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 March 31, 2015

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

  

þ

 

  

Non-accelerated filer

  

¨

 

  

  

(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 May 4, 2015, 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

 

 

  

Item 1.

  

Financial Statements (Unaudited)

 

 

  

 

  

Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014

3

 

  

 

  

Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2015 and 2014

4

 

  

 

  

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014

5

 

  

 

  

Condensed Consolidated Statements of Partners’ Capital for the Three Months Ended March 31, 2015

6

 

  

 

  

Notes to Condensed Consolidated Financial Statements

7

 

  

Cautionary Statement Regarding Forward-Looking Statements

23

 

  

Item 2.

  

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

24

 

  

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

34

 

  

Item 4.

  

Controls and Procedures

34

PART II.

  

OTHER INFORMATION

 

 

  

Item 1.

  

Legal Proceedings

35

 

  

Item 1A.

  

Risk Factors

35

 

  

Item 6.

  

Exhibits

35

SIGNATURES

36

EXHIBIT INDEX

37

 

 

 


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.

bpd:  Barrels 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.

GAAP:    Generally accepted accounting principles in the United States.

JOBS Act:    Jumpstart Our Business Startups Act.

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.

PCAOB:    Public Company Accounting Oversight Board.

 

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)

 

 

March 31,

 

 

December 31,

 

 

2015

 

 

2014

 

Assets:

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

4,445

 

 

$

6,599

 

Trade accounts receivable

 

3,942

 

 

 

3,746

 

Due from related parties

 

946

 

 

 

900

 

Inventories

 

349

 

 

 

285

 

Other current assets

 

1,673

 

 

 

1,226

 

Total current assets

 

11,355

 

 

 

12,756

 

Property, plant and equipment, net

 

195,585

 

 

 

195,886

 

Investment in unconsolidated affiliate

 

73,333

 

 

 

72,858

 

Intangible assets, net

 

32,021

 

 

 

33,189

 

Goodwill

 

15,162

 

 

 

15,162

 

Other assets

 

2,029

 

 

 

1,737

 

Total assets

$

329,485

 

 

$

331,588

 

Liabilities and partners’ capital:

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

2,025

 

 

$

2,136

 

Accrued expenses

 

1,820

 

 

 

2,133

 

Due to general partner

 

2,691

 

 

 

409

 

Other liabilities

 

32

 

 

 

34

 

Total current liabilities

 

6,568

 

 

 

4,712

 

Credit facility

 

111,063

 

 

 

111,063

 

Other non-current liabilities

 

2,944

 

 

 

2,747

 

Commitments and contingencies

 

 

 

 

 

 

 

Partners’ capital:

 

 

 

 

 

 

 

General partner interest

 

-

 

 

 

-

 

Limited partners’ interest

 

 

 

 

 

 

 

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

     at March 31, 2015 and December 31, 2014)

 

117,796

 

 

 

119,130

 

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

     at March 31, 2015 and December 31, 2014)

 

91,237

 

 

 

93,588

 

Accumulated other comprehensive (loss) income

 

(123

)

 

 

348

 

Total partners’ capital

 

208,910

 

 

 

213,066

 

Total liabilities and partners’ capital

$

329,485

 

 

$

331,588

 

 

 

 

 

 

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

 

 

 

March 31,

 

 

 

2015

 

 

2014

 

Revenues:

 

 

 

 

 

 

 

 

Third-party customers

 

$

11,379

 

 

$

10,875

 

Related parties

 

 

2,178

 

 

 

2,338

 

 

 

 

13,557

 

 

 

13,213

 

Expenses:

 

 

 

 

 

 

 

 

Operating expenses

 

 

6,280

 

 

 

7,132

 

Selling, general and administrative

 

 

4,298

 

 

 

1,776

 

Selling, general and administrative affiliate

 

 

1,076

 

 

 

884

 

Depreciation

 

 

1,844

 

 

 

1,698

 

Amortization

 

 

1,246

 

 

 

1,339

 

Total expenses

 

 

14,744

 

 

 

12,829

 

Operating (loss) income

 

 

(1,187

)

 

 

384

 

Other income (expense):

 

 

 

 

 

 

 

 

Equity earnings from unconsolidated affiliate

 

 

2,489

 

 

 

2,437

 

Other income

 

 

5

 

 

 

-

 

Interest expense

 

 

(951

)

 

 

(910

)

Total other income, net

 

 

1,543

 

 

 

1,527

 

Income before income taxes

 

 

356

 

 

 

1,911

 

Income taxes

 

 

52

 

 

 

50

 

Net income attributable to partners’ capital

 

 

304

 

 

 

1,861

 

Other comprehensive loss

 

 

(471

)

 

 

(88

)

Comprehensive (loss) income attributable to partners’ capital

 

$

(167

)

 

$

1,773

 

 

 

 

 

 

 

 

 

 

Earnings per limited partner unit:

 

 

 

 

 

 

 

 

Common units (basic and diluted)

 

$

0.01

 

 

$

0.14

 

Subordinated units (basic and diluted)

 

$

0.01

 

 

$

0.14

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

 

2014

 

Cash flow from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

304

 

 

$

1,861

 

