UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

Or

¨

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: 001-36168

ARC LOGISTICS PARTNERS LP

(Exact name of registrant as specified in its charter)

 

Delaware

 

36-4767846

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

725 Fifth Avenue, 19th Floor

New York, New York

 

10022

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (212) 993-1290

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  þ    No  ¨

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  þ    No  ¨

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

  

¨

 

  

  

 

  

Accelerated filer

  

¨

 

  

 

 

 

 

 

Non-accelerated filer

  

þ

 

  

  

(Do not check if a smaller reporting company)

  

Smaller reporting company

  

¨

 

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   þ

As of August 8, 2014, there were 6,867,950 common units and 6,081,081 subordinated units outstanding.

 

 

 

 

 

 


 

 

ARC LOGISTICS PARTNERS LP

TABLE OF CONTENTS

 

 

    

 

  

 

Page

GLOSSARY OF TERMS

2

PART I.

  

FINANCIAL INFORMATION

3

 

  

Item 1.

  

Financial Statements (Unaudited)

3

 

  

 

  

Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013

3

 

  

 

  

Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2014 and 2013

4

 

  

 

  

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013

5

 

  

 

  

Condensed Consolidated Statements of Partners’ Capital for the Six Months Ended June 30, 2014

6

 

  

 

  

Notes to Condensed Consolidated Financial Statements

7

 

  

Cautionary Statement Regarding Forward-Looking Statements

22

 

  

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

 

  

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

34

 

  

Item 4.

  

Controls and Procedures

34

PART II.

  

OTHER INFORMATION

35

 

  

Item 1.

  

Legal Proceedings

35

 

  

Item 1A.

  

Risk Factors

35

 

  

Item 6.

  

Exhibits

35

SIGNATURES

36

 

 

 

 


 

GLOSSARY OF TERMS

Adjusted EBITDA:    Represents net income before interest expense, income taxes and depreciation and amortization expense, as further adjusted for other non-cash charges and other charges that are not reflective of our ongoing operations. Adjusted EBITDA is not a presentation made in accordance with GAAP. Please see the reconciliation of Adjusted EBITDA to net income in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of Our Results of Operations—Adjusted EBITDA.”

ancillary services fees:    Fees associated with ancillary services, such as heating, blending and mixing our customers’ products that are stored in our tanks.

barrel or bbl:    One barrel of petroleum products equals 42 U.S. gallons.

bpd:    One barrel per day.

Distributable Cash Flow:    Represents Adjusted EBITDA less (i) cash interest expense paid; (ii) cash income taxes paid; (iii) maintenance capital expenditures paid; (iv) equity earnings from the LNG Interest; plus (v) cash distributions from the LNG Interest. Distributable Cash Flow is not a presentation made in accordance with GAAP. Please see the reconciliation of Distributable Cash Flow to net income in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of Our Results of Operations—Distributable Cash Flow.”

expansion capital expenditures:    Capital expenditures that we expect will increase our operating capacity or operating income over the long term. Examples of expansion capital expenditures include the acquisition of equipment or the construction, development or acquisition of additional storage, terminalling or pipeline capacity to the extent such capital expenditures are expected to increase our long-term operating capacity or operating income.

fuel oil:    A liquid petroleum product used as an energy source. Fuel oil includes distillate fuel oil (No. 1, No. 2, No. 3 and No. 4) and residual fuel oil (No. 5 and No. 6).

GAAP:    Generally accepted accounting principles in the United States.

GE EFS:    GE Energy Financial Services, a unit of General Electric Capital Corporation, an indirect wholly owned subsidiary of General Electric Company.

LNG:    Liquefied natural gas.

maintenance capital expenditures:    Capital expenditures made to maintain our long-term operating capacity or operating income. Examples of maintenance capital expenditures include expenditures to repair, refurbish and replace storage, terminalling and pipeline infrastructure, to maintain equipment reliability, integrity and safety and to comply with environmental laws and regulations to the extent such expenditures are made to maintain our long-term operating capacity or operating income.

mbpd:    One thousand barrels per day.

NYSE:    New York Stock Exchange.

SEC:    U.S. Securities and Exchange Commission.

storage and throughput services fees:    Fees paid by our customers to reserve tank storage, throughput and transloading capacity at our facilities and to compensate us for the receipt, storage, throughput and transloading of crude oil and petroleum products.

transloading:    The transfer of goods or products from one mode of transportation to another (e.g., from railcar to truck).

 

 

 

2


 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

ARC LOGISTICS PARTNERS LP

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except unit amounts)

(Unaudited)

 

 

June 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Assets:

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

6,216

 

 

$

4,454

 

Trade accounts receivable

 

4,012

 

 

 

4,403

 

Due from related parties

 

825

 

 

 

722

 

Inventories

 

254

 

 

 

302

 

Other current assets

 

1,561

 

 

 

777

 

Total current assets

 

12,868

 

 

 

10,658

 

Property, plant and equipment, net

 

203,128

 

 

 

201,477

 

Investment in unconsolidated affiliate

 

72,463

 

 

 

72,046

 

Intangible assets, net

 

35,769

 

 

 

38,307

 

Goodwill

 

15,162

 

 

 

15,162

 

Other assets

 

1,699

 

 

 

1,716

 

Total assets

$

341,089

 

 

$

339,366

 

Liabilities and partners' capital:

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

4,399

 

 

 

4,115

 

Accrued expenses

 

2,217

 

 

 

2,144

 

Due to general partner

 

467

 

 

 

127

 

Other liabilities

 

47

 

 

 

25

 

Total current liabilities

 

7,130

 

 

 

6,411

 

Credit facility

 

108,063

 

 

 

105,563

 

Other non-current liabilities

 

2,032

 

 

 

-

 

Commitments and contingencies

 

 

 

 

 

 

 

Partners' capital:

 

 

 

 

 

 

 

General partner interest

 

-

 

 

 

-

 

Limited partners' interest

 

 

 

 

 

 

 

Common units – (6,867,950 units issued and outstanding

     at June 30, 2014 and December 31, 2013)

 

123,737

 

 

 

125,375

 

Subordinated units – (6,081,081 units issued and outstanding

     at June 30, 2014 and December 31, 2013)

 

100,075

 

 

 

101,525

 

Accumulated other comprehensive income

 

52

 

 

 

492

 

Total partners' capital

 

223,864

 

 

 

227,392

 

Total liabilities and partners' capital

$

341,089

 

 

$

339,366

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

3


 

ARC LOGISTICS PARTNERS LP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per unit amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third-party customers

 

$

12,673

 

 

$

11,198

 

 

$

23,548

 

 

$

18,683

 

Related parties

 

 

2,054

 

 

 

1,898

 

 

 

4,392

 

 

 

4,021

 

 

 

 

14,727

 

 

 

13,096

 

 

 

27,940

 

 

 

22,704

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

7,342

 

 

 

5,668

 

 

 

14,473

 

 

 

9,132

 

Selling, general and administrative

 

 

2,030

 

 

 

1,181

 

 

 

3,807

 

 

 

4,793

 

Selling, general and administrative - affiliate

 

 

1,056

 

 

 

604

 

 

 

1,940

 

 

 

1,218

 

Depreciation

 

