S-1/A 1 d633486ds1a.htm S-1/A S-1/A
Table of Contents

As filed with the Securities and Exchange Commission on November 26, 2013

Registration Statement No. 333-191848

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 2

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

American Petroleum Tankers Partners LP

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   4400   80-0947184

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

600 W. Germantown Pike, Suite 400

Plymouth Meeting, PA 19462

(610) 940-1677

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Philip J. Doherty

Chief Financial Officer

600 W. Germantown Pike, Suite 400

Plymouth Meeting, PA 19462

(610) 940-1677

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Lesley Peng

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017

(212) 455-2000

 

Alon Harnoy

Shiboleth LLP

1 Penn Plaza, Suite 2527

New York, New York 10119

(212) 244-4111

 

Laura Lanza Tyson

Baker Botts L.L.P.

98 San Jacinto Center, Suite 1500

Austin, Texas 78701

(512) 322-2500

 

 

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

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities to be Registered
  Proposed
Maximum
Aggregate
Offering Price(1)(2)
  Amount of
Registration Fee

Common units representing limited partner interests

 

$172,500,000

  $22,218(3)

 

 

(1) Includes common units issuable upon exercise of the underwriters’ option to purchase additional common units.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(3) Previously paid.

 

 

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

The information in this preliminary 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 jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED NOVEMBER 26, 2013

PRELIMINARY PROSPECTUS

 

LOGO

American Petroleum Tankers Partners LP

                                                 Common Units

Representing Limited Partner Interests

 

 

This is the initial public offering of our common units. We currently expect the initial public offering price to be between $             and $            per common unit. We are selling                common units.

Prior to this offering, there has been no public market for our common units. We have applied to list the common units on the New York Stock Exchange under the symbol “JAT.”

 

 

We are an “emerging growth company,” and we are eligible for reduced reporting requirements. See “Summary—Implications of Being an Emerging Growth Company.” Investing in our common units involves risks. Please read “Risk Factors” beginning on page 25.

These risks include the following:

 

   

We have generated net losses in each of the last three fiscal years and may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses to enable us to pay the minimum quarterly distribution on our common units and subordinated units.

 

   

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 actual results to differ materially from those forecasted.

 

   

Our ability to grow and to meet our financial needs may be adversely affected by our cash distribution policy.

 

   

We will derive all of our revenues from a limited number of customers and the loss of any of these customers or time charters with any of them could result in an adverse effect on our business and results of operations.

 

   

We will have a limited number of vessels and any loss of use of a vessel would adversely affect our results of operations.

 

   

Our business would be adversely affected if the Jones Act provisions on coastwise trade were waived, modified or repealed or if changes in international trade agreements or applicable law or government regulations were to occur or if the Oil Pollution Act of 1990 were modified.

 

   

Marine transportation is inherently risky and an incident involving significant loss or environmental contamination by any of our vessels could harm our reputation and business.

 

   

Decreases in United States refining activity, particularly in the U.S. Gulf Coast region, could adversely affect our business and financial condition.

 

   

A decrease in the cost of importing or transporting refined petroleum products could cause demand for U.S.-flag product carrier capacity and daily hire rates to decline, which would decrease our revenues and profitability.

 

   

Our Sponsors own a controlling interest in us and have limited contractual and fiduciary duties to us and our common unitholders, and they may favor their own interests to the detriment of us and our other common unitholders.

 

   

Our Sponsors own a controlling interest in us and their interests may conflict with ours or yours in the future.

 

   

Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors, which could reduce the price at which the common units trade.

 

   

Our partnership agreement limits the duties our general partner may have to our unitholders and restricts the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

 

   

You will experience immediate and substantial dilution of $         per common unit on a tangible book value basis.

 

   

Our partnership agreement limits the ownership of common units by individuals and entities that are not U.S. citizens within the meaning of the Jones Act.

   

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

 

   

We are an “emerging growth company” and we are subject to reduced disclosure requirements applicable to emerging growth companies, which may make our common units less attractive to investors.

 

   

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

 

   

You will be required to pay taxes on your share of our taxable income even if you do not receive any cash distributions from us.

