arcx-10q_20170331.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2017

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      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      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”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer                    

 

 

 

 

 

 

 

 

Non-accelerated filer (Do not check if a smaller reporting company)

 

 

 

 

 

 

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  

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

As of May 2, 2017, there were 19,518,577 common units.

 

 

 


 

ARC LOGISTICS PARTNERS LP

TABLE OF CONTENTS

 

 

    

 

  

 

Page

GLOSSARY OF TERMS

3

PART I.

  

FINANCIAL INFORMATION

 

 

  

Item 1.

  

Financial Statements (Unaudited)

 

 

  

 

  

Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016

4

 

  

 

  

Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2017 and 2016

5

 

  

 

  

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016

6

 

  

 

  

Condensed Consolidated Statements of Partners’ Capital for the Three Months Ended March 31, 2017

7

 

  

 

  

Notes to Condensed Consolidated Financial Statements

8

 

  

Cautionary Statement Regarding Forward-Looking Statements

27

 

  

Item 2.

  

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

28

 

  

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

40

 

  

Item 4.

  

Controls and Procedures

40

PART II.

  

OTHER INFORMATION

 

 

  

Item 1.

  

Legal Proceedings

41

 

  

Item 1A.

  

Risk Factors

41

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

41

 

  

Item 6.

  

Exhibits

42

SIGNATURES

43

EXHIBIT INDEX

44

 

 

 


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.

asphalts and industrial products: Category of petroleum products and liquids that includes various grades of asphalts, methanol, crude tall oil, black liquor soap and other related products.

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

bcf/d:    One billion cubic feet per day (generally used as a measure of natural gas quantities).

bpd:  Barrels per day.

crude tall oil:    A by-product of paper pulp processing and derived from coniferous wood used for a component of adhesives, rubbers and inks, and as an emulsifier.

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

Distributable Cash Flow:    Represents Adjusted EBITDA less (i) cash interest expense paid; (ii) cash income taxes paid; (iii) maintenance capital expenditures paid; and (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.

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.

M3:    Cubic meters (generally used as a measure of liquefied natural gas quantities).

methanol:    A light, volatile, colorless liquid used as, among other things, a solvent, a feedstock for derivative chemicals, fuel and antifreeze.

 

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, petroleum products and other liquids.

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

3


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,

 

 

2017

 

 

2016

 

Assets:

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

1,762

 

 

$

4,584

 

Trade accounts receivable

 

9,216

 

 

 

8,257

 

Due from related parties

 

549

 

 

 

1,321

 

Inventories

 

369

 

 

 

397

 

Other current assets

 

2,341

 

 

 

2,060

 

Total current assets

 

14,237

 

 

 

16,619

 

Property, plant and equipment, net

 

395,006

 

 

 

395,511

 

Investment in unconsolidated affiliate

 

76,807

 

 

 

75,716

 

Intangible assets, net

 

114,121

 

 

 

117,716

 

Goodwill

 

39,871

 

 

 

39,871

 

Other assets

 

2,599

 

 

 

2,980

 

Total assets

$

642,641

 

 

$

648,413

 

Liabilities and partners’ capital:

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

4,609

 

 

$

2,455

 

Accrued expenses

 

4,741

 

 

 

5,684

 

Due to general partner

 

1,557

 

 

 

2,082

 

Other liabilities

 

2,855

 

 

 

2,961

 

Total current liabilities

 

13,762

 

 

 

13,182

 

Credit facility

 

249,500

 

 

 

249,000

 

Other non-current liabilities

 

19,391

 

 

 

19,805

 

Total liabilities

 

282,653

 

 

 

281,987

 

Commitments and contingencies

 

 

 

 

 

 

 

Partners’ capital:

 

 

 

 

 

 

 

General partner interest

 

-

 

 

 

-

 

Limited partners’ interest

 

 

 

 

 

 

 

Common units – (19,515,678 and 19,477,021 units issued and outstanding at March 31, 2017 and December 31, 2016, respectively)

 

276,614

 

 

 

282,228

 

Non-controlling interests

 

80,269

 

 

 

81,541

 

Accumulated other comprehensive (loss) income

 

3,105

 

 

 

2,657

 

Total partners’ capital

 

359,988

 

 

 

366,426

 

Total liabilities and partners’ capital

$

642,641

 

 

$

648,413

 

 

 

 

 

 

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

 

 

4


ARC LOGISTICS PARTNERS LP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per unit amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

Third-party customers

 

$

24,448

 

 

$

22,584

 

Related parties

 

 

1,477

 

 

 

3,483

 

 

 

 

25,925

 

 

 

26,067

 

Expenses:

 

 

 

 

 

 

 

 

Operating expenses

 

 

8,873

 

 

 

8,687

 

Selling, general and administrative

 

 

3,239

 

 

 

3,924

 

Selling, general and administrative affiliate

 

 

1,262

 

 

 

1,322

 

Depreciation

 

 

4,456

 

 

 

3,652

 

Amortization

 

 

3,672

 

 

 

3,697

 

(Gain) Loss on revaluation of contingent consideration, net

 

 

318

 

 

 

(189

)

Total expenses

 

 

21,820

 

 

 

21,093

 

Operating income (loss)

 

 

4,105

 

 

 

4,974

 

Other income (expense):

 

 

 

 

 

 

 

 

Equity earnings from unconsolidated affiliate

 

 

2,371

 

 

 

2,461

 

Interest expense

 

 

(2,654

)

 

 

(2,367

)

Total other income (loss), net

 

 

(283

)

 

 

94

 

Income before income taxes

 

 

3,822

 

 

