UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 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 August 3, 2015, there were 13,167,744 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.

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.

 

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.”

In May 2015, the Partnership sold 4,520,795 common units at a price of $16.59 per unit in a private placement as part of the acquisition of Joliet Bulk, Barge & Rail LLC (“JBBR”; and such acquisition, the “JBBR Acquisition”).  The Partnership, through Arc Terminals Joliet Holdings LLC (“Joliet Holdings”), a joint venture company owned 60% by the Partnership and 40% by EFS Midstream Holdings LLC (an affiliate of GE Energy Financial Services (“GE EFS”)), acquired all of the membership interests of JBBR from CenterPoint Properties Trust (“CenterPoint”).  Refer to “Note 3 – Acquisitions” for further discussion on the JBBR Acquisition.  

As of June 30, 2015, our Sponsor owned 68,617 common units and 5,146,264 subordinated units representing a 29.9% 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 (the “2014 Partnership 10-K”). Certain items from that discussion are repeated or updated below as necessary to assist in the understanding of these interim statements.

 

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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 statement of these interim statements have been included. The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year or for any other period. These interim statements should be read in conjunction with the Partnership’s consolidated financial statements for the year ended December 31, 2014, which are included in the 2014 Partnership 10-K, as filed with the SEC. The year-end balance sheet data was derived from the audited financial statements, but does not include all disclosures required by GAAP.  

Use of Estimates

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

Impairment of Long-Lived Assets

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

No impairment charges were recorded during the six months ended June 30, 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):

 

Refer to “Note 3—Acquisitions – JBBR Acquisition” for discussion on the goodwill recorded in the second quarter of 2015 in connection with the JBBR Acquisition.  

 

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 June 30, 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).  

In connection with the JBBR Acquisition, Joliet Holdings has an earn-out obligation to CenterPoint which was valued at the time of the JBBR Acquisition, in connection with the purchase price allocation, at approximately $19.7 million.  Refer to “Note 3—Acquisitions – JBBR Acquisition” for further discussion on the JBBR Acquisition. Joliet Holdings’ earn-out obligations to CenterPoint will terminate upon the payment, in the aggregate, of $27.0 million.  Since the fair value of the contingent consideration obligation is based primarily upon unobservable inputs it is classified as Level 3 in the fair value hierarchy.  The contingent consideration obligation, incurred in connection with the JBBR Acquisition, will be revalued at each reporting period and changes to the fair value will be recorded as a component of operating income.  Increases or decreases in the fair value of the contingent consideration obligations can result from changes in the assumed timing of revenue and expense estimates.  Significant judgement is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent reporting period.  Accordingly, future business and economic conditions, can materially impact the amount of contingent consideration expense we record in any given period.  No revalue adjustments were necessary during the three and six months ended June 30, 2015.  As of June 30, 2015, the Joliet Holdings has incurred $0.2 million related to the earn-out obligation.  

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 units, 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.”

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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.

 

Noncontrolling Interests

The Partnership applies the provisions of ASC 810 Consolidations, which were amended on January 1, 2009 by ASC 810-10-65 and ASC 810-10-45 (“ASC 810”).  As required by ASC 810, our noncontrolling ownership interests in consolidated subsidiaries are presented in the consolidated balance sheet within capital as a separate component from partners’ capital.  In addition, consolidated net income includes earnings attributable to both the partners and the noncontrolling interests.  Through June 30, 2015, no distributions have been made to noncontrolling interest holders of consolidated subsidiaries.

Recently Issued Accounting Pronouncements

 

In May 2014, the FASB issued updated guidance on the reporting and disclosure of revenue recognition. The update requires that an entity recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update also requires new qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, information about contract balances and performance obligations, and assets recognized from costs incurred to obtain or fulfill a contract. 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.  

 

In April 2015, the FASB issued new guidance related to the accounting for fees paid in a cloud computing arrangement. The standard clarifies the circumstances under which a cloud computing customer would account for the arrangement as a license of internal-use software under ASC 350-40. 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 specifying that for purposes of calculating historical earnings per unit under the two-class method, the earnings (losses) of a transferred business before the date of a drop down transaction should be allocated entirely to the general partner. In that circumstance, the previously reported earnings per unit of the limited partners (which is typically the earnings per unit measure presented in the financial statements) would not change as a result of the drop down transaction. In addition, the standard requires additional qualitative disclosures about how the rights to the earnings (losses) differ before and after the drop down transaction occurs for purposes of computing earnings per unit under the two-class method. The new accounting guidance is effective for the Partnership beginning in the first quarter of 2016, and should be applied retrospectively. The Partnership is currently assessing the impact that adopting this new accounting guidance will have on its consolidated financial statements and

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footnote disclosures, but does not anticipate that adoption will have a material impact on its financial position, results of operations or cash flows.

 

Note 3 – Acquisitions

 

Acquisitions

 

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

 

JBBR Acquisition

 

In May 2015, the Partnership and an affiliate of GE EFS, through Joliet Holdings, purchased all of the membership interests in JBBR from CenterPoint for a base cash purchase price of $216 million (“JBBR Purchase Price”).  Joliet Holdings is also required to pay to CenterPoint earn-out payments for each barrel of crude oil that is either delivered to or received by the Joliet Terminal (as defined below) (without duplication) or for which JBBR receives payment under minimum volume commitments regardless of actual throughput activity. Joliet Holdings’ earn-out obligations to CenterPoint will terminate upon the payment, in the aggregate, of $27.0 million.  JBBR among other things owns a petroleum products terminal and 4-mile crude oil pipeline located in Joliet, Illinois (“Joliet Terminal”).  To finance the Partnership’s portion of the consideration payable by it in connection with the JBBR Acquisition, the Partnership sold 4,520,795 common units at a price of $16.59 per unit in a private placement for proceeds totaling $72.7 million after placement agent commissions and expenses.  In addition, the Partnership borrowed $61.0 million under its Credit Facility to partially finance the balance of the purchase price payable by it at the closing of the JBBR Acquisition.    