 

To the extent the underwriters sell more than                 common units in this offering, the underwriters have an option to purchase up to                 additional common units from us, at the public offering price, less underwriting discounts, for 30 days after the date of this prospectus.

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.

 

 

 

     Per
Common Unit
     Total  

Public offering price

   $                            $                        

Underwriting discount(1)

   $         $     

Proceeds, before expenses, to American Petroleum Tankers Partners LP(2)

   $         $     

 

(1) Excludes a structuring fee of 0.25% of the offering proceeds payable to Merrill Lynch, Pierce, Fenner & Smith Incorporated and Barclays Capital Inc.
(2) We have agreed to reimburse the underwriters for certain FINRA-related expenses. See “Underwriting—Discounts and Fees.”

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

 

 

 

BofA Merrill Lynch     Barclays

Credit Suisse

  UBS Investment Bank   Wells Fargo Securities

 

 

 

Blackstone Capital Markets    Global Hunter Securities   Macquarie Capital   Stifel

The date of this prospectus is                 , 2013


Table of Contents

We are responsible for the information contained in this prospectus and in any free writing prospectus we prepare or authorize. We have not authorized anyone to provide you with different information, and we take no responsibility for any other information others may give you. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date of this prospectus. Our business, financial condition, results of operation and prospects may have changed since that date.

Table of Contents

 

     Page  

INDUSTRY AND MARKET DATA

     iv   

SUMMARY

     1   

American Petroleum Tankers Partners LP

     1   

Our Fleet

     2   

Option to Purchase State Class Newbuild Vessels

     4   

Jones Act Tanker Industry Fundamentals

     4   

Competitive Strengths

     6   

Business Strategies

     7   

Our Vessel Manager

     7   

Our Sponsors

     7   

Formation Transactions

     8   

Simplified Organizational and Ownership Structure After this Offering

     9   

Our Management

     10   

Summary of Conflicts of Interest and Fiduciary Duties

     10   

Risk Factors

     12   

Implications of Being an Emerging Growth Company

     14   

Principal Executive Offices and Internet Address; SEC Filing Requirements

     14   

The Offering

     15   

Summary Historical Financial and Operating Data

     21   

RISK FACTORS

     25   

Risks Inherent in Our Business

     25   

Risks Inherent in an Investment in Us

     45   

Tax Risks to Common Unitholders

     56   

FORWARD-LOOKING STATEMENTS

     60   

USE OF PROCEEDS

     61   

CAPITALIZATION

     62   

DILUTION

     63   

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     65   

General

     65   

Unaudited Pro Forma Cash Available for Distribution for the Twelve-Month Period Ended September  30, 2013 and the Year Ended December 31, 2012

     69   

Estimated Cash Available for Distribution for the Twelve-Month Period Ending September 30, 2014

     71   

Forecast Assumptions and Considerations

     75   

HOW WE MAKE CASH DISTRIBUTIONS

     79   

Distributions of Available Cash

     79   

Operating Surplus and Capital Surplus

     80   

Subordination Period

     83   

Distributions of Available Cash From Operating Surplus During the Subordination Period

     86   

Distributions of Available Cash From Operating Surplus After the Subordination Period

     86   

 

i


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General Partner Interest and Incentive Distribution Rights

     86   

Percentage Allocations of Available Cash From Operating Surplus

     87   

Our General Partner’s Right to Reset Incentive Distribution Levels

     88   

Distributions From Capital Surplus

     90   

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     91   

Distributions of Cash Upon Liquidation

     91   

Adjustments to Capital Accounts Upon Issuance of Additional Units

     93   

SELECTED HISTORICAL FINANCIAL DATA

     94   

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

     96   

Overview

     96   

Items You Should Consider When Evaluating Our Historical Financial Performance and Assessing Our Future Prospects

