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EX-32.2 - EX-32.2 - Arc Logistics Partners LParcx-ex322_201409307.htm

 

 

 

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 September 30, 2014

Or

¨

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

For the transition period from              to             

Commission File Number: 001-36168

ARC LOGISTICS PARTNERS LP

(Exact name of registrant as specified in its charter)

 

Delaware

 

36-4767846

(State or other jurisdiction of

incorporation or organization)

 

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

 

 

 

725 Fifth Avenue, 19th Floor

New York, New York

 

10022

(Address of principal executive offices)

 

(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

  

¨

 

  

  

 

  

Accelerated filer

  

¨

 

  

 

 

 

 

 

Non-accelerated filer

  

þ

 

  

  

(Do not check if a smaller reporting company)

  

Smaller reporting company

  

¨

 

  

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

As of November 7, 2014, there were 6,867,950 common units and 6,081,081 subordinated units outstanding.

 

 

 

 

 

 


 

 

ARC LOGISTICS PARTNERS LP

TABLE OF CONTENTS

 

 

    

 

  

 

Page

GLOSSARY OF TERMS

2

PART I.

  

FINANCIAL INFORMATION

 

 

  

Item 1.

  

Financial Statements (Unaudited)

 

 

  

 

  

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

3

 

  

 

  

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

4

 

  

 

  

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013

5

 

  

 

  

Condensed Consolidated Statements of Partners’ Capital for the Nine Months Ended September 30, 2014

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

35

 

  

Item 4.

  

Controls and Procedures

36

PART II.

  

OTHER INFORMATION

 

 

  

Item 1.

  

Legal Proceedings

36

 

  

Item 1A.

  

Risk Factors

36

 

  

Item 6.

  

Exhibits

36

SIGNATURES

37

EXHIBIT INDEX

38

 

 

 


 

GLOSSARY OF TERMS

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

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

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

bpd:    One barrel per day.

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

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

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

GAAP:    Generally accepted accounting principles in the United States.

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

LNG:    Liquefied natural gas.

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

mbpd:    One thousand barrels per day.

NYSE:    New York Stock Exchange.

SEC:    U.S. Securities and Exchange Commission.

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

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

 

 

 

2


 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

ARC LOGISTICS PARTNERS LP

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except unit amounts)

(Unaudited)

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Assets:

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

4,559

 

 

$

4,454

 

Trade accounts receivable

 

4,626

 

 

 

4,403

 

Due from related parties

 

825

 

 

 

722

 

Inventories

 

247

 

 

 

302

 

Other current assets

 

1,197

 

 

 

777

 

Total current assets

 

11,454

 

 

 

10,658

 

Property, plant and equipment, net

 

202,700

 

 

 

201,477

 

Investment in unconsolidated affiliate

 

72,888

 

 

 

72,046

 

Intangible assets, net

 

34,480

 

 

 

38,307

 

Goodwill

 

15,162

 

 

 

15,162

 

Other assets

 

1,596

 

 

 

1,716

 

Total assets

$

338,280

 

 

$

339,366

 

Liabilities and partners’ capital:

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

2,395

 

 

 

4,115

 

Accrued expenses

 

2,706

 

 

 

2,144

 

Due to general partner

 

292

 

 

 

127

 

Other liabilities

 

41

 

 

 

25

 

Total current liabilities

 

5,434

 

 

 

6,411

 

Credit facility

 

108,063

 

 

 

105,563

 

Other non-current liabilities

 

2,517

 

 

 

-

 

Commitments and contingencies

 

 

 

 

 

 

 

Partners’ capital:

 

 

 

 

 

 

 

General partner interest

 

-

 

 

 

-

 

Limited partners’ interest

 

 

 

 

 

 

 

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

     at September 30, 2014 and December 31, 2013)

 

123,078

 

 

 

125,375

 

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

     at September 30, 2014 and December 31, 2013)

 

98,411

 

 

 

101,525

 

Accumulated other comprehensive income

 

777

 

 

 

492

 

Total partners’ capital

 

222,266

 

 

 

227,392

 

Total liabilities and partners’ capital

$

338,280

 

 

$

339,366

 

 

 

 

 

 

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

 

 

3


 

ARC LOGISTICS PARTNERS LP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per unit amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third-party customers

 

$

11,329

 

 

$

10,777

 

 

$

34,878

 

 

$

29,460

 

Related parties

 

 

2,361

 

 

 

1,848

 

 

 

6,753

 

 

 

5,869

 

 

 

 

13,690

 

 

 

12,625

 

 

 

41,631

 

 

 

35,329

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

6,627

 

 

 

5,062

 

 

 

21,101

 

 

 

14,194

 

Selling, general and administrative

 

 

2,743

 

 

 

1,368

 

 

 

6,550

 

 

 

6,161

 

Selling, general and administrative affiliate

 

 

1,054

 

 

 

624

 

 

 

2,994

 

 

 

1,842

 

Depreciation

 

 

1,860

 

 

 

1,548

 

 

 

5,319

 

 

 

4,154

 

Amortization

 

 

1,367

 

 

 

1,290

 

 

 

4,060

 

 

 

3,425

 

Total expenses

 

 

13,651

 

 

 

9,892

 

 

 

40,024

 

 

 

29,776

 

Operating income

 

 

39

 

 

 

2,733

 

 

 

1,607

 

 

 

5,553

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on bargain purchase of business

 

 

-

 

 

 

-

 

 

 

-

 

 

 

11,777

 

Equity earnings from unconsolidated affiliate

 

 

2,482

 

 

 

-

 

 

 

7,406

 

 

 

-

 

Other income

 

 

7

 

 

 

-

 

 

 

10

 

 

 

47

 

Interest expense

 

 

(890

)

 

 

(1,456

)

 

 

(2,730

)

 

 

(4,889

)

Total other income (expenses), net

 

 

1,599

 

 

 

(1,456

)

 

 

4,686

 

 

 

6,935

 

Income before income taxes

 

 

1,638

 

 

 

1,277

 

 

 

6,293

 

 

 

12,488

 

Income taxes

 

 

2

 

 

 

3

 

 

 

54

 

 

 

18

 

Net Income

 

 

1,636

 

 

 

1,274

 

 

 

6,239

 

 

 

12,470

 

Less: Net income attributable to preferred units

 

 

-

 

 

 

600

 

 

 

-

 

 

 

1,546

 

Net income attributable to partners’ capital

 

 

1,636

 

 

 

674

 

 

 

6,239

 

 

 

10,924

 

Other comprehensive income

 

 

725

 

 

 

-

 

 

 

285

 

 

 

-

 

Comprehensive income attributable to partners’ capital

 

$

2,361

 

 

$

674

 

 

$

6,524

 

 

$

10,924

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per limited partner unit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common units (basic and diluted)

 

$

0.11

 

 

$

0.09

 

 

$

0.45

 

 

$

1.56

 

Subordinated units (basic and diluted)

 

$

0.11

 

 

$

0.09

 

 

$

0.45

 

 

$

1.56

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2014

 

 

2013

 

Cash flow from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

6,239

 

 

$

12,470

 

Adjustments to reconcile net income to net cash provided by

(used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

5,319

 

 

 

4,154

 

Amortization

 

 

4,060

 

 

 

3,425

 

Gain on bargain purchase of business

 

 

-

 

 

 

(11,777

)

Equity earnings from unconsolidated affiliate, net of distributions

 

 

(108

)

 

 

-

 

Amortization of deferred financing costs

 

 

371

 

 

 

1,639

 

Unit-based compensation

 

 

1,426

 

 

 

-

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(223

)

 

 

(2,665

)

Due from related parties

 

 

(104

)

 

 

231

 

Inventories

 

 

55

 

 

 

(13

)

Other current assets

 

 

(420

)

 

 

(456

)

Other assets

 

 

-

 

 

 

(1,206

)

Accounts payable

 

 

(2,159

)

 

 

3,137

 

Accrued expenses

 

 

562

 

 

 

1,012

 

Due to general partner

 

 

165

 

 

 

4,556

 

Other liabilities

 

 

2,533

 

 

 

(20

)

Net cash provided by operating activities

 

 

17,716

 

 

 

14,487

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(6,103

)

 

 

(10,540

)

Investment in unconsolidated affiliate

 

 

(681

)

 

 

-

 

Net cash paid for acquisitions

 

 

-

 

 

 

(82,000

)

Net cash used in investing activities

 

 

(6,784

)

 

 

(92,540

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Distributions

 

 

(12,870

)

 

 

(946

)

Deferred financing costs

 

 

(251

)

 

 

(3,519

)

Repayments to credit facility

 

 

(25,000

)

 

 

(35,938

)

Proceeds from credit facility

 

 

27,500

 

 

 

118,000

 

Distribution equivalent rights paid on unissued units

 

 

(206

)

 

 

-

 

Net cash (used in) provided by financing activities

 

 

(10,827

)

 

 

77,597

 

Net increase (decrease) in cash and cash equivalents

 

 

105

 

 

 

(456

)

Cash and cash equivalents, beginning of period

 

 

4,454

 

 

 

1,429

 

Cash and cash equivalents, end of period

 

$

4,559

 

 

$

973

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,534

 

 

$

3,497

 

Cash paid for income taxes

 

 

54

 

 

 

18

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Issuance of preferred units

 

 

-

 

 

 

30,000

 

Deemed distributions to preferred units

 

 

-

 

 

 

1,546

 

Increase (Decrease) in purchases of property plant and

    equipment in accounts payable and accrued expenses

 

 

439

 

 

 

(202

)

 

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, 2013

 

$

125,375

 

 

$

101,525

 

 

$

492

 

 

$

227,392

 

Net income

 

 

3,309

 

 

 

2,930

 

 

 

-

 

 

 

6,239

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

285

 

 

 

285

 

Unit-based compensation

 

 

1,426

 

 

 

-

 

 

 

-

 

 

 

1,426

 

Distribution equivalent rights paid on unissued units

 

 

(206

)

 

 

-

 

 

 

-

 

 

 

(206

)

Distributions

 

 

(6,826

)

 

 

(6,044

)

 

 

-

 

 

 

(12,870

)

Partners’ capital at September 30, 2014

 

$

123,078

 

 

$

98,411

 

 

$

777

 

 

$

222,266

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Organization and Initial Public Offering

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

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

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

 

Note 2—Summary of Significant Accounting Policies

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

 

7


 

Basis of Presentation

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

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

Use of Estimates

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

Goodwill

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

 

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

 

 

As of

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Beginning Balance

$

15,162

 

 

$

6,730

 

Goodwill acquired

 

-

 

 

 

8,432

 

Impairment

 

-

 

 

 

-

 

Ending Balance

$

15,162

 

 

$

15,162

 

 

Deferred Rent

 

The Lease Agreement (as defined in “Note 12—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 September 30, 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). Since the Credit Facility has a market rate of interest its carrying amount approximated fair value (Level 2).

