UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2015

Or

For the transition period from              to             

Commission File Number: 001-36168

ARC LOGISTICS PARTNERS LP

(Exact name of registrant as specified in its charter)

 

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.

 

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

As of May 4, 2015, there were 6,867,950 common units and 6,081,081 subordinated units outstanding.

 

 

 

 

 

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ARC LOGISTICS PARTNERS LP

TABLE OF CONTENTS

 

 

 

 

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GLOSSARY OF TERMS

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

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

bpd:  Barrels per day.

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

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

GAAP:    Generally accepted accounting principles in the United States.

JOBS Act:    Jumpstart Our Business Startups Act.

LNG:     Liquefied natural gas.

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

mbpd:    One thousand barrels per day.

NYSE:     New York Stock Exchange.

PCAOB:    Public Company Accounting Oversight Board.

 

SEC:    U.S. Securities and Exchange Commission.

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

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

 

 

 

 

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PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

ARC LOGISTICS PARTNERS LP

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except unit amounts)

(Unaudited)

 

 

 

 

 

 

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

 

 

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ARC LOGISTICS PARTNERS LP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per unit amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

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ARC LOGISTICS PARTNERS LP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

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

 

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ARC LOGISTICS PARTNERS LP

CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

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ARC LOGISTICS PARTNERS LP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—Organization and Presentation

Defined Terms

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

Organization

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

In November 2013, the Partnership completed its IPO by selling 6,786,869 common units (which includes 786,869 common units issued pursuant to the exercise of the underwriters’ over-allotment option) representing limited partner interests in the Partnership at a price to the public of $19.00 per common unit.  Our common units are listed on the New York Stock Exchange under the symbol “ARCX.”

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

 

Note 2—Summary of Significant Accounting Policies

The Partnership has provided a discussion of significant accounting policies in its Annual Report on Form 10-K for the year ended December 31, 2014. Certain items from that discussion are repeated or updated below as necessary to assist in the understanding of these interim statements.

 

Basis of Presentation

The accompanying interim statements of the Partnership have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments and disclosures necessary for a fair presentation of these interim statements have been included. The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year or for any other period. These interim statements should be read in conjunction with the Partnership’s consolidated financial statements for the year ended December 31, 2014, which are included in the Partnership’s Annual Report on Form 10-K, as filed with the SEC. The year-end balance sheet data was derived from the audited financial statements, but does not include all disclosures required by GAAP.  

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The most significant estimates relate to the valuation of acquired businesses, goodwill and intangible assets, assessment

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

Impairment of Long-Lived Assets

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

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

Goodwill

Goodwill represents the excess of consideration paid over the fair value of net assets acquired in a business combination. Goodwill is not amortized but instead is assessed for impairment at least annually or when facts and circumstances warrant. The Partnership determined at December 31, 2014 that there were no impairment charges and subsequent to that date no event indicating an impairment has occurred.

 

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

 

 

Deferred Rent

 

The Lease Agreement (as defined in “Note 11—Related Party Transactions—Other Transactions with Related Persons—Operating Lease Agreement” below) contains certain rent escalation clauses, contingent rent provisions and lease termination payments. The Partnership recognizes rent expense for operating leases on a straight-line basis over the term of the lease, taking into consideration the items noted above. Contingent rental payments are generally recognized as rent expense as incurred. The deferred rent resulting from the recognition of rent expense on a straight-line basis related to the Lease Agreement is included within “Other non-current liabilities” in the accompanying unaudited condensed consolidated balance sheet at March 31, 2015 and December 31, 2014.

 

 

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Revenue Recognition

 

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

Fair Value of Financial Instruments

 

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

 

The amounts reported in the balance sheet for cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of the short-term maturities of these instruments (Level 1). Because the Credit Facility (as defined in “Note 7 – Debt – Credit Facility” below) has a market rate of interest, its carrying amount approximated fair value (Level 2).

 

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

 

Unit-Based Compensation

 

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

 

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

Net Income Per Unit

 

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

Segment Reporting

 

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

 

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Recently Issued Accounting Pronouncements

 

In May 2014, the FASB issued updated guidance on the reporting and disclosure of revenue recognition. The update requires that an entity recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update also requires new qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, information about contract balances and performance obligations, and assets recognized from costs incurred to obtain or fulfill a contract. The Partnership is currently evaluating the potential impact of this authoritative guidance on its financial condition, results of operations, cash flows and related disclosures.  In April 2015, the FASB proposed a one year deferral of the effective date, and therefore, this guidance will be effective for the Partnership beginning in the first quarter of 2018, with early adoption optional but not before the original effective date of December 15, 2016.