     97   

Factors Affecting Our Results of Operations

     97   

Results of Operations

     98   

Liquidity and Capital Resources

     102   

Contractual Obligations

     107   

Off-Balance Sheet Arrangements

     107   

Critical Accounting Policies and Estimates

     107   

New Accounting Pronouncements

     109   

Quantitative and Qualitative Disclosures About Market Risk

     109   

THE JONES ACT PRODUCT CARRIER MARKET

     111   

BUSINESS

     120   

American Petroleum Tankers Partners LP

     120   

Our Fleet

     120   

Option to Purchase State Class Newbuild Vessels

     122   

Competitive Strengths

     123   

Business Strategies

     124   

Our Customers and Charters

     124   

Our Vessel Manager

     127   

Key Trade Routes

     129   

Our Safety and Maintenance

     129   

Our Competition

     131   

Major Oil Company Vetting Process

     131   

Classification, Inspection and Certification

     132   

Insurance and Risk Management

     133   

Regulation

     133   

Employees

     142   

Legal Proceedings

     143   

Physical Property

     143   

MANAGEMENT

     144   

Management of American Petroleum Tankers Partners LP

     144   

Directors and Executive Officers of our General Partner

     144   

Composition of the Board of Directors

     145   

Reimbursement of Expenses of Our General Partner

     147   

Code of Business Conduct and Ethics

     147   

Executive Compensation

     147   

Summary of Employment Agreements

     149   

Compensation Arrangements in Connection with this Offering

     150   

2013 Omnibus Incentive Plan

     151   

Compensation of Directors

     155   

PRINCIPAL UNITHOLDERS

     156   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     158   

Distributions and Payments to Our General Partner and Its Affiliates

     158   

 

ii


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Agreements Governing the Formation Transactions

     159   

Other Related Party Transactions

     161   

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

     162   

CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

     163   

Conflicts of Interest

     163   

Fiduciary Duties of the General Partner

     168   

DESCRIPTION OF THE COMMON UNITS

     171   

The Units

     171   

Transfer Agent and Registrar

     171   

Restrictions on Ownership by Non-U.S. Citizens

     171   

Restrictions on Voting

     171   

Transfer of Common Units

     171   

THE PARTNERSHIP AGREEMENT

     173   

Organization and Duration

     173   

Purpose

     173   

Deemed Authority

     173   

Cash Distributions

     173   

Capital Contributions

     174   

Voting Rights

     174   

Applicable Law; Forum, Venue and Jurisdiction

     175   

Limited Liability

     176   

Issuance of Additional Partnership Interests

     177   

Amendment of the Partnership Agreement

     177   

Merger, Sale, Conversion or Other Disposition of Assets

     179   

Termination and Dissolution

     180   

Liquidation and Distribution of Proceeds

     180   

Withdrawal or Removal of our General Partner

     180   

Transfer of General Partner Interest

     182   

Transfer of Ownership Interests in General Partner

     182   

Transfer of Subordinated Units and Incentive Distribution Rights

     182   

Anti-Takeover Provisions

     182   

Limited Call Right

     183   

Ownership by Non-U.S. Citizens

     183   

Meetings; Voting

     187   

Voting Rights of Incentive Distribution Rights

     188   

Status as Limited Partner

     188   

Indemnification

     188   

Reimbursement of Expenses

     189   

Books and Reports

     189   

Right to Inspect Our Books and Records

     189   

UNITS ELIGIBLE FOR FUTURE SALE

     191   

Rule 144

     191   

Our Partnership Agreement

     191   

Our Registration Rights Agreement

     191   

2013 Omnibus Incentive Plan

     192   

Lock-Up Agreements

     192   

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     193   

Partnership Status

     194   

Limited Partner Status

     195   

Tax Consequences to Unitholders

     196   

Disposition of Common Units

     202   

 