 

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

 

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 10—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 and preferred 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.  This guidance will be effective for the Partnership beginning in the first quarter of 2017.

 

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

Note 3—Acquisitions

 

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

2013 Acquisitions

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

 

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

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

 

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

 

Consideration:

 

 

 

Cash paid to seller

$

25,000

 

Debt assumed

 

30,000

 

Preferred units issued

 

30,000

 

Total consideration

$

85,000

 

Allocation of purchase price:

 

 

 

Property and equipment

$

39,242

 

Intangible assets

 

37,326

 

Goodwill

 

8,432

 

Net assets acquired

$

85,000

 

 

10


 

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

 

 

 

Nine Months Ended

 

 

 

September 30, 2013

 

 

 

(unaudited proforma)

 

Total revenues

 

$

36,930

 

Operating income

 

 

9,017

 

Net Income

 

$

15,255

 

Less: Net income attributable to preferred units

 

$

1,800

 

Net income attributable to partners’ capital

 

$

13,455

 

Earnings per unit - Basic:

 

 

 

 

Common and Subordinated

 

$

2.48

 

Earnings per unit - Diluted:

 

 

 

 

Common and Subordinated

 

$

2.04

 

 

Since the acquisition date in February 2013 through September 30, 2013, the acquired GCAC assets earned approximately $13.2 million in revenue and $7.1 million of operating income.

Motiva Enterprises LLC Asset Acquisition

 

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

 

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

 

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

 

Consideration:

 

 

 

Cash paid to seller

$

27,000

 

Allocation of purchase price:

 

 

 

Property and equipment

$

36,749

 

Inventory

 

19

 

Intangible assets

 

2,009

 

Bargain purchase gain

 

(11,777

)

Net assets acquired

$

27,000

 

 

Since the acquisition date in February 2013 through September 30, 2013, the Brooklyn Terminal earned approximately $4.1 million in revenue and $2.4 million of operating income.

 

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

 

11


 

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 September 30, 2014 and December 31, 2013 are represented below (in thousands):

 

Balance at December 31, 2013

$

72,046

 

Equity earnings

 

7,406

 

Contributions

 

681

 

Distributions

 

(7,298

)

Amortization of premium

 

(232

)

Other comprehensive income

 

285

 

Balance at September 30, 2014

$

72,888

 

 

 

Gulf LNG Holdings Acquisition

 

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

 

 

Total

 

2014

$

75

 

2015

 

309

 

2016

 

309

 

2017

 

309

 

2018

 

309

 

Thereafter

 

7,062

 

 

$

8,373

 

 

 

 

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

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Balance sheets

 

 

 

 

 

 

 

Current assets

$

11,506

 

 

$

8,694

 

Noncurrent assets

 

931,137

 

 

 

952,630

 

Total assets

$

942,643

 

 

$

961,324

 

Current liabilities

$

83,501

 

 

$

81,173

 

Long-term liabilities

 

739,341

 

 

 

773,115

 

Member’s equity

 

119,801

 

 

 

107,036

 

Total liabilities and member’s equity

$

942,643

 

 

$

961,324

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Income statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

46,561

 

 

$

46,522

 

 

$

139,682

 

 

$

139,567

 

Total operating costs and expenses

 

14,198

 

 

 

13,434

 

 

 

42,629

 

 

 

42,160

 

Operating income

 

32,363

 

 

 

33,088

 

 

 

97,053

 

 

 

97,407

 

Net income

$

24,097

 

 

$

24,370

 

 

$

71,900

 

 

$

71,027

 

 

 

12


 

Note 5—Property, Plant and Equipment

 

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

 

 

 

As of

 

 

 

September 30,

 

 

December 31,

 

 

 

2014

 

 

2013

 

Land

 

$

51,175

 

 

$

51,175

 

Buildings and site improvements

 

 

36,438

 

 

 

34,660

 

Tanks and trim

 

 

94,666

 

 

 

92,337

 

Machinery and equipment

 

 

34,220

 

 

 

32,819

 

Office furniture and equipment

 

 

2,474

 

 

 

2,334

 

Construction in progress

 

 

5,897

 

 

 

5,003

 

 

 

 

224,870

 

 

 

218,328

 

Less:  Accumulated depreciation

 

 

(22,170

)

 

 

(16,851

)

Property, plant and equipment, net

 

$

202,700

 

 

$

201,477

 

 

 

Note 6—Intangible Assets

 

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

 

 

Estimated

 

As of

 

 

Useful Lives

 

September 30,

 

 

December 31,

 

 

in Years

 

2014

 

 

2013

 

Customer relationships

21

 

$

4,785

 

 

$

4,785

 

Acquired contracts

2-10

 

 

39,900

 

 

 

39,900

 

Noncompete agreements

2-3

 

 

741

 

 

 

741

 

 

 

 

 

45,426

 

 

 

45,426

 

Less:  Accumulated amortization

 

 

 

(10,946

)

 

 

(7,119

)

Intangible assets, net

 

 

$

34,480

 

 

$

38,307

 

 

 

The Partnership’s intangible assets are amortized on a straight-line basis over the expected life of each intangible asset. The estimated future amortization expense is approximately $1.3 million for the remainder of 2014, $4.3 million in 2015, $3.9 million in 2016, $3.9 million in 2017, $3.9 million in 2018 and $17.2 million thereafter.

 

Note 7—Debt

Credit Facility

 

In January 2012, the Partnership entered into a $40.0 million credit facility (the “Terminal Credit Facility”). On November 12, 2013, concurrent with the closing of the IPO, the Partnership amended and restated the Terminal Credit Facility (the “Credit Facility”) with a syndicate of lenders, under which Arc Terminals Holdings LLC, a wholly owned subsidiary of the Partnership (“Arc Terminals Holdings”) is the borrower. The Credit Facility has up to $175.0 million of borrowing capacity. As of September 30, 2014, the Partnership had borrowings of $108.1 million under the Credit Facility at an interest rate of 2.66%. Based on the restrictions under the total leverage ratio covenant, as of September 30, 2014, the Partnership had $29.1 million of available capacity under the Credit Facility.

 

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

 

13


 

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

 

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

 

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

 

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

 

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

 

Terminal Credit Facility

 

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

 

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

 

Note 8—Preferred Units

 

In February 2013, the Partnership, as a part of the GCAC Purchase Price (see “Note 3—Acquisitions”), issued 1,500,000 preferred units to GCAC with a value of $30.0 million. The preferred units ranked senior in liquidation preference and distributions to all existing and outstanding common and subordinated units. The preferred units were entitled to 8% annual distributions, paid 45 days following each calendar quarter, assuming the Partnership remained in compliance with all related covenants in the Terminal Credit Facility. If for any reason the Partnership were to be unable to pay the quarterly distributions on time to the preferred unitholders, the distribution amount would have compounded at an 8% annual interest rate until paid. At the time of the IPO, the Partnership issued 779 common units and 58,426 subordinated units and made a cash distribution of approximately $29.0 million to

14


 

GCAC for the contribution of its preferred units in Arc Terminals to the Partnership. Prior to the IPO, the Partnership recorded the preferred units as mezzanine equity in accordance with ASC Topic 480, “Distinguishing Liabilities from Equity” due to the redeemable nature, at the option of the holders, of the preferred units at a fixed and determinable price based upon certain redemption events which were outside the control of the Partnership. For the three and nine months ended September 30, 2013, the Partnership paid $0.6 million and $0.9 million in cash distributions to the preferred unitholders.

 

Note 9—Partners’ Capital and Distributions

Cash Distributions

 

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

 

 

 

Total Quarterly

 

 

Total Cash

 

 

Date of

 

Unitholders

Quarter Ended

 

Distribution Per Unit

 

 

Distribution

 

 

Distribution

 

Record Date

September 30, 2014

 

$

0.4100

 

 

$

5,309

 

 

November 17, 2014 (1)

 

November 10, 2014 (1)

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

December 31, 2013

 

$

0.2064

 

 

$

2,673

 

 

February 18, 2014 (2)

 

February 10, 2014 (2)

 

 

 

(1) Expected dates as of the filing date.