 

1,761

 

 

 

1,467

 

 

 

3,459

 

 

 

2,605

 

Amortization

 

 

1,353

 

 

 

1,339

 

 

 

2,692

 

 

 

2,135

 

Total expenses

 

 

13,542

 

 

 

10,259

 

 

 

26,371

 

 

 

19,883

 

Operating income

 

 

1,185

 

 

 

2,837

 

 

 

1,569

 

 

 

2,821

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on bargain purchase of business

 

 

-

 

 

 

-

 

 

 

-

 

 

 

11,777

 

Equity earnings from unconsolidated affiliate

 

 

2,487

 

 

 

-

 

 

 

4,924

 

 

 

-

 

Other income

 

 

3

 

 

 

46

 

 

 

3

 

 

 

46

 

Interest expense

 

 

(930

)

 

 

(1,545

)

 

 

(1,841

)

 

 

(3,433

)

Total other (expenses) income, net

 

 

1,560

 

 

 

(1,499

)

 

 

3,086

 

 

 

8,390

 

Income before income taxes

 

 

2,745

 

 

 

1,338

 

 

 

4,655

 

 

 

11,211

 

Income taxes

 

 

3

 

 

 

-

 

 

 

52

 

 

 

15

 

Net Income

 

 

2,742

 

 

 

1,338

 

 

 

4,603

 

 

 

11,196

 

Less: Net income attributable to preferred units

 

 

-

 

 

 

600

 

 

 

-

 

 

 

947

 

Net income attributable to partners' capital

 

 

2,742

 

 

 

738

 

 

 

4,603

 

 

 

10,249

 

Other comprehensive loss

 

 

(353

)

 

 

-

 

 

 

(440

)

 

 

-

 

Comprehensive income attributable to partners' capital

 

$

2,389

 

 

$

738

 

 

$

4,163

 

 

$

10,249

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per limited partner unit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common units (basic and diluted)

 

$

0.21

 

 

$

0.10

 

 

$

0.36

 

 

$

1.47

 

Subordinated units (basic and diluted)

 

$

0.21

 

 

$

0.10

 

 

$

0.36

 

 

$

1.47

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

4


 

ARC LOGISTICS PARTNERS LP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2014

 

 

2013

 

Cash flow from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

4,603

 

 

$

11,196

 

Adjustments to reconcile net income to net cash provided by

(used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

3,459

 

 

 

2,605

 

Amortization

 

 

2,692

 

 

 

2,135

 

Gain on bargain purchase of business

 

 

-

 

 

 

(11,777

)

Equity earnings from unconsolidated affiliate, net of distributions

 

 

(330

)

 

 

-

 

Amortization of deferred financing costs

 

 

246

 

 

 

1,347

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

391

 

 

 

(2,429

)

Due from related parties

 

 

(103

)

 

 

275

 

Inventories

 

 

48

 

 

 

15

 

Other current assets

 

 

(784

)

 

 

(339

)

Other assets

 

 

-

 

 

 

(257

)

Accounts payable

 

 

885

 

 

 

4,349

 

Accrued expenses

 

 

74

 

 

 

513

 

Due to general partner

 

 

339

 

 

 

2,933

 

Other liabilities

 

 

2,055

 

 

 

(14

)

Net cash provided by operating activities

 

 

13,575

 

 

 

10,552

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(5,711

)

 

 

(9,310

)

Investment in unconsolidated affiliate

 

 

(681

)

 

 

-

 

Net cash paid for acquisitions

 

 

-

 

 

 

(82,000

)

Net cash used in investing activities

 

 

(6,392

)

 

 

(91,310

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Distributions

 

 

(7,691

)

 

 

(347

)

Deferred financing costs

 

 

(230

)

 

 

(3,473

)

Repayments to credit facility

 

 

(25,000

)

 

 

(33,125

)

Proceeds from credit facility

 

 

27,500

 

 

 

118,000

 

Net cash (used in) provided by financing activities

 

 

(5,421

)

 

 

81,055

 

Net decrease in cash and cash equivalents

 

 

1,762

 

 

 

297

 

Cash and cash equivalents, beginning of period

 

 

4,454

 

 

 

1,429

 

Cash and cash equivalents, end of period

 

$

6,216

 

 

$

1,726

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,714

 

 

$

2,175

 

Cash paid for income taxes

 

 

52

 

 

 

15

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Issuance of preferred units

 

 

-

 

 

 

30,000

 

Deemed distributions to preferred units

 

 

-

 

 

 

947

 

Decrease in purchases of property plant and

    equipment in accounts payable and accrued expenses

 

 

(601

)

 

 

(2,047

)

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

5


 

ARC LOGISTICS PARTNERS LP

CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

(In thousands)

(Unaudited)

 

 

 

Partners' Capital

 

 

 

 

 

 

 

Limited Partner

 

 

Accumulated Other

 

 

Total

 

 

 

Limited Partner

 

 

Subordinated

 

 

Comprehensive

 

 

Partners'

 

 

 

Common Interest

 

 

Interest

 

 

Income

 

 

Capital

 

Partners’ capital at December 31, 2013

 

$

125,375

 

 

$

101,525

 

 

$

492

 

 

$

227,392

 

Net income

 

 

2,441

 

 

 

2,162

 

 

 

-

 

 

 

4,603

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

(440

)

 

 

(440

)

Distributions

 

 

(4,079

)

 

 

(3,612

)

 

 

-

 

 

 

(7,691

)

Partners’ capital at June 30, 2014

 

$

123,737

 

 

$

100,075

 

 

$

52

 

 

$

223,864

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

6


 

ARC LOGISTICS PARTNERS LP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—Organization and Presentation

Defined Terms

Unless the context clearly indicates otherwise, references in these unaudited interim condensed consolidated financial statements (“interim statements”) to “Arc Terminals” or the “Partnership” when used for periods prior to November 12, 2013, the closing of the initial public offering of Arc Logistics Partners LP (the “IPO”), refer to Arc Terminals LP and its subsidiaries, which were contributed to Arc Logistics Partners LP in connection with the IPO, and references to “Arc Logistics” or the “Partnership” when used for periods on or after the closing of the IPO refer to Arc Logistics Partners LP and its subsidiaries. Unless the context clearly indicates otherwise, references to our “General Partner” for periods prior to the closing of the IPO refer to Arc Terminals GP LLC which owned the general partner interest in Arc Terminals, and references to our “General Partner” for periods on or after the closing of the IPO refer to Arc Logistics GP LLC, the general partner of Arc Logistics. References to “Sponsor” or “Lightfoot” refer to Lightfoot Capital Partners, LP and its general partner, Lightfoot Capital Partners GP LLC. References to “GCAC” refer to Gulf Coast Asphalt Company, L.L.C., which contributed its preferred units in Arc Terminals to the Partnership upon the consummation of the IPO. References to “Center Oil” refer to GP&W, Inc., d.b.a. Center Oil, and affiliates, including Center Terminal Company-Cleveland, which contributed its limited partner interests in Arc Terminals to the Partnership upon the consummation of the IPO. References to “Gulf LNG Holdings” refer to Gulf LNG Holdings Group, LLC and its subsidiaries, which own a liquefied natural gas regasification and storage facility in Pascagoula, MS, which is referred to herein as the “LNG Facility.” The Partnership used a portion of the proceeds from the IPO to acquire a 10.3% limited liability company interest in Gulf LNG Holdings, which is referred to herein as the “LNG Interest.”