 

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

 

In February 2015, the FASB issued new guidance related to evaluating entities for inclusion in consolidations for both the variable interest model and for the voting model for limited partnerships and similar entities.  The update requires that all reporting entities reevaluate whether they should consolidate certain legal entities.  The Partnership does not expect this requirement to have a significant impact on its financial condition, results of operations, cash flows and related disclosures.  This guidance will be effective for the Partnership in the first quarter of 2016, with early adoption optional.  

 

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

 

Note 3 – Acquisitions

 

Pending JBBR Acquisition

 

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

 

 

 

 

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Note 4—Investment in Unconsolidated Affiliate

 

The Partnership accounts for investments in limited liability companies under the equity method of accounting unless the Partnership’s interest is deemed to be so minor that it may have virtually no influence over operating and financial policies. “Investment in unconsolidated affiliate” consisted of the LNG Interest, and its balances as of March 31, 2015 and December 31, 2014 are represented below (in thousands):

 

 

 

Gulf LNG Holdings Acquisition

 

In November 2013, the Partnership purchased the LNG Interest from an affiliate of GE EFS for approximately $72.7 million. The carrying value of the LNG Interest on the date of acquisition was approximately $64.1 million with a purchase price of approximately $72.7 million and the excess paid over the carrying value of approximately $8.6 million. This excess can be attributed to the underlying long lived assets of Gulf LNG Holdings and is therefore being amortized using the straight line method over the remaining useful lives of the respective assets, which is 28 years. The estimated aggregate amortization of this premium for its remaining useful life from March 31, 2015 is as follows (in thousands):

 

 

 

 

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

 

 

 

 

 

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Note 5—Property, Plant and Equipment

 

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

 

 

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

 

Note 6—Intangible Assets

 

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

 

 

 

The Partnership’s intangible assets are amortized on a straight-line basis over the expected life of each intangible asset. The estimated future amortization expense is approximately $3.1 million for the remainder of 2015, $3.9 million in 2016, $3.9 million in 2017, $3.9 million in 2018, $3.9 million in 2019 and $13.3 million thereafter.

 

Note 7—Debt

Credit Facility

 

In November 2013, concurrent with the closing of the IPO, the Partnership entered into the Second Amended and Restated Revolving Credit Agreement (the “Credit Facility”) with a syndicate of lenders, under which Arc Terminals Holdings LLC, a wholly owned subsidiary of the Partnership (“Arc Terminals Holdings”) is the borrower. The Credit Facility has up to $175.0 million of borrowing capacity. As of March 31, 2015, the Partnership had borrowings of $111.1 million under the Credit Facility at an interest rate of 2.93%. As of March 31, 2015, the Partnership had a $10 million letter of credit outstanding under its letter of credit sub-facility, which was issued in connection with the JBBR Acquisition.   Based on the restrictions under the total leverage ratio covenant, as of March 31, 2015, the Partnership had $24.4 million of available capacity under the Credit Facility.

 

The Credit Facility is available to fund working capital and to finance capital expenditures and other permitted payments and for other lawful corporate purposes and allows the Partnership to request that the maximum amount of the Credit Facility be increased by up to an aggregate principal amount of $100.0 million, subject to receiving increased commitments from lenders or commitments

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from other financial institutions. The Credit Facility is available for revolving loans, including a sublimit of $5.0 million for swing line loans and a sublimit of $10.0 million for letters of credit. The Partnership’s obligations under the Credit Facility are secured by a first priority lien on substantially all of the Partnership’s material assets (other than the LNG Interest). The Partnership and each of the Partnership’s existing restricted subsidiaries (other than the borrower) guarantee, and each of the Partnership’s future restricted subsidiaries will also guarantee, the Credit Facility. The Credit Facility matures in November 2018.