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

 

Cash Distribution Policy

 

The partnership agreement provides that the General Partner will make a determination no less frequently than 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 has adopted a cash distribution policy that sets forth the General Partner’s intention with respect to the distributions to be made to unitholders. Pursuant to the cash distribution policy, within 60 days after the end of each quarter, the Partnership expects to distribute to the holders of common and subordinated units on a quarterly basis at least the minimum quarterly distribution of $0.3875 per unit, or $1.55 per unit on an annualized basis, to the extent the Partnership has sufficient cash after establishment of cash reserves and payment of fees and expenses, including payments to the General Partner and its affiliates.

 

The board of directors of the General Partner may change the foregoing distribution policy at any time and from time to time, and even if the cash distribution policy is not modified or revoked, the amount of distributions paid under the policy and the decision to make any distribution is determined 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:

15


 

 Total Quarterly

Distribution Per Unit

Target Amount

  

Marginal Percentage
Interest
in Distributions

 

  

Unitholders

 

 

General
Partner

 

above $0.3875 up to $0.4456

  

 

100.0

 

 

0.0

above $0.4456 up to $0.4844

  

 

85.0

 

 

15.0

above $0.4844 up to $0.5813

  

 

75.0

 

 

25.0

above $0.5813

  

 

50.0

 

 

50.0

 

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

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

 

 

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

 

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

 

Note 10—Equity Plans

 

2013 Long-Term Incentive Plan

 

The Board of Directors of the General Partner (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 “Committee”) to administer 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. The Committee also has the ability to grant distribution equivalent rights (“DER”) 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 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 and nine months ended September 30, 2014, the Partnership recorded approximately $0.2 million of unit-based compensation expense with respect to the Director Grants. As of September 30, 2014, the unrecognized unit-based compensation expense for the Director Grants is approximately $2.4 million, which will be recognized ratably over the remaining term of the awards.

 

16


 

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 the three and nine months ended September 30, 2014, the Partnership recorded approximately $1.3 million of unit-based compensation expense with respect to the Employee Equity Grants. As of September 30, 2014, the unrecognized unit-based compensation expense for the Employee Equity Grants was approximately $19.9 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 and nine months ended September 30, 2014, the Partnership recorded less than $0.1 million of unit-based compensation expense with respect to the Employee Liability Grants.  As of September 30, 2014, the unrecognized unit based compensation expense for the Employee Liability Grants was approximately $0.2 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.

 

Subject to applicable earning criteria, the DER included in each Director Grant, Employee Equity Grant and Employee Liability Grant 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 and nine months ended September 30, 2014, 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 $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 and nine months ended September 30, 2014 was $1.4 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 September 30, 2014 was less than $0.1 million.

 

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

 

 

 

Equity Awards

 

 

 

Liability Awards

 

 

Nine Months Ended

 

 

 

Nine Months Ended

 

 

September 30, 2014

 

 

 

September 30, 2014

 

 

Number

 

 

Weighted Avg.

 

 

 

Number

 

 

Weighted Avg.

 

 

 

 

 

 

of Phantom

 

 

Grant Date

 

 

 

of Phantom

 

 

Grant Date

 

 

Fair Value at

 

 

Units

 

 

Fair Value

 

 

 

Units

 

 

Fair Value

 

 

9/30/2014

 

Balance at December 31, 2013

 

-

 

 

$

-

 

 

 

 

-

 

 

$

-

 

 

$

-

 

Granted

 

932,000

 

 

$

25.46

 

 

 

 

7,500

 

 

$

25.46

 

 

$

25.15

 

Vested

 

-

 

 

$

-

 

 

 

 

-

 

 

$

-

 

 

$

-

 

Forfeited

 

(1,500

)

 

$

25.46

 

 

 

 

-

 

 

$

-

 

 

$

-

 

Balance at September 30, 2014

 

930,500

 

 

$

25.46

 

 

 

 

7,500

 

 

$

25.46

 

 

$

25.15

 

 

 

17


 

Note 11—Earnings Per Unit

 

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

 

Diluted net income per unit applicable to limited partners includes the effects of potentially dilutive units on the Partnership’s units. For the three and nine months ended September 30, 2014, the only potentially dilutive units outstanding consisted of the phantom units (see “Note 10—Equity Plans”). For the three and nine months ended September 30, 2013, the only potentially dilutive units outstanding consisted of GCAC’s preferred units (see “Note 8—Preferred Units”).

 

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net Income

 

$

1,636

 

 

$

1,274

 

 

$

6,239

 

 

$

12,470

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution equivalent rights for unissued units

 

 

211

 

 

 

-

 

 

 

417

 

 

 

-

 

Preferred unit distributions

 

 

-

 

 

 

600

 

 

 

-

 

 

 

1,546

 

Earnings attributable to preferred units

 

 

-

 

 

 

125

 

 

 

-

 

 

 

1,408

 

Net income available to limited partners

 

$

1,425

 

 

$

549

 

 

$

5,822

 

 

$

9,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator for basic and diluted earnings per limited partner unit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocation of net income among limited partner interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income allocated to common unitholders

 

$

756

 

 

$

7

 

 

$

3,088

 

 

$

125

 

Net income allocated to subordinated unitholders

 

$

669

 

 

$

542

 

 

$

2,734

 

 

$

9,391

 

Net income allocated to limited partners:

 

$

1,425

 

 

$

549

 

 

$

5,822

 

 

$

9,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic and diluted earnings per limited partner unit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common units - (basic and diluted)

 

 

6,868

 

 

 

80

 

 

 

6,868

 

 

 

80

 

Subordinated units - (basic and diluted)

 

 

6,081

 

 

 

6,023

 

 

 

6,081

 

 

 

6,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per limited partner unit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common - (basic and diluted)

 

$

0.11

 

 

$

0.09

 

 

$

0.45

 

 

$

1.56

 

Subordinated - (basic and diluted)

 

$

0.11

 

 

$

0.09

 

 

$

0.45

 

 

$

1.56

 

 

 

 


18


 

Note 12—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 September 30, 2014  and 2013, the General Partner incurred expenses of $1.1 million and $0.6 million, respectively. For the nine months ended September 30, 2014 and 2013, the General Partner incurred expenses of $3.0 million and $1.8 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 September 30, 2014 and December 31, 2013, the Partnership had a payable of approximately $0.3 million and $0.1 million, respectively, to the General Partner which is reflected as “Due to general partner” in the accompanying unaudited condensed consolidated balance sheets.

 

Registration Rights Agreement

 

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

 

Assignment and Equity Purchase Agreement with GE EFS

 

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

Other Transactions with Related Persons

GCAC Guarantee

 

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

 

Storage and Throughput Agreements with Center Oil

 

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

19


 

at the Baltimore, MD terminal. The storage and throughput fees are calculated monthly based on the terms and conditions of the storage and throughput agreement. The agreement has a one-year term and comes up for renewal in May 2015.

 

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

 

In May 2013, the Partnership entered into an agreement to provide gasoline storage and throughput services to Center Oil at the Brooklyn, NY terminal. The Partnership charges Center Oil a fixed per 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.

Storage and Throughput Agreements with GCAC

 

In February 2013, and in connection with the GCAC Asset Acquisition, the Partnership entered into a storage and throughput agreement (the “GCAC Agreement 1”) with GCAC whereby the Partnership provides storage and throughput services for various petroleum products to GCAC at the acquired storage tanks existing at the time of the GCAC Asset Acquisition 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.

 

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

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Center Oil

$

1,897

 

 

$

1,756

 

 

$

5,363

 

 

$

5,616

 

GCAC

 

464

 

 

 

92

 

 

 

1,390

 

 

 

253

 

Total

$

2,361

 

 

$

1,848

 

 

$

6,753

 

 

$

5,869

 

 

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

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Center Oil

$

511

 

 

$

536

 

GCAC

 

314

 

 

 

186

 

Total

$

825

 

 

$

722

 

 


20


 

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 rents 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 rents 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 September 30, 2014, spending on terminal-related projects totaled approximately $4.4 million.    The base rents will be increased at the end of year five by the change in the consumer price index for the prior five years, and every year thereafter by the greater of two percent or the change in the consumer price index. The base rent is not influenced by the flow of hydrocarbons. Variable rent will result from the flow of hydrocarbons through the Portland Terminal in excess of a designated threshold of 12,500 barrels per day of oil equivalent.  Variable rent is capped at 30% of base rent payments regardless of the level of hydrocarbon throughput.  During the three and nine months ended September 30, 2014, the expense associated with the Lease Agreement was $1.2 million and $2.4 million, respectively.  During the three and nine months ended September 30, 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.

 

Note 13—Major Customers

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

 

 

% of Revenues

 

 

% of Revenues

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

% of Receivables

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Customer A

 

23

%

 

 

2

%

 

 

19

%

 

 

3

%

 

 

42

%

 

 

7

%

Customer B

 

14

%

 

 

14

%

 

 

13

%

 

 

5

%

 

 

9

%

 

 

10

%

Total

 

37

%

 

 

16

%

 

 

32

%

 

 

8

%

 

 

51

%

 

 

17

%

 

 

 


21


 

Note 14—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 September 30, 2014 and December 31, 2013.

 

Commitments and contractual obligations

 

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

 

 

 

Payments Due by Period

 

 

 

Total

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

Thereafter

 

Long-term debt obligations

 

$

108,063

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

108,063

 

 

$

-

 

Operating lease obligations

 

 

31,708

 

 

 

1,484

 

 

 

6,436

 

 

 

6,472

 

 

 

6,342

 

 

 

10,868

 

 

 

106

 

Total

 

$

139,771

 

 

$

1,484

 

 

$

6,436

 

 

$

6,472

 

 

$

6,342

 

 

$

118,931

 

 

$

106

 

 

The schedule above assumes the Partnership will either exercise its Purchase Option or its right to terminate the Lease Agreement.

