The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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 and Description of Business
The Partnership is a fee-based, growth-oriented Delaware limited partnership formed by Lightfoot in 2007 to own, operate, develop and acquire a diversified portfolio of complementary energy logistics assets. The Partnership is principally engaged in the terminalling, storage, throughput and transloading of crude oil and petroleum products. The Partnership is focused on growing its business through the optimization, organic development and acquisition of terminalling, storage, rail, pipeline and other energy logistics assets that generate stable cash flows.
In November 2013, the Partnership completed its IPO by selling 6,786,869 common units (which includes 786,869 common units issued pursuant to the exercise of the underwriters’ over-allotment option) representing limited partner interests in the Partnership at a price to the public of $19.00 per common unit. In connection with the IPO, the Partnership amended and restated its $40.0 million revolving credit facility.
The Partnership’s energy logistics assets are strategically located in the East Coast, Gulf Coast, Midwest, Rocky Mountains and West Coast regions of the United States and supply a diverse group of third-party customers, including major oil companies, independent refiners, crude oil and petroleum product marketers, distributors and various industrial manufacturers. Depending upon the location, The Partnership’s facilities possess pipeline, rail, marine and truck loading and unloading capabilities allowing customers to receive and deliver product throughout North America. The Partnership’s asset platform allows customers to meet the specialized handling requirements that may be required by particular products. The Partnership’s combination of diverse geographic locations and logistics platforms gives it the flexibility to meet the evolving demands of existing customers and address those of prospective customers.
As of June 30, 2016, the Partnership’s assets consisted of:
|
●
|
21 terminals in twelve states located in the East Coast, Gulf Coast, Midwest, Rocky Mountains and West Coast regions of the United States with approximately 7.7 million barrels of crude oil and petroleum product storage capacity;
|
|
●
|
four rail transloading facilities with approximately 126,000 bpd of throughput capacity; and
|
|
●
|
the LNG Interest in connection with the LNG Facility, which has 320,000 M
3
of LNG storage, 1.5 bcf/d natural gas sendout capacity and interconnects to major natural gas pipeline networks.
|
The Partnership interests included the following as of June 30, 2016:
|
●
|
13,181,409 common units representing limited partner interests (of which 68,617 common units are held by Lightfoot);
|
|
●
|
6,081,081 subordinated units representing limited partner interests (of which 5,146,264 subordinated units are held by Lightfoot);
|
|
●
|
a non-economic general partner interest (which is held by our general partner, which is owned by Lightfoot); and
|
|
●
|
incentive distribution rights (which are held by our general partner, which is owned by Lightfoot).
|
7
N
ote 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, 2015 (the “2015 Partnership 10-K”). Certain items from that discussion are repeated or updated below as necessary to assist in the understanding of these interim statements.
Basis of Presentation
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, 2015, which are included in the 2015 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, 2016 and 2015.
Goodwill
Goodwill represents the excess of consideration paid over the fair value of net assets acquired in a business combination. Goodwill is not amortized but instead is assessed for impairment at least annually or when facts and circumstances warrant. Goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The Partnership determines the fair value of its single reporting unit by blending two valuation approaches: the income approach and a market value approach. The inputs included assumptions related to the future performance of the Partnership and assumptions related to discount rates, long-term growth rates and control premiums. Based on the results of the first step of the quantitative impairment assessment of its goodwill as of December 31, 2015, the fair value of the Partnership’s reporting unit exceeded its carrying value by approximately 9% and management concluded that no impairment was necessary. In the event that market conditions were to remain weak for an extended period of time, the Partnership may be required to record an impairment of goodwill in the future, and such impairment could be material.
A summary of the changes in the carrying amount of goodwill is as follows (in thousands):
|
As of
|
|
|
June 30,
|
|
|
December 31,
|
|
|
2016
|
|
|
2015
|
|
Beginning Balance
|
$
|
39,871
|
|
|
$
|
15,162
|
|
Goodwill acquired
|
|
-
|
|
|
|
24,709
|
|
Ending Balance
|
$
|
39,871
|
|
|
$
|
39,871
|
|
8
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 (as defined in “Note 2
—
Summary of Significant Accounting Policies
—
Fair Value of Financial Instruments” below).
Deferred Rent
The Portland Lease Agreement (as defined in “Note 11—Related Party Transactions—Other Transactions with Related Persons—Operating Lease Agreement”
below) contains certain rent escalation clauses, contingent rent provisions and lease termination payments. The Partnership recognizes rent expense for operating leases on a straight-line basis over the term of the lease, taking into consideration the items noted above. Contingent rental payments are generally recognized as rent expense as incurred. The deferred rent resulting from the recognition of rent expense on a straight-line basis related to the Portland Lease Agreement is included within “Other non-current liabilities” in the accompanying unaudited condensed consolidated balance sheets at June 30, 2016 and December 31, 2015.
Contingencies
In the normal course of business, the Partnership may be subject to loss contingencies, such as legal proceedings and claims arising out of its business that cover a wide range of matters. An accrual for a loss contingency is recognized when it is probable that an asset had been impaired or a liability had been incurred and the amount of loss can be reasonably estimated. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Partnership’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed. If the estimate of a probable loss is a range and no amount within the range is more likely, the Partnership will accrue the minimum amount of the range.
There are many uncertainties associated with any legal proceeding and these actions or other third-party claims against us may cause us to incur costly litigation and/or substantial settlement charges. As a result, our business, financial condition, results of operations and cash flows could be adversely affected. The actual liability in any such matters may be materially different from our estimates, if any.
Revenue Recognition
Revenues from leased tank storage and delivery services are recognized as the services are performed, evidence of a contractual arrangement exists and collectability is reasonably assured. Revenues also include the sale of excess products and additives which are mixed with customer-owned liquid products. Revenues for the sale of excess products and additives are recognized when title and risk of loss pass to the customer.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at a specified measurement date. Fair value measurements are derived using inputs and assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. GAAP establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This three-tier hierarchy classifies fair value amounts recognized or disclosed in the condensed consolidated financial statements based on the observability of inputs used to estimate such fair values. The classification within the hierarchy of a financial asset or liability is determined based on the lowest level input that is significant to the fair value measurement. The hierarchy considers fair value amounts based on observable inputs (Levels 1 and 2) to be more reliable and predictable than those based primarily on unobservable inputs (Level 3). At each balance sheet reporting date, the Partnership categorizes its financial assets and liabilities using this hierarchy.
The amounts reported in the balance sheet for cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of the short-term maturities of these instruments (Level 1). Because the Credit Facility (as defined in “Note 7 – Debt – Credit Facility” below) has a market rate of interest, its carrying amount approximated fair value (Level 2).