 

Loans under the Credit Facility bear interest at a floating rate, based upon the Partnership’s total leverage ratio, equal to, at the Partnership’s option, either (a) a base rate plus a range from 100 to 200 basis points per annum or (b) a LIBOR rate, plus a range of 200 to 300 basis points. The base rate is established as the highest of (i) the rate which SunTrust Bank announces, from time to time, as its prime lending rate, (ii) the daily one-month LIBOR plus 100 basis points per annum and (iii) the federal funds rate plus 50 basis points per annum. The unused portion of the Credit Facility is subject to a commitment fee calculated based upon the Partnership’s total leverage ratio ranging from 0.375% to 0.50% per annum. Upon any event of default, the interest rate will, upon the request of the lenders holding a majority of the commitments, be increased by 2.0% on overdue amounts per annum for the period during which the event of default exists.

 

The Credit Facility contains certain customary representations and warranties, affirmative covenants, negative covenants and events of default. As of March 31, 2015, the Partnership was in compliance with such covenants. The negative covenants include restrictions on the Partnership’s ability to incur additional indebtedness, acquire and sell assets, create liens, enter into certain lease agreements, make investments and make distributions.

 

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

 

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

 

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

 

Debt Financing

 

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

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Note 8—Partners’ Capital and Distributions

Cash Distributions

 

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

 

 

 

Cash Distribution Policy

 

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

 

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

 

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

 

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:

 

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

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

 

 

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

 

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

 

 

 

Note 9—Equity Plans

 

2013 Long-Term Incentive Plan

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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

 

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

 

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

 

 

 

 

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Note 10—Earnings Per Unit

 

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

 

Diluted net income per unit applicable to limited partners includes the effects of potentially dilutive units on the Partnership’s units. For the three months ended March 31, 2015, the only potentially dilutive units outstanding consisted of the phantom units (see “Note 9—Equity Plans”). For the three months ended March 31, 2015, none of the phantom units are considered outstanding and therefore there were no potentially dilutive units outstanding.

 

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

 

 

 

 

Note 11—Related Party Transactions

Agreements with Affiliates

Payments to the General Partner and its Affiliates

 

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

 

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

 

 

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Registration Rights Agreement

 

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

Other Transactions with Related Persons

GCAC Guarantee

 

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

 

Storage and Throughput Agreements with Center Oil

 

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

 

The term of the storage and throughput agreement extends through June 2017.  The agreement will automatically renew for a period of three years at the expiration of the current term at an inflation adjusted rate (subject to a cap), as determined in accordance with the agreement, unless a party delivers a written notice of its election to terminate the storage and throughput agreement at least eighteen months prior to the expiration of the current term.

 

 In February 2010, the Partnership acquired a 50% undivided interest in the Baltimore, MD terminal. In connection with the acquisition, the Partnership acquired an existing agreement with Center Oil whereby the Partnership provides ethanol storage and throughput services to Center Oil. The Partnership charges Center Oil a fixed fee for storage and a fee based upon ethanol throughput at the Baltimore, MD terminal. The storage and throughput fees are calculated monthly based on the terms and conditions of the storage and throughput agreement.  This agreement was renewed under the one-year evergreen provision and has been extended to May 2016.  

 

In May 2011, the Partnership entered into an agreement to provide refined products storage and throughput services to Center Oil at the Baltimore, MD terminal. The Partnership charges Center Oil a fixed fee for storage and a fee for ethanol blending and any additives added to Center Oil’s product. The storage and throughput fees are calculated monthly based on the terms and conditions of the storage and throughput agreement.  This agreement was not renewed and will expire in May 2015.  

 

In May 2013, the Partnership entered into an agreement to provide gasoline storage and throughput services to Center Oil at the Brooklyn, NY terminal. The Partnership charges Center Oil a fixed per barrel fee for each inbound delivery of ethanol and every outbound barrel of product shipped or committed to be shipped and a fee for any ethanol blending and additives added to Center Oil’s product. The storage and throughput fees are calculated monthly based on the terms and conditions of the storage and throughput agreement. The agreement has a one-year term and comes up for renewal in May 2015.   This agreement was renewed under the one-year evergreen provision and has been extended to May 2016.