Adjustments to reconcile net income to net cash provided by

(used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

1,844

 

 

 

1,698

 

Amortization

 

 

1,246

 

 

 

1,339

 

Equity earnings from unconsolidated affiliate, net of distributions

 

 

(714

)

 

 

(686

)

Amortization of deferred financing costs

 

 

96

 

 

 

94

 

Unit-based compensation

 

 

1,535

 

 

 

-

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(196

)

 

 

423

 

Due from related parties

 

 

(45

)

 

 

(183

)

Inventories

 

 

(64

)

 

 

27

 

Other current assets

 

 

(447

)

 

 

(347

)

Other assets

 

 

-

 

 

 

(1

)

Accounts payable

 

 

(321

)

 

 

(517

)

Accrued expenses

 

 

(314

)

 

 

(412

)

Due to general partner

 

 

2,282

 

 

 

87

 

Other liabilities

 

 

197

 

 

 

1,112

 

Net cash provided by operating activities

 

 

5,403

 

 

 

4,495

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(1,334

)

 

 

(1,800

)

Investment in unconsolidated affiliate

 

 

(310

)

 

 

(165

)

Net cash used in investing activities

 

 

(1,644

)

 

 

(1,965

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Distributions

 

 

(5,309

)

 

 

(2,673

)

Deferred financing costs

 

 

(389

)

 

 

(195

)

Distribution equivalent rights paid on unissued units

 

 

(215

)

 

 

-

 

Net cash used in financing activities

 

 

(5,913

)

 

 

(2,868

)

Net decrease in cash and cash equivalents

 

 

(2,154

)

 

 

(338

)

Cash and cash equivalents, beginning of period

 

 

6,599

 

 

 

4,454

 

Cash and cash equivalents, end of period

 

$

4,445

 

 

$

4,116

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

906

 

 

$

856

 

Cash paid for income taxes

 

 

52

 

 

 

50

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Increase in purchases of property plant and

    equipment in accounts payable and accrued expenses

 

 

209

 

 

 

243

 

 

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 Common Interest

 

 

Limited Partner Subordinated Interest

 

 

Accumulated Other Comprehensive Income

 

 

Total Partners' Capital

 

Partners’ capital at December 31, 2014

 

$

119,130

 

 

$

93,588

 

 

$

348

 

 

$

213,066

 

Net income

 

 

162

 

 

 

142

 

 

 

-

 

 

 

304

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

(471

)

 

 

(471

)

Unit-based compensation

 

 

1,535

 

 

 

-

 

 

 

-

 

 

 

1,535

 

Distribution equivalent rights paid on unissued units

 

 

(215

)

 

 

-

 

 

 

-

 

 

 

(215

)

Distributions

 

 

(2,816

)

 

 

(2,493

)

 

 

-

 

 

 

(5,309

)

Partners’ capital at March 31, 2015

 

$

117,796

 

 

$

91,237

 

 

$

(123

)

 

$

208,910

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 condensed consolidated financial statements (“interim statements”) to “Arc Logistics” or the “Partnership” refer to Arc Logistics Partners LP and its subsidiaries. Unless the context clearly indicates otherwise, references to our “General Partner” 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 LP, predecessor to Arc Logistics (“Arc Terminals”), to the Partnership upon the consummation of the Partnership’s initial public offering in November 2013 (“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 owns a 10.3% limited liability company interest in Gulf LNG Holdings, which is referred to herein as the “LNG Interest.”

Organization

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.  Our common units are listed on the New York Stock Exchange under the symbol “ARCX.”

As of March 31, 2015, our Sponsor owned 68,617 common units and 5,146,264 subordinated units representing a 40.3% limited partner interest in us.  Our Sponsor also owns and controls our General Partner, which maintains a non-economic general partner interest in us and owns the incentive distribution rights.  

 

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, 2014. 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, 2014, which are included in the Partnership’s Annual Report on 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.  

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, assessment

7


for impairment of long-lived assets and the useful lives of intangible assets and property, plant and equipment. Actual results could differ from those estimates.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated.

No impairment charges were recorded during the three months ended March 31, 2015. Refer to “Note 5—Property, Plant and Equipment” for discussion on impairments recorded during the year ended December 31, 2014.

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, 2014 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

 

 

March 31,

 

 

December 31,

 

 

2015

 

 

2014

 

Beginning Balance

$

15,162

 

 

$

15,162

 

Goodwill acquired

 

-

 

 

 

-

 

Impairment

 

-

 

 

 

-

 

Ending Balance

$

15,162

 

 

$

15,162

 

 

Deferred Rent

 

The Lease Agreement (as defined in “Note 11—Related Party Transactions—Other Transactions with Related Persons—Operating Lease Agreement” 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 March 31, 2015 and December 31, 2014.

 

 

8


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.

 

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). Because the Credit Facility (as defined in “Note 7 – Debt – Credit Facility” below) 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.

