S-1/A 1 d525617ds1a.htm FORM S-1/A Form S-1/A
Table of Contents
Index to Financial Statements

As filed with the Securities and Exchange Commission on August 1, 2013

Registration No. 333-189396

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 5

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

World Point Terminals, LP

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   5171   46-2598540
(State or Other Jurisdiction of
  (Primary Standard Industrial
  (I.R.S. Employer
Incorporation or Organization)   Classification Code Number)   Identification Number)

8235 Forsyth Blvd., Suite 400

St. Louis, Missouri 63105

(314) 889-9600

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

Steven G. Twele

Chief Financial Officer

8235 Forsyth Blvd., Suite 400

St. Louis, Missouri 63105

(314) 889-9600

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

Copies to:

 

Sean T. Wheeler
Latham & Watkins LLP
811 Main Street, Suite 3700
Houston, Texas 77002
Tel: (713) 546-5400
  Joshua Davidson
Baker Botts L.L.P.
910 Louisiana, Suite 3200
Houston, Texas 77002
(713) 229-1234

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

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

 

Large accelerated filer  ¨

  Accelerated filer  ¨  

Non-accelerated filer  x

(Do not check if a smaller reporting company)

  Smaller reporting company  ¨

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents
Index to Financial Statements

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject To Completion

Preliminary Prospectus dated August 1, 2013

PROSPECTUS

 

LOGO

8,750,000 Common Units

Representing Limited Partner Interests

World Point Terminals, LP

 

 

This is the initial public offering of our common units representing limited partner interests. We are offering 3,871,750 common units, and CPT 2010, LLC, or the selling unitholder, is offering 4,878,250 common units in this offering. We will not receive any proceeds from the sale of the common units by the selling unitholder. Prior to this offering, there has been no public market for our common units.

We currently expect the initial public offering price to be between $19.00 and $21.00 per common unit. Our common units have been approved for listing on the New York Stock Exchange, or NYSE, under the symbol “WPT,” subject to official notice of issuance. We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act, or the JOBS Act.

Investing in our common units involves risks. See “Risk Factors” beginning on page 23.

These risks include the following:

 

   

We may not have sufficient cash from operations following the establishment of cash reserves and payment of costs and expenses, including cost reimbursements to our general partner, to enable us to pay the minimum quarterly distribution to our unitholders.

 

   

Our business would be adversely affected if the operations of our customers experienced significant interruptions. In certain circumstances, the obligations of many of our key customers under their terminal services agreements may be reduced, suspended or terminated, which would adversely affect our financial condition and results of operations.

 

   

Our financial results depend on the demand for the light refined products, heavy refined products, crude oil and other related services that we perform at our terminals, among other factors, and general economic downturns could result in lower demand for these products for a sustained period of time.

 

   

We depend on Apex Oil Company, Inc., an affiliate of our general partner, and a relatively limited number of other customers for a significant portion of our revenues. The loss of, or material nonpayment or nonperformance by, Apex or any one or more of these other customers could adversely affect our ability to make cash distributions to you.

 

   

Our general partner and its affiliates, including World Point Terminals, Inc., Apex and their stockholders, have conflicts of interest with us and limited duties, and they may favor their own interests to the detriment of us and our unitholders.

 

   

Our partnership agreement restricts the remedies available to holders of our common units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

 

   

Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors.

 

   

Unitholders will experience immediate and substantial dilution in pro forma net tangible book value of $15.25 per common unit.

 

   

Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service, or the IRS, were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, then our cash available for distribution to our unitholders would be substantially reduced.

 

   

Our unitholders’ share of our income will be taxable to them for federal income tax purposes even if they do not receive any cash distributions from us.

 

 

 

    

Per Common Unit

      

Total

 

Public offering price

   $           $     

Underwriting discount (1)

   $           $     

Proceeds to World Point Terminals, LP (before expenses)

   $           $     

Proceeds to the selling unitholder (before expenses)

   $           $     

 

  (1) Excludes a structuring fee of 0.50% of the gross offering proceeds payable to Merrill Lynch, Pierce Fenner & Smith Incorporated. Please read “Underwriting” for a description of all underwriting compensation payable in connection with this offering.

We have granted the underwriters a 30-day option to purchase up to an additional 1,312,500 common units on the same terms and conditions as set forth above if the underwriters sell more than 8,750,000 common units in this offering. World Point Terminals, Inc. is an underwriter with respect to any common units issued and sold under the option. The selling unitholder is an underwriter with respect to the common units that it will sell in the offering.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the common units to purchasers on or about                     , 2013 through the book-entry facilities of The Depository Trust Company.

 

 

BofA Merrill Lynch

 

Credit Suisse    Citigroup    Stifel

 

 

BNP PARIBAS   

Stephens Inc.

  

Wedbush Securities

The date of this prospectus is                     , 2013.


Table of Contents
Index to Financial Statements

LOGO


Table of Contents
Index to Financial Statements

TABLE OF CONTENTS

 

SUMMARY

     1   

World Point Terminals, LP

     1   

Our Business Strategies

     4   

Our Competitive Strengths

     5   

Our Relationship with Our Sponsors

     7   

Risk Factors

     8   

Our Management

     9   

Summary of Conflicts of Interest and Duties

     10   

Principal Executive Offices

     11   

Implications of Being an Emerging Growth Company

     11   

Partnership Structure and Offering-Related Transactions

     12   

Organizational Structure

     13   

The Offering

     14   

Summary Historical and Pro Forma Financial and Operating Data

     19   

Non-GAAP Financial Measure

     21   

RISK FACTORS

     23   

Risks Inherent in Our Business

     23   

Risks Inherent in an Investment in Us

     37   

Tax Risks to Common Unitholders

     48   

USE OF PROCEEDS

     53   

CAPITALIZATION

     54   

DILUTION

     55   

CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     57   

General

     57   

Our Minimum Quarterly Distribution

     59   

Unaudited Pro Forma Cash Available for Distribution for the Year Ended December  31, 2012 and the Twelve Months Ended March 31, 2013

     61   

Estimated Cash Available for Distribution for the Twelve Months Ending June 30, 2014

     63   

PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

     69   

Distributions of Available Cash

     69   

Operating Surplus and Capital Surplus

     70   

Capital Expenditures

     72   

Subordinated Units and Subordination Period

     73   

Distributions of Available Cash from Operating Surplus During the Subordination Period

     74   

Distributions of Available Cash from Operating Surplus After the Subordination Period

     75   

General Partner Interest

     75   

Incentive Distribution Rights

     75   

Percentage Allocations of Available Cash From Operating Surplus

     76   

Right to Reset Incentive Distribution Levels

     76   

Distributions From Capital Surplus

     79   

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     80   

Distributions of Cash Upon Liquidation

     80   

SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OPERATING DATA

     83   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     86   

Overview

     86   

How We Generate Revenues

     86   

Factors That Impact Our Business

     87   

Factors Impacting the Comparability of Our Financial Results

     88   

Overview of Our Results of Operations

     89   

 

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Index to Financial Statements

Results of Operations

     91   

Liquidity and Capital Resources

     96   

Cash Flows

     97   

Future Trends and Outlook

     100   

Quantitative and Qualitative Disclosures About Market Risk

     101   

Seasonality

     102   

Off-Balance Sheet Arrangements

     102   

Critical Accounting Policies and Estimates

     102   

INDEPENDENT STORAGE INDUSTRY OVERVIEW

     104   

Overview

     104   

Terminal Services

     108   

Barriers to Entry

     109   

Parameters of Competition

     109   

Customers

     110   

Market Developments

     110   

BUSINESS

     112   

Overview

     112   

Our Terminal Assets

     113   

Our Operations

     119   

Our Business Strategies

     120   

Our Competitive Strengths

     121   

Our Relationship with Our Sponsors

     122   

Customers

     124   

Contracts

     124   

Competition

     124   

Environmental and Occupational Safety and Health Regulation

     125   

Title to Properties and Permits

     129   

Safety and Maintenance

     129   

Seasonality

     130   

Insurance

     130   

Legal Proceedings

     130   

MANAGEMENT

     131   

Management of World Point Terminals, LP

     131   

Executive Officers and Directors of Our General Partner

     132   

Board Leadership Structure

     135   

Board Role in Risk Oversight

     136   

Executive Compensation

     136   

Long-Term Incentive Plan

     136   

Compensation of Our Directors

     139   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     140   

SELLING UNITHOLDER

     142   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     143   

Distributions and Payments to Our General Partner and Its Affiliates

     143   

Agreements Governing the Transactions

     144   

Procedures for Review, Approval and Ratification of Transactions with Related Persons

     146   

CONFLICTS OF INTEREST AND DUTIES

     148   

Conflicts of Interest

     148   

Duties of the General Partner

     154   

DESCRIPTION OF THE COMMON UNITS

     157   

The Units

     157   

Transfer Agent and Registrar

     157   

Transfer of Common Units

     157   

 

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Index to Financial Statements

THE PARTNERSHIP AGREEMENT

     159   

Organization and Duration

     159   

Purpose

     159   

Capital Contributions

     159   

Voting Rights

     159   

Limited Liability

     161   

Issuance of Additional Securities

     162   

Amendment of the Partnership Agreement

     162   

Merger, Consolidation, Conversion, Sale or Other Disposition of Assets

     164   

Termination and Dissolution

     165   

Liquidation and Distribution of Proceeds

     165   

Withdrawal or Removal of Our General Partner

     165   

Transfer of General Partner Interest

     167   

Transfer of Ownership Interests in the General Partner

     167   

Transfer of Incentive Distribution Rights

     167   

Change of Management Provisions

     167   

Limited Call Right

     168   

Redemption of Ineligible Holders

     168   

Meetings; Voting

     168   

Status as Limited Partner

     169   

Indemnification

     169   

Reimbursement of Expenses

     170   

Books and Reports

     170   

Right to Inspect Our Books and Records

     170   

Registration Rights

     171   

Forum

     171   

UNITS ELIGIBLE FOR FUTURE SALE

     172   

Rule 144

     172   

Our Partnership Agreement and Registration Rights

     172   

Lock-Up Agreements

     173   

Registration Statement on Form S-8

     173   

MATERIAL FEDERAL INCOME TAX CONSEQUENCES

     174   

Partnership Status

     175   

Limited Partner Status

     176   

Tax Consequences of Unit Ownership

     176   

Tax Treatment of Operations

     183   

Disposition of Common Units

     184   

Uniformity of Units

     186   

Tax-Exempt Organizations and Other Investors

     187   

Administrative Matters

     188   

Recent Legislative Developments

     191   

State, Local and Other Tax Considerations

     191   

INVESTMENT IN WORLD POINT TERMINALS, LP BY EMPLOYEE BENEFIT PLANS

     192   

UNDERWRITING

     194   

VALIDITY OF OUR COMMON UNITS

     202   

EXPERTS

     202   

WHERE YOU CAN FIND MORE INFORMATION

     202   

FORWARD-LOOKING STATEMENTS

     202   

INDEX TO FINANCIAL STATEMENTS

     F-1   

APPENDIX A FORM OF FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF WORLD POINT TERMINALS, LP

     A-1   

APPENDIX B GLOSSARY OF TERMS

     B-1   

 

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You should rely only on the information contained in this prospectus or in any free writing prospectus we or the selling unitholder may authorize to be delivered to you. We and the selling unitholder have not, and the underwriters have not, authorized any other person to provide you with information different from that contained in this prospectus and any free writing prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted.

Through and including                     , 2013 (the 25th day after the date of this prospectus), federal securities laws may require all dealers that effect transactions in these securities, whether or not participating in this offering, to deliver a prospectus. This requirement is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. Please read “Risk Factors” and “Forward-Looking Statements.”

Industry and Market Data

The data included in this prospectus regarding the midstream refined products and crude oil industry, including descriptions of trends in the market and our position and the position of our competitors within the industry, is based on a variety of sources, including independent industry publications, government publications and other published independent sources, information obtained from customers, distributors, suppliers and trade and business organizations and publicly available information, as well as our good faith estimates, which have been derived from management’s knowledge and experience in the industry in which we operate. Although we have not independently verified the accuracy or completeness of the third party information included in this prospectus, based on management’s knowledge and experience we believe that the third party sources are reliable and that the third party information included in this prospectus or in our estimates is accurate and complete.

 

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Index to Financial Statements

SUMMARY

This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the historical and pro forma financial statements and the notes to those financial statements, before investing in our common units. The information presented in this prospectus assumes (1) an initial public offering price of $20.00 per common unit (the midpoint of the price range set forth on the cover page of this prospectus) and (2) unless otherwise indicated, that the underwriters’ option to purchase additional common units is not exercised. You should read “Risk Factors” beginning on page 23 for information about important risks that you should consider before buying our common units.

References in this prospectus to (i) “World Point Terminals, LP,” the “partnership,” “we,” “our,” “us” or like terms when used in a historical context refer to the businesses of Center Point Terminal Company, our predecessor for accounting purposes, also referred to as “our predecessor,” and when used in the present tense or prospectively, refer to World Point Terminals, LP, a Delaware limited partnership, and its subsidiaries; (ii) “our general partner” refer to WPT GP, LLC, the general partner of the partnership; (iii) “our parent” refer to World Point Terminals, Inc. and its subsidiaries; (iv) “Apex” refer to Apex Oil Company, Inc. and its subsidiaries; (v) “the controlling shareholders” refer to Paul A. Novelly, the chairman of the board of directors of our parent, our general partner and Apex, and his family, who together control our parent and Apex; (vi) “our sponsors” refer to our parent, Apex and the controlling shareholders, collectively, and (vii) “the selling unitholder” refer to CPT 2010, LLC, a wholly owned subsidiary of our parent. We include a glossary of some of the terms used in this prospectus as Appendix  B.

World Point Terminals, LP

Overview

We are a fee-based, growth-oriented Delaware limited partnership recently formed to own, operate, develop and acquire terminals and other assets relating to the storage of light refined products, heavy refined products and crude oil. Our storage terminals are strategically located in the East Coast, Gulf Coast and Midwest regions of the United States and, as of May 31, 2013, had a combined available storage capacity of 12.4 million barrels, and at the closing of this offering we will have 12.8 million barrels of available storage capacity. Since January 1, 2013, we completed construction of and placed into service 0.2 million barrels of available storage capacity at existing facilities and have acquired or will acquire prior to the closing of this offering an additional 1.4 million barrels of available storage capacity, increasing our storage capacity since December 31, 2012 by approximately 14%. Most of our terminal facilities are strategically located on major waterways, providing easy ship or barge access for the movement of petroleum products, and have truck racks with efficient loading logistics. Several of our terminal facilities also have rail or pipeline access.

Our primary business objectives are to generate stable cash flows to enable us to pay quarterly cash distributions to our unitholders and to increase our quarterly distributions over time. We intend to achieve these objectives by anticipating long-term infrastructure needs in the areas we serve and by growing our storage terminal network through acquisitions of complementary assets from our sponsors, expansion of our existing facilities, the construction of new terminals in existing or new markets and strategic acquisitions from third parties.

We operate in a single reportable segment consisting primarily of the fee-based storage and terminaling services we perform under contracts with our customers. We do not take title to any of the products we store or handle on behalf of our customers. For the years ended December 31, 2011 and 2012, we generated approximately 86% of our revenue from storage services fees, and for the three months ended March 31, 2012 and 2013, we generated approximately 84% of our revenue from these fees. Of our revenue for the years ended December 31, 2011 and 2012 and the three months ended March 31, 2012 and 2013, 82%, 85%, 79% and 82%, respectively, consisted of base storage services fees, which are fixed monthly fees paid at the beginning of each

 

 

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Index to Financial Statements

month to reserve dedicated tanks or storage space and to compensate us for handling up to a base amount of product volume at our terminals. Our customers are required to pay these base storage services fees to us regardless of the actual storage capacity they use or the volume of products that we receive. Our customers also pay us excess storage fees for volumes handled in excess of the amount attributable to their base storage services fees. The remainder of our revenues were generated from (1) ancillary fees for services such as heating, mixing and blending products, transferring products between tanks and rail car loading and dock operations and (2) fees for injecting additives, some of which are mandated by federal, state and local regulations.

For the year ended December 31, 2012 and the three months ended March 31, 2013, approximately 28% and 34%, respectively, of our revenues were derived from Apex. Formed in 1932, Apex is a distribution and marketing company controlled by the controlling shareholders that supplies, distributes and markets refined petroleum products to refiners, wholesalers, distributors, marketers and industrial and commercial end users throughout the United States and international markets. For the three years ended September 30, 2012, Apex averaged annual revenue in excess of $5.0 billion and sales in excess of 50 million barrels of refined products. Our terminals provide critical logistics services that support Apex’s distribution and marketing operations. Apex also owns six refined product and crude oil storage terminals in the East Coast and Gulf Coast regions, with an aggregate available storage capacity of 7.8 million barrels.

As of May 31, 2013, approximately 93% of our available storage capacity was under contract. During the five years ended December 31, 2012, more than 95% of our available storage capacity was under contract. While many of our contracts provide for a termination right after the expiration of the initial contract period, our long-standing relationships with our customers, including major integrated oil companies, have provided stable revenue. Our top ten customers (including Apex), which represented over 84% of our revenue for 2012 and for the first three months of 2013, have used our services for an average of approximately ten years.

Our Terminal Assets

Our terminal assets are strategically located in the East Coast, Gulf Coast and Midwest regions of the United States. Refiners typically use our terminals because they prefer to subcontract terminaling and storage services or their facilities do not have adequate storage capacity or dock infrastructure or do not meet specialized handling requirements for a particular product. We also provide storage services to distributors, marketers and traders that require access to large, strategically located storage capacity with efficient access to transportation infrastructure and in close proximity to refineries, demand markets or export hubs. Our combination of geographic location, efficient and well-maintained storage assets and access to multiple modes of transportation gives us the flexibility to meet the evolving demands of our existing customers, as well as the demands of prospective customers.

 

 

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Index to Financial Statements

The following table sets forth certain information regarding our terminals and related assets as of April 30, 2013, after giving effect to the transactions described under “—Partnership Structure and Offering-Related Transactions” below:

 

Location

  Available
Storage
Capacity
(shell
mbbls) 
    % of Total
Available
Storage
Capacity
   

Product

 

Facility Site

Owned/

Leased

 

Supply Method

 

Delivery Method

East Coast

           

Albany, NY (1)

    384        3.0   Gasoline, Distillate, Kerosene   Owned   Barge, Ship, Rail   Truck

Baltimore, MD

    1,267        9.9   Gasoline, No. 2 Oil, Kerosene, Ultra Low Sulfur Diesel   Owned   Barge, Ship, Colonial Pipeline   Truck, Ship, Barge

Chesapeake, VA

    560        4.4   Gasoline, Liquid Asphalt, Distillate, Aviation Gas   Owned   Barge, Rail, Ship, Colonial Pipeline   Truck

Gates, NY

    276        2.2   Gasoline, Distillate   Owned   Buckeye Pipeline, Sun Pipeline   Truck

Glenmont, NY

    2,103        16.5   Gasoline, Distillate, Kerosene   Owned   Barge, Ship   Truck

Jacksonville, FL (2)

    1,130        8.8   Gasoline, Distillate   Owned   Barge, Rail, Ship, Truck   Truck, Barge

Newark, NJ (3)

    1,064        8.3   Gasoline, Distillate   Owned   Barge, Colonial Pipeline   Truck, Barge

Weirton, WV

    680        5.3   Crude Oil, Condensate, Biodiesel   Owned   Barge, Truck   Barge

Gulf Coast

           

Baton Rouge, LA

    1,640        12.9   No. 6 Oil, Vacuum Gas Oil, Liquid Asphalt, Carbon Black   Leased   Barge, Rail, Ship   Barge, Rail, Truck

Galveston, TX

    2,020        15.8   Vacuum Gas Oil, Vacuum Tower Bottoms, Bunker Fuel, No. 6 Oil  

Owned

and Leased

  Barge, Ship   Barge, Ship, Truck

Midwest

           

Granite City, IL

    821        6.4   Liquid Asphalt, Polymer Facility   Leased   Barge, Rail   Barge, Rail, Truck

Memphis, TN

    213        1.7   Jet Fuel, Aviation Gas, Distillate   Owned   Barge   Truck, Barge

N. Little Rock, AR

    130        1.1   Caustic, Diesel, Biodiesel   Owned   Barge   Truck, Pipeline

Pine Bluff, AR

    126        1.0   No. 2 Oil, Caustic   Owned   Barge   Truck, Barge

St. Louis, MO

    351        2.7   Liquid Asphalt   Owned   Barge   Truck, Barge
 

 

 

   

 

 

         
    12,765        100.0        

 

(1) At the closing of this offering, we will acquire a 32% interest in this terminal and operate it as a part of a joint venture with Apex, which will own the remaining 68% interest in the terminal. The 384,000 barrels of available storage capacity presented in this table represent our proportionate share of the 1.2 million barrels of available total storage capacity of the terminal.
(2) We expanded the available storage capacity at the Jacksonville terminal in April 2013 through the acquisition of an adjacent terminal, which contains 450,000 barrels of storage capacity.
(3) We have owned 51% of the Newark terminal since 2005. Since April 30, 2013, we acquired the remaining 49% noncontrolling interest in the terminal from our parent, increasing our share of available storage capacity by 540,000 barrels (to 1,064,000 barrels).

 

 

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Index to Financial Statements

Our Operations

We provide terminaling and storage of light refined products, such as gasoline, distillates and jet fuels; heavy refined products, such as residual fuel oils and liquid asphalt; and crude oil. We generate substantially all of our revenues through the provision of fee-based services to our customers. The types of fees we charge are:

 

   

Storage Services Fees. For the year ended December 31, 2012 and the three months ended March 31, 2013, we generated approximately 86% and 84%, respectively, of our revenues from fees for storage services.

 

   

Our customers pay base storage services fees, which are fixed monthly fees paid at the beginning of each month to reserve storage capacity in our tanks and to compensate us for receiving up to a base amount of product volume on their behalf. Our customers are required to pay these base storage services fees to us regardless of the actual storage capacity they use or the amount of product that we receive. For the past three calendar years, these base storage services fees accounted for between 82% and 85% of our annual revenue.

 

   

Our customers also pay us excess storage fees when we handle product volume on their behalf that exceed the volume contemplated in their monthly base storage services fee. For the year ended December 31, 2012 and the three months ended March 31, 2013, we generated approximately 2% of our revenues from these excess storage fees. For the past three calendar years, these excess storage fees have generated between 2% and 4% of our annual revenue.

 

   

Ancillary Services Fees. For the year ended December 31, 2012 and the three months ended March 31, 2013, we generated approximately 11% and 13%, respectively, of our revenues from fees associated with ancillary services, such as (i) heating, mixing and blending our customers’ products that are stored in our tanks, (ii) transferring our customers’ products between our tanks, (iii) at our Granite City terminal, adding polymer to liquid asphalt and (iv) rail car loading and dock operations. The revenues we generate from ancillary services fees vary based upon the activity levels of our customers.

 

   

Additive Services Fees. For the year ended December 31, 2012 and the three months ended March 31, 2013, we generated approximately 3% of our revenues from fees for injecting generic gasoline, proprietary gasoline, lubricity, red dye and cold flow additives to our customers’ products. Certain of these additives are mandated by applicable federal, state and local regulations for all light refined products, and other additives, such as cold flow additive, may be required to meet customer specifications. The revenues we generate from additive services fees vary based upon the activity levels of our customers.

We believe that the high percentage of fixed storage services fees we generate from contracts with a diverse portfolio of longstanding customers creates stable cash flow and substantially mitigates our exposure to volatility in supply and demand and other market factors. For additional information about our contracts, please read “Business—Contracts.”

Our Business Strategies

Our primary business objective is to generate stable cash flows to enable us to pay quarterly cash distributions to our unitholders and to increase our quarterly cash distributions over time. We intend to accomplish this objective by executing the following business strategies:

 

   

Generate stable cash flows through the use of long-term, fee-based contracts with our customers, including the terminaling services agreements we will enter into with Apex at the closing of this

 

 

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offering. We generate revenues from customers who pay us storage services fees based on the amount of contracted storage capacity, as well as excess storage services fees based on the volume of refined products and crude oil handled by our terminals above the contract minimum. Generally, we do not have direct commodity price risk because we do not own any of the products at our terminals. To provide further stability to our cash flows, we will enter into long-term terminaling services agreements pursuant to which Apex will agree to reserve 5.7 million barrels of storage capacity at our terminals. We believe that the fee-based nature of our business, Apex’s minimum storage capacity commitment and the long-term nature of our contracts with Apex and our other customers will provide stability to our cash flows.

 

   

Capitalize on organic growth opportunities by expanding and developing the assets and properties that we already own. We continually evaluate opportunities to expand our existing asset base and will consider constructing new refined product terminals in areas of high demand. Since January 1, 2008, we have constructed and placed into commercial service approximately 2.0 million barrels of available storage capacity at our Galveston, Jacksonville and Memphis terminals. We will continue to evaluate adding storage capacity in order to meet increasing demand for our terminal services. We also seek to identify and pursue opportunities to increase our utilization, improve our operating efficiency, further diversify our customer base and expand our service offerings to existing customers, which we believe is an efficient and cost-effective method to achieve organic growth.

 

   

Grow our business by pursuing accretive acquisitions of fee-based terminaling and related assets from Apex and third parties. We intend to pursue strategic and accretive acquisitions of fee-based terminaling and related assets from Apex and third parties that expand or complement our existing asset portfolio. In addition to evaluating Apex’s terminaling assets covered by a right of first offer to be granted to us at the closing of this offering, we will continually monitor the marketplace to identify and pursue third party acquisitions, whether within our existing geographies or new regions. If we are successful in completing the acquisition of any terminal or related business, we will seek to operate it more efficiently and competitively than the prior owner, thereby enhancing cash flow to us. Please read “—Our Relationship with Our Sponsors.”

