ARCX Arc Logistic Partners LP Common Units Representing Limited Partner Interest (delisted)

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

Organization and Description of Business

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

In November 2013, the Partnership completed its IPO by selling 6,786,869 common units (which includes 786,869 common units issued pursuant to the exercise of the underwriters’ over-allotment option) representing limited partner interests in the Partnership at a price to the public of $19.00 per common unit. In connection with the IPO, the Partnership amended and restated its $40.0 million revolving credit facility.  

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

As of September 30, 2017, the Partnership’s assets consisted of:

The Partnership interests included the following as of September 30, 2017:

19,545,944 common units representing limited partner interests (of which 5,242,775 common units are held by Lightfoot);

Merger Transaction

On August 29, 2017, the Partnership, the General Partner (together with the Partnership, the “MLP Entities”), the Lightfoot Entities, Zenith Energy U.S., L.P., a Delaware limited partnership (“Parent”), Zenith Energy U.S. GP, LLC, a Delaware limited liability company and the general partner of Parent (“Parent GP”), Zenith Energy U.S. Logistics Holdings, LLC, a Delaware limited liability company and a subsidiary of Parent (“Holdings”), and Zenith Energy U.S. Logistics, LLC, a Delaware limited liability company and a subsidiary of Holdings (“Merger Sub” and, together with Parent, Parent GP and Holdings, the “Parent Entities”),

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e ntered into a Purchase Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which Merger Sub will, upon the terms and subject to the conditions thereof, merge with and into the Partnership (the “Merger”), with the Partnership surviving the Mer ger as a subsidiary of Parent, and LCP GP will transfer to Holdings 100% of the issued and outstanding membership interests in the General Partner, including all rights and obligations relating thereto and all economic and capital interest therein (the “GP Equity Transfer”).

The conflicts committee (the “GP Conflicts Committee”), of the General Partner’s Board of Directors (the “Board”), after consultation with its independent legal and financial advisors, unanimously (i) determined that it is fair and reasonable and in the best interests of the Partnership and the holders of common units representing limited partner interests in the Partnership other than the Lightfoot Entities and their controlling affiliates to enter into the Merger Agreement and consummate the Merger, (ii) approved the Merger Agreement and the Merger, such approval constituting Special Approval pursuant to Section 7.9(d) of the Partnership’s partnership agreement, (iii) recommended approval of the Merger Agreement and the Merger by the  Board, (iv) recommended that the Board direct the Merger Agreement to be submitted to a vote of the Partnership’s limited partners at a special meeting and (v) recommended that the Partnership’s limited partners approve the Merger Agreement and the Merger. The Board, acting based in part upon the recommendation of the GP Conflicts Committee, unanimously (i) determined that it is fair and reasonable and in the best interests of the Partnership and its common unitholders to enter into the Merger Agreement and consummate the Merger, (ii) approved the Merger Agreement and the Merger, (iii) directed the Merger Agreement to be submitted to a vote of the Partnership’s limited partners at a special meeting and (iv) determined to recommend that the Partnership’s limited partners approve the Merger Agreement and the Merger.

Upon the Merger and GP Equity Transfer becoming effective (the “Effective Time”), (a) each common unit representing a limited partner interest in the Partnership issued and outstanding immediately prior to the Effective Time (other than those common units owned by the Lightfoot Entities (the “Sponsor Units”)) will be converted into the right to receive an amount in cash equal to $16.50 per common unit, no longer be outstanding, automatically be cancelled and cease to exist, (b) each Sponsor Unit issued and outstanding immediately prior to the Effective Time will be converted into the right to receive an amount in cash equal to $14.50 per common unit, no longer be outstanding, automatically be cancelled and cease to exist, in each case, upon the terms and subject to the conditions set forth in the Merger Agreement and (c) Holdings will (or Parent will on Holdings’ behalf) pay to LCP GP $94,500,000 in cash in exchange for 100% of the membership interests in its General Partner acquired by Holdings in connection with the GP Equity Transfer.

Unless otherwise mutually agreed by the parties, including with the approval of the GP Conflicts Committee, the Merger will not be consummated earlier than November 30, 2017. The consummation of the Merger and the GP Equity Transfer is subject to the satisfaction or waiver of a number of conditions, including, among others: (i) receipt of the approval by the holders of a majority of the Partnership’s outstanding common units at a special meeting of its common unitholders of the Merger Agreement and the Merger (the “MLP Unitholder Approval” ), (ii) expiration or termination of the waiting period applicable to the Transactions (as defined below) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (which termination was granted on September 22, 2017), (iii) the absence of certain legal impediments to the consummation of the Merger, (iv) the accuracy or waiver of the parties’ representations and warranties, (v) the performance of the parties’ obligations under the Merger Agreement, (vi) nothing has occurred (excluding, among other things, (a) developments generally affecting the prices of commodities, or (b) any changes in or effect upon the business or condition (financial or otherwise) of the MLP Entities and its subsidiaries or any adverse consequences upon or affecting Gulf LNG Holdings or its direct or indirect equityholders as a result of the outcome of that certain arbitration proceeding between Eni USA Gas Marketing L.L.C. and certain operating subsidiaries of Gulf LNG Holdings, as more fully described in Note 4 below) resulting in or reasonably expected to result in a material adverse effect on the business or financial results or condition of the MLP Entities, (vii) nothing has occurred that has a material adverse effect on the ability of the MLP Entities or the Lightfoot Entities to consummate the Transactions, (viii) the Partnership’s receipt of a legal opinion regarding certain tax matters, (ix) Holdings’ receipt of the written resignations of each member of the Board and each officer of the General Partner , dated to be effected as of the Effective Time, and (x) Parent GP’s receipt of the transition services agreement related thereto.