In April 2014, the members of Gulf LNG Holdings approved spending up to approximately $13.0 million towards the development of a potential natural gas liquefaction and export terminal at the LNG Facility. For the nine months ended September 30, 2014, capital calls totaling $10.0 million were issued to all members of Gulf LNG Holdings, for which the Partnership’s pro rata share was approximately $1.0 million. As of September 30, 2014, the Partnership’s pro rata share of the remaining capital commitment was approximately $0.8 million, of which $0.5 million was paid in October 2014.

In addition to the above, GCAC is able to receive up to an additional $5.0 million in cash earnout payments based upon the throughput activity of one customer through December 31, 2016. As of September 30, 2014, no additional amounts had been paid or are owed to GCAC.

 

Note 15—Subsequent Events

Cash Distribution

In October 2014, the Partnership declared a quarterly cash distribution of $0.41 per unit ($1.64 per unit on an annualized basis) totaling approximately $5.3 million for all common and subordinated units outstanding. The distribution is for the period from July 1, 2014 through September 30, 2014. The third quarter 2014 distribution represents a 2.5% increase over the second quarter 2014 cash distribution of $0.40 per unit ($1.60 per unit on an annualized basis). The distribution is payable on November 17, 2014 to unitholders of record on November 10, 2014.

 


22


 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements and information in this Quarterly Report on Form 10-Q may constitute “forward-looking statements.” The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:

 

adverse regional, national or international economic conditions, adverse capital market conditions or adverse political developments;

changes in the marketplace for our products or services, such as increased competition, better energy efficiency, or general reductions in demand;

changes in the long-term supply and demand of crude oil and petroleum products in the markets in which we operate;

actions taken by our customers, competitors and third party operators;

nonpayment or nonperformance by our customers;

changes in the availability and cost of capital;

unanticipated capital expenditures in connection with the construction, repair, or replacement of our assets;

operating hazards, natural disasters, terrorism, weather-related delays, adverse weather conditions, including hurricanes, natural disasters, environmental releases, casualty losses and other matters beyond our control;

the effects of existing and future laws and governmental regulations to which we are subject, including those that permit the treatment of us as a partnership for federal income tax purposes; and

the effects of future litigation.

For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC.

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.

 

 

 

23


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with our unaudited condensed consolidated financial statements (“interim statements”), including the notes thereto, set forth herein. The following information and such unaudited condensed consolidated financial statements should also be read in conjunction with the audited consolidated financial statements and related notes, together with our discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC. This discussion may contain forward-looking statements that are based on the views and beliefs of our management, as well as assumptions and estimates made by our management. Actual results could differ materially from such forward-looking statements as a result of various risk factors, including those that may not be in the control of management. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly under “Cautionary Statement Regarding Forward-Looking Statements.”

Unless the context clearly indicates otherwise, references in this Quarterly Report on Form 10-Q to “Arc Terminals,” the “Partnership,” “we,” “our,” “us” or similar terms when used for periods prior to November 12, 2013, the closing date of the initial public offering of Arc Logistics Partners LP (the “IPO”), refer to Arc Terminals LP and its subsidiaries, which were contributed to Arc Logistics Partners LP in connection with the IPO, and references to “Arc Logistics,” the “Partnership,” “we,” “our,” “us” or similar terms when used for periods on or after the closing date of the IPO refer to Arc Logistics Partners LP and its subsidiaries. Unless the context clearly indicates otherwise, references to our “General Partner” for periods prior to the closing date of the IPO refer to Arc Terminals GP LLC which owned the general partner interest in Arc Terminals, and references to our “General Partner” for periods on or after the closing date of the IPO refer to Arc Logistics GP LLC, the general partner of Arc Logistics. References to our “Sponsor” or “Lightfoot” refer to Lightfoot Capital Partners, LP and its general partner, Lightfoot Capital Partners GP LLC. References to “GCAC” refer to Gulf Coast Asphalt Company, L.L.C., which contributed its preferred units in Arc Terminals to the Partnership upon the consummation of the IPO. References to “Center Oil” refer to GP&W, Inc., d.b.a. Center Oil, and affiliates, including Center Terminal Company-Cleveland, which contributed its limited partner interests in Arc Terminals to the Partnership upon the consummation of the IPO. References to “Gulf LNG Holdings” refer to Gulf LNG Holdings Group, LLC and its subsidiaries, which own a liquefied natural gas regasification and storage facility in Pascagoula, MS, which is referred to herein as the “LNG Facility.” The Partnership used a portion of the proceeds from the IPO to acquire a 10.3% limited liability company interest in Gulf LNG Holdings, which is referred to herein as the “LNG Interest.”

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

Overview

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

Our primary business objective is to generate stable cash flows that enable us to pay quarterly cash distributions to unitholders and, over time, increase quarterly cash distributions. We intend to achieve this objective by evaluating long-term infrastructure needs in the areas we serve and by growing our network of energy logistics assets through expansion of existing facilities, the construction of new facilities in existing or new markets and strategic acquisitions from our Sponsor and third parties.

Factors That Impact Our Business

The revenues generated by our logistics assets are generally driven by the storage, throughput and transloading capacity under contract. The regional demand for our customers’ products being shipped through our facilities drives the physical utilization of facilities and ultimately the revenues we receive for our services. Though substantially all of our services agreements require customers to enter into take-or-pay arrangements for committed storage or throughput capacity, our revenues can be affected by: (1) the incremental fees that we charge customers to receive and deliver product; (2) the length of any underlying back-to-back supply agreements that our customers have with their respective customers; (3) commodity pricing fluctuations when the existing contracted capacity is recontracted; (4) fluctuations in product volumes to the extent revenues under the contracts are a function of the amount of product transported; (5) inflation adjustments in services agreements; and (6) changes in the demand for ancillary services, such as heating, blending, and mixing our customers’ products between our tanks, railcars and marine operations.

24


 

We believe key factors that influence our business are: (1) the short-term and long-term demand for and supply of crude oil and petroleum products; (2) the indirect impact that changes in crude oil and petroleum product pricing have on the demand and supply of logistics assets; (3) the needs of our customers together with the competitiveness of our service offerings with respect to location, price, reliability and flexibility; (4) current and future economic conditions; (5) potential regulatory implications and/or changes to local, state and federal laws; and (6) our ability and the ability of our competitors to capitalize on growth opportunities and changing market dynamics.

Supply and Demand for Crude Oil and Petroleum Products

Our results of operations are dependent upon the volumes of crude oil and petroleum products we have contracted to store, throughput and transload. An important factor in such contracting is the amount of production and demand for crude oil and petroleum products. The production of and demand for crude oil and petroleum products are driven by many factors, including delivery costs, the price for crude oil and petroleum products, local and regional price dislocations, refining and manufacturing processes, weather/seasonal changes and general economic conditions. An increase or decrease in the demand for crude oil and petroleum products in the areas served by our facilities will have a corresponding effect on (1) the volumes we actually store, throughput and transload and (2) the volumes we contract to store, throughput and transload if we are not able to extend or replace our existing customer contracts.

Prices of Crude Oil and Petroleum Products

Because we do not own any of the crude oil and petroleum products that we handle and do not engage in the marketing of crude oil and petroleum products, we have minimal direct exposure to risks associated with fluctuating commodity prices. However, extended periods of depressed or elevated crude oil and petroleum product prices can lead producers and refiners to increase or decrease production of crude oil and petroleum products, which can impact supply and demand dynamics. Extended periods of depressed or elevated pricing for crude oil and petroleum products can impact our customers’ product movements.

If the future prices of crude oil and petroleum products are substantially higher than the then-current prices, also called market contango, our customers’ demand for excess storage generally increases. If the future prices of crude oil and petroleum products are lower than the then-current prices, also called market backwardation, our customers’ demand for excess storage capacity generally decreases.

Customers and Competition

We provide terminalling, storage, throughput and transloading services for a broad mix of third-party customers, including major oil companies, independent refiners, crude oil and petroleum product marketers, distributors, chemical companies and various manufacturers. In general, the mix of services we provide to our customers varies with the business strategies of our customers, regional economies, market conditions, expectations for future market conditions and the overall competitiveness of our service offerings.

The level of competition varies in the markets in which we operate. We compete with other terminal operators and logistics providers on the basis of rates, terms of service, types of service, supply and market access and flexibility and reliability of service. The competitiveness of our service offerings, including the rates we charge for new contracts or contract renewals, is affected by the availability of storage and rail capacity relative to the overall demand for storage or rail capacity in a given market area and could be significantly impacted by the entry of new competitors into a market in which one of our facilities operates. We believe that significant barriers to entry exist in the crude oil and petroleum products logistics business.

Economic Conditions

In the recent past, world financial markets experienced a severe reduction in the availability of credit. The condition of credit markets may adversely affect our liquidity and the availability of credit. In addition, given the number of parties involved in the exploration, transportation, storage and throughput of crude oil, petroleum products and chemicals, we could experience a tightening of trade credit as a result of our customers’ inability to access their own credit.

Regulatory Environment

The movement and storage of crude oil, petroleum products and chemicals in the United States is highly regulated by local, state and federal governments and governmental agencies. As an energy logistics service provider, in order to remain in compliance with these laws, we could be required to spend incremental capital expenditures or incur additional operating expenses to service our customer commitments, which could impact our business.