 

   

Maintain sound financial practices to ensure our long-term viability. We are committed to disciplined financial analysis and a balanced capital structure, which we believe will serve the long-term interests of our unitholders. We intend to maintain a conservative and balanced capital structure which, when combined with our stable, fee-based cash flows, should afford us efficient access to capital markets at a competitive cost of capital. Consistent with our disciplined financial approach, in the long-term, we intend to fund the capital required for expansion and acquisition projects through a balanced combination of equity and debt capital. At the closing of this offering, we do not expect to have any debt outstanding, and we expect to enter into a new, undrawn $200 million revolving credit facility. We believe this approach will provide us the flexibility to pursue accretive acquisitions and organic growth projects as they become available.

Our Competitive Strengths

We believe that we are well positioned to execute our business strategies successfully because of the following competitive strengths:

 

   

Strategically located and highly flexible asset base. At the closing of this offering, we will own and operate 15 strategically positioned terminals that have 12.8 million barrels of total refined product and crude oil storage capacity. We provide critical logistics services for refiners, marketers and distributors of refined products. Fourteen of our terminals have capabilities to receive product from waterborne vessels, and 10 of our terminals provide our customers with more than one method

 

 

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of loading capabilities for downstream distribution. We believe that our ability to offer several modes of inbound and downstream transportation gives us the flexibility to meet the evolving demands of our existing customers and prospective customers.

 

   

Established relationships with longstanding customers generating stable cash flows. We have cultivated valuable long-term relationships with our customers and, as a result, have historically enjoyed stable cash flows and minimal customer turnover. As of May 31, 2013, approximately 93% of our available storage capacity was under contract and our top ten customers for the year ended December 31, 2012 and the three months ended March 31, 2013 have used our services for an average of approximately ten years. Our top ten customers include several major oil and natural gas companies, including Phillips 66 Company, Sunoco, Inc. and ExxonMobil. We believe that our reputation as a reliable and cost-effective supplier of services will help us maintain strong relationships with our existing customers and will assist us in our efforts to develop relationships with new customers.

 

   

Our relationship with Apex. We intend to act as Apex’s primary refined products and crude oil infrastructure investment vehicle. We believe that our sponsors, as the owners of a 73.5% limited partner interest in us and all of our incentive distribution rights, are motivated to promote and support the successful execution of our principal business objectives and to pursue projects that directly or indirectly enhance the value of our assets through, for example, the following:

 

   

Acquisition Opportunities. Apex owns terminals located in the East Coast and Gulf Coast regions that are strategic to Apex’s distribution and marketing business. We believe that these terminals would complement our existing asset base. Upon the closing of this offering, we will enter into an omnibus agreement pursuant to which Apex will grant us a right of first offer to acquire each of its terminal assets should Apex desire to sell them. We expect that Apex would continue as the primary customer of these assets after any purchase. In addition, we will have a right of first offer to purchase certain terminaling and ancillary assets that Apex may purchase or construct in the future.

 

   

Market knowledge and customer relationships. We believe that Apex’s active participation in the distribution and marketing business and their unique insights into business opportunities in our industry will help us identify, evaluate and pursue attractive commercial growth opportunities, which may include expansion at existing facilities, the acquisition of assets from our sponsors or third parties or the construction of new assets. In addition, Apex has established strong, long-standing relationships within the energy industry, which we believe will enable us to grow and expand our business by creating opportunities with new customers and identifying new markets.

 

   

Terminaling Services Agreements. Under terminaling services agreements that we will enter into in connection with the closing of this offering, Apex will pay us fees to receive integrated terminaling services for a period of one year to five years based on the terminal location. The weighted average term of these agreements, measured by revenue, is more than three years. The agreements will contain an initial storage commitment to us of 5.7 million barrels, which amount may increase in the future. We expect the agreements will generate $25.9 million in storage services fees for the twelve months ending June 30, 2014.

 

   

Executive team with significant industry experience and management expertise. The members of our general partner’s management team have an average of over 25 years’ experience in the energy industry, each having held senior management positions in energy companies during their respective careers. As a result, the members of the management team possess significant experience

 

 

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with regard to the implementation of acquisition, operating and growth strategies in the refined product and crude oil logistics industry.

For a more detailed description of our business strategies and competitive strengths, please read “Business—Our Business Strategies” and “Business—Our Competitive Strengths.”

Our Relationship with Our Sponsors

At the closing of this offering, our parent will own a 73.5% limited partner interest in us through its direct ownership of 1,312,500 common units and its indirect ownership of 6,423,007 common units and 16,485,507 subordinated units through its ownership of the selling unitholder. Our parent may develop new terminals and acquire and hold third party terminals. Our parent may contribute these terminals to us in the future upon the development or substantial utilization of these assets although it has no obligation to do so.

One of our principal attributes is our relationship with Apex, which is controlled by Paul A. Novelly and members of his family. Approximately 28% of our revenue for 2012 was derived from Apex. Formed in 1932, Apex is a distribution and marketing company that supplies, distributes and markets refined petroleum products to refiners, wholesalers, distributors, marketers and industrial and commercial end users throughout the United States and international markets. For the three years ended September 30, 2012, Apex has averaged annual revenue in excess of $5.0 billion and sales in excess of 50 million barrels of refined products. Our terminals provide critical logistics services that support Apex’s distribution and marketing operations.

At the closing of this offering, the controlling shareholders will indirectly control our general partner, and our sponsors will own all of our incentive distribution rights. Because our sponsors will benefit from increases in our cash distributions through their ownership of our incentive distribution rights, our sponsors are positioned to benefit directly from facilitating our ability to pursue accretive growth projects, including organic and new build expansions as well as acquisitions from Apex and third parties. Additionally, the controlling shareholders will benefit from such acquisitions through the indirect ownership of our common and subordinated units.

Apex owns terminals in the East Coast and Gulf Coast regions that may be suitable to our operations in the future. The tanks within these terminals have approximately 7.8 million barrels of available storage capacity, including:

 

   

5.3 million barrels of available storage capacity in the East Coast region, including Apex’s 68% interest in the Albany terminal, and

 

   

2.5 million barrels of available storage capacity in the Gulf Coast region.

Refined petroleum products and crude oil are generally supplied to Apex’s terminals through barges, ships and the Colonial pipeline and delivered from the terminals by trucks.

Under terminaling services agreements that we will enter into in connection with the closing of this offering, Apex will pay us fees to receive integrated terminaling services for a period of one year to five years based on the terminal location. The weighted average term of these agreements, measured by revenue, is more than three years. The agreements will contain an initial storage commitment to us of 5.7 million barrels, which amount may increase in the future. We expect the agreements will generate $25.9 million in storage services fees for the twelve months ending June 30, 2014. The rates we will charge Apex under the agreements are consistent with pricing during the year ended December 31, 2012 and the three months ended March 31, 2013. Accordingly, no adjustments have been made in the pro forma financial information included in this prospectus to give effect to the agreements.

 

 

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Our omnibus agreement provides us with a right of first offer on Apex’s terminaling assets, including the facilities described above. Pursuant to this right, Apex will be required to offer us the opportunity to acquire these assets and any terminaling assets that Apex may acquire or construct in the future if it decides to sell them. Apex is the primary user of these terminals, and we expect that Apex would be the primary customer at these terminals after any purchase of such terminals by us. The consummation and timing of any acquisition of assets owned by Apex will depend upon, among other things, Apex’s willingness to offer the asset for sale and obtain any necessary consents, the determination that the asset is suitable for our business at that particular time, our ability to agree on a mutually acceptable price, our ability to negotiate an acceptable purchase agreement and terminal services agreement with respect to the asset and our ability to obtain financing on acceptable terms. While our sponsors are not obligated to sell us any assets or promote and support the successful execution of our growth plan and strategy, we believe that our sponsors’ significant economic stake in us following the completion of this offering provides them with a strong incentive to do so. We do not have a current agreement or understanding with Apex to purchase any assets covered by the right of first offer.

Risk Factors

An investment in our common units involves risks. You should carefully consider the following risk factors, those other risks described in “Risk Factors” and the other information in this prospectus, before deciding whether to invest in our common units. The following risks are discussed in more detail in “Risk Factors.”

Risks Inherent in Our Business

 

   

We may not have sufficient cash from operations following the establishment of cash reserves and payment of costs and expenses, including cost reimbursements to our general partner, to enable us to pay the minimum quarterly distribution to our unitholders.

 

   

On a pro forma basis, we would not have had sufficient cash available for distribution to pay the full minimum quarterly distribution on all of our units for the twelve months ended March 31, 2013.

 

   

The assumptions underlying our forecast of cash available for distribution included in “Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause cash available for distribution to differ materially from our estimates.

 

   

Our business would be adversely affected if the operations of our customers experienced significant interruptions. In certain circumstances, the obligations of many of our key customers under their terminal services agreements may be reduced, suspended or terminated, which would adversely affect our financial condition and results of operations.

 

   

Our financial results depend on the demand for the light refined products, heavy refined products, crude oil and other related services that we perform at our terminals, among other factors, and general economic downturns could result in lower demand for these products for a sustained period of time.

 

   

We depend on Apex and a relatively limited number of other customers for a significant portion of our revenues. The loss of, or material nonpayment or nonperformance by, Apex or any one or more of these other customers could adversely affect our ability to make cash distributions to you.

 

   

Reduced volatility in energy prices, certain market structures (including backwardated markets) or new governmental regulations could discourage our customers from holding positions in refined petroleum products or crude oil, which could adversely affect the demand for our storage services.

 

 

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Some of our current terminal services agreements are automatically renewing on a short-term basis. If one of more of our current terminal services agreements is terminated and we are unable to secure comparable alternative arrangements, our financial condition and results of operations will be affected.

 

   

Competition from other terminals that are able to supply our customers with comparable storage capacity at a lower price could adversely affect our financial condition and results of operations.

 

   

We may incur significant costs and liabilities in complying with environmental, health and safety laws and regulations, which are complex and frequently changing.

Risks Inherent in an Investment in Us

 

   

Our general partner and its affiliates, including our sponsors, have conflicts of interest with us and limited duties, and they may favor their own interests to the detriment of us and our unitholders.

 

   

Our partnership agreement requires that we distribute all of our available cash, which could limit our ability to grow and make acquisitions.

 

   

Our partnership agreement restricts the remedies available to holders of our common units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

 

   

Our parent and other affiliates of our general partner, including Apex, may compete with us.

 

   

Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors.

 

   

Unitholders will experience immediate and substantial dilution in pro forma net tangible book value of $15.25 per common unit.

Tax Risks to Common Unitholders

 

   

Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service, or the IRS, were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, then our cash available for distribution to our unitholders would be substantially reduced.

 

   

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

 

   

Our unitholders’ share of our income will be taxable to them for federal income tax purposes even if they do not receive any cash distributions from us.

Our Management

We are managed and operated by the board of directors and executive officers of our general partner, WPT GP, LLC, which is wholly owned by our parent. Following this offering, our parent will own, directly or indirectly, approximately 46.9% of our outstanding common units and all of our outstanding subordinated units, and our sponsors will own all of our incentive distribution rights. As a result of owning our general partner, our parent will have the right to appoint all members of the board of directors of our general partner, including at least three independent directors meeting the independence standards established by the New York Stock

 

 

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Exchange, or NYSE. We will have at least three independent directors within one year of the date our common units are first listed on the NYSE. Our board has determined that Paul M. Manheim, Alain Louvel and Paul F. Little, director nominees who will become members of the board of directors of our general partner at the closing of this offering, are independent under the independence standards of the NYSE. Our unitholders will not be entitled to elect our general partner or its directors or otherwise directly participate in our management or operations. For more information about the executive officers and directors of our general partner, please read “Management.”

In order to maintain operational flexibility, our operations will be conducted through, and our operating assets will be owned by, various operating subsidiaries. Center Point Terminal Company, LLC, which will be one of our subsidiaries upon completion of this offering, will employ the personnel who work at our terminaling facilities. Our general partner has the sole responsibility for providing the remaining personnel necessary to conduct our operations, whether through directly hiring employees or by obtaining the services of personnel employed by our parent, Apex or others. Although many of the personnel that will conduct our business immediately following the closing of this offering will be employed or contracted by or through our general partner, we sometimes refer to these individuals in this prospectus as our employees.

Summary of Conflicts of Interest and Duties

General

Our general partner has a legal duty to manage us in a manner it subjectively believes is not adverse to our best interest. However, the officers and directors of our general partner also have a duty to manage the business of our general partner in a manner beneficial to our parent, its owner. Certain of the directors and officers of our general partner are also directors and officers of our parent and Apex. As a result of these relationships, conflicts of interest may arise in the future between us and holders of our common units, on the one hand, and our sponsors and our general partner, on the other hand. For example, our general partner will be entitled to make determinations that affect the amount of cash distributions we make to the holders of common units, which in turn has an effect on whether our general partner and its affiliates receive incentive cash distributions.

Partnership Agreement Replacement of Fiduciary Duties

Delaware law provides that Delaware limited partnerships may, in their partnership agreements, expand, restrict or eliminate the fiduciary duties owed by the general partner to limited partners and the partnership. Pursuant to these provisions, our partnership agreement contains various provisions replacing the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing the duties of the general partner and the methods of resolving conflicts of interest. The effect of these provisions is to restrict the remedies available to our common unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty. By purchasing a common unit, the purchaser agrees to be bound by the terms of our partnership agreement and, pursuant to the terms of our partnership agreement, each holder of common units consents to various actions and potential conflicts of interest contemplated in the partnership agreement that might otherwise be considered a breach of fiduciary or other duties under applicable state law.

Apex and Our Parent May Compete Against Us

Our partnership agreement does not prohibit Apex, our parent or its affiliates, other than our general partner, from owning assets or engaging in businesses that compete directly or indirectly with us.

For a more detailed description of the conflicts of interest and the duties of our general partner, please read “Conflicts of Interest and Duties.” For a description of other relationships with our affiliates, please read “Certain Relationships and Related Party Transactions.”

 

 

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Principal Executive Offices

Our principal executive offices are located at 8235 Forsyth Blvd., Suite 400, St. Louis, Missouri 63105, and our telephone number is (314) 889-9660. Our website address will be www.worldpointlp.com and will be activated immediately following this offering. We intend to make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission, or SEC, available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.

Implications of Being an Emerging Growth Company

We are an “emerging growth company” within the meaning of the federal securities laws. For as long as we are an emerging growth company, we will not be required to:

 

   

provide three years of audited financial statements and management’s discussion and analysis of financial condition and results of operations;

 

   

provide five years of selected financial data;

 

   

provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002;

 

   

comply with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and our financial statements;

 

   

provide certain disclosure regarding executive compensation required of larger public companies; or

 

   

hold shareholder advisory votes on executive compensation.

We will remain an emerging growth company for five years unless, prior to that time, we have more than $1.0 billion in annual revenues, have a market value for our common units held by non-affiliates of more than $700 million or issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all of these reduced obligations. We have availed ourselves of the reduced reporting obligations with respect to financial statements, selected financial data, management’s discussion and analysis of financial condition and results of operations and executive compensation disclosure in this prospectus, and expect to continue to avail ourselves of the reduced reporting obligations available to emerging growth companies in future filings. For as long as we take advantage of the reduced reporting obligations, the information that we provide unitholders may be different than might be provided by other public companies in which you hold equity interests.

We are also choosing to “opt out” of the extended transition period for complying with new or revised accounting standards available to emerging growth companies, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Under federal securities laws, our decision to opt out of the extended transition period is irrevocable.

 

 

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Partnership Structure and Offering-Related Transactions

We are a Delaware limited partnership formed in April 2013 to own and operate the businesses that have historically been conducted by Center Point Terminal Company.

In connection with the closing of this offering, the following will occur:

 

   

Center Point Terminal Company, our predecessor for accounting purposes, will distribute its interest in the Jacksonville and Weirton terminals to the selling unitholder;

 

   

the selling unitholder will convey its interest in the Jacksonville and Weirton terminals to us in exchange for 4,878,250 common units;

 

   

our parent will convey its 32% interest in the Albany terminal and its 49% interest in the Newark terminal to us in exchange for 1,312,500 common units and our assumption of $14.1 million of our parent’s debt;

 

   

the selling unitholder will convey its interest in Center Point Terminal Company to us in exchange for 6,423,007 common units, 16,485,507 subordinated units and the right to receive $23.6 million in proceeds of this offering to reimburse it for certain capital expenditures incurred with respect to Center Point Terminal Company;

 

   

WPT GP, LLC will maintain its 0.0% non-economic general partner interest in us. We also will issue to our sponsors all of our incentive distribution rights, which entitle the holders to increasing percentages, up to an aggregate maximum of 50.0%, of the cash we distribute in excess of our minimum quarterly distribution of $0.30 per unit per quarter, as described under “Cash Distribution Policy and Restrictions on Distributions”;

 

   

we will issue 3,871,750 common units to the public (5,184,250 common units if the underwriters exercise their option to purchase 1,312,500 additional common units in full) and will use the net proceeds from this offering as described under “Use of Proceeds,” and the selling unitholder will offer 4,878,250 common units to the public;

 

   

we will enter into terminaling services agreements with Apex, pursuant to which Apex will pay us fees to receive integrated terminaling services for a period of one year to five years based on the location and type of product involved; and

 

   

we will enter into agreements with our general partner and our sponsors, and certain of their affiliates, pursuant to which they will agree to, among other things, indemnify us for certain liabilities and to grant us a right of first offer to purchase certain of Apex’s terminaling assets. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions.”

In addition, at the closing of this offering, we expect to enter into a new $200 million revolving credit facility. We do not expect to borrow under the revolving credit facility or to have any other debt at the closing of this offering.

 

 

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Organizational Structure

The following is a simplified diagram of our ownership structure after giving effect to this offering and the related transactions.

 

Public Common Units

     26.5

Parent Common Units

     4.0

Selling Unitholder Common Units

     19.5

Selling Unitholder Subordinated Units

     50.0

General Partner Interest

     0.0
  

 

 

 
     100
  

 

 

 

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The Offering

 

Common units offered to the public by us

3,871,750 common units, or 5,184,250 common units if the underwriters exercise their option to purchase an additional common units.

 

Common units offered to the public by the selling unitholder

4,878,250 common units.

 

Units outstanding after this offering

16,485,507 common units and 16,485,507 subordinated units, representing a 50.0% and 50.0% limited partner interest in us, respectively. Our general partner will own a 0.0% non-economic general partner interest in us.

 

Use of proceeds

We intend to use the estimated net proceeds to us of approximately $70.0 million from this offering (based on an assumed initial offering price of $20.00 per common unit, the midpoint of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discount, structuring fee and offering expenses, to:

 

   

pay transaction expenses related to our new revolving credit facility in the amount of approximately $1.6 million;

 

   

distribute to the selling unitholder approximately $29.9 million, the majority of which is to reimburse the selling unitholder for costs related to the acquisition or improvement of assets that the selling unitholder will contribute to us;

 

   

repay indebtedness owed to a commercial bank under a term loan of approximately $8.1 million;

 

   

repay indebtedness owed to a related party of approximately $14.1 million;

 

   

repay existing payables of approximately $4.3 million; and

 

   

provide us working capital of approximately $12.0 million.

 

  The net proceeds to us reflect that we are paying the full amount of the estimated offering expenses attributable to all the common units that we and the selling unitholder are selling to the public. We will not receive any proceeds from the sale of common units by the selling unitholder in this offering.

 

 

The net proceeds from any exercise by the underwriters of their option to purchase additional common units will be used to redeem from our parent a number of common units equal to the number of common units issued upon exercise of the option at a price per

 

 

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common unit equal to the net proceeds per common unit in this offering before expenses but after deducting underwriting discounts and the structuring fee.

 

Cash distributions

We intend to make a minimum quarterly distribution of $0.30 per unit to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner.

 

  For the quarter in which this offering closes, we will pay a prorated distribution on our units covering the period from the completion of this offering through September 30, 2013, based on the actual length of that period.

 

  In general, we will pay any cash distributions we make each quarter in the following manner:

 

   

first, to the holders of common units, until each common unit has received a minimum quarterly distribution of $0.30 plus any arrearages from prior quarters;

 

   

second, to the holders of subordinated units, until each subordinated unit has received a minimum quarterly distribution of $0.30; and

 

   

third, to all unitholders, pro rata, until each unit has received a distribution of $0.345.

 

  If cash distributions to our unitholders exceed $0.345 per unit in any quarter, our sponsors will receive increasing percentages, up to 50.0%, of the cash we distribute in excess of that amount. We refer to these distributions as “incentive distributions.” In certain circumstances, the holders of our incentive distribution rights have the right to reset the target distribution levels described above to higher levels based on our cash distributions at the time of the exercise of this reset election. Please read “Provisions of our Partnership Agreement Relating to Cash Distributions.”

 

  If we do not generate sufficient available cash from operations, we may, but are under no obligation to, borrow funds to pay the minimum quarterly distribution to our unitholders.

 

 

The amount of pro forma available cash generated during the year ended December 31, 2012 would have been sufficient to allow us to pay the minimum quarterly distribution on our common and subordinated units during that period. The amount of pro forma cash generated during the twelve months ended March 31, 2013 would not have been sufficient to allow us to pay the minimum quarterly distribution on our common and subordinated units during that period. Specifically, the amount of pro forma available cash generated during the twelve months ended March 31, 2013 would have been

 

 

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sufficient to pay 100% of the aggregate minimum quarterly distribution on our common units during that period, but only 95.5% of the aggregate minimum quarterly distribution on our subordinated units during that period.

 

  We believe, based on our financial forecast and related assumptions included in “Cash Distribution Policy and Restrictions on Distributions—Estimated Cash Available for Distribution for the Twelve Months Ending June 30, 2014” that we will have sufficient available cash to pay the aggregate minimum quarterly distribution of $39.6 million on all of our common units and subordinated units for the twelve months ending June 30, 2014. However, we do not have a legal obligation to pay distributions at our minimum quarterly distribution rate or at any other rate except as provided in our partnership agreement, and there is no guarantee that we will make quarterly cash distributions to our unitholders. Please read “Cash Distribution Policy and Restrictions on Distributions.”

 

Subordinated units

Our parent initially will own, directly and through its ownership of the selling unitholder, all of our subordinated units. The principal difference between our common units and subordinated units is that in any quarter during the subordination period, holders of the subordinated units are not entitled to receive any distribution until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units will not accrue arrearages.

 

Conversion of subordinated units

The subordination period will end on the first business day after we have earned and paid at least (1) $1.20 (the minimum quarterly distribution on an annualized basis) on each outstanding common unit and subordinated unit for each of three consecutive, non-overlapping four quarter periods ending on or after September 30, 2016 or (2) $1.80 (150.0% of the annualized minimum quarterly distribution) on each outstanding common unit and subordinated unit and the incentive distribution rights for the four-quarter period immediately preceding that date, in each case provided there are no arrearages on our common units at that time.

 

  The subordination period also will end upon the removal of our general partner other than for cause if no subordinated units or common units held by the holders of subordinated units or their affiliates are voted in favor of that removal.

 

  When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and all common units will no longer be entitled to arrearages. Please read “Provisions of our Partnership Agreement Relating to Cash Distributions—Subordinated Units and Subordination Period.”

 

 

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Right to reset the target distribution levels

Our sponsors, as the initial holders of our incentive distribution rights, have the right, at any time when there are no subordinated units outstanding and they have received incentive distributions at the highest level to which they are entitled (50.0%) for each of the prior four consecutive whole fiscal quarters and the amount of each such distribution did not exceed the adjusted operating surplus for such quarter, to reset the initial target distribution levels at higher levels based on our cash distributions at the time of the exercise of the reset election. If our sponsors transfer all or a portion of their incentive distribution rights in the future, then the holder or holders of a majority of our incentive distribution rights will be entitled to exercise this right. The following assumes that our sponsors hold all of the incentive distribution rights at the time that a reset election is made. Following a reset election, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution, and the target distribution levels will be reset to correspondingly higher levels based on the same percentage increases above the reset minimum quarterly distribution as the current target distribution levels.

 

  If our sponsors elect to reset the target distribution levels, they will be entitled to receive a number of common units equal to the number of common units that would have entitled them to an average aggregate quarterly cash distribution in the prior two quarters equal to the average of the distributions to our sponsors on their respective incentive distribution rights in such prior two quarters. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Right to Reset Incentive Distribution Levels.”

 

Issuance of additional units

Our partnership agreement authorizes us to issue an unlimited number of additional units without the approval of our unitholders. Please read “Units Eligible for Future Sale” and “The Partnership Agreement—Issuance of Additional Securities.”

 

Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our business. Our unitholders will have no right to elect our general partner or its directors on an annual or other continuing basis. Our general partner may not be removed except by a vote of the holders of at least 66 2/3% of the outstanding units, including any units owned by our general partner and its affiliates, voting together as a single class. Upon consummation of this offering, our parent, directly or indirectly, will own an aggregate of 73.5% of our outstanding voting units (or 69.5% of our outstanding voting units, if the underwriters exercise their option to purchase additional common units in full). This will give our parent the ability initially to prevent the removal of our general partner. Please read “The Partnership Agreement—Voting Rights.”

 

 

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Limited call right

If at any time our general partner and its affiliates own more than 80% of the outstanding common units, our general partner has the right, but not the obligation, to purchase all of the remaining common units at a price equal to the greater of (1) the average of the daily closing price of the common units over the 20 trading days preceding the date three days before notice of exercise of the call right is first mailed and (2) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. At the end of the subordination period, assuming no additional issuances of common units, our general partner and its affiliates would own approximately 73.5% of our aggregate outstanding common units. Please read “The Partnership Agreement—Limited Call Right.”

 

Estimated ratio of taxable income to distributions

We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ending December 31, 2016, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be less than 20% of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $1.20 per unit, we estimate that your average allocable federal taxable income per year will be no more than approximately $0.24 per unit. Thereafter, the ratio of allocable taxable income to cash distributions to you could substantially increase. For each taxable year during which the subordinated units are outstanding, items of deduction attributable to the Jacksonville and Weirton terminals that the selling unitholder conveyed to us in exchange for 4,878,250 common units, which would otherwise be allocated to the holders of the class of common units held by the public, will be specially allocated to the holders of the subordinated units. Such special allocation will, in no event, exceed the amount that would result in a purchaser of common units in this offering being allocated an amount of federal taxable income for such year that exceeds 20% of the cash distributed with respect to such year. Please read “Material Federal Income Tax Consequences—Tax Consequences of Unit Ownership” for the basis of this estimate.