 

5,068

 

Income taxes

 

 

31

 

 

 

28

 

Net income

 

 

3,791

 

 

 

5,040

 

Net income attributable to non-controlling interests

 

 

(1,328

)

 

 

(1,811

)

Net income attributable to partners' capital

 

 

2,463

 

 

 

3,229

 

Other comprehensive (loss) income

 

 

448

 

 

 

(896

)

Comprehensive income (loss) attributable to partners’ capital

 

$

2,911

 

 

$

2,333

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per limited partner unit:

 

 

 

 

 

 

 

 

Common units (basic and diluted)

 

$

0.12

 

 

$

0.15

 

Subordinated units (basic and diluted)

 

$

-

 

 

$

0.15

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

5


ARC LOGISTICS PARTNERS LP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Cash flow from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

3,791

 

 

$

5,040

 

Adjustments to reconcile net income to net cash provided by

(used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

4,456

 

 

 

3,652

 

Amortization

 

 

3,672

 

 

 

3,697

 

Equity earnings from unconsolidated affiliate, net of distributions

 

 

(719

)

 

 

(282

)

Amortization of deferred financing costs

 

 

406

 

 

 

359

 

Unit-based compensation

 

 

839

 

 

 

1,095

 

Net loss (gain) on revaluation of contingent consideration

 

 

318

 

 

 

(189

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(960

)

 

 

(219

)

Due from related parties

 

 

772

 

 

 

195

 

Inventories

 

 

27

 

 

 

(101

)

Other current assets

 

 

(281

)

 

 

56

 

Accounts payable

 

 

415

 

 

 

(792

)

Accrued expenses

 

 

(448

)

 

 

(1,447

)

Due to general partner

 

 

(525

)

 

 

383

 

Other liabilities

 

 

(220

)

 

 

1,073

 

Net cash provided by operating activities

 

 

11,543

 

 

 

12,520

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(2,557

)

 

 

(5,715

)

Net cash paid for acquisitions

 

 

-

 

 

 

(8,000

)

Net cash used in investing activities

 

 

(2,557

)

 

 

(13,715

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Distributions

 

 

(8,570

)

 

 

(8,473

)

Deferred financing costs

 

 

(25

)

 

 

(192

)

Repayments to credit facility

 

 

(5,000

)

 

 

-

 

Proceeds from credit facility

 

 

5,500

 

 

 

14,250

 

Payments of earn-out liability

 

 

(951

)

 

 

(341

)

Distributions paid to non-controlling interests

 

 

(2,600

)

 

 

(2,800

)

Distribution equivalent rights paid on unissued units

 

 

(162

)

 

 

(231

)

Net cash provided by (used in) financing activities

 

 

(11,808

)

 

 

2,213

 

Net increase (decrease) in cash and cash equivalents

 

 

(2,822

)

 

 

1,018

 

Cash and cash equivalents, beginning of period

 

 

4,584

 

 

 

5,870

 

Cash and cash equivalents, end of period

 

$

1,762

 

 

$

6,888

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,273

 

 

$

2,138

 

Cash paid for income taxes

 

 

31

 

 

 

27

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Decrease (increase) in earn-out liability in accounts payable

    and accrued expenses

 

 

(333

)

 

 

-

 

Increase (decrease) in purchases of property plant and

    equipment in accounts payable and accrued expenses

 

 

1,393

 

 

 

438

 

 

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


6


ARC LOGISTICS PARTNERS LP

CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

(In thousands)

(Unaudited)

 

 

 

Partners' Capital

 

 

 

Limited Partner Common Interest

 

 

Non-Controlling Interests

 

 

Accumulated Other Comprehensive Income

 

 

Total Partners' Capital

 

Partners’ capital at December 31, 2016

 

$

282,228

 

 

$

81,541

 

 

$

2,657

 

 

$

366,426

 

Net income

 

 

2,463

 

 

 

1,328

 

 

 

-

 

 

 

3,791

 

Other comprehensive income (loss)

 

 

-

 

 

 

-

 

 

 

448

 

 

 

448

 

Unit-based compensation

 

 

839

 

 

 

-

 

 

 

-

 

 

 

839

 

Net settlement of withholding taxes related to unit-based compensation

 

 

(184

)

 

 

-

 

 

 

-

 

 

 

(184

)

Distribution equivalent rights paid on unissued units

 

 

(162

)

 

 

-

 

 

 

-

 

 

 

(162

)

Distributions

 

 

(8,570

)

 

 

(2,600

)

 

 

-

 

 

 

(11,170

)

Partners’ capital at March 31, 2017

 

$

276,614

 

 

$

80,269

 

 

$

3,105

 

 

$

359,988

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

7


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 “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 LP, predecessor to Arc Logistics, to the Partnership upon the consummation of the Partnership’s initial public offering in November 2013 (“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 and Description of Business

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, petroleum products and other liquids. 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 its $40.0 million revolving credit facility.  

The Partnership’s energy logistics assets are strategically located in the East Coast, Gulf Coast, Midwest, Rocky Mountains and West Coast regions of the United States and supply a diverse group of third-party customers, including major oil companies, independent refiners, petroleum product and other liquid marketers, distributors and various industrial manufacturers. Depending upon the location, the Partnership’s facilities possess pipeline, rail, marine and truck loading and unloading capabilities allowing customers to receive and deliver product throughout North America. The Partnership’s asset platform allows customers to meet the specialized handling requirements that may be required by particular products. The Partnership’s combination of diverse geographic locations and logistics platforms gives it the flexibility to meet the evolving demands of existing customers and address those of prospective customers.