 

Joliet Holdings is consolidated under the voting interest model in the Partnerships operating results.  The GE EFS ownership interest in Joliet Holdings is presented separately as a noncontrolling interest.  

 

The JBBR Acquisition was accounted for as a business combination in accordance with ASC Topic 805, “Business Combinations” (“ASC 805”).  In accordance with ASC 805, the Partnership recorded approximately $19.7 million of additional consideration related to Joliet Holdings’s earn-out payments as contingent consideration.   The $19.7 million is recorded on the balance sheet of the Partnership as a liability and will be reduced by any future earn-out payments made to CenterPoint. This liability is subject to remeasurement each reporting period until the full amount of the earn-out has been satisfied.   The JBBR Purchase Price exceeded the approximately $211.0 million fair value of the identifiable assets acquired and accordingly, the Partnership recognized goodwill of approximately $24.7 million.  The Partnership believes the primary items that generated goodwill are the expected ability to grow the acquired business by leveraging its existing customer relationships and by attracting new customers based on the strategic location of the Joliet Terminal.  Furthermore, the Partnership expects that the entire amount of its recorded goodwill will be deductible for tax purposes.  Transaction costs incurred by the Partnership in connection with the acquisition, consisting primarily of legal and other professional fees, totaled approximately $1.3 million and were expensed as incurred in accordance with ASC 805 and included in the “Selling, general and administrative” line item in the accompanying consolidated statement of operations and comprehensive income.

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The following table summarizes the consideration paid and the assets acquired at the JBBR Acquisition closing date (in thousands):

 

 

Since the JBBR Acquisition closing date in May 2015 through June 30, 2015, the acquired JBBR assets have earned approximately $4.4 million in revenue and $1.6 million of operating income.  

 

The unaudited pro forma results related to the JBBR Acquisition have been excluded as the Joliet Terminal was under construction prior to the consummation of the JBBR Acquisition and therefore there were no revenue-producing activities previously associated with the Joliet Terminal. The Joliet Terminal, post-acquisition, is now operating and has begun to generate revenue.  In addition, the historical financial information for the Joliet Terminal prior to the acquisition is not indicative of how the Joliet Terminal is being operated since the JBBR Acquisition and would be of no comparative value in understanding the future operations of the Joliet Terminal.  

 

 

Note 4—Investment in Unconsolidated Affiliate

 

The Partnership accounts for investments in limited liability companies under the equity method of accounting unless the Partnership’s interest is deemed to be so minor that it may have virtually no influence over operating and financial policies. “Investment in unconsolidated affiliate” consisted of the LNG Interest, and its balances as of June 30, 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 June 30, 2015 is as follows (in thousands):

 

 

 

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

 

 

 

 

 

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.

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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 $5.2 million for the remainder of 2015, $10.1 million in 2016, $9.7 million in 2017, $8.5 million in 2018, $7.9 million in 2019 and $42.7 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. After several amendments, the Credit Facility currently has up to $275.0 million of borrowing capacity. As of June 30, 2015, the Partnership had borrowings of $176.1 million under the Credit Facility at an interest rate of 3.19%. During the first and second quarters of 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. This letter of credit was extinguished when the JBBR Acquisition closed in May 2015.  Based on the restrictions under the total leverage ratio covenant, as of June 30, 2015, the Partnership had $42.6 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 from other financial institutions. The Credit Facility is available for revolving loans, including a sublimit of $5.0 million for swing line loans and a sublimit of $20.0 million for letters of credit. The Partnership’s obligations under the Credit Facility are secured by a first priority lien on substantially all of the Partnership’s material assets (other than the LNG Interest and the assets owned by JBBR and its subsidiaries). 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 June 30, 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.

 

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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.

 

First Amendment

 

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”).

 

 

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Second Amendment

 

In May 2015, our operating subsidiary, Arc Terminals Holdings, as borrower, together with Arc Logistics and certain of its other subsidiaries, as guarantors, entered into the Second Amendment to the Credit Facility (the “Second Amendment”) as part of its financing for the JBBR Acquisition.  Upon the consummation of the JBBR Acquisition in May 2015, the aggregate commitments under the Credit Facility increased from $175 million to $275 million.  In addition, the sublimit for letters of credit was increased from $10 million to $20 million.  

 

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:

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

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

 

 

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

 

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

 

Note 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 for accounting purposes (the “Director Grants”).  Each Director Grant will be settled in common units and includes a DER. The Director Grants have an aggregate grant date fair value of $2.5 million and vest in equal annual installments over a three-year period starting from the date of grant. For the three and six months ended June 30, 2015, the Partnership recorded approximately $0.2 million and $0.4 million, respectively, of unit-based compensation expense with respect to the Director Grants. As of June 30, 2015, the unrecognized unit-based compensation expense for the Director Grants is approximately $1.7 million, which will be recognized ratably over the remaining term of the awards.

 

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Of the July 2014 awards, a total of 832,000 phantom units were granted to employees and certain consultants of the Partnership Entities and are classified as equity awards for accounting purposes (the “Employee Equity Grants”).  Each Employee Equity Grant will be settled in common units and includes a DER.  The Employee Equity Grants have an aggregate grant date fair value of $21.2 million and vest as follows: (i) 25% of the Employee Equity Grants will vest the day after the end of the Subordination Period (as defined in the Partnership’s limited partnership agreement); and (ii) the three remaining 25% installments of the Employee Equity Grants will vest based on the date on which the Partnership has paid, for three consecutive quarters, distributions to its common and subordinated unitholders at or above a stated level, with (A) 25% of the award vesting after distributions are paid at or above $0.4457 per unit for the required period, (B) 25% of the award vesting after distributions are paid at or above $0.4845 per unit for the required period, and (C) the last 25% of the award vesting after distributions are paid at or above $0.5814 per unit for the required period.  To the extent not previously vested, the Employee Equity Grants expire on the fifth anniversary of the date of grant, provided that the expiration date can be extended to the eighth anniversary of the date of grant or longer upon the satisfaction of certain conditions specified in the award agreement.  For the three and six months ended June 30, 2015, the Partnership recorded approximately $1.0 million and $2.3 million, respectively, of unit-based compensation expense with respect to the Employee Equity Grants. As of June 30, 2015, the unrecognized unit-based compensation expense for the Employee Equity Grants was approximately $15.7 million, which may be recognized variably over the remaining term of the awards based on the probability of the achievement of the performance vesting requirements.