Additionally, the consummation of the Merger and the GP Equity Transfer is subject to the consummation or contemporaneous consummation of (a) the purchase by Holdings and the Lightfoot Entities of certain of the interests in Arc Terminals Joliet Holdings LLC, a Delaware limited liability company (“Joliet Holdings”), held by EFS Midstream Holdings LLC, a Delaware limited liability company (“GE EFS”) (such purchase, the “Joliet Purchase”), pursuant to the Purchase Agreement dated August 29, 2017, by and among Holdings, the Lightfoot Entities and GE EFS, and (b) the purchase by Holdings of a 5.51646% interest and, subject to certain conditions, an additional 4.16154% interest, in Gulf LNG Holdings from LCP LNG Holdings, LLC, a Delaware limited liability company and subsidiary of LCP LP (“LCP LNG”) (such purchase, the “Gulf LNG Purchase” and together with the Joliet Purchase, the Merger, the GP Equity Transfer and the other transactions contemplated by the Merger Agreement, the “Transactions”) pursuant to the Partially Conditional Purchase Agreement, dated August 29, 2017, by and among LCP LNG, the Lightfoot Entities, Parent, Parent GP, Holdings and, solely for the purposes of Section 1.1(d) of such agreement, the Partnership.

The Merger Agreement contains certain termination rights including, among others, (i) by mutual agreement of Parent GP and our General Partner, (ii) by either the General Partner or Parent GP, in the event that (a) a court issues a final, non-appealable order or injunction prohibiting the Merger, (b) after final adjournment of the special meeting of the Partnership’s limited partners, MLP Unitholder Approval has not been obtained, or (c) the Merger has not been consummated on or before February 7, 2018, subject to extension at Parent GP’s election to March 1, 2018, in certain circumstances as specified in the Merger Agreement (the “Outside

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D ate”), (iii) by the General Partner, in the event (a) the GP Conflicts Committee withdraws its recommendation that the Partnership’s limited partners approve the Merger and Merger Agreement due to a superior proposal, the Board authorizes the MLP Entities to enter into an agreement with respect to such superior proposal and, concurrently with the termination of the Merger Agreement, the MLP Entities enter into such agreement, (b) any Parent Entity has breached any of its representations or warranties or has failed to perform any of its covenants or agreements which such breach or failure would prevent the satisfaction of a condition to the consummation of the Merger or is incapable of being cured within a specified time or (c) the Parent Entities fail to clo se within a specified time after receiving notice from the MLP Entities that all conditions to closing have been satisfied or waived and the MLP Entities stand ready, willing and able to close and (iv) by Parent GP, in the event that (a) any MLP Entity or any Lightfoot Entity has breached the non-solicit obligations under the Merger Agreement, (b) any MLP Entity or any Lightfoot Entity has breached any of its representations or warranties or has failed to perform any of its covenants or agreements which suc h breach or failure would prevent the satisfaction of a condition to the consummation of the Merger or is incapable of being cured within a specified time or (c) prior to final adjournment of the special meeting the Partnership’s limited partners, the Boar d withdraws its recommendation that the Partnership’s limited partners approve the Merger and Merger Agreement. Upon termination of the Merger Agreement under specific circumstances, the Partnership will be required to pay Parent a termination fee of $11,4 87,696 (the “MLP Termination Fee”). If the Merger Agreement is terminated (A) (i) due to the passing of the Outside Date, (ii) failure to obtain MLP Unitholder Approval or (iii) due to any Lightfoot Entity or MLP Entity’s failure to perform any covenant or agreement or the failure of any of the representations and warranties of any Lightfoot Entity or MLP Entity to be true and correct as of the date of the Merger Agreement and (B) any MLP Entity or Lightfoot Entity or affiliate thereof enters into an altern ative acquisition within 12 months of such termination, the MLP Termination Fee is payable. The MLP Termination Fee is also payable in the event, among other things, that Parent terminates the Merger Agreement due to any MLP Entity or Lightfoot Entity’s br each of the non-solicit provisions in the Merger Agreement, excluding breaches that do not adversely affect the Parent Entities or the Transactions in any material respect, or if the Board withdraws its recommendation that the Partnership’s limited partner s approve the Merger and the Merger Agreement due to a superior proposal, the Board authorizes the MLP Entities to enter into an agreement with respect to such superior proposal and, concurrently with the termination of the Merger Agreement, the MLP Entiti es enter into such agreement. The Merger Agreement also provides that Parent will be required to pay the Partnership a termination fee of $24,616,491 if the Merger Agreement is terminated under certain circumstances.

From the date of the Merger Agreement until the Effective Time, the Partnership plans to declare and pay quarterly distributions in the ordinary course of business and consistent with past practices. Assuming that the Merger has not closed by January 26, 2018, the Partnership expects that it would declare a distribution associated with the quarter ended December 31, 2017 on or about January 26, 2018, to be paid on or about February 15, 2018 to the Partnership’s common unitholders of record as of February 8, 2018.  If, as anticipated, the Merger closes prior to the record date for the distribution associated with the fourth quarter of 2017, then the holders of the Partnership’s common units as of immediately prior to the closing of the Merger will not receive any distribution associated with the fourth quarter of 2017. If, alternatively, the Merger does not close by the record date for the distribution associated with the fourth quarter of 2017, then the Partnership plans to pay the fourth quarter distribution, on or around February 15, 2018, to the Partnership’s common unitholders of record as of the record date applicable to such distribution, irrespective of whether the Merger closes thereafter or whether the General Partner or Parent GP terminates the Merger Agreement after the Outside Date.