 

Material federal income tax consequences

For a discussion of the material federal income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States, please read “Material Federal Income Tax Consequences.”

 

Exchange listing

Our common units have been approved for listing on the NYSE under the symbol “WPT,” subject to official notice of issuance.

 

 

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Summary Historical and Pro Forma Financial and Operating Data

We were formed in April 2013 and do not have historical financial statements. Therefore, in this prospectus we present the historical financial statements of Center Point Terminal Company, our predecessor. We refer to our predecessor for accounting purposes as “Predecessor.”

The following table should be read together with, and is qualified in its entirety by reference to, the historical and pro forma financial statements and the accompanying notes appearing elsewhere in this prospectus. Among other things, the historical and pro forma financial statements include more detailed information regarding the basis of presentation for the information in the following table. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Use of Proceeds” and “Business.”

The summary historical financial data presented as of December 31, 2011 and 2012 are derived from the audited historical consolidated financial statements of our Predecessor that are included elsewhere in this prospectus. The historical financial data presented as of March 31, 2013 and for the three months ended March 31, 2013 and March 31, 2012 are derived from unaudited historical consolidated financial statements of our Predecessor that are included elsewhere in this prospectus.

The summary pro forma financial data presented as of and for the three months ended March 31, 2013 and for the year ended December 31, 2012 are derived from our unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus. Our unaudited pro forma condensed consolidated financial statements give pro forma effect to the following:

 

   

the contribution to us by the selling unitholder and our parent of their respective ownership interests in Center Point Terminal Company and its assets and other related assets;

 

   

the issuance by us to the selling unitholder of 11,301,257 common units and 16,485,507 subordinated units;

 

   

the issuance by us to our parent of 1,312,500 common units;

 

   

the issuance by us to our general partner of a 0.0% non-economic general partner interest;

 

   

the issuance by us to our sponsors of the incentive distribution rights in us;

 

   

the issuance by us to the public of 3,871,750 common units and the use of the net proceeds from this offering (assuming a price of $20.00 per common unit, the midpoint of the price range set forth on the cover of this prospectus) as described under “Use of Proceeds”; and

 

   

the execution of a new $200 million revolving credit facility.

The rates we will charge Apex under the terminaling services agreements are consistent with pricing during the year ended December 31, 2012 and the three months ended March 31, 2013. Accordingly, no adjustments have been made in the pro forma financial information included in this prospectus to give effect to the agreements.

For a detailed discussion of the summary historical consolidated financial information contained in the following table, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The following table should also be read in conjunction with “Use of Proceeds” and our historical and pro forma financial statements included elsewhere in this prospectus. Among other things, the historical consolidated and unaudited pro forma financial statements include more detailed information regarding the basis of presentation for the information in the following table.

The following table presents a non-GAAP financial measure, Adjusted EBITDA, which we use in our business because it is an important supplemental measure of our performance and liquidity. Adjusted EBITDA

 

 

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represents net income (loss) before interest expense, income tax expense and depreciation and amortization expense, as further adjusted to remove gain or loss on investments and on the disposition of assets. This measure is not calculated or presented in accordance with generally accepted accounting principles, or GAAP. We explain this measure under “—Non-GAAP Financial Measure” and reconcile it to its most directly comparable financial measures calculated and presented in accordance with GAAP.

 

    Predecessor Historical     Pro Forma  
    Year Ended
December 31,
    Three Months
Ended

March  31,
    Year Ended
December 31,
    Three Months
Ended

March  31,
 
        2011             2012             2012             2013         2012     2013  
    (In thousands except operating data)  

Statements of Operations Data:

           

Revenues:

           

Third parties

  $ 53,000      $ 52,591      $ 13,621      $ 12,163      $ 52,591      $ 12,163   

Affiliates

    21,766        21,518        5,556        6,823        21,518        6,823   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    74,766        74,109        19,177        18,986        74,109        18,986   

Operating expenses:

           

Operating expenses

    22,203        24,108        6,222        7,775        23,980        7,753   

Selling, general and administrative (1)

    2,350        2,723        609        677        2,703        677   

Depreciation and amortization

    14,234        15,363        3,772        3,869        15,361        3,869   

Loss on disposition of assets

    —          476        —          —          476        —     

Total operating expenses

    38,787        42,670        10,603        12,321        42,520        12,299   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    35,979        31,439        8,574        6,665        31,589        6,687   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

           

Interest expense and other

    (663     (498     (161     (91     (580     (145

Interest and dividend income

    1,287        135        23        52        25        25   

Earnings from equity method

    —          —          —          —          456        151   

Gain (loss) on investments and other—net

    (536     368        63        790        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    36,067        31,444        8,499        7,416        31,490        6,718   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for income taxes

    588        524        204        246        80        80   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 35,479      $ 30,920      $ 8,295      $ 7,170      $ 31,410      $ 6,638   

Net income attributable to noncontrolling interest

    (1,267     (867     (366     (204     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to shareholder/unitholders

  $ 34,212      $ 30,053      $ 7,929      $ 6,966      $ 31,410      $ 6,638   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance Sheet Data (at period end):

           

Property, plant and equipment, less accumulated depreciation

  $ 115,825      $ 116,440      $ 115,099      $ 114,828        $ 135,826   

Total assets

  $ 127,919      $ 134,151      $ 135,538      $ 139,890        $ 157,530   

Total liabilities

  $ 18,156      $ 15,721      $ 17,600      $ 14,750        $ 642   

Total shareholder’s/partners’ equity

  $ 109,763      $ 118,430      $ 117,938      $ 125,140        $ 156,888   

Cash Flow Data:

           

Net cash provided by (used in):

           

Operating activities

  $ 45,392      $ 44,912      $ 11,704      $ 10,197       

Investing activities

  $ (1,112   $ (18,413   $ (3,405   $ (3,320    

Financing activities

  $ (66,139   $ (25,825   $ (1,014   $ (1,353    

Other Financial Data:

           

Adjusted EBITDA (1)(2)

  $ 48,946      $ 46,411      $ 11,980      $ 10,330      $ 47,972      $ 10,729   

Capital expenditures:

           

Maintenance capital expenditures (3)

  $ 9,441      $ 4,616      $ 1,164      $ 1,112      $ 4,634      $ 1,112   

Expansion capital expenditures (4)

    1,880        11,828        1,880        1,141        10,001        1,141   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 11,321      $ 16,444      $ 3,044      $ 2,253      $ 14,635      $ 2,253   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Data:

           

Available storage capacity, end of period (mbbls)

    11,198        11,198        11,198        11,198       

Average daily terminal throughput (mbbls)

    114        122        122        134       

 

 

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(1) Pro forma selling, general and administrative expenses do not give effect to annual incremental selling, general and administrative expenses of approximately $3.0 million that we expect to incur as a result of being a publicly traded partnership.

 

(2) Adjusted EBITDA is defined in “—Non-GAAP Financial Measure” below.

 

(3) Maintenance capital expenditures are those capital expenditures required to maintain our long-term operating capacity or operating income.

 

(4) Expansion capital expenditures are capital expenditures made to increase the long-term operating capacity of our asset base whether through construction or acquisitions.

Non-GAAP Financial Measure

We define Adjusted EBITDA as net income (loss) before net interest expense, income tax expense and depreciation and amortization expense, as further adjusted to remove gain or loss on investments and on the disposition of assets. Adjusted EBITDA is not a presentation made in accordance with GAAP.

Adjusted EBITDA is a non-GAAP supplemental financial measure that management and external users of our consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess:

 

   

our operating performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or financing methods;

 

   

the ability of our assets to generate sufficient cash flow to make distributions to our unitholders;

 

   

our ability to incur and service debt and fund capital expenditures; and

 

   

the viability of acquisitions and other capital expenditure projects and the returns on investment in various opportunities.

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

 

 

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The following table presents a reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial measures, on a historical basis and pro forma basis, as applicable, for each of the periods indicated.

 

     Predecessor Historical     Pro Forma  
     Year Ended
December 31,
    Three Months Ended
March 31,
    Year Ended
December 31,
2012
    Three Months
Ended March 31,

2013
 
     2011     2012         2012             2013          
     (In thousands)  

Reconciliation of Adjusted EBITDA to net income:

            

Net income attributable to shareholder/unitholders

   $ 34,212      $ 30,053      $ 7,929      $ 6,966      $ 31,410      $ 6,638   

Depreciation and amortization

     14,234        15,363        3,772        3,869        15,361        3,869   

Provision (benefit) for income taxes

     588        524        204        246        80        80   

Interest expense and other

     663        498        161        91        580        145   

Interest and dividend income

     (1,287     (135     (23     (52     (25     (25

Loss on disposition of assets

     —          476        —          —          476        —     

(Gain) loss on investments and other—net

     536        (368     (63     (790     —       

 

—  

  

Depreciation and amortization expense deducted in determining earnings from equity method investment

     —          —          —          —          90        22   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 48,946      $ 46,411      $ 11,980      $ 10,330      $ 47,972      $ 10,729   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation of Adjusted EBITDA to net cash provided by operating activities:

            

Net cash flows from operating activities

   $ 45,392      $ 44,912      $ 11,704      $ 10,197       

Changes in assets and liabilities that provided cash

     4,840        1,578        300        71       

Net income attributable to noncontrolling interest

     (1,267     (867     (366     (204    

Deferred income taxes

     17        (99     —          (16    

Provision (benefit) for income taxes

     588        524        204        246       

Interest expense and other

     663        498        161        91       

Interest and dividend income

     (1,287     (135     (23     (52    

Other income

     —          —          —          (3    
  

 

 

   

 

 

   

 

 

   

 

 

     

Adjusted EBITDA

   $ 48,946      $ 46,411      $ 11,980      $ 10,330       
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

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RISK FACTORS

Investing in our common units involves a high degree of risk. You should carefully consider the risks described below with all of the other information included in this prospectus before deciding to invest in our common units. Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. If any of the following risks actually occur, they may materially harm our business and our financial condition and results of operations. In this event, we might not be able to pay distributions on our common units, the trading price of our common units could decline, and you could lose part or all of your investment.

Risks Inherent in Our Business

We may not have sufficient cash from operations following the establishment of cash reserves and payment of costs and expenses, including cost reimbursements to our general partner, to enable us to pay the minimum quarterly distribution to our unitholders.

We may not have sufficient cash each quarter to pay the full amount of our minimum quarterly distribution of $0.30 per unit, or $1.20 per unit per year, which will require us to have available cash of approximately $9.9 million per quarter, or $39.6 million per year, based on the number of common and subordinated units to be outstanding after the completion of this offering. The amount of cash we can distribute on our common and subordinated units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:

 

   

the volumes of light refined products, heavy refined products and crude oil we handle;

 

   

the terminaling and storage fees with respect to volumes that we handle;

 

   

damage to pipelines facilities, related equipment and surrounding properties caused by hurricanes, earthquakes, floods, fires, severe weather, explosions and other natural disasters and acts of terrorism;

 

   

leaks or accidental releases of products or other materials into the environment, whether as a result of human error or otherwise;

 

   

planned or unplanned shutdowns of the refineries and industrial production facilities owned by or supplying our customers;

 

   

prevailing economic and market conditions;

 

   

difficulties in collecting our receivables because of credit or financial problems of customers;

 

   

the effects of new or expanded health, environmental and safety regulations;

 

   

governmental regulation, including changes in governmental regulation of the industries in which we operate;

 

   

changes in tax laws;

 

   

weather conditions; and

 

   

force majeure.

 

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In addition, the actual amount of cash we will have available for distribution will depend on other factors, some of which are beyond our control, including:

 

   

the level of capital expenditures we make;

 

   

the cost of acquisitions;

 

   

our debt service requirements and other liabilities;

 

   

fluctuations in our working capital needs;

 

   

our ability to borrow funds and access capital markets;

 

   

restrictions contained in debt agreements to which we are a party; and

 

   

the amount of cash reserves established by our general partner.

For a description of additional restrictions and factors that may affect our ability to pay cash distributions, please read “Cash Distribution Policy and Restrictions on Distributions.”

On a pro forma basis, we would not have had sufficient cash available for distribution to pay the full minimum quarterly distribution on all of our units for the twelve months ended March 31, 2013.

We must generate approximately $39.6 million of cash available for distribution to pay the aggregate minimum quarterly distributions for four quarters on all units that will be outstanding immediately following this offering. The amount of pro forma cash available for distribution generated during the year ended December 31, 2012 was $39.8 million, which would have allowed us to pay 100% of the aggregate minimum quarterly distribution on all of our common and subordinated units during that period. The amount of pro forma cash available for distribution generated during the twelve months ended March 31, 2013 was $38.7 million, which would have allowed us to pay 100% of the aggregate minimum quarterly distribution on all of our common units during that period, but only 95.5% of the aggregate minimum quarterly distribution on our subordinated units during that period. For a calculation of our ability to make cash distributions to our unitholders based on our historical as adjusted results, please read “Cash Distribution Policy and Restrictions on Distributions.” If we are not able to generate additional cash for distribution to our unitholders in future periods, we may not be able to pay the full minimum quarterly distribution or any amount on our common or subordinated units, in which event the market price of our common units may decline materially.

The assumptions underlying our forecast of cash available for distribution included in “Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause cash available for distribution to differ materially from our estimates.

The forecast of cash available for distribution set forth in “Cash Distribution Policy and Restrictions on Distributions” includes our forecast of our results of operations and cash available for distribution for the twelve months ending June 30, 2014. Our ability to pay the full minimum quarterly distribution in the forecast period is based on a number of assumptions that may not prove to be correct, which are discussed in “Cash Distribution Policy and Restrictions on Distributions.”

Our forecast of cash available for distribution has been prepared by management, and we have not received an opinion or report on it from any independent registered public accountants. The assumptions underlying our forecast of cash available for distribution are inherently uncertain and are subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause cash available

 

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for distribution to differ materially from that which is forecasted. If we do not achieve our forecasted results, we may be unable to pay the minimum quarterly distribution or any amount on our common units or subordinated units, in which event the market price of our common units may decline materially. Please read “Cash Distribution Policy and Restrictions on Distributions.”

The amount of cash we have available for distribution to holders of our common and subordinated units depends primarily on our cash flow rather than on our profitability, which may prevent us from making distributions, even during periods in which we record net income.

The amount of cash we have available for distribution depends primarily upon our cash flow and not solely on profitability, which will be affected by non-cash items. As a result, we may make cash distributions during periods when we record losses for financial accounting purposes and may not make cash distributions during periods when we record net earnings for financial accounting purposes.

Our business would be adversely affected if the operations of our customers experienced significant interruptions. In certain circumstances, the obligations of many of our key customers under their terminal services agreements may be reduced, suspended or terminated, which would adversely affect our financial condition and results of operations.

We are dependent upon the uninterrupted operations of certain facilities owned or operated by third parties, such as the pipelines, barges and retail fuel distribution assets, as well as refineries and other production facilities that produce products we handle. Any significant interruption at these facilities or inability to transport products to or from these facilities or to or from our customers for any reason would adversely affect our results of operations, cash flow and ability to make distributions to our unitholders. Operations at our facilities and at the facilities owned or operated by our customers and their suppliers could be partially or completely shut down, temporarily or permanently, as the result of any number of circumstances that are not within our control, such as:

 

   

catastrophic events, including hurricanes and floods;

 

   

explosion, breakage, accidents to machinery, storage tanks or facilities;

 

   

environmental remediation;

 

   

labor difficulties; and

 

   

disruptions in the supply of products to or from our facilities, including the failure of third party pipelines or other facilities.

Additionally, terrorist attacks and acts of sabotage could target oil and gas production facilities, refineries, processing plants, terminals and other infrastructure facilities.

Our terminal services agreements with many of our key customers provide that, if any of a number of events occur, including certain of those events described above, which we refer to as events of force majeure, and the event significantly delays or renders performance impossible with respect to a facility, usually for a specified minimum period of days, our customer’s obligations would be temporarily suspended with respect to that facility. In that case, a customer’s fixed storage services fees may be reduced or suspended, even if we are contractually restricted from recontracting out the storage space in question during such force majeure period, or the contract may be subject to termination. There can be no assurance that we are adequately insured against such risks. As a result, our revenue and results of operations could be materially adversely affected.

 

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Our financial results depend on the demand for the light refined products, heavy refined products, crude oil and other related services that we perform at our terminals, among other factors, and general economic downturns could result in lower demand for these products for a sustained period of time.

Any sustained decrease in demand for light refined products, heavy refined products and crude oil related services in the markets served by our terminals could result in a significant reduction in storage usage in our terminals, which would reduce our cash flow and our ability to make distributions to our unitholders. Our financial results may also be affected by uncertain or changing economic conditions within certain regions, including the challenges that are currently affecting economic conditions in the entire United States. If economic and market conditions remain uncertain or adverse conditions persist, spread or deteriorate further, we may experience material impacts on our business, financial condition and results of operations.

Other factors that could lead to a decrease in market demand include:

 

   

the impact of weather on demand for refined petroleum products and crude oil;

 

   

the level of domestic oil and gas production, both on a stand-alone basis and as compared to the level of foreign oil and gas production;

 

   

the level of foreign oil and gas production and any disruption of those supplies;

 

   

higher fuel taxes or other governmental or regulatory actions that increase, directly or indirectly, the cost of gasoline and diesel;

 

   

an increase in automotive engine fuel economy, whether as a result of a shift by consumers to more fuel-efficient vehicles or technological advances by manufacturers;

 

   

the increased use of alternative fuel sources, such as ethanol, biodiesel, fuel cells and solar, electric and battery-powered engines. Current laws will require a significant increase in the quantity of ethanol and biodiesel used in transportation fuels between now and 2022. Such an increase could have a material impact on the volume of fuels loaded at our terminals; and

 

   

an increase in the market price of crude oil that leads to higher refined petroleum product prices, which may reduce demand for refined petroleum products and drive demand for alternative products. Market prices for refined products and crude oil are subject to wide fluctuation in response to changes in global and regional supply that are beyond our control, and increases in the price of crude oil may result in a lower demand for refined petroleum products.

Any decrease in supply and marketing activities may result in reduced storage volumes at our terminal facilities, which would adversely affect our financial condition and results of operations.

We depend on Apex and a relatively limited number of our other customers for a significant portion of our revenues. The loss of, or material nonpayment or nonperformance by, Apex or any one or more of our other customers could adversely affect our ability to make cash distributions to you.

A significant percentage of our revenue is attributable to a relatively limited number of customers, including Apex. Our top ten customers accounted for approximately 84% of our revenue for the year ended December 31, 2012 and the three months ended March 31, 2013, including Apex, which accounted for approximately 28% and 34% of our revenue for the year ended December 31, 2012 and the three months ended March 31, 2013, respectively.

Because of Apex’s position as a major customer of our business, events which adversely affect Apex’s creditworthiness or business operations may adversely affect our financial condition or results of operations. If Apex is unable to meet its minimum volume commitment for any reason, then our revenues would decline and

 

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our ability to make distributions to our unitholders would be reduced. Therefore, we are indirectly subject to the business risks of Apex, many of which are similar to the business risks we face. In addition, if we acquire additional terminals from Apex pursuant to our right of first offer or otherwise, or if we enter into new or expanded agreements, the percentage of our revenue generated by Apex may increase. In particular, these business risks include the following:

 

   

Apex’s inability to negotiate favorable terms with its distribution and marketing customers;

 

   

contract non-performance by Apex’s customers;

 

   

Apex and our customers’ inability to obtain financing on reasonable terms. Apex has a working capital credit facility that provides common terms and conditions pursuant to which individual banks that are a party to the facility may choose to make loans to it from time to time; however, no lender has an obligation to make any additional future loans to Apex;

 

   

a material decline in refined product supplies, which could increase Apex’s terminaling, storage and throughput costs on a per-barrel basis; and

 

   

various operational risks to which Apex’s business is subject.

In addition, some of our customers may have material financial and liquidity issues or may, as a result of operational incidents or other events, be disproportionately affected as compared to larger, better capitalized companies. Any material nonpayment or nonperformance by any of our key customers could have a material adverse effect on our revenue and cash flows and our ability to make cash distributions to our unitholders. We expect our exposure to concentrated risk of non-payment or non-performance to continue as long as we remain substantially dependent on a relatively limited number of customers for a substantial portion of our revenue.

If we are unable to renew or extend the terminaling services agreements we have with Apex, our ability to make distributions to our unitholders will be reduced.

The terms of Apex’s obligations under its terminaling services agreements with us range from one to five years based on the terminal location. If Apex fails to use our facilities and services after expiration of the applicable commitment and we are unable to generate additional revenues from third parties, our ability to make cash distributions to unitholders will be reduced.

Apex’s or our parent’s level of indebtedness could adversely affect our ability to grow our business, our ability to make cash distributions to our unitholders and our credit ratings and profile.

A high level of indebtedness at Apex increases the risk that it may default on its obligations, including under its terminaling services agreements with us. Apex partially finances its operations through working capital borrowings, which may at times be significant. The covenants contained in the agreements governing Apex’s and our parent’s outstanding and future indebtedness may limit their ability to make certain investments or to sell assets, which also may reduce their ability to sell additional assets to us.

We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our key customers could adversely affect our financial results and cash available for distribution.

We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers. Approximately 84% of our revenues for the year ended December 31, 2012 and the three months ended March 31, 2013 were attributable to our ten largest customers. Our credit procedures and policies may not be adequate to fully eliminate customer credit risk. If we fail to adequately assess the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or

 

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nonperformance by them and our inability to re-market or otherwise use the storage capacity could have a material adverse effect on our business, financial condition, results of operations and ability to pay distributions to our unitholders.

Our operations are subject to operational hazards and unforeseen interruptions, including interruptions from hurricanes, floods or severe storms, for which we may not be adequately insured.

A majority of our operations are currently located in the Gulf Coast, Midwest and East Coast regions and are subject to operational hazards and unforeseen interruptions, including interruptions from hurricanes, floods or severe storms, which have historically impacted such regions with some regularity. For example, operations at our Newark terminal were suspended for 23 days as a result of Hurricane Sandy in 2012. We may also be affected by factors such as adverse weather, accidents, fires, explosions, hazardous materials releases, mechanical failures, disruptions in supply infrastructure or logistics and other events beyond our control. In addition, our operations are exposed to other potential natural disasters, including tornadoes, storms, floods and earthquakes. If any of these events were to occur, we could incur substantial losses because of personal injury or loss of life, severe damage to and destruction of property and equipment, and pollution or other environmental damage resulting in curtailment or suspension of our related operations.

We are not fully insured against all risks incident to our business. Certain of the insurance policies covering entities and their operations that will be contributed to us as a part of our initial public offering also provide coverage to entities that will not be contributed to us. The coverage available under those insurance policies has historically been allocated among the entities that will be contributed to us and the entities that will not be contributed to us. This allocation may result in limiting the amount of recovery available to us for purposes of covered losses.

Furthermore, we may be unable to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies have increased and could escalate further. In addition sub-limits have been imposed for certain risks. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we are not fully insured, it could have a material adverse effect on our financial condition, results of operations and cash available for distribution to unitholders.

Reduced volatility in energy prices, certain market structures (including backwardated markets) or new government regulations could discourage our storage customers from holding positions in refined petroleum products or crude oil, which could adversely affect the demand for our storage services.

We have constructed and continue to construct new storage facilities in response to increased customer demand for storage. Many of our competitors have also built new storage facilities. The demand for new storage has resulted in part from our customers’ desire to have the ability to take advantage of profit opportunities created by volatility in the prices of refined petroleum products and crude oil. A condition in which future prices of refined products and crude oil are higher than the then-current prices, also called market contango, is favorable to commercial strategies that are associated with storage capacity as it allows a party to simultaneously purchase refined petroleum products or crude oil at current prices for storage and sell at higher prices for future delivery. Wide contango spreads combined with price structure volatility generally have a favorable impact on our results. If the price of refined products and crude oil is lower in the future than the then-current price, also called market backwardation, there is little incentive to store these commodities as current prices are above future delivery prices. In either case, margins can be improved when prices are volatile. The periods between these two market structures are referred to as transition periods. If the market is in a backwardated to transitional structure, our results from operations may be less than those generated during the more favorable contango market conditions. If the prices of refined products and crude oil become relatively stable, or if federal and/or state regulations are passed that discourage our customers from storing those commodities, demand for our storage services could decrease, in which case we may be unable to renew contracts for our storage services or be forced to reduce the rates we charge for our storage services, either of which would reduce the amount of cash we generate.

 

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Some of our current terminal services agreements are automatically renewing on a short-term basis, and may be terminated at the end of the current renewal term upon requisite notice. If one or more of our current terminal services agreements is terminated and we are unable to secure comparable alternative arrangements, our financial condition and results of operations will be adversely affected.

Some of our terminal services agreements currently in effect are operating in the automatic renewal phase of the contract that begins upon the expiration of the primary contract term. Our terminal services agreements generally have primary contract terms that range from one year to five years. Upon expiration of the primary contract term, these agreements renew automatically for successive renewal terms that range from one to three years unless earlier terminated by either party upon the giving of the requisite notice, generally ranging from one to 12 months prior to the expiration of the applicable renewal term. As of May 31, 2013, after giving effect to our new terminaling services agreements with Apex, the capacity-weighted average remaining term of our terminaling services agreements was approximately 2.4 years. Terminal services agreements that account for an aggregate of 22% of our expected revenues for the twelve months ending June 30, 2014 could be terminated by our customers without penalty within the same period. If any one or more of our terminal services agreements is terminated and we are unable to secure comparable alternative arrangements, we may not be able to generate sufficient additional revenue from third parties to replace any shortfall in revenue or increase in costs. Additionally, we may incur substantial costs if modifications to our terminals are required by a new or renegotiated terminal services agreement. The occurrence of any one or more of these events could have a material impact on our financial condition and results of operations.