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Uniformity of Common Units

     203   

Tax-Exempt Organizations and Other Investors

     203   

Administrative Matters

     204   

Taxes in Other State, Local and Non-U.S. Jurisdictions

     207   

CERTAIN ERISA CONSIDERATIONS

     208   

UNDERWRITING

     210   

Discounts and Fees

     210   

Option to Purchase Additional Common Units

     211   

Lock-Up Agreement

     211   

Listing

     212   

Price Stabilization, Short Positions and Penalty Bids

     212   

Electronic Distribution

     213   

Discretionary Sales

     213   

FINRA

     213   

Other Relationships

     213   

Notice to Prospective Investors in Australia

     214   

Notice to Prospective Investors in the European Economic Area

     214   

Notice to Prospective Investors in the United Kingdom

     215   

Notice to Prospective Investors in Germany

     216   

Notice to Prospective Investors in Hong Kong

     216   

Notice to Prospective Investors in the Netherlands

     216   

Notice to Prospective Investors in Switzerland

     216   

LEGAL MATTERS

     217   

EXPERTS

     217   

WHERE YOU CAN FIND MORE INFORMATION

     218   

INDEX TO FINANCIAL STATEMENTS

     F-1   

APPENDIX A: FORM OF AGREEMENT OF LIMITED PARTNERSHIP

     A-1   

 

 

INDUSTRY AND MARKET DATA

Navigistics Consulting (“Navigistics”) has provided us certain statistical and graphical information contained in this prospectus and relating to the maritime oil transportation industry. We do not have any knowledge that the information obtained from or provided by Navigistics is inaccurate in any material respect. Navigistics has advised us that this information is drawn from its database and other sources and that: (1) some information in Navigistics’ database is derived from its estimates or subjective judgments, (2) the information in the databases of other maritime data collection agencies may differ from the information in Navigistics’ database and (3) while Navigistics has taken reasonable care in the compilation of the statistical and graphical information provided by it and believes it to be accurate and correct, data compilation is subject to limited audit and validation procedures. We believe that, notwithstanding any such qualifications by Navigistics, the industry data provided by Navigistics is accurate in all material respects.

We obtained certain other information contained in this prospectus from the U.S. Energy Information Administration (“EIA”) and the U.S. Department of Transportation’s Maritime Administration (“MarAd”). We believe that the information obtained from EIA and MarAd is accurate in all material respects.

 

 

 

 

iv


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SUMMARY

This summary highlights information contained elsewhere in this prospectus. Unless we otherwise specify, all references to information and data in this prospectus about our business and fleet refer to the business and fleet to be contributed to us by American Petroleum Tankers Holding LLC (“Holding”) upon the closing of this offering (our “initial fleet”) but prior to our exercise of our option to purchase the newbuild vessels (the “State Class newbuild vessels”) from State Class Tankers II LLC and/or certain of its subsidiaries (collectively, “State Class Tankers”). See “—Our Fleet.” Prior to the closing of this offering, we will not own any vessels. Unless otherwise indicated, all references to size, age and capacity of our fleet and other Jones Act vessels are as of September 30, 2013.

Unless the context otherwise requires, all references in this prospectus to “we,” “our,” “us” and “the Partnership” or similar terms when used in a historical context refer to the assets, liabilities and operations of Holding, including its vessels and its subsidiaries that hold interests in the vessels in our initial fleet, which constitute 100% of its assets. When used in the present tense or prospectively, those terms refer to American Petroleum Tankers Partners LP and its subsidiaries. All references in this prospectus to “our general partner” refer to American Petroleum Tankers GP LLC, the general partner of American Petroleum Tankers Partners LP. All references in this prospectus to our “Sponsors” refer to Blackstone Capital Partners V USS L.P. (“BCPV”), a fund of The Blackstone Group, L.P., and its affiliates (collectively, “Blackstone”), affiliates of GSO Capital Partners LP (“GSO”) and affiliates of Cerberus Capital Management, L.P. (“Cerberus”), which together indirectly own substantially all of the equity interests of Holding and our general partner.

You should read the entire prospectus carefully, including our historical financial statements and the notes to those financial statements. The information presented in this prospectus assumes, unless otherwise noted, (1) an initial public offering price of $         per common unit and (2) that the underwriters do not exercise their option to purchase additional common units. You should read “Risk Factors” for more information about important risks that you should consider carefully before buying our common units.