In connection with the Partnership’s acquisition, through a joint venture company formed with an affiliate of GE Energy Financial Services (“GE EFS”), of all of the memberships interests of Joliet Bulk, Barge & Rail LLC (“JBBR”) from CenterPoint Properties Trust (“CenterPoint”) for $216.0 million (the “JBBR Acquisition”), Arc Terminals Joliet Holdings LLC (“Joliet Holdings”) has an earn-out obligation to CenterPoint which was valued at the time of the JBBR Acquisition at $19.7 million. 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. The balance of the earn-out liability is included within “Other non-current liabilities” in the accompanying consolidated balance sheets at June 30, 2016 and December 31, 2015. Since the fair value of the contingent consideration obligation is based primarily upon unobservable inputs, it is classified as Level 3 in the fair value hierarchy. The contingent consideration obligation will be revalued at each reporting period and changes to the fair value will be recorded as a component of operating income. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in the assumed timing of revenue and expense estimates. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent reporting period.
9
Accordingly, future business and economic conditions can materially impact the amount of contingent consideration expense we record in any given period. No rev
aluation adjustments have been necessary since the JBBR acquisition closed. For the three and six months ended June 30, 2016, Joliet Holdings has paid $0.3 million and $0.7 million, respectively, related to the earn-out obligation. For the three and six
months ended June 30, 2015, Joliet Holdings has paid $0.2 million and $0.2 million, respectively, related to the earn-out obligation. Since the JBBR Acquisition through June 30, 2016, Joliet Holdings has paid $1.6 million of the earn-out to CenterPoint.
The following is a reconciliation of the beginning and ending amounts of the contingent consideration obligation related to the JBBR Acquisition (in thousands):
|
Balance at
|
|
|
|
|
|
|
Earn-out
|
|
|
Balance at
|
|
|
December 31
|
|
|
Revaluation
|
|
|
payments
|
|
|
June 30,
|
|
|
2015
|
|
|
Adjustments
|
|
|
paid
|
|
|
2016
|
|
Liabilities at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JBBR contingent consideration
|
$
|
18,830
|
|
|
$
|
-
|
|
|
$
|
(683
|
)
|
|
$
|
18,147
|
|
Total liabilities at fair value
|
$
|
18,830
|
|
|
$
|
-
|
|
|
$
|
(683
|
)
|
|
$
|
18,147
|
|
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.”
Segment Reporting
The Partnership derives revenue from operating its terminal and transloading facilities. These facilities have been aggregated into one reportable segment because the facilities have similar long-term economic characteristics, products and types of customers.
Non-controlling Interests
The Partnership applies the provisions of ASC 810
Consolidations
, which were amended on January 1, 2009 by ASC 810-10-65 and ASC 810-10-45 (“ASC 810”). As required by ASC 810, our non-controlling ownership interests in consolidated subsidiaries are presented in the consolidated balance sheet within capital as a separate component from partners’ capital. In addition, consolidated net income includes earnings attributable to both the partners and the non-controlling interests. For the six months ended June 30, 2016 and 2015, $5.4 million and $0 million, respectively, of distributions have been made to non-controlling interest holders of consolidated subsidiaries. Refer to “Note 3
—
Acquisitions
—
JBBR Acquisition” for discussion of the JBBR Acquisition which gave rise to the non-controlling interests.
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,
10
including significant judgments and changes in judgments, information about contract balances and performance obligations, and assets recognized from costs incurred to obtain or fulfill a contract. In April 2015, the FASB pr
oposed 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 M
ay 2016, the FASB issued certain narrow-scope improvements and practical expedients to the guidance. The Partnership is currently evaluating the potential impact of this authoritative guidance on its financial condition, results of operations, cash flows
and related disclosures.
In August 2015, the FASB issued new guidance which adds comments from the SEC related to the presentation of debt issuance costs related to line-of-credit arrangements. The SEC commented it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Partnership adopted this requirement in the first quarter of 2016 and it had no impact on its financial condition, results of operations, cash flows and related disclosures.
In January 2016, the FASB issued new guidance which requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes
in fair value recognized in net income; requires public business entities to use the exit price notion when measuring fair value of financial
instruments for disclosure purposes; requires separate presentation of financial assets and financial liabilities by measurement category and form of
financial asset (i.e., securities or loans and receivables); and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate fair value that is required to be disclosed for financial instruments measured at amortized cost. The effective date will be the first quarter of fiscal year 2017. The Partnership does not expect this requirement to have a significant impact on its financial condition, results of operations, cash flows and related disclosures.
In February 2016, the FASB issued new guidance which amends various aspects of existing guidance for leases. The new guidance requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. The main difference between previous GAAP and the amended standard is the recognition of lease assets and lease liabilities by lessees on the balance sheet for those leases classified as operating leases under previous GAAP. As a result, the Partnership will have to recognize a liability representing its lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. The new guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Partnership is currently evaluating the effect this standard will have on its consolidated financial position or results of operations.
In March 2016, the FASB issued new guidance which changes the accounting for certain aspects of share-based compensation to employees including forfeitures, employer tax withholding and the financial statement presentation of excess tax benefits or expense. This guidance also clarifies the statement of cash flows presentation of certain components of share-based compensation. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016 and early adoption is permitted. The Partnership is currently evaluating the effect this standard will have on its consolidated financial position or results of operations.
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.
Gulf Oil Terminals Acquisition
In January 2016, the Partnership, through its wholly owned subsidiary Arc Terminals Holdings LLC (“Arc Terminals Holdings”), acquired four petroleum products terminals (the “Pennsylvania Terminals”) located in Altoona, Mechanicsburg, Pittston and South Williamsport, Pennsylvania from Gulf Oil Limited Partnership (“Gulf Oil”) for $8.0 million (the “Gulf Oil Terminals Acquisition”). In connection with this acquisition, the Partnership also acquired an option to purchase from Gulf Oil at an agreed upon purchase price additional land with storage tanks located adjacent to one of the Pennsylvania Terminals. At closing, the Partnership entered into a take-or-pay terminal services agreement with Gulf Oil with an initial term of two years. The throughput and related services provided by the Partnership to Gulf Oil under the terminal services agreement are provided at the Pennsylvania Terminals, as well as several of the Partnership’s other petroleum products terminals. The acquisition was financed with a combination of available cash and borrowings under the Credit Facility.
The Gulf Oil Terminals Acquisition was accounted for as a business combination in accordance with ASC Topic 805, “Business Combinations” (“ASC 805”). The Gulf Oil Terminals Acquisition purchase price equaled the approximately $8.0 million fair value of the identifiable assets acquired and, accordingly the Partnership did not recognize any goodwill as a part of the Gulf Oil Terminals Acquisition. Transaction costs incurred by the Partnership in connection with the acquisition, consisting primarily of legal and other professional fees, totaled approximately $0.6 million and were expensed as incurred in accordance with ASC 805.
11
Management has finalized the valuation of the net assets acquired in connection with the Gulf Oil Terminals Acquisition and the final purchase price allocation has been determined.
The total purchase price of $8.0 million was preliminarily allocated to the net assets acquired as follows (in thousands):
Consideration:
|
|
|
|
Cash paid to seller
|
$
|
8,000
|
|
Total consideration
|
$
|
8,000
|
|
Allocation of purchase price:
|
|
|
|
Property and equipment
|
$
|
8,000
|
|
Net assets acquired
|
$
|
8,000
|
|
Since the Gulf Oil Terminals Acquisition closing date in January 2016 through June 30, 2016, the Pennsylvania Terminals have generated approximately $0.8 million in revenue and less than $0.1 million of operating income.