The Merger is targeted to close on or about December 21, 2017 and is subject to the right that each of the General Partner and Parent GP has to terminate the Merger Agreement if the Merger has not been consummated on or before the Outside Date. Additional information regarding the proposed transaction and the terms and conditions of the Merger Agreement are set forth in the Partnership’s definitive proxy statement for the special meeting of the Partnership’s common unitholders to consider and vote on the Merger Agreement and the Merger, filed on October 30, 2017.

Note 2—Summary of Significant Accounting Policies

The Partnership has provided a discussion of significant accounting policies in its Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Partnership 10-K”). Certain items from that discussion are repeated or updated below as necessary to assist in the understanding of these interim statements.

Basis of Presentation

The accompanying interim statements of the Partnership have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments and disclosures necessary for a fair statement of these interim statements have been included. The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year or for any other period. These interim statements should be read in conjunction with the Partnership’s consolidated financial statements for the year ended December 31, 2016, which are included in the 2016 Partnership 10-K, as filed with the SEC. The year-end balance sheet data was derived from the audited financial statements, but does not include all disclosures required by GAAP.  

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Revision of Financial Statements

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

The following table details the impact of these revisions for the three and nine months ended September 30, 2016, on the Condensed Consolidated Statement of Operations:

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, valuation of contingent consideration, 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 nine months ended September 30, 2017 and 2016.

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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, 2016, the fair value of the Partnership’s reporting unit exceeded its carrying value by approximately 11% and management concluded that no impairment was necessary.  In the event that market conditions were to remain weak for an extended period of time, the Partnership may be required to record an impairment of goodwill in the future, and such impairment could be material.

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

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 September 30, 2017 and December 31, 2016.

Contingent Consideration

The Partnership records an estimate of the fair value of contingent consideration related to the earn-out obligations to CenterPoint Properties Trust (“CenterPoint”) as a part of the Joliet terminal acquisition, within “Other Liabilities” and “Other non-current liabilities” in the accompanying consolidated balance sheets at September 30, 2017 and December 31, 2016 .  On a quarterly basis, the Partnership revalues the liability and records increases or decreases in the fair value of the recorded liability as an adjustment to earnings.  Changes to the contingent consideration liability can result from adjustments to the discount rate or the estimated amount and timing of the future throughput activity at the Joliet terminal.  The assumptions used to estimate fair value require significant judgment.  The use of different assumptions and judgments could result in a materially different estimate of fair value.  The key inputs in determining fair value of the Partnership’s contingent consideration obligations of $17.6 million and $18.0 million at September 30, 2017 and December 31, 2016, respectively, include discount rates ranging from 7.1% to 7.7% and changes in the assumed amount and timing of the future throughput activity which affects the amount and timing of payments on the earn-out obligation .  For further information, see Note 2, “Summary of Significant Accounting Policies – Fair Value of Financial Instruments,” to the unaudited condensed consolidated financial statements included in this report for additional information about the Partnership’s contingent consideration obligations.

Contingencies

In the normal course of business, the Partnership may be subject to loss contingencies, such as legal proceedings and claims arising out of its business that cover a wide range of matters. An accrual for a loss contingency is recognized when it is probable that an asset had been impaired or a liability had been incurred and the amount of loss can be reasonably estimated.  If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Partnership’s financial statements. If the assessment indicates that a potential material loss

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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 the Partnership may cause the Partnership to incur costly litigation and/or substantial settlement charges. As a result, the Partnership’s 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 the Partnership’s 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 Joliet Holdings, a joint venture company formed with an affiliate of GE Energy Financial Services (“GE EFS”), of all of the memberships interests of Joliet Bulk, Barge & Rail LLC (“JBBR”) from CenterPoint for $216.0 million (the “JBBR Acquisition”), Joliet Holdings has an earn-out obligation to CenterPoint which was valued at the time of the JBBR Acquisition at $19.7 million.  Joliet Holdings’ earn-out obligations to CenterPoint will terminate upon the payment, in the aggregate, of $27.0 million.  The balance of the earn-out liability is included within “Other non-current liabilities” in the accompanying consolidated balance sheets at September 30, 2017 and December 31, 2016.  Since the fair value of the contingent consideration obligation is based primarily upon unobservable inputs, it is classified as Level 3 in the fair value hierarchy.  The contingent consideration obligation will be revalued at each reporting period and changes to the fair value will be recorded as a component of operating income.  Increases or decreases in the fair value of the contingent consideration obligations can result from changes in the assumed throughput (contracted or uncontracted) and the long-term interest rates.  Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent reporting period.  Accordingly, future business and economic conditions can materially impact the amount of contingent consideration expense the Partnership records in any given period.   The key inputs in determining fair value of the Partnership’s contingent consideration obligations of $17.6 million and $18.0 million at September 30, 2017 and December 31, 2016, respectively, include discount rates ranging from 7.1% to 7.7% and changes in the estimated amount and timing of the future throughput activity which affects the timing of payments on the earn-out obligation . The Partnership recorded a $0.5 million non-cash loss on the revaluation of the earn-out liability for each of the three months ended September 30, 2017 and 2016.  The Partnership recorded a $1.5 million non-cash loss and a $0.3 million non-cash gain on the revaluation of the earn-out liability during the nine months ended September 30, 2017 and 2016, respectively.  For the three and nine months ended September 30, 2017, Joliet Holdings reported earn-out payments of $0.6 million and $1.9 million, respectively, to Centerpoint related to the earn-out obligation. For the three and nine months ended September 30, 2016, Joliet Holdings reported earn-out payments of $0.3 million and $1.0 million, respectively, to Centerpoint related to the earn-out obligation.  Since the closing of the JBBR Acquisition in May 2015 through September 30, 2017, Joliet Holdings has reported earn-out payments of $4.6 million related to the earn-out obligation.  The following is a reconciliation of the beginning and ending amounts of the contingent consideration obligation related to the JBBR Acquisition (in thousands):