American Petroleum Tankers Partners LP

We are a Delaware master limited partnership formed to own, operate and acquire tankers that transport refined petroleum products and crude oil in the U.S. domestic trade, which is commonly referred to as the Jones Act trade, under long-term time charter contracts. Our initial fleet will consist of five medium-range (“MR”) product tankers with an average age of 3.8 years, compared to an average age of 12 years for the rest of the fleet of tankers that satisfy the requirements to conduct Jones Act trade (or the “Jones Act fleet”). Our product tankers are modern, high quality vessels that are versatile and that we believe are among the most fuel efficient tankers in the Jones Act fleet. We intend to leverage the experience, reputation and relationships of our management team and Sponsors to capitalize on what we believe are significant growth opportunities in the Jones Act tanker market.

We operate our vessels under contracts, or time charters, with creditworthy counterparties, including affiliates of BP, p.l.c. (“BP”), Royal Dutch Shell plc (“Shell”), Chevron Corporation (“Chevron”), the Military Sealift Command of the U.S. Navy (“MSC”), a division of the U.S. Department of Defense, and, on a forward basis, with Phillips 66 Company (“Phillips 66”) and an affiliate of Tesoro Corporation (“Tesoro”). Each of the vessels in our initial fleet is either operating pursuant to a time charter with a remaining term of more than one year or is forward chartered to another counterparty for a multiple-year term (which we refer to, in either case, as a “long-term time charter”). These long-term time charters provide predictable and stable cash flows based on contracted daily rates of hire for our vessels and have allowed us to maintain utilization rates for our initial fleet in excess of 99% since their commencement.

We intend to grow our business and cash distributions through accretive acquisitions of additional Jones Act vessels from State Class Tankers, an affiliate of Blackstone that is building four new MR tankers that we have an

 

 

1


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option to purchase, and from third parties. The contracts on our existing fleet will also provide us with built-in cash flow growth as the two forward time charters we have in place on our MSC-chartered vessels will commence at substantially higher daily rates beginning as early as October 2014.

Our market is insulated from foreign competition by virtue of the Merchant Marine Act, 1920, and related coastwise trade laws, commonly referred to as the Jones Act. These laws generally restrict U.S. point-to-point maritime shipping to vessels operating under the U.S. flag, built in the United States, owned and operated by U.S.-organized companies that are controlled and at least 75% owned by U.S. citizens and manned predominantly by U.S. crews. All of the vessels in our initial fleet are, and each of the State Class newbuild vessels will be, permitted to transport cargo between U.S. ports under the Jones Act.

Our initial fleet and the related charter agreements will be contributed to us by Holding, which is owned by our Sponsors. Our revenues, Adjusted EBITDA and net loss were $94.8 million, $54.1 million and $51.9 million, respectively, for the year ended December 31, 2012 and $73.4 million, $41.9 million and $20.6 million, respectively, for the nine months ended September 30, 2013. See “—Summary Historical Financial and Operating Data” for our definition of Adjusted EBITDA and a reconciliation of our net loss to Adjusted EBITDA. The net losses during these periods reflect the paid-in-kind interest and debt prepayment fees related to our former Sponsor facility and our senior secured notes which were converted into equity and redeemed in the second quarter of 2013. Assuming that this offering and the related formation transactions had been completed on January 1, 2012, our pro forma revenues, pro forma Adjusted EBITDA and pro forma net income would have been $94.8 million, $52.1 million and $16.8 million, respectively, for the year ended December 31, 2012 and $96.7 million, $52.5 million and $18.1 million, respectively, for the twelve-month period ended September 30, 2013. See “Our Cash Distribution Policy and Restrictions on Distributions—Unaudited Pro Forma Cash Available for Distribution for the Twelve-Month Period Ended September 30, 2013 and the Year Ended December 31, 2012.” Upon completion of this offering, our general partner will own our non-economic general partner interest and all of our incentive distribution rights and Holding will own a     % limited partnership interest in us.

Our Fleet

Upon the closing of this offering, we will own and operate a fleet of five modern 49,000 deadweight tonnage (“dwt”) MR product tankers designed for deep-sea trade. A product tanker is a self-propelled vessel with design features including special tank coatings, cargo segregations and piping systems that permit the simultaneous transportation of multiple grades of cargo.

