amortization: |
|
|
|
|
|
Crude oil pipelines and storage |
|
$ |
1,257 |
|
$ |
9,523 |
|
Crude oil supply and logistics |
|
226,371 |
|
338,201 |
|
Refined products terminals and storage |
|
1,876 |
|
3,127 |
|
NGLs distribution and sales |
|
27,954 |
|
40,085 |
|
Intersegment eliminations |
|
(2,441 |
) |
(8,740 |
) |
Amounts not included in segment Adjusted EBITDA |
|
(127 |
) |
693 |
|
Total cost of sales, excluding depreciation and amortization |
|
$ |
254,890 |
|
$ |
382,889 |
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
Crude oil pipelines and storage |
|
$ |
999 |
|
$ |
998 |
|
Crude oil supply and logistics |
|
2,009 |
|
1,487 |
|
Refined products terminals and storage |
|
608 |
|
663 |
|
NGLs distribution and sales |
|
12,786 |
|
12,803 |
|
Amounts not included in segment Adjusted EBITDA |
|
209 |
|
202 |
|
Total operating expenses |
|
$ |
16,611 |
|
$ |
16,153 |
|
|
|
|
|
|
|
Adjusted EBITDA: |
|
|
|
|
|
Crude oil pipelines and storage |
|
$ |
5,476 |
|
$ |
4,968 |
|
Crude oil supply and logistics |
|
1,982 |
|
695 |
|
Refined products terminals and storage |
|
2,822 |
|
4,853 |
|
NGLs distribution and sales |
|
12,098 |
|
5,252 |
|
Total adjusted EBITDA from reportable segments |
|
$ |
22,378 |
|
$ |
15,768 |
|
16
Table of Contents
A reconciliation of total Adjusted EBITDA from reportable segments to net income (loss) from continuing operations is included in the table below.
|
|
Three months ended March 31, |
|
|
|
2015 |
|
2014 |
|
|
|
(in thousands) |
|
Total adjusted EBITDA from reportable segments |
|
$ |
22,378 |
|
$ |
15,768 |
|
Other expenses not allocated to reportable segments |
|
(7,189 |
) |
(7,349 |
) |
Depreciation and amortization |
|
(11,339 |
) |
(10,094 |
) |
Interest expense |
|
(1,173 |
) |
(3,259 |
) |
Loss on extinguishment of debt |
|
|
|
(1,634 |
) |
Income tax (expense) benefit |
|
(22 |
) |
57 |
|
Loss on disposal of assets, net |
|
(130 |
) |
(356 |
) |
Unit-based compensation |
|
(431 |
) |
(282 |
) |
Total gain on commodity derivatives |
|
771 |
|
135 |
|
Net cash payments (receipts) for commodity derivatives settled during the period |
|
3,192 |
|
(633 |
) |
Non-cash inventory costing adjustment |
|
(2,915 |
) |
|
|
Transaction costs and other |
|
(2,477 |
) |
(536 |
) |
Net income (loss) from continuing operations |
|
$ |
665 |
|
$ |
(8,183 |
) |
Total assets for our reportable segments as of March 31, 2015 and December 31, 2014 were as follows:
|
|
March 31, 2015 |
|
December 31, 2014 |
|
|
|
(in thousands) |
|
Crude oil pipelines and storage |
|
$ |
321,184 |
|
$ |
323,100 |
|
Crude oil supply and logistics |
|
159,927 |
|
165,288 |
|
Refined products terminals and storage |
|
131,107 |
|
131,923 |
|
NGLs distribution and sales |
|
174,512 |
|
170,904 |
|
Corporate and other |
|
22,224 |
|
21,958 |
|
Total assets |
|
$ |
808,954 |
|
$ |
813,173 |
|
11. Related Party Transactions
We perform certain management services for JP Development. We receive a monthly fee of $50,000 for these services which reduced the general and administrative expenses on the condensed consolidated statements of operations by $150,000 for each of the three month periods ended March 31, 2015 and 2014.
JP Development has a pipeline transportation business that provides crude oil pipeline transportation services to our crude oil supply and logistics segment. As a result of utilizing JP Developments pipeline transportation services, we incurred pipeline tariff fees of $1,640,000 and $2,905,000 for the three months ended March 31, 2015 and 2014, respectively, which are included in costs of sales on the condensed consolidated statements of operations. As of March 31, 2015 and December 31, 2014, we had a net receivable from JP Development of $7,968,000 primarily as the result of the prepayments made in 2014 for the crude oil pipeline transportation services to be provided by JP Development. We expect these amounts to be recovered during 2015.
On November 5, 2013, we issued a $1,000,000 promissory note to JP Development for working capital requirements. The note was to mature on November 5, 2016 and bore interest at 4.75%. The interest rate was subject to an adjustment each quarter equal to the weighted average rate of JP Developments outstanding indebtedness during the most recently ended fiscal quarter. Accrued interest on the note was payable quarterly in arrears. On March 20, 2014, we repaid this promissory note in full.
As a result of the acquisition of the North Little Rock, Arkansas refined product terminal (ATT) in November 2012, TAC owns common and subordinated units in us. In addition, Mr. Greg Arnold, President and CEO of TAC, is also one of our directors and owns a 5% equity interest in our general partner. Our refined products terminals and storage segment sold refined products to TAC during 2014. Our revenue from TAC was $6,381,000 for the three months ended March 31, 2014.
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Table of Contents
Our NGL distribution and sales segment also purchases refined products from TAC. We paid $226,000 and $495,000 for refined product purchases from TAC during the three months ended March 31, 2015 and 2014, respectively, which are included in cost of sales on the condensed consolidated statements of operations.
We entered into transactions with CAMS Bluewire, an entity in which ArcLight holds a non-controlling interest. CAMS Bluewire provides IT support for us. We paid $109,000 and $128,000 for the three months ended March 31, 2015 and 2014, respectively, for IT support and consulting services, and for the purchases of IT equipment which are included in operating expense, general and administrative and property, plant and equipment, net, on the condensed consolidated statements of operations and the condensed consolidated balance sheets. There were no amounts due to CAMS Bluewire as of March 31, 2015. The total amount due to CAMS Bluewire as of December 31, 2014 was $32,000.
During the third quarter of 2014, we began performing certain management services for Republic Midstream, LLC (Republic), an entity owned by ArcLight. We charge a monthly fee of approximately $59,000 for these services. The monthly fee reduced the general and administrative expenses on the condensed consolidated statements of operations by $178,000 for the three months ended March 31, 2015. As of March 31, 2015 and December 31, 2014, we had a receivable balance due from Republic of $475,000 and $297,000, respectively, which is included in receivables from related parties on the condensed consolidated balance sheets.
In the first quarter of 2015, certain executive bonuses related to the year ended December 31, 2014 were paid on our behalf by ArcLight. Total amounts paid on our behalf were $1,350,000 and were treated as deemed contributions from ArcLight for the three months ended March 31, 2015.
We do not have any employees. The employees supporting our operations are employees of our general partner, and as such, we reimburse our general partner for payroll and other payroll-related expenses we incur. There were no amounts due to our general partner as of March 31, 2015. As of December 31, 2014, we had a receivable balance due from our general partner of $2,205,000 as a result of the timing of payroll funding. Amounts from our general partner are included in receivables from related parties on the condensed consolidated balance sheets.
Our NGL distribution and sales segment enters into transactions with Enogex Holdings, an entity partially owned by ArcLight. Enogex Holdings is a provider of rack sales, propane and trucks. For the three months ended March 31, 2015, we paid $56,000 for propane purchases from Enogex Holdings, which is included in cost of sales on the condensed consolidated statements of operations. There were no amounts paid to Enogex Holdings during the three months ended March 31, 2014. As of March 31, 2015 and December 31, 2014, there were no amounts due to Enogex Holdings.