Competition from other terminals that are able to supply our customers with comparable storage capacity at a lower price could adversely affect our financial condition and results of operations.

We face competition from other terminals that may be able to supply our customers with integrated terminaling services on a more competitive basis. We compete with national, regional and local terminal and storage companies, including major integrated oil companies, of widely varying sizes, financial resources and experience. Many of these competitors have significantly greater financial resources than we have. Our ability to compete could be harmed by factors we cannot control, including:

 

   

our competitors’ construction of new assets or redeployment of existing assets in a manner that would result in more intense competition in the markets we serve;

 

   

the perception that another company may provide better service; and

 

   

the availability of alternative supply points or supply points located closer to our customers’ operations.

Any combination of these factors could result in our customers utilizing the assets and services of our competitors instead of our assets and services, or our being required to lower our prices or increase our costs to retain our customers, either of which could adversely affect our results of operations, financial position or cash flows, as well as our ability to pay cash distributions to our unitholders.

Our expansion of existing assets and construction of new assets may not result in revenue increases and will be subject to regulatory, environmental, political, legal and economic risks, which could adversely affect our operations and financial condition.

A portion of our strategy to grow and increase distributions to unitholders is dependent on our ability to expand existing assets and to construct additional assets. The construction of a new terminal, or the expansion of an existing terminal, such as by increasing storage capacity or otherwise, involves numerous regulatory, environmental, political and legal uncertainties, most of which are beyond our control. Moreover, we may not receive sufficient long-term contractual commitments from customers to provide the revenue needed to support

 

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such projects. As a result, we may construct new facilities that are not able to attract enough customers to achieve our expected investment return, which could adversely affect our results of operations and financial condition and our ability to make distributions to our unitholders.

If we undertake these projects, they may not be completed on schedule or at all or at the budgeted cost. We may be unable to negotiate acceptable interconnection agreements with third party pipelines to provide destinations for increased storage services. Even if we receive sufficient multi-year contractual commitments from customers to provide the revenue needed to support such projects and we complete our construction projects as planned, we may not realize an increase in revenue for an extended period of time. For instance, if we build a new terminal, the construction will occur over an extended period of time, generally 12 to 24 months, and we will not receive any material increases in revenues until after completion of the project. Any of these circumstances could adversely affect our results of operations and financial condition and our ability to make distributions to our unitholders.

If we are unable to make acquisitions on economically acceptable terms, our future growth would be limited, and any acquisitions we make may reduce, rather than increase, our cash generated from operations on a per unit basis.

A portion of our strategy to grow our business and increase distributions to unitholders is dependent on our ability to make acquisitions that result in an increase in our cash available for distribution per unit. If we are unable to make acquisitions from third parties or our sponsors because we are unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts, we are unable to obtain financing for these acquisitions on economically acceptable terms or we are outbid by competitors, our future growth and ability to increase distributions will be limited. Furthermore, even if we do consummate acquisitions that we believe will be accretive, they may in fact result in a decrease in our cash available for distribution per unit. Any acquisition involves potential risks, some of which are beyond our control, including, among other things:

 

   

mistaken assumptions about revenues and costs, including synergies;

 

   

an inability to integrate successfully the businesses we acquire;

 

   

an inability to hire, train or retain qualified personnel to manage and operate our business and newly acquired assets;

 

   

the assumption of unknown liabilities;

 

   

limitations on rights to indemnity from the seller;

 

   

mistaken assumptions about the overall costs of equity or debt;

 

   

the diversion of management’s attention from other business concerns;

 

   

unforeseen difficulties operating in new product areas or new geographic areas; and

 

   

customer or key employee losses at the acquired businesses.

If we consummate any future acquisitions, our capitalization and results of operations may change significantly, and unitholders will not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in determining the application of these funds and other resources.

 

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Our right of first offer to acquire Apex’s existing terminaling assets and any terminaling assets that it may acquire or construct in the future is subject to risks and uncertainty, and ultimately we may not acquire any of those assets.

Our omnibus agreement provides us with a right of first offer on Apex’s existing terminaling assets and any terminaling assets that it may acquire or construct in the future if it decides to sell them. The consummation and timing of any future acquisitions pursuant to this right will depend upon, among other things, Apex’s willingness to offer a subject asset for sale and obtain any necessary consents, the determination that the asset is suitable for our business at that particular time, our ability to agree on a mutually acceptable price, our ability to negotiate an acceptable purchase agreement and terminal services agreement with respect to the asset and our ability to obtain financing on acceptable terms. We can offer no assurance that we will be able to successfully consummate any future acquisitions pursuant to our right of first offer, and Apex is under no obligation to accept any offer that we may choose to make. In addition, we may decide not to exercise our right of first offer if and when any assets are offered for sale, and our decision will not be subject to unitholder approval. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement.”

Our operations are subject to federal and state laws and regulations relating to product quality specifications, and we could be subject to damages based on claims brought against us by our customers or lose customers as a result of the failure of products we distribute to meet certain quality specifications.

Various federal and state agencies prescribe specific product quality specifications for refined products, including vapor pressure, sulfur content, ethanol content and biodiesel content. Changes in product quality specifications or blending requirements could reduce our product volumes at our terminals, require us to incur additional handling costs or require capital expenditures. For example, mandated increases in use of renewable fuels could require the construction of additional storage and blending equipment. If we are unable to recover these costs through increased revenues, our cash flows and ability to pay cash distributions to our unitholders could be adversely affected. Violations of product quality laws attributable to our operations could subject us to significant fines and penalties as well as negative publicity. In addition, changes in the quality of the products we receive on our pipeline system could reduce or eliminate our ability to blend products.

We have a responsibility to ensure the quality and purity of the products loaded at our loading racks. Off-specification product distributed for public use, even if not a violation of specific product quality laws, could result in poor engine performance or even engine damage. This type of incident could result in liability claims regarding damages caused by the off-specification fuel or could result in negative publicity, impacting our ability to retain existing customers or to acquire new customers, any of which could have a material adverse impact on our results of operations and cash flows.

Revenues we generate from excess storage fees vary based upon the product volume handled at our terminals and the activity levels of our customers. Any short- or long-term decrease in the demand for the light refined products, heavy refined products and crude oil we handle, or any interruptions to the operations of certain of our customers, could reduce the amount of cash we generate and adversely affect our ability to make distributions to our unitholders.

For the year ended December 31, 2012, we generated approximately 2% of our revenues from excess storage fees, which our storage customers pay us to receive product volume on their behalf that exceeds the base storage services contemplated in their agreed upon monthly storage services fee.

The revenues we generate from excess storage fees vary based upon the product volume accepted at or withdrawn from our terminals, and our customers are not obligated to pay us any excess storage fees unless we move product volume across our pipelines or docks on their behalf. If one or more of our customers were to slow or suspend its operations, or otherwise experience a decrease in demand for our services, our revenues under our agreements with such customers would be reduced or suspended, resulting in a decrease in the revenues we generate.

 

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Any reduction in the capability of our customers to obtain access to barge facilities, third party pipelines or other transportation facilities, or to continue utilizing them at current costs, could cause a reduction of volumes transported through our terminals.

Many users of our terminals are dependent upon third party barge operations, pipelines or other transportation providers to receive and deliver light refined products, heavy refined products and crude oil. Any interruptions or reduction in the capabilities of these modes of transportation would result in reduced volumes transported through our terminals. Similarly, increased demand for these services could result in reduced allocations to our existing customers, which also could reduce volumes transported through our terminals. Allocation reductions of this nature are not infrequent and are beyond our control. In addition, if the costs to us or our storage service customers to transport refined products or crude oil significantly increase, our profitability could be reduced. Any such increases in cost, interruptions or allocation reductions that, individually or in the aggregate, are material or continue for a sustained period of time could have a material adverse effect on our financial position, results of operations or cash flows.

Many of our terminal and storage assets have been in service for several decades, which could result in increased maintenance or remediation expenditures, which could adversely affect our business, results of operations, financial condition and our ability to make cash distributions to our unitholders.

Our terminal and storage assets are generally long-lived assets. As a result, some of those assets have been in service for many decades. The age and condition of these assets could result in increased maintenance or remediation expenditures. Any significant increase in these expenditures could adversely affect our business, results of operations, financial condition and our ability to make cash distributions to our unitholders.

We may incur significant costs and liabilities in complying with environmental, health and safety laws and regulations, which are complex and frequently changing.

Our operations involve the transport and storage of light refined products, heavy refined products and crude oil and are subject to federal, state, and local laws and regulations governing, among other things, the gathering, storage, handling and transportation of petroleum and hazardous substances, the emission and discharge of materials into the environment, the generation, management and disposal of wastes, and other matters otherwise relating to the protection of the environment. Our operations are also subject to various laws and regulations relating to occupational health and safety. Compliance with this complex array of federal, state, and local laws and implementing regulations is difficult and may require significant capital expenditures and operating costs to mitigate or prevent pollution. Moreover, our business is inherently subject to accidental spills, discharges or other releases of petroleum or hazardous substances into the environment and neighboring areas, for which we may incur substantial liabilities to investigate and remediate. Failure to comply with applicable environmental, health, and safety laws and regulations may result in the assessment of sanctions, including administrative, civil or criminal penalties, permit revocations, and injunctions limiting or prohibiting some or all of our operations.

We cannot predict what additional environmental, health, and safety legislation or regulations will be enacted or become effective in the future or how existing or future laws or regulations will be administered or interpreted with respect to our operations. Many of these laws and regulations are becoming increasingly stringent, and the cost of compliance with these requirements can be expected to increase over time. These expenditures or costs for environmental, health, and safety compliance could have a material adverse effect on our financial condition, results of operations or cash flows.

We could incur significant costs and liabilities in responding to contamination that occurs at our facilities.

Our terminal facilities have been used for transportation, storage and distribution of light refined products, heavy refined products and crude oil for many years. Although we have utilized operating and disposal

 

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practices that were standard in the industry at the time, hydrocarbons and wastes from time to time may have been spilled or released on or under the terminal properties. In addition, the terminal properties were previously owned and operated by other parties and those parties from time to time also may have spilled or released hydrocarbons or wastes. The terminal properties are subject to federal, state and local laws that impose investigatory and remedial obligations, some of which are joint and several or strict liability obligations without regard to fault, to address and prevent environmental contamination. We may incur significant costs and liabilities in responding to any soil and groundwater contamination that occurs on our properties, even if the contamination was caused by prior owners and operators of our facilities.

Climate change legislation or regulations restricting emissions of greenhouse gases could result in increased operating and capital costs and reduced demand for our storage services.

There is a growing belief that emissions of greenhouse gases, or GHGs, such as carbon dioxide and methane, may be linked to climate change. Climate change and the costs that may be associated with its impacts and the regulation of GHGs have the potential to affect our business in many ways, including negatively impacting the costs we incur in providing our services and the demand for our services (due to change in both costs and weather patterns).

In recent years, the U.S. Congress has from time to time considered adopting legislation to reduce emissions of GHGs and almost one-half of the states have already taken legal measures to reduce emissions of GHGs primarily through the planned development of GHG emission inventories and/or regional GHG cap and trade programs. Most of these cap and trade programs work by requiring major sources of emissions, such as electric power plants, or major producers of fuels, such as refineries and gas processing plants, to acquire and surrender emission allowances. The number of allowances available for purchase is reduced each year in an effort to achieve the overall GHG emission reduction goal.

Depending on the scope of a particular program, we could be required to purchase and surrender allowances for GHG emissions resulting from our operations. Although most of the state-level initiatives have to date been focused on large sources of GHG emissions, such as electric power plants, it is possible that smaller sources such as our operations could become subject to GHG-related regulation. Depending on the particular program, we could be required to control emissions or to purchase and surrender allowances for GHG emissions resulting from our operations. Independent of Congress, the EPA has adopted regulations controlling GHG emissions under its existing Clean Air Act authority. For example, on December 15, 2009, the EPA officially published its findings that emissions of carbon dioxide, methane and other GHGs present an endangerment to human health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth’s atmosphere and other climatic changes. These findings by the EPA allow the agency to proceed with the adoption and implementation of regulations that would restrict emissions of greenhouse gases under existing provisions of the federal Clean Air Act. In 2009, the EPA adopted rules regarding regulation of GHG emissions from motor vehicles. In 2010, EPA also issued a final rule, known as the “Tailoring Rule,” that makes certain large stationary sources and modification projects subject to permitting requirements for greenhouse gas emissions under the Clean Air Act. In addition, on September 22, 2009, the EPA issued a final rule requiring the reporting of greenhouse gas emissions from specified large greenhouse gas emission sources in the U.S. beginning in 2011 for emissions occurring in 2010. None of our facilities currently generate enough greenhouse gasses to be subject to this reporting requirement under this rule, but we could become subject to such reporting requirements in the future.

Although it is not possible at this time to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business, any future federal laws or implementing regulations that may be adopted to address greenhouse gas emissions could require us to incur increased operating costs and could adversely affect demand for the refined products and crude oil we store. The potential increase in the costs of our operations resulting from any legislation or regulation to restrict emissions of greenhouse gases could include new or increased costs to operate and maintain our facilities, install new

 

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emission controls on our facilities, acquire allowances to authorize our greenhouse gas emissions, pay any taxes related to our greenhouse gas emissions and administer and manage a greenhouse gas emissions program. While we may be able to include some or all of such increased costs in the rates charged for our services, such recovery of costs is uncertain. Moreover, incentives to conserve energy or use alternative energy sources could reduce demand for our services. We cannot predict with any certainty at this time how these possibilities may affect our operations. Many scientists have concluded that increasing concentrations of GHGs in the Earth’s atmosphere may produce climate change that could have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climatic events; if such effects were to occur, they could have an adverse effect on our operations.

Debt we incur in the future may limit our flexibility to obtain financing and to pursue other business opportunities.

Upon the closing of this offering, we expect to have approximately $200 million available for future borrowings under our revolving credit facility. Our future level of debt could have important consequences to us, including the following:

 

   

our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired or such financing may not be available on favorable terms;

 

   

our funds available for operations, future business opportunities and cash distributions to unitholders will be reduced by that portion of our cash flow required to make interest payments on our debt;

 

   

we may be more vulnerable to competitive pressures or a downturn in our business or the economy generally; and

 

   

our flexibility in responding to changing business and economic conditions may be limited.

Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service any future indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets or seeking additional equity capital. We may not be able to effect any of these actions on satisfactory terms or at all.

Restrictions in our revolving credit facility could adversely affect our business, financial condition, results of operations, ability to make distributions to unitholders and value of our common units.

Our revolving credit facility limits our ability to, among other things:

 

   

incur or guarantee additional debt;

 

   

make distributions on or redeem or repurchase units;

 

   

make certain investments and acquisitions;

 

   

make capital expenditures;

 

   

incur certain liens or permit them to exist;

 

   

enter into certain types of transactions with affiliates;

 

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merge or consolidate with another company; and

 

   

transfer, sell or otherwise dispose of assets.

Our revolving credit facility contains covenants requiring us to maintain certain financial ratios. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet those ratios and tests.

The provisions of our revolving credit facility may affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the provisions of our revolving credit facility could result in a default or an event of default that could enable our lenders to declare the outstanding principal of that debt, together with accrued and unpaid interest, to be immediately due and payable. Such event of default would also permit our lenders to foreclose on our assets serving as collateral for our obligations under our revolving credit facility. If the payment of our debt is accelerated, our assets may be insufficient to repay such debt in full, and our unitholders could experience a partial or total loss of their investment. Our revolving credit facility will also have cross default provisions that apply to any other material indebtedness that we may have. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—New Revolving Credit Facility.”

Increases in interest rates could adversely impact our unit price, our ability to issue equity or incur debt for acquisitions or other purposes, and our ability to make cash distributions at our intended levels.

Interest rates may increase in the future. As a result, interest rates on our new revolving credit facility or future credit facilities and debt offerings could be higher than current levels, causing our financing costs to increase accordingly. As with other yield-oriented securities, our unit price will be impacted by our level of our cash distributions and implied distribution yield. The distribution yield is often used by investors to compare and rank yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our units, and a rising interest rate environment could have an adverse impact on our unit price and our ability to issue equity or incur debt for acquisitions or other purposes and to make cash distributions at our intended levels.

The adoption of derivatives legislation by Congress could have an adverse impact on our customers’ ability to hedge risks associated with their business.

On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act regulates derivative transactions, which include certain instruments used in our risk management activities.

The Dodd-Frank Act requires the Commodity Futures Trading Commission, or the CFTC, and the SEC to promulgate rules and regulations relating to, among other things, swaps, participants in the derivatives markets, clearing of swaps and reporting of swap transactions. In general, the Dodd-Frank Act subjects swap transactions and participants to greater regulation and supervision by the CFTC and the SEC and will require many swaps to be cleared through a CFTC- or SEC-registered clearing facility and executed on a designated exchange or swap execution facility. Among the other provisions of the Dodd-Frank Act that may affect derivative transactions are those relating to establishment of capital and margin requirements for certain derivative participants; establishment of business conduct standards, recordkeeping and reporting requirements; and imposition of position limits.

The new legislation and regulations promulgated thereunder could increase the operational and transactional cost of derivatives contracts and affect the number and/or creditworthiness of counterparties available to us or our customers.

 

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Our executive officers and certain key personnel are critical to our business, and these officers and key personnel may not remain with us in the future.

Our future success depends upon the continued service of our executive officers and other key personnel. If we lose the services of one or more of our executive officers or key employees, our business, operating results and financial condition could be harmed.

If we fail to develop or maintain an effective system of internal controls, we may not be able to report our financial results timely and accurately or prevent fraud, which would likely have a negative impact on the market price of our common units.

Upon the completion of this offering, we will become subject to the public reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, including the rules thereunder that will require our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. Effective internal controls are necessary for us to provide reliable and timely financial reports, prevent fraud and to operate successfully as a publicly traded partnership. We prepare our consolidated financial statements in accordance with GAAP, but our internal accounting controls may not meet all standards applicable to companies with publicly traded securities. Our efforts to develop and maintain our internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future or to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, which we refer to as Section 404.

Given the difficulties inherent in the design and operation of internal controls over financial reporting, in addition to our limited accounting personnel and management resources, we can provide no assurance as to our, or our independent registered public accounting firms, future conclusions about the effectiveness of our internal controls, and we may incur significant costs in our efforts to comply with Section 404. Any failure to implement and maintain effective internal controls over financial reporting will subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business and would likely have a negative effect on the trading price of our common units.

Although we will be required to disclose changes made in our internal control and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the fiscal year ending December 31, 2014. In addition, pursuant to the recently enacted JOBS Act, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an “emerging growth company,” which may be up to five full fiscal years following this offering.

None of the proceeds from the sale of common units by the selling unitholder in this offering will be available to fund our operations or to pay distributions.

We will not receive any proceeds from the sale of common units by the selling unitholder in this offering. Consequently, none of the proceeds from such sale will be available to fund our operations or to pay distributions to the public unitholders. Please read “Use of Proceeds.”

Terrorist attacks aimed at our facilities or surrounding areas could adversely affect our business.

The U.S. government has issued warnings that energy assets, specifically the nation’s pipeline and terminal infrastructure, may be the future targets of terrorist organizations. Any terrorist attack at our facilities, those of our customers and, in some cases, those of other pipelines, refineries, or terminals could materially and adversely affect our financial condition, results of operations or cash flows.

 

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Risks Inherent in an Investment in Us

Our general partner and its affiliates, including our sponsors, have conflicts of interest with us and limited duties, and they may favor their own interests to the detriment of us and our unitholders.

Following the offering, our parent will own and control our general partner and will appoint all of the directors and officers of our general partner, some of whom will also be directors and officers of our parent and Apex, which are controlled by Paul A. Novelly and his family. Although our general partner has a duty to manage us in a manner that is not adverse to the best interests of our partnership and our unitholders, the directors and officers of our general partner also have a duty to manage our general partner in a manner that is not adverse to the best interests of our parent, its owner. Therefore, conflicts of interest may arise between our sponsors and our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts of interest, our general partner may favor its own interests and the interests of our sponsors over the interests of our common unitholders. These conflicts include the following situations, among others:

 

   

our general partner is allowed to take into account the interests of parties other than us, such as our parent, in resolving conflicts of interest, which has the effect of limiting its duties to our unitholders;

 

   

neither our partnership agreement nor any other agreement requires our parent or Apex to pursue a business strategy that favors us, and the directors and officers of our parent and Apex have a fiduciary duty to make these decisions in the best interests of their stockholders. Our parent or Apex may choose to shift the focus of its investment and growth to areas not served by our assets;

 

   

our partnership agreement replaces the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing its duties, limiting our general partner’s liabilities and restricting the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty;

 

   

except in limited circumstances, our general partner has the power and authority to conduct our business without unitholder approval;

 

   

our general partner will determine the amount and timing of asset purchases and sales, borrowings, issuance of additional partnership securities and the creation, reduction or increase of cash reserves, each of which can affect the amount of cash that is distributed to our unitholders;

 

   

our general partner will determine the amount and timing of many of our cash expenditures and whether a cash expenditure is classified as an expansion capital expenditure, which would not reduce operating surplus, or a maintenance capital expenditure, which would reduce our operating surplus. This determination can affect the amount of cash that is distributed to our unitholders and to our general partner, the amount of adjusted operating surplus generated in any given period and the ability of the subordinated units to convert into common units;

 

   

our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units, to make incentive distributions or to accelerate the expiration of the subordination period;

 

   

our partnership agreement permits us to distribute up to $30.0 million as operating surplus, even if it is generated from asset sales, non-working capital borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions on our subordinated units or to our sponsors in respect of the incentive distribution rights;

 

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our general partner determines which costs incurred by it and its affiliates are reimbursable by us;

 

   

our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with its affiliates on our behalf;

 

   

our general partner intends to limit its liability regarding our contractual and other obligations;

 

   

our general partner may exercise its right to call and purchase all of the common units not owned by it and its affiliates if it and its affiliates own more than 80% of the common units;

 

   

disputes may arise under our terminaling services agreements with Apex, including with respect to the interpretation of the agreement and fee redeterminations or renegotiation thereof;

 

   

our general partner controls the enforcement of obligations owed to us by our general partner and its affiliates, including Apex’s obligations under the terminaling services agreements and our general partner’s and Apex’s obligations under the omnibus agreement; and

 

   

our general partner decides whether to retain separate counsel, accountants or others to perform services for us.

Under the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our general partner or any of its affiliates, including its executive officers, directors and owners. Any such person or entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Any such person or entity will not be liable to us or to any limited partner for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not communicate such opportunity or information to us. This may create actual and potential conflicts of interest between us and affiliates of our general partner and result in less than favorable treatment of us and our unitholders. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement” and “Conflicts of Interest and Duties.”

Our general partner intends to limit its liability regarding our obligations.

Our general partner intends to limit its liability under contractual arrangements so that the counterparties to such arrangements have recourse only against our assets, and not against our general partner or its assets. Our general partner may therefore cause us to incur indebtedness or other obligations that are nonrecourse to our general partner. Our partnership agreement provides that any action taken by our general partner to limit its liability is not a breach of our general partner’s duties, even if we could have obtained more favorable terms without the limitation on liability. In addition, we are obligated to reimburse or indemnify our general partner to the extent that it incurs obligations on our behalf. Any such reimbursement or indemnification payments would reduce the amount of cash otherwise available for distribution to our unitholders.

Our partnership agreement requires that we distribute all of our available cash, which could limit our ability to grow and make acquisitions.

Our partnership agreement requires that we distribute all of our available cash to our unitholders. As a result, we expect to rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, to fund our acquisitions and expansion capital expenditures. Therefore, to the extent we are unable to finance our growth externally, our cash distribution policy will significantly impair our ability to grow. In addition, because we will distribute all of our available cash, our growth may not be as fast

 

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as that of businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement or our revolving credit facility on our ability to issue additional units, including units ranking senior to the common units as to distribution or liquidation, and our unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such additional units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which, in turn, may reduce the amount of cash available to distribute to our unitholders.

Actions taken by our general partner may affect the amount of cash available for distribution to unitholders or accelerate the right to convert subordinated units.

The amount of cash that is available for distribution to unitholders is affected by decisions of our general partner regarding such matters as:

 

   

the amount and timing of asset purchases and sales;

 

   

cash expenditures;

 

   

borrowings;

 

   

the issuance of additional units; and

 

   

the creation, reduction or increase of reserves in any quarter.

Our general partner determines the amount and timing of any capital expenditures and whether a capital expenditure is classified as a maintenance capital expenditure, which reduces operating surplus, or an expansion capital expenditure, which does not reduce operating surplus. This determination can affect the amount of cash that is distributed to our unitholders and to our general partner and the ability of the subordinated units to convert into common units.

In addition, our general partner may use an amount, initially equal to $30.0 million, which would not otherwise constitute available cash from operating surplus, in order to permit the payment of cash distributions on its affiliates’ units and our sponsors’ incentive distribution rights. All of these actions may affect the amount of cash distributed to our unitholders and our general partner and may facilitate the conversion of subordinated units into common units. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions.”

In addition, borrowings by us and our affiliates do not constitute a breach of any duty owed by our general partner to our unitholders, including borrowings that have the purpose or effect of:

 

   

enabling our general partner or its affiliates to receive distributions on any subordinated units held by them; or

 

   

accelerating the expiration of the subordination period.

For example, in the event we have not generated sufficient cash from our operations to pay the minimum quarterly distribution on our common units and our subordinated units, our partnership agreement permits us to borrow working capital funds, which would enable us to make this distribution on all outstanding units. Please read “Provisions of our Partnership Agreement Relating to Cash Distributions—Subordinated Units and Subordination Period.”

 

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Our partnership agreement replaces our general partner’s fiduciary duties to holders of our common units with contractual standards governing its duties.