 

Unit-Based Compensation

 

The Partnership recognizes all unit-based compensation to directors, officers, employees and other service providers in the consolidated financial statements based on the fair value of the awards.  Fair value for unit-based awards classified as equity awards is determined on the grant date of the award, and this value is recognized as compensation expense ratably over the requisite service or performance period of the equity award. Fair value for equity awards is calculated at the closing price of the common units on the grant date. Fair value for unit-based awards classified as liability awards is calculated at the closing price of the common units on the grant date and is remeasured at each reporting period until the award is settled. Compensation expense related to unit-based awards is included in the “Selling, general and administrative” line item in the accompanying unaudited condensed consolidated statements of operations and comprehensive income.

 

For awards with performance conditions, the expense is accrued over the service period only if the performance condition is considered to be probable of occurring. When awards with performance conditions that were previously considered improbable become probable, the Partnership incurs additional expense in the period that the probability assessment changes (see “Note 9—Equity Plans”).

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. 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 phantom unitholders, if any, 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.

 

9


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.  In April 2015, the FASB proposed a one year deferral of the effective date, and therefore, this guidance will be effective for the Partnership beginning in the first quarter of 2018, with early adoption optional but not before the original effective date of December 15, 2016.

 

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.

 

In February 2015, the FASB issued new guidance related to evaluating entities for inclusion in consolidations for both the variable interest model and for the voting model for limited partnerships and similar entities.  The update requires that all reporting entities reevaluate whether they should consolidate certain legal entities.  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 in the first quarter of 2016, with early adoption optional.  

 

In April 2015, the FASB issued new guidance related to presentation of debt issuance costs.  The update requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount.  The Partnership is currently assessing the impact that adopting this new accounting guidance will have on its consolidated financial statements and disclosures.  This guidance will be effective for the Partnership in the first quarter of 2016, with early adoption optional.  

 

Note 3 – Acquisitions

 

Pending JBBR Acquisition

 

In February 2015, Arc Terminals Joliet Holdings LLC, a Delaware limited liability company (“Buyer” or “Arc AcquisitionCo”), and a wholly owned subsidiary of the Partnership that will be, upon the closing of the JBBR Acquisition referred to below, owned jointly by the Partnership and an affiliate of GE Energy Financial Services (“GE EFS”), entered into a Membership Interest Purchase Agreement (the “JBBR Purchase Agreement”) pursuant to which Buyer has agreed, subject to the terms and conditions thereof, to acquire from CenterPoint Properties Trust (“Seller” or “CenterPoint”), for a base cash purchase price of $216 million, all of the  membership interests in Joliet Bulk, Barge & Rail LLC (“JBBR”; and such acquisition, the “JBBR Acquisition”), which among other things owns a crude oil unloading terminal and a 4-mile crude oil pipeline that are in the final stages of construction in Joliet, Illinois (the “Joliet Terminal”). Arc AcquisitionCo is also required to pay to CenterPoint earn-out payments for each barrel of petroleum product that is either delivered to or received from the Joliet Terminal (without duplication) or for which JBBR receives payment under minimum volume commitments regardless of actual throughput activity.  Arc AcquisitionCo’s earn-out obligations to CenterPoint will terminate upon the payment, in the aggregate, of $27 million.  In connection with the JBBR Acquisition, the Partnership has entered into a joint venture arrangement with GE EFS. Upon the closing of the JBBR Acquisition, an affiliate of GE EFS will own 40% of Buyer, with the remaining 60% owned by the Partnership. The Partnership will manage the ongoing operations of Buyer and its subsidiaries, including JBBR.   

 

 

 

 

10


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 March 31, 2015 and December 31, 2014 are represented below (in thousands):

 

Balance at December 31, 2014

$

72,858

 

Equity earnings

 

2,489

 

Contributions

 

310

 

Distributions

 

(1,775

)

Amortization of premium

 

(78

)

Other comprehensive income

 

(471

)

Balance at March 31, 2015

$

73,333

 

 

 

Gulf LNG Holdings Acquisition

 

In November 2013, 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 assets, which is 28 years. The estimated aggregate amortization of this premium for its remaining useful life from March 31, 2015 is as follows (in thousands):

 

 

Total

 

2015

$

231

 

2016

 

309

 

2017

 

309

 

2018

 

309

 

2019

 

309

 

Thereafter

 

6,753

 

 

$

8,220

 

 

 

 

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

 

 

March 31,

 

 

December 31,

 

 

2015

 

 

2014

 

Balance sheets

 

 

 

 

 

 

 

Current assets

$

9,767

 

 

$

12,537

 

Noncurrent assets

 

920,489

 

 

 

926,980

 

Total assets

$

930,256

 

 

$

939,517

 

Current liabilities

$

77,281

 

 

$

85,818

 

Long-term liabilities

 

727,286

 

 

 

733,401

 

Member’s equity

 

125,689

 

 

 

120,298

 

Total liabilities and member’s equity

$

930,256

 

 

$

939,517

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

2015

 

 

2014

 

 

 

 

 

Income statements

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

46,624

 

 

$

46,561

 

 

 

 

 

Total operating costs and expenses

 

14,206

 

 

 

14,280

 

 

 

 

 

Operating income

 

32,418

 

 

 

32,281

 

 

 

 

 

Net income

$

24,165

 

 

$

23,656

 

 

 

 

 

 

11


 

Note 5—Property, Plant and Equipment

 