Storage and Throughput Agreements with GCAC

 

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

 

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

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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):

 

 

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):

 

 

Operating Lease Agreement

 

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

 

During the term of the Lease Agreement, Arc Terminals Holdings will make base monthly rental payments and variable rent payments based on the volume of liquid hydrocarbons that flowed through the Portland Terminal in the prior month.  The base rent in the initial years of the Lease Agreement were $230,000 per month through July 2014 (prorated for the partial month of January 2014) and are $417,522 for each month thereafter until the end of year five.  The base rent also increased each month starting with the month of August 2014 by a factor of 0.00958 of the specified construction costs incurred by LCP Oregon Holdings LLC (“LCP Oregon”) at the Portland Terminal, estimated at $10 million.  Assuming such improvements are completed, the base rent will increase by approximately $95,800 per month.  As of March 31, 2015, spending on terminal-related projects by CorEnergy since the commencement of the Lease Agreement totaled approximately $7.5 million and, as a result, the base rent has increased by approximately $72,000 per month.    The base rent will be increased at the end of year five by the change in the consumer price index for the prior five years, and every year thereafter by the greater of two percent or the change in the consumer price index. The base rent is not influenced by the flow of hydrocarbons. Variable rent will result from the flow of hydrocarbons through the Portland Terminal in excess of a designated threshold of 12,500 barrels per day of oil equivalent.  Variable rent is capped at 30% of base rent payments regardless of the level of hydrocarbon throughput.  During the three months ended March 31, 2015 and 2014, the expense associated with the Lease Agreement was $1.6 million and $1.6 million, respectively.  During the three months ended March 31, 2015 and 2014, there was no variable rent associated with the Lease Agreement.

 

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

 

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Pending JBBR Acquisition

 

JBBR Purchase Agreement

 

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

 

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

 

Equity Commitment Letter and Interim Investors Agreement

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

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

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

 

Financing of the Partnership Equity Commitment

 

PIPE Transaction

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

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

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

 

Note 12—Major Customers

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

 

 

 

Note 13—Commitments and Contingencies

Environmental matters

 

The Partnership may have environmental liabilities that arise from time to time in the ordinary course of business and provides for losses associated with environmental remediation obligations, when such losses are probable and reasonably estimable. Estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Loss accruals are adjusted as further information becomes available or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. There were no accruals recorded for environmental losses as of March 31, 2015 and December 31, 2014.

 

Commitments and contractual obligations

 

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

 

 

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

During 2014, the members of Gulf LNG Holdings approved spending up to approximately $14.6 million towards the development of a potential natural gas liquefaction and export terminal at the LNG Facility.  Through March 31, 2015, capital calls totaling $14.6 million were issued to all members of Gulf LNG Holdings, for which the Partnership’s pro-rata share was approximately $1.5 million.  As of March 31, 2015, there are no additional remaining capital commitments.  

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 March 31, 2015, no additional amounts had been paid or are owed to GCAC.

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Note 14—Subsequent Events

Amendment to Credit Facility

In April 2015, Arc Terminals Holdings, together with the Partnership and certain of its other subsidiaries, as guarantors, entered into the second amendment to the Credit Facility (the “Second Amendment”) in contemplation, of the pending JBBR Acquisition.  The Second Amendment principally modifies certain provisions of the Credit Facility (i) to provide availability to finance a portion of the Partnership’s purchase price obligations for the JBBR Acquisition and (ii) to increase the aggregate commitments under the Credit Facility from $175 million to $275 million, subject to the satisfaction of certain conditions and the consummation of the JBBR Acquisition.  

Long-Term Incentive Plan

In April 2015, the Partnership granted 32,500 additional phantom units pursuant to the 2013 Plan to certain employees of the Partnership Entities.  Each grant has performance based vesting on terms similar to the Employee Equity Grants issued in July 2014, will be settled in common units and includes a DER.  

Cash Distribution

In May 2015, 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 January 1, 2015 through March 31, 2015. The distribution is payable on May 15, 2015 to unitholders of record on May 11, 2015.

 

 

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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:

 

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, 2014, 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.

 

 

 

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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, 2014, 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 Logistics,” the “Partnership,” “we,” “our,” “us” or similar terms refer to Arc Logistics Partners LP and its subsidiaries. Unless the context clearly indicates otherwise, references to our “General Partner” refer to Arc Logistics GP LLC, the general partner of Arc Logistics. References to 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 LP, predecessor to Arc Logistics (“Arc Terminals”), to the Partnership upon the consummation of the Partnership’s initial public offering in November 2013 (“IPO”). References to “Center Oil” refer to GP&W, Inc., d.b.a. Center Oil, and affiliates, including Center Terminal Company-Cleveland, which contributed its limited partner interests in Arc Terminals to the Partnership upon the consummation of the IPO. References to “Gulf LNG Holdings” refer to Gulf LNG Holdings Group, LLC and its subsidiaries, which own a liquefied natural gas regasification and storage facility in Pascagoula, MS, which is referred to herein as the “LNG Facility.” The Partnership owns a 10.3% limited liability company interest in Gulf LNG Holdings, which is referred to herein as the “LNG Interest.”