Organization and Initial Public Offering

The Partnership is a fee-based, growth-oriented Delaware limited partnership formed by Lightfoot in 2007 to own, operate, develop and acquire a diversified portfolio of complementary energy logistics assets. The Partnership is principally engaged in the terminalling, storage, throughput and transloading of crude oil and petroleum products. The Partnership is focused on growing its business through the optimization, organic development and acquisition of terminalling, storage, rail, pipeline and other energy logistics assets that generate stable cash flows.

In November 2013, the Partnership completed its IPO by selling 6,786,869 common units (which includes 786,869 common units issued pursuant to the exercise of the underwriters’ over-allotment option) representing limited partner interests in the Partnership at a price to the public of $19.00 per common unit. In connection with the IPO, the Partnership amended and restated the Terminal Credit Facility (as defined below, see “Note 7—Debt”).

The $120.2 million of net proceeds from the IPO (including the underwriters’ option to purchase additional common units and after deducting the underwriting discount and structuring fee) were used to: (i) fund the purchase of the LNG Interest from an affiliate of GE EFS for approximately $72.7 million; (ii) make a cash distribution to GCAC as partial consideration for the contribution of its preferred units in Arc Terminals LP to the Partnership of approximately $29.8 million; (iii) repay intercompany payables owed to the Sponsor of approximately $6.6 million; and (iv) reduce amounts outstanding under the Partnership’s Credit Facility (as defined below, see “Note 7—Debt”) by $6.0 million. The remaining funds were used for general partnership purposes, including the payment of transaction expenses related to the IPO and the Credit Facility.

 

Note 2—Summary of Significant Accounting Policies

The Partnership has provided a discussion of significant accounting policies in its Annual Report on Form 10-K for the year ended December 31, 2013. Certain items from that discussion are repeated or updated below as necessary to assist in the understanding of these interim statements.

Basis of Presentation

The accompanying interim statements of the Partnership have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, and disclosures necessary for a fair presentation of these interim statements have been included. The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year or for any other period. These interim statements should be read in conjunction with the Partnership’s consolidated financial statements for the year ended December 31, 2013, which are included in the Partnership’s Annual Report on

7


 

Form 10-K, as filed with the SEC. The year-end balance sheet data was derived from the audited financial statements, but does not include all disclosures required by GAAP.

The Partnership has disclosed consolidated figures of the Partnership as if the Partnership had operated since the inception of Arc Terminals. The contribution of Arc Terminals to Arc Logistics in connection with the IPO was not considered a business combination accounted for under the purchase method as it was a transfer of assets under common control and, accordingly, balances have been transferred at their historical cost. The condensed consolidated financial statements for the periods prior to the contribution on November 12, 2013 have been prepared using Arc Terminals’ historical basis in the assets and liabilities and include all revenues, costs, assets and liabilities attributed to Arc Terminals.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The most significant estimates relate to the valuation of acquired businesses, goodwill and intangible assets and the useful lives of intangible assets and property, plant and equipment. Actual results could differ from those estimates.

Goodwill

Goodwill represents the excess of consideration paid over the fair value of net assets acquired in a business combination. Goodwill is not amortized but instead is assessed for impairment at least annually or when facts and circumstances warrant. The Partnership determined at December 31, 2013 that there were no impairment charges and subsequent to that date no event indicating an impairment has occurred.

 

A summary of the changes in the carrying amount of goodwill is as follows (in thousands):

 

 

As of

 

 

June 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Beginning Balance

$

15,162

 

 

$

6,730

 

Goodwill acquired

 

-

 

 

 

8,432

 

Impairment

 

-

 

 

 

-

 

Ending Balance

$

15,162

 

 

$

15,162

 

 

 

 

 

 

 

 

 

     Deferred Rent

The Lease Agreement (as defined below) contains certain rent escalation clauses, contingent rent provisions and lease termination payments. The Partnership recognizes rent expense for operating leases on a straight-line basis over the term of the lease, taking into consideration the items noted above. Contingent rental payments are generally recognized as rent expense as incurred. The deferred rent resulting from the recognition of rent expense on a straight-line basis related to the Lease Agreement is included within “Other non-current liabilities” in the accompanying unaudited condensed consolidated balance sheet at June 30, 2014.

 

Revenue Recognition

Revenues from leased tank storage and delivery services are recognized as the services are performed, evidence of a contractual arrangement exists and collectability is reasonably assured. Revenues also include the sale of excess products and additives which are mixed with customer-owned liquid products. Revenues for the sale of excess products and additives are recognized when title and risk of loss passes to the customer.

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at a specified measurement date. Fair value measurements are derived using inputs and assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. GAAP establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This three-tier hierarchy classifies fair value amounts recognized or disclosed in the condensed consolidated financial statements based on the observability of inputs used to estimate such fair values. The classification within the hierarchy of a financial asset or liability is determined based on the lowest level input that is significant to the fair value measurement. The hierarchy considers fair value amounts based on observable inputs (Level 1 and 2) to be more reliable and predictable than those based primarily on unobservable inputs (Level 3). At each balance sheet reporting date, the Partnership categorizes its financial assets and liabilities using this hierarchy.

8


 

The amounts reported in the balance sheet for cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of the short-term maturities of these instruments (Level 1). Since the Credit Facility has a market rate of interest its carrying amount approximated fair value (Level 2).

 

The Partnership believes that its valuation methods are appropriate and consistent with the values that would be determined by other market participants. However, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Limited Partners’ Net Income Per Unit

The Partnership uses the two-class method in the computation of earnings per unit since there is more than one participating class of securities. Basic earnings per common and subordinated unit are determined by dividing net income allocated to the common units and subordinated units, respectively, after deducting the amount allocated to the preferred unitholders, by the weighted average number of outstanding common and subordinated units, respectively, during the period. The overall computation, presentation and disclosure of the Partnership’s limited partners’ net income per unit are made in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 260 “Earnings per Share.”

Segment Reporting

The Partnership derives revenue from operating its terminal and transloading facilities.  These facilities have been aggregated into one reportable segment because the facilities have similar long-term economic characteristics, products and types of customers.

 

Recently Issued Accounting Pronouncements

 

In May 2014, the FASB issued updated guidance on the reporting and disclosure of revenue recognition.  The update requires that an entity recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  This update also requires new qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, information about contract balances and performance obligations, and assets recognized from costs incurred to obtain or fulfill a contract.  The Partnership is currently evaluating the potential impact of this authoritative guidance on its financial condition, results of operations, cash flows and related disclosures.  This guidance will be effective for the Partnership beginning in the first quarter of 2017.

 

In June 2014, the FASB issued new guidance related to stock compensation.  The new standard requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition.  As such, the performance target should not be reflected in estimating the grant date fair value of the award.  This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered.  The Partnership does not expect this requirement to have a significant impact on its financial condition, results of operations, cash flows and related disclosures.  This guidance will be effective for the Partnership beginning in the first quarter of 2016, with early adoption optional.