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

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Land

 

$

49,615

 

 

$

49,615

 

Buildings and site improvements

 

 

36,356

 

 

 

36,298

 

Tanks and trim

 

 

91,600

 

 

 

91,463

 

Machinery and equipment

 

 

33,010

 

 

 

32,815

 

Office furniture and equipment

 

 

2,353

 

 

 

2,348

 

Construction in progress

 

 

7,323

 

 

 

6,175

 

 

 

 

220,257

 

 

 

218,714

 

Less:  Accumulated depreciation

 

 

(24,672

)

 

 

(22,828

)

Property, plant and equipment, net

 

$

195,585

 

 

$

195,886

 

 

Due to a change in the operating logistics at the Partnership’s Chillicothe, IL terminal (the “Chillicothe Terminal”) in April 2013, the Partnership evaluated the long-lived assets at the Chillicothe Terminal for impairment as of December 31, 2013 and December 31, 2014. Based upon a market strategy to repurpose the Chillicothe Terminal, the Partnership’s estimate of undiscounted cash flows as of December 31, 2013 indicated that such carrying amounts were expected to be recovered. The Partnership re-evaluated the Chillicothe Terminal and based upon the inability to enter into a service agreement with a new or existing customer, the Partnership recognized a non-cash impairment loss of approximately $6.1 million as of December 31, 2014. The net impact of this impairment was reflected in “Long-lived asset impairment” in the consolidated statement of operations and comprehensive income for the year ended December 31, 2014.

 

Note 6—Intangible Assets

 

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

 

 

Estimated

 

As of

 

 

Useful Lives

 

March 31,

 

 

December 31,

 

 

in Years

 

2015

 

 

2014

 

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

 

 

 

(13,405

)

 

 

(12,237

)

Intangible assets, net

 

 

$

32,021

 

 

$

33,189

 

 

 

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 $3.1 million for the remainder of 2015, $3.9 million in 2016, $3.9 million in 2017, $3.9 million in 2018, $3.9 million in 2019 and $13.3 million thereafter.

 

Note 7—Debt

Credit Facility

 

In November 2013, concurrent with the closing of the IPO, the Partnership entered into the Second Amended and Restated Revolving Credit Agreement (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. As of March 31, 2015, the Partnership had borrowings of $111.1 million under the Credit Facility at an interest rate of 2.93%. As of March 31, 2015, the Partnership had a $10 million letter of credit outstanding under its letter of credit sub-facility, which was issued in connection with the JBBR Acquisition.   Based on the restrictions under the total leverage ratio covenant, as of March 31, 2015, the Partnership had $24.4 million of available capacity under the Credit Facility.

 

The Credit Facility is available 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 principal amount of $100.0 million, subject to receiving increased commitments from lenders or commitments

12


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 restricted 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 in November 2018.

 

Loans under the Credit Facility bear interest at a floating rate, based upon the Partnership’s total 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 50 basis points per annum. The unused portion of the Credit Facility is subject to a commitment fee calculated based upon the Partnership’s total 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 March 31, 2015, 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 total 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 material 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 Credit Facility are unconditionally guaranteed by the Partnership and each of the Partnership’s existing restricted 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 to the Credit Facility (the “First Amendment”). The First Amendment principally modified certain provisions of the Credit Facility to allow Arc Terminals Holdings to enter into the Lease Agreement relating to the use of petroleum products terminals and pipeline infrastructure located in Portland, Oregon (the “Portland Terminal”).

 

Debt Financing

 

In February 2015, our operating subsidiary, Arc Terminals Holdings, entered into the Debt Commitment Letter with SunTrust Bank and SunTrust Robinson Humphrey, Inc. (together with SunTrust Bank, “SunTrust”) (i) that sets forth the terms and conditions of an incremental senior secured credit facility (the “Incremental Facility”) consisting of an increase of the aggregate commitments under the Credit Facility from $175 million to $275 million and (ii) pursuant to which SunTrust agreed to provide 100% of a backstop senior secured credit facility of up to $275 million in order to refinance the Credit Facility in the event that the lenders under the Credit Facility fail to fund any portion of the Incremental Facility required to be funded in connection with the consummation of the JBBR Acquisition.

13


 

Note 8—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

March 31, 2015

 

$

0.4100

 

 

$

5,309

 

 

May 15, 2015

 

May 11, 2015

December 31, 2014

 

$

0.4100

 

 

$

5,309

 

 

February 17, 2015

 

February 9, 2015

September 30, 2014

 

$

0.4100

 

 

$

5,309

 

 

November 17, 2014

 

November 10, 2014

June 30, 2014

 

$

0.4000

 

 

$

5,180

 

 

August 18, 2014

 

August 11, 2014

March 31, 2014

 

$

0.3875

 

 

$

5,018

 

 

May 16, 2014

 

May 9, 2014

 

 

Cash Distribution Policy

 

The partnership agreement provides that the General Partner will make a determination no less frequently than each 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 (the “Board”) 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 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 solely 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.

 

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.”