The unaudited pro forma results related to the Gulf Oil Terminals Acquisition have been excluded as the nature of the revenue-producing activities previously associated with the Pennsylvania Terminals has changed substantially post-acquisition from intercompany revenue to third-party generated revenue. In addition, historical financial information for the Pennsylvania Terminals prior to the acquisition is not indicative of how the Pennsylvania Terminals are being operated since the Partnership’s acquisition and would be of no comparative value in understanding the future operations of the Pennsylvania Terminals.
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 $216.0 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 owns, among other things, 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 Partnership’s operating results. The GE EFS ownership interest in Joliet Holdings is presented separately as a non-controlling interest.
The JBBR Acquisition was accounted for as a business combination in accordance with ASC 805. In accordance with ASC 805, the Partnership recorded $19.7 million of additional consideration related to Joliet Holdings’ 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 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 $211.0 million fair value of the identifiable assets acquired, and accordingly the Partnership recognized goodwill of $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 $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. Management has finalized the valuation of the net assets acquired in connection with the JBBR Acquisition and the final purchase price allocation has been determined.
12
The following table summarizes the consideration paid an
d the assets acquired at the JBBR Acquisition closing date (in thousands):
Consideration:
|
|
|
|
Cash paid to seller
|
$
|
216,000
|
|
Earn-out liability recognized
|
|
19,700
|
|
Total consideration
|
$
|
235,700
|
|
Allocation of purchase price:
|
|
|
|
Property and equipment
|
$
|
156,991
|
|
Intangible assets
|
|
54,000
|
|
Goodwill
|
|
24,709
|
|
Net assets acquired
|
$
|
235,700
|
|
The unaudited pro forma results pursuant to ASC 805 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 is generating 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.
Pawnee Terminal Acquisition
In July 2015, the Partnership, through its wholly owned 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 “Pawnee Sellers”) for total consideration (net of certain adjustments) of $76.6 million (the “Pawnee Purchase Price”), consisting of $44.3 million in cash and $32.3 million in common units of the Partnership (the “Pawnee Terminal Acquisition”). 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 (“Pawnee Terminal”). The number of common units issued to the Pawnee 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 (“Pawnee Transaction Units”). The fair value of the Pawnee Transaction Units on the closing date was $17.30 per unit (based upon the closing price of the Partnership’s common unit price on the closing date), which resulted in a further reduction of the Pawnee Purchase Price, recognized for accounting purposes, of $2.1 million. In connection with the issuance of the common units to the Pawnee Sellers, the Partnership entered into an agreement with the Pawnee Sellers granting the Pawnee Sellers certain registration rights. Arc Terminals is responsible for completing the remaining construction of the Pawnee Terminal and the costs thereof are estimated to be approximately $11.0 million. The Partnership recorded $4.5 million of liabilities related to the construction costs that had been completed, but not paid, as of the closing date. The $4.5 million was recorded on the balance sheet as a current liability and as of June 30, 2016, the Partnership had paid all amounts related to the construction liability acquired. The Partnership expects construction of the Pawnee Terminal to be completed in 2016.
The Pawnee Terminal Acquisition was accounted for as a business combination in accordance with ASC 805. The Pawnee Terminal Acquisition purchase price equaled the $74.5 million fair value of the identifiable assets acquired and accordingly, the Partnership did not recognize any goodwill as a part of the Pawnee Terminal Acquisition. Transaction costs incurred by the Partnership in connection with the acquisition, consisting primarily of legal and other professional fees, totaled $1.8 million and were expensed as incurred in accordance with ASC 805. Management has finalized the valuation of the net assets acquired in connection with the Pawnee Terminal Acquisition and the final purchase price allocation has been determined.
The following table summarizes the consideration paid and the assets acquired at the Pawnee Terminal Acquisition closing date (in thousands):
Consideration:
|
|
|
|
Cash paid to seller
|
$
|
44,332
|
|
Fair value of equity issued to seller
|
|
30,200
|
|
Total consideration
|
$
|
74,532
|
|
Allocation of purchase price:
|
|
|
|
Property and equipment
|
$
|
23,613
|
|
Intangible assets
|
|
55,442
|
|
Less: liabilities assumed
|
|
(4,523
|
)
|
Net assets acquired
|
$
|
74,532
|
|
13
The unaudited pro forma operating results pursuant to ASC 805 related to the Pawnee Terminal Acquisition have been excluded due to immateriality.
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, 2016 and December 31, 2015 are represented below (in thousands):
Balance at December 31, 2015
|
$
|
74,399
|
|
Equity earnings
|
|
4,927
|
|
Contributions
|
|
-
|
|
Distributions
|
|
(4,760
|
)
|
Amortization of premium
|
|
(154
|
)
|
Other comprehensive income (loss)
|
|
(915
|
)
|
Balance at June 30, 2016
|
$
|
73,497
|
|
Investment in Gulf LNG Holdings
In November 2013, the Partnership purchased the LNG Interest from an affiliate of GE EFS for $72.7 million. The carrying value of the LNG Interest on the date of acquisition was $64.1 million and therefore the excess amount paid, by the Partnership, over the carrying value was $8.6 million. This excess can be attributed to the underlying long lived assets of Gulf LNG Holdings and is therefore being amortized using the straight line method over the remaining useful lives of the respective assets, which is 28 years. The estimated aggregate amortization of this premium for its remaining useful life from June 30, 2016 is as follows (in thousands):
|
Total
|
|
2016
|
$
|
154
|
|
2017
|
|
309
|
|
2018
|
|
309
|
|
2019
|
|
309
|
|
2020
|
|
309
|
|
Thereafter
|
|
6,444
|
|
|
$
|
7,834
|
|
Summarized financial information for Gulf LNG Holdings is reported below (in thousands):
|
June 30,
|
|
|
December 31,
|
|
|
2016
|
|
|
2015
|
|
Balance sheets
|
|
|
|
|
|
|
|
Current assets
|
$
|
5,245
|
|
|
$
|
7,523
|
|
Noncurrent assets
|
|
872,406
|
|
|
|
889,655
|
|
Total assets
|
$
|
877,651
|
|
|
$
|
897,178
|
|
Current liabilities
|
$
|
79,404
|
|
|
$
|
79,970
|
|
Long-term liabilities
|
|
663,699
|
|
|
|
678,926
|
|
Member’s equity
|
|
134,548
|
|
|
|
138,282
|
|
Total liabilities and member’s equity
|
$
|
877,651
|
|
|
$
|
897,178
|
|
14
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Income statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
46,484
|
|
|
$
|
46,625
|
|
|
$
|
92,968
|
|
|
$
|
93,249
|
|
Total operating costs and expenses
|
|
14,103
|
|
|
|
14,283
|
|
|
|
27,958
|
|
|
|
28,489
|
|
Operating income
|
|
32,381
|
|
|
|
32,342
|
|
|
|
65,010
|
|
|
|
64,760
|
|
Net income
|
$
|
23,891
|
|
|
$
|
24,252
|
|
|
$
|
47,736
|
|
|
$
|
48,417
|
|
LNG Facility Arbitration
On March 1, 2016, an affiliate of Gulf LNG Holdings received a Notice of Disagreement and Disputed Statements and a Notice of Arbitration from Eni USA Gas Marketing L.L.C. (“Eni USA”), one of the two companies that had entered into a terminal use agreement for capacity of the LNG Facility. Eni USA is an indirect subsidiary of Eni S.p.A., a multi-national integrated energy company headquartered in Milan, Italy. Pursuant to the Notice of Arbitration, Eni USA seeks declaratory and monetary relief in respect of its terminal use agreement, asserting that (i) the terminal use agreement should be terminated because changes in the U.S. natural gas market since the execution of the agreement in December 2007 have “frustrated the essential purpose” of the agreement and (ii) the activities undertaken by affiliates of Gulf LNG Holdings “in connection with a plan to convert the LNG Facility into a liquefaction/export facility have given rise to a contractual right on the part of Eni USA to terminate” the terminal use agreement.