Our partnership agreement contains provisions that eliminate the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law and replaces those duties with several different contractual standards. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, free of any duties to us and our unitholders other than the implied contractual covenant of good faith and fair dealing, which means that a court will enforce the reasonable expectations of the parties where the language in our partnership agreement does not provide for a clear course of action. This provision entitles our general partner to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. Examples of decisions that our general partner may make in its individual capacity include the allocation of corporate opportunities among us and our affiliates, the exercise of its limited call right, its voting rights with respect to the units it owns and its registration rights, and its determination whether or not to consent to any merger, consolidation or conversion of the partnership or amendment to our partnership agreement. By purchasing a common unit, a unitholder is treated as having consented to the provisions in our partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Duties—Duties of the General Partner.”

Our partnership agreement restricts the remedies available to holders of our common and subordinated units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

Our partnership agreement contains provisions that restrict the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. For example, our partnership agreement:

 

   

permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner. This entitles our general partner to consider only the interests and factors that it desires, and it has no duty or obligation to give any consideration to any interest of, or factors affecting, us or any limited partner. Examples of decisions that our general partner may make in its individual capacity include: (1) how to allocate business opportunities among us and its other affiliates; (2) whether to exercise its limited call right; (3) how to exercise its voting rights with respect to the units it owns; (4) whether to exercise its registration rights; (5) whether to elect to reset target distribution levels; and (6) whether or not to consent to any merger or consolidation of the partnership or amendment to our partnership agreement;

 

   

provides that the general partner will have no liability to us or our limited partners for decisions made in its capacity as a general partner so long as such decisions are made in good faith;

 

   

generally provides that in a situation involving a transaction with an affiliate or other conflict of interest, any determination by our general partner must be made in good faith. In addition, our general partner may seek the approval of such resolution from the conflicts committee of the board of directors of our general partner, but is not required to do so. If an affiliate transaction or the resolution of another conflict of interest is not approved by our public common unitholders or the conflicts committee and the board of directors of our general partner determines that the resolution or course of action taken with respect to the affiliate transaction or conflict of interest is either on terms no less favorable to us than those generally being provided to or available from unrelated third parties or is “fair and reasonable” to us, considering the totality of the relationships between the parties involved, including other transactions that may be particularly advantageous or beneficial to us, then it will be presumed that in making its decision, the board of directors of our general partner acted in good faith, and in any proceeding brought by or on behalf of any limited partner or us challenging such decision, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption; and

 

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provides that our general partner and its officers and directors will not be liable for monetary damages to us or our limited partners resulting from any act or omission unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or its officers or directors, as the cases may be, acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that the conduct was unlawful.

In connection with a situation involving a transaction with an affiliate or a conflict of interest, our partnership agreement provides that any determination by our general partner must be made in good faith, and that our conflicts committee and the board of directors of our general partner are entitled to a presumption that they acted in good faith. In any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Please read “Conflicts of Interest and Duties.”

Our parent and other affiliates of our general partner, including Apex, may compete with us.

Our partnership agreement provides that our general partner will be restricted from engaging in any business activities other than acting as our general partner and those activities incidental to its ownership interest in us. Affiliates of our general partner, including our parent and Apex, are not prohibited from engaging in other businesses or activities, including those that might be in direct competition with us. Our parent and Apex currently hold substantial interests in other companies in the terminaling business. Our parent and Apex may make investments and purchase entities that acquire, own and operate terminaling businesses. These investments and acquisitions may include entities or assets that we would have been interested in acquiring. Therefore, our parent and Apex may compete with us for investment opportunities and our parent and Apex may own interests in entities that compete with us.

Our sponsors, as the initial owners of our incentive distribution rights, may elect to cause us to issue common units to them in connection with a resetting of the target distribution levels related to the incentive distribution rights, without the approval of the conflicts committee of their board of directors or the holders of our common units. This could result in lower distributions to holders of our common units.

Our sponsors, as the initial owners of our incentive distribution rights, have the right, at any time when there are no subordinated units outstanding and payments have been paid on incentive distributions at the highest level to which they are entitled (50.0%) for each of the prior four consecutive whole fiscal quarters and the amount of each such distribution did not exceed the adjusted operating surplus for such quarter, to reset the initial target distribution levels at higher levels based on our cash distributions at the time of the exercise of the reset election. Following a reset election by our sponsors, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution, and the target distribution levels will be reset to correspondingly higher levels based on the same percentage increases above the reset minimum quarterly distribution as the current target distribution levels.

If the owners of a majority of the incentive distribution rights elect to reset the target distribution levels, the owners of the incentive distribution rights will be entitled to receive a number of common units equal to the number of common units which would have entitled them to an average aggregate quarterly cash distribution in such prior two quarters equal to the average of the distributions to the owners of the incentive distribution rights on their respective incentive distribution rights in the prior two quarters. We anticipate that the owners of the incentive distribution rights would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per common unit without such conversion. It is possible, however, that the owners of the incentive distribution rights could exercise this reset election at a time when they are experiencing, or expect to experience, declines in the cash distributions they receive related to their respective incentive distribution rights and may, therefore, desire to be issued common units rather than retain the right to receive incentive distributions based on the initial target distribution levels. As a result, a reset election may cause our common unitholders to experience a reduction in the amount of cash distributions that our

 

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common unitholders would have otherwise received had we not issued new common units to the owners of the incentive distribution rights in connection with resetting the target distribution levels. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Right to Reset Incentive Distribution Levels.”

Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors.

Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Our unitholders will have no right on an annual or ongoing basis to elect our general partner or its board of directors. The board of directors of our general partner, including the independent directors, is chosen entirely by our parent, as a result of its owning our general partner, and not by our unitholders. Please read “Management—Management of World Point Terminals, LP” and “Certain Relationships and Related Party Transactions.” Unlike publicly traded corporations, we will not conduct annual meetings of our unitholders to elect directors or conduct other matters routinely conducted at annual meetings of stockholders of corporations. As a result of these limitations, the price at which the common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.

Even if holders of our common units are dissatisfied, they cannot initially remove our general partner without its consent.

If our unitholders are dissatisfied with the performance of our general partner, they will have limited ability to remove our general partner. Unitholders initially will be unable to remove our general partner without its consent because our general partner and its affiliates will own sufficient units upon the completion of this offering to be able to prevent its removal. The vote of the holders of at least 66 2/3% of all our outstanding common and subordinated units voting together as a single class is required to remove our general partner. Following the closing of this offering, our parent will own, directly or indirectly, an aggregate of 73.5% of our common and subordinated units (or 69.5% of our common and subordinated units, if the underwriters exercise their option to purchase additional common units in full). Also, if our general partner is removed without cause during the subordination period and no units held by the holders of our subordinated units or their affiliates are voted in favor of that removal, all remaining subordinated units will automatically be converted into common units and any existing arrearages on the common units will be extinguished. Cause is narrowly defined in our partnership agreement to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding our general partner liable for actual fraud or willful or wanton misconduct in its capacity as our general partner. Cause does not include most cases of charges of poor management of the business.

Unitholders will experience immediate and substantial dilution in pro forma net tangible book value of $15.25 per common unit.

The assumed initial public offering price of $20.00 per common unit (the midpoint of the price range set forth on the cover page of this prospectus) exceeds pro forma net tangible book value of $4.75 per common unit. Based on the assumed initial public offering price of $20.00 per common unit, unitholders will incur immediate and substantial dilution of $15.25 per common unit. This dilution results primarily because the assets contributed to us by affiliates of our general partner are recorded at their historical cost in accordance with GAAP, and not their fair value. Please read “Dilution.”

Our general partner interest or the control of our general partner may be transferred to a third party without unitholder consent.

Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of our unitholders. Furthermore, our partnership agreement does not restrict the ability of the members of our general partner to transfer their respective membership interests in our general partner to a third party. The new members of our general partner would then be in a

 

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position to replace the board of directors and executive officers of our general partner with their own designees and thereby exert significant control over the decisions taken by the board of directors and executive officers of our general partner. This effectively permits a “change of control” without the vote or consent of the unitholders.

Our general partner has a limited call right that may require unitholders to sell their common units at an undesirable time or price.

If at any time our general partner and its affiliates own more than 80% of the common units, our general partner will have the right, which it may assign to any of its affiliates or to us, but not the obligation, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price that is not less than their then-current market price, as calculated pursuant to the terms of our partnership agreement. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. At the closing of this offering, and assuming no exercise of the underwriters’ option to purchase additional common units, our parent will own, directly or indirectly, approximately 46.9% of our 16,485,507 outstanding common units. At the end of the subordination period, assuming no additional issuances of common units (other than upon the conversion of the subordinated units), our parent will own, directly or indirectly, approximately 73.5 % of our outstanding common units. For additional information about this right, please read “The Partnership Agreement—Limited Call Right.”

We may issue additional units without unitholder approval, which would dilute existing unitholder ownership interests.

Our partnership agreement does not limit the number of additional limited partner interests we may issue at any time without the approval of our unitholders. The issuance of additional common units or other equity interests of equal or senior rank will have the following effects:

 

   

our existing unitholders’ proportionate ownership interest in us will decrease;

 

   

the amount of cash available for distribution on each unit may decrease;

 

   

because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of the minimum quarterly distribution will be borne by our common unitholders will increase;

 

   

the ratio of taxable income to distributions may increase;

 

   

the relative voting strength of each previously outstanding unit may be diminished; and

 

   

the market price of the common units may decline. Please read “The Partnership Agreement—Issuance of Additional Securities.”

The market price of our common units could be adversely affected by sales of substantial amounts of our common units in the public or private markets, including sales by our parent or other large holders.

After this offering, we will have 16,485,507 common units and 16,485,507 subordinated units outstanding, which includes the 8,750,000 common units we and the selling unitholder are selling in this offering that may be resold in the public market immediately (10,062,500 if the underwriters exercise in full their option to purchase additional common units). All of the 16,485,507 subordinated units will convert into common units on a one-for-one basis at the end of the subordination period. All of the 7,735,507 common units (6,423,007 if the underwriters exercise in full their option to purchase additional common units) that are issued to our parent and the selling unitholder will be subject to resale restrictions under a 180-day lock-up agreement with the underwriters. Each of the lock-up agreements with the underwriters may be waived in the discretion of certain of the underwriters. Sales by our sponsors or other large holders of a substantial number of our common units in the

 

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public markets following this offering, or the perception that such sales might occur, could have a material adverse effect on the price of our common units or could impair our ability to obtain capital through an offering of equity securities. In addition, we have agreed to provide registration rights to our parent. Under our partnership agreement, our general partner and its affiliates have registration rights relating to the offer and sale of any units that they hold, subject to certain limitations. Please read “Units Eligible for Future Sale.”

Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.

Our partnership agreement restricts unitholders’ voting rights by providing that any units held by a person or group that owns 20% or more of any class of units then outstanding, other than our general partner and its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot vote on any matter.

Reimbursements due to our general partner and its affiliates for services provided to us or on our behalf will reduce cash available for distribution to our common unitholders. The amount and timing of such reimbursements will be determined by our general partner, and there are no limits on the amount that we may be required to pay.

Prior to making any distribution on our common units, we will reimburse our general partner and its affiliates, including our parent, for expenses they incur and payments they make on our behalf. Under our partnership agreement, we will reimburse our general partner and its affiliates for certain expenses incurred on our behalf, including, among other items, compensation expense for all employees required to manage and operate our business. Our partnership agreement provides that our general partner will determine in good faith the expenses that are allocable to us. The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates will reduce the amount of available cash to pay cash distributions to our common unitholders. Under our partnership agreement, there is no limit on the fees and expense reimbursements we may be required to pay our general partner. Please read “Cash Distribution Policy and Restrictions on Distributions.”

Our general partner’s discretion in establishing cash reserves may reduce the amount of cash available for distribution to unitholders.

Our partnership agreement requires our general partner to deduct from operating surplus cash reserves that it determines are necessary to fund our future operating expenditures. In addition, the partnership agreement permits the general partner to reduce available cash by establishing cash reserves for the proper conduct of our business, to comply with applicable law or agreements to which we are a party, or to provide funds for future distributions to partners. These cash reserves will affect the amount of cash available for distribution to unitholders.

While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including provisions requiring us to make cash distributions contained therein, may be amended.

While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including provisions requiring us to make cash distributions contained therein, may be amended. Our partnership agreement generally may not be amended during the subordination period without the approval of our public common unitholders. However, our partnership agreement can be amended with the consent of our general partner and the approval of a majority of the outstanding common units (including common units held by our parent) after the subordination period has ended. At the closing of this offering, our parent will own, directly or indirectly, approximately 46.9% of the outstanding common units and all of our outstanding subordinated units. Please read “The Partnership Agreement—Amendment of the Partnership Agreement.”

 

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There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. The price of our common units may fluctuate significantly, and unitholders could lose all or part of their investment.

Prior to this offering, there has been no public market for the common units. After this offering, there will be only 8,750,000 publicly traded common units held by our public unitholders (10,062,500 common units if the underwriters exercise their option to purchase additional common units in full). We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. Unitholders may not be able to resell their common units at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.

The initial public offering price for our common units will be determined by negotiations between us and the representative of the underwriters and may not be indicative of the market price of the common units that will prevail in the trading market. The market price of our common units may decline below the initial public offering price. The market price of our common units may also be influenced by many factors, some of which are beyond our control, including:

 

   

our quarterly distributions;

 

   

our quarterly or annual earnings or those of other companies in our industry;

 

   

announcements by us or our competitors of significant contracts or acquisitions;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

general economic conditions;

 

   

the failure of securities analysts to cover our common units after this offering or changes in financial estimates by analysts;

 

   

future sales of our common units; and

 

   

the other factors described in these “Risk Factors.”

Your liability may not be limited if a court finds that unitholder action constitutes control of our business.

A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made non-recourse to the general partner. Our partnership is organized under Delaware law, and we conduct business in a number of other states. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some jurisdictions. You could be liable for our obligations as if you were a general partner if a court or government agency were to determine that:

 

   

we were conducting business in a state but had not complied with that particular state’s partnership statute; or

 

   

your right to act with other unitholders to remove or replace the general partner, to approve some amendments to our partnership agreement or to take other actions under our partnership agreement constitute “control” of our business.

Please read “The Partnership Agreement—Limited Liability” for a discussion of the implications of the limitations of liability on a unitholder.

 

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Except in limited circumstances, our general partner has the power and authority to conduct our business without unitholder approval.

Under our partnership agreement, our general partner, which is controlled by our parent, has full power and authority to do all things, other than those items that require unitholder approval or with respect to which our general partner has sought conflicts committee approval, on such terms as it determines to be necessary or appropriate to conduct our business, including, but not limited to, the following:

 

   

the making of any expenditures, the lending or borrowing of money, the assumption or guarantee of or other contracting for, indebtedness and other liabilities, the issuance of evidences of indebtedness, including indebtedness that is convertible into our securities, and the incurring of any other obligations;

 

   

the purchase, sale or other acquisition or disposition of our securities, or the issuance of additional options, rights, warrants and appreciation rights relating to our securities;

 

   

the acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any or all of our assets;

 

   

the negotiation, execution and performance of any contracts, conveyances or other instruments;

 

   

the distribution of our cash;

 

   

the selection and dismissal of employees and agents, outside attorneys, accountants, consultants and contractors and the determination of their compensation and other terms of employment or hiring;

 

   

the maintenance of insurance for our benefit and the benefit of our partners;

 

   

the formation of, or acquisition of an interest in, the contribution of property to, and the making of loans to, any limited or general partnership, joint venture, corporation, limited liability company or other entity;

 

   

the control of any matters affecting our rights and obligations, including the bringing and defending of actions at law or in equity, otherwise engaging in the conduct of litigation, arbitration or mediation, the incurring of legal expense and the settlement of claims and litigation;

 

   

the indemnification of any person against liabilities and contingencies to the extent permitted by law;

 

   

the making of tax, regulatory and other filings or the rendering of periodic or other reports to governmental or other agencies having jurisdiction over our business or assets; and

 

   

the entering into of agreements with any of its affiliates to render services to us or to itself in the discharge of its duties as our general partner.

Our partnership agreement provides that our general partner must act in “good faith” when making decisions on our behalf, and our partnership agreement further provides that in order for a determination to be made in “good faith,” our general partner must subjectively believe that the determination is not adverse to the best interests of our partnership. Please read “The Partnership Agreement—Voting Rights” for information regarding matters that require unitholder approval.

 

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Contracts between us, on the one hand, and our general partner and its affiliates, on the other hand, will not be the result of arm’s-length negotiations.

Our partnership agreement allows our general partner to determine, in good faith, any amounts to pay itself or its affiliates for any services rendered to us. Our general partner may also enter into additional contractual arrangements with any of its affiliates on our behalf. Our general partner will determine, in good faith, the terms of any arrangements or transactions entered into after the close of this offering. Similarly, agreements, contracts or arrangements between us and our general partner and its affiliates that are entered into following the closing of this offering will not be required to be negotiated on an arm’s-length basis, although, in some circumstances, our general partner may determine that the conflicts committee may make a determination on our behalf with respect to such arrangements.

Our general partner and its affiliates will have no obligation to permit us to use any facilities or assets of our general partner and its affiliates, except as may be provided in contracts entered into specifically for such use. There is no obligation of our general partner and its affiliates to enter into any contracts of this kind.

Common unitholders will have no right to enforce obligations of our general partner and its affiliates under agreements with us.

Any agreements between us, on the one hand, and our general partner and its affiliates, on the other hand, will not grant to the unitholders, separate and apart from us, the right to enforce the obligations of our general partner and its affiliates in our favor.

Our general partner decides whether to retain separate counsel, accountants or others to perform services for us.

The attorneys, independent accountants and others who perform services for us have been retained by our general partner. Attorneys, independent accountants and others who perform services for us are selected by our general partner or our conflicts committee and may perform services for our general partner and its affiliates. We may retain separate counsel for ourselves or the holders of common units in the event of a conflict of interest between our general partner and its affiliates, on the one hand, and us or the holders of common units, on the other, depending on the nature of the conflict. We do not intend to do so in most cases.

The NYSE does not require a publicly traded partnership like us to comply with certain of its corporate governance requirements.

Our common units have been approved for listing on the NYSE, subject to official notice of issuance. Because we will be a publicly traded partnership, the NYSE does not require us to have, and we will not have, a majority of independent directors on our general partner’s board of directors or to establish a compensation committee or a nominating and corporate governance committee. Accordingly, unitholders will not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements. Please read “Management—Management of World Point Terminals, LP.”

We will incur increased costs as a result of being a publicly traded partnership.

We have no history operating as a publicly traded partnership. As a publicly traded partnership, we will incur significant legal, accounting and other expenses that we did not incur prior to this offering. In addition, the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC and the NYSE, require publicly traded entities to adopt various corporate governance practices that will further increase our costs. Before we are able to make distributions to our unitholders, we must first pay or reserve cash for our expenses, including the costs of being a publicly traded partnership. As a result, the amount of cash we have available for distribution to our unitholders will be affected by the costs associated with being a public company.

 

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Prior to this offering, we have not filed reports with the SEC. Following this offering, we will become subject to the public reporting requirements of the Exchange Act. We expect these rules and regulations to increase certain of our legal and financial compliance costs and to make activities more time-consuming and costly. For example, as a result of becoming a publicly traded partnership, we are required to have at least three independent directors, create an audit committee and adopt policies regarding internal controls and disclosure controls and procedures, including the preparation of reports on internal controls over financial reporting. In addition, we will incur additional costs associated with our SEC reporting requirements.

We also expect to incur significant expense in order to obtain director and officer liability insurance. Because of the limitations in coverage for directors, it may be more difficult for us to attract and retain qualified persons to serve on our board or as executive officers.

We estimate that we will incur approximately $3.0 million of incremental external costs per year and additional internal costs associated with being a publicly traded partnership; however, it is possible that our actual incremental costs of being a publicly traded partnership will be higher than we currently estimate.

Tax Risks to Common Unitholders

In addition to reading the following risk factors, please read “Material Federal Income Tax Consequences” for a more complete discussion of the expected material federal income tax consequences of owning and disposing of common units.

Our tax treatment depends on our status as a partnership for federal income tax purposes. If the IRS were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, then our cash available for distribution to our unitholders would be substantially reduced.

The anticipated after-tax economic benefit of an investment in the common units depends largely on our being treated as a partnership for federal income tax purposes. We have not requested a ruling from the IRS on this or any other tax matter affecting us.

Despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. A change in our business or a change in current law could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.

If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35.0%, and would likely pay state and local income tax at varying rates. Distributions would generally be taxed again as corporate dividends (to the extent of our current and accumulated earnings and profits), and no income, gains, losses, deductions, or credits would flow through to you. Because a tax would be imposed upon us as a corporation, our cash available for distribution to you would be substantially reduced. Therefore, if we were treated as a corporation for federal income tax purposes, there would be a material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units.

Our partnership agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state or local income tax purposes, the minimum quarterly distribution amount and the target distribution levels may be adjusted to reflect the impact of that law on us.

If we were subjected to a material amount of additional entity-level taxation by individual states, it would reduce our cash available for distribution to our unitholders.

Changes in current state law may subject us to additional entity-level taxation by individual states. Because of widespread state budget deficits and other reasons, several states are evaluating ways to subject

 

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partnerships to entity-level taxation through the imposition of state income, franchise and other forms of taxation. Imposition of any such taxes may substantially reduce the cash available for distribution to you. Our partnership agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to entity-level taxation, the minimum quarterly distribution amount and the target distribution levels may be adjusted to reflect the impact of that law on us.

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

The present federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time. For example, from time to time, members of Congress propose and consider substantive changes to the existing federal income tax laws that affect publicly traded partnerships. Any modification to the federal income tax laws and interpretations thereof may or may not be retroactively applied and could make it more difficult or impossible to meet the exception for us to be treated as a partnership for federal income tax purposes. Please read “Material Federal Income Tax Consequences—Partnership Status.” We are unable to predict whether any such changes will ultimately be enacted. However, it is possible that a change in law could affect us, and any such changes could negatively impact the value of an investment in our common units.

Our unitholders’ share of our income will be taxable to them for federal income tax purposes even if they do not receive any cash distributions from us.

Because a unitholder will be treated as a partner to whom we will allocate taxable income that could be different in amount than the cash we distribute, a unitholder’s allocable share of our taxable income will be taxable to it, which may require the payment of federal income taxes and, in some cases, state and local income taxes, on its share of our taxable income even if it receives no cash distributions from us. Our unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from that income.

If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the cost of any IRS contest will reduce our cash available for distribution to our unitholders.

We have not requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes. The IRS may adopt positions that differ from the conclusions of our counsel expressed in this prospectus or from the positions we take, and the IRS’s positions may ultimately be sustained. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s conclusions or the positions we take and such positions may not ultimately be sustained. A court may not agree with some or all of our counsel’s conclusions or the positions we take. Any contest with the IRS, and the outcome of any IRS contest, may have a materially adverse impact on the market for our common units and the price at which they trade. In addition, our costs of any contest with the IRS will be borne indirectly by our unitholders and our general partner because the costs will reduce our cash available for distribution.

Tax gain or loss on the disposition of our common units could be more or less than expected.

If our unitholders sell common units, they will recognize a gain or loss for federal income tax purposes equal to the difference between the amount realized and their tax basis in those common units. Because distributions in excess of their allocable share of our net taxable income decrease their tax basis in their common units, the amount, if any, of such prior excess distributions with respect to the common units a unitholder sells will, in effect, become taxable income to the unitholder if it sells such common units at a price greater than its tax basis in those common units, even if the price received is less than its original cost. Furthermore, a substantial

 

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portion of the amount realized on any sale of your common units, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, a unitholder that sells common units, may incur a tax liability in excess of the amount of cash received from the sale. Please read “Material Federal Income Tax Consequences—Disposition of Common Units—Recognition of Gain or Loss” for a further discussion of the foregoing.

Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.

Investment in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (known as IRAs), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file federal income tax returns and pay tax on their share of our taxable income. If you are a tax-exempt entity or a non-U.S. person, you should consult a tax advisor before investing in our common units.

We will treat each purchaser of common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.

Because we cannot match transferors and transferees of common units and because of other reasons, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. Latham & Watkins LLP is unable to opine as to the validity of such filing positions. It also could affect the timing of these tax benefits or the amount of gain from your sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns. Please read “Material Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Section 754 Election” for a further discussion of the effect of the depreciation and amortization positions we will adopt.

We prorate our items of income, gain, loss and deduction for federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.

We will prorate our items of income, gain, loss and deduction for federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The use of this proration method may not be permitted under existing Treasury Regulations, and, accordingly, our counsel is unable to opine as to the validity of this method. Recently, however, the U.S. Treasury Department issued proposed regulations that provide a safe harbor pursuant to which publicly traded partnerships may use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders. Nonetheless, the proposed regulations do not specifically authorize the use of the proration method we will adopt. If the IRS were to challenge this method or new Treasury regulations were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders. Latham & Watkins LLP has not rendered an opinion with respect to whether our monthly convention for allocating taxable income and losses is permitted by existing Treasury Regulations. Please read “Material Federal Income Tax Consequences—Disposition of Common Units—Allocations Between Transferors and Transferees.”

 

 

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A unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of those common units. If so, he would no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan and may recognize gain or loss from the disposition.

Because a unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of the loaned common units, he may no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those common units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those common units could be fully taxable as ordinary income. Latham & Watkins LLP has not rendered an opinion regarding the treatment of a unitholder where common units are loaned to a short seller to effect a short sale of common units; therefore, our unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller are urged to consult a tax advisor to discuss whether it is advisable to modify any applicable brokerage account agreements to prohibit their brokers from loaning their common units.

We will adopt certain valuation methodologies and monthly conventions for federal income tax purposes that may result in a shift of income, gain, loss and deduction between our general partner and our unitholders. The IRS may challenge this treatment, which could adversely affect the value of the common units.