 

 

Note 3—Acquisitions

The following acquisitions were accounted for under the acquisition method of accounting whereby management utilized the services of third-party valuation consultants, along with estimates and assumptions provided by management, to estimate the fair value of the net assets acquired. The third-party valuation consultants utilized several appraisal methodologies including income, market and cost approaches to estimate the fair value of the identifiable assets acquired.

2013 Acquisitions

Gulf Coast Asphalt Company, L.L.C. Acquisition

In February 2013, the Partnership acquired substantially all of the Mobile, AL and Saraland, AL operating assets related to the terminalling business of GCAC for approximately $85.0 million (“GCAC Purchase Price”) consisting of approximately $25.0 million in cash, $30.0 million in new preferred units (see “Note 8—Preferred Units”) in the Partnership and $30.0 million of assumed debt which was simultaneously extinguished at the acquisition closing by the Partnership.

 


9


 

The transaction was accounted for as a business combination in accordance with ASC Topic 805, “Business Combinations” (“ASC 805”). The GCAC Purchase Price exceeded the approximately $76.6 million fair value of the identifiable assets acquired and accordingly, the Partnership recognized goodwill of approximately $8.4 million. The Partnership believes the primary items that generated goodwill are both the value of the synergies created between the acquired assets and its existing assets, and its expected ability to grow the business acquired by leveraging its existing customer relationships. Furthermore, the Partnership expects that the entire amount of its recorded goodwill will be deductible for tax purposes. Transaction costs incurred in connection with the acquisition, consisting primarily of legal and other professional fees, totaled approximately $1.9 million and were expensed as incurred in accordance with ASC 805 and included in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations and comprehensive income. GCAC is also able to receive up to an additional $5.0 million in cash earnout payments based upon the throughput activity of one customer through December 31, 2016. As of June 30, 2014, no additional amounts have been paid or are owed to GCAC.

The following table summarizes the consideration paid and the amounts of assets acquired at the acquisition date (in thousands):

 

Consideration:

 

 

 

Cash paid to seller

$

25,000

 

Debt assumed

 

30,000

 

Preferred units issued

 

30,000

 

Total consideration

$

85,000

 

Allocation of purchase price:

 

 

 

Property and equipment

$

39,242

 

Intangible assets

 

37,326

 

Goodwill

 

8,432

 

Net assets acquired

$

85,000

 

 

The following unaudited pro forma financial results for the six months ended June 30, 2013 are presented for comparative purposes only and assume the GCAC acquisition had occurred on January 1, 2013. The effects of the acquisition of GCAC are included in the accompanying unaudited condensed consolidated statement of operations and comprehensive income for the three and six months ended June 30, 2014, as well as for the three months ended June 30, 2013. The unaudited pro forma results reflect certain adjustments to the acquisition, such as increased depreciation and amortization expense on the fair value of the assets acquired. The unaudited pro forma financial results may not be indicative of the results that would have occurred had the acquisition been completed at the beginning of the period presented, nor are they indicative of future results of operations (in thousands, except per unit amounts):

 

 

 

Six Months Ended

 

 

 

June 30, 2013

 

 

 

(unaudited proforma)

 

Total revenues

 

$

24,305

 

Operating income

 

 

6,190

 

Net Income

 

$

14,074

 

Less: Net income attributable to preferred units

 

$

1,200

 

Net income attributable to partners' capital

 

$

12,874

 

Earnings per unit - Basic:

 

 

 

 

Common and Subordinated

 

$

2.09

 

Earnings per unit - Diluted:

 

 

 

 

Common and Subordinated

 

$

1.72

 

 

Since the acquisition date in February 2013 through June 30, 2013, the acquired GCAC assets earned approximately $8.2 million in revenue and $4.4 million of operating income.

Motiva Enterprises LLC Acquisition

 

In February 2013, the Partnership acquired substantially all of the operating assets related to the Brooklyn, NY terminal (the “Brooklyn Terminal”) from Motiva Enterprises LLC (“Motiva”) for approximately $27.0 million (“Brooklyn Purchase Price”) in cash.

 


10


 

The transaction was accounted for as a business combination in accordance with ASC 805. The fair value of the identifiable assets acquired of approximately $38.8 million exceeded the Brooklyn Purchase Price. Accordingly, the acquisition has been accounted for as a bargain purchase and, as a result, the Partnership recognized a gain of approximately $11.8 million associated with the acquisition. The gain is included in the line item “Gain on bargain purchase of business” in the accompanying condensed consolidated statement of operations and comprehensive income. Transaction costs incurred in connection with the acquisition, consisting primarily of legal and other professional fees, totaled approximately $1.5 million and were expensed as incurred in accordance with ASC 805 and included in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations and comprehensive income.

The following table summarizes the consideration paid and the amounts of assets acquired at the acquisition date (in thousands):

 

Consideration:

 

 

 

Cash paid to seller

$

27,000

 

Allocation of purchase price:

 

 

 

Property and equipment

$

36,749

 

Inventory

 

19

 

Intangible assets

 

2,009

 

Bargain purchase gain

 

(11,777

)

Net assets acquired

$

27,000

 

 

Since the acquisition date in February 2013 through June 30, 2013, the Brooklyn Terminal earned approximately $2.3 million in revenue and $1.3 million of operating income.

 

The unaudited pro forma results related to the Motiva acquisition have been excluded as the nature of the revenue-producing activities previously associated with the Brooklyn Terminal have changed substantially post-acquisition from intercompany revenue to third-party generated revenue. In addition, historical financial information for the Brooklyn Terminal prior to the acquisition is not indicative of how the Brooklyn Terminal is being operated since the Partnership’s acquisition and would be of no comparative value in understanding the future operations of the Brooklyn Terminal.

 

Note 4—Investment in Unconsolidated Affiliate

 

The Partnership accounts for investments in limited liability companies under the equity method of accounting unless the Partnership’s interest is deemed to be so minor that it may have virtually no influence over operating and financial policies. “Investment in unconsolidated affiliate” consisted of the LNG Interest and its balances as of June 30, 2014 and December 31, 2013 are represented below (in thousands):

 

 

Balance at December 31, 2013

$

72,046

 

Equity earnings

 

4,924

 

Contributions

 

681

 

Distributions

 

(4,594

)

Amortization of premium

 

(154

)

Other comprehensive loss

 

(440

)

Balance at June 30, 2014

$

72,463

 

 

 

 

 

 

11


 

Gulf LNG Holdings Acquisition

 

In connection with the IPO, the Partnership purchased the LNG Interest from an affiliate of GE EFS for approximately $72.7 million. The carrying value of the LNG Interest on the date of acquisition was approximately $64.1 million with a purchase price of approximately $72.7 million and the excess paid over the carrying value of approximately $8.6 million. This excess can be attributed to the underlying long lived assets of Gulf LNG Holdings and is therefore being amortized using the straight line method over the remaining useful lives of the respective asset, which is 28 years. The estimated aggregate amortization of this premium for its remaining useful life from June 30, 2014 is as follows (in thousands):

 

 

Total

 

2014

$

153

 

2015

 

309

 

2016

 

309

 

2017

 

309

 

2018

 