 

Of the July 2014 awards, a total of 7,500 phantom units were granted to certain employees of the Partnership Entities and are classified as liability awards for accounting purposes (the “Employee Liability Grants”).  Each Employee Liability Grant will be settled in cash (as such award consists of less than 1,000 phantom units) and includes a DER. The Employee Liability Grants have an aggregate grant date fair value of $0.2 million and have the same term and vesting requirements as the Employee Equity Grants described in the preceding paragraph.  For the three and six months ended June 30, 2015, the Partnership recorded less than $0.1 million of unit-based compensation expense during each period, with respect to the Employee Liability Grants.  As of June 30, 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 and six months ended June 30, 2015, the Partnership recorded less than $0.1 million of unit-based compensation expense during each period, with respect to the 2015 Equity Grants.  As of June 30, 2015, the unrecognized unit-based compensation expense for the 2015 Equity Grants is approximately $0.8 million, which will be recognized ratably over the remaining term of the awards.    

 

During the three months ended June 30, 2015, the Board and Chief Executive Officer authorized the grant of an aggregate of  38,600 phantom units pursuant to the 2013 Plan to certain employees of the Partnership Entities (“2015 Performance Grants”).  Each 2015 Performance Grant will be settled in common units and includes a DER.  The 2015 Performance Grants are classified as equity awards for accounting purposes and have an aggregate grant date fair value of $0.7 million and have the same term and vesting requirements as the Employee Equity Grants described above.  For the three and six months ended June 30, 2015, the Partnership recorded less than $0.1 million of unit-based compensation expense during each period, with respect to the 2015 Performance Grants.  As of June 30, 2015, the unrecognized unit-based compensation expense for the 2015 Performance Grants is approximately $0.7 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.

 

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 and six months ended June 30, 2015, the Partnership paid approximately $0.4 million and $0.8 million, respectively, in DERs to phantom unit holders. For the three and six months ended June 30, 2015, $0.2 million and $0.4 million, respectively, was reflected as a reduction of partners’ capital, and the other $0.2 million and $0.4 million was reflected as compensation expense and included in the “Selling, general and administrative” line item in the accompanying unaudited condensed consolidated statements of operations and comprehensive income.  

 

The total compensation expense related to the 2013 Plan for the three and six months ended June 30, 2015 was $1.3 million and $2.9 million, respectively, which was included in the “Selling, general and administrative” line item in the accompanying unaudited

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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 June 30, 2015 was less than $0.1 million.

 

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

 

 

 

 

Note 10—Earnings Per Unit

 

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

 

Diluted net income per unit applicable to limited partners includes the effects of potentially dilutive units on the Partnership’s units. For the three and six months ended June 30, 2015, the only potentially dilutive units outstanding consisted of the phantom units (see “Note 9—Equity Plans”). For the three and six months ended June 30, 2015, none of the phantom units are considered outstanding and therefore there were no potentially dilutive units outstanding.

 

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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 June 30, 2015 and 2014, the General Partner incurred expenses of $1.1 million and $1.1 million, respectively. For the six months ended June 30, 2015 and 2014, the General Partner incurred expenses of $2.2 million and $1.9 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 June 30, 2015 and December 31, 2014, the Partnership had a payable of approximately $1.7 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.

 

Registration Rights Agreement with the Sponsors

 

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.

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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 expired 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 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.  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.

 

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):

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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 Capital Partners LP.  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 was $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 June 30, 2015, spending on terminal-related projects by CorEnergy since the commencement of the Lease Agreement totaled approximately $8.8 million and, as a result, the base rent has increased by approximately $84,000 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 June 30, 2015 and 2014, the expense associated with the Lease Agreement was $1.6 million and $1.6 million, respectively.  During the six months ended June 30, 2015 and 2014, the expense associated with the Lease Agreement was $3.2 million and $3.3 million, respectively.  During the three and six months ended June 30, 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 Option 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.

Joliet LLC Agreement

In connection with the JBBR Acquisition, the Partnership and an affiliate of GE EFS entered into an amended and restated limited liability company agreement of Joliet Holdings governing their respective interests in Joliet Holdings (the “Joliet LLC Agreement”).  An affiliate of GE EFS owns 40% of Joliet Holdings, while the remaining 60% is owned by the Partnership. GE EFS owns, indirectly, interests in Lightfoot.  Lightfoot has a significant interest in the Partnership through its ownership of a 29.9% limited partner interest in the Partnership, 100% of the limited liability company interests in the General Partner and all of the Partnership’s

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incentive distribution rights.  Daniel Castagnola serves on the board of managers of Lightfoot Capital Partners GP LLC and on the Board of the General Partner and is a Managing Director at GE EFS, which is an affiliate of General Electric Capital Corporation.  In addition, Arc Terminals Holdings entered into a Management Services Agreement (the “MSA”) with Joliet Holdings to manage and operate the Joliet Terminal.  Arc Terminals Holdings is receiving a fixed monthly management fee and reimbursements for out-of-pocket expenses.  In addition, Arc Terminals Holdings may receive additional monthly management fees based upon the throughput activity at the Joliet Terminal.  During the three and six months ended June 30, 2015, the Partnership was paid $0.4 million, in each period, in fees and reimbursements by Joliet Holdings under the MSA.