When we issue additional units or engage in certain other transactions, we will determine the fair market value of our assets and allocate any unrealized gain or loss attributable to our assets to the capital accounts of our unitholders and our general partner. Our methodology may be viewed as understating the value of our assets. In that case, there may be a shift of income, gain, loss and deduction between certain unitholders and our general partner, which may be unfavorable to such unitholders. Moreover, under our valuation methods, subsequent purchasers of common units may have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to our tangible assets and a lesser portion allocated to our intangible assets. The IRS may challenge our valuation methods, or our allocation of the Section 743(b) adjustment attributable to our tangible and intangible assets, and allocations of taxable income, gain, loss and deduction between our general partner and certain of our unitholders.

A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount of taxable gain from our unitholders’ sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.

The sale or exchange of 50.0% or more of our capital and profits interests during any 12-month period will result in the termination of our partnership for federal income tax purposes.

We will be considered to have technically terminated our partnership for federal income tax purposes if there is a sale or exchange of 50.0% or more of the total interests in our capital and profits within a 12-month period. For purposes of determining whether the 50.0% threshold has been met, multiple sales of the same interest will be counted only once. Our technical termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns (and our unitholders could receive two Schedules K-1 if relief was not available, as described below) for one fiscal year and could result in a deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. Our termination currently would not affect our classification as a partnership for federal income tax purposes, but instead we would be treated as a new partnership for federal income tax purposes. If treated as a new partnership, we must make new tax elections, including a new election under Section 754 of the

 

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Internal Revenue Code, and could be subject to penalties if we are unable to determine that a termination occurred. The IRS has recently announced a publicly traded partnership technical termination relief program whereby, if a publicly traded partnership that technically terminated requests publicly traded partnership technical termination relief and such relief is granted by the IRS, among other things, the partnership will only have to provide one Schedule K-1 to unitholders for the year notwithstanding two partnership tax years. Please read “Material Federal Income Tax Consequences—Disposition of Common Units—Constructive Termination” for a discussion of the consequences of our termination for federal income tax purposes.

As a result of investing in our common units, you may become subject to state and local taxes and return filing requirements in jurisdictions where we operate or own or acquire properties.

In addition to federal income taxes, our unitholders will likely be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or control property now or in the future, even if they do not live in any of those jurisdictions. Our unitholders will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, our unitholders may be subject to penalties for failure to comply with those requirements. We initially expect to conduct business in Arkansas, Florida, Illinois, Louisiana, Maryland, Missouri, New Jersey, New York, Tennessee, Texas, Virginia and West Virginia. Several of these states currently impose a personal income tax on individuals. As we make acquisitions or expand our business, we may control assets or conduct business in additional states that impose a personal income tax. It is your responsibility to file all federal, state and local tax returns. Our counsel has not rendered an opinion on the state or local tax consequences of an investment in our common units. Please consult your tax advisor.

 

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USE OF PROCEEDS

We expect to receive net proceeds of approximately $70.0 million from the sale of 3,871,750 common units offered by us in this offering, based on an assumed initial public offering price of $20.00 per common unit, after deducting underwriting discounts, structuring fee and estimated offering expenses. The net proceeds to us reflect that we are paying the estimated offering expenses attributable to all the common units that we and the selling unitholder are selling to the public. We intend to use these proceeds as follows:

 

   

pay transaction expenses related to our new revolving credit facility in the amount of approximately $1.6 million;

 

   

distribute to the selling unitholder approximately $29.9 million, the majority of which is to reimburse the selling unitholder for costs related to the acquisition or improvement of assets that the selling unitholder will contribute to us;

 

   

repay indebtedness owed to a commercial bank under a term loan of approximately $8.1 million;

 

   

repay indebtedness owed to a related party of approximately $14.1 million;

 

   

repay existing payables of approximately $4.3 million; and

 

   

provide us working capital of approximately $12.0 million.

We will not receive any proceeds from the sale of common units by the selling unitholder in this offering.

Immediately following the repayment of the outstanding balance of our existing indebtedness with the net proceeds of this offering, we will enter into a new revolving credit facility. We do not expect to borrow under the revolving credit facility or to have any other debt at the closing of this offering.

As of May 31, 2013, we had approximately $8.1 million of debt outstanding under our existing term loan. Borrowings under our existing term loan bear interest at 0.77% over the one-month LIBOR rate and are due on October 8, 2013. Our outstanding indebtedness was incurred primarily to provide funds for acquisitions and for general corporate purposes.

The net proceeds from any exercise by the underwriters of their option to purchase additional common units will be used to redeem from our parent a number of common units equal to the number of common units issued upon exercise of the option at a price per common unit equal to the net proceeds per common unit in this offering before expenses but after deducting underwriting discounts and the structuring fee. Accordingly, any exercise of the underwriters’ option will not affect the total number of units outstanding or the amount of cash needed to pay the minimum quarterly distribution on all units. Please read “Underwriting.”

An increase or decrease in the initial public offering price of $1.00 per common unit would cause the net proceeds to us from the offering, after deducting underwriting discounts, the structuring fee and offering expenses, to increase or decrease by $3.6 million, based on an assumed initial public offering price of $20.00 per common unit. In addition, we may also increase or decrease the number of common units we are offering. Each increase of 0.7 million common units offered by us, together with a concurrent $1.00 increase in the assumed public offering price to $21.00 per common unit, would increase net proceeds to us from this offering by approximately $17.4 million. Similarly, each decrease of 0.7 million common units offered by us, together with a concurrent $1.00 decrease in the assumed initial offering price to $19.00 per common unit, would decrease the net proceeds to us from this offering by approximately $16.1 million. If the proceeds increase or decrease due to a change in offering price or offering size, then the cash distribution to our parent from the proceeds of this offering will increase or decrease, as applicable, by a corresponding amount. These net proceeds will be paid to our parent in partial consideration of its contribution of assets to us.

 

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CAPITALIZATION

The following table shows:

 

   

the historical cash and cash equivalents and capitalization of our Predecessor as of March 31, 2013; and

 

   

our pro forma capitalization as of March 31, 2013, giving effect to the pro forma adjustments described in our unaudited pro forma consolidated financial data included elsewhere in this prospectus, including this offering and the application of the net proceeds of this offering in the manner described under “Use of Proceeds” and the other transactions described under “Summary—Partnership Structure and Offering-Related Transactions.”

This table is derived from, should be read together with and is qualified in its entirety by reference to the historical consolidated financial statements and the accompanying notes and the pro forma consolidated financial data and accompanying notes included elsewhere in this prospectus.

 

     As of March 31, 2013  
     Historical      Pro Forma  
     (In thousands)  

Cash and cash equivalents

   $ 13,223       $ 12,000   
  

 

 

    

 

 

 

Debt:

     

Term Loan

   $ 8,098         —     
  

 

 

    

 

 

 

Total long-term debt (including current maturities)

   $ 8,098         —     
  

 

 

    

 

 

 

Shareholder’s equity/Partners’ equity

     

Shareholder’s equity

   $ 125,012       $ —     

Limited partners:

     

Common units—public

     —           63,675   

Common units—our parent and selling unitholder (1)

     —           29,770   

Subordinated units—selling unitholder

     —           63,443   

General partner

     —           —     
  

 

 

    

 

 

 

Total shareholder’s/partners’ capital

   $ 125,012       $ 156,888   
  

 

 

    

 

 

 

Total capitalization

   $ 133,110       $ 156,888   
  

 

 

    

 

 

 

 

(1) We will convert the limited partner interest held by our parent into common units and subordinated units, representing an aggregate 73.5% limited partner interest in us. A portion of the common units and all of the subordinated units will be owned indirectly by our parent through its ownership of the selling unitholder.

 

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DILUTION

Dilution is the amount by which the offering price per common unit in this offering will exceed the pro forma net tangible book value per unit after the offering. On a pro forma basis as of March 31, 2013, after giving effect to the offering of common units and the related transactions, our net tangible book value was approximately $156.5 million, or $4.75 per unit. Purchasers of common units in this offering will experience substantial and immediate dilution in pro forma net tangible book value per common unit for financial accounting purposes, as illustrated in the following table.

 

Assumed initial public offering price per common unit

     $ 20.00   

Pro forma net tangible book value per unit before the offering (1)

   $ 5.94     

Decrease in net tangible book value per unit attributable to purchasers in the offering

     (1.19  
  

 

 

   

Less: Pro forma net tangible book value per unit after the offering (2)

       4.75   
    

 

 

 

Immediate dilution in net tangible book value per common unit to purchasers in the offering (3)(4)

     $ 15.25   
    

 

 

 

 

(1) Determined by dividing the number of units (7,735,507 common units and 16,485,507 subordinated units) to be issued to our parent and its affiliates for their contribution of assets and liabilities to us into the pro forma net tangible book value of the contributed assets and liabilities.

 

(2) Determined by dividing the number of units to be outstanding after this offering (16,485,507 total common units and 16,485,507 subordinated units) and the application of the related net proceeds into our pro forma net tangible book value, after giving effect to the application of the net proceeds of this offering.

 

(3) If the initial public offering price were to increase or decrease by $1.00 per common unit, then dilution in net tangible book value per common unit would equal $16.25 and $14.25, respectively.

 

(4) Because the total number of units outstanding following this offering will not be impacted by any exercise of the underwriters’ option to purchase additional common units and any net proceeds from such exercise will not be retained by us, there will be no change to the dilution in net tangible book value per common unit to purchasers in this offering due to any such exercise of the option.

The following table sets forth the number of units that we will issue and the total consideration contributed to us by our parent and its affiliates in respect of their units and by the purchasers of common units in this offering upon consummation of the transactions contemplated by this prospectus.

 

     Units Acquired     Total
Consideration
 
      Number      %     Amount      %  
                  (In thousands)         

Our parent and its affiliates (1)(2)(3)

     24,221,014         73.5   $ 93,213         34.8

Purchasers in this offering

     8,750,000         26.5   $ 175,000         65.2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     32,971,014         100.0   $ 268,213         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Upon the consummation of the transactions contemplated by this prospectus, our parent and its affiliates will own 7,735,507 common units and 16,485,507 subordinated units.

 

(2) Assumes the underwriters’ option to purchase additional common units is not exercised.

 

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(3) The assets contributed by our parent and its affiliates were recorded at historical cost in accordance with accounting principles generally accepted in the United States. Book value of the consideration provided by our parent and its affiliates, as of March 31, 2013, after giving effect to the application of the net proceeds of the offering, is as follows:

 

     (In thousands)  

Book value of net assets contributed

   $ 116,777   

Less:

  

Distribution to the selling unitholder, in part to satisfy its right to a reimbursement of capital expenditures made with respect to the contributed assets

     (23,564
  

 

 

 

Total consideration

   $ 93,213   
  

 

 

 

 

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CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

The following discussion of our cash distribution policy should be read in conjunction with the specific assumptions included in this section. In addition, “Forward-Looking Statements” and “Risk Factors” should be read for information regarding statements that do not relate strictly to historical or current facts and regarding certain risks inherent in our business.

For additional information regarding our historical and pro forma results of operations, please refer to our historical consolidated financial statements and accompanying notes and the pro forma consolidated financial data and accompanying notes included elsewhere in this prospectus.

General

Rationale for Our Cash Distribution Policy

Our partnership agreement requires that we distribute all of our available cash quarterly. This requirement forms the basis of our cash distribution policy and reflects a basic judgment that our unitholders will be better served by our distributing our available cash rather than retaining it, because, among other reasons, we believe we will generally finance any expansion capital expenditures from external financing sources. Under our current cash distribution policy, we intend to make a minimum quarterly distribution to the holders of our common units and subordinated units of $0.30 per unit, or $1.20 per unit on an annualized basis, to the extent we have sufficient cash from our operations after the establishment of cash reserves and the payment of costs and expenses, including the payment of expenses to our general partner. However, we have no legal obligation to make quarterly cash distributions in this or any other amount, and our general partner has considerable discretion to determine the amount of our available cash each quarter. In addition, our general partner may change our cash distribution policy at any time, subject to the requirement in our partnership agreement to distribute all of our available cash quarterly. Generally, our available cash is our (i) cash on hand at the end of a quarter after the payment of our expenses and the establishment of cash reserves and (ii) cash on hand resulting from working capital borrowings made after the end of the quarter. Because we are not subject to an entity-level federal income tax, we expect to have more cash to distribute than would be the case if we were subject to federal income tax. If we do not generate sufficient available cash from operations, we may, but are under no obligation to, borrow funds to pay the minimum quarterly distribution to our unitholders.

Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy

Although our partnership agreement requires that we distribute all of our available cash quarterly, there is no guarantee that we will make quarterly cash distributions to our unitholders at our minimum quarterly distribution rate or at any other rate, and we have no legal obligation to do so. Our current cash distribution policy is subject to certain restrictions, as well as the considerable discretion of our general partner in determining the amount of our available cash each quarter. The following factors will affect our ability to make cash distributions, as well as the amount of any cash distributions we make:

 

   

Our cash distribution policy may be subject to restrictions on distributions under our revolving credit facility or other debt agreements entered into in the future. Our revolving credit facility will contain financial tests and covenants that we must satisfy. These financial tests and covenants are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—New Revolving Credit Facility.” If we are unable to satisfy these financial tests and covenants or if we are otherwise in default under our revolving credit facility, we will be prohibited from making cash distributions to you notwithstanding our stated cash distribution policy.

 

   

The amount of cash that we distribute and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement. Specifically,

 

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our general partner will have the authority to establish cash reserves for the proper conduct of our business and for future cash distributions to our unitholders, and the establishment of or increase in those reserves could result in a reduction in cash distributions from levels we currently anticipate pursuant to our stated cash distribution policy. Any decision to establish cash reserves made by our general partner in good faith will be binding on our unitholders.

 

   

While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including the provisions requiring us to make cash distributions contained therein, may be amended. Our partnership agreement generally may not be amended during the subordination period without the approval of our public common unitholders other than in certain limited circumstances where no unitholder approval is required. However, our partnership agreement can be amended with the consent of our general partner and the approval of a majority of the outstanding common units (including common units held by our general partner and its affiliates) after the subordination period has ended. Our parent owns our general partner. At the closing of this offering, assuming no exercise of the underwriters’ option to purchase additional common units, our parent will own approximately 46.9% of our outstanding common units and 100% of our outstanding subordinated units, including subordinated units held indirectly through the selling unitholder.

 

   

Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, or the Delaware Act, we may not make a distribution if the distribution would cause our liabilities to exceed the fair value of our assets.

 

   

We may lack sufficient cash to pay distributions to our unitholders due to cash flow shortfalls attributable to a number of operational, commercial or other factors as well as increases in our operating or general and administrative expenses, principal and interest payments on our debt, tax expenses, working capital requirements and anticipated cash needs. Our cash available for distribution to unitholders is directly impacted by our cash expenses necessary to run our business and will be reduced dollar-for-dollar to the extent such uses of cash increase. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Distributions of Available Cash.”

 

   

Our ability to make distributions to our unitholders depends on the performance of our subsidiaries and their ability to distribute cash to us. The ability of our subsidiaries to make distributions to us may be restricted by, among other things, the provisions of any existing and future indebtedness, applicable state partnership and limited liability company laws and other laws and regulations.

 

   

If and to the extent our available cash materially declines from quarter to quarter, we may elect to change our current cash distribution policy and reduce the amount of our quarterly distributions in order to service or repay our debt or fund expansion capital expenditures.

To the extent that our general partner determines not to distribute the full minimum quarterly distribution with respect to any quarter during the subordination period, the common units will accrue an arrearage equal to the difference between the minimum quarterly distribution and the amount of the distribution actually paid with respect to that quarter. The aggregate amount of any such arrearages must be paid on the common units before any distributions of available cash from operating surplus may be made on the subordinated units and before any subordinated units may convert into common units. Any shortfall in the payment of the minimum quarterly distribution with respect to any quarter during the subordination period may decrease the likelihood that our quarterly distribution rate would increase in subsequent quarters. Please read “Provisions of our Partnership Agreement Relating to Cash Distributions—Subordinated Units and Subordination Period.”

 

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Our Ability to Grow is Dependent on Our Ability to Access External Expansion Capital

Because we will distribute all of our available cash to our unitholders, we expect that we will rely primarily upon external financing sources, including commercial borrowings and the issuance of debt and equity securities, to fund our acquisitions and expansion capital expenditures. We do not have any commitment from our general partner or other affiliates, including our sponsors, to provide any direct or indirect financial assistance to us following the closing of this offering. As a result, to the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow. In addition, because we intend to distribute all of our available cash, our growth may not be as fast as that of businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units and the incremental distributions on the incentive distribution rights may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement, and we do not anticipate there being limitations in our revolving credit facility, on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which in turn may impact the available cash that we have to distribute to our unitholders. In addition, our revolving credit facility will likely contain covenants requiring us to maintain certain financial ratios. Please read “Risk Factors—Risks Inherent in Our Business—Restrictions in our revolving credit facility could adversely affect our business, financial condition, results of operations, ability to make distributions to unitholders and value of our common units.”

Our Minimum Quarterly Distribution

Upon the consummation of this offering, our partnership agreement will provide for a minimum quarterly distribution of $0.30 per unit for each whole quarter, or $1.20 per unit on an annualized basis. Our ability to make cash distributions at the minimum quarterly distribution rate will be subject to the factors described above under “—General—Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy.” Quarterly distributions, if any, will be made within 45 days after the end of each calendar quarter to holders of record on or about the first day of each such month. If the distribution date does not fall on a business day, we will make the distribution on the first business day immediately preceding the indicated distribution date. We do not expect to make distributions for the period that begins on July 1, 2013 and ends on the day prior to the closing of this offering other than the distribution to be made to our parent in connection with the closing of this offering as described in “Summary—Partnership Structure and Offering-Related Transactions” and “Use of Proceeds.” We will adjust the amount of our first distribution for the period from the closing of this offering through September 30, 2013 based on the actual length of the period. The amount of available cash needed to pay the minimum quarterly distribution on all of our common units and subordinated units to be outstanding immediately after this offering for one quarter and on an annualized basis is summarized in the table below:

 

    

 

     Minimum Quarterly Distributions  
     Number of Units      One Quarter      Annualized  
            (In millions)  

Publicly held common units (1)

     8,750,000       $ 2.63       $ 10.50   

Common units held by our parent (1)

     1,312,500         0.39         1.58   

Common units held by the selling unitholder

     6,423,007         1.93         7.71   

Subordinated units held by the selling unitholder

     16,485,507         4.95         19.78   
  

 

 

    

 

 

    

 

 

 

Total

     32,971,014       $ 9.90       $ 39.57   
  

 

 

    

 

 

    

 

 

 

 

(1) Assumes that the underwriters’ option to purchase additional common units is not exercised. Please read “Summary—Partnership Structure and Offering-Related Transactions” for a description of the impact of an exercise of the option on the common unit ownership percentages.

 

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Our sponsors will also hold the incentive distribution rights, which entitle the holders to increasing percentages, up to an aggregate maximum of 50.0%, of the cash we distribute in excess of $0.345 per unit per quarter.

During the subordination period, before we make any quarterly distributions to our subordinated unitholders, our common unitholders are entitled to receive payment of the full minimum quarterly distribution for such quarter plus any arrearages in distributions of the minimum quarterly distribution from prior quarters. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordinated Units and Subordination Period.” We cannot guarantee, however, that we will pay the minimum quarterly distribution on our common units in any quarter.

Although holders of our common units may pursue judicial action to enforce provisions of our partnership agreement, including those related to requirements to make cash distributions as described above, our partnership agreement provides that any determination made by our general partner in its capacity as our general partner must be made in good faith and that any such determination will not be subject to any other standard imposed by the Delaware Act or any other law, rule or regulation or at equity. Our partnership agreement provides that, in order for a determination by our general partner to be made in “good faith,” our general partner must believe that the determination is not adverse to the best interests of our partnership. Please read “Conflicts of Interest and Duties.”

The provision in our partnership agreement requiring us to distribute all of our available cash quarterly may not be modified without amending our partnership agreement; however, as described above, the actual amount of our cash distributions for any quarter is subject to fluctuations based on the amount of cash we generate from our business, the amount of reserves our general partner establishes in accordance with our partnership agreement and the amount of available cash from working capital borrowings.

Additionally, our general partner may reduce the minimum quarterly distribution and the target distribution levels if legislation is enacted or modified that results in our becoming taxable as a corporation or otherwise subject to taxation as an entity for federal, state or local income tax purposes. In such an event, the minimum quarterly distribution and the target distribution levels may be reduced proportionately by the percentage decrease in our available cash resulting from the estimated tax liability we would incur in the quarter in which such legislation or interpretation is effective. The minimum quarterly distribution will also be proportionately adjusted in the event of any distribution, combination or subdivision of common units in accordance with the partnership agreement, or in the event of a distribution of available cash from capital surplus. Please read “Provisions of our Partnership Agreement Relating to Cash Distributions—Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels.” The minimum quarterly distribution will also automatically be adjusted in connection with the resetting of the target distribution levels related to our sponsors’ incentive distribution rights. In connection with any such reset, the minimum quarterly distribution will be reset to an amount equal to the average cash distribution amount per common unit for the two quarters immediately preceding the reset. Please read “Provisions of our Partnership Agreement Relating to Cash Distributions—Right to Reset Incentive Distribution Levels.”

In the sections that follow, we present in detail the basis for our belief that we will be able to fully fund our annualized minimum quarterly distribution of $1.20 per unit for the twelve months ending June 30, 2014.

In those sections, we present two tables, consisting of:

 

   

“Unaudited Pro Forma Cash Available for Distribution for the Year Ended December 31, 2012 and the Twelve Months Ended March 31, 2013,” in which we present the amount of cash we would have had available for distribution on a pro forma basis for the year ended December 31, 2012 and twelve months ended March 31, 2013, derived from our unaudited pro forma financial data that are included in this prospectus, as adjusted to give pro forma effect to this offering and the related formation transactions; and

 

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“Estimated Cash Available for Distribution for the Twelve Months Ending June 30, 2014,” in which we provide our estimated forecast of our ability to generate sufficient cash available for distribution for us to pay the minimum quarterly distribution on all units for the twelve months ending June 30, 2014.

Unaudited Pro Forma Cash Available for Distribution for the Year Ended December 31, 2012 and the Twelve Months Ended March 31, 2013

If we had completed the transactions contemplated in this prospectus on January 1, 2012, our unaudited pro forma cash available for distribution would have been approximately $39.8 million for the year ended December 31, 2012. This amount would have been sufficient to pay 100% of the aggregate minimum quarterly distribution on our common and subordinated units during that period.

If we had completed the transactions contemplated in this prospectus on April 1, 2012, our unaudited pro forma cash available for distribution would have been approximately $38.7 million for the twelve months ended March 31, 2013. This amount would have been sufficient to pay 100% of the aggregate minimum quarterly distribution on our common units during that period, but only 95.5% of the aggregate minimum quarterly distribution on our subordinated units during that period.

Our unaudited pro forma cash available for distribution for the year ended December 31, 2012 and the twelve months ended March 31, 2013 takes into account $3.0 million of incremental annual selling, general and administrative expenses that we expect to incur as a result of becoming a publicly traded partnership. This amount is an estimate, and our general partner will ultimately determine the actual amount of these incremental annual selling, general and administrative expenses to be reimbursed by us in accordance with our partnership agreement. Incremental annual general and administrative expenses related to being a publicly traded partnership consist of costs associated with SEC reporting requirements, including annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, registered independent auditor fees, investor relations activities, Sarbanes-Oxley compliance, NYSE listing, registrar and transfer agent fees, incremental director and officer liability insurance costs and director compensation. These expenses are not reflected in our historical or pro forma financial statements.

Our estimate of incremental annual general and administrative expenses is based upon currently available information. The adjusted amounts below do not purport to present our results of operations had this offering been completed as of the date indicated. In addition, cash available to pay distributions is primarily a cash accounting concept, while our pro forma financial statements have been prepared on an accrual basis. As a result, you should view the amount of pro forma available cash only as a general indication of the amount of cash available to pay distributions that we might have generated had we completed this offering on the dates indicated.

 

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The following table illustrates, on a pro forma basis, for the year ended December 31, 2012 and the twelve months ended March 31, 2013, the amount of cash that would have been available for distribution to our unitholders, assuming that this offering had been completed at the beginning of such period. Each of the adjustments reflected or presented below is explained in the footnotes to such adjustments.

 

     Year Ended
December 31, 2012
    Twelve Months Ended
March 31, 2013
 
     (In millions)  

Pro Forma Net Income Attributable to Unitholders

   $ 31.4      $ 30.0   
  

 

 

   

 

 

 

Add:

    

Income tax expense

     —          —     

Interest expense, net

     0.6        0.6   

Depreciation and amortization expense

     15.4        15.5   

Depreciation and amortization expense deducted in determining earnings from equity method investment

     0.1        —     

Other, net

     0.5        0.5   
  

 

 

   

 

 

 

Pro Forma Adjusted EBITDA (1)

     48.0        46.6   

Less:

    

Incremental selling, general and administrative expense (2)

     3.0        3.0   

Cash interest paid

     0.6        0.6   

Cash taxes paid

     —          —     

Maintenance capital expenditures (3)

     4.6        4.3   

Expansion capital expenditures (3)

     10.0        9.5   

Add:

    

Cash used to fund expansion capital expenditures (4)

     10.0        9.5   
  

 

 

   

 

 

 

Pro Forma Cash Available for Distribution

     39.8        38.7   
  

 

 

   

 

 

 

Pro Forma Cash Distributions

    

Distributions to public common unitholders

     10.5        10.5   

Distributions to our parent—common units

     1.6        1.6   

Distributions to our selling unitholder—common units

  

 

7.7

  

    7.7   

Distributions to our selling unitholder—subordinated units

     19.8        19.8   
  

 

 

   

 

 

 

Total distributions

     39.6        39.6   
  

 

 

   

 

 

 

Excess (Shortfall)

   $ 0.2      $ (0.9
  

 

 

   

 

 

 

Percent of minimum quarterly distributions payable to common unitholders

     100.0     100.0

Percent of minimum quarterly distributions payable to subordinated unitholders

     100.0     95.5

 

(1) For a definition of Adjusted EBITDA and a reconciliation to its most directly comparable financial measure calculated in accordance with GAAP, please read “Selected Historical and Pro Forma Consolidated Financial and Operating Data—Non-GAAP Financial Measures,” and for a discussion of how we use Adjusted EBITDA to evaluate our operating performance, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of Our Results of Operations.”