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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. Following payment of the cash distribution for the third quarter of 2016, the requirements for the conversion of all subordinated units were satisfied under the partnership agreement.  As a result, effective November 16, 2016, the 6,081,081 subordinated units, of which 5,146,264 were owned by Lightfoot, converted on a one-for-one basis into common units and thereafter participate on terms equal with all other common units in distributions of available cash. The overall computation, presentation and disclosure of the Partnership’s limited partners’ net income per unit are made in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 260 “Earnings per Share.”

Segment Reporting

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

Non-Controlling Interests

The Partnership applies the provisions of ASC 810 Consolidations , which were amended on January 1, 2009 by ASC 810-10-65 and ASC 810-10-45 (“ASC 810”).  As required by ASC 810, the Partnership’s 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 nine months ended September 30, 2017 and 2016, $7.2 million and $8.0 million, respectively, of distributions have been made to non-controlling interest holders of consolidated subsidiaries.  For the nine months ended September 30, 2017 and 2016, $1.6 million and $0 million, respectively, of contributions have been made by non-controlling interest holders of consolidated subsidiaries.  

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued updated guidance on the reporting and disclosure of revenue recognition. The update requires that an entity recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update also requires new qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, information about contract balances and performance obligations, and assets recognized from costs incurred to obtain or fulfill a contract.  In April 2015, the FASB proposed a one-year deferral of the effective date, and therefore, this guidance will be effective for the Partnership beginning in the first quarter of 2018, with early

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adopti on optional but not before the original effective date of December 15, 2016.  In May and December 2016, the FASB issued certain narrow-scope improvements and practical expedients to the guidance.  The Partnership plans to adopt this guidance effective Janu ary 1, 2018 using the modified retrospective method applied to contracts that are not completed as of that date.  To date, the Partnership has not identified changes to its revenue recognition policies that would result in a material adjustment to the open ing balance of partnership capital on January 1, 2018; however, it is continuing to evaluate the effect, if any, adopting this guidance will have on its financial position, results of operations, cash flows and related disclosures.  Adopting this guidance will result in increased disclosures related to revenue recognition policies and disaggregation of revenue.  

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

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

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

Note 3 – Acquisitions

Acquisitions

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

Gulf Oil Terminals Acquisition

In January 2016, the Partnership, through a newly formed wholly owned subsidiary, 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

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fair value of the identifiable assets acquired and, accordingly, the Partnership did not r ecognize any goodwill as a part of the Gulf Oil Terminals Acquisition.  Transaction costs incurred by the Partnership in connection with the acquisition, consisting primarily of legal and other professional fees, totaled approximately $0.6 million and were expensed as incurred in accordance with ASC 805.   Management has finalized the valuation of the net assets acquired in connection with the Gulf Oil Terminals Acquisition and the final purchase price allocation has been determined.

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

Note 4—Investment in Unconsolidated Affiliate

The Partnership accounts for investments in limited liability companies under the equity method of accounting unless the Partnership’s interest is deemed to be so minor that it may have virtually no influence over operating and financial policies. “Investment in unconsolidated affiliate” consisted of the LNG Interest, and its balances as of September 30, 2017 and December 31, 2016 are represented below (in thousands):

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 September 30, 2017 is as follows (in thousands):

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

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 the Partnership that they view the assertions by Eni USA to be without merit and that they will continue to vigorously contest the assertions set forth by Eni USA.  Although the Partnership does not control Gulf LNG Holdings, the Partnership also is of the view that the assertions made by Eni USA are without merit. As contemplated by the terminal use agreement, disputes are meant to be resolved by final and binding arbitration. A three-member arbitration panel conducted an arbitration hearing in January 2017.  The Partnership expects the arbitration panel will issue its decision before the end of the fourth quarter of 2017.  If the arbitration panel has not issued its decision on or about December 4, 2017, the Partnership has been advised that the panel is expected, on or around such date, to advise the parties to the arbitration of the date that the panel expects to issue its decision.  Eni USA has advised Gulf LNG Holdings’ affiliates that it will continue to pay the amounts claimed to be due under the terminal use agreement pending resolution of the dispute.  

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

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During the three months ended September 30, 2017, the Partnership recognized a non-cash loss of $1.5 million as a result of dismantling and selling salt unloading equipment at the Joliet terminal. The existing location of the salt unloading equipment interfered with the location of a new pipeline that is being constructed to support future commercial activities at the Joliet terminal and the Partnership opted to dismantle and sell the salt unloading equipment accordingly. The net impact of this disposal is reflected in “Loss on disposal of property and equipment” in the accompanying consolidated statement of operations and comprehensive income.  