25


 

Organic Growth Opportunities

Regional crude oil and petroleum products supply and demand dynamics shift over time, which can lead to rapid and significant changes in demand for logistics services. At such times, we believe the companies that have positioned themselves to provide a complementary suite of logistics assets with organic growth opportunities will have a competitive advantage in capitalizing on the shifting market dynamics. Where feasible, we have designed the infrastructure at our facilities to allow for future expansion. As of September 30, 2014, we had an aggregate of over 90 acres of available land in Blakeley, AL, Mobile, AL, Chillicothe, IL, Baltimore, MD, Selma, NC, Brooklyn, NY, Toledo, OH, Portland, OR and Madison, WI that allows us to increase our rail, marine, truck and/or terminal capacity should either the crude oil or petroleum products market warrant incremental growth opportunities.

Factors Impacting the Comparability of Our Financial Results

Our future results of operations may not be comparable to our historical results of operations for the following reasons:

We anticipate incurring incremental selling, general and administrative (“SG&A”) expenses as a result of being a publicly traded partnership, consisting of expenses associated with SEC reporting requirements, including annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, Sarbanes-Oxley Act compliance, NYSE listing, independent auditor fees, legal fees, investor relations activities, registrar and transfer agent fees, director and officer insurance and director compensation.

Prior to the November 12, 2013 closing of the IPO, the historical consolidated financial statements do not include earnings from the LNG Interest acquired with proceeds from the IPO. We account for the LNG Interest under the equity accounting method.

The acquisition of the Mobile, AL, Saraland, AL and Brooklyn, NY terminals closed in February 2013 and the historical consolidated financial statements do not reflect the full year impact of these acquisitions on earnings.

We completed the construction of the Chickasaw, AL and Saraland, AL crude-by-rail transloading expansion projects in the first quarter of 2013 and the historical consolidated financial statements do not reflect the full year impact of these earnings.

In January 2014, we entered into a triple net operating lease agreement for the use of a petroleum products terminal located in Portland, Oregon together with a supplemental co-terminus triple net operating lease agreement for the use of certain pipeline infrastructure at such terminal (the “Portland Terminal,” and such lease agreements, collectively, the “Lease Agreement”).  The historical consolidated financial statements do not reflect the impact of these revenues and expenses in 2013.

In July 2014, phantom unit awards were granted under our Long Term Incentive Plan (the “2013 Plan”) and the historical consolidated financial statements do not reflect the impact of this expense in 2013 and the full year impact in 2014.

Overview of Our Results of Operations

Our management uses a variety of financial measurements to analyze our performance, including the following key measures: (1) revenues derived from (a) storage and throughput services fees and (b) ancillary services fees; (2) our operating and SG&A expenses; (3) Adjusted EBITDA; and (4) Distributable Cash Flow.

We do not utilize non-cash depreciation and amortization expense in our key measures because we focus our performance management on cash flow generation and our assets have long useful lives. In our period-to-period comparisons of our revenues and expenses set forth below, we analyze the following revenue and expense components:

26


 

Revenues

Our cash flows are primarily generated by fee-based terminalling, storage, throughput and transloading services that we perform under multi-year contracts. A portion of our services agreements are operating under automatic renewal terms that began upon the expiration of the primary contract term. While a portion of our capacity is subject to a one year commitment, historically these customers have continued to renew or expand their business. We generate revenues through the following fee-based services to our customers:

Storage and Throughput Services Fees. We generate revenues from customers who reserve storage, throughput and transloading capacity at our facilities. Our service agreements typically allow us to charge customers a number of activity fees, including for the receipt, storage, throughput and transloading of crude oil and petroleum products. Many of our service agreements contain take-or-pay provisions whereby we generate revenue regardless of customers’ use of the facility.

Ancillary Services Fees. We generate revenues from ancillary services, such as heating, blending and mixing associated with our customers’ activity. The revenues we generate from ancillary services vary based upon customers’ activity levels.

We believe that the high percentage of take-or-pay storage and throughput services fees generated from a diverse portfolio of multi-year contracts, coupled with little exposure to commodity price fluctuations, creates stable cash flow and substantially mitigates our exposure to volatility in supply and demand and other market factors.

We also receive cash distributions from the LNG Interest we acquired on November 12, 2013, which is accounted for using equity method accounting. These distributions are supported by two 20-year, firm reservation charge terminal use agreements for all of the capacity of the LNG Facility that went into commercial operation in October 2011 with several integrated, multi-national oil and gas companies.

While our financial statements separately present revenue from third parties and related parties, we evaluate our business and characterize our revenues as derived from storage and throughput services fees and ancillary services fees.

Operating Expenses

Our management seeks to maximize the profitability of our operations by effectively managing operating expenses. These expenses are comprised primarily of labor expenses, utility costs, additive expenses, insurance premiums, repair and maintenance expenses, health, safety and environmental compliance and property taxes. These expenses generally remain relatively stable across broad ranges of activity levels at our facilities but can fluctuate from period to period depending on the mix of activities performed during that period and the timing of these expenses. We incorporate preventative maintenance programs by scheduling maintenance over time to avoid significant variability in maintenance expenses and minimize their impact on our cash flow.

Selling, General and Administrative Expenses

While our financial statements separately present SG&A expenses and SG&A–affiliate expenses, we evaluate our SG&A expenses as a whole, which primarily consist of compensation of non-operating personnel, employee benefits, transaction costs, reimbursements to our General Partner and its affiliates of SG&A expenses incurred in connection with our operations and expenses of overall administration.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that management and external users of our consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess: (i) the performance of our assets without regard to the impact of financing methods, capital structure or historical cost basis of our assets; (ii) the viability of capital expenditure projects and the overall rates of return on alternative investment opportunities; (iii) our ability to make distributions; (iv) our ability to incur and service debt; (v) our ability to fund capital expenditures; and (vi) our ability to incur additional expenses. We define Adjusted EBITDA as 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.

We believe that the presentation of Adjusted EBITDA provides useful information to investors in assessing our financial condition and results of operations. The GAAP measure most directly comparable to Adjusted EBITDA is net income. Adjusted EBITDA should not be considered as an alternative to net income. Adjusted EBITDA has important limitations as an analytical tool because it excludes some but not all items that affect net income. You should not consider Adjusted EBITDA in isolation or as a substitute for analysis of our results as reported under GAAP. Additionally, because Adjusted EBITDA may be defined differently by other companies in our industry, our definition of Adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.

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Distributable Cash Flow

Distributable Cash Flow is a non-GAAP financial measure that management and external users of our consolidated financial statements may use to evaluate whether we are generating sufficient cash flow to support distributions to our unitholders as well as measure the ability of our assets to generate cash sufficient to support our indebtedness and maintain our operations.  We define Distributable Cash Flow as 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.

The GAAP measure most directly comparable to Distributable Cash Flow is net income. Distributable Cash Flow should not be considered as an alternative to net income. You should not consider Distributable Cash Flow in isolation or as a substitute for analysis of our results as reported under GAAP. Additionally, because Distributable Cash Flow may be defined differently by other companies in our industry, our definition of Distributable Cash Flow may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.

 

The following table presents a reconciliation of Adjusted EBITDA and Distributable Cash Flow to net income for each of the periods indicated (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net Income

 

$

1,636

 

 

$

1,274

 

 

$

6,239

 

 

$

12,470

 

Income taxes

 

 

2

 

 

 

3

 

 

 

54

 

 

 

18

 

Interest expense

 

 

890

 

 

 

1,456

 

 

 

2,730

 

 

 

4,889

 

Gain on bargain purchase of business

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(11,777

)

Depreciation

 

 

1,860

 

 

 

1,548

 

 

 

5,319

 

 

 

4,154

 

Amortization

 

 

1,367

 

 

 

1,290

 

 

 

4,060

 

 

 

3,425

 

One-time transaction expenses (a)

 

 

-

 

 

 

374

 

 

 

451

 

 

 

3,666

 

Non-cash charges (b)

 

 

1,910

 

 

 

-

 

 

 

3,943

 

 

 

-

 

Adjusted EBITDA

 

$

7,665

 

 

$

5,945

 

 

$

22,796

 

 

$

16,845

 

Cash interest expense

 

 

(819

)

 

 

 

 

 

 

(2,534

)

 

 

 

 

Cash income taxes

 

 

(2

)

 

 

 

 

 

 

(54

)

 

 

 

 

Maintenance capital expenditures

 

 

(625

)

 

 

 

 

 

 

(1,802

)

 

 

 

 

Equity earnings from the LNG Interest

 

 

(2,482

)

 

 

 

 

 

 

(7,406

)

 

 

 

 

Cash distributions received from the LNG Interest

 

 

2,704

 

 

 

 

 

 

 

7,298

 

 

 

 

 

Distributable Cash Flow

 

$

6,441

 

 

 

 

 

 

$

18,298

 

 

 

 

 

 

 

 

(a)

The one-time transaction expenses for 2013 relate to the due diligence and transaction expenses associated with the purchase of the Mobile, AL, Saraland, AL and Brooklyn, NY facilities; for 2014, such expenses relate to the execution of the Lease Agreement.

 

(b)

For the three months ended September 30, 2014, the non-cash charges were comprised of $0.5 million of deferred rent expense associated with the accounting treatment of the Portland Terminal lease transaction and $1.4 million of amortization for the unit-based compensation. For the nine months ended September 30, 2014, the non-cash charges were comprised of $2.5 million of deferred rent expense associated with the accounting treatment of the Portland Terminal lease transaction and $1.4 million of amortization for the unit-based compensation.