14


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 9—Equity Plans

 

2013 Long-Term Incentive Plan

 

The Board approved and adopted the Arc Logistics Long-Term Incentive Plan (the “2013 Plan”) in November 2013.  In July 2014, the Board formed a Compensation Committee (the “Compensation Committee”) to administer the 2013 Plan.  Effective as of March 2015, the Board dissolved the Compensation Committee and, on and after such date, the Board serves as the administrative committee (the “Committee”) under the 2013 Plan.  Employees (including officers), consultants and directors of the General Partner, the Partnership and its affiliates (the “Partnership Entities”) are eligible to receive awards under the 2013 Plan.  The 2013 Plan authorizes up to an aggregate of 2.0 million common units to be available for awards under the 2013 Plan, subject to adjustment as provided in the 2013 Plan.  Awards available for grant under the 2013 Plan include, but are not limited to, restricted units, phantom units, unit options, and unit appreciation rights, but only phantom units have been granted under the 2013 Plan to date. Distribution equivalent rights (“DER”) are also available for grant under the 2013 Plan, either alone or in tandem with other specific awards, which entitle the recipient to receive an amount equal to distributions paid on an outstanding common unit.  Upon the occurrence of a “change of control” or an award recipient’s termination of service due to death or “disability” (each quoted term, as defined in the 2013 Plan), any outstanding unvested award will vest in full.  

 

In July 2014, the Compensation Committee authorized the grant of an aggregate of 939,500 phantom units pursuant to the 2013 Plan to certain employees, consultants and non-employee directors of the Partnership Entities. Awards of phantom units are settled in common units, except that an award of less than 1,000 phantom units is settled in cash. If a phantom unit award recipient experiences a termination of service with the Partnership Entities other than (i) as a result of death or “disability” or (ii) due to certain circumstances in connection with a “change of control,” the Committee, at its sole discretion, may decide to vest all or any portion of the recipient’s unvested phantom units as of the date of such termination or may allow the unvested phantom units to remain outstanding and vest pursuant to the vesting schedule set forth in the applicable award agreement.

 

Of the July 2014 awards, a total of 100,000 phantom units were granted to certain non-employee directors of the Board and are classified as equity awards (the “Director Grants”).  Each Director Grant will be settled in common units and includes a DER. The Director Grants have an aggregate grant date fair value of $2.5 million and vest in equal annual installments over a three-year period starting from the date of grant. For the three months ended March 31, 2015, the Partnership recorded approximately $0.2 million of unit-based compensation expense with respect to the Director Grants. As of March 31, 2015, the unrecognized unit-based compensation expense for the Director Grants is approximately $2.0 million, which will be recognized ratably over the remaining term of the awards.

 

Of the July 2014 awards, a total of 832,000 phantom units were granted to employees and certain consultants of the Partnership Entities and are classified as equity awards (the “Employee Equity Grants”).  Each Employee Equity Grant will be settled in common units and includes a DER.  The Employee Equity Grants have an aggregate grant date fair value of $21.2 million and vest as follows: (i) 25% of the Employee Equity Grants will vest the day after the end of the Subordination Period (as defined in the Partnership’s limited partnership agreement); and (ii) the three remaining 25% installments of the Employee Equity Grants will vest based on the date on which the Partnership has paid, for three consecutive quarters, distributions to its common and subordinated unitholders at or above a stated level, with (A) 25% of the award vesting after distributions are paid at or above $0.4457 per unit for the required period, (B) 25% of the award vesting after distributions are paid at or above $0.4845 per unit for the required period, and (C) the last 25% of the award vesting after distributions are paid at or above $0.5814 per unit for the required period.  To the extent not previously vested, the Employee Equity Grants expire on the fifth anniversary of the date of grant, provided that the expiration date can be extended to the eighth anniversary of the date of grant or longer upon the satisfaction of certain conditions specified in the award agreement.  For

15


the three months ended March 31, 2015, the Partnership recorded approximately $1.3 million of unit-based compensation expense with respect to the Employee Equity Grants. As of March 31, 2015, the unrecognized unit-based compensation expense for the Employee Equity Grants was approximately $17.3 million, which may be recognized variably over the remaining term of the awards based on the probability of the achievement of the performance vesting requirements.

 

Of the July 2014 awards, a total of 7,500 phantom units were granted to certain employees of the Partnership Entities and are classified as liability awards for accounting purposes (the “Employee Liability Grants”).  Each Employee Liability Grant will be settled in cash (as such award consists of less than 1,000 phantom units) and includes a DER. The Employee Liability Grants have an aggregate grant date fair value of $0.2 million and have the same term and vesting requirements as the Employee Equity Grants described in the preceding paragraph.  For the three months ended March 31, 2015, the Partnership recorded less than $0.1 million of unit-based compensation expense with respect to the Employee Liability Grants.  As of March 31, 2015, the unrecognized unit based compensation expense for the Employee Liability Grants was approximately $0.1 million, which may be recognized variably over the remaining term of the awards based on the probability of the achievement of the performance vesting requirements and is subject to remeasurement each reporting period until the awards settle.