The Partnership’s intangible assets are amortized on a straight-line basis over the expected life of each intangible asset. The estimated future amortization expense is approximately $3.5 million for the remainder of 2017, $12.8 million in 2018, $12.2 million in 2019, $12.2 million in 2020, $12.2 million in 2021 and $54.3 million thereafter.

Note 7—Debt

Credit Facility

Concurrent with the closing of the IPO, the Partnership entered into the Second Amended and Restated Revolving Credit Agreement (the “Credit Facility”) with a syndicate of lenders, under which Arc Terminals Holdings LLC (“Arc Terminals Holdings”) is the borrower. The Credit Facility matures in November 2018 and has up to $300.0 million of borrowing capacity. As of September 30, 2017, the Partnership had borrowings of $256.0 million under the Credit Facility at an interest rate of 4.25%.  Based on the restrictions under the total leverage ratio covenant, as of September 30, 2017, the Partnership had $25.0 million of available capacity under the Credit Facility.

The Credit Facility is available to fund working capital and to finance capital expenditures and other permitted payments and allows the Partnership to request that the maximum amount of the Credit Facility be increased by up to an aggregate principal amount of $100.0 million, subject to receiving increased commitments from lenders or commitments from other financial institutions. The Credit Facility is available for revolving loans, including a sublimit of $5.0 million for swing line loans and a sublimit of $20.0 million for letters of credit. The Partnership’s obligations under the Credit Facility are secured by a first priority lien on substantially all of the Partnership’s material assets other than the LNG Interest and the assets of the Partnership’s Joliet terminal (which is owned indirectly

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by Joliet Holdings, 40% of which is owned by an affiliate of GE EFS). The Partnership and each of the Partnership’s existing restricted subsidiaries (other than the borrower) guarantee, and each of the Partnership’s future restricted subsidiaries will also guarantee, the Credit Facility.

Loans under the Credit Facility bear interest at a floating rate, based upon the Partnership’s total leverage ratio, equal to, at the Partnership’s option, either (a) a base rate plus a range from 100 to 225 basis points per annum or (b) a LIBOR rate, plus a range of 200 to 325 basis points. The base rate is established as the highest of (i) the rate which SunTrust Bank announces, from time to time, as its prime lending rate, (ii) the daily one-month LIBOR rate plus 100 basis points per annum and (iii) the federal funds rate plus 50 basis points per annum. The unused portion of the Credit Facility is subject to a commitment fee calculated based upon the Partnership’s total leverage ratio ranging from 0.375% to 0.50% per annum. Upon any event of default, the interest rate will, upon the request of the lenders holding a majority of the commitments, be increased by 2.0% on overdue amounts per annum for the period during which the event of default exists.

The Credit Facility contains certain customary representations and warranties, affirmative covenants, negative covenants and events of default. As of September 30, 2017, the Partnership was in compliance with such covenants. The negative covenants include restrictions on the Partnership’s ability to incur additional indebtedness, acquire and sell assets, create liens, enter into certain lease agreements, make investments and make distributions.

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

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

First Amendment

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

Second Amendment

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

Third Amendment

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

Fourth Amendment

In June 2016, Arc Terminals Holdings, as borrower, together with the Partnership and certain of its other subsidiaries, as guarantors, entered into the fourth amendment to the Credit Facility (the “Fourth Amendment”).  The Fourth Amendment principally modifies certain provisions of the Credit Facility including (i) the circumstances whereby the Partnership may increase up to or

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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 gr eater than or equal to 4.50 to 1.00.  

Fifth Amendment

In May 2017, Arc Terminals Holdings, as borrower, together with the Partnership and certain of its other subsidiaries, as guarantors, entered into the fifth amendment to the Credit Facility (the “Fifth Amendment”).  The Fifth Amendment principally modifies a provision of the Credit Agreement whereby the Partnership may maintain a total leverage ratio of up to 5.00 to 1.00 for a stated period of time.  

Note 8—Partners’ Capital and Distributions

Units Outstanding

As of September 30, 2017, the Partnership had 19,545,944 common units outstanding.  Of that number, 5,242,775 were owned by Lightfoot.  In addition, the General Partner, which is owned by Lightfoot, has a non-economic general partner interest in the Partnership along with incentive distribution rights.

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

The table below summarizes the changes in the number of common units outstanding at December 31, 2016 through September 30, 2017:

Cash Distribution Policy

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

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

The partnership agreement generally provides that the Partnership will distribute cash each quarter to all unitholders pro rata, until each has received a distribution of $0.4456.  In connection with the entering into of the Merger Agreement, the Partnership

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amended its distribution policy to provide that, from the date of the Merger Agreement through the date that the Merger is consummated, the Partnership will not declare or pay a distribution on its common units in excess of $0.44 per common unit.