As of March 31, 2017, the Partnership’s assets consisted of:

 

21 terminals in twelve states located in the East Coast, Gulf Coast, Midwest, Rocky Mountains and West Coast regions of the United States with approximately 7.8 million barrels of crude oil, petroleum product and other liquids storage capacity;

 

four rail transloading facilities with approximately 126,000 bpd of throughput capacity; and

 

the LNG Interest in connection with the LNG Facility, which has 320,000 M3 of LNG storage, 1.5 bcf/d natural gas sendout capacity and interconnects to major natural gas pipeline networks.

The Partnership interests included the following as of March 31, 2017:

19,515,678 common units representing limited partner interests (of which 5,242,775 common units are held by Lightfoot);

 

a non-economic general partner interest (which is held by our General Partner, which is owned by Lightfoot); and

 

incentive distribution rights (which are held by our General Partner, which is owned by Lightfoot).

 

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, 2016 (the “2016 Partnership 10-K”). Certain items from that discussion are repeated or updated below as necessary to assist in the understanding of these interim statements.

Basis of Presentation

8


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 statement 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, 2016, which are included in the 2016 Partnership 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.  

Revision of Financial Statements

During the fourth quarter of 2016, the Partnership identified errors in the determination of the fair value of the earn-out liability related to the Joliet terminal acquisition for the first, second and third quarters of 2016.  Such liabilities should have been revalued at each reporting period to estimated fair value with the offset to current earnings.  The Partnership evaluated the materiality of the errors from qualitative and quantitative perspectives and concluded that the errors were not material, either individually or in the aggregate, to our previously issued interim financial statements.  The Partnership has, however, revised its interim statements for the affected periods.  

The following table details the impact of these revisions for the three months ended March 31, 2016, on the Condensed Consolidated Statement of Operations:

 

 

 

Quarter to date March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As previously

 

 

 

 

 

 

 

 

 

 

 

reported

 

 

Adjustments

 

 

As revised

 

Gain (loss) on revaluation of contingent consideration (a)

 

$

-

 

 

$

189

 

 

$

189

 

Operating income

 

 

4,785

 

 

 

189

 

 

 

4,974

 

Income before income taxes

 

 

4,879

 

 

 

189

 

 

 

5,068

 

Net income (a)

 

 

4,851

 

 

 

189

 

 

 

5,040

 

Net income attributable to non-controlling interest

 

 

(1,735

)

 

 

(76

)

 

 

(1,811

)

Net income attributable to partners' capital

 

 

3,116

 

 

 

113

 

 

 

3,229

 

Comprehensive (loss) income attributable to partners' capital

 

 

2,220

 

 

 

113

 

 

 

2,333

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per unit - common

 

$

0.15

 

 

$

-

 

 

$

0.15

 

Basic and diluted earnings per unit - subordinated

 

$

0.15

 

 

$

-

 

 

$

0.15

 

 

(a)

The corresponding amounts have been revised within the statement of cash flows for the three months ended March 31, 2016, with no net impact to operating cash flow.  

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 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, 2017 and 2016.

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. Goodwill

9


impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The Partnership determines the fair value of its single reporting unit by blending two valuation approaches: the income approach and a market value approach. The inputs included assumptions related to the future performance of the Partnership and assumptions related to discount rates, long-term growth rates and control premiums.  Based on the results of the first step of the quantitative impairment assessment of its goodwill as of December 31, 2016, the fair value of the Partnership’s reporting unit exceeded its carrying value by approximately 11% and management concluded that no impairment was necessary.  In the event that market conditions were to remain weak for an extended period of time, the Partnership may be required to record an impairment of goodwill in the future, and such impairment could be material.

 

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

 

 

As of

 

 

March 31,

 

 

December 31,

 

 

2017

 

 

2016

 

Beginning Balance

$

39,871

 

 

$

39,871

 

Goodwill acquired

 

-

 

 

 

-

 

Ending Balance

$

39,871

 

 

$

39,871

 

  

Deferred Rent

 

The Portland 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 Portland Lease Agreement is included within “Other non-current liabilities” in the accompanying unaudited condensed consolidated balance sheets at March 31, 2017 and December 31, 2016.

Contingent Consideration

The Partnership records an estimate of the fair value of contingent consideration related to the earn-out obligations to CenterPoint Properties Trust (“CenterPoint”) as a part of the Joliet terminal acquisition, within “Other Liabilities” and “Other non-current liabilities” in the accompanying consolidated balance sheets at March 31, 2017 and December 31, 2016.  On a quarterly basis, the Partnership revalues the liability and records increases or decreases in the fair value of the recorded liability as an adjustment to earnings.  Changes to the contingent consideration liability can result from adjustments to the discount rate or the estimated amount and timing of the future throughput activity at the Joliet terminal.  The assumptions used to estimate fair value require significant judgment.  The use of different assumptions and judgments could result in a materially different estimate of fair value.  The key inputs in determining fair value of the Partnership’s contingent consideration obligations of $17.7 million and $18.0 million at March 31, 2017 and December 31, 2016, respectively, include discount rates ranging from 7.2% to 7.7% and changes in the assumed amount and timing of the future throughput activity which affects the amount and timing of payments on the earn-out obligation.  For further information, see Note 2, “Summary of Significant Accounting Policies – Fair Value of Financial Instruments,” to the unaudited condensed consolidated financial statements included in this report for additional information about the Partnership’s contingent consideration obligations.