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.

Recent Developments

Pending JBBR Acquisition

Through a joint venture arrangement with GE Energy Financial Services (“GE EFS”), we agreed to acquire, subject to the terms and conditions of a definitive acquisition agreement, all of the membership interests of Joliet Bulk, Barge & Rail LLC (“JBBR”) from CenterPoint Properties Trust (“CenterPoint”) for $216 million (“JBBR Acquisition”). JBBR's principal assets consist of a crude oil unloading terminal and a 4-mile crude oil pipeline (“Joliet Terminal”), which are in the final stages of construction in Joliet, IL. The closing is subject to customary closing conditions as well as the commencement of the payment obligations of the Joliet Terminal’s major customer pursuant to its terminal services agreement with JBBR (which will occur at the time the Joliet Terminal becomes commercially operable). The JBBR Acquisition is expected to close on or before May 18, 2015. The acquisition consideration also includes an earn-out payable by the JBBR joint venture company (referred to below) to CenterPoint based upon petroleum product throughput volumes at the Joliet Terminal (including minimum volumes paid under customer contracts irrespective of physical deliveries of product thereunder). JBBR joint venture company’s earn-out obligations to CenterPoint will terminate upon the payment, in the aggregate, of $27 million.

At the closing of the acquisition, we will manage ongoing operations of the Joliet Terminal and own a 60% interest in the JBBR joint venture company. GE EFS will own the remaining 40%. The acquisition will not close until the Joliet Terminal becomes commercially operable. Either we or CenterPoint may terminate the definitive acquisition agreement if the closing of the JBBR Acquisition does not occur by May 18, 2015.

We will finance our approximate $130 million portion of the purchase price with net proceeds from the sale of common units in a private placement and from borrowings under the Credit Facility (as defined herein). Institutional investors have committed to acquire, concurrently with the closing of the acquisition, approximately 4.4 million of our common units in a private placement at a

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price of $17.00 per unit, resulting in gross proceeds (before fees and expenses) to us of $75 million.  The common unit purchase price payable by the institutional investors will be reduced by the Partnership’s first quarter 2015 distribution in respect of its common units if the closing occurs after the record date for such distribution.  Assuming the closing occurs after the record date of the Partnership’s first quarter 2015 distribution, the Partnership will sell 4,520,795 common units at a price of $16.59 to the purchasers in the private placement.

Once completed, the Joliet Terminal will have the capability to unload approximately 85,000 barrels of crude oil per day and will have approximately 300,000 barrels of storage and a 4-mile pipeline connection to a common carrier crude oil pipeline. The facility will have rail and marine access, as well as more than 80 acres of land available for future expansion. At closing, the Joliet Terminal will be supported by a terminal services agreement and a throughput and deficiency agreement with a major oil company, each with a term of three years based on minimum throughput volume commitments.

The JBBR Acquisition continues our existing business strategy to expand our market position and support the expansion plans of new and existing customers, while generating stable cash flows for our unit holders from quality assets supported by long-term contracts.

In connection with the JBBR Acquisition, Arc Terminals Holdings LLC (“Arc Terminals Holdings”), together with the Partnership and certain of its subsidiaries, as guarantors, entered into the Second Amendment (as defined herein).  The Second Amendment principally modifies certain provisions of the Credit Facility (i) to provide availability to finance a portion of the Partnership’s purchase price obligations in connection with the JBBR Acquisition and (ii) to increase the aggregate commitments under the Credit Facility from $175 million to $275 million, subject to the satisfaction of certain conditions and the consummation of the JBBR Acquisition.  

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.

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 of crude oil and petroleum product pricing 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. A significant increase or decrease in the demand for crude oil and petroleum products, which can be the result of fluctuations in production, market prices or a combination of both, 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 or significant changes in the pricing of crude oil or petroleum products in a short period of time 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.

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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.

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 March 31, 2015, we had an aggregate of over 120 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:

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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:

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:

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 in November 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.  As of March 31, 2015, the remaining term of each terminal use agreement is approximately 17 years.  