If cash distributions to the Partnership’s unitholders exceed $0.4456 per unit in any quarter, the Partnership’s unitholders and the General Partner, as the initial holder of the incentive distribution rights, will receive distributions according to the following percentage allocations:

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

Note 9—Equity Plans

2013 Long-Term Incentive Plan

The Board approved and adopted the Arc Logistics Long-Term Incentive Plan (as amended from time to time, the “2013 Plan”) in November 2013.  In July 2014, the Board formed a Compensation Committee (the “Compensation Committee”) to administer the 2013 Plan.  Effective as of March 2015, the Board dissolved the Compensation Committee and, on and after such date, the Board serves as the administrative committee (the “Committee”) under the 2013 Plan.  The Board amended and restated the 2013 Plan in March 2016.  Employees (including officers), consultants and directors of the General Partner, the Partnership and its affiliates (the “Partnership Entities”) are eligible to receive awards under the 2013 Plan.  The 2013 Plan authorizes up to an aggregate of 2.0 million common units to be available for awards under the 2013 Plan, subject to adjustment as provided in the 2013 Plan.  Awards available for grant under the 2013 Plan include, but are not limited to, restricted units, phantom units, unit options and unit appreciation rights, but only phantom units have been granted under the 2013 Plan to date. Distribution equivalent rights (“DER”) are also available for grant under the 2013 Plan, either alone or in tandem with other specific awards, which entitle the recipient to receive an amount equal to distributions paid on an outstanding common unit.  Upon the occurrence of a “change of control” or an award recipient’s termination of service due to death or “disability” (each quoted term, as defined in the 2013 Plan), any outstanding unvested award will vest in full, except that, with respect to awards issued on or after March 9, 2016, the Committee may condition the automatic vesting of any such awards then outstanding upon a separation of employment for certain reasons (as established in an individual award agreement) following the occurrence of a “change of control”.  

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

Of the July 2014 awards, a total of 100,000 phantom units were granted to certain non-employee directors of the Board and are classified as equity awards for accounting purposes (the “Director Grants”).  Each Director Grant will be settled in common units and includes a DER. The Director Grants have an aggregate grant date fair value of $2.5 million and vest in equal annual installments over a three-year period starting from the date of grant. For the three and nine months ended September 30, 2017, the Partnership recorded approximately less than $0.1 million and $0.4 million, respectively, of unit-based compensation expense related to the Director Grants.  For the three and nine months ended September 30, 2016, the Partnership recorded $0.2 million and $0.6 million, respectively, of unit-based compensation related to the Director Grants.  As of September 30, 2017, 100% of the phantom units granted under the Director Grants have vested and all of the related unit-based compensation expense has been recognized.  

Of the July 2014 awards, a total of 832,000 phantom units were granted to employees and certain consultants of the Partnership Entities and are classified as equity awards for accounting purposes (the “Employee Equity Grants”).  Each Employee Equity Grant will be settled in common units and includes a DER.  The Employee Equity Grants have an aggregate grant date fair value of $21.2 million and vest as follows: (i) 25% of the Employee Equity Grants vested on the day after the end of the Subordination Period (as defined in the partnership agreement); and (ii) the three remaining 25% installments of the Employee Equity Grants will vest based on the date on which the Partnership has paid, for three consecutive quarters, distributions to its common unitholders at or above a stated level, with (A) 25% of the award vesting after distributions are paid at or above $0.4457 per unit for the required period, (B) 25% of the award vesting after distributions are paid at or above $0.4845 per unit for the required period, and (C) the last 25% of the award

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vesting after distributions are paid at or above $0.5814 per unit for the required per iod.  To the extent not previously vested, the Employee Equity Grants expire on the fifth anniversary of the date of grant, provided that the expiration date can be extended to the eighth anniversary of the date of grant or longer upon the satisfaction of certain conditions specified in the award agreement.  For the three and nine months ended September 30, 2017, the Partnership recorded $0.2 million and $0.5 million, respectively, of unit-based compensation expense related to the Employee Equity Grants.  F or the three and nine months ended September 30, 2016, the Partnership recorded $0.8 million and $2.3 million, respectively, of unit-based compensation expense related to the Employee Equity Grants.  As of September 30, 2017, the unrecognized unit-based co mpensation expense for the Employee Equity Grants was approximately $10.6 million, which may be recognized variably over the remaining term of the awards based on the probability of the achievement of the performance vesting requirements.  Through Septembe r 30, 2017, one-fourth of the phantom units granted under the Employee Equity Grants have vested.

Of the July 2014 awards, a total of 7,500 phantom units were granted to certain employees of the Partnership Entities and are classified as liability awards for accounting purposes (the “Employee Liability Grants”).  Each Employee Liability Grant will be settled in cash (as such award consists of less than 1,000 phantom units) and includes a DER. The Employee Liability Grants have an aggregate grant date fair value of $0.2 million and have the same term and vesting requirements as the Employee Equity Grants described in the preceding paragraph.  For the three and nine months ended September 30, 2017 and 2016, the Partnership recorded less than $0.1 million of unit-based compensation expense during each period, with respect to the Employee Liability Grants.  As of September 30, 2017, the unrecognized unit based compensation expense for the Employee Liability Grants was approximately less than $0.1 million, which may be recognized variably over the remaining term of the awards based on the probability of the achievement of the performance vesting requirements and is subject to remeasurement each reporting period until the awards settle.  Through September 30, 2017, one-fourth of the phantom units granted under the Employee Liability Grants have vested.