12. Subsequent Events
Long-Term Incentive Plan and 2015 Phantom Units. Our general partner adopted the 2014 Long-Term Incentive Plan (LTIP) in October 2014 for officers, directors and employees of our general partner or its affiliates, and any consultants, affiliates of our general partner or other individuals who perform services for us. The LTIP contemplates the issuance or delivery of up to 3,642,700 common units to satisfy awards thereunder.
On April 1, 2015, in connection with the LTIP, we granted 444,378 phantom units to certain employees (including officers) of our general partner. Phantom units are notional units that entitle the grantee to receive a common unit upon the vesting of the phantom unit or, at the discretion of the LTIP administrator, cash equal to the fair market value of a common unit. Of the total phantom units, 320,178 phantom units will vest over a three year period while the remaining 124,200 phantom units will cliff vest after three years. Total unrecognized compensation related to these phantom units is $4,139,000, which is expected to be recognized on a straight-line basis over the vesting period. All phantom units issued under the LTIP include distribution equivalent rights, which are rights to receive cash distributions per phantom unit in an amount equal to and at the same time as the cash distributions made on a common unit during the period the phantom unit is outstanding.
Acquisition of Southern Propane, Inc. On April 13, 2015, we entered into an agreement to acquire substantially all of the assets of Southern Propane Inc., a Houston-based industrial and commercial propane distribution and logistics company, for approximately $14,900,000, subject to customary purchase price adjustments. The acquisition closed on May 8, 2015 and was funded through the use of borrowings from our revolving credit facility and the issuance of approximately 267,000 of our common units.
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Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited historical condensed consolidated financial statements and notes in Item 1. Financial Statements contained herein and our audited historical consolidated financial statements as of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013, and 2012 included in our Annual Report on Form 10-K, as filed with the SEC on March 11, 2015 (our 2014 Form 10-K). Among other things, those historical consolidated financial statements include more detailed information regarding the basis of presentation for the following information. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below as a result of various risk factors, including those that may not be in the control of management. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled Risk Factors included in our 2014 Form 10-K. See also Forward-Looking Statements.
General
We are a growth-oriented limited partnership formed in May 2010 by members of management and further capitalized by ArcLight to own, operate, develop and acquire a diversified portfolio of midstream energy assets. Our operations currently consist of four business segments: (i) crude oil pipelines and storage, (ii) crude oil supply and logistics, (iii) refined products terminals and storage and (iv) NGL distribution and sales. Together our businesses provide midstream infrastructure solutions for the growing supply of crude oil, refined products and NGLs in the United States. Since our formation, our primary business strategy has been to focus on:
· owning, operating and developing midstream assets serving two of the most prolific shale plays in the United States, as well as serving key crude oil, refined product and NGL distribution hubs;
· providing midstream infrastructure solutions to users of liquid petroleum products in order to capitalize on changing product flows between producing and consuming markets resulting from the significant growth in hydrocarbon production across the United States; and
· operating one of the largest portable propane cylinder exchange businesses in the United States and capitalizing on the increase in demand and extended applications for portable propane cylinders.
We conduct our business through fee-based and margin-based arrangements.
Fee-based. We charge our customers a capacity, throughput or volume-based fee that is not contingent on commodity price changes. Our fee-based services include the operations in our crude oil pipelines and storage segment, our refined products terminals and storage segment, and the NGL transportation services we provide within our NGL distribution and sales segment. In our crude oil pipelines business, we purchase crude oil at an index price less a transportation fee, and simultaneously sell an identical volume of crude oil at a designated delivery point to the same party at the same index price. We consider this a fee-based business because we lock in the economic equivalent of a transportation fee. Our fee-based businesses are governed by tariffs or other negotiated fee agreements between us and our customers with terms ranging from one month to nine years.
Margin-based. We purchase and sell crude oil in our crude oil supply and logistics segment, and NGLs and refined products in our NGL distribution and sales segment. A substantial portion of our margin related to the purchase and sale of crude oil in our crude oil supply and logistics segment is derived from fee equivalent transactions in which we concurrently purchase and sell crude oil at prices that are based on an index, thereby generating revenue consisting of a margin plus our purchase, transportation, handling and storage costs. In our NGL distribution and sales segment, sales prices to our customers generally provide for a margin plus the cost of our products to our customers. We also perform blending services in our crude oil supply and logistics segment and our refined products terminals and storage segment, which allows us to generate additional margin based on the difference between our cost to purchase and blend the products and the market sales price of the finished blended product. We manage commodity price exposure through the structure of our sales and supply contracts and through a managed hedging program. Our risk management policy permits the use of financial instruments to reduce the exposure to changes in commodity prices that occur in the normal course of business but prohibits the use of financial instruments for trading or to speculate on future changes in commodity prices.
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Table of Contents
Recent Developments
Expansions of Silver Dollar Pipeline System
In February 2015, we signed a 10-year fee-based gathering agreement with Discovery Natural Resources LLC (Discovery) to construct and operate an extension of our Silver Dollar Pipeline crude oil gathering system into the core of the Midland Basin. The agreement with Discovery is supported by a dedication of approximately 53,000 acres in Reagan, Glasscock, Sterling and Irion Counties. In addition to pipeline gathering, we also provide crude oil trucking, marketing and related services for Discovery. The gathering system extension will consist of approximately 55 miles of pipeline, extending from southern Reagan County north into Glasscock County across the Midland Basin. The project is expected to be completed in the second half of 2015.
In February 2015, we also commissioned a new 70,000 barrel crude oil storage tank which increased our total crude oil storage capacity on the Silver Dollar Pipeline to 110,000 barrels.
In April 2015, we announced that we have executed an interconnection agreement with an affiliate of Magellan Midstream Partners, L.P. (Magellan) to connect our Silver Dollar Pipeline System to Magellans Longhorn pipeline at the Barnhart Terminal in Crockett County, Texas. The interconnection provides producers with a third takeaway option from the Silver Dollar Pipeline System and direct access from the core of the Midland Basin to Houston end markets. The connection is expected to be in service by the third quarter of 2015.
Acquisition of Southern Propane, Inc.
In April 2015, we signed a definitive agreement to acquire substantially all of the assets of Southern Propane, Inc., a Houston-based industrial and commercial propane distribution and logistics company, for approximately $14.9 million, subject to customary purchase price adjustments. The acquisition closed on May 8, 2015 and was funded through the use of borrowings from our revolving credit facility and the issuance of approximately 267,000 of our common units.
How We Evaluate Our Operations
Our management uses a variety of financial and operational metrics to analyze our performance. We view these metrics as important factors in evaluating our profitability and review these measurements for consistency and trend analysis. These metrics include volumes, revenues, cost of sales, excluding depreciation and amortization, operating expenses, Adjusted EBITDA and adjusted gross margin.
Volumes and revenues
· Crude oil pipelines and storage. The amount of revenue we generate from our crude oil pipelines business depends primarily on throughput volumes. We generate a substantial majority of our crude oil pipeline revenues through long-term contracts containing acreage dedications or minimum volume commitments. Throughput volumes on our pipeline system are affected primarily by the supply of crude oil in the market served by our assets. The volume of crude oil stored at our crude oil storage facility in Cushing, Oklahoma has no impact on the revenue generated by our crude oil storage business because we receive a fixed monthly fee per barrel of shell capacity that is not contingent on the usage of our storage tanks.