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Results of Operations

The following table and discussion is a summary of our results of operations for the three and nine months ended September 30, 2014 and 2013 (in thousands, except operating data):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third-party customers

 

$

11,329

 

 

$

10,777

 

 

$

34,878

 

 

$

29,460

 

Related parties

 

 

2,361

 

 

 

1,848

 

 

 

6,753

 

 

 

5,869

 

 

 

 

13,690

 

 

 

12,625

 

 

 

41,631

 

 

 

35,329

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

6,627

 

 

 

5,062

 

 

 

21,101

 

 

 

14,194

 

Selling, general and administrative

 

 

2,743

 

 

 

1,368

 

 

 

6,550

 

 

 

6,161

 

Selling, general and administrative - affiliate

 

 

1,054

 

 

 

624

 

 

 

2,994

 

 

 

1,842

 

Depreciation

 

 

1,860

 

 

 

1,548

 

 

 

5,319

 

 

 

4,154

 

Amortization

 

 

1,367

 

 

 

1,290

 

 

 

4,060

 

 

 

3,425

 

Total expenses

 

 

13,651

 

 

 

9,892

 

 

 

40,024

 

 

 

29,776

 

Operating income

 

 

39

 

 

 

2,733

 

 

 

1,607

 

 

 

5,553

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on bargain purchase of business

 

 

-

 

 

 

-

 

 

 

-

 

 

 

11,777

 

Equity earnings from unconsolidated affiliate

 

 

2,482

 

 

 

-

 

 

 

7,406

 

 

 

-

 

Other income

 

 

7

 

 

 

-

 

 

 

10

 

 

 

47

 

Interest expense

 

 

(890

)

 

 

(1,456

)

 

 

(2,730

)

 

 

(4,889

)

Total other income (expenses), net

 

 

1,599

 

 

 

(1,456

)

 

 

4,686

 

 

 

6,935

 

Income before income taxes

 

 

1,638

 

 

 

1,277

 

 

 

6,293

 

 

 

12,488

 

Income taxes

 

 

2

 

 

 

3

 

 

 

54

 

 

 

18

 

Net Income

 

 

1,636

 

 

 

1,274

 

 

 

6,239

 

 

 

12,470

 

Less: Net income attributable to preferred units

 

 

-

 

 

 

600

 

 

 

-

 

 

 

1,546

 

Net income attributable to partners' capital

 

$

1,636

 

 

$

674

 

 

$

6,239

 

 

$

10,924

 

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$

7,665

 

 

$

5,945

 

 

$

22,796

 

 

$

16,845

 

Distributable Cash Flow

 

$

6,441

 

 

 

 

 

 

$

18,298

 

 

 

 

 

Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Storage capacity (bbls)

 

 

6,425,100

 

 

 

4,959,100

 

 

 

6,425,100

 

 

 

4,959,100

 

Throughput (bpd)

 

 

64,806

 

 

 

76,499

 

 

 

71,788

 

 

 

71,353

 

 

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

Storage Capacity. Storage capacity for the three months ended September 30, 2014 increased by 1.5 million bbls, or 30%, compared to the three months ended September 30, 2013. The increase was due to the procurement of storage capacity associated with the Portland Terminal lease transaction.

Throughput Activity. Throughput activity for the three months ended September 30, 2014 decreased by 11.7 mbpd, or 15%, compared to the three months ended September 30, 2013.  The decrease was due to reduced customer activity and the expiration of customer agreements in Baltimore, MD, Blakeley, AL, Brooklyn, NY, Chickasaw, AL, Mobile, AL, Norfolk, VA and Saraland, AL offset by the execution of new customer agreements and increased customer activity in Baltimore, MD, Cleveland, OH, Mobile, AL and Selma, NC, and the addition of the Portland Terminal.

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Revenues. The following table details the types and amounts of revenues generated during the three months ended September 30, 2014 and 2013 (in thousands, except percentages).

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

2013

 

 

$ Change

 

 

% Change

 

Storage and throughput services fees

 

$

11,654

 

 

$

11,053

 

 

$

601

 

 

 

5

%

Ancillary services fees

 

 

2,036

 

 

 

1,572

 

 

 

464

 

 

 

30

%

Total revenues

 

$

13,690

 

 

$

12,625

 

 

$

1,065

 

 

 

8

%

 

Revenues for the three months ended September 30, 2014 increased by $1.1 million, or 8%, compared to the three months ended September 30, 2013.  The $0.6 million, or 5%, increase in storage and throughput services fees was the result of the execution of new short-term customer agreements in Blakeley, AL and Cleveland, OH and customer activity at the new Portland Terminal offset by reduced customer activity and the expiration of customer agreements in Baltimore, MD, Blakeley, AL, Brooklyn, NY, Chickasaw, AL, Mobile, AL, Norfolk, VA and Saraland, AL.  The $0.5 million, or 30%, increase in ancillary services fees was driven by additional services provided to our customers in the Blakeley, AL, Chickasaw, AL, Mobile, AL and Saraland, AL facilities and the new Portland Terminal.

 

Operating Expenses. Operating expenses for the three months ended September 30, 2014 increased by $1.6 million, or 31%, compared to the three months ended September 30, 2013. The $1.6 million increase in operating expenses was the result of an additional $2.4 million of operating expenses related to the new Portland Terminal, offset by a reduction of $0.8 million in contract labor in Blakeley, AL, Chickasaw, AL and Saraland, AL and the elimination of $0.1 million in tank rental expense for a customer in Mobile, AL. The $2.4 million of operating expenses in Portland, OR includes $1.6 million in expenses associated with the Portland Terminal lease, of which $0.5 million is deferred rent expense.

 

Selling, General and Administrative Expenses.  SG&A expenses for the three months ended September 30, 2014 increased by $1.8 million, or 91%, compared to the three months ended September 30, 2013.  The increase in SG&A expense was due to $1.6 million of unit-based compensation associated with the 2013 Plan, expenses associated with being a public company, including professional fees and allocations from our General Partner, of $0.7 million, offset by a reduction of one-time transaction related expenses of $0.4 million.

 

Depreciation and Amortization Expense. Depreciation expense for the three months ended September 30, 2014 increased by $0.3 million, or 20%, compared to the three months ended September 30, 2013, primarily due to the impact of the 2013 capital expenditures program.  Amortization expense for the three months ended September 30, 2014 increased by $0.1 million, or 6%, compared to the three months ended September 30, 2013, due to the amortization of the LNG Interest.

 

Equity Earnings from Unconsolidated Affiliate. At the closing of the IPO in November 2013, we acquired the LNG Interest. We account for the LNG Interest under the equity method of accounting. For the three months ended September 30, 2014, we recorded equity earnings of $2.5 million.

 

Interest Expense. Interest expense for the three months ended September 30, 2014 decreased by $0.6 million, or 39%, compared to the three months ended September 30, 2013. The reduction in interest expense was related to the impact of lower interest rates due to the amendment and restatement of the Terminal Credit Facility in November 2013 and a reduction in outstanding indebtedness from $112.6 million to $108.1 million.

 

Net Income. Net income for the three months ended September 30, 2014 increased by $0.4 million, or 28%, compared to the three months ended September 30, 2013, related to the equity earnings from the LNG Interest of $2.5 million, a reduction in one-time transaction related expenses of $0.4 million and a decrease in interest expense of $0.6 million, offset by $1.6 million of rent expense associated with the Portland Terminal lease and $1.6 million of unit-based compensation associated with the 2013 Plan.

 

Adjusted EBITDA. Adjusted EBITDA for the three months ended September 30, 2014 increased by $1.7 million, or 29%, compared to the three months ended September 30, 2013.  The increase in Adjusted EBITDA was driven by customer activity in the new Portland Terminal, the impact of the expansion projects completed in 2013 and the execution of new customer agreements in Blakeley, AL, Cleveland, OH, Brooklyn, NY and Selma, NC offset by expiring customer agreements in Baltimore, MD and Saraland, AL.

30


 

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

 

Storage Capacity. Storage capacity for the nine months ended September 30, 2014 increased by 1.5 million bbls, or 30%, compared to the nine months ended September 30, 2013. The increase was due to the procurement of storage capacity associated with the Portland Terminal lease transaction.

 

Throughput Activity. Throughput activity for the nine months ended September 30, 2014 increased by 0.4 mbpd, or 1%, compared to the nine months ended September 30, 2013. The increase was principally due to the acquisition of the Mobile, AL and Brooklyn, NY facilities in February 2013, increased and new customer activity in the Cleveland, OH, Portland, OR, Selma, NC and Spartanburg, SC facilities, offset by reduced customer activity in the Baltimore, MD, Blakeley, AL, Chickasaw, AL, Mobile, AL and Saraland, AL facilities.

 

Revenues. The following table details the types and amounts of revenues generated during the nine months ended September 30, 2014 and 2013 (in thousands, except percentages).

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

2013

 

 

$ Change

 

 

% Change

 

Storage and throughput services fees

 

$

35,754

 

 

$

30,999

 

 

$

4,755

 

 

 

15

%

Ancillary services fees

 

 

5,877

 

 

 

4,330

 

 

 

1,547

 

 

 

36

%

Total revenues

 

$

41,631

 

 

$

35,329

 

 

$

6,302

 

 

 

18

%

 

Revenues for the nine months ended September 30, 2014 increased by $6.3 million, or 18%, compared to the nine months ended September 30, 2013. The $4.8 million, or 15%, increase in storage and throughput services fees was the result of the acquisition of the Mobile, AL and Brooklyn, NY facilities in February 2013, new customer activity in Portland, OR, and the execution of new commercial agreements in Brooklyn, NY, Cleveland, OH and Selma, NC. The $1.5 million, or 36%, increase in ancillary services fees was driven by the acquisition of the Mobile, AL and Saraland, AL facilities in February 2013, additional services provided to our customers in the Blakeley, AL and Saraland, AL facilities and other ancillary services provided to customers at both our refined and heavy products terminals.