Contingencies

In the normal course of business, the Partnership may be subject to loss contingencies, such as legal proceedings and claims arising out of its business that cover a wide range of matters. An accrual for a loss contingency is recognized when it is probable that an asset had been impaired or a liability had been incurred and the amount of loss can be reasonably estimated.  If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Partnership’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.  If the estimate of a probable loss is a range and no amount within the range is more likely, the Partnership will accrue the minimum amount of the range.  

10


There are many uncertainties associated with any legal proceeding and these actions or other third-party claims against us may cause us to incur costly litigation and/or substantial settlement charges. As a result, our business, financial condition, results of operations and cash flows could be adversely affected. The actual liability in any such matters may be materially different from our estimates, if any.

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 pass 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 (Levels 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).  

In connection with the Partnership’s acquisition, through a joint venture company formed with an affiliate of GE Energy Financial Services (“GE EFS”), of all of the memberships interests of Joliet Bulk, Barge & Rail LLC (“JBBR”) from CenterPoint for $216.0 million (the “JBBR Acquisition”), Arc Terminals Joliet Holdings LLC (“Joliet Holdings”) has an earn-out obligation to CenterPoint which was valued at the time of the JBBR Acquisition at $19.7 million.  Joliet Holdings’ earn-out obligations to CenterPoint will terminate upon the payment, in the aggregate, of $27.0 million.  The balance of the earn-out liability is included within “Other non-current liabilities” in the accompanying consolidated balance sheets at March 31, 2017 and December 31, 2016.  Since the fair value of the contingent consideration obligation is based primarily upon unobservable inputs, it is classified as Level 3 in the fair value hierarchy.  The contingent consideration obligation will be revalued at each reporting period and changes to the fair value will be recorded as a component of operating income.  Increases or decreases in the fair value of the contingent consideration obligations can result from changes in the assumed throughput (contracted or uncontracted) and the long-term interest rates.  Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent reporting period.  Accordingly, future business and economic conditions can materially impact the amount of contingent consideration expense the Partnership records in any given period.  The key inputs in determining fair value of the Partnership’s contingent consideration obligations of $17.7 million and $18.0 million at March 31, 2017 and December 31, 2016, respectively, include discount rates ranging from 7.2% to 7.7% and changes in the estimated amount and timing of the future throughput activity which affects the timing of payments on the earn-out obligation. The Partnership recorded a $0.3 million non-cash loss and a $0.2 million non-cash gain on the revaluation of the earn-out liability during the three months ended March 31, 2017 and 2016, respectively.  For the three months ended March 31, 2017 and 2016, Joliet Holdings paid $0.6 million and $0.3 million, respectively, related to the earn-out obligation. Since the closing of the JBBR Acquisition in May 2015 through March 31, 2017, Joliet Holdings has paid $3.4 million of the earn-out to CenterPoint.  The following is a reconciliation of the beginning and ending amounts of the contingent consideration obligation related to the JBBR Acquisition (in thousands):

 

 

Balance at

 

 

 

 

 

 

Earn-out

 

 

Balance at

 

 

December 31

 

 

Revaluation

 

 

payments

 

 

March 31,

 

 

2016

 

 

Adjustments

 

 

paid

 

 

2017

 

Liabilities at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JBBR contingent consideration

$

18,000

 

 

$

318

 

 

$

(618

)

 

$

17,700

 

Total liabilities at fair value

$

18,000

 

 

$

318

 

 

$

(618

)

 

$

17,700

 

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.

 

11


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 units, if any, by the weighted average number of outstanding common and subordinated units, respectively, during the period. Following payment of the cash distribution for the third quarter of 2016, the requirements for the conversion of all subordinated units were satisfied under the partnership agreement.  As a result, effective November 16, 2016, the 6,081,081 subordinated units, of which 5,146,264 were owned by Lightfoot, converted on a one-for-one basis into common units and thereafter participate on terms equal with all other common units in distributions of available cash. 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.

Non-Controlling Interests

The Partnership applies the provisions of ASC 810 Consolidations, which were amended on January 1, 2009 by ASC 810-10-65 and ASC 810-10-45 (“ASC 810”).  As required by ASC 810, our non-controlling ownership interests in consolidated subsidiaries are presented in the consolidated balance sheet within capital as a separate component from partners’ capital.  In addition, consolidated net income includes earnings attributable to both the partners and the non-controlling interests.  For the three months ended March 31, 2017 and 2016, $2.6 million and $2.8 million, respectively, of distributions have been made to non-controlling interest holders of consolidated subsidiaries.  

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.  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 May and December 2016, the FASB issued certain narrow-scope improvements and practical expedients to the guidance.  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 February 2016, the FASB issued new guidance which amends various aspects of existing guidance for leases.   The new guidance requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. The main difference between previous GAAP and the amended standard is the recognition of lease assets and lease liabilities by lessees on the balance sheet for those leases classified as operating leases under previous GAAP. As a result, the Partnership will have to recognize a liability representing its lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. The new guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Partnership is currently evaluating the effect this standard will have on its consolidated financial position or results of operations.

12


In August 2016, the FASB issued new guidance which makes eight targeted changes to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The update provides specific guidance on cash flow classification issues that are not currently addressed by GAAP and thereby reduces the current diversity in practice. The standard is effective for our financial statements issued for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted.  The Partnership does not expect this requirement to have a significant impact on its financial condition, results of operations, cash flows and related disclosures.

In January 2017, the FASB issued new guidance which provides clarifications to evaluating when a set of transferred assets and activities (collectively, the "set") is a business and provides a screen to determine when a set is not a business. Under the new guidance, when substantially all of the fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset, or group of similar assets, the assets acquired would not represent a business. Also, to be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to produce outputs. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied on a prospective basis to any transactions occurring within the period of adoption. Early adoption is permitted for interim or annual periods in which the financial statements have not been issued. The Partnership does not expect this requirement to have a significant impact on its financial condition, results of operations, cash flows and related disclosures.