· Crude oil supply and logistics. The revenue generated from our crude oil supply and logistics business depends on the volume of crude oil we purchase from producers, aggregators and traders and then sell to producers, traders and refiners as well as the volumes of crude oil that we gather and transport. The volume of our crude oil supply and logistics activities and the volumes transported by our crude oil gathering and transportation trucks are affected by the supply of crude oil in the markets served directly or indirectly by our assets. Accordingly, we actively monitor producer activity in the areas served by our crude oil supply and logistics business and other producing areas in the United States to compete for volumes from crude oil producers. Revenues in this segment are also impacted by changes in the market price of commodities that we pass through to our customers.
· Refined products terminals and storage. The amount of revenue we generate from our refined products terminals depends primarily on the volume of refined products that we handle. These volumes are affected primarily by the supply of and demand for refined products in the markets served directly or indirectly by our refined products terminals, which we believe are strategically located to take advantage of infrastructure development opportunities resulting from growing markets.
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Table of Contents
· NGL distribution and sales. The amount of revenue we generate from our NGL distribution and sales segment depends on the gallons of NGLs we sell through our cylinder exchange and NGL sales businesses. In addition, our NGL transportation operations generate revenue based on the number of gallons of NGLs we gather and the distance we transport those gallons for our customers. Revenues in this segment are also impacted by changes in the market price of commodities that we pass through to our customers.
Cost of sales, excluding depreciation and amortization. Our management attempts to minimize cost of sales, excluding depreciation and amortization, in order to enhance the profitability of our operations. Cost of sales, excluding depreciation and amortization, includes the costs to purchase the product and any costs incurred to transport the product to the point of sale and to store the product until it is sold. We seek to minimize cost of sales, excluding depreciation and amortization, by attempting to acquire the products that we use in each of our segments at times and at prices that we believe are most optimal based on our knowledge of the industry and the regions in which we operate.
Operating expenses. Our management seeks to maximize the profitability of our operations in part by minimizing operating expenses. These expenses are comprised of payroll, wages and benefits, utility costs, fleet costs, repair and maintenance costs, rent, fuel, insurance premiums, taxes and other operating costs, some of which are independent of the volumes we handle.
Adjusted EBITDA and adjusted gross margin. Our management uses Adjusted EBITDA and adjusted gross margin to analyze our performance. We define Adjusted EBITDA as net income (loss) plus (minus) interest expense (income), income tax expense (benefit), depreciation and amortization expense, asset impairments, (gains) losses on asset sales, certain non-cash charges such as non-cash equity compensation, non-cash vacation expense, non-cash (gains) losses on commodity derivative contracts (total (gain) loss on commodity derivatives less net cash flow associated with commodity derivatives settled during the period) and selected (gains) charges and transaction costs that are unusual or non-recurring. We define adjusted gross margin as total revenues minus cost of sales, excluding depreciation and amortization, and certain non-cash charges such as non-cash vacation expense and non-cash gains (losses) on derivative contracts (total gain (losses) on commodity derivatives less net cash flow associated with commodity derivatives settled during the period).
Adjusted EBITDA and adjusted gross margin are supplemental, non-GAAP financial measures used 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 sector, without regard to financing methods, historical cost basis or capital structure;
· the ability of our assets to generate sufficient cash flow 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.
Adjusted EBITDA and adjusted gross margin are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures provides information useful to investors in assessing our financial condition and results of operations. The GAAP measures most directly comparable to Adjusted EBITDA and adjusted gross margin are net income (loss) and operating income (loss), respectively. Adjusted EBITDA and adjusted gross margin should not be considered as an alternative to net income (loss), operating income (loss) or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA and adjusted gross margin exclude some, but not all, items that affect net income (loss) and operating income (loss) and these measures may vary among other companies. As a result, Adjusted EBITDA and adjusted gross margin may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
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Table of Contents
Set forth below are reconciliations of Adjusted EBITDA and adjusted gross margin to their most directly comparable financial measures calculated in accordance with GAAP.
|
|
Three months ended March 31, |
|
|
|
2015 |
|
2014 |
|
|
|
(in thousands) |
|
Reconciliation of Adjusted EBITDA to net income (loss) |
|
|
|
|
|
Net income (loss) |
|
$ |
665 |
|
$ |
(8,588 |
) |
Depreciation and amortization |
|
11,339 |
|
10,094 |
|
Interest expense |
|
1,173 |
|
3,259 |
|
Loss on extinguishment of debt |
|
|
|
1,634 |
|
Income tax expense (benefit) |
|
22 |
|
(57 |
) |
Loss on disposal of assets, net |
|
130 |
|
356 |
|
Unit-based compensation |
|
431 |
|
282 |
|
Total gain on commodity derivatives |
|
(771 |
) |
(135 |
) |
Net cash receipts (payments) for commodity derivatives settled during the period |
|
(3,192 |
) |
633 |
|
Non-cash inventory costing adjustment |
|
2,915 |
|
|
|
Transaction costs and other |
|
2,477 |
|
536 |
|
Discontinued operations (1) |
|
|
|
484 |
|
Adjusted EBITDA |
|
$ |
15,189 |
|
$ |
8,498 |
|
(1) In June 2014, we completed the sale of our crude oil logistics operations in the Bakken region of North Dakota, Montana and Wyoming.
|
|
Three months ended March 31, |
|
|
|
2015 |
|
2014 |
|
|
|
(in thousands) |
|
Reconciliation of adjusted gross margin to operating income (loss) |
|
|
|
|
|
Adjusted gross margin |
|
|
|
|
|
Crude oil pipelines and storage |
|
$ |
6,667 |
|
$ |
6,096 |
|
Crude oil supply and logistics |
|
4,992 |
|
3,070 |
|
Refined products terminals and storage |
|
3,632 |
|
5,862 |
|
NGL distribution and sales |
|
28,358 |
|
21,443 |
|
Total Adjusted gross margin |
|
43,649 |
|
36,471 |
|
|
|
|
|
|
|
Operating expenses |
|
(16,611 |
) |
(16,153 |
) |
General and administrative |
|
(14,475 |
) |
(12,633 |
) |
Depreciation and amortization |
|
(11,339 |
) |
(10,094 |
) |
Loss on disposal of assets, net |
|
(130 |
) |
(356 |
) |
Total gain from commodity derivative contracts |
|
771 |
|
135 |
|
Net cash (receipts) payments for commodity derivatives settled during the period |
|
3,192 |
|
(633 |
) |
Non-cash inventory costing adjustment |
|
(2,915 |
) |
|
|
Other |
|
(301 |
) |
(195 |
) |
Operating income (loss) |
|
$ |
1,841 |
|
$ |
(3,458 |
) |
22
Table of Contents
Results of Operations
The following table summarizes our results of operations for the periods presented (dollars in thousands).
|
|
Three months ended March 31, |
|
|
|
2015 |
|
2014 |
|
|
|
(in thousands) |
|
Total revenues |
|
$ |
299,286 |
|
$ |
418,667 |
|
|
|
|
|
|
|
COSTS AND EXPENSES |
|
|
|
|
|
Cost of sales, excluding depreciation and amortization |
|
254,890 |
|
382,889 |
|
Operating expense |
|
16,611 |
|
16,153 |
|
General and administrative |
|
14,475 |
|
12,633 |
|
Depreciation and amortization |
|
11,339 |
|
10,094 |
|
Loss on disposal of assets, net |
|
130 |
|
356 |
|
OPERATING INCOME (LOSS) |
|
1,841 |
|
(3,458 |
) |
|
|
|
|
|
|
OTHER INCOME (EXPENSE) |
|
|
|
|
|
Interest expense |
|
(1,173 |
) |
(3,259 |
) |
Loss on extinguishment of debt |
|
|
|
(1,634 |
) |
Other income, net |
|
19 |
|
111 |
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
|
687 |
|
(8,240 |
) |
|
|
|
|
|
|
Income tax (expense) benefit |
|
(22 |
) |
57 |
|
INCOME (LOSS) FROM CONTINUING OPERATIONS |
|
665 |
|
(8,183 |
) |
|
|
|
|
|
|
DISCONTINUED OPERATIONS (1) |
|
|
|
|
|
Net loss from discontinued operations |
|
|
|
(405 |
) |
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
665 |
|
$ |
(8,588 |
) |
(1) In June 2014, we completed the sale of our crude oil logistics operations in the Bakken region of North Dakota, Montana and Wyoming.