Affiliates of Kinder Morgan, Inc., which control Gulf LNG Holdings and operate the LNG Facility, have expressed to us that they view the assertions by Eni USA to be without merit and that they intend to vigorously contest the assertions set forth by Eni USA. Although we do not control Gulf LNG Holdings, we also are of the view that the assertions made by Eni USA are without merit. As contemplated by the terminal use agreement, disputes are meant to be resolved by final and binding arbitration. A three-member arbitration panel has been chosen, and the arbitration hearing is scheduled for January 2017. Eni USA has advised Gulf LNG Holdings’ affiliates that it will continue to pay the amounts claimed to be due under the terminal use agreement pending resolution of the dispute.
If the assertions by Eni USA are ultimately successful, our business, financial conditions and results of operations and our ability to make cash distributions to our unitholders would be materially adversely affected. We are unable at this time to predict the amount of the legal fees in this matter that will be allocable to our LNG Interest.
Note 5—Property, Plant and Equipment
The Partnership’s property, plant and equipment consisted of (in thousands):
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Land
|
|
$
|
78,455
|
|
|
$
|
74,855
|
|
Buildings and site improvements
|
|
|
79,798
|
|
|
|
77,514
|
|
Tanks and trim
|
|
|
117,234
|
|
|
|
111,076
|
|
Pipelines
|
|
|
20,364
|
|
|
|
20,364
|
|
Machinery and equipment
|
|
|
120,465
|
|
|
|
118,503
|
|
Office furniture and equipment
|
|
|
801
|
|
|
|
561
|
|
Construction in progress
|
|
|
19,360
|
|
|
|
12,306
|
|
|
|
|
436,477
|
|
|
|
415,179
|
|
Less: Accumulated depreciation
|
|
|
(41,880
|
)
|
|
|
(34,508
|
)
|
Property, plant and equipment, net
|
|
$
|
394,597
|
|
|
$
|
380,671
|
|
15
Note 6—Intangible Assets
The Partnership’s intangible assets consisted of (in thousands):
|
Estimated
|
|
As of
|
|
|
Useful Lives
|
|
June 30,
|
|
|
December 31,
|
|
|
in Years
|
|
2016
|
|
|
2015
|
|
Customer relationships
|
21
|
|
$
|
4,785
|
|
|
$
|
4,785
|
|
Acquired contracts
|
2-12
|
|
|
149,342
|
|
|
|
149,342
|
|
Non-compete agreements
|
2-3
|
|
|
741
|
|
|
|
741
|
|
|
|
|
|
154,868
|
|
|
|
154,868
|
|
Less: Accumulated amortization
|
|
|
|
(29,962
|
)
|
|
|
(22,747
|
)
|
Intangible assets, net
|
|
|
$
|
124,906
|
|
|
$
|
132,121
|
|
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 $7.2 million for the remainder of 2016, $14.0 million in 2017, $12.8 million in 2018, $12.2 million in 2019, $12.2 million in 2020 and $66.5 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 is the borrower. After several amendments, the Credit Facility currently has up to $300.0 million of borrowing capacity. As of June 30, 2016, the Partnership had borrowings of $243.3 million under the Credit Facility at an interest rate of 3.47%. 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.
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 225 basis points per annum or (b) a LIBOR rate, plus a range of 200 to 325 basis points. The base rate is established as the highest of (i) the rate which SunTrust Bank announces, from time to time, as its prime lending rate, (ii) the daily one-month LIBOR 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, 2016, the Partnership was in compliance with such covenants. The negative covenants include restrictions on the Partnership’s ability to incur additional indebtedness, acquire and sell assets, create liens, enter into certain lease agreements, make investments and make distributions.
The Credit Facility requires the Partnership to maintain a total leverage ratio of not more than 4.50 to 1.00, which may increase to up to 5.00 to 1.00 during specified periods following a material permitted acquisition or issuance of over $200.0 million of senior notes, and a minimum interest coverage ratio of not less than 2.50 to 1.00. If the Partnership issues over $200.0 million of senior notes, the Partnership will be subject to an additional financial covenant pursuant to which the Partnership’s secured leverage ratio must not be more than 3.50 to 1.00. The Credit Facility places certain restrictions on the issuance of senior notes.
If an event of default occurs, the agent would be entitled to take various actions, including the acceleration of amounts due under the Credit Facility, termination of the commitments under the Credit Facility and all remedial actions available to a secured creditor. The events of default include customary events for a financing agreement of this type, including, without limitation, payment
16
defaults, material inaccuracies of repre
sentations 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 c
hange 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 an
d 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, together with the Partnership and certain of its other subsidiaries, as guarantors, entered into the First amendment to the Credit Facility (the “First Amendment”). The First Amendment principally modified certain provisions of the Credit Facility to allow Arc Terminals Holdings to enter into the Portland Lease Agreement relating to the use of petroleum products terminals and pipeline infrastructure located in Portland, Oregon (the “Portland Terminal”).
Second Amendment
In May 2015, Arc Terminals Holdings, together with the Partnership 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
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.
Fourth Amendment
In June 2016, Arc Terminals Holdings, together with the Partnership and certain of its other subsidiaries, as guarantors, entered into the fourth amendment to the Credit Facility (the “Fourth Amendment”). The Fourth Amendment principally modifies certain provisions of the Credit Facility including (i) the circumstances whereby the Partnership may increase up to or maintain a total leverage ratio of 5.00 to 1.00 and (ii) the interest rate pricing grid to include an additional pricing tier if the total leverage ratio is greater than or equal to 4.50 to 1.00.