All of the vessels in our initial fleet are currently employed under time charters, which provide for a fixed daily hire rate when the vessels are available for hire. The current average contracted rate charged on each day of the charter term other than off-hire days (or “daily hire rate”) for our initial fleet is approximately $54,000 per day. Under our time charters, our counterparties (the “charterers”) are responsible for the cost of fuel and port charges, and as a result our time charter revenues are not impacted by fluctuations in bunker fuel prices. In addition, our time charters contain fixed-rate escalation provisions to offset the effects of increases in operating expenses.

The table below summarizes the vessels in our initial fleet and their associated time charters:

 

Vessel

  Charter
Commencement

Date
  Charter Expiry(1)   Charterer   Charterer
Ratings(2)
  Initial
Charter
Term
    Extension Options

Golden State

  January 2009   January 2019   BP   A2/A     7 years      3 one-year options

Pelican State

  July 2012   July 2017   Shell   Aa1/AA     3 years      2 one-year options

Sunshine State

  January 2013   December 2017   Chevron   Aa1/AA     4 years      1 one-year option

Empire State(3)

  October 2010   August 2015   MSC   Aaa/AA+(4)     1 year      3 one-year options;
1 eleven-month option

 

 

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Vessel

  Charter
Commencement

Date
   Charter
Expiry(1)
   Charterer    Charterer
Ratings(2)
  Initial
Charter
Term
    Extension Options
  Upon redelivery
from MSC, but no
earlier than August
2014
   August 2019 to
August 2020
   Phillips
66
   Baa1/BBB     5 years      N/A

Evergreen State(3)

  January 2011    August 2015    MSC    Aaa/AA+(4)     1 year      3 one-year options; 
1 eleven-month option
  Upon redelivery
from MSC
   August 2022 to
August 2023
   Tesoro    Ba1/BB+     4 years      2 two-year options

 

(1) Assumes the exercise of each extension option.
(2) Moody’s Investors Services, Inc./Standard & Poor’s Ratings Services. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time.
(3) Option periods for the MSC time charters run in conjunction with the government fiscal year (October 1 through September 30). Upon redelivery from MSC, the Empire State or, at our option, the Evergreen State, will be chartered to Phillips 66, to begin no earlier than August 1, 2014, for an initial term of five years, with no extension options and, upon redelivery from MSC, the Evergreen State or, at our option, the Empire State, will be chartered to Tesoro for an initial term of four years, with two options to extend for two years each. The MSC time charters are subject to cancellation by MSC at its convenience.
(4) U.S. Government Sovereign Rating.

The table below depicts the existing contracted terms and remaining extension options currently in place for our initial fleet:

 

LOGO

 

 

(1) Assumes the exercise of the final extension option by MSC and redelivery of the Empire State in August 2015.
(2) Assumes the exercise of the final extension option by MSC and redelivery of the Evergreen State in August 2015.

The table below sets forth the average contracted daily hire rates for the vessels in our initial fleet:

 

Year Ended December 31

   Average
Contracted
Daily Hire
Rates(1)
 

2013

   $ 53,968   

2014

   $ 55,040   

2015

   $ 60,919   

2016

   $ 65,417   

 

(1) Assumes the exercise of each extension option.

 

 

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Option to Purchase State Class Newbuild Vessels

Upon the closing of this offering, we will enter into an option agreement pursuant to which we will have an option to purchase each of the following Jones Act MR product tankers from State Class Tankers:

 

Vessel

  Expected
Delivery Date to
State Class Tankers
  Charter
Expiry(1)
  Charterer   Charterer
Rating
  Initial
Charter
Term
    Extension
Options

State Class Tanker 1

  November 2015   November 2023   Major Oil Company   Aa1/AA     5 years      3 one-year options

State Class Tanker 2

  April 2016   April 2024   Major Oil Company   Aa1/AA     5 years      3 one-year options

State Class Tanker 3

  October 2016   October 2024   Major Oil Company   Aa1/AA     5 years      3 one-year options

State Class Tanker 4

  July 2016   July 2024   Major Oil Company   Aa1/AA     5 years      3 one-year options

 

(1) Assumes the exercise of each extension option.