309

 

Thereafter

 

7,062

 

 

$

8,451

 

 

 

 

 

 

 

Summarized financial information for the Gulf LNG Holdings is reported below (in thousands):

 

 

June 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Balance sheets

 

 

 

 

 

 

 

Current assets

$

14,881

 

 

$

8,694

 

Noncurrent assets

 

934,185

 

 

 

952,630

 

Total assets

$

949,066

 

 

$

961,324

 

Current liabilities

$

78,644

 

 

$

81,173

 

Long-term liabilities

 

755,554

 

 

 

773,115

 

Member’s equity

 

114,868

 

 

 

107,036

 

Total liabilities and member’s equity

$

949,066

 

 

$

961,324

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Income statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

46,560

 

 

$

46,523

 

 

$

93,121

 

 

$

93,045

 

Total operating costs and expenses

 

14,151

 

 

 

14,442

 

 

 

28,431

 

 

 

28,726

 

Operating income

 

32,409

 

 

 

32,081

 

 

 

64,690

 

 

 

64,319

 

Net income

$

24,147

 

 

$

23,444

 

 

$

47,803

 

 

$

46,657

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12


 

Note 5—Property, Plant and Equipment

 

The Partnership’s property, plant and equipment consisted of (in thousands):

 

 

 

As of

 

 

 

June 30,

 

 

December 31,

 

 

 

2014

 

 

2013

 

Land

 

$

51,175

 

 

$

51,175

 

Buildings and site improvements

 

 

34,738

 

 

 

34,660

 

Tanks and trim

 

 

94,405

 

 

 

92,337

 

Machinery and equipment

 

 

33,808

 

 

 

32,819

 

Office furniture and equipment

 

 

2,438

 

 

 

2,334

 

Construction in progress

 

 

6,874

 

 

 

5,003

 

 

 

 

223,438

 

 

 

218,328

 

Less:  Accumulated depreciation

 

 

(20,310

)

 

 

(16,851

)

Property, plant and equipment, net

 

$

203,128

 

 

$

201,477

 

 

 

 

 

 

 

 

 

 

 

 

Note 6—Intangible Assets

 

The Partnership’s intangible assets consisted of (in thousands):

 

 

Estimated

 

As of

 

 

Useful Lives

 

June 30,

 

 

December 31,

 

 

in Years

 

2014

 

 

2013

 

Customer relationships

21

 

$

4,785

 

 

$

4,785

 

Acquired contracts

2-10

 

 

39,900

 

 

 

39,900

 

Noncompete agreements

2-3

 

 

741

 

 

 

741

 

 

 

 

 

45,426

 

 

 

45,426

 

Less:  Accumulated amortization

 

 

 

(9,657

)

 

 

(7,119

)

Intangible assets, net

 

 

$

35,769

 

 

$

38,307

 

 

 

 

 

 

 

 

 

 

 

 

The Partnership’s intangible assets are amortized on a straight-line basis over the expected life of each intangible asset. The estimated future amortization expense is approximately $2.6 million in 2014, $4.3 million in 2015, $3.9 million in 2016, $3.9 million in 2017, $3.9 million in 2018 and $17.2 million thereafter.

 

 

Note 7—Debt

Credit Facility

 

In January 2012, the Partnership entered into a $40.0 million credit facility (the “Terminal Credit Facility”). On November 12, 2013, concurrent with the closing of the IPO, the Partnership amended and restated the Terminal Credit Facility (the “Credit Facility”) with a syndicate of lenders, under which Arc Terminals Holdings LLC, a wholly owned subsidiary of the Partnership (“Arc Terminals Holdings”) is the borrower. The Credit Facility has up to $175.0 million of borrowing capacity (see “Note 2—Summary of Significant Accounting Policies—Other Assets” for discussion regarding deferred financing costs). As of June 30, 2014, the Partnership had borrowings of $108.1 million under the Credit Facility at an interest rate of 2.65%. Due to the restrictions under the total leverage ratio covenant, as of June 30, 2014, the Partnership had $33.6 million of available capacity under the Credit Facility.

 

The Credit Facility is available to refinance existing indebtedness, to fund working capital and to finance capital expenditures and other permitted payments and for other lawful corporate purposes and allows the Partnership to request that the maximum amount of the Credit Facility be increased by up to an aggregate of $100.0 million, subject to receiving increased commitments from lenders or commitments from other financial institutions. The Credit Facility is available for revolving loans, including a sublimit of $5.0 million for swing line loans and a sublimit of $10.0 million for letters of credit. The Partnership’s obligations under the Credit Facility are secured by a first priority lien on substantially all of the Partnership’s material assets (other than the LNG Interest). The Partnership and each of the Partnership’s existing subsidiaries (other than the borrower) guarantee, and each of the Partnership’s future restricted subsidiaries will also guarantee, the Credit Facility. The Credit Facility matures on November 12, 2018.

13


 

 

Loans under the Credit Facility bear interest at a floating rate based upon the leverage ratio, equal to, at the Partnership’s option, either (a) a base rate plus a range from 100 to 200 basis points per annum or (b) a LIBOR rate, plus a range of 200 to 300 basis points. The base rate is established as the highest of (i) the rate which SunTrust Bank announces, from time to time, as its prime lending rate, (ii) the daily one-month LIBOR plus 100 basis points per annum and (iii) the federal funds rate plus 0.50% per annum. The unused portion of the Credit Facility is subject to a commitment fee calculated based upon the Partnership’s leverage ratio ranging from 0.375% to 0.50% per annum. Upon any event of default, the interest rate will, upon the request of the lenders holding a majority of the commitments, be increased by 2.0% on overdue amounts per annum for the period during which the event of default exists.

 

The Credit Facility contains certain customary representations and warranties, affirmative covenants, negative covenants and events of default. As of June 30, 2014, the Partnership was in compliance with such covenants. The negative covenants include restrictions on the Partnership’s ability to incur additional indebtedness, acquire and sell assets, create liens, enter into certain lease agreements, make investments and make distributions.

 

The Credit Facility requires the Partnership to maintain a leverage ratio of not more than 4.50 to 1.00, which may increase to up to 5.00 to 1.00 during specified periods following a permitted acquisition or issuance of over $200.0 million of senior notes, and a minimum interest coverage ratio of not less than 2.50 to 1.00. If the Partnership issues over $200.0 million of senior notes, the Partnership will be subject to an additional financial covenant pursuant to which the Partnership’s secured leverage ratio must not be more than 3.50 to 1.00. The Credit Facility places certain restrictions on the issuance of senior notes.

 

If an event of default occurs, the agent would be entitled to take various actions, including the acceleration of amounts due under the Credit Facility, termination of the commitments under the Credit Facility and all remedial actions available to a secured creditor. The events of default include customary events for a financing agreement of this type, including, without limitation, payment defaults, material inaccuracies of representations and warranties, defaults in the performance of affirmative or negative covenants (including financial covenants), bankruptcy or related defaults, defaults relating to judgments, nonpayment of other material indebtedness and the occurrence of a change in control. In connection with the Credit Facility, the Partnership and the Partnership’s subsidiaries have entered into certain customary ancillary agreements and arrangements, which, among other things, provide that the indebtedness, obligations and liabilities arising under or in connection with the facility are unconditionally guaranteed by the Partnership and each of the Partnership’s existing subsidiaries (other than the borrower) and each of the Partnership’s future restricted subsidiaries.