Note 8—Partners’ Capital and Distributions
Cash Distributions
The table below summarizes the quarterly distributions related to the Partnership’s quarterly financial results (in thousands, except per unit data):
|
|
Total Quarterly
|
|
|
Total Cash
|
|
|
Date of
|
|
Unitholders
|
Quarter Ended
|
|
Distribution Per Unit
|
|
|
Distribution
|
|
|
Distribution
|
|
Record Date
|
June 30, 2016
|
|
$
|
0.4400
|
|
|
$
|
8,490
|
|
|
August 12, 2016
|
|
August 8, 2016
|
March 31, 2016
|
|
$
|
0.4400
|
|
|
$
|
8,475
|
|
|
May 13, 2016
|
|
May 9, 2016
|
December 31, 2015
|
|
$
|
0.4400
|
|
|
$
|
8,472
|
|
|
February 12, 2016
|
|
February 8, 2016
|
September 30, 2015
|
|
$
|
0.4400
|
|
|
$
|
8,472
|
|
|
November 13, 2015
|
|
November 9, 2015
|
June 30, 2015
|
|
$
|
0.4250
|
|
|
$
|
8,181
|
|
|
August 14, 2015
|
|
August 10, 2015
|
Cash Distribution Policy
The Partnership’s partnership agreement (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
17
distribution, or any distribution, on the units in any quarter. However, the partnership agreement contains provis
ions intended to motivate the General Partner to make steady, increasing and sustainable distributions over time.
The Partnership Agreement generally provides that the Partnership will distribute cash each quarter in the following manner:
|
●
|
first
, to the holders of common units, until each common unit has received the minimum quarterly distribution of $0.3875 plus any arrearages from prior quarters;
|
|
●
|
second
, to the holders of subordinated units, until each subordinated unit has received the minimum quarterly distribution of $0.3875; and
|
|
●
|
third
, to all unitholders pro rata, until each has received a distribution of $0.4456.
|
If cash distributions to the Partnership’s unitholders exceed $0.4456 per unit in any quarter, the Partnership’s unitholders and the General Partner, as the initial holder of the incentive distribution rights, will receive distributions according to the following percentage allocations:
Total Quarterly
Distribution Per Unit
Target Amount
|
|
Marginal Percentage
Interest
in Distributions
|
|
|
Unitholders
|
|
|
General
Partner
|
|
above $0.3875 up to $0.4456
|
|
|
100.0
|
%
|
|
|
0.0
|
%
|
above $0.4456 up to $0.4844
|
|
|
85.0
|
%
|
|
|
15.0
|
%
|
above $0.4844 up to $0.5813
|
|
|
75.0
|
%
|
|
|
25.0
|
%
|
above $0.5813
|
|
|
50.0
|
%
|
|
|
50.0
|
%
|
The Partnership refers to additional increasing distributions to the General Partner as “incentive distributions.”
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
18
common units, except that an award of le
ss 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 pursuan
t 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, 2016, the Partnership recorded approximately $0.2 million and $0.4 million, respectively, of unit-based compensation expense with respect to the Director Grants. 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, 2016, the unrecognized unit-based compensation expense for the Director Grants is approximately $0.9 million, which will be recognized ratably over the remaining term of the awards. Through July 2016, two-thirds of the phantom units granted under the Director Grants have vested.
Of the July 2014 awards, a total of 832,000 phantom units were granted to employees and certain consultants of the Partnership Entities and are classified as equity awards for accounting purposes (the “Employee Equity Grants”). Each Employee Equity Grant will be settled in common units and includes a DER. The Employee Equity Grants have an aggregate grant date fair value of $21.2 million and vest as follows: (i) 25% of the Employee Equity Grants will vest the day after the end of the Subordination Period (as defined in the Partnership Agreement); and (ii) the three remaining 25% installments of the Employee Equity Grants will vest based on the date on which the Partnership has paid, for three consecutive quarters, distributions to its common 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, 2016, the Partnership recorded approximately $0.8 million and $1.5 million, respectively, of unit-based compensation expense with respect to the Employee Equity Grants. 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, 2016, the unrecognized unit-based compensation expense for the Employee Equity Grants was approximately $12.2 million, which may be recognized variably over the remaining term of the awards based on the probability of the achievement of the performance vesting requirements.
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, 2016 and 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, 2016, 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, 2016, the Partnership recorded $0.1 million and $0.2 million, respectively, of unit-based compensation expense with respect to the 2015 Equity Grants. 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, 2016, the unrecognized unit-based compensation expense for the 2015 Equity Grants is approximately $0.5 million, which will be recognized ratably over the remaining term of the awards. In March 2016, one-third of the phantom units granted under the 2015 Equity Grants vested.
During the year ended December 31, 2015, the Board and Chief Executive Officer authorized the grant of an aggregate of 57,100 phantom units pursuant to the 2013 Plan to certain employees of the Partnership Entities (“2015 Performance Grants”). Each 2015 Performance Grant will be settled in common units and includes a DER. The 2015 Performance Grants are classified as equity awards for accounting purposes and have an aggregate grant date fair value of $1.0 million and have the same term and vesting requirements as the Employee Equity Grants described above. For the three and six months ended June 30, 2016, the Partnership recorded $0.1 million of unit-based compensation expense during each period, with respect to the 2015 Performance Grants. 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, 2016, the unrecognized unit-based compensation expense
19
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.
During the six months ended June 30, 2016, the Board authorized the grant of an aggregate of 90,500 phantom units pursuant to the 2013 Plan to certain employees and consultants of the Partnership Entities (“2016 Equity Grants”). Each 2016 Equity Grant will be settled in common units and includes a DER. The 2016 Equity Grants are classified as equity awards for accounting purposes and have an aggregate grant date fair value of $1.1 million and vest in equal annual installments over a three-year period starting from the date of grant. For the three and six months ended June 30, 2016, the Partnership recorded $0.1 million of unit-based compensation expense during each period, with respect to the 2016 Equity Grants. As of June 30, 2016, the unrecognized unit-based compensation expense for the 2016 Equity Grants is approximately $1.0 million, which will be recognized ratably over the remaining term of the awards.
Subject to applicable earning criteria, the DER included in each phantom unit award described above entitles the award recipient to a cash payment (or, if applicable, payment of other property) equal to the cash distribution (or, if applicable, distribution of other property) paid on an outstanding common unit to unitholders generally based on the number of common units related to the portion of the award recipient’s phantom units that have not vested and been settled as of the record date for such distribution. Cash distributions paid during the vesting period on phantom units that are classified as equity awards for accounting purposes are reflected initially as a reduction of partners’ capital. Cash distributions paid on such equity awards that are not initially expected to vest or ultimately do not vest are classified as compensation expense. As the probability of vesting changes, these initial categorizations could change. Cash distributions paid during the vesting period on phantom units that are classified as liability awards for accounting purposes are reflected as compensation expense and included in the “Selling, general and administrative” line item in the accompanying unaudited condensed consolidated statements of operations and comprehensive income. During the three and six months ended June 30, 2016, the Partnership paid approximately $0.5 million and $0.9 million, respectively, in DERs to phantom unit holders. For the three and six months ended June 30, 2016, $0.3 million and $0.5 million, respectively, was reflected as a reduction of partners’ capital, and the other $0.2 million and $0.4 million, respectively, was reflected as compensation expense and included in the “Selling, general and administrative” line item in the accompanying unaudited condensed consolidated statements of operations and comprehensive income. For the three 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, respectively, 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, 2016 was $1.2 million and $2.4 million, respectively, which was
included in the “Selling, general and administrative” line item in the accompanying unaudited condensed consolidated statements of operations and comprehensive income
. The 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 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, 2016 was less than $0.1 million.