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Table of Contents
Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014
Consolidated Results
|
|
Three months ended March 31, |
|
|
|
2015 |
|
2014 |
|
Change |
|
|
|
(in thousands) |
|
Segment Adjusted EBITDA |
|
|
|
|
|
|
|
Crude oil pipelines and storage (1) |
|
$ |
5,476 |
|
$ |
4,968 |
|
$ |
508 |
|
Crude oil supply and logistics (1) |
|
1,982 |
|
695 |
|
1,287 |
|
Refined products terminaling and storage (1) |
|
2,822 |
|
4,853 |
|
(2,031 |
) |
NGL distribution and sales (1) |
|
12,098 |
|
5,252 |
|
6,846 |
|
Discontinued operations (2) |
|
|
|
79 |
|
(79 |
) |
Corporate and other |
|
(7,189 |
) |
(7,349 |
) |
160 |
|
Total Adjusted EBITDA |
|
15,189 |
|
8,498 |
|
6,691 |
|
Depreciation and amortization |
|
(11,339 |
) |
(10,094 |
) |
(1,245 |
) |
Interest expense |
|
(1,173 |
) |
(3,259 |
) |
2,086 |
|
Loss on extinguishment of debt |
|
|
|
(1,634 |
) |
1,634 |
|
Income tax (expense) benefit |
|
(22 |
) |
57 |
|
(79 |
) |
Loss on disposal of assets, net |
|
(130 |
) |
(356 |
) |
226 |
|
Unit-based compensation |
|
(431 |
) |
(282 |
) |
(149 |
) |
Total gain on commodity derivatives |
|
771 |
|
135 |
|
636 |
|
Net cash (receipts) payments for commodity derivatives settled during the period |
|
3,192 |
|
(633 |
) |
3,825 |
|
Non-cash inventory costing adjustment |
|
(2,915 |
) |
|
|
(2,915 |
) |
Transaction costs and other |
|
(2,477 |
) |
(536 |
) |
(1,941 |
) |
Discontinued operations (2) |
|
|
|
(484 |
) |
484 |
|
Net income (loss) |
|
$ |
665 |
|
$ |
(8,588 |
) |
$ |
9,253 |
|
(1) See further analysis of Adjusted EBITDA of each reportable segment below.
(2) In June 2014, we completed the sale of our crude oil logistics operations in the Bakken region of North Dakota, Montana and Wyoming.
Depreciation and amortization expense. Depreciation and amortization expense for the three months ended March 31, 2015 increased to $11.3 million from $10.1 million for the three months ended March 31, 2014. The increase was primarily due to the expansions of our Silver Dollar Pipeline System in the fourth quarter of 2014. Our property, plant and equipment base increased from $237.2 million as of March 31, 2014 to $272.6 million as of March 31, 2015.
Interest expense. Interest expense for the three months ended March 31, 2015 decreased to $1.2 million from $3.3 million for the three months ended March 31, 2014. The decrease was primarily due to the significant repayment of our revolving credit facility, utilizing a portion of the proceeds from our initial public offering completed on October 7, 2014. Our average borrowing decreased from $210.0 million for the three months ended March 31, 2014 to $101.4 million for the three months ended March 31, 2015.
Loss on extinguishment of debt. Loss on extinguishment of debt of $1.6 million for the three months ended March 31, 2014 relates to the write off of deferred financing costs associated with the termination of our previous revolving credit facility.
Total gain on commodity derivatives and net cash (receipts) payments for commodity derivatives settled during the period. The sum of the total gain on commodity derivatives and net cash (receipts) payments for commodity derivatives settled during the period represents the total non-cash gain (loss) on commodity derivatives that was recognized in our statements of operations but excluded from our Adjusted EBITDA calculation. Total non-cash gain on commodity derivatives was $4.0 million for the three months ended March 31, 2015 compared to a loss of $0.5 million for the three months ended March 31, 2014. The change is due to the more favorable position of our crude oil and propane hedges during the three months ended March 31, 2015 compared to the three months ended March 31, 2014.
Non-cash inventory costing adjustment. We use the first-in, first-out (FIFO) method to calculate the cost of our crude oil inventory. During the first quarter of 2015, we entered into several fixed price forward sale contracts that will be executed during the third and fourth quarters of this year. We will physically
24
Table of Contents
hold the crude oil inventory associated with these forward sales contracts until the time of the sale. The non-cash inventory costing adjustment reflects the difference between the actual purchase price for this crude oil inventory and the cost calculated under the FIFO method. As a result, we have excluded the $2.9 million non-cash inventory costing adjustment in calculating Adjusted EBITDA, which will result in realization of the actual cost of this inventory in the same period when the inventory is physically sold.
Transaction costs and other. Transaction costs and other non-cash items increased for the three months ended March 31, 2015 to $2.5 million from $0.5 million for the three months ended March 31, 2014 primarily due to $1.0 million of expenses related to changes in our management structure and personnel in the three months ended March 31, 2015 and an increase in transaction costs of $0.7 million.
Segment Operating Results
Crude Oil Pipelines and Storage
|
|
Three months ended March 31, |
|
|
|
2015 |
|
2014 |
|
Change |
|
|
|
(in thousands, unless otherwise noted) |
|
Volumes: |
|
|
|
|
|
|
|
Crude oil pipeline throughput (Bbl/d) (1) |
|
28,329 |
|
18,129 |
|
10,200 |
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
Crude oil sales |
|
$ |
3,934 |
|
$ |
11,677 |
|
$ |
(7,743 |
) |
Gathering, transportation and storage fees |
|
3,397 |
|
3,600 |
|
(203 |
) |
Other revenues |
|
593 |
|
342 |
|
251 |
|
Total Revenues (2) |
|
7,924 |
|
15,619 |
|
(7,695 |
) |
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and amortization (3) (4) |
|
(1,257 |
) |
(9,523 |
) |
8,266 |
|
Adjusted gross margin |
|
6,667 |
|
6,096 |
|
571 |
|
|
|
|
|
|
|
|
|
Operating Expenses (4) |
|
(999 |
) |
(998 |
) |
(1 |
) |
General and Administrative |
|
(192 |
) |
(130 |
) |
(62 |
) |
Segment Adjusted EBITDA |
|
$ |
5,476 |
|
$ |
4,968 |
|
$ |
508 |
|
(1) Represents the average daily throughput volume in our crude oil pipelines operations. The volumes in our crude oil storage operations have no effect on operations as we receive a set fee per month that does not fluctuate with the volume of crude oil stored.
(2) Includes intersegment revenues of $0.6 million for the three months ended March 31, 2015. The intersegment revenues were eliminated upon consolidation.
(3) Includes intersegment cost of sales, excluding depreciation and amortization, of $0.6 million and $8.7 million for the three months ended March 31, 2015 and 2014, respectively. The intersegment cost of sales, excluding depreciation and amortization were eliminated upon consolidation.