 

In March 2015, the Board authorized the grant of an aggregate of 45,668 phantom units pursuant to the 2013 Plan to certain employees, consultants and non-employee directors of the Partnership Entities (“2015 Equity Grants”).  Each 2015 Equity Grant will be settled in common units and includes a DER.  The 2015 Equity Grants are classified as equity awards for accounting purposes and have an aggregate grant date fair value of $0.9 million and vest in equal annual installments over a three-year period starting from the date of grant.  For the three months ended March 31, 2015, the Partnership recorded less than $0.1 million of unit-based compensation expense with respect to the 2015 Equity Grants.  As of March 31, 2015, the unrecognized unit-based compensation expense for the 2015 Equity Grants is approximately $0.9 million, which will be recognized ratably over the remaining term of the awards.    

 

Subject to applicable earning criteria, the DER included in each phantom unit award described above entitles the award recipient to a cash payment (or, if applicable, payment of other property) equal to the cash distribution (or, if applicable, distribution of other property) paid on an outstanding common unit to unitholders generally based on the number of common units related to the portion of the award recipient’s phantom units that have not vested and been settled as of the record date for such distribution.  Cash distributions paid during the vesting period on phantom units that are classified as equity awards for accounting purposes are reflected initially as a reduction of partners’ capital.  Cash distributions paid on such equity awards that are not initially expected to vest or ultimately do not vest are classified as compensation expense.  As the probability of vesting changes, these initial categorizations could change.  Cash distributions paid during the vesting period on phantom units that are classified as liability awards for accounting purposes are reflected as compensation expense and included in the “Selling, general and administrative” line item in the accompanying unaudited condensed consolidated statements of operations and comprehensive income. During the three months ended March 31, 2015, the Partnership paid approximately $0.4 million in DERs to phantom unit holders, $0.2 million of which was reflected as a reduction of partners’ capital and the other $0.2 million was reflected as compensation expense and included in the “Selling, general and administrative” line item in the accompanying unaudited condensed consolidated statements of operations and comprehensive income.  

 

The compensation expense related to the 2013 Plan for the three months ended March 31, 2015 was $1.5 million, which was included in the “Selling, general and administrative” line item in the accompanying unaudited condensed consolidated statements of operations and comprehensive income. The amount recorded as liabilities in “Other non-current liabilities” in the accompanying unaudited condensed consolidated balance sheet as of March 31, 2015 was less than $0.1 million.

 

The following table presents phantom units granted pursuant to the 2013 Plan:

 

 

 

Equity Awards

 

 

 

Liability Awards

 

 

Three Months Ended

 

 

 

Three Months Ended

 

 

March 31, 2015

 

 

 

March 31, 2015

 

 

Number

 

 

Weighted Avg.

 

 

 

Number

 

 

Weighted Avg.

 

 

 

 

 

 

of Phantom

 

 

Grant Date

 

 

 

of Phantom

 

 

Grant Date

 

 

Fair Value at

 

 

Units

 

 

Fair Value

 

 

 

Units

 

 

Fair Value

 

 

3/31/2015

 

Balance at December 31, 2014

 

928,500

 

 

$

25.46

 

 

 

 

7,500

 

 

$

25.46

 

 

$

19.28

 

Granted

 

45,668

 

 

$

19.13

 

 

 

 

-

 

 

$

-

 

 

$

-

 

Vested

 

-

 

 

$

-

 

 

 

 

-

 

 

$

-

 

 

$

-

 

Forfeited

 

(6,000

)

 

$

25.46

 

 

 

 

-

 

 

$

-

 

 

$

-

 

Balance at March 31, 2015

 

968,168

 

 

$

25.16

 

 

 

 

7,500

 

 

$

25.46

 

 

$

19.28

 

 

 

16


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 months ended March 31, 2015, the only potentially dilutive units outstanding consisted of the phantom units (see “Note 9—Equity Plans”). For the three months ended March 31, 2015, none of the phantom units are considered outstanding and therefore there were no potentially dilutive units outstanding.

 

The following table sets forth the calculation of basic and diluted earnings per limited partner unit for the periods indicated (in thousands, except per unit data):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

 

2014

 

Net Income

 

$

304

 

 

$

1,861

 

Less:

 

 

 

 

 

 

 

 

Distribution equivalent rights for unissued units

 

 

230

 

 

 

-

 

Net income available to limited partners

 

$

74

 

 

$

1,861

 

 

 

 

 

 

 

 

 

 

Numerator for basic and diluted earnings per limited partner unit:

 

 

 

 

 

 

 

 

Allocation of net income among limited partner interests:

 

 

 

 

 

 

 

 

Net income allocated to common unitholders

 

$

39

 

 

$

987

 

Net income allocated to subordinated unitholders

 

$

35

 

 

$

874

 

Net income allocated to limited partners:

 

$

74

 

 

$

1,861

 

 

 

 

 

 

 

 

 

 

Denominator for basic and diluted earnings per limited partner unit:

 

 

 

 

 

 

 

 

Common units - (basic and diluted)

 

 

6,868

 

 

 

6,868

 

Subordinated units - (basic and diluted)

 

 

6,081

 

 

 

6,081

 

 

 

 

 

 

 

 

 

 

Earnings per limited partner unit:

 

 

 

 

 

 

 

 

Common - (basic and diluted)

 

$

0.01

 

 

$

0.14

 

Subordinated - (basic and diluted)

 

$

0.01

 

 

$

0.14

 

 

 

 

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 March 31, 2015  and 2014, the General Partner incurred expenses of $1.1 million and $0.9 million, respectively. Such expenses are reimbursable from the Partnership and are reflected in the “Selling, general and administrative – affiliate” line on the accompanying unaudited condensed consolidated statements of operations and comprehensive income. As of March 31, 2015 and December 31, 2014, the Partnership had a payable of approximately $2.7 million and $0.4 million, respectively, to the General Partner which is reflected as “Due to general partner” in the accompanying unaudited condensed consolidated balance sheets.