State Class Tankers, an affiliate of Blackstone, has entered into a contract with the National Steel and Shipbuilding Company (“NASSCO”) shipyard of General Dynamics for the construction of four ECO-class MR product tankers. The vessels are being constructed based on a design by DSEC Co., Ltd., a subsidiary of Daewoo Shipbuilding & Marine Engineering, and will be among the most modern and fuel-efficient tankers in the Jones Act fleet. State Class Tankers has also entered into five-year time charters with a major oil company for each of the four State Class newbuild vessels that will begin on the vessels’ respective scheduled dates of delivery to the charterer.

Pursuant to an option agreement, which we intend to enter into with State Class Tankers at the closing of this offering, we will have an option to purchase each of the State Class newbuild vessels at an exercise price per vessel equal to its fair market value, subject to a minimum price, each as determined in accordance with the option agreement. If we do not exercise our option to purchase a State Class newbuild vessel within nine months following such vessel’s delivery date, the purchase option shall terminate for such vessel. Under the option agreement, Holding, State Class Tankers and any entity, other than the Partnership, operated by the Chief Executive Officer or the Chief Financial Officer of our general partner (each a “Related Entity”) will grant a right of first offer to us, subject to certain exceptions, for any Jones Act tanker vessel they own that is engaged in the Jones Act trade and operating under a time charter of three or more years. Additionally, under the option agreement, we and our subsidiaries will grant a similar right of first offer to the Related Entities on any proposed sale, transfer or other disposition of any MR product tanker engaged in the Jones Act trade and operating under a time charter of less than three years.

The decision to purchase a State Class newbuild vessel, the exercise price to be paid for a State Class newbuild vessel, and any other terms of our purchase must be approved by our conflicts committee. We are under no obligation to buy the State Class newbuild vessels. We intend to fund the acquisition of any State Class newbuild vessel through a combination of debt and equity, to be determined at the time of any such acquisition. Our ability to purchase the State Class newbuild vessels, should we exercise our right to purchase such vessels, is dependent on our ability to obtain financing to fund all or a portion of the acquisition costs of these vessels.

Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Formation Transactions—Option Agreement” for a description of the agreement governing our relationship with State Class Tankers and our option to acquire the State Class newbuild vessels.

Jones Act Tanker Industry Fundamentals

Dynamics in the Jones Act tanker industry are impacted fundamentally by the domestic marine transportation demand for crude oil, refined petroleum products and chemicals and the available supply of vessels. We believe the following Jones Act industry trends will cause daily hire rates to increase as companies pursue longer term time charters in conjunction with rising demand and decreasing supply of vessels over time:

 

   

Our market enjoys significant barriers to entry. The Jones Act limitation on foreign-owned and/or constructed vessels protects the U.S. point-to-point maritime shipping market from foreign

 

 

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competition. Additionally, the scarcity of shipbuilding capacity in the United States limits the number of new tankers that can be constructed domestically. Currently, only two shipyards in the United States, NASSCO and Aker Philadelphia Shipyard, are actively building Jones Act tankers and have a favorable industry reputation and a track record of delivering Jones Act tankers at competitive prices based upon industry-approved technical designs. However, industry trade publications recently reported that the Avondale Shipyard is in discussions to build up to eight MR Jones Act tankers with the technical assistance of a foreign shipyard.

The number of Jones Act qualified tankers has declined significantly, from 48 ships at its recent peak in 2009 to 32 ships in 2013, and may continue to decline as approximately 19% of the existing tankers are over 28 years of age. Compliance with stricter environmental regulations, increasing customer vetting pressure and the commercial obsolescence of older tonnage has accelerated the retirement of many ships, while the high barriers to entry resulting from relatively high construction costs, limited shipyard capacity and the regulatory protection from foreign competition has limited the number of new ships entering the fleet. Despite these recent declines, the number of product tankers in the Jones Act fleet could begin to increase in 2015. Crowley Maritime Corporation and Aker Philadelphia Shipyard recently announced a joint venture to build four new product tankers to be delivered in 2015 and 2016, with an option to build up to four additional tankers in the future, and NASSCO has contracted with State Class Tankers to deliver the four State Class newbuild vessels in 2015 and 2016 and with Seabulk Tankers, Inc., a wholly-owned subsidiary of SEACOR Holdings Inc., to design and construct three 50,000 dwt product tankers to be delivered in 2016 and 2017, plus an option for one additional vessel.