In March 2015, the Board authorized the grant of an aggregate of 45,668 phantom units pursuant to the 2013 Plan to certain employees, consultants and non-employee directors of the Partnership Entities (“2015 Equity Grants”).  Each 2015 Equity Grant will be settled in common units and includes a DER.  The 2015 Equity Grants are classified as equity awards for accounting purposes and have an aggregate grant date fair value of $0.9 million and vest in equal annual installments over a three-year period starting from the date of grant.  For the three and nine months ended September 30, 2017, 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 nine months ended September 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.  As of September 30, 2017, the unrecognized unit-based compensation expense for the 2015 Equity Grants is approximately $0.1 million, which will be recognized ratably over the remaining term of the awards.  Through September 30, 2017, two-thirds of the phantom units granted under the 2015 Equity Grants have vested.  

During the year ended December 31, 2015, the Board and Chief Executive Officer authorized the grant of an aggregate of 57,100 phantom units (in addition to the 45,668 phantom units granted in March 2015) pursuant to the 2013 Plan to certain employees of the Partnership Entities (“2015 Performance Grants”).  Each 2015 Performance Grant will be settled in common units and includes a DER.  The 2015 Performance Grants are classified as equity awards for accounting purposes and have an aggregate grant date fair value of $1.0 million and have the same term and vesting requirements as the Employee Equity Grants described above.  For the three and nine months ended September 30, 2017, the Partnership recorded less than $0.1 million of unit-based compensation expense during each period with respect to the 2015 Performance Grants.  For the three and nine months ended September 30, 2016, the Partnership recorded $0.1 million and $0.2 million, respectively, of unit-based compensation expense with respect to the 2015 Performance Grants.  As of September 30, 2017, the unrecognized unit-based compensation expense for the 2015 Performance Grants is approximately $0.6 million, which may be recognized variably over the remaining term of the awards based on the probability of the achievement of the performance vesting requirements.  Through September 30, 2017, one-fourth of the phantom units granted under the 2015 Performance Grants have vested.

During the year ended December 31, 2016, the Board authorized the grant of an aggregate of 94,000 phantom units pursuant to the 2013 Plan to certain employees and consultants of the Partnership Entities (“2016 Equity Grants”).  Each 2016 Equity Grant will be settled in common units and includes a DER.  The 2016 Equity Grants are classified as equity awards for accounting purposes and have an aggregate grant date fair value of $1.1 million and vest in three equal annual installments over a three-year period starting from the date of grant.  For the three and nine months ended September 30, 2017, the Partnership recorded $0.1 million and $0.3 million, respectively, of unit-based compensation expense with respect to the 2016 Equity Grants.  For the three and nine months ended September 30, 2016, the Partnership recorded $0.1 million and $0.2 million, respectively, of unit-based compensation with respect to the 2016 Equity Grants.  As of September 30, 2017, the unrecognized unit-based compensation expense for the 2016 Equity Grants is approximately $0.6 million, which will be recognized ratably over the remaining term of the awards.  Through September 30, 2017, one-third of the phantom units granted under the 2016 Equity Grants have vested.  

During the nine months ended September 30, 2017, the Board authorized the grant of an aggregate of 227,561 phantom units pursuant to the 2013 Plan to certain employees, directors and consultants of the Partnership Entities (“2017 Equity Grants”).  Each 2017 Equity Grant will be settled in common units and includes a DER.  The 2017 Equity Grants are classified as equity awards for accounting purposes and have an aggregate grant date fair value of $3.4 million, 209,111 of the 2017 Equity Grants vest in three equal annual installments over a three-year period starting from the date of grant, 16,450 of the 2017 Equity Grants vested immediately on the date of grant, and 2,000 of the 2017 Equity Grants had one-third of the phantom units vest on the date of grant while the remaining two-thirds will vest in two equal annual installments over a two-year period starting from the date of grant.  For the three and nine months ended September 30, 2017, the Partnership recorded $0.2 million and $0.6 million, respectively, of unit based compensation

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expense with respect to the 2017 Equity Grants.  As of September 30, 2017, the unrecognized unit-based compensation expense for the 2017 Equity Grants is approximately $2.7 million, which will be recognized ratably over the remaining term of the awards.

During the nine months ended September 30, 2017, the Board authorized the grant of an aggregate of 26,250 phantom units pursuant to the 2013 Plan to an employee of an affiliate of the Partnership Entities (“2017 Performance Grant”).  The 2017 Performance Grant will be settled in common units and includes a DER.  The 2017 Performance Grant is classified as an equity award for accounting purposes, has an aggregate grant date fair value of $0.4 million and will vest in three equal installments based on the date on which the Partnership has paid, for three consecutive quarters, distributions to its common unitholders at or above a stated level, with (A) one-third of the award vesting after distributions are paid at or above $0.4457 per unit for the required period, (B) one-third of the award vesting after distributions are paid at or above $0.4845 per unit for the required period, and (C) the last one-third of the award vesting after distributions are paid at or above $0.5814 per unit for the required period.  To the extent not previously vested, the 2017 Performance Grant expires on the fifth anniversary of the date of grant, provided that the expiration date can be extended to the eighth anniversary of the date of grant or longer upon the satisfaction of certain conditions specified in the award agreement.  For the three and nine months ended September 30, 2017, the Partnership recorded less than $0.1 million and $0.1 million, respectively, of unit-based compensation expense with respect to the 2017 Performance Grant.  As of September 30, 2017, the unrecognized unit-based compensation expense for the 2017 Performance Grant is approximately $0.3 million which may be recognized variably over the remaining term of the award based on the probability of the achievement of the performance vesting requirements.