 

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(2) Represents incremental annual selling, general and administrative expenses that we expect to incur as a result of becoming a publicly traded partnership.

 

(3) Historically, our predecessor has not made a distinction between maintenance capital expenditures and expansion capital expenditures. Under our partnership agreement, maintenance capital expenditures are capital expenditures made to maintain our long-term operating income or operating capacity, while expansion capital expenditures are capital expenditures that we expect will increase our long-term operating income or our operating capacity. Examples of maintenance capital expenditures are those made to repair, refurbish and replace storage, terminaling and pipeline infrastructure, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations. In contrast, expansion capital expenditures are those made to acquire additional assets to grow our business, such as additional storage, terminaling or pipeline capacity.

 

     For the year ended December 31, 2012, our pro forma capital expenditures totaled $14.6 million, which reflects an adjustment to remove two parcels of unimproved real estate and a portfolio of short-term investments that will not be contributed to us. We estimate that approximately $4.6 million of our pro forma capital expenditures were maintenance capital expenditures and that approximately $10.0 million of our pro forma capital expenditures were expansion capital expenditures. Expansion capital expenditures for the year ended December 31, 2012 consisted of $4.9 million for the renovations to the Weirton terminal to support crude oil gathering operations, $3.8 million for the construction of new tanks at the Galveston terminal and $1.3 million for the purchase of adjacent land at the St. Louis and Weirton terminals.

 

     For the twelve months ended March 31, 2013, our pro forma capital expenditures totaled $13.8 million. We estimate that approximately $4.3 million of our pro forma capital expenditures were maintenance capital expenditures and that approximately $9.5 million of our pro forma capital expenditures were expansion capital expenditures. Expansion capital expenditures for the twelve months ended March 31, 2013 consisted of $5.5 million for renovations to the Weirton terminal to support crude oil gathering operations, $2.7 million for the construction of new tanks at the Galveston terminal and $1.3 million for the purchase of adjacent land at the St. Louis and Weirton terminals.

 

(4) We have assumed for purposes of calculating our pro forma available cash that we funded our expansion capital expenditures during the year ended December 31, 2012 and the twelve months ended March 31, 2013 with cash from operations. We expect that in the future, our expansion capital expenditures will primarily be funded through external financing sources, including commercial borrowings and the issuance of debt and equity securities.

Estimated Cash Available for Distribution for the Twelve Months Ending June 30, 2014

We forecast that our cash available for distribution generated during the twelve months ending June 30, 2014 will be approximately $45.5 million. This amount would exceed by $5.9 million the amount needed to pay the total annualized minimum quarterly distribution of $39.6 million on all of our common and subordinated units for the twelve months ending June 30, 2014.

We do not, as a matter of course, make public projections as to future revenues, earnings or other results. However, management has prepared the forecast of estimated cash available for distribution and related assumptions and considerations set forth below to substantiate our belief that we will have sufficient cash available for distribution to allow us to pay the total annualized minimum quarterly distribution on all of our outstanding common and subordinated units for the twelve months ending June 30, 2014. This forecast is a forward-looking statement and should be read together with our historical consolidated financial statements and the accompanying notes, and our Predecessor’s historical consolidated financial statements and the accompanying notes included elsewhere in this prospectus, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The accompanying prospective financial information was not

 

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prepared with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of our management, is substantially consistent with those guidelines and was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of management’s knowledge and belief, the assumptions on which we base our belief that we can generate the minimum estimated cash available for distribution necessary to pay the total annualized minimum quarterly distribution on all of our outstanding common and subordinated units for the twelve months ending June 30, 2014. However, this information is not fact and should not be relied upon as being necessarily indicative of future results, and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information. Please read below under “—Significant Forecast Assumptions” for further information as to the assumptions we have made for the financial forecast.

The prospective financial information included in this prospectus has been prepared by, and is the responsibility of, our management. Neither our independent registered public accounting firm nor any other independent accountants have compiled, examined, or performed any procedures with respect to the prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability. They therefore assume no responsibility for, and disclaim any association with, the prospective financial information. The reports of our independent registered public accounting firm included in this prospectus relate to our and our Predecessor’s historical financial information, and those reports do not extend to the prospective financial information and should not be read to do so.

When considering our financial forecast, you should keep in mind the risk factors and other cautionary statements under “Risk Factors.” Any of the risks discussed in this prospectus, to the extent they are realized, could cause our actual results of operations to vary significantly from those that would enable us to generate the minimum estimated cash available for distribution necessary to pay the total annualized minimum quarterly distribution on all of our outstanding common and subordinated units for the twelve months ending June 30, 2014.

We do not undertake any obligation to release publicly the results of any future revisions we may make to the financial forecast or to update this financial forecast to reflect events or circumstances after the date of this prospectus. Therefore, the statement that we believe that we will have sufficient cash available for distribution to allow us to pay the total annualized minimum quarterly distribution on all of our outstanding common and subordinated units for the twelve months ending June 30, 2014 should not be regarded as a representation by us, the underwriters or any other person that we will make such distributions. Therefore, you are cautioned not to place undue reliance on this information.

 

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    Quarter Ending(1)     Twelve
Months
Ending
June 30,
2014
 
    September 30,
2013
    December 31,
2013
    March 31,
2014
    June 30,
2014
   
   

(In millions)

 

Revenues

         

Base storage services fees

  $ 17.2      $ 17.4      $ 17.3      $ 17.3      $ 69.2   

Excess storage fees

    0.4        0.4        0.4        0.4        1.6   

Ancillary services fees

   
2.1
  
   
2.1
  
   
2.1
  
   
2.1
  
    8.4   

Additive services fees

   
0.9
  
   
0.9
  
   
0.9
  
   
0.9
  
    3.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

   
20.6
  
   
20.8
  
   
20.7
  
   
20.7
  
    82.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Expenses

         

Operating costs and expenses

   
6.1
  
   
6.1
  
   
5.9
  
   
5.9
  
    24.1   

Selling, general and administrative

   
1.4
  
   
1.4
  
   
1.4
  
   
1.4
  
    5.6   

Depreciation and amortization expense

   
4.1
  
   
4.1
  
   
4.1
  
   
4.1
  
    16.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Expenses

   
11.6
  
   
11.6
  
   
11.4
  
   
11.4
  
    46.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

   
9.0
  
   
9.2
  
   
9.3
  
   
9.3
  
    36.7   

Interest expense

   
(0.2

   
(0.2

   
(0.2

   
(0.2

    (0.8

Earnings from equity method

   
0.1
  
   
0.1
  
   
0.1
  
   
0.1
  
    0.3   

Taxes

   
—  
  
   
—  
  
   
—  
  
   
—  
  
    —     

Net Income

   
8.9
  
   
9.1
  
   
9.2
  
   
9.2
  
    36.2   

Adjustments to reconcile net income to estimated Adjusted EBITDA

         

Add:

         

Depreciation and amortization expense

   
4.1
  
   
4.1
  
   
4.1
  
   
4.1
  
    16.4   

Interest expense

   
0.2
  
   
0.2
  
   
0.2
  
   
0.2
  
    0.8   

Depreciation and amortization expense deducted in determining earnings from equity method investment

   
0.1
  
   
0.1
  
   
0.1
  
   
0.1
  
    0.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated Adjusted EBITDA (2)

   
13.3
  
   
13.5
  
   
13.6
  
   
13.6
  
    53.7   

Adjustments to reconcile estimated Adjusted EBITDA to estimated cash available for distribution

         

Less:

         

Cash interest expense

   
0.2
  
   
0.2
  
   
0.2
  
   
0.2
  
    0.6   

Cash tax expense

   
—  
  
    —         
—  
  
   
—  
  
    0.1   

Maintenance capital expenditures

   
1.9
  
   
1.9
  
   
1.9
  
   
1.9
  
    7.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated Cash Available for Distribution

  $ 11.2      $ 11.4      $ 11.5      $ 11.5      $ 45.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributions to public common unitholders

  $ 2.63      $ 2.63      $ 2.63      $ 2.63      $ 10.50   

Distributions to our parent—common units

   
0.39
  
   
0.39
  
   
0.39
  
   
0.39
  
    1.58   

Distributions to our selling unitholder—common units

    1.93        1.93        1.93        1.93        7.71   

Distributions to our selling unitholder—subordinated units

   
4.95
  
    4.95       
4.95
  
   
4.95
  
    19.78   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total distributions

  $ 9.90      $ 9.90      $ 9.90      $ 9.90      $ 39.60   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess of cash available for distribution over aggregate annualized minimum cash distributions

  $ 1.3      $ 1.5      $ 1.6      $ 1.6      $ 5.9   

Calculation of minimum estimated Adjusted EBITDA necessary to pay aggregate annualized minimum annual cash distributions:

         

Estimated Adjusted EBITDA

  $ 13.3      $ 13.5      $ 13.6      $ 13.6      $ 53.7   

Minimum estimated Adjusted EBITDA necessary to pay aggregate annualized minimum quarterly distributions

  $ 12.0      $ 12.0      $ 12.0      $ 12.0      $ 47.8   

 

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(1) The sum of forecast amounts for the four quarters may not equal the twelve month totals due the effects of rounding.
(2) Adjusted EBITDA is defined in “Selected Historical and Pro Forma Financial and Operating Data—Non-GAAP Financial Measures.” For a reconciliation of Adjusted EBITDA to its most directly comparable financial measures calculated and presented in accordance with GAAP, please read “Selected Historical and Pro Forma Consolidated Financial and Operating Data—Non-GAAP Financial Measures.”

Significant Forecast Assumptions

Set forth below are the material assumptions that we have made in order to demonstrate our ability to generate the minimum estimated cash available for distribution to pay the total annualized minimum quarterly distribution to all unitholders for the twelve months ending June 30, 2014. We are unaware of any facts that have occurred from April 1, 2013 through June 30, 2013 that would differ materially from the assumptions set forth below with respect to the twelve month period ending June 30, 2014.

Revenues. We estimate that our total revenues for the twelve months ending June 30, 2014 will be approximately $82.8 million, as compared to approximately $74.1 million pro forma for the year ended December 31, 2012 and $73.9 million pro forma for the twelve months ended March 31, 2013. Our forecasted revenues and operating expenses do not include the results of the Albany terminal, which is operated by a joint venture with Apex. Please read “—Earnings from Equity Method.” Our forecast is based primarily on the following assumptions:

 

   

Storage Services Fees. Our customers pay base storage services fees, which are fixed monthly fees paid at the beginning of each month, to reserve storage capacity in our tanks and to compensate us for receiving up to a base amount of product volume on their behalf. Our customers are required to pay these base storage services fees to us regardless of the actual storage capacity they use or the amount of product that we receive. Our customers also pay us additional fees when we handle product volume on their behalf that exceed the volumes contemplated in their monthly base storage services fee.

We estimate approximately 84%, or $69.2 million, of our forecasted revenue, will be attributable to base storage services fees. This compares to approximately 85%, or approximately $62.6 million, of our total revenues that were attributable to base storage services fees pro forma for the year ended December 31, 2012 and approximately 82%, or approximately $60.6 million, of our total revenues that were attributable to base storage services fees pro forma for the twelve months ended March 31, 2013. The increase in total revenues from base storage services fees is primarily attributable to the acquisition of 1.1 million barrels of available storage capacity at our Jacksonville and Newark terminals and the completion and placement into operation of approximately 0.2 million barrels of available storage capacity at our Galveston terminal. The majority of this additional capacity is supported by long-term contracts with multiple customers. We expect that this new capacity will generate $2.7 million in base storage services fees from Apex and $4.5 million from third parties during the forecast period. In addition, approximately $1.7 million of the increase in total revenues is attributable to contractually agreed increases in the fees under certain customer contracts.

 

   

Our terminaling services agreements with Apex are expected to generate $25.9 million of base storage services fees during the twelve months ending June 30, 2014. This compares to $19.5 million of base storage services fees paid by Apex during the year ended December 31, 2012 and $20.2 million of base storage services fees paid by Apex during the twelve months ended March 31, 2013. The increase in base storage services fees paid by Apex is attributable to 0.9 million barrels of additional contracted storage capacity. The rates we will charge Apex under the agreements are consistent with pricing during the year ended December 31, 2012 and the twelve months ended March 31, 2013.

 

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We estimate approximately 2%, or $1.6 million, of our forecasted revenues will be attributable to excess storage fees. This compares to approximately 2%, or approximately $1.5 million, of our total revenues that were attributable to excess storage fees pro forma for the year ended December 31, 2012 and approximately 2%, or approximately $1.5 million, of our total revenues that were attributable to excess storage fees pro forma for the twelve months ended March 31, 2013. The increase in total revenues derived from excess storage fees is primarily attributable to throughput related to new contracts at facilities we acquired in 2013.

 

   

Ancillary and Additive Services Fees. We receive fees for ancillary services such as (i) heating, mixing and blending our customers’ products, (ii) transferring our customers’ products between our tanks, (iii) at our Granite City terminal, adding polymer to liquid asphalt and (iv) rail car loading and dock operations. We also receive additive services fees for injecting generic gasoline, proprietary gasoline, lubricity, red dye and cold flow additives to our customers’ products. Certain of these additives are mandated by applicable federal, state and local regulations for light refined products and other additives, such as cold flow additive, are required to meet customer specifications for seasonal use of certain products. We estimate that approximately 14%, or approximately $11.9 million of our total revenues for the twelve months ending June 30, 2014 will be attributable to ancillary and additive services fees. This compares to approximately 11%, or approximately $10.0 million of our total revenues, that were attributable to ancillary and additive services fees pro forma for the year ended December 31, 2012 and approximately 16%, or approximately $11.8 million of our total revenues, that were attributable to ancillary and additive services fees pro forma for the twelve months ended March 31, 2013. The increase in total revenues derived from ancillary and additive services fees is primarily attributable to higher expected throughput of products that require ancillary and additive services related to new contracts at facilities we acquired in 2013.

Our forecasted revenues and operating expenses do not include the results of the Albany terminal, which is operated by a joint venture with Apex. Please read “—Earnings from Equity Method.”

Operating Expenses. Operating expenses are primarily comprised of labor expenses, utility costs, insurance premiums, repairs and maintenance expenses, environmental compliance and property taxes. We estimate that our operating expenses will be approximately $24.1 million for the twelve months ending June 30, 2014, as compared to approximately $24.0 million pro forma for the year ended December 31, 2012 and approximately $25.5 million pro forma for the twelve months ended March 31, 2013. This increase in operating expenses compared to the twelve months ended December 31, 2012 is primarily due to the expected inflationary effects on our labor costs. This decrease in operating expenses compared to the twelve months ended March 31, 2013 is primarily due to a reduction in maintenance expenses incurred in the prior period to repair damage caused by storms, as well as the anticipated decrease in the number of tanks scheduled for maintenance, partially offset by expected inflationary effects on our labor costs. We do not expect our operating costs to increase proportionately when we make capacity additions at our existing facilities, because we believe that we will be able to capitalize on our current scale and existing infrastructure to improve operating margins because these expansions do not require significant additions of operating employees.

Selling, General and Administrative. We estimate that selling, general and administrative expenses will be approximately $5.6 million for the twelve months ending June 30, 2014, as compared to approximately $2.7 million pro forma for the year ended December 31, 2012 and approximately $2.8 million pro forma for the twelve months ended March 31, 2013. Selling, general and administrative expenses include costs not directly attributable to the operations of our facilities and include costs such as professional services, compensation of non-operating personnel and expenses of the overall administration of the company. The increase in forecasted selling, general and administrative expenses relate primarily to an estimated $3.0 million of annual incremental expenses that we expect to incur as a result of being a publicly traded partnership.

Depreciation and Amortization. Depreciation and amortization will be approximately $16.4 million for the twelve months ending June 30, 2014 compared to approximately $15.3 million pro forma for the year ended December 31, 2012 and approximately $15.5 million pro forma for the twelve months ended March 31, 2013.

 

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Depreciation and amortization for the twelve months ending June 30, 2014 is expected to increase by $0.9 million related to new tank construction at our Galveston terminal, conversion of our Weirton terminal to handle crude oil in 2012, our acquisition of the 32% interest in the Albany terminal and purchase of the terminal assets in Jacksonville in 2013, partially offset by decreases for property that became fully depreciated during 2012.

Taxes. We expect to incur state and local income taxes of approximately $0.1 million.

Earnings from Equity Method. Earnings from equity method relate to our 32% interest in the Albany terminal, which we acquired in 2013. For the twelve months ending June 30, 2014, we expect these earnings to be approximately $0.3 million. In the calculation of Adjusted EBITDA, we have made an adjustment of $0.3 million, representing our 32% of the forecasted depreciation and amortization expense for the Albany terminal for the twelve months ending June 30, 2014. This amount was a deduction in the calculation of earnings from equity method included in net income.

Financing. We estimate that interest expense will be approximately $0.8 million for the twelve months ending June 30, 2014. We do not expect to incur any borrowings over the twelve months ending June 30, 2014. We expect to enter into a $200 million revolving credit facility, and we expect interest expense to be composed of the following costs:

 

   

$0.6 million for a commitment fee at a rate of 0.30% for the unused portion of our revolving credit facility; and

 

   

the remaining costs for the amortization of debt issuance costs incurred in connection with our revolving credit facility.

Maintenance Capital Expenditures. We estimate that maintenance capital expenditures will be $7.5 million for the twelve months ending June 30, 2014, as compared to $4.6 million for the year ended December 31, 2012 and $4.6 million for the twelve months ended March 31, 2013. Of our estimated capital expenditures, $4.3 million relates to significant tank repairs, including floor and roof replacements, $0.9 million relates to tank and pipeline painting, $0.7 million relates to pipeline repairs and $2.9 million for other capital repairs.

Regulatory, Industry and Economic Factors. The forecast is based on the following assumptions related to regulatory, industry and economic factors:

 

   

There will not be any material nonperformance or credit-related defaults by suppliers, customers or vendors or a shortage of skilled labor.

 

   

All supplies and commodities necessary for production and sufficient transportation will be readily available.

 

   

There will not be any new federal, state or local regulation of the portions of the industry in which we operate or any interpretation of existing regulation that will be materially adverse to our business.

 

   

There will not be any material accidents, releases, weather-related incidents, unscheduled downtime or similar unanticipated events, including any events that could lead to force majeure under any of our terminal services agreements.

 

   

There will not be any major adverse change in the markets in which we operate resulting from supply or production disruptions, reduced demand for our services or significant changes in the market prices for our services.

 

   

There will not be any material changes to market, regulatory and overall economic conditions.

 

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PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

Set forth below is a summary of the significant provisions of our partnership agreement that relate to cash distributions.

Distributions of Available Cash

General

Our partnership agreement requires that, within 45 days after the end of each quarter, beginning with the quarter ending September 30, 2013, we distribute all of our available cash to unitholders of record on the applicable record date. We will adjust the amount of our distribution for the period from the completion of this offering through September 30, 2013 based on the actual length of the period.

Definition of Available Cash

Available cash generally means, for any quarter, all cash and cash equivalents on hand at the end of that quarter:

 

   

less, the amount of cash reserves established by our general partner to:

 

   

provide for the proper conduct of our business (including cash reserves for future capital expenditures and for our anticipated future credit needs);

 

   

comply with applicable law, any of our debt instruments or other agreements; or

 

   

provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters (provided that our general partner may not establish cash reserves for distributions if the effect of the establishment of such reserves will prevent us from distributing the minimum quarterly distribution on all common units and any cumulative arrearages on such common units for the current quarter);

 

   

plus, if our general partner so determines, all or any portion of the cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made subsequent to the end of such quarter.

The purpose and effect of the last bullet point above is to allow our general partner, if it so decides, to use cash from working capital borrowings made after the end of the quarter but on or before the date of determination of available cash for that quarter to pay distributions to unitholders. Under our partnership agreement, working capital borrowings are generally borrowings that are made under a credit facility, commercial paper facility or similar financing arrangement, and in all cases are used solely for working capital purposes or to pay distributions to partners and with the intent of the borrower to repay such borrowings within twelve months with funds other than from additional working capital borrowings.

Intent to Distribute the Minimum Quarterly Distribution

Under our current cash distribution policy, we intend to make a minimum quarterly distribution to the holders of our common units and subordinated units of $0.30 per unit, or $1.20 per unit on an annualized basis, to the extent we have sufficient cash from our operations after the establishment of cash reserves and the payment of costs and expenses, including reimbursements of expenses to our general partner. However, there is no guarantee that we will pay the minimum quarterly distribution on our units in any quarter. The amount of distributions paid under our policy and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement. Please read “Management’s Discussion

 

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and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—New Revolving Credit Facility” for a discussion of the restrictions to be included in our revolving credit facility that may restrict our ability to make distributions.

General Partner Interest and Incentive Distribution Rights

Initially, our general partner will own a 0.0% non-economic general partner interest.

Our sponsors currently hold incentive distribution rights that entitle them to receive increasing percentages, up to an aggregate maximum of 50.0%, of the cash we distribute from operating surplus (as defined below) in excess of $0.345 per unit per quarter. The aggregate maximum distribution of 50.0% does not include any distributions they or their affiliates may receive on common or subordinated units that they own. Please read “—Incentive Distribution Rights” for additional information.

Operating Surplus and Capital Surplus

General

All cash distributed to unitholders will be characterized as either being paid from “operating surplus” or “capital surplus.” We treat distributions of available cash from operating surplus differently than distributions of available cash from capital surplus.

Operating Surplus

We define operating surplus as:

 

   

$30.0 million (as described below); plus

 

   

all of our cash receipts after the closing of this offering, excluding cash from interim capital transactions (as defined below), provided that cash receipts from the termination of a commodity hedge or interest rate hedge prior to its specified termination date shall be included in operating surplus in equal quarterly installments over the remaining scheduled life of such commodity hedge or interest rate hedge; plus

 

   

working capital borrowings made after the end of a quarter but on or before the date of determination of operating surplus for that quarter; plus

 

   

cash distributions (including incremental distributions on incentive distribution rights) paid in respect of equity issued, other than equity issued in this offering, to finance all or a portion of expansion capital expenditures in respect of the period from the date that we enter into a binding obligation to commence the construction, development, replacement, improvement or expansion of a capital asset and ending on the earlier to occur of the date the capital asset commences commercial service and the date that it is abandoned or disposed of; less

 

   

all of our operating expenditures (as defined below) after the closing of this offering; less

 

   

the amount of cash reserves established by our general partner to provide funds for future operating expenditures; less

 

   

all working capital borrowings not repaid within twelve months after having been incurred, or repaid within such 12-month period with the proceeds of additional working capital borrowings.

 

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As described above, operating surplus does not reflect actual cash on hand that is available for distribution to our unitholders and is not limited to cash generated by operations. For example, it includes a provision that will enable us, if we choose, to distribute as operating surplus up to $30.0 million of cash we receive in the future from non-operating sources such as asset sales, issuances of securities and long-term borrowings that would otherwise be distributed as capital surplus. In addition, the effect of including, as described above, certain cash distributions on equity interests in operating surplus will be to increase operating surplus by the amount of any such cash distributions. As a result, we may also distribute as operating surplus up to the amount of any such cash that we receive from non-operating sources.

The proceeds of working capital borrowings increase operating surplus and repayments of working capital borrowings are generally operating expenditures (as described below) and thus reduce operating surplus when repayments are made. However, if working capital borrowings, which increase operating surplus, are not repaid during the 12-month period following the borrowing, they will be deemed repaid at the end of such period, thus decreasing operating surplus at such time. When such working capital borrowings are in fact repaid, they will not be treated as a further reduction in operating surplus because operating surplus will have been previously reduced by the deemed repayment.

We define interim capital transactions as (i) borrowings, refinancings or refundings of indebtedness (other than working capital borrowings and items purchased on open account or for a deferred purchase price in the ordinary course of business) and sales of debt securities, (ii) sales of equity securities, (iii) sales or other dispositions of assets, other than sales or other dispositions of inventory, accounts receivable and other assets in the ordinary course of business and sales or other dispositions of assets as part of normal asset retirements or replacements and (iv) capital contributions received.

We define operating expenditures as all of our cash expenditures, including, but not limited to, taxes, reimbursements of expenses of our general partner and its affiliates, officer, director and employee compensation, debt service payments, payments made in the ordinary course of business under interest rate hedge contracts and commodity hedge contracts (provided that payments made in connection with the termination of any interest rate hedge contract or commodity hedge contract prior to the expiration of its settlement or termination date specified therein will be included in operating expenditures in equal quarterly installments over the remaining scheduled life of such interest rate hedge contract or commodity hedge contract and amounts paid in connection with the initial purchase of a rate hedge contract or a commodity hedge contract will be amortized at the life of such rate hedge contract or commodity hedge contract), maintenance capital expenditures (as discussed in further detail below), and repayment of working capital borrowings; provided, however, that operating expenditures will not include:

 

   

repayments of working capital borrowings where such borrowings have previously been deemed to have been repaid (as described above);

 

   

payments (including prepayments and prepayment penalties) of principal of and premium on indebtedness, other than working capital borrowings;

 

   

expansion capital expenditures;

 

   

payment of transaction expenses (including, but not limited to, taxes) relating to interim capital transactions;

 

   

distributions to our partners; or

 

   

repurchases of partnership interests (excluding repurchases we make to satisfy obligations under employee benefit plans).

 

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Capital Surplus

Capital surplus is defined in our partnership agreement as any distribution of available cash in excess of our operating surplus. Accordingly, except as described above, capital surplus would generally be generated by:

 

   

borrowings other than working capital borrowings;

 

   

sales of our equity and debt securities;

 

   

sales or other dispositions of assets, other than inventory, accounts receivable and other assets sold in the ordinary course of business or as part of ordinary course retirement or replacement of assets; and

 

   

capital contributions received.