(4) Certain non-cash or non-recurring expenses have been excluded from cost of sales, excluding depreciation and amortization and operating expenses for the purpose of calculating adjusted gross margin and segment Adjusted EBITDA. For a reconciliation of adjusted gross margin and Adjusted EBITDA to the most directly comparable financial measure calculated in accordance with GAAP, see the reconciliation of adjusted gross margin and Adjusted EBITDA.
Volumes. Crude oil pipeline throughput volumes increased to 28,329 barrels per day for the three months ended March 31, 2015 from 18,129 barrels per day for the three months ended March 31, 2014. The increase was due to the expansions of the Silver Dollar Pipeline System in the fourth quarter of 2014.
Adjusted gross margin. Adjusted gross margin increased to $6.7 million for the three months ended March 31, 2015 from $6.1 million for the three months ended March 31, 2014. The increase was primarily due to the increase in crude oil throughput volume ($1.2 million), as explained above, offset by a decrease in the average crude oil sales margin ($0.4 million) and a decrease in storage fees ($0.2 million). The decrease in the average crude oil sales margin is primarily due to shorter hauls on non-anchor trucked barrels. The decrease in storage fees is due to a service outage that occurred to make repairs to a portion of our storage tanks in January 2015.
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Table of Contents
Crude Oil Supply and Logistics
|
|
Three months ended March 31, |
|
|
|
2015 |
|
2014 |
|
Change |
|
|
|
(in thousands, unless otherwise noted) |
|
Volumes: |
|
|
|
|
|
|
|
Crude oil sales (Bbls/d) (1) |
|
73,779 |
|
43,356 |
|
30,423 |
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
Crude oil sales (2) (4) |
|
$ |
229,674 |
|
$ |
338,068 |
|
$ |
(108,394 |
) |
Gathering, transportation and storage fees |
|
1,646 |
|
$ |
3,173 |
|
(1,527 |
) |
Other revenues |
|
43 |
|
30 |
|
13 |
|
Total Revenues |
|
231,363 |
|
341,271 |
|
(109,908 |
) |
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and amortization (3) (4) |
|
(226,371 |
) |
(338,201 |
) |
111,830 |
|
Adjusted gross margin |
|
4,992 |
|
3,070 |
|
1,922 |
|
|
|
|
|
|
|
|
|
Operating expenses (4) |
|
(2,009 |
) |
(1,487 |
) |
(522 |
) |
General and administrative (4) |
|
(1,002 |
) |
(899 |
) |
(103 |
) |
Other income (expenses), net |
|
1 |
|
11 |
|
(10 |
) |
Segment Adjusted EBITDA |
|
$ |
1,982 |
|
$ |
695 |
|
$ |
1,287 |
|
(1) Represents the average daily sales volume in our crude oil supply and logistics operations.
(2) Includes intersegment revenues of $1.8 million and $8.7 million for the three months ended March 31, 2015 and 2014, respectively. The intersegment revenues were eliminated upon consolidation.
(3) Includes intersegment cost of sales, excluding depreciation and amortization, of $0.5 million for the three months ended March 31, 2015. The intersegment cost of sales, excluding depreciation and amortization, were eliminated upon consolidation.
(4) Certain non-cash or non-recurring items have been excluded from crude oil sales, cost of sales, excluding depreciation and amortization, operating expenses and general and administrative expenses for the purpose of calculating adjusted gross margin and segment Adjusted EBITDA. For a reconciliation of adjusted gross margin and Adjusted EBITDA to the most directly comparable financial measure calculated in accordance with GAAP, see the reconciliation of adjusted gross margin and Adjusted EBITDA.
Volumes. Crude oil sales volumes increased to 73,779 barrels per day for the three months ended March 31, 2015 from 43,356 barrels per day for the three months ended March 31, 2014. The increase was primarily due to the growth of our market share in the Permian Basin related to the expansions of the Silver Dollar Pipeline System in the fourth quarter of 2014.
Adjusted gross margin. Adjusted gross margin increased to $5.0 million for the three months ended March 31, 2015 from $3.1 million for the three months ended March 31, 2014 primarily due to the increase in sales volumes as explained above.
Operating expenses. Operating expenses increased to $2.0 million for the three months ended March 31, 2015 from $1.5 million for the three months ended March 31, 2014. The increase was primarily due to an increase in insurance premiums ($0.2 million) and an increase in lodging expense ($0.1 million) related to the temporary reassignment of certain crude oil supply and logistics employees to serve our growing market share in the Permian Basin.
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Table of Contents
Refined Products Terminals and Storage
|
|
Three months ended March 31, |
|
|
|
2015 |
|
2014 |
|
Change |
|
|
|
(in thousands, unless otherwise noted) |
|
Volumes: |
|
|
|
|
|
|
|
Terminal and storage throughput (Bbl/d) (1) |
|
63,787 |
|
61,619 |
|
2,168 |
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
Refined product sales |
|
$ |
2,244 |
|
$ |
6,353 |
|
$ |
(4,109 |
) |
Refined products terminals and storage fees |
|
3,264 |
|
2,636 |
|
628 |
|
Total Revenues |
|
5,508 |
|
8,989 |
|
(3,481 |
) |
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and amortization (2) |
|
(1,876 |
) |
(3,127 |
) |
1,251 |
|
Adjusted gross margin |
|
3,632 |
|
5,862 |
|
(2,230 |
) |
|
|
|
|
|
|
|
|
Operating Expenses (2) |
|
(608 |
) |
(663 |
) |
55 |
|
General and Administrative (2) |
|
(204 |
) |
(349 |
) |
145 |
|
Other income (expenses), net |
|
2 |
|
3 |
|
(1 |
) |
Segment Adjusted EBITDA |
|
$ |
2,822 |
|
$ |
4,853 |
|
$ |
(2,031 |
) |
(1) Represents the average daily throughput volume in our refined products terminals and storage segment.
(2) Certain non-cash or non-recurring expenses have been excluded from cost of sales, excluding depreciation and amortization, operating expenses and general and administrative expenses for the purpose of calculating adjusted gross margin segment Adjusted EBITDA. For a reconciliation of adjusted gross margin and Adjusted EBITDA to the most directly comparable financial measure calculated in accordance with GAAP, see the reconciliation of adjusted gross margin and Adjusted EBITDA.
Revenues. Revenues decreased to $5.5 million for the three months ended March 31, 2015 from $9.0 million for the three months ended March 31, 2014. The decrease was primarily due to a decrease in refined product sales revenue ($4.1 million) due to the decrease in both the volume of refined products sold and refined product commodities prices in the three months ended March 31, 2015 compared to the three months ended March 31, 2014. This decrease was offset by an increase in terminal and storage throughput volumes ($0.6 million) related to increased throughput at our Caddo Mills terminal attributable to a decrease in competition due to a refinery turn-around in our area of operation.
Cost of sales, excluding depreciation and amortization. Cost of sales, excluding depreciation and amortization, decreased to $1.9 million for the three months ended March 31, 2015 from $3.1 million for the three months ended March 31, 2014. The decrease was primarily due to the decrease in refined product commodities prices in the three months ended March 31, 2015 compared to the three months ended March 31, 2014.