PIPE Transaction

Registration Rights Agreement with PIPE Investors

Pursuant to the Unit Purchase Agreement dated as of February 19, 2015 (the “PIPE Purchase Agreement”) among the Partnership and the purchasers named therein (the “PIPE Purchasers”), the Partnership sold 4,520,795 common units at a price of $16.59 per common unit in a private placement (the “PIPE Transaction”) on May 14, 2015 for proceeds totaling $72.7 million after placement agent commissions and expenses, which were used to partially finance the Partnership’s portion of the JBBR Acquisition. As a part of the PIPE Transaction, the Partnership entered into a registration rights agreement (the “PIPE Registration Rights Agreement”), dated May 14, 2015, with the PIPE Purchasers. The issuance of the common units pursuant to the PIPE Purchase Agreement was made in reliance upon an exemption from the registration requirements of the Securities Act of 1933 pursuant to Section 4(a)(2) thereof.

Pursuant to the PIPE Registration Rights Agreement, the Partnership filed, and the SEC declared effective, a shelf registration statement registering the common units of the PIPE Purchasers. In addition, the PIPE Registration Rights Agreement gives the PIPE Purchasers piggyback registration rights under certain circumstances. These registration rights are transferable to affiliates of the PIPE Purchasers.

Material Relationships Relating to PIPE Transaction

MTP Energy Master Fund Ltd. (“Magnetar PIPE Investor”), one of the PIPE Purchasers, purchased 572,635 common units for approximately $9.5 million 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 Lightfoot, 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 June 30, 2015 and December 31, 2014.

 

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Commitments and contractual obligations

 

Future non-cancelable commitments related to certain contractual obligations as of June 30, 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 (See “Note 11—Related Party Transactions—Other Transactions with Related Persons—Operating Lease Agreement” for further information).

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 June 30, 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 June 30, 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 June 30, 2015, no additional amounts had been paid or are owed to GCAC.

In connection with the JBBR Acquisition, CenterPoint is entitled to receive up to an additional $27.0 million in cash earn-out payments.  As a part of the purchase price allocation related to the JBBR Acquisition, Joliet Holdings recorded a liability of $19.7 million, as of the date of the JBBR Acquisition, in connection with this potential CenterPoint earn-out payment.  As of June 30, 2015, the Joliet Holdings has incurred $0.2 million related to the earn-out payment.  The Partnership will continue to evaluate this liability each quarter for any changes in the estimated fair value.  

Note 14—Subsequent Events

Pawnee Terminal Acquisition

In July 2015, the Partnership, through its subsidiary Arc Terminals Holdings, acquired all of the limited liability company interests of UET Midstream, LLC (“UET Midstream”) from United Energy Trading, LLC (“UET”) and Hawkeye Midstream, LLC (together with UET, the “Sellers,” and such acquisition the “Pawnee Terminal Acquisition”) for total consideration of approximately $78.3 million, consisting of cash and common units of the Partnership subject to certain adjustments including a reduction in the cash component of the consideration payable by Arc Terminals Holdings at closing equal to an agreed upon amount of UET Midstream’s revenue attributable to the period commencing on May 1, 2015 and ending on the closing date. The Sellers remain responsible for all of UET Midstream’s operating expenses and are entitled to receive all of UET Midstream’s revenue, in each case to the extent attributable to the period prior to closing. UET Midstream’s principal assets consist of a newly constructed, substantially completed crude oil terminal and a nearby development property in northeastern Weld County, Colorado.  After taking into account certain estimated adjustments (which is subject to a further post-closing reconciliation procedure), the consideration paid to the Sellers at closing of approximately $76.6 million consisted of approximately $44.3 million in cash and approximately $32.3 million in unregistered common units of the Partnership.   The number of common units issued to the Sellers at the closing of the Pawnee Terminal Acquisition was based upon an issuance price of $18.50 per unit, which resulted in the issuance of 1,745,669 of the Partnership’s common units.  In connection with the issuance of the common units to the Sellers, the Partnership entered into an agreement with the Sellers granting the Sellers certain registration rights.  Management is currently reviewing the valuation of the net assets acquired in connection with the Pawnee Terminal Acquisition to determine the final purchase price allocation, which is expected to be completed in the third quarter of 2015.  

 

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Amendment to Credit Facility

In July 2015 and in connection with the Pawnee Terminal Acquisition, Arc Terminals Holdings, together with the Partnership and certain of its other subsidiaries, as guarantors, entered into the third amendment to the Credit Facility (the “Third Amendment”).  The Third Amendment principally modifies certain provisions of the Credit Facility (i) to permit the consummation of the Pawnee Terminal Acquisition and (ii) to increase the aggregate commitments under the Credit Facility from $275 million to $300 million.  

Cash Distributions

In July 2015, the Partnership declared a quarterly cash distribution of $0.425 per unit ($1.70 per unit on an annualized basis) totaling approximately $8.2 million for all common and subordinated units outstanding. The distribution is for the period from April 1, 2015 through June 30, 2015. The second quarter distribution represents a 3.7% increase over the first quarter 2015 cash distribution of $0.41 per unit ($1.64 per unit on an annualized basis).  The distribution is payable on August 14, 2015 to unitholders of record on August 10, 2015.

In July 2015, Joliet Holdings made a distribution to the members of approximately $3.0 million.  The Partnership received approximately $1.8 million of such distribution and the remaining $1.2 million was paid to an affiliate of GE EFS, the non-controlling interest member.  