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 selling, general and administrative (“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.

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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.

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; and (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):

 

 

 

 

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Results of Operations

The following table and discussion is a summary of our results of operations for the three months ended March 31, 2015 and 2014 (in thousands, except operating data):

 

 

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014

Storage Capacity. Storage capacity for the three months ended March 31, 2015, did not change when compared to the three months ended March 31, 2014.  

Throughput Activity. Throughput activity for the three months ended March 31, 2015 decreased by 2.1 mbpd, or 3%, compared to the three months ended March 31, 2014.  The decrease was due to reduced customer activity and the expiration of customer agreements in Baltimore, MD, Mobile, AL, Norfolk, VA and Saraland, AL offset by the execution of new customer agreements and increased customer activity in Brooklyn, NY, Cleveland, OH and Selma, NC and due to the addition of the Portland Terminal.

Revenues. The following table details the types and amounts of revenues generated during the three months ended March 31, 2015 and 2014 (in thousands, except percentages).

 

 

Revenues for the three months ended March 31, 2015 increased by $0.3 million, or 3%, compared to the three months ended March 31, 2014.  The $0.8 million, or 7%, increase in storage and throughput services fees was the result of the execution of new customer agreements in Blakeley, AL and Toledo, OH and amendments to existing agreements in Brooklyn, NY and Portland, OR

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offset by reduced customer activity and the expiration of customer agreements in Blakeley, AL, Chickasaw, AL, Mobile, AL and Saraland, AL.  The $0.4 million, or 23%, decrease in ancillary services fees was driven by a reduction in customer activity in our Gulf Coast terminals compared to the first quarter of 2014.

 

Operating Expenses. Operating expenses for the three months ended March 31, 2015 decreased by $0.8 million, or 12%, compared to the three months ended March 31, 2014. The $0.8 million decrease in operating expenses was the result of lower utility and contractor expenses because of reduced transloading activity at the Gulf Coast terminals.

 

Selling, General and Administrative Expenses.  SG&A expenses for the three months ended March 31, 2014 increased by $2.7 million, or 102%, compared to the three months ended March 31, 2014.  The increase in SG&A expense was the result of unit-based compensation expense of $1.7 million related to the 2013 Plan grants in July 2014, an increase in due diligence expense of approximately $0.7 million, which was related to the JBBR Acquisition, and an increase in expenses paid to the General Partner of $0.2 million.

 

Depreciation and Amortization Expense. Depreciation expense for the three months ended March 31, 2015 increased by $0.2 million, or 9%, compared to the three months ended March 31, 2014, primarily due to the impact of the 2014 capital expenditures program which included expansion capital expenditures to upgrade our Blakeley, AL, Chickasaw, AL and Cleveland, OH terminals for customer expansion activities and incremental maintenance capital expenditures at our Mobile AL and Brooklyn, NY facilities.  Amortization expense for the three months ended March 31, 2015 decreased by $0.1 million, or 7%, compared to the three months ended March 31, 2015, due to full amortization of certain intangibles in 2014.

 

Equity Earnings from Unconsolidated Affiliate. Equity earnings from unconsolidated affiliate for the three months ended March 31, 2015 increased by $0.1 million, or 2%, compared to the three months ended March 31, 2014.

 

Interest Expense. Interest expense for the three months ended March 31, 2015 increased by less than $0.1 million, or 3%, compared to the three months ended March 31, 2014. The increase in interest expense is a result of higher outstanding indebtedness at March 31, 2015 of $111.1 million compared to $105.6 million at March 31, 2014.

 

Net Income. Net income for the three months ended March 31, 2015 decreased by $1.6 million, or 84%, compared to the three months ended March 31, 2014, primarily related to an increase in one-time transaction related expenses of $0.7 million and an increase of $1.7 million of unit-based compensation expense associated with the 2013 Plan offset by a decrease in operating expenses of $0.8 million as a result of lower utility and contractor expenses due to reduced transloading activity at the Gulf Coast terminals.  

 

Adjusted EBITDA. Adjusted EBITDA for the three months ended March 31, 2015 increased by less than $0.1 million, or less than 1%, compared to the three months ended March 31, 2014.  

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.