 

 

17


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, upon request of the Sponsor, a registration statement to register the common units issued to the Sponsor and the common units issuable upon the conversion of the subordinated units held by 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.

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 is required 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 will automatically renew for a period of three years at the expiration of the current term at an inflation adjusted rate (subject to a cap), as determined in accordance with the agreement, unless a party delivers a written notice of its election to terminate the storage and throughput agreement at least eighteen months prior to the expiration of the current term.

 

 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.  This agreement was renewed under the one-year evergreen provision and has been extended to May 2016.  

 

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.  This agreement was not renewed and will expire 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 barrel 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.   This agreement was renewed under the one-year evergreen provision and has been extended to May 2016.

Storage and Throughput Agreements with GCAC

 

In February 2013, the Partnership entered into a storage and throughput agreement with GCAC (the “GCAC Agreement 1”) whereby the Partnership provides storage and throughput services for various petroleum products to GCAC 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 accompanying unaudited condensed consolidated statements of operations and comprehensive income are as follows (in thousands):

 

 

Three Months Ended

 

 

March 31,

 

 

2015

 

 

2014

 

Center Oil

$

1,728

 

 

$

1,885

 

GCAC

 

450

 

 

 

453

 

Total

$

2,178

 

 

$

2,338

 

 

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 accompanying unaudited condensed consolidated balance sheets are as follows (in thousands):

 

 

As of

 

 

March 31,

 

 

December 31,

 

 

2015

 

 

2014

 

Center Oil

$

636

 

 

$

594

 

GCAC

 

310

 

 

 

306

 

Total

$

946

 

 

$

900

 

 

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 Portland Terminal together with a supplemental co-terminus triple net operating lease agreement for the use of certain pipeline infrastructure at such terminal (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 the prior month.  The base rent in the initial years of the Lease Agreement were $230,000 per month through July 2014 (prorated for the partial month of January 2014) and are $417,522 for each month thereafter until the end of year five.  The base rent also increased 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.  As of March 31, 2015, spending on terminal-related projects by CorEnergy since the commencement of the Lease Agreement totaled approximately $7.5 million and, as a result, the base rent has increased by approximately $72,000 per month.    The base rent 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.  During the three months ended March 31, 2015 and 2014, the expense associated with the Lease Agreement was $1.6 million and $1.6 million, respectively.  During the three months ended March 31, 2015 and 2014, there was no variable rent associated with the Lease Agreement.

 

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 and (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


 

Pending JBBR Acquisition

 

JBBR Purchase Agreement

 

In February 2015, Arc AcquisitionCo, the Partnership’s indirect, wholly owned subsidiary that upon the closing of the JBBR Acquisition will be owned jointly by the Partnership and an affiliate of GE EFS, entered into the JBBR Purchase Agreement pursuant to which Arc AcquisitionCo agreed, subject to the terms and conditions thereof, to acquire from CenterPoint, for a base cash purchase price of $216 million (the “JBBR Purchase Price”), all of the membership interests in JBBR, which among other things owns the Joliet Terminal. Arc AcquisitionCo is also required to pay to CenterPoint earn-out payments for each barrel of petroleum product that is either delivered to or received from the Joliet Terminal (without duplication) or for which JBBR receives payment under minimum volume commitments regardless of actual throughput activity.  Arc AcquisitionCo’s earn-out obligations to CenterPoint will terminate upon the payment, in the aggregate, of $27 million.  In connection with the JBBR Acquisition, the Partnership entered into a joint venture arrangement with GE EFS. Upon the closing of the JBBR Acquisition, an affiliate of GE EFS will own 40% of Arc AcquisitionCo, with the remaining 60% owned by the Partnership. The Partnership will manage the ongoing operations of Arc AcquisitionCo and its subsidiaries, including JBBR.

 

Arc AcquisitionCo is also required to pay to CenterPoint earn-out payments for each barrel of petroleum product that is either delivered to or received from the Joliet Terminal (without duplication) or for which JBBR receives payment under minimum volume commitments regardless of actual throughput activity.  Arc AcquisitionCo’s earn-out obligations to CenterPoint will terminate upon the payment, in the aggregate, of $27 million.