 

 

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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 and any updates thereto in the Partnership’s subsequent quarterly reports on Form 10-Q and current reports on Form 8-K, 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 (“2014 Partnership 10-K”), 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

Pawnee Terminal Acquisition

In July 2015, we extended our operational footprint and customer relationships into the Colorado market by acquiring all of the limited liability company interests of UET Midstream, LLC (“UET Midstream”) from United Energy Trading, LLC (”UET”) and Hawkeye Midstream, LLC (together with UET, the “Sellers”) for a total consideration of approximately $78.3 million, consisting of cash and common units of the Partnership, subject to certain adjustments including a reduction in the cash component of the consideration payable at closing equal to an agreed upon amount of UET Midstream’s revenue attributable to the period commencing on May 1, 2015 and ending on the closing date. Sellers remain responsible for all of UET Midstream’s operating expenses and will be entitled to receive all of UET Midstream’s revenue, in each case to the extent attributable to the period prior to closing. UET Midstream’s principal assets consist of a newly constructed, substantially completed crude oil terminal (the “Pawnee Terminal”) and a nearby development property in northeastern Weld County, Colorado.  The Pawnee Terminal serves as the primary injection point on the Northeast Colorado Lateral of the Pony Express Pipeline, providing the Pawnee Terminal customers with ultimate service to Cushing, Oklahoma.  The Pawnee Terminal has approximately 200,000 barrels of commingled storage capacity (with room for additional storage) and is capable of receiving crude oil via truck unloading stations and connections to local crude oil gathering systems.  As of the closing date, the Pawnee Terminal is servicing several third-party contracts with a weighted average contract life of approximately five years, with aggregate take-or-pay volume commitments increasing each year during such five-year period.

After taking into account an estimate for certain adjustments (which is subject to a further post-closing reconciliation procedure), the consideration paid to the Sellers at closing was approximately $76.6 million and consisted of approximately $44.3 million in cash and approximately $32.3 million in unregistered common units of the Partnership (based on an issuance price of $18.50 per unit, resulting in the issuance of 1,745,669 common units at closing).  In connection with the issuance of the common units to the Sellers, the Partnership entered into an agreement with the Sellers granting the Sellers certain registration rights. The Partnership financed the cash portion of the consideration with borrowings under its Credit Facility.

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In connection with the Pawnee Terminal Acquisition, Arc Terminals Holdings LLC (“Arc Terminals Holdings”), together with the Partnership and certain of its subsidiaries, as guarantors, entered into the Third Amendment (as defined herein).  The Third Amendment principally modifies certain provisions of the Credit Facility (i) to permit the consummation of the Pawnee Terminal Acquisition and (ii) to increase the aggregate commitments under the Credit Facility from $275 million to $300 million.  

JBBR Acquisition

In May 2015, our joint venture company formed with an affiliate of GE Energy Financial Services (“GE EFS”) acquired 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 petroleum products terminal and a 4-mile crude oil pipeline (“Joliet Terminal”) located in Joliet, IL, which commenced commercial operations on May 17, 2015 and is in the final stages of construction. The acquisition consideration requires our joint venture company, Arc Terminals Joliet Holdings LLC (“Joliet Holdings”), to pay to CenterPoint earn-out payments for each barrel of crude oil that is either delivered to or received by the Joliet Terminal (without duplication) or for which JBBR receives payment under minimum volume commitments regardless of actual throughput activity.  Joliet Holdings’ earn-out obligations to CenterPoint will terminate upon the payment, in the aggregate, of $27 million.

We manage the ongoing operations of the Joliet Terminal and own a 60% interest in the Joliet Holdings. An affiliate of GE EFS owns the remaining 40% interest.

We financed 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). The Partnership sold 4,520,795 common units at a price of $16.59 to the purchasers in a private placement for proceeds totaling $72.7 million after placement agent commissions and expenses.  In addition, Arc Terminals Holdings borrowed  $61.0 million under the Credit Facility to partially finance the balance of the purchase price payable by it at the closing of the JBBR Acquisition.  

The Joliet Terminal has the capability to unload approximately 85,000 barrels of crude oil per day and has approximately 300,000 barrels of storage and a 4-mile pipeline connection to a common carrier crude oil pipeline. The facility has rail and marine access, as well as more than 80 acres of land available for future expansion. The Joliet Terminal is 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, 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.  

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; (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 including regional pricing differentials 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) changes to local, state and federal laws and regulations and (6) our ability and the ability of our competitors to capitalize on growth opportunities and changing market dynamics.

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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 differentials, 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.

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.

In most cases, as the market price of crude oil and petroleum products paid by our customers in local markets increases over the price charged by producers to our customers for such crude oil and petroleum products, our customers’ demand for crude oil and/or petroleum products will be high.  As the market price for crude oil and petroleum products by our customers in local markets decreases as compared to the price charged by producers to our customers for such crude oil and petroleum products, our customers’ demand for crude oil and petroleum products will be lower. In general, demand for our throughput services increases and decreases as pricing differentials in favor of our customers’ increases or decreases, respectively.

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.

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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 June 30, 2015, we had an aggregate of over 150 acres of available land in Blakeley, AL, Mobile, AL, Chillicothe, IL, Joliet, 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:

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 selling, general and administrative (“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.

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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 June 30, 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 SG&A expenses and SG&A–affiliate expenses, we evaluate our SG&A expenses as a whole, which primarily consist of compensation of non-operating personnel, employee benefits, transaction costs, reimbursements to our General Partner and its affiliates of SG&A expenses incurred in connection with our operations and expenses of overall administration.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that management and external users of our consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess: (i) the performance of our assets without regard to the impact of financing methods, capital structure or historical cost basis of our assets; (ii) the viability of capital expenditure projects and the overall rates of return on alternative investment opportunities; (iii) our ability to make distributions; (iv) our ability to incur and service debt; (v) our ability to fund capital expenditures; and (vi) our ability to incur additional expenses. We define Adjusted EBITDA as net income before interest expense, income taxes and depreciation and amortization expense, as further adjusted for other non-cash charges and other charges that are not reflective of our ongoing operations.