In January 2017, the FASB issued new guidance which eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendment, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new standard is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for annual or interim goodwill impairment testing performed after January 1, 2017. The Partnership does not expect this requirement to have a significant impact on its financial condition, results of operations, cash flows and related disclosures.

Note 3 – Acquisitions

Acquisitions

The following acquisition was 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 consultant utilized several appraisal methodologies including income, market and cost approaches to estimate the fair value of the identifiable assets acquired.

Gulf Oil Terminals Acquisition

In January 2016, the Partnership, through its wholly owned subsidiary Arc Terminals Holdings LLC (“Arc Terminals Holdings”), acquired four petroleum products terminals (the “Pennsylvania Terminals”) located in Altoona, Mechanicsburg, Pittston and South Williamsport, Pennsylvania from Gulf Oil Limited Partnership (“Gulf Oil”) for $8.0 million (the “Gulf Oil Terminals Acquisition”).  In connection with this acquisition, the Partnership also acquired an option to purchase from Gulf Oil at an agreed upon purchase price additional land with storage tanks located adjacent to one of the Pennsylvania Terminals.  At closing, the Partnership entered into a take-or-pay terminal services agreement with Gulf Oil with an initial term of two years.  The throughput and related services provided by the Partnership to Gulf Oil under the terminal services agreement are provided at the Pennsylvania Terminals, as well as several of the Partnership’s other petroleum products terminals.  The acquisition was financed with a combination of available cash and borrowings under the Credit Facility.

The Gulf Oil Terminals Acquisition was accounted for as a business combination in accordance with ASC Topic 805, “Business Combinations” (“ASC 805”).  The Gulf Oil Terminals Acquisition purchase price equaled the approximately $8.0 million fair value of the identifiable assets acquired and, accordingly the Partnership did not recognize any goodwill as a part of the Gulf Oil Terminals Acquisition.  Transaction costs incurred by the Partnership in connection with the acquisition, consisting primarily of legal and other professional fees, totaled approximately $0.6 million and were expensed as incurred in accordance with ASC 805.  Management has finalized the valuation of the net assets acquired in connection with the Gulf Oil Terminals Acquisition and the final purchase price allocation has been determined.

The total purchase price of $8.0 million was preliminarily allocated to the net assets acquired as follows (in thousands):

 

Consideration:

 

 

 

Cash paid to seller

$

8,000

 

Total consideration

$

8,000

 

Allocation of purchase price:

 

 

 

Inventories

$

163

 

Property and equipment

 

7,837

 

Net assets acquired

$

8,000

 

13


 

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, 2017 and December 31, 2016 are represented below (in thousands):

 

Balance at December 31, 2016

$

75,716

 

Equity earnings

 

2,371

 

Contributions

 

-

 

Distributions

 

(1,652

)

Amortization of premium

 

(76

)

Other comprehensive income (loss)

 

448

 

Balance at March 31, 2017

$

76,807

 

 

 

Investment in Gulf LNG Holdings

 

In November 2013, the Partnership purchased the LNG Interest from an affiliate of GE EFS for $72.7 million. The carrying value of the LNG Interest on the date of acquisition was $64.1 million and therefore the excess amount paid, by the Partnership, over the carrying value was $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, 2017 is as follows (in thousands):

 

 

Total

 

2017

$

232

 

2018

 

309

 

2019

 

309

 

2020

 

309

 

2021

 

309

 

Thereafter

 

6,136

 

 

$

7,604

 

 

 

 

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

 

 

March 31,

 

 

December 31,

 

 

2017

 

 

2016

 

Balance sheets

 

 

 

 

 

 

 

Current assets

$

6,486

 

 

$

7,474

 

Noncurrent assets

 

847,159

 

 

 

855,703

 

Total assets

$

853,645

 

 

$

863,177

 

Current liabilities

$

77,523

 

 

$

83,825

 

Long-term liabilities

 

607,250

 

 

 

621,802

 

Member’s equity

 

168,872

 

 

 

157,550

 

Total liabilities and member’s equity

$

853,645

 

 

$

863,177

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2017

 

 

2016

 

Income statements

 

 

 

 

 

 

 

Revenues

$

46,497

 

 

$

46,484

 

Total operating costs and expenses

 

15,026

 

 

 

13,855

 

Operating income

 

31,471

 

 

 

32,629

 

Net income

$

22,977

 

 

$

23,845

 

 

14


 

LNG Facility Arbitration

On March 1, 2016, an affiliate of Gulf LNG Holdings received a Notice of Disagreement and Disputed Statements and a Notice of Arbitration from Eni USA Gas Marketing L.L.C. (“Eni USA”), one of the two companies that had entered into a terminal use agreement for capacity of the LNG Facility.  Eni USA is an indirect subsidiary of Eni S.p.A., a multi-national integrated energy company headquartered in Milan, Italy.  Pursuant to the Notice of Arbitration, Eni USA seeks declaratory and monetary relief in respect of its terminal use agreement, asserting that (i) the terminal use agreement should be terminated because changes in the U.S. natural gas market since the execution of the agreement in December 2007 have “frustrated the essential purpose” of the agreement and (ii) the activities undertaken by affiliates of Gulf LNG Holdings “in connection with a plan to convert the LNG Facility into a liquefaction/export facility have given rise to a contractual right on the part of Eni USA to terminate” the terminal use agreement. 