 

Equity Commitment Letter and Interim Investors Agreement

In February 2015, Aircraft Services Corporation (the “GE Equity Provider”), an affiliate of GE EFS, entered into an equity commitment letter with Arc AcquisitionCo under which GE Equity Provider agreed to contribute to Arc AcquisitionCo forty percent (40%) of the JBBR Purchase Price to enable Arc AcquisitionCo to consummate the JBBR Acquisition. GE Equity Provider’s obligations to make such funding available to Arc AcquisitionCo at the JBBR Closing are subject to customary funding conditions, including the satisfaction (or waiver by Arc AcquisitionCo) of all conditions to Arc AcquisitionCo’s obligation to consummate the JBBR Acquisition pursuant to the JBBR Purchase Agreement, as more fully set forth in the equity commitment letter provided by GE Equity Provider.

In February 2015, the Partnership and EFS-S LLC (an affiliate of GE EFS and, as such, “GE JV Partner”) entered into an interim investors agreement (the “Interim Investors Agreement”), which governs the actions of Arc AcquisitionCo and the relationship between the Partnership and GE JV Partner as it relates to Arc AcquisitionCo until the earlier of the JBBR Closing and the termination of the JBBR Purchase Agreement. The Partnership and GE JV Partner have agreed to enter into an amended and restated limited liability company agreement of Arc AcquisitionCo concurrently with the JBBR Closing on terms consistent with terms set forth in the Interim Investors Agreement.

GE EFS owns, indirectly, interests in Lightfoot. Lightfoot has a significant interest in the Partnership through its ownership of a 40.3% limited partner interest in the Partnership (prior to giving effect to the issuance by the Partnership of common units in the PIPE Transaction described below), 100% of the limited liability company interests in the General Partner, and all of the Partnership’s incentive distribution rights. Daniel Castagnola, Managing Director of GE EFS, which is an affiliate of General Electric Capital Corporation, serves on the Board.

 

Financing of the Partnership Equity Commitment

 

PIPE Transaction

In February 2015, the Partnership entered into a Unit Purchase Agreement (the “PIPE Purchase Agreement”) with the purchasers named therein (the “PIPE Purchasers”) to sell 4,411,765 common units at a price of $17.00 per unit in a private placement. The common unit purchase price payable by the PIPE Purchasers will be reduced by the Partnership’s first quarter 2015 distribution in respect of its common units if the closing of the PIPE Transaction occurs after the record date for such distribution. Assuming the closing occurs after the record date of the Partnership’s first quarter 2015 distribution, the Partnership will sell 4,520,795 common units at a price of $16.59 to the PIPE Purchasers.  The Partnership will use the proceeds from the private placement (totaling $75 million before placement agent commissions and expenses) to fund a portion of the Partnership’s obligations under an equity commitment letter delivered by the Partnership to Arc AcquisitionCo with respect to the Partnership’s 60% (approximately $130 million) of the JBBR Purchase Price. If the PIPE Purchase Agreement is terminated pursuant to its terms, including on account of the termination of the JBBR Purchase Agreement or if the closing under the PIPE Purchase Agreement fails to occur by May 18, 2015, the Partnership is required to pay to each PIPE Purchaser a commitment fee of 1% of such PIPE Purchaser’s commitment amount. During the period commencing on the date of execution of the PIPE Purchase Agreement and ending 90 days following the date of the

20


closing of the PIPE Transaction, the Partnership is restricted from issuing, without the consent of the PIPE Purchasers holding a majority of the purchased common units (or, prior to closing, the PIPE Purchasers entitled to acquire at closing a majority of such common units), equity securities of the Partnership except for, in general, common units of the Partnership issued at or above a stated issuance price in (or to fund) an acquisition that is determined by the Board to result in an increase in the Partnership’s distributable cash flow over the first full four quarters following such acquisition. The issuance of the common units pursuant to the PIPE Purchase Agreement is being made in reliance upon an exemption from the registration requirements of the Securities Act of 1933 pursuant to Section 4(a)(2) thereof.

MTP Energy Master Fund Ltd. (“Magnetar PIPE Investor”), one of the PIPE Purchasers, has committed $9.5 million to the purchase of common units in the PIPE Transaction. Magnetar Financial LLC controls the investment manager of the Magnetar PIPE Investor, and an affiliate of Magnetar Financial LLC also owns interests in the Sponsor, which is the sole owner of the General Partner. Eric Scheyer, the Head of the Energy Group of Magnetar Financial LLC, also serves on the Board.

 

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

% of Receivables

 

 

March 31,

 

 

March 31,

 

 

December 31,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Customer A

 

25

%

 

 

10

%

 

 

23

%

 

 

26

%

Customer B

 

13

%

 

 

14

%

 

 

12

%

 

 

13

%

Total

 

38

%

 

 

24

%

 

 

35

%

 

 

39

%

 

 

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 March 31, 2015 and December 31, 2014.

 

Commitments and contractual obligations

 

Future non-cancelable commitments related to certain contractual obligations as of March 31, 2015 are presented below (in thousands):

 

 

 

Payments Due by Period

 

 

 

Total

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

Thereafter

 

Long-term debt obligations

 

$

111,063

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

111,063

 

 

$

-

 

Operating lease obligations

 

 

28,394

 

 

 

4,787

 

 

 

6,416

 

 

 

6,284

 

 

 

6,288

 

 

 

4,619

 

 

 

-

 

Total

 

$

139,457

 

 

$

4,787

 

 

$

6,416

 

 

$