 

Operating Expenses. Operating expenses for the nine months ended September 30, 2014 increased by $6.9 million, or 49%, compared to the nine months ended September 30, 2013. The $6.9 million increase in operating expenses was the result of $7.2 million of operating expenses in the Portland Terminal, $1.0 million due to the acquisition of the Mobile, AL and Brooklyn NY facilities in February 2013 and $0.9 million of insurance expense partially offset by a $1.9 million reduction in contract labor in Blakeley, AL, Chickasaw, AL and Saraland, AL and the elimination of $0.3 million in tank rental expense for a customer in Mobile, AL. The $7.2 million of operating expenses associated with the Portland Terminal includes $4.9 million in expenses associated with the Portland Terminal lease, of which $2.5 million is related to deferred rent expense.

 

Selling, General and Administrative Expenses. SG&A expenses for the nine months ended September 30, 2014 increased by $1.5 million, or 19%, compared to the nine months ended September 30, 2013. The increase in SG&A expense was related to an increase in public company expenses including professional fees and allocations from our General Partner of $2.3 million and $1.6 million of unit-based compensation relating to the 2013 Plan, offset by a reduction in one-time transaction and due diligence related expenses of $2.4 million.

 

Depreciation and Amortization Expense. Depreciation expense for the nine months ended September 30, 2014 increased by $1.2 million, or 28%, compared to the nine months ended September 30, 2013, primarily due to the acquisition of the Mobile, AL, Saraland, AL and Brooklyn, NY facilities in February 2013 and the impact of the 2013 capital expenditures program.  Amortization expense for the nine months ended September 30, 2014 increased by $0.6 million, or 19%, compared to the nine months ended September 30, 2013, primarily due to the acquisition of the Mobile, AL and Brooklyn, NY terminals in February 2013 and the amortization of the LNG Interest, partially offset by the full amortization of the long-term contracts at our Chickasaw, AL and Blakeley, AL terminals, which were acquired in 2010.

 

Gain on Bargain Purchase of Business. As part of the purchase price allocation for the Brooklyn, NY terminal acquisition in 2013, it was determined that the fair value of the assets acquired exceeded the purchase price resulting in a one-time gain of approximately $11.8 million.

 

Equity Earnings from Unconsolidated Affiliate. At the closing of the IPO in November 2013, we acquired the LNG Interest. We account for the LNG Interest under the equity method of accounting. For the nine months ended September 30, 2014, we recorded equity earnings of $7.4 million.

31


 

Interest Expense. Interest expense for the nine months ended September 30, 2014 decreased by $2.2 million, or 44%, compared to the nine months ended September 30, 2013. The reduction in interest expense was related to the write-off of deferred financing fees in February 2013 due to the amendment of the Terminal Credit Facility and the impact of lower interest rates due to the amendment and restatement of the Terminal Credit Facility in November 2013.

 

Net Income. Net income for the nine months ended September 30, 2014 decreased by $6.2 million, or 50%, compared to the nine months ended September 30, 2013, primarily related to the $4.9 million of rent expense associated with the Portland Terminal lease, a decrease in gain on bargain purchase of business of $11.8 million and $1.6 million of unit-based compensation associated with the 2013 Plan, offset by a reduction in one-time transaction and due diligence related expenses of $2.4 million, new customer activity in Portland, OR, a full period of operating results for the Mobile, AL, Saraland, AL and Brooklyn, NY acquisitions completed in February 2013, equity earnings from the LNG Interest of $7.4 million and a decrease in interest expense of $2.2 million.

 

Adjusted EBITDA. Adjusted EBITDA for the nine months ended September 30, 2014 increased by $6.0 million, or 35%, compared to the nine months ended September 30, 2013. The increase in Adjusted EBITDA was primarily attributable to three full quarters of operating results for the Mobile, AL, Saraland, AL and Brooklyn, NY acquisitions completed in February 2013, new commercial activity in Portland, OR, the impact of the expansion projects completed in 2013 and the execution of customer agreements in Blakeley, AL, Brooklyn, NY, Cleveland, OH and Selma, NC.

Liquidity and Capital Resources

Liquidity

 

Our principal liquidity requirements are to finance current operations, fund capital expenditures, including acquisitions from time to time, service our debt and pay distributions to our partners. Our sources of liquidity include cash generated by our operations, borrowings under our Credit Facility and issuances of equity and debt securities. We believe that cash generated from these sources will be sufficient to meet our short-term working capital requirements and long-term capital expenditure requirements. Please read “—Cash Flows” and “—Capital Expenditures” for a further discussion of the impact on liquidity.

 

We intend to pay a quarterly distribution of $0.41 per common unit and subordinated unit per quarter, which equates to $5.3 million per quarter, or $21.2 million per year, based on the number of common and subordinated units outstanding as of September 30, 2014. Maintaining this level of distribution is dependent on our ability to generate sufficient cash from our operations after establishment of cash reserves and payment of fees and expenses, including payments to our General Partner and its affiliates. We do not have a legal obligation to pay this distribution.

 

Credit Facility

 

In January 2012, we entered into a $40.0 million revolving credit facility (the “Terminal Credit Facility”). The Terminal Credit Facility had an initial three-year term and bore interest based upon the London Interbank Offered Rate (“LIBOR”). In February 2013, concurrent with the financing of the acquisitions of the Mobile, AL, Saraland, AL and Brooklyn, NY facilities, we amended the Terminal Credit Facility to include a $65.0 million term loan and a $65.0 million revolving line of credit. As amended, the Terminal Credit Facility had an initial three-year term and bore interest based upon either the base rate or LIBOR, in each case, plus an applicable margin. Prior to the closing of the IPO, the outstanding balance on the amended Terminal Credit Facility was $112.6 million at an interest rate of 4.17%.

 

Concurrent with the closing of the IPO, we amended and restated the Terminal Credit Facility (the “Credit Facility”) with a syndicate of lenders, under which Arc Terminals Holdings is the borrower.  The Credit Facility matures on November 12, 2018 and has up to $175.0 million of borrowing capacity.  As of September 30, 2014, we had borrowings of $108.1 million under the Credit Facility at an interest rate of 2.66%.  Based on the restrictions under our total leverage ratio covenant, as of September 30, 2014, we had $29.1 million of available capacity under the Credit Facility.

 

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

32


 

Loans under the Credit Facility bear interest at a floating rate based upon our leverage ratio, equal to, at our option, either (a) a base rate plus a range from 100 to 200 basis points per annum or (b) a LIBOR rate, plus a range of 200 to 300 basis points. The base rate is established as the highest of (i) the rate which SunTrust Bank announces, from time to time, as its prime lending rate, (ii) the daily one-month LIBOR plus 100 basis points per annum and (iii) the federal funds rate plus 0.50% per annum. The unused portion of the Credit Facility is subject to a commitment fee calculated based upon our 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 September 30, 2014, the Partnership was in compliance with such covenants. The negative covenants include restrictions on our 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 us to maintain a leverage ratio of not more than 4.50 to 1.00, which may increase to up to 5.00 to 1.00 during specified periods following a permitted acquisition or issuance of over $200.0 million of senior notes, and a minimum interest coverage ratio of not less than 2.50 to 1.00. If we issue over $200.0 million of senior notes, we will be subject to an additional financial covenant pursuant to which our 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, we and our subsidiaries have entered into certain customary ancillary agreements and arrangements, which, among other things, provide that the indebtedness, obligations and liabilities arising under or in connection with the facility are unconditionally guaranteed by us and each of our existing subsidiaries (other than the borrower) and each of our future restricted subsidiaries.

Amendment to Credit Agreement

 

In January 2014, in connection with the Lease Agreement, Arc Terminals Holdings LLC, a wholly owned subsidiary of us (“Arc Terminals Holdings”), as borrower, and Arc Logistics and its other subsidiaries, as guarantors, entered into the first amendment (the “First Amendment”) to the Credit Facility agreement. The First Amendment principally modified certain provisions of the Credit Facility agreement to allow Arc Terminals Holdings to enter into the Lease Agreement relating to the use of the Portland Terminal.

 

Cash Flows

A summary of the changes in cash flow data is provided as follows (in thousands, except percentages):

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

2013

 

 

$ Change

 

 

% Change

 

Net cash flows provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

17,716

 

 

$

14,487

 

 

$

3,229

 

 

 

22

%

Investing activities

 

 

(6,784

)

 

 

(92,540

)

 

 

85,756

 

 

 

93

%

Financing activities

 

 

(10,827

)

 

 

77,597

 

 

 

(88,424

)

 

 

-114

%

 

Cash Flow from Operating Activities. Operating activities primarily consist of net income adjusted for non-cash items, including depreciation and amortization and the effect of working capital changes. Net cash provided by operating activities was $17.7 million for the nine months ended September 30, 2014 compared to $14.5 million for the nine months ended September 30, 2013. This $3.2 million increase across periods was primarily attributable to a $7.3 million increase in distributions from our unconsolidated affiliate, partially offset by a $4.2 million increase of cash used in working capital. Cash used by changes in working capital of $4.2 million across the comparable periods was primarily due to the changes of cash used in accounts receivable, other assets, and amounts due to our General Partner of $2.3 million, $1.2 million and $4.4 million, respectively, partially offset by cash provided by changes in due from related parties, accounts payable, accrued expenses and other liabilities of $0.2 million, $5.3 million, $0.5 million and $2.5 million, respectively.

33


 

Cash Flow from Investing Activities. Investing activities consist primarily of capital expenditures for expansion and maintenance as well as property and equipment divestitures. Net cash used in investing activities was $6.8 million for the nine months ended September 30, 2014, of which $0.7 million related to the capital calls by Gulf LNG Holdings for its development of a natural gas liquefaction and export terminal at the LNG Facility. Net cash used in investing activities was $92.5 million for the nine months ended September 30, 2013 primarily for the purchase of the Mobile, AL, Saraland, AL and Brooklyn, NY facilities in February 2013 in addition to capital spending related to the construction and improvements of our Blakeley, AL, Chickasaw, AL and Saraland, AL facilities.