 

Affiliates of Kinder Morgan, Inc., which control Gulf LNG Holdings and operate the LNG Facility, have expressed to us that they view the assertions by Eni USA to be without merit and that they will continue to vigorously contest the assertions set forth by Eni USA.  Although we do not control Gulf LNG Holdings, we also are of the view that the assertions made by Eni USA are without merit. As contemplated by the terminal use agreement, disputes are meant to be resolved by final and binding arbitration. A three-member arbitration panel conducted an arbitration hearing in January, 2017.  We expect the arbitration panel will issue its decision within approximately four months.  Eni USA has advised Gulf LNG Holdings’ affiliates that it will continue to pay the amounts claimed to be due under the terminal use agreement pending resolution of the dispute.  

If the assertions by Eni USA to terminate or amend its payment obligations under the terminal use agreement prior to the expiration of its initial term are ultimately successful, our business, financial conditions and results of operations and our ability to make cash distributions to our unitholders would be (or in the event Eni USA’s payment obligations are amended, could be) materially adversely affected.

Note 5—Property, Plant and Equipment

 

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

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Land

 

$

78,455

 

 

$

78,455

 

Buildings and site improvements

 

 

85,336

 

 

 

84,976

 

Tanks and trim

 

 

127,470

 

 

 

124,438

 

Pipelines

 

 

20,507

 

 

 

20,507

 

Machinery and equipment

 

 

122,022

 

 

 

121,278

 

Office furniture and equipment

 

 

1,225

 

 

 

1,152

 

Construction in progress

 

 

14,659

 

 

 

14,917

 

 

 

 

449,674

 

 

 

445,723

 

Less:  Accumulated depreciation

 

 

(54,668

)

 

 

(50,212

)

Property, plant and equipment, net

 

$

395,006

 

 

$

395,511

 

 

 

Note 6—Intangible Assets

 

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

 

 

Estimated

 

As of

 

 

Useful Lives

 

March 31,

 

 

December 31,

 

 

in Years

 

2017

 

 

2016

 

Customer relationships

21

 

$

4,785

 

 

$

4,785

 

Acquired contracts

2-12

 

 

149,342

 

 

 

149,342

 

Non-compete agreements

2-3

 

 

741

 

 

 

741

 

 

 

 

 

154,868

 

 

 

154,868

 

Less:  Accumulated amortization

 

 

 

(40,747

)

 

 

(37,152

)

Intangible assets, net

 

 

$

114,121

 

 

$

117,716

 

 

 

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 $10.5 million for the remainder of 2017, $12.8 million in 2018, $12.2 million in 2019, $12.2 million in 2020, $12.2 million in 2021 and $54.3 million thereafter.

15


Note 7—Debt

Credit Facility

 

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 is the borrower. The Credit Facility matures in November 2018 and has up to $300.0 million of borrowing capacity. As of March 31, 2017, the Partnership had borrowings of $249.5 million under the Credit Facility at an interest rate of 3.99%.  Based on the restrictions under the total leverage ratio covenant, as of March 31, 2017, the Partnership had $29.0 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 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 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 $20.0 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 and the assets of the Partnership’s Joliet terminal (which is owned indirectly by Joliet Holdings, 40% of which is owned by an affiliate of GE EFS). 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.

 

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 225 basis points per annum or (b) a LIBOR rate, plus a range of 200 to 325 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 rate 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, 2017, 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 subsidiaries (other than the borrower and Joliet Holdings and the subsidiaries thereof) and each of the Partnership’s future restricted subsidiaries.

First Amendment

In January 2014, in connection with the lease agreement entered into at the Partnership’s Portland terminal, Arc Terminals Holdings, as borrower, together with the Partnership and certain of 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 Portland Lease Agreement relating to the use of petroleum products terminals and pipeline infrastructure located in Portland, Oregon (the “Portland Terminal”).

Second Amendment

In May 2015, Arc Terminals Holdings, as borrower, together with the Partnership and certain of its other subsidiaries, as guarantors, entered into the second amendment to the Credit Facility as part of its financing for the JBBR Acquisition.  Upon the closing of the JBBR Acquisition in May 2015, the aggregate commitments under the Credit Facility increased from $175 million to $275 million.  In addition, the sublimit for letters of credit was increased from $10 million to $20 million.  

16


Third Amendment

In July 2015, Arc Terminals Holdings, as borrower, together with the Partnership and certain of its other subsidiaries, as guarantors, entered into the third amendment to the Credit Facility as part of the financing for the Partnership’s purchase in July 2015 of all of the membership interests in UET Midstream, LLC from United Energy Trading, LLC (“UET”) and Hawkeye Midstream, LLC (together with UET, the “Pawnee Sellers”) for a purchase price, net of certain adjustments, of $76.6 million (the “Pawnee Terminal Acquisition”). Upon the consummation of the Pawnee Terminal Acquisition in July 2015, the aggregate commitments under the Credit Facility increased from $275 million to $300 million.

Fourth Amendment

In June 2016, Arc Terminals Holdings, as borrower, together with the Partnership and certain of its other subsidiaries, as guarantors, entered into the fourth amendment to the Credit Facility (the “Fourth Amendment”).  The Fourth Amendment principally modifies certain provisions of the Credit Facility including (i) the circumstances whereby the Partnership may increase up to or maintain a total leverage ratio of 5.00 to 1.00 and (ii) the interest rate pricing grid to include an additional pricing tier if the total leverage ratio is greater than or equal to 4.50 to 1.00.  