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

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.

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

 

 

 

 

 

(c) The depreciation and amortization have been adjusted to remove the non-controlling interest portion related to the JBBR Acquisition.

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Results of Operations

The following table and discussion is a summary of our results of operations for the three and six months ended June 30, 2015 and 2014 (in thousands, except operating data):

 

 

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

Storage Capacity. Storage capacity for the three months ended June 30, 2015 increased by 300,000 barrels or 5% compared to the three months ended June 30, 2014.  The increase in storage capacity is related to the JBBR Acquisition.  

Throughput Activity. Throughput activity for the three months ended June 30, 2015 decreased by 16.2 mbpd, or 20%, compared to the three months ended June 30, 2014.  The decrease was due to reduced customer activity and the expiration of customer agreements in Baltimore, MD, Blakeley, AL, Chickasaw, AL, Cleveland, OH, Mobile, AL, Portland, OR and Saraland, AL offset by the execution of new customer agreements and increased customer activity in Brooklyn, NY and Selma, NC.

Revenues. The following table details the types and amounts of revenues generated during the three months ended June 30, 2015 and 2014 (in thousands, except percentages).

 

 

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Revenues for the three months ended June 30, 2015 increased by $4.4 million, or 30%, compared to the three months ended June 30, 2014.  The $4.7 million, or 37%, increase in storage and throughput services fees was the result of the execution of new customer agreements in Blakeley, AL and Toledo, OH, amendments to existing agreements in Brooklyn, NY and Portland, OR, increased throughput activity at certain refined products terminals and the new customer agreements acquired in the JBBR Acquisition 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 19%, decrease in ancillary services fees was driven by a reduction in customer activity in our Gulf Coast terminals compared to the second quarter of 2014.

 

Operating Expenses. Operating expenses for the three months ended June 30, 2015 decreased by $0.3 million, or 4%, compared to the three months ended June 30, 2014. The $0.3 million decrease in operating expenses was the result of lower utility and contractor expenses due to reduced transloading activity in our Gulf Coast terminals offset by the additional operating expenses at the Joliet Terminal.

 

Selling, General and Administrative Expenses.  SG&A expenses for the three months ended June 30, 2015 increased by $2.4 million, or 78%, compared to the three months ended June 30, 2014.  The increase in SG&A expense was the result of unit-based compensation expense of $1.6 million related to the 2013 Plan grants and an increase in due diligence expense of approximately $0.7 million, which was related to the JBBR Acquisition and Pawnee Terminal Acquisition.

 

Depreciation and Amortization Expense. Depreciation expense for the three months ended June 30, 2015 increased by $0.9 million, or 49%, compared to the three months ended June 30, 2014, primarily due to the impact of the JBBR Acquisition, the 2015 capital expenditure program at the Mobile – Methanol, AL terminal for customer expansion activities and incremental maintenance capital expenditures at the Brooklyn, NY facility.  Amortization expense for the three months ended June 30, 2015 increased by $0.8 million, or 58%, compared to the three months ended June 30, 2014, primarily due to the intangible assets purchased in the JBBR Acquisition offset by the full amortization of certain intangibles in 2014.

 

Equity Earnings from Unconsolidated Affiliate. Equity earnings from unconsolidated affiliate for the three months ended June 30, 2015 increased less than $0.1 million, or 1%, compared to the three months ended June 30, 2014.

 

Interest Expense. Interest expense for the three months ended June 30, 2015 increased $0.6 million, or 63%, compared to the three months ended June 30, 2014. The increase in interest expense is the result of higher outstanding indebtedness at June 30, 2015 of $176.1 million compared to $111.1 million at June 30, 2014.  The increase in indebtedness was primarily related to amounts drawn from the Credit Facility to partially finance the JBBR Acquisition.    

 

Net Income. Net income for the three months ended June 30, 2015 increased by $0.1 million, or 3%, compared to the three months ended June 30, 2014, primarily related to an increase in revenues of $4.4 million primarily attributable to the JBBR Acquisition and a decrease in operating expenses of $0.3 million as a result of lower utility and contractor expenses due to reduced transloading activity at the Gulf Coast terminals offset by an increase in one-time transaction related expenses of $0.7 million, an increase in interest expense of $0.6 million due to a higher outstanding indebtedness at June 30, 2015, an increase in depreciation and amortization of $0.9 million and $0.8 million, respectively, attributable to the JBBR Acquisition and an increase of $1.6 million of unit-based compensation expense associated with the 2013 Plan.  

 

Adjusted EBITDA. Adjusted EBITDA for the three months ended June 30, 2015 increased by $2.9 million, or 37%, compared to the three months ended June 30, 2014.  The increase in Adjusted EBITDA for the three months ended June 30, 2015 was primarily attributable to the execution of new customer agreements in Blakeley, AL and Toledo, OH, reduced operating expenses at our Gulf Coast facilities, increased customer activity at certain refined products terminals and the contribution of the Joliet Terminal operations.  

 

Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

Storage Capacity. Storage capacity for the six months ended June 30, 2015 increased by 300,000 barrels or 5% compared to the six months ended June 30, 2014.  The increase in storage capacity is related to the JBBR Acquisition.  

Throughput Activity. Throughput activity for the six months ended June 30, 2015 decreased by 9.2 mbpd, or 12%, compared to the six months ended June 30, 2014.  The decrease was due to reduced customer activity and the expiration of customer agreements in Baltimore, MD, Blakeley, AL, Chickasaw, AL, Cleveland, OH, Mobile, AL, Portland, OR and Saraland, AL offset by the execution of new customer agreements and increased customer activity in Brooklyn, NY, Mobile - Methanol, AL and Selma, NC.