Characterization of Cash Distributions

All available cash distributed by us on any date from any source will be treated as distributed from operating surplus until the sum of all available cash distributed by us since the closing of this offering equals the operating surplus from the closing of this offering through the end of the quarter immediately preceding that distribution. We anticipate that distributions from operating surplus will generally not represent a return of capital. However, operating surplus, as defined in our partnership agreement, includes certain components, including a $30.0 million cash basket, that represent non-operating sources of cash. Consequently, it is possible that all or a portion of specific distributions from operating surplus may represent a return of capital. Any available cash distributed by us in excess of our cumulative operating surplus will be deemed to be capital surplus under our partnership agreement. Our partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from this initial public offering and as a return of capital. We do not anticipate that we will make any distributions from capital surplus.

Capital Expenditures

Maintenance capital expenditures are cash expenditures (including expenditures for the construction or development of new capital assets or the replacement, improvement or expansion of existing capital assets) made to maintain, over the long term, our operating capacity or operating income. Examples of maintenance capital expenditures are expenditures to repair, refurbish and replace storage, terminaling and pipeline infrastructure, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations.

Expansion capital expenditures are cash expenditures incurred for acquisitions or capital improvements that we expect will increase our operating capacity or operating income over the long term. Examples of expansion capital expenditures include the acquisition of equipment, or the construction, development or acquisition of additional storage, terminaling or pipeline capacity, to the extent such capital expenditures are expected to expand our long-term operating capacity or operating income. Expansion capital expenditures include interest payments (and related fees) on debt incurred to finance all or a portion of expansion capital expenditures in respect of the period from the date that we enter into a binding obligation to commence the construction, development, replacement, improvement or expansion of a capital asset and ending on the earlier to occur of the date that such capital improvement commences commercial service and the date that such capital improvement is abandoned or disposed of.

Capital expenditures that are made in part for maintenance capital purposes and in part for expansion capital purposes will be allocated as maintenance capital expenditures or expansion capital expenditures by our general partner.

 

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Subordinated Units and Subordination Period

General

Our partnership agreement provides that, during the subordination period (which we define below), the common units will have the right to receive distributions of available cash from operating surplus each quarter in an amount equal to $0.30 per common unit, which amount is defined in our partnership agreement as the minimum quarterly distribution, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. These units are deemed “subordinated” because for a period of time, referred to as the subordination period, the subordinated units will not be entitled to receive any distributions until the common units have received the minimum quarterly distribution plus any arrearages from prior quarters. Furthermore, no arrearages will be paid on the subordinated units. The practical effect of the subordinated units is to increase the likelihood that, during the subordination period, there will be available cash to be distributed on the common units.

Determination of Subordination Period

Except as described below, the subordination period will begin on the closing date of this offering and will extend until the first business day following the distribution of available cash in respect of any quarter beginning after September 30, 2016, that each of the following tests are met:

 

   

distributions of available cash from operating surplus on each of the outstanding common units and subordinated units equaled or exceeded $1.20 (the annualized minimum quarterly distribution), for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date;

 

   

the adjusted operating surplus (as defined below) generated during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of $1.20 (the annualized minimum quarterly distribution) on all of the outstanding common units and subordinated units during those periods on a fully diluted basis; and

 

   

there are no arrearages in payment of the minimum quarterly distribution on the common units.

Early Termination of Subordination Period

Notwithstanding the foregoing, the subordination period will automatically terminate on the first business day following the distribution of available cash in respect of any quarter, beginning with the quarter ending September 30, 2014, that each of the following tests are met:

 

   

distributions of available cash from operating surplus on each of the outstanding common units and subordinated units equaled or exceeded $1.80 (150.0% of the annualized minimum quarterly distribution) for the four-quarter period immediately preceding that date;

 

   

the adjusted operating surplus (as defined below) generated during the four-quarter period immediately preceding that date equaled or exceeded the sum of (1) $1.80 (150.0% of the annualized minimum quarterly distribution) on all outstanding common and subordinated units on a fully diluted basis, and (2) the corresponding distribution on the incentive distribution rights; and

 

   

there are no arrearages in payment of the minimum quarterly distributions on the common units.

 

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Expiration Upon Removal of the General Partner

In addition, if the unitholders remove our general partner other than for cause:

 

   

the subordinated units held by any person will immediately and automatically convert into common units on a one-for-one basis, provided (1) neither such person nor any of its affiliates voted any of its units in favor of the removal and (2) such person is not an affiliate of the successor general partner; and

 

   

if all of the subordinated units convert pursuant to the foregoing, all cumulative common unit arrearages on the common units will be extinguished and the subordination period will end; and

Expiration of the Subordination Period

When the subordination period ends, each outstanding subordinated unit will convert into one common unit and will thereafter participate pro rata with the other common units in distributions of available cash.

Adjusted Operating Surplus

Adjusted operating surplus is intended to reflect the cash generated from operations during a particular period and therefore excludes net drawdowns of reserves of cash established in prior periods. Adjusted operating surplus for a period consists of:

 

   

operating surplus generated with respect to that period (excluding any amount attributable to the item described in the first bullet of the definition of operating surplus); less

 

   

any net increase in working capital borrowings with respect to that period; less

 

   

any net decrease in cash reserves for operating expenditures with respect to that period not relating to an operating expenditure made with respect to that period; plus

 

   

any net decrease in working capital borrowings with respect to that period; plus

 

   

any net decrease made in subsequent periods to cash reserves for operating expenditures initially established with respect to that period to the extent such decrease results in a reduction in adjusted operating surplus in subsequent periods; plus

 

   

any net increase in cash reserves for operating expenditures with respect to that period required by any debt instrument for the repayment of principal, interest or premium.

Distributions of Available Cash from Operating Surplus During the Subordination Period

We will make distributions of available cash from operating surplus for any quarter during the subordination period in the following manner:

 

   

first, to the common unitholders, pro rata, until we distribute for each outstanding common unit an amount equal to the minimum quarterly distribution for that quarter;

 

   

second, to the common unitholders, pro rata, until we distribute for each outstanding common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period;

 

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third, to the subordinated unitholders, pro rata, until we distribute for each outstanding subordinated unit an amount equal to the minimum quarterly distribution for that quarter; and

 

   

thereafter, in the manner described in “—Incentive Distribution Rights” below.

The preceding discussion is based on the assumptions that we do not issue additional classes of equity securities.

Distributions of Available Cash from Operating Surplus After the Subordination Period

We will make distributions of available cash from operating surplus for any quarter after the subordination period in the following manner:

 

   

first, to all unitholders, pro rata, until we distribute for each outstanding unit an amount equal to the minimum quarterly distribution for that quarter; and

 

   

thereafter, in the manner described in “—Incentive Distribution Rights” below.

The preceding discussion is based on the assumptions that we do not issue additional classes of equity securities.

General Partner Interest

Our general partner owns a 0.0% non-economic general partner interest in us, which does not entitle it to receive cash distributions. However, our general partner may in the future own common units or other equity interests in us, and will be entitled to receive distributions on such interests.

Incentive Distribution Rights

Incentive distribution rights represent the right to receive an increasing percentage (15.0%, 25.0% and 50.0%) of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. Our sponsors currently hold the incentive distribution rights, but may transfer these rights, subject to restrictions in our partnership agreement.

If for any quarter:

 

   

we have distributed available cash from operating surplus to the common and subordinated unitholders in an amount equal to the minimum quarterly distribution; and

 

   

we have distributed available cash from operating surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution;

then, we will distribute any additional available cash from operating surplus for that quarter among the unitholders and the holders of our incentive distribution rights in the following manner:

 

   

first, to all unitholders, pro rata, until each unitholder receives a total of $0.345 per unit for that quarter (the “first target distribution”);

 

   

second, 85.0% to all unitholders, pro rata, and 15.0% to the holders of the incentive distribution rights, pro rata, until each unitholder receives a total of $0.375 per unit for that quarter (the “second target distribution”);

 

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third, 75.0% to all unitholders, pro rata, and 25.0% to the holders of the incentive distribution rights, pro rata, until each unitholder receives a total of $0.45 per unit for that quarter (the “third target distribution”); and

 

   

thereafter, 50.0% to all unitholders, pro rata, and 50.0% to the holders of the incentive distributions rights, pro rata.

In each case, the amount of the target distribution set forth above is exclusive of any distributions to common unitholders to eliminate any cumulative arrearages in payment of the minimum quarterly distribution. The percentage interests set forth above assume that we do not issue additional classes of equity securities.

Percentage Allocations of Available Cash From Operating Surplus

The following table illustrates the percentage allocations of available cash from operating surplus among the unitholders and the holders of the incentive distribution rights up to the various target distribution levels. The amounts set forth under “Marginal Percentage Interest in Distributions” are the percentage interests of the unitholders and the holders of the incentive distribution rights in any available cash from operating surplus we distribute up to and including the corresponding amount in the column “Total Quarterly Distribution Target Amount,” until available cash from operating surplus we distribute reaches the next target distribution level, if any. The percentage interests shown for the unitholders and the holders of the incentive distribution rights for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests set forth below assume that there are no arrearages on common units.

 

     Total Quarterly Distribution
Target Amount
     Marginal Percentage
Interest in Distributions
 
      Unitholders     Holders of IDRs  

Minimum Quarterly Distribution

     $0.300         100.0     —     

First Target Distribution

   above $ 0.300 up to $0.345         100.0     —     

Second Target Distribution

   above $ 0.345 up to $0.375         85.0     15.0

Third Target Distribution

   above $ 0.375 up to $0.450         75.0     25.0

Thereafter

   above $ 0.450                              50.0     50.0

Right to Reset Incentive Distribution Levels

Our sponsors, as the initial holders of our incentive distribution rights, have the right under our partnership agreement, subject to certain conditions, to elect to relinquish the right to receive incentive distribution payments based on the initial target distribution levels and to reset, at higher levels, the minimum quarterly distribution amount and target distribution levels upon which the incentive distribution payments to them would be set. If our sponsors transfer all or a portion of their incentive distribution rights in the future, then the holder or holders of a majority of our incentive distribution rights will be entitled to exercise this right. The following discussion assumes that our sponsors hold all of the incentive distribution rights at the time that a reset election is made. Our sponsors’ right to reset the minimum quarterly distribution amount and the target distribution levels upon which the incentive distributions payable to them are based may be exercised, without approval of our unitholders or the conflicts committee, at any time when there are no subordinated units outstanding, we have made cash distributions to the holders of the incentive distribution rights at the highest level of incentive distribution for each of the four consecutive fiscal quarters immediately preceding such time and the amount of each such distribution did not exceed adjusted operating surplus for such quarter, respectively. If our sponsors are not the holders of a majority of the incentive distribution rights at the time an election is made to reset the minimum quarterly distribution amount and the target distribution levels, then the proposed reset will be subject to the prior written concurrence of the general partner that the conditions described above have been satisfied. The reset minimum quarterly distribution amount and target distribution levels will be higher than the

 

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minimum quarterly distribution amount and the target distribution levels prior to the reset such that our sponsors will not receive any incentive distributions under the reset target distribution levels until cash distributions per unit following this event increase as described below. We anticipate that our sponsors would exercise this reset right in order to facilitate acquisitions or internal growth projects that would otherwise not be sufficiently accretive to cash distributions per common unit, taking into account the existing levels of incentive distribution payments being made to them.

In connection with the resetting of the minimum quarterly distribution amount and the target distribution levels and the corresponding relinquishment by our sponsors of incentive distribution payments based on the target distributions prior to the reset, our sponsors will be entitled to receive a number of newly issued common units based on a predetermined formula described below that takes into account the “cash parity” value of the average cash distributions related to the incentive distribution rights received by our sponsors for the two quarters immediately preceding the reset event as compared to the average cash distributions per common unit during that two-quarter period.

The number of common units that our sponsors would be entitled to receive from us in connection with a resetting of the minimum quarterly distribution amount and the target distribution levels then in effect would be equal to the quotient determined by dividing (x) the average aggregate amount of cash distributions received by our sponsors in respect of their incentive distribution rights during the two consecutive fiscal quarters ended immediately prior to the date of such reset election by (y) the average of the aggregate amount of cash distributed per common unit during each of these two quarters.

Following a reset election, the minimum quarterly distribution amount will be reset to an amount equal to the average cash distribution amount per common unit for the two fiscal quarters immediately preceding the reset election (which amount we refer to as the “reset minimum quarterly distribution”) and the target distribution levels will be reset to be correspondingly higher such that we would distribute all of our available cash from operating surplus for each quarter thereafter as follows:

 

   

first, to all unitholders, pro rata, until each unitholder receives an amount equal to 115.0% of the reset minimum quarterly distribution for that quarter;

 

   

second, 85.0% to all unitholders, pro rata, and 15.0% to the holders of the incentive distribution right, pro rata, until each unitholder receives an amount per unit equal to 125.0% of the reset minimum quarterly distribution for the quarter;

 

   

third, 75.0% to all unitholders, pro rata, and 25.0% to the holders of the incentive distribution rights, pro rata, until each unitholder receives an amount per unit equal to 150.0% of the reset minimum quarterly distribution for the quarter; and

 

   

thereafter, 50.0% to all unitholders, pro rata, and 50.0% to the holders of the incentive distribution right, pro rata.

 

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The following table illustrates the percentage allocations of available cash from operating surplus between the unitholders and the holders of the incentive distribution rights at various cash distribution levels (1) pursuant to the cash distribution provisions of our partnership agreement in effect at the completion of this offering, as well as (2) following a hypothetical reset of the minimum quarterly distribution and target distribution levels based on the assumption that the average quarterly cash distribution amount per common unit during the two fiscal quarters immediately preceding the reset election was $0.50.

 

   

Quarterly

Distribution
Per Unit Prior to

Reset

  Marginal Percentage
Interest in
Distributions
    Quarterly Distribution Per Unit
following Hypothetical Reset
 
      Common
Unitholders
    Holders
of IDRs
   

Minimum Quarterly Distribution

  $0.300     100.0     —         $0.500     

First Target Distribution

  above $0.300 up to $0.345     100.0     —         above $0.500      up to $ 0.575(1)   

Second Target Distribution

  above $0.345 up to $0.375     85.0     15.0   above $ 0.575(1)      up to $ 0.625(2)   

Third Target Distribution

  above $0.375 up to $0.450     75.0     25.0   above $ 0.625(2)      up to $ 0.750(3)   

Thereafter

  above $0.450     50.0     50.0   above $ 0.750(3)     

 

(1) This amount is 115.0% of the hypothetical reset minimum quarterly distribution.

 

(2) This amount is 125.0% of the hypothetical reset minimum quarterly distribution.

 

(3) This amount is 150.0% of the hypothetical reset minimum quarterly distribution.

The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders and holders of the incentive distribution rights based on an average of the amounts distributed for the two quarters immediately prior to the reset. The table assumes that immediately prior to the reset there would be 32,971,014 common units outstanding and the average distribution to each common unit would be $0.50 per quarter for the two consecutive non-overlapping quarters prior to the reset.

 

   

Quarterly
Distributions
per Unit Prior to

Reset

  Cash
Distributions
to Common
Unitholders
Prior to
Reset
    Cash Distributions to Our

Sponsors
Prior to Reset
    Total
Distributions
 
      Common
units
    Incentive
Distribution
Rights
    Total    

Minimum Quarterly Distribution

  $0.300   $ 9,891,304      $ 7,266,304      $ —        $ 7,266,304      $ 9,891,304   

First Target Distribution

  above $0.300 up to $0.345     1,483,696        1,089,946        —          1,089,946        1,483,696   

Second Target Distribution

  above $0.345 up to $0.375     989,130        726,630        174,552        901,183        1,163,683   

Third Target Distribution

  above $0.375 up to $0.450     2,472,826        1,816,576        824,275        2,640,851        3,297,101   

Thereafter

  above $0.450     1,648,551        1,211,051        1,648,551        2,859,602        3,297,101   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 16,485,507      $ 12,110,507      $ 2,647,378      $ 14,757,886      $ 19,132,885   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders and the holders of the incentive distribution rights with respect to the quarter after the reset occurs. The table reflects that, as a result of the reset, there would be 38,265,770 common units outstanding, and that the average distribution to each common unit would be $0.50. The number of common units issued as a result of the reset was calculated by dividing (x) $2,647,378 as the average of the amounts received by our sponsors in respect of their incentive distribution rights for the two consecutive non-overlapping quarters prior to the reset as shown in the table above, by (y) the average of the cash distributions made on each common unit per quarter for the two consecutive non-overlapping quarters prior to the reset as shown in the table above, or $0.50.

 

   

Quarterly
Distributions
per Unit
After to Reset

  Cash
Distributions
to Common
Unitholders
After to
Reset
    Cash Distributions to Our
Sponsors
After Reset
    Total
Distributions
 
      Common
Units
    Incentive
Distribution
Rights
    Total    

Minimum Quarterly Distribution

  $0.500   $ 19,132,885      $ 14,757,885      $ —        $ 14,757,885      $ 19,132,885   

First Target Distribution

  above $0.500 up to $0.575     —          —          —          —          —     

Second Target Distribution

  above $0.575 up to $0.625     —          —          —          —          —     

Third Target Distribution

  above $0.625 up to $0.750     —          —          —          —          —     

Thereafter

  above $0.750     —          —          —          —          —     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 19,132,885      $ 14,757,885      $ —        $ 14,757,885      $ 19,132,885   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Our sponsors will be entitled to cause the minimum quarterly distribution amount and the target distribution levels to be reset on more than one occasion, provided that it may not make a reset election except at a time when it has received incentive distributions for the immediately preceding four consecutive fiscal quarters based on the highest level of incentive distributions that it is entitled to receive under our partnership agreement.

Distributions From Capital Surplus

How Distributions from Capital Surplus Will Be Made

We will make distributions of available cash from capital surplus, if any, in the following manner:

 

   

first, to all unitholders, pro rata, until we distribute for each common unit that was issued in this offering, an amount of available cash from capital surplus equal to the initial public offering price;

 

   

second, to all unitholders, pro rata, until we distribute for each common unit an amount of available cash from capital surplus equal to any unpaid arrearages in payment of the minimum quarterly distribution on the common units; and

 

   

thereafter, as if they were from operating surplus.

The preceding discussion is based on the assumption that we do not issue additional classes of equity securities.

Effect of a Distribution from Capital Surplus

Our partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from this initial public offering, which is a return of capital. The initial public offering price less any distributions of capital surplus per unit is referred to as the “unrecovered initial unit price.” Each time a distribution of capital surplus is made, the minimum quarterly distribution and the target distribution levels will

 

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be reduced in the same proportion as the corresponding reduction in the unrecovered initial unit price. Because distributions of capital surplus will reduce the minimum quarterly distribution after any of these distributions are made, it may be easier for our sponsors to receive incentive distributions and for the subordinated units to convert into common units. However, any distribution of capital surplus before the unrecovered initial unit price is reduced to zero cannot be applied to the payment of the minimum quarterly distribution or any arrearages.

Once we distribute capital surplus on a unit issued in this offering in an amount equal to the initial unit price, we will reduce the minimum quarterly distribution and the target distribution levels to zero. We will then make all future distributions from operating surplus, with 50.0% being paid to the unitholders, pro rata, and 50.0% to the holders of our incentive distribution rights.

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

In addition to adjusting the minimum quarterly distribution and target distribution levels to reflect a distribution of capital surplus, if we combine our units into fewer units or subdivide our units into a greater number of units, we will proportionately adjust:

 

   

the minimum quarterly distribution;

 

   

target distribution levels;

 

   

the unrecovered initial unit price; and

 

   

the arrearages in payment of the minimum quarterly distribution on the common units.

For example, if a two-for-one split of the common units should occur, the minimum quarterly distribution, the target distribution levels and the unrecovered initial unit price would each be reduced to 50.0% of its initial level, and each subordinated unit would be split into two subordinated units. We will not make any adjustment by reason of the issuance of additional units for cash or property.

In addition, if legislation is enacted or if the official interpretation of existing law is modified by a governmental authority, so that we become taxable as a corporation or otherwise subject to taxation as an entity for federal, state or local income tax purposes, our partnership agreement specifies that the minimum quarterly distribution and the target distribution levels for each quarter may be reduced by multiplying each distribution level by a fraction, the numerator of which is available cash for that quarter (reduced by the amount of the estimated tax liability for such quarter payable by reason of such legislation or interpretation) and the denominator of which is the sum of available cash for that quarter (reduced by the amount of the estimated tax liability for such quarter payable by reason of such legislation or interpretation) plus our general partner’s estimate of our aggregate liability for the quarter for such income taxes payable by reason of such legislation or interpretation. To the extent that the actual tax liability differs from the estimated tax liability for any quarter, the difference may be accounted for in subsequent quarters.

Distributions of Cash Upon Liquidation

General

If we dissolve in accordance with our partnership agreement, we will sell or otherwise dispose of our assets in a process called liquidation. We will first apply the proceeds of liquidation to the payment of our creditors. We will distribute any remaining proceeds to the unitholders in accordance with their capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.

 

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The allocations of gain and loss upon liquidation are intended, to the extent possible, to entitle the holders of outstanding common units to a preference over the holders of outstanding subordinated units upon our liquidation, to the extent required to permit common unitholders to receive their unrecovered initial unit price plus the minimum quarterly distribution for the quarter during which liquidation occurs plus any unpaid arrearages in payment of the minimum quarterly distribution on the common units. However, there may not be sufficient gain upon our liquidation to enable the holders of common units to fully recover all of these amounts, even though there may be cash available for distribution to the holders of subordinated units. Any further net gain recognized upon liquidation will be allocated in a manner that takes into account the incentive distribution rights of our sponsors.

Manner of Adjustments for Gain

The manner of the adjustment for gain is set forth in our partnership agreement. If our liquidation occurs before the end of the subordination period, we will allocate any gain to our partners in the following manner:

 

   

first, to the common unitholders, pro rata, until the capital account for each common unit is equal to the sum of: (1) the unrecovered initial unit price; (2) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs; and (3) any unpaid arrearages in payment of the minimum quarterly distribution;

 

   

second, to the subordinated unitholders, pro rata, until the capital account for each subordinated unit is equal to the sum of: (1) the unrecovered initial unit price; and (2) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs;

 

   

third, to all unitholders, pro rata, until we allocate under this paragraph an amount per unit equal to: (1) the sum of the excess of the first target distribution per unit over the minimum quarterly distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the minimum quarterly distribution per unit that we distributed to the unitholders, pro rata, for each quarter of our existence;

 

   

fourth, 85.0% to all unitholders, pro rata, and 15.0% to the holders of the incentive distribution rights, pro rata, until we allocate under this paragraph an amount per unit equal to: (1) the sum of the excess of the second target distribution per unit over the first target distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the first target distribution per unit that we distributed 85.0% to the unitholders, pro rata and 15.0% to the holders of incentive distribution rights, pro rata, for each quarter of our existence;

 

   

fifth, 75.0% to all unitholders, pro rata, and 25.0% to the holders of the incentive distribution rights, pro rata, until we allocate under this paragraph an amount per unit equal to: (1) the sum of the excess of the third target distribution per unit over the second target distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the second target distribution per unit that we distributed 75.0% to the unitholders, pro rata and 25.0% to the holders of incentive distribution rights, pro rata, for each quarter of our existence; and

 

   

thereafter, 50.0% to all unitholders, pro rata, and 50.0% to the holders of incentive distribution rights, pro rata.

The percentages set forth above are based on the assumption that our sponsors have not transferred their incentive distribution rights and that we do not issue additional classes of equity securities.

 

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If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that clause (3) of the second bullet point above and all of the fourth bullet point above will no longer be applicable.

Manner of Adjustments for Losses

If our liquidation occurs before the end of the subordination period, after making allocations of loss to the unitholders in a manner intended to offset in reverse order the allocations of gains that have previously been allocated, we will generally allocate any loss to our unitholders in the following manner:

 

   

first, to the holders of subordinated units in proportion to the positive balances in their capital accounts, until the capital accounts of the subordinated unitholders have been reduced to zero; and

 

   

second, to the holders of common units in accordance with their percentage interest.

If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that all of the first bullet point above will no longer be applicable.

Adjustments to Capital Accounts

Our partnership agreement requires that we make adjustments to capital accounts upon the issuance of additional units. In this regard, our partnership agreement specifies that we allocate any unrealized and, for tax purposes, unrecognized gain resulting from the adjustments to the unitholders in the same manner as we allocate gain upon liquidation. In the event that we make positive adjustments to the capital accounts upon the issuance of additional units, our partnership agreement requires that we generally allocate any later negative adjustments to the capital accounts resulting from the issuance of additional units or upon our liquidation in a manner that results, to the extent possible, in the partners’ capital account balances equaling the amount that they would have been if no earlier positive adjustments to the capital accounts had been made. In contrast to the allocations of gain, and except as provided above, we generally will allocate any unrealized and unrecognized loss resulting from the adjustments to capital accounts upon the issuance of additional units to the unitholders based on their respective percentage ownership of us. In this manner, prior to the end of the subordination period, we generally will allocate any such loss equally with respect to our common and subordinated units. If we make negative adjustments to the capital accounts as a result of such loss, future positive adjustments resulting from the issuance of additional units will be allocated in a manner designed to reverse the prior negative adjustments, and special allocations will be made upon liquidation in a manner that results, to the extent possible, in our unitholders’ capital account balances equaling the amounts they would have been if no earlier adjustments for loss had been made.

 

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SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL

AND OPERATING DATA

We were formed in April 2013 and do not have historical financial statements. Therefore, in this prospectus we present the historical financial statements of Center Point Terminal Company, our predecessor. We refer to our predecessor for accounting purposes as “Predecessor.”

The following table should be read together with, and is qualified in its entirety by reference to, the historical and pro forma financial statements and the accompanying notes appearing elsewhere in this prospectus. Among other things, the historical and pro forma financial statements include more deta