 

Note 8—Partners’ Capital and Distributions

Units Outstanding

As of March 31, 2017, the Partnership had 19,515,678 common units outstanding.  Of that number, 5,242,775 were owned by Lightfoot.  In addition, our General Partner, which is owned by Lightfoot, has a non-economic general partner interest in the Partnership along with incentive distribution rights.

Following payment of the cash distribution for the third quarter of 2016, the requirements for the conversion of all subordinated units were satisfied under the partnership agreement.  As a result, effective November 16, 2016, the 6,081,081 subordinated units, of which 5,146,264 were owned by Lightfoot, converted on a one-for-one basis into common units and thereafter participate on terms equal with all other common units in distributions of available cash.  The conversion did not impact the amount of cash distributions paid by the Partnership or the total units outstanding.  

The table below summarizes the changes in the number of common units outstanding at December 31, 2016 through March 31, 2017:

 

 

Limited Partner

Common Units

 

Units outstanding at December 31, 2016

 

 

19,477,021

 

Vesting of equity-based compensation awards

 

 

38,657

 

Units outstanding at March 31, 2017

 

 

19,515,678

 

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, 2017

 

$

0.4400

 

 

$

8,588

 

 

May 15, 2017

 

May 8, 2017

December 31, 2016

 

$

0.4400

 

 

$

8,570

 

 

February 15, 2017

 

February 8, 2017

September 30, 2016

 

$

0.4400

 

 

$

8,493

 

 

November 15, 2016

 

November 7, 2016

June 30, 2016

 

$

0.4400

 

 

$

8,490

 

 

August 12, 2016

 

August 8, 2016

March 31, 2016

 

$

0.4400

 

 

$

8,475

 

 

May 13, 2016

 

May 9, 2016

 

Cash Distribution Policy

The Partnership’s 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 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.

 

17


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 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 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.”

 

Note 9—Equity Plans

 

2013 Long-Term Incentive Plan

 

The Board approved and adopted the Arc Logistics Long-Term Incentive Plan (as amended from time to time, 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.  The Board amended and restated the 2013 Plan in March 2016.  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, except that, with respect to awards issued on or after March 9, 2016, the Committee may condition the automatic vesting of any such awards then outstanding upon a separation of employment for certain reasons (as established in an individual award agreement) following the occurrence of a “change of control”.  

 

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 for accounting purposes (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, 2017 and 2016, the Partnership recorded approximately $0.2 million during each period, of unit-based compensation expense with respect to the Director Grants.  As of March 31, 2017, the unrecognized unit-based compensation expense for the Director Grants is approximately $0.3 million, which will be recognized ratably over the remaining term of the awards.  Through March 31, 2017, two-thirds of the phantom units granted under the Director Grants have vested.  

 

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 for accounting purposes (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 vested on the day after the end of the Subordination Period (as

18


defined in the 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 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 the three months ended March 31, 2017 and 2016, the Partnership recorded approximately $0.2 million and $0.8 million, respectively, of unit-based compensation expense with respect to the Employee Equity Grants.  As of March 31, 2017, the unrecognized unit-based compensation expense for the Employee Equity Grants was approximately $11.0 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.  Through March 31, 2017, one-fourth of the phantom units granted under the Employee Equity Grants have vested.

 

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 ended March 31, 2017 and 2016, the Partnership recorded less than $0.1 million of unit-based compensation expense during each period, with respect to the Employee Liability Grants.  As of March 31, 2017, the unrecognized unit based compensation expense for the Employee Liability Grants was less than 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.  Through March 31, 2017, one-fourth of the phantom units granted under the Employee Liability Grants have vested.

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, 2017 and 2016, the Partnership recorded $0.1 million and $0.1 million, respectively, of unit-based compensation expense with respect to the 2015 Equity Grants.  As of March 31, 2017, the unrecognized unit-based compensation expense for the 2015 Equity Grants is approximately $0.2 million, which will be recognized ratably over the remaining term of the awards.  Through March 31, 2017, two-thirds of the phantom units granted under the 2015 Equity Grants have vested.  

 

During the year ended December 31, 2015, the Board and Chief Executive Officer authorized the grant of an aggregate of 57,100 phantom units (in addition to the 45,668 phantom units granted in March 2015) pursuant to the 2013 Plan to certain employees of the Partnership Entities (“2015 Performance Grants”).  Each 2015 Performance Grant will be settled in common units and includes a DER.  The 2015 Performance Grants are classified as equity awards for accounting purposes and have an aggregate grant date fair value of $1.0 million and have the same term and vesting requirements as the Employee Equity Grants described above.  For the three months ended March 31, 2017 and 2016, the Partnership recorded less than $0.1 million and $0.1 million, respectively, of unit-based compensation expense with respect to the 2015 Performance Grants.  As of March 31, 2017, the unrecognized unit-based compensation expense for the 2015 Performance Grants is approximately $0.6 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.  Through March 31, 2017, one-fourth of the phantom units granted under the 2015 Performance Grants have vested.

During the year ended December 31, 2016, the Board authorized the grant of an aggregate of 94,000 phantom units pursuant to the 2013 Plan to certain employees and consultants of the Partnership Entities (“2016 Equity Grants”).  Each 2016 Equity Grant will be settled in common units and includes a DER.  The 2016 Equity Grants are classified as equity awards for accounting purposes and have an aggregate grant date fair value of $1.1 million and vest in three equal annual installments over a three-year period starting from the date of grant.  For the three months ended March 31, 2017 and 2016, the Partnership recorded $0.1 million and less than $0.1 million, respectively, of unit-based compensation expense with respect to the 2016 Equity Grants.  As of March 31, 2017, the unrecognized unit-based compensation expense for the 2016 Equity Grants is approximately $0.7 million, which will be recognized ratably over the remaining term of the awards.  Through March 31, 2017, one-third of the phantom units granted under the 2016 Equity Grants have vested.  