The following table presents phantom units granted pursuant to the 2013 Plan:
|
Equity Awards
|
|
|
|
Liability Awards
|
|
|
Six Months Ended
|
|
|
|
Six Months Ended
|
|
|
June 30, 2016
|
|
|
|
June 30, 2016
|
|
|
Number
|
|
|
Weighted Avg.
|
|
|
|
Number
|
|
|
Weighted Avg.
|
|
|
|
|
|
|
of Phantom
|
|
|
Grant Date
|
|
|
|
of Phantom
|
|
|
Grant Date
|
|
|
Fair Value at
|
|
|
Units
|
|
|
Fair Value
|
|
|
|
Units
|
|
|
Fair Value
|
|
|
6/30/2016
|
|
Balance at December 31, 2015
|
|
985,272
|
|
|
$
|
24.76
|
|
|
|
|
7,200
|
|
|
$
|
25.46
|
|
|
$
|
13.00
|
|
Granted
|
|
90,500
|
|
|
$
|
11.86
|
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Vested
|
|
(8,551
|
)
|
|
$
|
19.13
|
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Forfeited
|
|
(8,000
|
)
|
|
$
|
25.46
|
|
|
|
|
(1,300
|
)
|
|
$
|
25.46
|
|
|
$
|
-
|
|
Balance at June 30, 2016
|
|
1,059,221
|
|
|
$
|
23.74
|
|
|
|
|
5,900
|
|
|
$
|
25.46
|
|
|
$
|
13.00
|
|
20
Note 10—Earnings Per Unit
The Partnership uses the two-class method when calculating the net income per unit applicable to limited partners. The two-class method is based on the weighted-average number of common and subordinated units outstanding during the period. Basic net income per unit applicable to limited partners (including subordinated unitholders) is computed by dividing limited partners’ interest in net income, after deducting distributions, if any, by the weighted-average number of outstanding common and subordinated units. Payments made to the Partnership’s unitholders are determined in relation to actual distributions paid and are not based on the net income allocations used in the calculation of net income per unit.
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, 2016 and 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, 2016 and 2015, none of the phantom units are considered outstanding and therefore there were no potentially dilutive units outstanding.
The following table sets forth the calculation of basic and diluted earnings per limited partner unit for the periods indicated (in thousands, except per unit data):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net Income attributable to partners' capital
|
|
$
|
4,455
|
|
|
$
|
2,188
|
|
|
$
|
7,572
|
|
|
$
|
2,494
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution equivalent rights for unissued units
|
|
|
260
|
|
|
|
231
|
|
|
|
534
|
|
|
|
466
|
|
Net income available to limited partners
|
|
$
|
4,195
|
|
|
$
|
1,957
|
|
|
$
|
7,038
|
|
|
$
|
2,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings per limited partner unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of net income among limited partner interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to common unitholders
|
|
$
|
2,871
|
|
|
$
|
1,841
|
|
|
$
|
4,821
|
|
|
$
|
1,877
|
|
Net income (loss) allocated to subordinated unitholders
|
|
$
|
1,324
|
|
|
$
|
116
|
|
|
$
|
2,217
|
|
|
$
|
151
|
|
Net income allocated to limited partners:
|
|
$
|
4,195
|
|
|
$
|
1,957
|
|
|
$
|
7,038
|
|
|
$
|
2,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted earnings per limited partner unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common units - (basic and diluted)
|
|
|
13,181
|
|
|
|
9,253
|
|
|
|
13,179
|
|
|
|
8,067
|
|
Subordinated units - (basic and diluted)
|
|
|
6,081
|
|
|
|
6,081
|
|
|
|
6,081
|
|
|
|
6,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per limited partner unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common - (basic and diluted)
|
|
$
|
0.22
|
|
|
$
|
0.20
|
|
|
$
|
0.37
|
|
|
$
|
0.23
|
|
Subordinated - (basic and diluted)
|
|
$
|
0.22
|
|
|
$
|
0.02
|
|
|
$
|
0.36
|
|
|
$
|
0.02
|
|
21
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, 2016 and 2015, the General Partner incurred expenses of $1.3 million and $1.1 million, respectively. For the six months ended June 30, 2016 and 2015, the General Partners incurred expenses of $2.6 million and $2.2 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, 2016 and December 31, 2015, the Partnership had a payable of approximately $1.0 million and $0.6 million, respectively, to the General Partner, which is reflected as “Due to general partner” in the accompanying unaudited condensed consolidated balance sheets.
Registration Rights Agreement
In connection with the IPO, the Partnership entered into a registration rights agreement with the Sponsor. Pursuant to the registration rights agreement, the Partnership is required to file, upon request of the Sponsor, a registration statement to register the common units issued to the Sponsor and the common units issuable upon the conversion of the subordinated units held by the Sponsor. In addition, the registration rights agreement gives the Sponsor piggyback registration rights under certain circumstances. The registration rights agreement also includes provisions dealing with holdback agreements, indemnification and contribution and allocation of expenses. These registration rights are transferable to affiliates and, in certain circumstances, to third parties.
Other Transactions with Related Persons
GCAC Guarantee
GCAC guarantees up to $20 million of the Partnership’s Credit Facility. Under certain circumstances, the lenders may release GCAC from such guarantee.
Storage and Throughput Agreements with Center Oil
During 2007, the Partnership acquired seven terminals from Center Oil for $35.0 million in cash and 750,000 subordinated units in the Partnership. In connection with this purchase, the Partnership entered into a storage and throughput agreement with Center Oil whereby the Partnership provides storage and throughput services for various petroleum products to Center Oil at the terminals acquired by the Partnership in return for a fixed per barrel fee for each outbound barrel of Center Oil product shipped or committed to be shipped. The throughput fee is calculated and due monthly based on the terms and conditions as set forth in the storage and throughput agreement. In addition to the monthly throughput fee, Center Oil is required to pay the Partnership a fixed per barrel fee for any additives added into Center Oil’s product.
In December 2015, the Partnership extended the term of the storage and throughput agreement with Center Oil from June 2017 to June 2020. 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 2017.
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 charged 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 were calculated monthly based on the terms and conditions of the storage and throughput agreement. This agreement was not renewed and expired in May 2015.
22
In May 2013, the Partnership entered into an agreement to provide gasoline storage and throughput services to Center Oil at the Brooklyn 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 2017.
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.