During the nine months ended September 30, 2017, the Board authorized the grant of an aggregate of 10,475 phantom units pursuant to the 2013 Plan to employees of the Partnership Entities (“2017 Employee Liability Grants”). Each 2017 Employee Liability Grant will be settled in cash (as such award consists of less than 1,000 phantom units) and includes a DER.  The 2017 Employee Liability Grants are classified as liability awards for accounting purposes, have an aggregate grant date fair value of $0.1 million and will vest in three equal installments over a three-year period starting from the date of grant.  For the three and nine months ended September 30, 2017, the Partnership recorded less than $0.1 million of unit-based compensation expense during each period, with respect to the 2017 Employee Liability Grants.  As of September 30, 2017, the unrecognized unit-based compensation expense for the 2017 Employee Liability Grants is approximately $0.1 million, which will be recognized ratably over the remaining term of the awards.

Subject to applicable earning criteria, the DER included in each phantom unit award described above entitles the award recipient to a cash payment (or, if applicable, payment of other property) equal to the cash distribution (or, if applicable, distribution of other property) paid on an outstanding common unit to unitholders generally based on the number of common units related to the portion of the award recipient’s phantom units that have not vested and been settled as of the record date for such distribution.  Cash distributions paid during the vesting period on phantom units that are classified as equity awards for accounting purposes are reflected initially as a reduction of partners’ capital.  Cash distributions paid on such equity awards that are not initially expected to vest or ultimately do not vest are classified as compensation expense.  As the probability of vesting changes, these initial categorizations could change.  Cash distributions paid during the vesting period on phantom units that are classified as liability awards for accounting purposes are reflected as compensation expense and included in the “Selling, general and administrative” line item in the accompanying unaudited condensed consolidated statements of operations and comprehensive income. During the three and nine months ended September 30, 2017, the Partnership paid approximately $0.4 million and $1.2 million, respectively, in DERs to phantom unit-holders. For the three and nine months ended September 30, 2017, $0.2 million and $0.6 million, respectively, was reflected as a reduction of partners’ capital, and the other $0.2 million and $0.6 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 nine months ended September 30, 2016, the Partnership paid approximately $0.5 million and $1.4 million, respectively, in DERs to phantom unit-holders.  For the three months and nine months ended September 30, 2016, $0.3 million and $0.8 million, respectively, was reflected as a reduction of partners’ capital, and the other $0.2 million and $0.6 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 nine months ended September 30, 2017 was $0.5 million and $1.9 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 total compensation expense related to the 2013 Plan for the three and nine months ended September 30, 2016 was $1.2 million and $3.6 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 September 30, 2017 was less than $0.1 million.

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

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Note 10—Earnings Per Unit

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

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

Diluted net income per unit applicable to limited partners includes the effects of potentially dilutive units on the Partnership’s units. For the three and nine months ended September 30, 2017 and 2016, the only potentially dilutive units outstanding consisted of the phantom units (see “Note 9—Equity Plans”) as they are considered to be participating securities. For the three and nine months ended September 30, 2017 and 2016, none of the phantom units are included in the calculation of diluted earnings per share due to the Partnership having declared distributions in excess of reported net income attributable to partners’ capital.

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

Note 11—Related Party Transactions

Agreements with Affiliates

Payments to the General Partner and its Affiliates

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

For the three months ended September 30, 2017 and 2016, the General Partner incurred expenses of $1.4 million and $1.3 million, respectively.  For the nine months ended September 30, 2017 and 2016, the General Partner incurred expenses of $3.9 million and $4.0 million, respectively.  Such expenses are reimbursable from the Partnership and are reflected in the “Selling, general and administrative – affiliate” line on the accompanying unaudited condensed consolidated statements of operations and comprehensive income. As of September 30, 2017 and December 31, 2016, the Partnership had a payable of approximately $2.8 million and $2.1 million, respectively, to the General Partner, which is reflected as “Due to general partner” in the accompanying unaudited condensed consolidated balance sheets.

Registration Rights Agreement

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

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Other Transactions with Related Persons

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 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 2018.  

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 2018.

Throughput Agreements with UET

  In connection with the Pawnee Terminals 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 (which expire in May 2020) will automatically extend under certain circumstances.  Each UET Throughput Agreement requires UET to deliver crude oil 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.

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The total receivables associated with the storage and throughput agreements for Center Oil, UET and GCAC reflected in the “Due from related parties” line on the accompanying unaudited condensed consolidated balance sheets are as follows (in thousands):

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, 2018, unless mutually extended for an additional year by both UET and the Partnership.

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.  As of April 2017, John Pugh 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 Company.  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 receives 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 September 30, 2017 and 2016, the Partnership was paid $0.5 million and $0.3 million, respectively, in fees and reimbursements by Joliet Holdings under the MSA.  During the nine months ended September 30, 2017 and 2016, the Partnership was paid $1.1 million and $1.0 million, respectively, in fees and reimbursements by Joliet Holdings under the MSA.  

PIPE Transaction

Registration Rights Agreement with PIPE Investors

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 sold 4,520,795 common units at a price of $16.59 per common unit in a private placement (the “PIPE Transaction”) on May 14, 2015 for proceeds totaling $72.7 million after placement agent commissions and expenses, which were used to partially finance the Partnership’s portion of the 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 wholly owned 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

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interests of UET Midstream from the Pawnee Sellers for total consideration, net of certain adjustments, of $76.6 million, consis ting 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 result ed 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 Partnership’s common 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 Partnership’s common 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.