 

Cash Flow from Financing Activities. Financing activities consist primarily of borrowings and repayments related to the Terminal Credit Facility and Credit Facility, the related deferred financing costs and distributions to our investors. Net cash flows used in financing activities was $10.8 million for the nine months ended September 30, 2014, compared to net cash flows provided by financing activities of $77.6 million for the nine months ended September 30, 2013. This $88.4 million decrease was primarily attributable to a net decrease in borrowings of $79.6 million during the nine months ended September 30, 2014 and an increase in distributions to our investors of $11.9 million, offset by a decrease in deferred financing costs of $3.3 million.

Contractual Obligations

 

We have contractual obligations that are required to be settled in cash. Our contractual obligations as of September 30, 2014 were as follows (in thousands):

 

 

 

Payments Due by Period

 

 

 

 

 

 

 

Less than

 

 

1-3

 

 

3-5

 

 

More than

 

 

 

Total

 

 

1 year

 

 

years

 

 

years

 

 

5 years

 

Long-term debt obligations

 

$

108,063

 

 

$

-

 

 

$

-

 

 

$

108,063

 

 

$

-

 

Operating lease obligations

 

 

31,708

 

 

 

6,303

 

 

 

12,845

 

 

 

12,549

 

 

 

11

 

Total

 

$

139,771

 

 

$

6,303

 

 

$

12,845

 

 

$

120,612

 

 

$

11

 

 

Capital Expenditures

 

The terminalling and storage business is capital-intensive, requiring significant investment for the maintenance of existing assets and the acquisition or development of new facilities. We categorize our capital expenditures as either:

maintenance capital expenditures, which are cash expenditures made to maintain our long-term operating capacity or operating income; or

expansion capital expenditures, which are cash expenditures incurred for acquisitions or capital improvements that we expect will increase our operating capacity or operating income over the long term.

 

We incurred maintenance and expansion capital expenditures for the three and nine months ended September 30, 2014 and 2013 as set forth in the following table (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Maintenance capital expenditures

 

$

625

 

 

$

829

 

 

$

1,802

 

 

$

1,512

 

Expansion capital expenditures

 

 

808

 

 

 

2,649

 

 

 

4,740

 

 

 

91,230

 

Total capital expenditures

 

$

1,433

 

 

$

3,478

 

 

$

6,542

 

 

$

92,742

 

 

Maintenance Capital Expenditures

 

Maintenance capital typically consists of capital invested to: (i) clean, inspect and repair storage tanks; (ii) clean and paint tank exteriors; (iii) inspect and upgrade vapor recovery/combustion units; (iv) upgrade fire protection systems; (v) evaluate certain facilities regulatory programs; (vi) inspect and repair cathodic protection systems; (vii) inspect and repair tank infrastructure; and (vi) make other general facility repairs as required. Due to the nature of these projects we will incur additional capital expenditures in some years as compared to others.  The decrease during the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 was due to the completion of tank inspections and repairs in the Mobile, AL terminal in 2013.  The increase during the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 was related to maintenance projects in Blakeley, AL, Norfolk, VA, Portland, OR and Toledo, OH, offset by the completion of tank repair projects in Cleveland, OH in 2013.

34


 

Expansion Capital Expenditures

 

During the three and nine months ended September 30, 2014, we invested capital to: (i) complete the fuel oil tank system and asphalt tank system in Mobile, AL for customer expansion opportunities; (ii) install a permanent boiler system in the Chickasaw, AL terminal; (iii) upgrade the marine infrastructure and truck rack in Cleveland, OH in connection with a new customer agreement; (iv) upgrade a tank in Blakeley, AL and Chickasaw, AL for new and existing customer agreements; and (v) complete carryover projects from 2013.

 

During the three and nine months ended September 30, 2013, we invested capital to: (i) acquire the Mobile, AL, Saraland, AL and Brooklyn, NY terminals; (ii) construct 150,000 bbls of storage capacity in Mobile, AL; (iii) expand rail infrastructure in Chickasaw, AL and Saraland, AL; (iv) expand the Blakeley, AL dock to service Aframax capable vessels; and (v) enhance the Blakeley, AL tank infrastructure to handle heated petroleum products.

 

Our capital funding requirements were funded from borrowings under the Terminal Credit Facility, Credit Facility and cash from operations. We anticipate that maintenance capital expenditures will be funded primarily with cash from operations or with borrowings under our Credit Facility. We generally intend to fund the capital required for expansion capital expenditures through borrowings under our Credit Facility and the issuance of equity and debt securities, but in certain instances we may fund expansion capital with cash from operations.

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

 

In addition to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013, the Partnership considers the accounting principles surrounding unit-based awards with performance conditions granted under the 2013 Plan to be a critical accounting policy and significant estimate.  Unit-based awards with performance conditions were first issued under the 2013 Plan in July 2014.  The Partnership must make significant estimates and judgments in regards to the probability of achieving the performance vesting requirements applicable to unit-based awards with performance conditions, and the expense attributable to such awards is accrued over the service period only if the performance condition is considered to be probable of occurring.  Actual results may differ from the estimates made under different assumptions or conditions.  If 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 2—Summary of Significant Accounting Policies—Unit Based Compensation” and “Note 10—Equity Plans” to our condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q).

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The following market risk disclosures should be read in conjunction with the quantitative and qualitative disclosures about market risk contained in our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC. Market risk is the risk of loss arising from adverse changes in market rates and prices. We do not take title to the crude oil and petroleum products that we handle and store. We do not intend to hedge our indirect exposure to commodity risk.

 

Interest Rate Risk

 

We will have exposure to changes in interest rates on our indebtedness. As of September 30, 2014, we had $108.1 million of outstanding borrowings under the Credit Facility, bearing interest at variable rates. The weighted average interest rate incurred on the indebtedness during the three and nine months ended September 30, 2014 was approximately 3.0% and 3.1%, respectively. The impact of a 1% increase in the interest rate on this amount of debt would have resulted in an estimated $0.3 million increase and a $0.8 million increase in interest expense for the three and nine months ended September 30, 2014, respectively, assuming that our indebtedness remained constant throughout the year. We may use certain derivative instruments to hedge our exposure to variable interest rates in the future, but we do not currently have in place any hedges.

 

35


 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we have evaluated, under the supervision and with the participation of management of our General Partner, including our General Partner’s principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our General Partner’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon that evaluation, our General Partner’s principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2014 at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2014 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

 

Although we may, from time to time, be involved in various legal claims arising out of our operations in the normal course of business, we do not believe that the resolution of these matters will have a material adverse impact on our financial condition or results of operations.

Item 1A. Risk Factors

 

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risks under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 10-K”). There has been no material change in our risk factors from those described in the 2013 10-K. These risks are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.

Item 6. Exhibits

 

The information required by this Item 6 is set forth in the Index to Exhibits accompanying this Quarterly Report on Form 10-Q and is incorporated herein by reference.

 

 

 

36


 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

ARC LOGISTICS PARTNERS LP

 

 

 

 

 

By:

 

ARC LOGISTICS GP LLC, its General Partner

 

 

 

Date: November 13, 2014

 

By:

 

/s/ BRADLEY K. OSWALD

 

 

 

 

Bradley K. Oswald

 

 

 

 

Senior Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer and Duly Authorized Officer)

 

 

 

 

37


 

EXHIBIT INDEX

 

Exhibit No.

 

Description

 

 

 

2.1

 

Membership Interests Purchase Agreement, dated January 14, 2014, by and among Lightfoot Capital Partners, L.P., CorEnergy Infrastructure Trust, Inc. and Arc Terminals Holdings LLC (incorporated herein by reference to Exhibit 2.1 of Arc Logistics Partners LP’s Current Report on Form 8-K filed on January 14, 2014 (SEC File No. 001-36168)).

 

 

 

3.1

 

Certificate of Limited Partnership of Arc Logistics Partners LP (incorporated herein by reference to Exhibit 3.1 to Amendment No. 1 to Arc Logistics Partners LP’s Registration Statement on Form S-1 filed on October 21, 2013 (SEC File No. 333-191534)).

 

 

 

3.2

 

First Amended and Restated Agreement of Limited Partnership of Arc Logistics Partners LP, dated November 12, 2013, by and among Arc Logistics GP LLC, Lightfoot Capital Partners, LP and Lightfoot Capital Partners GP LLC (incorporated herein by reference to Exhibit 3.1 of Arc Logistics Partners LP’s Current Report on Form 8-K filed on November 12, 2013 (SEC File No. 001-36168)).

 

 

 

10.1

 

Form of Phantom Unit Award Agreement (Employees) under the Arc Logistics Long Term Incentive Plan (incorporated herein by reference to Exhibit 10.1 of Arc Logistics Partners LP’s Current Report on Form 8-K filed on July 21, 2014 (SEC File No. 001-36168)).

 

 

 

10.2

 

Form of Phantom Unit Award Agreement (Directors) under the Arc Logistics Long Term Incentive Plan (incorporated herein by reference to Exhibit 10.2 of Arc Logistics Partners LP’s Current Report on Form 8-K filed on July 21, 2014 (SEC File No. 001-36168)).

 

 

 

31.1*

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2*

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1**

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2**

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS*

 

XBRL Instance Document.

 

 

 

101.SCH*

 

XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

 

 

 

*

Filed herewith

**

Furnished herewith

 

38