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Table of Contents
NGL Distribution and Sales
|
|
Three months ended March 31, |
|
|
|
2015 |
|
2014 |
|
Change |
|
|
|
(in thousands, unless otherwise noted) |
|
Volumes: |
|
|
|
|
|
|
|
NGL and refined product sales (Mgal/d) (1) |
|
274 |
|
236 |
|
38 |
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
Gathering, transportation and storage fees |
|
$ |
1,775 |
|
$ |
1,323 |
|
$ |
452 |
|
NGL and refined product sales |
|
52,013 |
|
57,448 |
|
(5,435 |
) |
Other revenues |
|
2,524 |
|
2,757 |
|
(233 |
) |
Total Revenues (2) |
|
56,312 |
|
61,528 |
|
(5,216 |
) |
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and amortization (3) |
|
(27,954 |
) |
(40,085 |
) |
12,131 |
|
Adjusted gross margin |
|
28,358 |
|
21,443 |
|
6,915 |
|
|
|
|
|
|
|
|
|
Operating Expenses (3) |
|
(12,786 |
) |
(12,803 |
) |
17 |
|
General and administrative (3) |
|
(3,516 |
) |
(3,486 |
) |
(30 |
) |
Other income (expenses), net |
|
42 |
|
98 |
|
(56 |
) |
Segment Adjusted EBITDA |
|
$ |
12,098 |
|
$ |
5,252 |
|
$ |
6,846 |
|
(1) Represents the average daily sales volume in our NGL distribution and sales segment.
(2) Includes intersegment revenues of $0.1 million for the three months ended March 31, 2015. The intersegment revenues were eliminated upon consolidation.
(3) Certain non-cash or non-recurring expenses have been excluded from cost of sales, excluding depreciation and amortization, operating expenses and general and administrative expenses for the purpose of calculating adjusted gross margin segment Adjusted EBITDA. For a reconciliation of adjusted gross margin and Adjusted EBITDA to the most directly comparable financial measure calculated in accordance with GAAP, see the reconciliation of adjusted gross margin and Adjusted EBITDA.
Adjusted gross margin. Adjusted gross margin increased to $28.4 million for the three months ended March 31, 2015 from $21.4 million for the three months ended March 31, 2014. The increase was primarily due to an increase in NGL and refined product sales volumes ($4.5 million) combined with an increase in the average NGL and refined products sales margin ($2.4 million). Sales volumes increased as a result of organic growth in our customer base. The average sales margin of NGL and refined products increased due to more favorable market conditions in the three months ended March 31, 2015 compared to the three months ended March 31, 2014.
Liquidity and Capital Resources
We principally require liquidity to finance current operations, fund capital expenditures, including acquisitions from time to time, and to service our debt. We expect our sources of liquidity to include cash generated from operations, borrowings under our revolving credit facility and issuances of debt and equity.
We believe that cash on hand, cash generated from operations and availability under our revolving credit facility will be adequate to meet our operating needs, our planned short-term capital and debt service requirements and our cash distribution requirements. We believe that future internal growth projects or potential acquisitions will be funded primarily through borrowings under our revolving credit facility or through issuances of debt and equity securities.
Distributions
We intend to pay a minimum quarterly distribution of $0.3250 per unit per quarter, which equates to approximately $12.0 million per quarter, or $48.0 million per year, calculated based on the number of common and subordinated units outstanding as of May 5, 2015 and estimated unvested phantom units under our long-term incentive plan. We do not have a legal obligation to pay this distribution, except as provided in our partnership agreement. We currently estimate that our distributable cash flow in certain quarters of 2015 will be less than our anticipated distributions to unitholders during those periods. This shortfall is expected to be temporary and will be funded with borrowings from our revolving credit facility. The amount of such borrowings is currently estimated to be in a range of $5.0 to $11.0 million. A distribution of $0.325 per common unit and subordinated unit for the three months ended March 31, 2015 was declared on April 28, 2015 and will be paid on May 14, 2015 to unitholders of record as of May 7, 2015.
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Table of Contents
Revolving Credit Facility
Our revolving credit facility has a maturity date of February 12, 2019 and consists of a $275.0 million revolving line of credit, which includes a sub-limit of up to $100.0 million for letters of credit, and contains an accordion feature that allows us to increase the borrowing capacity thereunder from $275.0 million to $425.0 million, subject to obtaining additional or increased lender commitments. Our revolving credit facility is available for, among other thing, refinancing and repayment of certain existing indebtedness, working capital, capital expenditures, permitted acquisitions and for general partnership purposes, including distributions, so long as the use is not in contravention of law or the loan documents. Substantially all of our assets, but excluding equity in and assets of unrestricted subsidiaries and other customary exclusions, are pledged as collateral under our revolving credit facility. Our revolving credit facility contains customary covenants, including, among others, those that restrict our ability to make or limit certain payments, distributions, acquisitions, loans, or investments, incur certain indebtedness or create certain liens on our assets.
Our revolving credit facility also requires compliance with certain financial covenants, which include the following:
· a consolidated interest coverage ratio of not less than 2.50;
· prior to our issuance of certain unsecured notes, a consolidated net total leverage ratio of not more than 4.50, which requirement to maintain a certain consolidated net total leverage ratio is subject to a provision for increases up to 5.00 in connection with certain future acquisitions and from and after our issuance of certain unsecured notes, a consolidated net total leverage ratio of not more than 5.00, which requirement to maintain a certain consolidated net total ratio is subject to increase up to 5.50 in connection with certain future acquisitions; and
· from and after our issuance of certain unsecured notes, a consolidated senior secured net leverage ratio of not more than 3.50.
We were in compliance with all covenants under our revolving credit facility as of March 31, 2015.
As of April 30, 2015, we had $122.0 million of outstanding borrowings under our revolving credit facility and a remaining borrowing capacity of $122.2 million thereunder. Issued and outstanding letters of credit, which reduced borrowing capacity, totaled $30.8 million as of April 30, 2015.
Borrowings under our revolving credit facility bear interest at a rate per annum equal to, at our option, either (a) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the prime rate of Bank of America, and (3) LIBOR, subject to certain adjustments, plus 1.00% or (b) LIBOR, in each case plus an applicable margin (base rate, LIBOR and applicable margin each as defined in our revolving credit facility). As of March 31, 2015, the applicable margin for base rate loans under our revolving credit facility range from 0.75% to 2.00% and the applicable margin for LIBOR loans range from 1.75% to 3.00%, in each case based on our consolidated net total leverage ratio.
Cash Flow
Cash provided by (used in) operating activities, investing activities and financing activities were as follows for the periods indicated:
|
|
Three months ended March 31, |
|
|
|
2015 |
|
2014 |
|
|
|
(in thousands) |
|
Operating activities |
|
$ |
3,440 |
|
$ |
8,337 |
|
Investing activities |
|
(20,291 |
) |
(6,740 |
) |
Financing activities |
|
15,678 |
|
(2,612 |
) |
|
|
|
|
|
|
|
|
Cash provided by operating activities. Cash provided by operating activities was $3.4 million for the three months ended March 31, 2015 compared to $8.3 million for the three months ended March 31, 2014. The $4.9 million decrease was primarily attributable to a $8.9 million decrease due to the timing of collections and payments, partially offset by a $6.7 million increase in Adjusted EBITDA.
Cash used in investing activities. Cash used in investing activities was $20.3 million for the three months ended March 31, 2015 compared to $6.7 million for the three months ended March 31, 2014. The $13.6 million increase was primarily due to an
29
Table of Contents
increase in capital expenditures of $14.1 million in the three months ended March 31, 2015 associated with our organic growth projects.
Cash provided by (used in) financing activities. Cash provided by financing activities was $15.7 million for the three months ended March 31, 2015 compared to cash used in financing activities of $2.6 million for the three months ended March 31, 2014. The $18.3 million change was primarily due to a $27.2 million increase in net borrowings under our revolving credit facility and other debt and a $52.0 million increase related to cash used to purchase the Dropdown Assets in the three months ended March 31, 2014. These amounts were partially offset by a $48.0 million decrease from the issuance of common and preferred units in the three months ended March 31, 2014, and an $11.1 million decrease attributable to distributions to unitholders in the three months ended March 31, 2015.