 

In January 2014, Arc Terminals Holdings, as borrower, and Arc Logistics and its other subsidiaries, as guarantors, entered into the first amendment (the “First Amendment”) to the Credit Facility agreement. The First Amendment principally modified certain provisions of the Credit Facility agreement to allow Arc Terminals Holdings to enter into the Lease Agreement (as defined in “Note 11—Related Party Transactions—Other Transactions with Related Persons—Operating Lease Agreement”) relating to the use of petroleum products terminals and pipeline infrastructure located in Portland, Oregon (the “Portland Terminal”).

 

Terminal Credit Facility

 

The Terminal Credit Facility bore interest based upon LIBOR plus an applicable margin. The applicable margin was based on the leverage ratio as defined by the Terminal Credit Facility agreement, calculated at the beginning of each interest period. At the time of closing, the Partnership borrowed $22.0 million on the Terminal Credit Facility, applying $20.0 million to extinguish the Partnership’s prior revolving line of credit and the balance was used to pay transaction fees and fund operations. The Terminal Credit Facility agreement required the Partnership to maintain a leverage ratio of not more than 3.75 to 1.00, which decreased to 3.50 to 1.00 on or after March 31, 2013 and a minimum fixed charge ratio of not less than 1.25 to 1.00.

 

In February 2013, the Partnership amended the Terminal Credit Facility to include a $65.0 million term loan and a $65.0 million revolving line of credit. The amended Terminal Credit Facility had an initial three year term and bore interest based upon LIBOR plus an applicable margin. The applicable margin was based on the leverage ratio as defined in the Terminal Credit Facility agreement, calculated at the beginning of each interest period. At the time of the closing, the Partnership borrowed an additional $55.0 million which was used to satisfy the cash portion of the GCAC Purchase Price and to extinguish the debt acquired as a part of the GCAC Purchase Price. Also in February 2013, the Partnership borrowed an additional $27.0 million to complete the Motiva acquisition. The amended Terminal Credit Facility agreement required the Partnership to maintain an initial leverage ratio of not more than 5.00 to 1.00, which decreased to 4.00 to 1.00 by December 31, 2013 and a minimum fixed charge ratio of not less than 1.25 to 1.00.


14


 

Note 8—Preferred Units

 

In February 2013, the Partnership, as a part of the GCAC Purchase Price (see “Note 3—Acquisitions”), issued 1,500,000 preferred units to GCAC with a value of $30.0 million. The preferred units ranked senior in liquidation preference and distributions to all existing and outstanding common and subordinated units. The preferred units were entitled to 8% annual distributions, paid 45 days following each calendar quarter, assuming the Partnership remained in compliance with all related covenants in the Terminal Credit Facility. If for any reason the Partnership were to be unable to pay the quarterly distributions on time to the preferred unitholders, the distribution amount would have compounded at an 8% annual interest rate until paid. At the time of the IPO, the Partnership issued 779 common units and 58,426 subordinated units and made a cash distribution of approximately $29.0 million to GCAC for the contribution of its preferred units in Arc Terminals LP to the Partnership. Prior to the IPO, the Partnership recorded the preferred units as mezzanine equity in accordance with ASC Topic 480, “Distinguishing Liabilities from Equity” due to the redeemable nature, at the option of the holders, of the preferred units at a fixed and determinable price based upon certain redemption events which were outside the control of the Partnership. For the three and six months ended June 30, 2013, the Partnership paid $0.3 million in cash distributions to the preferred unitholders.

 

Note 9—Partners’ Capital and Distributions

Cash Distributions

 

The table below summarizes the quarterly distributions related to the Partnership’s quarterly financial results (in thousands, except per unit data):

 

 

 

Total Quarterly

 

 

Total Cash

 

 

Date of

 

Unitholders

Quarter Ended

 

Distribution Per Unit

 

 

Distribution

 

 

Distribution

 

Record Date

June 30, 2014

 

$

0.4000

 

 

$

5,180

 

 

August 18, 2014 (1)

 

August 11, 2014 (1)

March 31, 2014

 

$

0.3875

 

 

$

5,018

 

 

May 16, 2014

 

May 9, 2014

December 31, 2013

 

$

0.2064

 

 

$

2,673

 

 

February 18, 2014 (2)

 

February 10, 2014 (2)

 

 

(1) Expected date of distribution as of filing date.

(2) Initial pro rata cash distribution, prorated for the period from November 13, 2013 to December 31, 2013.

 

Cash Distribution Policy

 

The partnership agreement provides that the General Partner will make a determination no less frequently than every quarter as to whether to make a distribution, but the partnership agreement does not require the Partnership to pay distributions at any time or in any amount. Instead, the board of directors of the General Partner has adopted a cash distribution policy that sets forth the General Partner’s intention with respect to the distributions to be made to unitholders. Pursuant to the cash distribution policy, within 60 days after the end of each quarter, the Partnership expects to distribute to the holders of common and subordinated units on a quarterly basis at least the minimum quarterly distribution of $0.3875 per unit, or $1.55 per unit on an annualized basis, to the extent the Partnership has sufficient cash after establishment of cash reserves and payment of fees and expenses, including payments to the General Partner and its affiliates.

 

The board of directors of the General Partner may change the foregoing distribution policy at any time and from time to time, and even if the cash distribution policy is not modified or revoked, the amount of distributions paid under the policy and the decision to make any distribution is determined by the General Partner. As a result, there is no guarantee that the Partnership will pay the minimum quarterly distribution, or any distribution, on the units in any quarter. However, the partnership agreement contains provisions intended to motivate the General Partner to make steady, increasing and sustainable distributions over time.

 

The partnership agreement generally provides that the Partnership will distribute cash each quarter in the following manner:

first, to the holders of common units, until each common unit has received the minimum quarterly distribution of $0.3875 plus any arrearages from prior quarters;

second, to the holders of subordinated units, until each subordinated unit has received the minimum quarterly distribution of $0.3875; and

third, to all unitholders pro rata, until each has received a distribution of $0.4456.

 

15


 

If cash distributions to the Partnership’s unitholders exceed $0.4456 per unit in any quarter, the Partnership’s unitholders and the General Partner, as the initial holder of the incentive distribution rights, will receive distributions according to the following percentage allocations:

 

 Total Quarterly

Distribution Per Unit

Target Amount

  

Marginal Percentage
Interest
in Distributions

 

  

Unitholders

 

 

General
Partner

 

above $0.3875 up to $0.4456

  

 

100.0

 

 

0.0

above $0.4456 up to $0.4844

  

 

85.0

 

 

15.0

above $0.4844 up to $0.5813

  

 

75.0

 

 

25.0

above $0.5813

  

 

50.0

 

 

50.0

 

The Partnership refers to additional increasing distributions to the General Partner as “incentive distributions.”

 

The principal difference between the Partnership’s common units and subordinated units is that in any quarter during the subordination period, holders of the subordinated units are not entitled to receive any distributions from operating surplus until the common units have received the minimum quarterly distribution for such quarter plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units will not accrue arrearages.