 

In May 2015, we declared 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 March 31, 2015.  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

 

Concurrent with the closing of the IPO, we entered into the Second Amended and Restated Revolving Credit Agreement (the “Credit Facility”) with a syndicate of lenders, under which Arc Terminals Holdings is the borrower.  The Credit Facility matures in November 2018 and has up to $175.0 million of borrowing capacity.  As of March 31, 2015, we had borrowings of $111.1 million under the Credit Facility at an interest rate of 2.93%.  As of March 31, 2015, the Partnership had a $10 million line of credit outstanding under its letter of credit sub-facility, which was issued in connection with the JBBR Acquisition. Based on the restrictions under our total leverage ratio covenant, as of March 31, 2015, we had $24.4 million of available capacity under the Credit Facility.

 

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The Credit Facility is available 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 principal amount of $100.0 million, subject to receiving increased commitments from lenders or commitments from other financial institutions. The Credit Facility is available for revolving loans, including a sublimit of $5.0 million for swing line loans and a sublimit of $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 restricted subsidiaries (other than the borrower) guarantee, and each of our future restricted subsidiaries will also guarantee, the Credit Facility.

Loans under the Credit Facility bear interest at a floating rate, based upon our total 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 rate plus 100 basis points per annum and (iii) the federal funds rate plus 50 basis points per annum. The unused portion of the Credit Facility is subject to a commitment fee calculated based upon our total leverage ratio ranging from 0.375% to 0.50% per annum. Upon any event of default, the interest rate will, upon the request of the lenders holding a majority of the commitments, be increased by 2.0% on overdue amounts per annum for the period during which the event of default exists.

 

The Credit Facility contains certain customary representations and warranties, affirmative covenants, negative covenants and events of default. As of March 31, 2015, the Partnership was in compliance with such covenants. The negative covenants include restrictions on 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 total leverage ratio of not more than 4.50 to 1.00, which may increase to up to 5.00 to 1.00 during specified periods following a material permitted acquisition or issuance of over $200.0 million of senior notes, and a minimum interest coverage ratio of not less than 2.50 to 1.00. If 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 Credit Facility are unconditionally guaranteed by us and each of our existing subsidiaries (other than the borrower) and each of our future restricted subsidiaries.

First Amendment to Credit Agreement

 

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

 

Second Amendment to Credit Agreement

 

In April 2015, Arc Terminals Holdings, together with Arc Logistics and certain of its other subsidiaries, as guarantors, entered into the second amendment to the Credit Facility (the “Second Amendment”) in contemplation of the pending JBBR Acquisition.  The Second Amendment principally modifies certain provisions of the Credit Facility (i) to provide availability to finance a portion of the Partnership’s purchase price obligations for the JBBR Acquisition and (ii) to increase the aggregate commitments under the Credit Facility from $175 million to $275 million, subject to the satisfaction of certain conditions and the consummation of the JBBR Acquisition.  

 

Pending JBBR Acquisition Financing

 

Debt Financing

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

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Facility fail to fund any portion of the Incremental Facility required to be funded in connection with the consummation of the JBBR Acquisition.

 

PIPE Transaction

In February 2015, we entered into a Unit Purchase Agreement (the “PIPE Purchase Agreement”) with the purchasers named therein (the “PIPE Purchasers”) to sell 4,411,765 common units at a price of $17.00 per unit (the “Common Unit Purchase Price”) in a private placement (the “PIPE Transaction”). The Common Unit Purchase Price will be reduced by our first quarter 2015 distribution in respect of our common units if the closing of the PIPE Transaction occurs after the record date for such distribution. Assuming the closing occurs after the record date of the Partnership’s first quarter 2015 distribution, the Partnership will sell 4,520,795 common units at a price of $16.59 to the purchasers under the PIPE Purchase Agreement. We will use the proceeds from the private placement (totaling $75 million before placement agent commissions and expenses) to fund a portion of our obligations under the equity commitment letter provided by the Partnership to Arc AcquisitionCo in connection with the JBBR Acquisition. If the PIPE Purchase Agreement is terminated pursuant to its terms, including on account of the termination of the JBBR Purchase Agreement, or if the closing under the PIPE Purchase Agreement fails to occur by May 18, 2015, we will pay to each PIPE Purchaser a commitment fee of 1% of such PIPE Purchaser’s commitment amount. During the period commencing on the date of execution of the PIPE Purchase Agreement and ending 90 days following the date of the closing of the PIPE Transaction, we are restricted from issuing, without the consent of the PIPE Purchasers holding a majority of the purchased common units (or, prior to closing, the PIPE Purchasers entitled to acquire at closing a majority of such common units), any of our equity securities except for, in general, our common units issued at or above a stated issuance price in (or to fund) an acquisition that is determined by the board of directors of the General Partner to result in an increase in our distributable cash flow over the first full four quarters following such acquisition. The issuance of the common units pursuant to the PIPE Purchase Agreement is being made in reliance upon an exemption from the registration requirements of the Securities Act of 1933 pursuant to Section 4(a)(2) thereof.