During the three months ended March 31, 2017, the Board authorized the grant of an aggregate of 125,561 phantom units pursuant to the 2013 Plan to certain employees and consultants of the Partnership Entities (“2017 Equity Grants”).  Each 2017 Equity Grant will be settled in common units and includes a DER.  The 2017 Equity Grants are classified as equity awards for accounting purposes and have an aggregate grant date fair value of $1.8 million, 109,111 of the 2017 Equity Grants vest in three equal annual installments over a three-year period starting from the date of grant, and 16,450 of the 2017 Equity Grants vested immediately on the date of grant.  For the three months ended March 31, 2017, the Partnership recorded $0.3 million of unit based compensation expense with respect to the 2017 Equity Grants.  As of March 31, 2017, the unrecognized unit-based compensation expense for the 2017 Equity Grants is approximately $1.5 million, which will be recognized ratably over the remaining term of the awards.

During the three months ended March 31, 2017, the Board authorized the grant of an aggregate of 26,250 phantom units pursuant to the 2013 Plan to an employee of the Partnership Entities (“2017 Performance Grant”).  The 2017 Performance Grant will

19


be settled in common units and includes a DER.  The 2017 Performance Grant is classified as an equity award for accounting purposes, has an aggregate grant date fair value of $0.4 million and will vest in three equal installments based on the date on which the Partnership has paid, for three consecutive quarters, distributions to its common unitholders at or above a stated level, with (A) one-third of the award vesting after distributions are paid at or above $0.4457 per unit for the required period, (B) one-third of the award vesting after distributions are paid at or above $0.4845 per unit for the required period, and (C) the last one-third 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 2017 Performance Grant expires 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 the three months ended March 31, 2017, the Partnership recorded less than $0.1 million of unit-based compensation expense with respect to the 2017 Performance Grant.  As of March 31, 2017, the unrecognized unit-based compensation expense for the 2017 Performance Grant is approximately $0.4 million which may be recognized variably over the remaining term of the award based on the probability of the achievement of the performance vesting requirements.

During the three months ended March 31, 2017, the Board authorized the grant of an aggregate of 10,475 phantom units pursuant to the 2013 Plan to employees of the Partnership Entities (“2017 Employee Liability Grants”). Each 2017 Employee Liability Grant will be settled in cash (as such award consists of less than 1,000 phantom units) and includes a DER.  The 2017 Employee Liability Grants are classified as liability awards for accounting purposes, have an aggregate grant date fair value of $0.1 million and will vest in three equal installments over a three-year period starting from the date of grant.  For the three months ended March 31, 2017, the Partnership recorded less than $0.1 million of unit-based compensation expense with respect to the 2017 Employee Liability Grants.  As of March 31, 2017, the unrecognized unit-based compensation expense for the 2017 Employee Liability Grants is approximately $0.1 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, 2017, the Partnership paid approximately $0.4 million in DERs to phantom unit-holders. For the three months ended March 31, 2017, $0.2 million 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.  For the three months ended March 31, 2016, the Partnership paid approximately $0.4 million in DERs to phantom unit-holders.  For the three months ended March 31, 2016, $0.2 million 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 total compensation expense related to the 2013 Plan for the three months ended March 31, 2017 and 2016 was $0.8 million and $1.1 million, respectively, 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, 2017 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, 2017

 

 

 

March 31, 2017

 

 

Number

 

 

Weighted Avg.

 

 

 

Number

 

 

Weighted Avg.

 

 

 

 

 

 

of Phantom

 

 

Grant Date

 

 

 

of Phantom

 

 

Grant Date

 

 

Fair Value at

 

 

Units

 

 

Fair Value

 

 

 

Units

 

 

Fair Value

 

 

3/31/2017

 

Balance at December 31, 2016

 

804,818

 

 

$

23.29

 

 

 

 

4,125

 

 

$

25.46

 

 

$

14.25

 

Granted

 

151,811

 

 

$

14.30

 

 

 

 

10,475

 

 

$

14.01

 

 

$

-

 

Vested

 

(51,837

)

 

$

13.79

 

 

 

 

-

 

 

$

-

 

 

$

-

 

Forfeited

 

-

 

 

$

-

 

 

 

 

(225

)

 

$

25.46

 

 

$

-

 

Balance at March 31, 2017

 

904,792

 

 

$

22.33

 

 

 

 

14,375

 

 

$

17.12

 

 

$

14.25

 

 

 

20


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.

Following payment of the cash distribution for the third quarter of 2016, the requirements for the conversion of all subordinated units were satisfied under the partnership agreement.  As a result, effective November 16, 2016, the 6,081,081 subordinated units, of which 5,146,264 were owned by Lightfoot, converted on a one-for-one basis into common units and thereafter participate on terms equal with all other common units in distributions of available cash.  The conversion did not impact the amount of cash distributions paid by the Partnership or the total units outstanding.  Following the conversion, the Partnership is no longer utilizing the two-class method when calculating the net income per unit applicable to limited partners.  

 

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, 2017 and 2016, the only potentially dilutive units outstanding consisted of the phantom units (see “Note 9—Equity Plans”) as they are considered to be participating securities. For the three months ended March 31, 2017 and 2016, none of the phantom units are included in the calculation of diluted earnings per share due to the Partnership having declared distributions in excess of reported net income attributable to partners’ capital.

 

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,

 

 

 

2017