 

 

The subordination period will end on the first business day after the Partnership has earned and paid at least (1) $1.55 (the minimum quarterly distribution on an annualized basis) on each outstanding common unit and subordinated unit for each of three consecutive, non-overlapping four quarter periods ending on or after September 30, 2016 or (2) $2.325 (150.0% of the annualized minimum quarterly distribution) on each outstanding common unit and subordinated unit and the related distribution on the incentive distribution rights for a four-quarter period ending immediately preceding such date, in each case provided there are no arrearages on the Partnership’s common units at that time.

 

The subordination period will also end upon the removal of the General Partner other than for cause if no subordinated units or common units held by holder(s) of subordinated units or their affiliates are voted in favor of that removal. When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and all common units thereafter will no longer be entitled to arrearages.

 

Note 10—Earnings Per Unit

 

The Partnership uses the two-class method when calculating the net income per unit applicable to limited partners. The two-class method is based on the weighted-average number of common and subordinated units outstanding during the period. Basic net income per unit applicable to limited partners (including subordinated unitholders) is computed by dividing limited partners’ interest in net income, after deducting distributions, if any, by the weighted-average number of outstanding common and subordinated units. Payments made to the Partnership’s unitholders are determined in relation to actual distributions paid and are not based on the net income allocations used in the calculation of net income per unit.

 

Diluted net income per unit applicable to limited partners includes the effects of potentially dilutive units on the Partnership’s units. For the three and six months ended June 30, 2013, the only potentially dilutive units outstanding consisted of GCAC’s preferred units (see “Note 8—Preferred Units”).

 

16


 

As a result of the recapitalization in connection with the IPO, earnings per unit was adjusted on a retroactive basis, as outlined below (in thousands, except per unit data):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net Income

 

$

2,742

 

 

$

1,338

 

 

$

4,603

 

 

$

11,196

 

Less: preferred unit distributions

 

 

-

 

 

 

600

 

 

 

-

 

 

 

947

 

Less: earnings attributable to preferred units

 

 

-

 

 

 

140

 

 

 

-

 

 

 

1,282

 

Undistributed earnings

 

$

2,742

 

 

$

598

 

 

$

4,603

 

 

$

8,967

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator for basic and diluted earnings per limited partner unit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocation of net income among limited partner interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income allocated to common unitholders

 

$

1,454

 

 

$

8

 

 

$

2,441

 

 

$

118

 

Net income allocated to subordinated unitholders

 

$

1,288

 

 

$

590

 

 

$

2,162

 

 

$

8,849

 

Net income allocated to limited partners:

 

$

2,742

 

 

$

598

 

 

$

4,603

 

 

$

8,967

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic and diluted earnings per limited partner unit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common units

 

 

6,868

 

 

 

80

 

 

 

6,868

 

 

 

80

 

Subordinated units

 

 

6,081

 

 

 

6,023

 

 

 

6,081

 

 

 

6,023

 

Total basic units outstanding

 

 

12,949

 

 

 

6,103

 

 

 

12,949

 

 

 

6,103

 

Earnings per limited partner unit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common units (basic and diluted)

 

$

0.21

 

 

$

0.10

 

 

$

0.36

 

 

$

1.47

 

Subordinated units (basic and diluted)

 

$

0.21

 

 

$

0.10

 

 

$

0.36

 

 

$

1.47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 11—Related Party Transactions

Agreements with Affiliates

Payments to the General Partner and its Affiliates

 

The General Partner conducts, directs and manages all activities of the Partnership. The General Partner is reimbursed on a monthly basis, or such other basis as may be determined, for: (i) all direct and indirect expenses it incurs or payments it makes on behalf of the Partnership and its subsidiaries; and (ii) all other expenses allocable to the Partnership and its subsidiaries or otherwise incurred by the General Partner in connection with operating the Partnership and its subsidiaries’ businesses (including expenses allocated to the General Partner by its affiliates).

 

For the three months ended June 30, 2014  and 2013, the General Partner incurred expenses of $1.1 million and $0.6 million, respectively. For the six months ended June 30, 2014 and 2013, the General Partner incurred expenses of $1.9 million and $1.2 million, respectively. Such expenses are reimbursable from the Partnership and are reflected in the “Selling, general and administrative – affiliate” line on the unaudited condensed consolidated statements of operations and comprehensive income. As of June 30, 2014 and December 31, 2013, the Partnership had a payable of approximately $0.5 million and $0.1 million, respectively, to the General Partner which is reflected as “Due to general partner” in the accompanying unaudited condensed consolidated balance sheets.

Registration Rights Agreement

 

In connection with the IPO, the Partnership entered into a registration rights agreement with the Sponsor. Pursuant to the registration rights agreement, the Partnership is required to file a registration statement to register the common units issued to the Sponsor and the common units issuable upon the conversion of the subordinated units upon request of the Sponsor. In addition, the registration rights agreement gives the Sponsor piggyback registration rights under certain circumstances. The registration rights agreement also includes provisions dealing with holdback agreements, indemnification and contribution and allocation of expenses. These registration rights are transferable to affiliates and, in certain circumstances, to third parties.

17


 

Assignment and Equity Purchase Agreement with GE EFS

 

In connection with the IPO, the Partnership entered into an assignment and equity purchase agreement with an affiliate of GE EFS that enabled the Partnership to acquire the LNG Interest. Approximately $72.7 million of the proceeds from the IPO were used to acquire the LNG Interest on the closing date of the IPO.

Other Transactions with Related Persons

GCAC Guarantee

 

GCAC guarantees up to $20 million of the Partnership’s Credit Facility. Under certain circumstances, the lenders may release GCAC from such guarantee.

Storage and Throughput Agreements with Center Oil

 

During 2007, the Partnership acquired seven terminals from Center Oil for $35.0 million in cash and 750,000 subordinated units in the Partnership. In connection with this purchase, the Partnership entered into a storage and throughput agreement with Center Oil whereby the Partnership provides storage and throughput services for various petroleum products to Center Oil at the terminals acquired by the Partnership in return for a fixed per barrel fee for each outbound barrel of Center Oil product shipped or committed to be shipped. The throughput fee is calculated and due monthly based on the terms and conditions as set forth in the storage and throughput agreement. In addition to the monthly throughput fee, Center Oil agrees to pay the Partnership a fixed per barrel fee for any additives added into Center Oil’s product.

 

The term of the storage and throughput agreement extends through June 2017. The agreement can be terminated by either party upon written notification of such party’s intent to terminate the agreement at the expiration of such applicable term and must be received by the other party not later than eighteen months prior to the expiration of the applicable term. If notice is not provided by Center Oil, the agreement automatically renews for an additional three-year term at a rate adjusted for inflation as determined in accordance with the terms of the agreement.

 

 In February 2010, the Partnership acquired a 50% undivided interest in the Baltimore, MD terminal. In connection with the acquisition, the Partnership acquired an existing agreement with Center Oil whereby the Partnership provides ethanol storage and throughput services to Center Oil. The Partnership charges Center Oil a fixed fee for storage and a fee based upon ethanol throughput at the Baltimore, MD terminal. The storage and throughput fees are calculated monthly based on the terms and conditions of the storage and throughput agreement. The agreement has a one-year term and comes up for renewal in May 2015.