 

GE Equity Commitment Letter

 

In February 2015 and in connection with the JBBR Acquisition, GE Equity Provider agreed to contribute to Arc AcquisitionCo, contemporaneously with the JBBR Closing, forty percent (40%) of the JBBR Purchase Price to enable Arc AcquisitionCo to consummate the JBBR Acquisition.  GE Equity Provider’s obligations to make such funding available to Arc AcquisitionCo are subject to the terms and conditions of an equity commitment letter entered into by GE Equity Provider in favor of Arc AcquistionCo.  The equity commitment letter contains customary funding conditions, including the satisfaction (or waiver) by Arc AcquisitionCo of all conditions to Arc AcquisitionCo’s obligation to consummate the JBBR Acquisition pursuant to the JBBR Purchase Agreement.

Cash Flows

 

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014

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

 

 

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 $5.4 million for the three months ended March 31, 2015 compared to $4.5 million for the three months ended March 31, 2014. This $0.9 million increase across periods was primarily attributable to a $0.9 million increase of cash provided by working capital.  Cash provided by changes in working capital of $0.9 million across the comparable periods was primarily due to the changes of cash provided by amounts due to our General Partner, accounts payable, and accrued expenses of $2.2 million, $0.2 million and $0.1 million, respectively, partially offset by cash used in changes to other liabilities, accounts receivables and other current assets of $0.9 million, $0.6 million and $0.1 million, respectively.

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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 $1.6 million for the three months ended March 31, 2015, of which $0.3 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 and $1.3 million was used for expansion and maintenance capital expenditures.  Net cash used in investing activities was $2.0 million for the three months ended March 31, 2014 primarily attributable to construction and improvements of our Blakeley, AL, Chickasaw, AL and Mobile, AL facilities.

 

Cash Flow from Financing Activities. Financing activities consist primarily of borrowings and repayments related to the Credit Facility, the related deferred financing costs and distributions to our investors. Net cash flows used in financing activities was $5.9 million for the three months ended March 31, 2015, compared to net cash flows used in financing activities of $2.9 million for the three months ended March 31, 2014. This $3.1 million increase was primarily attributable to an increase in distributions to our investors of $2.6 million.

Contractual Obligations

 

We have contractual obligations that are required to be settled in cash. Our contractual obligations as of March 31, 2015 were as follows (in thousands):

 

 

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:

 

We incurred maintenance and expansion capital expenditures for the three months ended March 31, 2015 and 2014 as set forth in the following table (in thousands):

 

 

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 March 31, 2015 as compared to the three months ended March 31, 2014 was due to unanticipated maintenance projects in Norfolk, VA and Toledo, OH as well as upgrades to certain IT equipment in 2014.  

 

Expansion Capital Expenditures

 

During the three months ended March 31, 2015, we invested capital to upgrade the Blakeley, AL and Toledo, OH terminals in connection with two new 5-year customer agreements.

 

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During the three months ended March 31, 2014, we invested capital to: (i) connect the fuel oil tank system and asphalt tank system in Mobile, AL for customer expansion opportunities; (ii) install a permanent boiler system in Chickasaw, AL terminal; and (iii) complete customer related projects and other carryover projects from 2013.

 

Our capital funding requirements were funded from borrowings under the 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

 

As of March 31, 2015, there have been no significant changes to our critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC.  

 

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, 2014, 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 have exposure to changes in interest rates on our indebtedness. As of March 31, 2015, we had $111.1 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 months ended March 31, 2015 was approximately 3.0%. 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 in interest expense for the three months ended March 31, 2015, 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.

 

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 March 31, 2015 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 March 31, 2015 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

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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, 2014 (the “2014 10-K”). There has been no material change in our risk factors from those described in the 2014 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.

 

 

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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.

 

 

 

 

 

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EXHIBIT INDEX

 

 

 

 

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