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Revenues. The following table details the types and amounts of revenues generated during the six months ended June 30, 2015 and 2014 (in thousands, except percentages).

 

Revenues for the six months ended June 30, 2015 increased by $4.7 million, or 17%, compared to the six months ended June 30, 2014.  The $5.5 million, or 23%, increase in storage and throughput services fees was the result of the execution of new customer agreements in Blakeley, AL and Toledo, OH, amendments to existing customer agreements in Brooklyn, NY and Portland, OR, increased throughput activity at certain refined products terminals and the new customer agreements acquired in the JBBR Acquisition offset by reduced customer activity and the expiration of customer agreements in Blakeley, AL, Chickasaw, AL, Mobile, AL and Saraland, AL.  The $0.8 million, or 20%, decrease in ancillary services fees was driven by a reduction in customer activity in our Gulf Coast terminals compared to the six months ended June 30, 2014.

 

Operating Expenses. Operating expenses for the six months ended June 30, 2015 decreased by $1.2 million, or 8%, compared to the six months ended June 30, 2014. The $1.2 million decrease in operating expenses was the result of lower utility and contractor expenses because of reduced transloading activity at the Gulf Coast terminals offset by the additional operating expenses at the Joliet Terminal.

 

Selling, General and Administrative Expenses.  SG&A expenses for the six months ended June 30, 2015 increased by $5.1 million, or 89%, compared to the six months ended June 30, 2014. The increase in SG&A expense was the result of unit-based compensation expense of $3.4 million related to the 2013 Plan grants, an increase in due diligence expense of approximately $1.4 million, which was related to the JBBR Acquisition and Pawnee Terminal Acquisition, and an increase in expenses paid to the General Partner of $0.2 million.

 

Depreciation and Amortization Expense. Depreciation expense for the six months ended June 30, 2015 increased by $1.0 million, or 29%, compared to the six months ended June 30, 2014, primarily due to the impact of the JBBR Acquisition, 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 six months ended June 30, 2015 increased by $0.7 million, or 25%, compared to the six months ended June 30, 2014, due to intangible assets purchased in the JBBR Acquisition offset by the full amortization of certain intangibles in 2014.

 

Equity Earnings from Unconsolidated Affiliate. Equity earnings from unconsolidated affiliate for the six months ended June 30, 2015 increased by $0.1 million, or 1%, compared to the six months ended June 30, 2014.

 

Interest Expense. Interest expense for the six months ended June 30, 2015 increased $0.6 million, or 34%, compared to the six months ended June 30, 2014. The increase in interest expense is a result of higher outstanding indebtedness at June 30, 2015 of $176.1 million compared to $111.1 million at June 30, 2014.  The increase in indebtedness was primarily related to amounts drawn from the Credit Facility to partially finance the JBBR Acquisition.

 

Net Income. Net income for the six months ended June 30, 2015 decreased by $1.5 million, or 32%, compared to the six months ended June 30, 2014, primarily related to an increase in one-time transaction related expenses of $1.4 million, an increase of $3.4 million of unit-based compensation expense associated with the 2013 Plan and increases in depreciation, amortization and interest expense of $1.0 million, $0.7 million and $0.6 million, respectively, primarily attributable to the JBBR Acquisition offset by a decrease in operating expenses of $1.2 million as a result of lower utility and contractor expenses due to reduced transloading activity at the Gulf Coast terminals and an increase in revenues of $4.7 million attributable to the JBBR Acquisition, new customer agreements and amendments to existing customer agreements.  

 

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Adjusted EBITDA. Adjusted EBITDA for the six months ended June 30, 2015 increased by $2.9 million, or 19%, compared to the six months ended June 30, 2014.  The increase in Adjusted EBITDA for the six months ended June 30, 2015 was primarily attributable to the execution of new customer agreements in Blakeley, AL and Toledo, OH, reduced operating expenses at our Gulf Coast facilities, increased customer activity at certain refined products terminals and the contribution of the Joliet Terminal operations offset by a reduction in transloading activities and incremental general and administrative expenses.  

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 July 2015, we declared a quarterly distribution of $0.425 per common unit and subordinated unit per quarter, which equates to approximately $8.2 million per quarter, or $32.7 million per year, based on the number of common and subordinated units outstanding as of August 3, 2015.  The distribution is payable on August 14, 2015 to unitholders of record on August 10, 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 $275.0 million of borrowing capacity.  As of June 30, 2015, we had borrowings of $176.1 million under the Credit Facility at an interest rate of 3.19%.  During the first and second quarter of 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. This letter of credit was extinguished when the JBBR Acquisition closed in May 2015.  Based on the restrictions under our total leverage ratio covenant, as of June 30, 2015, we had $42.6 million of available capacity under the Credit Facility.

 

The Credit Facility is available to fund working capital and to finance capital expenditures and other permitted payments and allows 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 $20.0 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 June 30, 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

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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 May 2015, our operating subsidiary, Arc Terminals Holdings, as borrower, together with Arc Logistics and certain of its other subsidiaries, as guarantors, entered into the Second Amendment to the Credit Facility (the “Second Amendment”) as part of its financing for the JBBR Acquisition.  Upon the consummation of the JBBR Acquisition in May 2015, the aggregate commitments under the Credit Facility increased from $175 million to $275 million.  In addition, the sublimit for letters of credit was increased from $10 million to $20 million.  

Third Amendment to Credit Agreement

In July 2015, our operating subsidiary, Arc Terminals Holdings, as borrower, together with Arc Logistics and certain of its other subsidiaries, as guarantors, entered into the Third Amendment to the Credit Facility (the “Third Amendment”) as part of its financing for the Pawnee Terminal Acquisition.  Upon the consummation of the Pawnee Terminal Acquisition in July 2015, the aggregate commitments under the Credit Facility increased from $275 million to $300 million.