Cash flows from discontinued operations. We combined the cash flows from discontinued operations with the cash flows from continuing operations. The cash flows from discontinued operations related to our operating, investing and financing activities were insignificant. We do not expect the absence of cash flows from these discontinued operations will have a significant impact to our future liquidity.
Capital Expenditures
Our capital spending program is focused on expanding our pipeline and cylinder exchange businesses, maintaining our fleet and storage assets and maintaining and updating our information systems. Capital expenditure plans are generally evaluated based on return on investment and estimated incremental cash flow. In addition to annually recurring capital expenditures, potential acquisition opportunities are evaluated based on their anticipated return on invested capital, accretive impact to operating results and strategic fit.
Under our partnership agreement, maintenance capital expenditures are capital expenditures made to maintain our operating income or operating capacity, while growth capital expenditures are capital expenditures that we expect will increase our operating income or operating capacity over the long-term. Examples of maintenance capital expenditures are those made to replace partially or fully depreciated assets, to maintain the existing operating capacity of our assets and to extend their useful lives, or other capital expenditures that are incurred in maintaining existing system volumes and related cash flows. In contrast, growth capital expenditures are those made to acquire additional assets to grow our business, to expand and upgrade our systems and facilities and to construct or acquire similar systems or facilities.
As of March 31, 2015, we have spent approximately $20.6 million on capital expenditures, of which $1.0 million represents maintenance capital expenditures and $19.6 million represents growth capital expenditures. We expect growth capital expenditures for the year ending December 31, 2015 to range from $75.0 million to $100.0 million, with the substantial majority of these investments to be made on our Silver Dollar Pipeline system. This estimated range of growth capital expenditures does not include any potential third party acquisitions that we will continue to evaluate throughout 2015.
Although we intend to move forward with our planned internal growth projects, we may further revise the timing and scope of these projects as necessary to adapt to existing economic conditions and the benefits expected to accrue to our unitholders from our expansion activities. We expect to fund our growth capital expenditures with borrowings under our revolving credit facility and a combination of debt and equity issuances.
Working Capital
Our working capital is the amount by which our current assets exceed our current liabilities and is a measure of our ability to pay our liabilities as they come due. Our working capital was $37.6 million and $26.3 million as of March 31, 2015, and December 31, 2014, respectively.
Our working capital requirements have been and will continue to be primarily driven by changes in accounts receivable and accounts payable, which generally fluctuate with changes in the market prices of commodities that we buy and sell in the ordinary course of our business. Other factors impacting changes in accounts receivable and accounts payable could include the timing of collections from customers and payments to suppliers, as well as our level of spending for maintenance and growth capital expenditures. A material adverse change in our operations or the availability of financing under our revolving credit facility could impact our ability to fund our working capital requirements for liquidity and capital resources.
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Table of Contents
Off-Balance Sheet Arrangements
We have not entered into any transactions, agreements or other contractual arrangements that would result in off balance sheet liabilities.
Critical Accounting Policies and Estimates
The critical accounting policies and estimates used in the preparation of our condensed consolidated financial statements are set forth in our 2014 Form 10-K for the year ended December 31, 2014 and have not changed.
Recent Accounting Pronouncements
In April 2015, the FASB issued ASU No. 2015-06, Earnings Per Share (Topic 260): Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions. ASU 2015-06 provides guidance on calculating and reporting historical earnings per unit under the two-class method following dropdown transactions between entities under common control. Under ASU 2015-06, the earnings (losses) of a transferred business before the date of a dropdown transaction should be allocated entirely to the general partner. Additionally, the previously reported earnings per unit of the limited partners for periods before the date of the dropdown transaction would not change as a result of the dropdown transaction. ASU 2015-06 is effective for interim and annual periods beginning after December 15, 2015, and should be applied retrospectively for all financial statements presented. Early adoption of this ASU is permitted. We plan to early adopt ASU 2015-06 in the second quarter of 2015 and do not expect the adoption to have a material impact on our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Cost. ASU 2015-03 changes the requirements for presenting debt issuance costs and requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this amendment. ASU 2015-03 is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted. The adoption of ASU 2015-03 involves presentation and disclosure and therefore is not expected to have a material impact on our consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 provides amended guidance on the consolidation evaluation for reporting entities that are required to evaluate whether they should consolidate certain legal entities, including limited partnerships. ASU 2015-02 is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted. The adoption of ASU 2015-02 is not expected to have a material impact on our financial statements.
In June 2014, the FASB issued ASU No. 2014-12, Compensation - Stock Compensation, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 provides explicit guidance on accounting for share-based payments requiring a specific performance target to be achieved in order for employees to become eligible to vest in the awards when that performance target may be achieved after the requisite service period for the award. The ASU requires that such performance targets be treated as a performance condition, and should not be reflected in the estimate of the grant-date fair value of the award. Instead, compensation cost should be recognized in the period in which it becomes probable the performance target will be achieved. ASU 2014-12 is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted. The adoption of ASU 2014-12 is not expected to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes the existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2016 using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). Early adoption is not permitted. We are currently evaluating the impact of the adoption of ASU 2014-09, but do not anticipate a material impact to our consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Commodity price risk. Market risk is the risk of loss arising from adverse changes in market rates and prices. We manage exposure to commodity price risk in our business segments through the structure of our sales and supply contracts and through a managed hedging program. Our risk management policy permits the use of financial instruments to reduce the exposure to changes in commodity prices that occur in the normal course of business but prohibits the use of financial instruments for trading or to speculate on future changes in commodity prices. See note 7 to our condensed consolidated financial statements included in Part I, Item I of this Form 10-Q for additional information.
We do not have direct exposure to commodity price changes in our crude oil pipelines and storage segment. In our crude oil supply and logistics business, we purchase and take title to a portion of the crude oil that we sell, which exposes us to changes in the price of crude oil in our sales markets. We manage this commodity price risk by limiting our net open positions and through the concurrent purchase and sale of like quantities of crude oil that are intended to lock in positive margins based on the timing, location or quality of the crude oil purchased and delivered. During the three months ended March 31, 2015, we also entered into fixed price forward sales contracts related to certain barrels of oil held in inventory and fixed price swap contracts to manage commodity price
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risk on anticipated physical crude oil sales. In our refined products terminals and storage segment, we sell excess volumes of refined products and our gross margin is impacted by changes in the market prices for these sales. We may execute forward sales contracts or financial swaps to reduce the risk of commodity price changes in this segment. In our NGL distribution and sales business, we are generally able to pass through the cost of products through sales prices to our customers. To the extent we enter into fixed price product sales contracts in this business, we generally hedge our supply costs using fixed price forward contracts and swap contracts. In our cylinder exchange business, we sell approximately half of our volumes pursuant to contracts of generally two to three years in duration, which allow us to re-negotiate prices at the time of contract renewal, and we sell the remaining volumes on demand or under month-to-month contracts and generally adjust prices on these contracts on an annual basis. We hedge a large majority of the forecasted volumes under our long-term contracts using financial swaps, and we may also use financial swaps to manage commodity price risk on our month-to-month contracts. In our NGL transportation business, we do not take title to the products we transport and therefore have no direct commodity price exposure.