Throughput Agreements with UET
During July 2015, the Partnership acquired UET Midstream and its Pawnee Terminal from the Pawnee Sellers for $44.3 million in cash and 1,745,669 in unregistered common units in the Partnership. In connection with such acquisition, the Partnership acquired two terminalling services agreements with UET (each, a “UET Throughput Agreement”). Each UET Throughput Agreement requires UET Midstream to make available to UET a minimum volume of throughput capacity on a monthly basis at the Pawnee Terminal in exchange for payment by UET of a fixed, per barrel monthly fee for such capacity regardless of whether UET utilizes any or all such throughput capacity, in each case subject to certain exceptions. The minimum monthly contract throughput capacity increases each year during the initial five-year term under one of the UET Throughput Agreements. The initial term of each UET Throughput Agreement will automatically extend under certain circumstances. Each UET Throughput Agreement requires UET to deliver crude that meets certain specifications and to pay certain other fees, including fees for the use of excess throughput capacity and certain other ancillary services. The UET Throughput Agreements contain certain other customary insurance, indemnification, default and termination provisions, including the right of a party to terminate the applicable UET Throughput Agreement following an event of default and the expiration of all applicable cure periods.
Revenues – Related Parties
The total revenues associated with the storage and throughput agreements for Center Oil, GCAC and UET and reflected in the “Revenues – Related parties” line on the accompanying unaudited condensed consolidated statements of operations and comprehensive income are as follows (in thousands):
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Center Oil
|
$
|
1,470
|
|
|
$
|
1,661
|
|
|
$
|
2,931
|
|
|
$
|
3,390
|
|
UET (a)
|
|
1,706
|
|
|
N/A
|
|
|
|
3,281
|
|
|
N/A
|
|
GCAC
|
|
449
|
|
|
|
453
|
|
|
|
896
|
|
|
|
902
|
|
Total
|
$
|
3,625
|
|
|
$
|
2,114
|
|
|
$
|
7,108
|
|
|
$
|
4,292
|
|
|
(a)
|
UET did not become a related party until the closing of the Pawnee Terminal Acquisition in July 2015.
|
The total receivables associated with the storage and throughput agreements for Center Oil, GCAC and UET and reflected in the “Due from related parties” line on the accompanying unaudited condensed consolidated balance sheets are as follows (in thousands):
|
As of
|
|
|
June 30,
|
|
|
December 31,
|
|
|
2016
|
|
|
2015
|
|
Center Oil
|
$
|
521
|
|
|
$
|
564
|
|
UET
|
|
585
|
|
|
|
528
|
|
GCAC
|
|
298
|
|
|
|
440
|
|
Total
|
$
|
1,404
|
|
|
$
|
1,532
|
|
23
Natural Gas Supply Agreement
In March 2016, the Partnership, through its wholly owned subsidiary, Arc Terminals Holdings, entered into a natural gas supply agreement with UET to supply the Portland Terminal with natural gas. UET charges the Partnership for the actual amount of natural gas supplied on a monthly basis plus a transportation fee. The agreement expires on March 31, 2017, unless mutually extended for an additional year by both UET and the Partnership.
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 “Portland 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 Portland 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 Portland 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 Portland 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 Portland Lease Agreement was $230,000 per month through July 2014 (prorated for the partial month of January 2014) and is $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. During 2015, spending on terminal-related projects by CorEnergy since the commencement of the Portland Lease Agreement totaled 10.0 million and, as a result, the base rent has increased by approximately $95,800 per month. Accordingly, any additional terminal-related projects will be funded by the Partnership. The base rent will be increased in February 2019 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, 2016 and 2015, the expense associated with the Portland Lease Agreement was $1.6 million, during each period. During the six months ended June 30, 2016 and 2015, the expense associated with the Portland Lease Agreement was $3.2 million during each period. During the three and six months ended June 30, 2016 and 2015, there was no variable rent associated with the Portland Lease Agreement.
So long as Arc Terminals Holdings is not in default under the Portland Lease Agreement, it shall have the right to purchase the Portland Terminal at the end of the third year of the Portland 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 Portland 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 Portland Lease Agreement on the fifth and tenth anniversaries, by providing written notice 12 months in advance, for a termination fee of $4 million and $6 million, respectively.
Joliet LLC Agreement
In connection with the JBBR Acquisition in May 2015, 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 indirectly owns interests in Lightfoot. Lightfoot has a significant interest in the Partnership through its ownership of a 27% limited partner interest in the Partnership, 100% of the limited liability company interests in the General Partner and all of the Partnership’s 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 months ended June 30, 2016 and 2015, the Partnership was paid $0.3 and $0.4 million, respectively, in fees and reimbursements by Joliet Holdings under the MSA. During the six months ended June 30, 2016 and 2015, the Partnership was paid $0.6 and $0.4 million, respectively, in fees and reimbursements by Joliet Holdings under the MSA.
PIPE Transaction
Registration Rights Agreement with PIPE Investors
24
Pursuant to a 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 s
old 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 Par
tnership’s portion of the purchase price 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, as amended (the “Securities Act”) 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
c
ommon
u
nits 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.
UET Contribution Agreement
In July 2015, the Partnership, through its subsidiary Arc Terminals Holdings, entered into a contribution agreement (the “Contribution Agreement”) with the Pawnee Sellers, pursuant to which it acquired all of the limited liability company interests of UET Midstream from the Pawnee Sellers for total consideration, net of certain adjustments, of $76.6 million, consisting of $44.3 million in cash and $32.3 million of common units of the Partnership. The number of common units issued to the Pawnee 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.
Registration Rights Agreement with Pawnee Sellers
In connection with the issuance of the Pawnee Transaction Units to the Pawnee Sellers (the “Initial Pawnee Holders”) pursuant to the Contribution Agreement as partial consideration for the Pawnee Terminal Acquisition, the Partnership entered into a Registration Rights Agreement (the “Pawnee Registration Rights Agreement”), dated as of July 14, 2015, with the Initial Pawnee Holders. The issuance of the Pawnee Transaction Units pursuant to the Contribution Agreement was made in reliance upon an exemption from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof.
Pursuant to the Pawnee Registration Rights Agreement, the Partnership filed, and the SEC declared effective, a shelf registration statement registering the common units of the Pawnee Sellers. In July 2016, the Partnership deregistered the common units of the Pawnee Sellers that remained unsold under the shelf registration statement because it no longer had an obligation to keep the shelf registration statement effective pursuant to the terms of the Pawnee Registration Rights Agreement.