 

In May 2011, the Partnership entered into an agreement to provide refined products storage and throughput services to Center Oil at the Baltimore, MD terminal. The Partnership charges Center Oil a fixed fee for storage and a fee for ethanol blending and any additives added to Center Oil’s product. The storage and throughput fees are calculated monthly based on the terms and conditions of the storage and throughput agreement. The agreement has a one-year term and comes up for renewal in May 2015.

 

In May 2013, the Partnership entered into an agreement to provide gasoline storage and throughput services to Center Oil at the Brooklyn, NY terminal. The Partnership charges Center Oil a fixed per bbl fee for each inbound delivery of ethanol and every outbound barrel of product shipped or committed to be shipped and a fee for any ethanol blending and additives added to Center Oil’s product. The storage and throughput fees are calculated monthly based on the terms and conditions of the storage and throughput agreement. The agreement has a one-year term and comes up for renewal in May 2015.

Storage and Throughput Agreements with GCAC

 

In February 2013, and in connection with the GCAC Purchase Price, the Partnership entered into a storage and throughput agreement (the “GCAC Agreement 1”) with GCAC whereby the Partnership provides storage and throughput services for various petroleum products to GCAC at the existing terminals acquired by the Partnership in return for a fixed per barrel storage fee plus a fixed per barrel fee for related throughput and other ancillary services. In addition, the Partnership entered into a second storage and throughput agreement with GCAC (the “GCAC Agreement 2”) whereby the Partnership built an additional 150,000 barrels of storage tanks for GCAC to store and throughput various petroleum products in return for similar economic terms of GCAC Agreement 1.

 

The initial term of GCAC Agreements 1 and 2 is approximately five years. These agreements can be mutually extended by both parties as long as the extension is agreed to 180 days prior to the end of the initial termination date, otherwise the Partnership has the right to lease the storage capacity to any third party.

 

18


 

The total revenues associated with the storage and throughput agreements for Center Oil and GCAC and reflected in the “Revenues – Related parties” line on the unaudited condensed consolidated statements of operations and comprehensive income are as follows (in thousands):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Center Oil

$

1,581

 

 

$

1,811

 

 

$

3,466

 

 

$

3,860

 

GCAC

 

473

 

 

 

87

 

 

 

926

 

 

 

161

 

Total

$

2,054

 

 

$

1,898

 

 

$

4,392

 

 

$

4,021

 

 

The total receivables associated with the storage and throughput agreements for Center Oil and GCAC and reflected in the “Due from related parties” line on the unaudited condensed consolidated balance sheets are as follows (in thousands):

 

 

As of

 

 

June 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Center Oil

$

511

 

 

$

536

 

GCAC

 

314

 

 

 

186

 

Total

$

825

 

 

$

722

 

 

 

 

 

 

 

 

 

 

Operating Lease Agreement

 

In January 2014, the Partnership, through its wholly owned subsidiary, Arc Terminals Holdings, entered into a triple net operating lease agreement relating to the use of a petroleum products terminal located in Portland, Oregon together with a supplemental co-terminus triple net operating lease agreement for the use of certain pipeline infrastructure at such terminal (the “Portland Terminal,” and such lease agreements, collectively, the “Lease Agreement”), pursuant to which Arc Terminals Holdings leased the Portland Terminal from a wholly owned subsidiary of CorEnergy Infrastructure Trust, Inc. (“CorEnergy”). Arc Logistics guaranteed Arc Terminals Holdings’ obligations under the Lease Agreement. CorEnergy owns a 6.6% direct investment in Lightfoot Capital Partners LP and a 1.5% direct investment in Lightfoot Capital Partners GP LLC, the general partner of Lightfoot. The Lease Agreement has a 15-year initial term and may be extended for additional five-year terms at the sole discretion of Arc Terminals Holdings, subject to renegotiated rental payment terms.

 

During the term of the Lease Agreement, Arc Terminals Holdings will make base monthly rental payments and variable rent payments based on the volume of liquid hydrocarbons that flowed through the Portland Terminal in a prior month. The base rents in the initial years of the Lease Agreement are $230,000 per month through July 2014 (prorated for the partial month of January 2014) and $417,522 for each month thereafter until the end of year five. The base rents will also increase each month starting with the month of August 2014 by a factor of 0.00958 of the specified construction costs incurred by LCP Oregon Holdings LLC (“LCP Oregon”) at the Portland Terminal, estimated at $10 million. Assuming such improvements are completed, the base rent will increase by approximately $95,800 per month. The base rents will be increased at the end of year five by the change in the consumer price index for the prior five years, and every year thereafter by the greater of two percent or the change in the consumer price index. The base rent is not influenced by the flow of hydrocarbons. Variable rent will result from the flow of hydrocarbons through the Portland Terminal in excess of a designated threshold of 12,500 barrels per day of oil equivalent. Variable rent is capped at 30% of base rent payments regardless of the level of hydrocarbon throughput.

 

So long as Arc Terminals Holdings is not in default under the Lease Agreement, it shall have the right to purchase the Portland Terminal at the end of the third year of the Lease Agreement and at the end of any month thereafter by delivery of 90 days’ notice (“Purchase Option”). The purchase price shall be the greater of (i) nine times the total of base rent and variable rent for the 12 months immediately preceding the notice or (ii) $65.7 million. If the purchase right is not exercised, the Lease Agreement shall remain in place and Arc Terminals Holdings shall continue to pay rent as provided above. Arc Terminals Holdings also has the option to terminate the Lease Agreement on the fifth and tenth anniversaries, by providing written notice 12 months in advance, for a termination fee of approximately $4 million and $6 million, respectively.


19


 

Note 12—Major Customers

The following table presents the percentage of revenues and receivables associated with the Partnership’s significant customers (those that have accounted for 10% or more of the Partnership’s revenues in a given period) for the periods indicated:

 

 

% of Revenues

 

 

% of Revenues

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

% of Receivables

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

December 31,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Customer A

 

23

%

 

 

2

%

 

 

16

%

 

 

4

%

 

 

35

%

 

 

7

%

Customer B

 

11

%

 

 

14

%

 

 

12

%

 

 

17

%

 

 

11

%

 

 

10

%

Customer C

 

2

%

 

 

13

%

 

 

4

%

 

 

10

%

 

 

2

%

 

 

5

%

Total

 

36

%

 

 

29

%

 

 

32

%

 

 

31

%

 

 

48

%

 

 

22

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 13—Commitments and Contingencies

Environmental matters

 

The Partnership may have environmental liabilities that arise from time to time in the ordinary course of business and provides for losses associated with environmental remediation obligations, when such losses are probable and reasonably estimable. Estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Loss accruals are adjusted as further information becomes available or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. There were no accruals recorded for environmental losses as of June 30, 2014 and December 31, 2013.

 

Commitments and contractual obligations

 

Future non-cancelable commitments related to certain contractual obligations as of June 30, 2014 are presented below (in thousands):

 

 

 

Payments Due by Period

 

 

 

Total

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

Thereafter

 

Long-term debt obligations

 

$

108,063

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$