JBBR Acquisition Financing

In May 2015 Joliet Holdings, a joint venture company owned 60% by the Partnership and 40% by an affiliate of GE EFS, purchased all of the membership interests in JBBR from CenterPoint for a base cash purchase price of $216 million.  We financed 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. Pursuant to the Unit Purchase Agreement with the purchasers named therein (the “PIPE Purchasers”) in a private placement, the Partnership sold 4,520,795 common units at a price of $16.59 to the PIPE Purchasers for proceeds totaling $72.7 million after placement agent commissions and expenses.  In addition, Arc Terminals Holdings borrowed $61.0 million under the Credit Facility to partially finance the balance of the purchase price payable by it at the closing of the JBBR Acquisition.

Cash Flows

 

Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 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 $12.6 million for the six months ended June 30, 2015 compared to $13.6 million for the six months ended June 30, 2014. This $1.0 million decrease across periods was primarily attributable to a $1.0 million decrease of cash provided by working capital.  The decrease in cash provided by changes in working capital of $1.0 million across the comparable periods was primarily due to the changes in cash provided by amounts due to our General Partner, other current assets, and accrued expenses of $0.9 million, $0.8 million and $0.5 million, respectively, partially offset by cash used in changes to accounts receivables of $3.0 million.

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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 $219.3 million for the six months ended June 30, 2015, of which $216.0 million was used for the JBBR Acquisition, $0.3 million was 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 $3.0 million was used for expansion and maintenance capital expenditures. Net cash used in investing activities was $6.4 million for the six months ended June 30, 2014, of which $5.7 million was used for construction and improvements of our Blakeley, AL, Chickasaw, AL and Mobile, AL facilities and $0.6 million was related to the capital calls by Gulf LNG Holdings for its development of a natural gas liquefaction and export terminal at the LNG Facility.

 

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 provided by financing activities was $210.1 million for the six months ended June 30, 2015, compared to net cash flows used in financing activities of $5.4 million for the six months ended June 30, 2014. This $215.5 million increase was primarily attributable to an increase in net borrowings from our Credit Facility of $62.5 million, net proceeds from our equity offering of $72.1 million and equity contributions from non-controlling interests of 87.0 million all connected to the JBBR Acquisition and Pawnee Terminal Acquisition offset by an increase in distributions of $2.9 million and an increase in deferred financing costs of $2.6 million.

Contractual Obligations

 

We have contractual obligations that are required to be settled in cash. Our contractual obligations as of June 30, 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 and six months ended June 30, 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 June 30, 2015 as compared to the three months ended June 30, 2014 was due to the timing of tank inspections at a number of terminals and upgrades to IT equipment upgrades in 2014.  The decrease during the six months ended June 30, 2015 as compared to the six months ended June 30, 2014 was due to a decrease in maintenance projects at our Gulf Coast terminals.

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Expansion Capital Expenditures

 

During the three and six months ended June 30, 2015, we invested capital to upgrade the Blakeley, AL, Brooklyn, NY and Mobile - Methanol, AL terminals in connection with new long-term customer agreements and invested capital to upgrade the Portland, OR terminal to support an existing customer agreement.

 

During the three and six months ended June 30, 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 the Chickasaw, AL terminal; (iii) upgrade the marine infrastructure and truck rack in Cleveland, OH for a new customer agreement; (iv) upgrade a tank in Chickasaw, AL for a new customer agreement; and (v) complete 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 June 30, 2015, there have been no significant changes to our critical accounting policies and estimates disclosed in our 2014 Partnership 10-K, 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 2014 Partnership 10-K, 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 June 30, 2015, we had $176.1 million of outstanding borrowings under the Credit Facility, bearing interest at variable rates. The weighted average interest rate incurred on the indebtedness during the three and six months ended June 30, 2015 was approximately 3.3%. The impact of a 1% increase in the interest rate on this amount of debt would have resulted in an estimated $0.4.million increase and a $0.6 million increase in interest expense for the three and six months ended June 30, 2015, respectively, assuming that our indebtedness remained constant throughout the year. We may use certain derivative instruments to hedge our exposure to variable interest rates in the future, but we do not currently have in place any hedges.

 

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 June 30, 2015 at the reasonable assurance level.

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Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2015 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

 

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

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risks under the heading “Risk Factors” in our 2014 Partnership 10-K and any updates thereto in the Partnership’s subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. There has been no material change in our risk factors from those described in the 2014 Partnership 10-K other than those disclosed below and in our current report on Form 8-K filed with the SEC on July 15, 2015 in connection with the Pawnee Terminal Acquisition. 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.

The tax treatment of publicly traded partnerships or an investment in our units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

The present U.S. federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial changes or differing interpretations at any time. For example, the Obama administration’s budget proposal for fiscal year 2016 recommends that certain publicly traded partnerships earning income from activities related to fossil fuels be taxed as corporations beginning in 2021. From time to time, members of Congress propose and consider such substantive changes to the existing federal income tax laws that affect publicly traded partnerships. If successful, the Obama administration’s proposal or other similar proposals could eliminate the qualifying income exception to the treatment of all publicly traded partnerships as corporations upon which we rely for our treatment as a partnership for U.S. federal income tax purposes.

In addition, the IRS, on May 5, 2015, issued proposed regulations concerning which activities give rise to qualifying income within the meaning of Section 7704 of the Internal Revenue Code. We do not believe the proposed regulations affect our ability to qualify as a publicly traded partnership. However, finalized regulations could modify the amount of our gross income that we are able to treat as qualifying income for the purposes of the qualifying income requirement.

Any modification to the U.S. federal income tax laws may be applied retroactively and could make it more difficult or impossible for us to meet the exception for certain publicly traded partnerships to be treated as partnerships for U.S. federal income tax purposes. We are unable to predict whether any of these changes or other proposals will ultimately be enacted. Any such changes could negatively impact the value of an investment in our common units.

 

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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