Note 12—Major Customers
The following table presents the percentage of revenues and receivables associated with the Partnership’s significant customers (those that have accounted for 10% or more of the Partnership’s revenues in a given period) for the periods indicated:
|
% of Revenues
|
|
|
% of Revenues
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
% of Receivables
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Customer A
|
|
33
|
%
|
|
|
24
|
%
|
|
|
33
|
%
|
|
|
15
|
%
|
|
|
29
|
%
|
|
|
30
|
%
|
Customer B
|
|
11
|
%
|
|
|
19
|
%
|
|
|
12
|
%
|
|
|
21
|
%
|
|
|
18
|
%
|
|
|
12
|
%
|
Customer C
|
|
6
|
%
|
|
|
9
|
%
|
|
|
6
|
%
|
|
|
10
|
%
|
|
|
5
|
%
|
|
|
6
|
%
|
Total
|
|
50
|
%
|
|
|
52
|
%
|
|
|
51
|
%
|
|
|
46
|
%
|
|
|
52
|
%
|
|
|
48
|
%
|
Note 13—Commitments and Contingencies
Environmental Matters
The Partnership may experience releases of crude oil, petroleum products and fuels or other contaminants into the environment or discover past releases that were previously unidentified. Although the Partnership maintains an inspection program designed to prevent and, as applicable, to detect and address such releases promptly, damages and liabilities incurred due to any such
25
environmental releases from the Partnership’s assets may affect its business. As a result, the Partnership may
accrue 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. The Partnership is not a party
to any material pending legal proceedings relating to environmental remediation or other environmental matters and is not aware of any claims or events relating to environmental remediation or other environmental matters that, either individually or in th
e aggregate, could have a material adverse effect on the Partnership’s business, financial condition, results of operations and ability to make quarterly distributions to its unitholders. As of June 30, 2016 and December 31, 2015, the Partnership had not
experienced any releases of crude oil, petroleum products and fuels or other contaminants into the environment or discovered past releases that were previously unidentified that would give rise to evaluating an estimate of possible losses or a range of los
ses. Accordingly, the Partnership had not accrued for any loss contingencies in 2016 and 2015.
Commitments and Contractual Obligations
Future non-cancelable commitments related to certain contractual obligations as of June 30, 2016 are presented below (in thousands):
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
Thereafter
|
|
Long-term debt obligations
|
|
$
|
243,313
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
243,313
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Operating lease obligations
|
|
|
20,606
|
|
|
|
3,243
|
|
|
|
6,353
|
|
|
|
6,346
|
|
|
|
4,664
|
|
|
|
-
|
|
|
|
-
|
|
Earn-out obligations
|
|
|
18,148
|
|
|
|
686
|
|
|
|
1,369
|
|
|
|
1,369
|
|
|
|
1,369
|
|
|
|
1,369
|
|
|
|
11,986
|
|
Settlement obligations
|
|
|
1,500
|
|
|
|
500
|
|
|
|
500
|
|
|
|
500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
283,567
|
|
|
$
|
4,429
|
|
|
$
|
8,222
|
|
|
$
|
251,528
|
|
|
$
|
6,033
|
|
|
$
|
1,369
|
|
|
$
|
11,986
|
|
The schedule above assumes the Partnership will either exercise its Purchase Option or its right to terminate the Portland Lease Agreement (See “Note 11—Related Party Transactions—Other Transactions with Related Persons—Operating Lease Agreement” for further information).
GCAC was able to receive up to an additional $5.0 million in cash earn-out payments based upon the throughput activity of one customer through January 31, 2016. As of June 30, 2016, no additional amounts had been paid or will be 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. From the date of acquisition through June 30, 2016, Joliet Holdings has paid $1.6 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.
In connection with the Pawnee Terminal Acquisition, Arc Terminals is responsible for completing the remaining construction of the Pawnee Terminal and the costs thereof are estimated to be approximately $11.0 million. The Partnership expects the construction at the Pawnee Terminal to be completed in 2016. The construction costs will be financed by a combination of available cash and borrowings under the Credit Facility.
In August 2015, the City of Mobile, AL filed a complaint against Arc Terminals Holdings, pursuant to which the City of Mobile alleged that Arc Terminals Holdings was storing sulfuric acid at its Blakeley, AL facility without proper zoning approval. Arc Terminals Holdings consented to an order with the City of Mobile, under which it agreed to cause all of the sulfuric acid of its customer (the “Blakeley Customer”) to be removed from its Blakeley, AL facility in a timely manner. Following the removal of all sulfuric acid from the Blakeley, AL facility in November 2015, the City of Mobile dismissed its complaint against Arc Terminals Holdings. The City of Mobile indicated that it intended to fine Arc Terminals Holdings $298 per day for each day that sulfuric acid was stored at its Blakeley, AL facility without the proper zoning approval. The Partnership reached a settlement with the City of Mobile with respect to this fine and donated $100,000 to the City of Mobile fire department for the purchase of fire-related equipment and supplies in full settlement of any fines that could be imposed on the Partnership by the City of Mobile for any such zoning violation.
In February 2016, Arc Terminals Holdings entered into a settlement agreement with the Blakeley Customer pursuant to which the parties agreed to terminate the terminal services agreement entered into by the parties for the storage and throughputting of sulfuric acid at the Blakeley, AL facility and to, among other things, release each party from all potential claims arising out of any non-performance of or non-compliance with the representations, warranties and covenants made thereunder. Pursuant to the settlement agreement, Arc Terminals Holdings agreed to pay to the Blakeley Customer an aggregate amount of $2.0 million in certain increments over a three-year period commencing with the first quarter of 2016, except that Arc Terminals Holdings’ payment obligations thereunder shall be reduced by $0.5 million in the event that Arc Terminals Holdings and the Blakeley Customer enter into a new terminal services agreement for the storage and throughputting of such customer’s sulfuric acid at the Blakeley, AL facility
26
comme
ncing no later than January 1, 2018. Neither Arc Terminals Holdings nor the Blakeley Customer has any obligation to enter into such new terminal services agreement.
As of December 31, 2015, the Partnership had established an accrual of $2.0 million with
respect to its obligations under such settlement agreement. Through June 30, 2016, the Partnership has paid $0.5 million related to the settlement agreement.
Note 14—Subsequent Events
Cash Distributions
In July 2016, the Partnership declared a quarterly cash distribution of $0.44 per unit ($1.76 per unit on an annualized basis) totaling approximately $8.5 million for all common and subordinated units outstanding. The distribution is for the period from April 1, 2016 through June 30, 2016. The second quarter distribution represents a 3.5% increase over the second quarter 2015 cash distribution of $0.425 per unit ($1.70 per unit on an annualized basis). The distribution is payable on August 12, 2016 to unitholders of record on August 8, 2016.
27
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements and information in this Quarterly Report on Form 10-Q may constitute “forward-looking statements.” The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:
|
●
|
adverse regional, national or international economic conditions, adverse capital market conditions or adverse political developments;
|
|
●
|
changes in the marketplace for our services, such as increased competition, better energy efficiency, or general reductions in demand;
|
|
●
|
changes in the long-term supply and demand of crude oil and petroleum products in the markets in which we operate;
|
|
●
|
actions taken by our customers, competitors and third party operators;
|
|
●
|
nonpayment or nonperformance by our customers;
|
|
●
|
changes in the availability and cost of capital;
|
|
●
|
unanticipated capital expenditures in connection with the construction, repair, or replacement of our assets;
|
|
●
|
operating hazards, natural disasters, terrorism, weather-related delays, adverse weather conditions, including hurricanes, natural disasters, environmental releases, casualty losses and other matters beyond our control;
|
|
●
|
inability to consummate acquisitions, pending or otherwise, on acceptable terms and successfully integrate such businesses into our operations;
|
|
●
|
the effects of existing and future laws and governmental regulations to which we are subject, including those that permit the treatment of us as a partnership for federal income tax purposes; and
|
|
●
|
the effects of future litigation.
|
For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015.
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.
28