Sensitivity analysis. The table below summarizes our commodity-related financial derivative instruments and fair values, as well as the effect of an assumed hypothetical 10% change in the underlying price of the commodity.
|
|
March 31, 2015 |
|
|
|
Maturity |
|
Notional Volume |
|
Fair Value Asset/(Liability) |
|
Effect of Hypothetical 10% Change |
|
|
|
|
|
|
|
(in thousands) |
|
Fixed Price Swaps: |
|
|
|
|
|
|
|
|
|
Propane (Gallons) |
|
Apr 2015 - Apr 2017 |
|
23,798,979 |
|
$ |
(8,851 |
) |
$ |
1,267 |
|
Crude Oil (Barrels) |
|
May 2015 - Nov 2015 |
|
(230,000 |
) |
2 |
|
1,151 |
|
Fixed Price Forward Contracts: |
|
|
|
|
|
|
|
|
|
Crude Oil (Barrels) |
|
Sept 2015 - Jul 2016 |
|
(325,000 |
) |
619 |
|
414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Price-risk sensitivities were calculated by assuming a theoretical 10% change (increase or decrease) in price regardless of term or historical relationships between the contractual price of the instruments and the underlying commodity price. Results are presented in absolute terms and represent a potential gain or loss in net income. The preceding hypothetical analysis is limited because changes in prices may or may not equal 10% and actual results may differ.
Interest rate risk. Our revolving credit facility bears interest at a variable rate and exposes us to interest rate risk. From time to time, we may use certain derivative instruments to hedge our exposure to variable interest rates. As of March 31, 2015, $75 million of our outstanding debt is economically hedged with interest rate swaps over six months with a weighted average interest rate of 0.52% plus an applicable margin. Based on our overall interest rate exposure to variable rate debt outstanding as of March 31, 2015, a 1% increase or decrease in interest rates would change interest expense by approximately $0.4 million.
We do not hold or purchase financial instruments or derivative financial instruments for trading purposes.
Credit risk. We are exposed to credit risk. Credit risk represents the loss that we would incur if a counterparty fails to perform under its contractual obligations. We manage our exposure to credit risk associated with customers to whom we extend credit through analyzing the counterparties financial condition prior to entering into an agreement, establishing credit limits, monitoring the appropriateness of these limits on an ongoing basis and entering into netting agreements that allow for offsetting counterparty receivable and payable balances for certain transactions, as deemed appropriate. We may request letters of credit, cash collateral, prepayments or guarantees as forms of credit support.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act), as of March 31, 2015. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2015, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures because of the material weaknesses in our internal control over financial reporting discussed below.
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A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. We did not have sufficient personnel with an appropriate level of accounting knowledge and experience commensurate with our financial reporting requirements. As a result, we did not design and maintain:
· formal accounting policies and formal review controls;
· effective controls over accounting for business combinations, including controls related to the valuation of assets acquired and liabilities assumed, and the integration of the businesses by applying consistent accounting policies and processes to determine compliance with industry standards and regulations; and
· adequate policies and procedures with respect to the primary components of information technology general controls, including the approval and review of access controls, system implementation and migration controls, and change management controls.
These material weaknesses resulted in audit adjustments and restatements of our financial statements in the periods prior to 2014. Additionally, these material weaknesses could result in a misstatement of the account balances or disclosures that would result in material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
We are currently working towards remediating the material weaknesses in our internal control over financial reporting and are implementing additional processes and controls designed to address the underlying causes of the material weaknesses. During the course of implementing additional processes and controls, as well as controls operating effectiveness testing, we may identify additional control deficiencies, which could give rise to other material weaknesses, in addition to the material weaknesses described above. As we continue to evaluate and work to improve our internal control over financial reporting, we may determine to take additional measures to address material weaknesses or determine to modify certain of the remediation measures.
Changes in Internal Controls over Financial Reporting
Except for the remediation efforts described above, there was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings.
The information required for this item is provided in Note 9 Commitments and Contingencies, included in the unaudited notes to our condensed consolidated financial statements included under Part I, Item I of this Form 10-Q, which is incorporated herein by reference.
Item 1A. Risk Factors.
In addition to the information set forth in this Form 10-Q, you should carefully consider the risk factors under Item 1A of our annual report on Form 10-K for the year ended December 31, 2014. There has been no material change in our risk factors from those described in our 2014 Form 10-K. Such risks are not the only risks we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also have a material adverse effect on our business or our operations.
Item 6. Exhibits.
Exhibit Number |
|
Description |
3.1* |
|
Certificate of Limited Partnership of JP Energy Partners LP (incorporated by reference to Exhibit 3.1 to the Partnerships Registration Statement on Form S-1 (File No. 333-195787) filed with the SEC on May 8, 2014). |
|
|
|
3.2* |
|
Third Amended and Restated Agreement of Limited Partnership of JP Energy Partners LP dated October 7, 2014 (incorporated by reference to Exhibit 3.1 to the Partnerships Current Report on Form 8-K filed with the SEC on October 7, 2014). |
|
|
|
4.1* |
|
Registration Rights Agreement dated November 27, 2012 among JP Energy Partners LP, Arkansas Terminaling and Training Inc., Michal Coulson, Mary Ann Dawkins and White Properties II Limited Partnership (incorporated by reference to Exhibit 4.1 to the Partnerships Registration Statement on Form S-1 (File No. 333-195787) filed with the SEC on May 8, 2014). |
|
|
|
31.1** |
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2** |
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1** |
|
Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2** |
|
Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
101.INS** |
|
XBRL Instance Document |
|
|
|
101.SCH** |
|
XBRL Taxonomy Extension Schema |
|
|
|
101.CAL** |
|
XBRL Taxonomy Calculation Linkbase |
|
|
|
101.DEF** |
|
XBRL Taxonomy Definition Linkbase |
|
|
|
101.LAB** |
|
XBRL Taxonomy Label Linkbase |
|
|
|
101.PRE** |
|
XBRL Taxonomy Presentation Linkbase |
* Previously filed
** Filed herewith
34
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
JP Energy Partners LP |
|
|
|
By: |
JP Energy GP II LLC, |
|
|
its general partner |
|
|
|
Date: May 12, 2015 |
By: |
/s/ J. Patrick Barley |
|
|
J. Patrick Barley |
|
|
President and Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
Date: May 12, 2015 |
By: |
/s/ Patrick J. Welch |
|
|
Patrick J. Welch |
|
|
Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
35
Exhibit 31.1
Certification Pursuant to
Rules 13a-14 and 15d-14 Under the Securities Exchange Act of 1934
I, J. Patrick Barley, certify that:
1. I have reviewed this quarterly report on Form 10-Q (this report) of JP Energy Partners LP (the registrant);
2. based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. the registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. the registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 12, 2015 |
/s/ J. Patrick Barley |
|
J. Patrick Barley |
|
President and Chief Executive Officer |
Exhibit 31.2
Certification Pursuant to
Rules 13a-14 and 15d-14 Under the Securities Exchange Act of 1934
I, Patrick J. Welch, certify that:
1. I have reviewed this quarterly report on Form 10-Q (this report) of JP Energy Partners LP (the registrant);
2. based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. the registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. the registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 12, 2015 |
/s/ Patrick J. Welch |
|
Patrick J. Welch |
|
Executive Vice President and Chief Financial Officer |
Exhibit 32.1
Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, J. Patrick Barley, President and Chief Executive Officer of JP Energy GP II LLC, as general partner of JP Energy Partners LP (the Partnership), hereby certify, to the best of my knowledge, that:
(1) the Partnerships Quarterly Report on Form 10-Q for the period ended March 31, 2015 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership.
Date: May 12, 2015 |
/s/ J. Patrick Barley |
|
Name: J. Patrick Barley |
|
Title: President and Chief Executive Officer |
Exhibit 32.2
Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, Patrick J. Welch, Executive Vice President and Chief Financial Officer of JP Energy GP II LLC, as general partner of JP Energy Partners LP (the Partnership), hereby certify, to the best of my knowledge, that:
(1) the Partnerships Quarterly Report on Form 10-Q for the period ended March 31, 2015 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership.
Date: May 12, 2015 |
/s/ Patrick J. Welch |
|
Name: Patrick J. Welch |
|
Title: Executive Vice President and Chief Financial Officer |
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