 

   

Increasing U.S. production of crude oil and chemicals. U.S. crude oil production increased from 5.7 to 6.5 million barrels per day (“bbl/d”) from 2011 to 2012, and is expected to continue to increase to an average 7.5 million bbl/d in 2013 and 8.4 million bbl/d in 2014, according to the EIA. Increased U.S. oil production is boosting coastal shipments as oil companies move crude to domestic refineries, due to United States prohibitions on exports of most crude oil. In the past 12 months, eight tankers, representing 25% of the total Jones Act tanker fleet, have been reallocated from other Jones Act trade to crude transportation in the U.S. Gulf Coast; prior to this reallocation, there were no tankers committed to crude transportation in the U.S. Gulf Coast. U.S. chemical production has also increased significantly as increasing shale gas production provides a competitively priced feedstock. Modern Jones Act product tankers, including the product tankers in our initial fleet, are capable of carrying a wide range of liquid cargoes, including crude oil and certain chemicals, without retrofitting. Accordingly, increases in demand for coastwise transportation of crude oil and chemicals directly impact demand for the services of modern Jones Act product tankers. Domestic chemical suppliers are expected to reclaim market share on the East Coast, business which was lost to imports during the last decade, potentially providing increased demand for Jones Act tonnage.

 

   

U.S. refinery and pipeline capacity driving increased reliance on coastwise transportation. Marine transportation provides a critical link between a number of major refined petroleum product producing and consuming regions of the United States. The growth in U.S. Gulf of Mexico refinery capacity and refinery closures in the Northeast and in the Caribbean have further accentuated the refined petroleum product surplus on the U.S. Gulf Coast and the supply deficit in the U.S. Atlantic States, driving additional demand for coastwise transportation. There are currently only two pipelines (the Colonial and the Plantation) that carry refined petroleum products from the U.S. Gulf of Mexico to the U.S. Mid-Atlantic and Southern Atlantic regions, and they are operating at full capacity. While a number of pipeline projects to move crude out of Canada, Texas and the Bakken region are scheduled to come on line over the next few years, the rapid growth in shale and unconventional oil production is outpacing the construction of pipeline capacity. Tankers and barges, as well as rail, are expected to be widely used to supplement the insufficient pipeline capacity and cover routes not practicably covered by pipelines.

See “The Jones Act Product Carrier Market.”

 

 

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Competitive Strengths

We believe that our future prospects for success are enhanced by the following aspects of our business:

 

   

Modern, high quality fleet. We have one of the youngest Jones Act tanker fleets, with an average age of approximately 3.8 years, compared to the average age of 12 years for the rest of the Jones Act tanker fleet, which we believe provides us with a competitive advantage and will allow us to capture new charter opportunities in the near and long-term. In addition, newer vessels are more fuel-efficient, cost-effective and environmentally sound than older vessels, while requiring less annual capital expenditures to maintain. As a result, we believe our vessels and the State Class newbuild vessels will be more attractive to customers with increasingly stringent vetting and inspection standards.

 

   

Stable cash flows from long-term time charters with creditworthy counterparties. We benefit from the stable cash flows and high utilization rates associated with our long-term time charters. The vessels in our initial fleet are currently employed under long-term time charters with affiliates of creditworthy counterparties, including BP (currently rated A2 / A), Shell (currently rated Aa1 / AA), and Chevron (currently rated Aa1 / AA) and MSC, a subdivision of the U.S. Government (Aaa / AA+), and two of our vessels are forward chartered to Tesoro (Ba1/BB+) and Phillips 66 (Baa1/BBB). In addition, the four State Class newbuild vessels that we have the option to purchase will also operate under long-term time charters with a major oil company. Our focus on modern high quality vessels and our employment strategy have allowed us to maintain utilization rates in excess of 99% for our initial fleet since the commencement of our current time charters. In addition, our time charters contain fixed-rate escalation provisions to offset the effects of increases in operating expenses.

 

   

Multiple visible growth opportunities. We will have an option to purchase from State Class Tankers four newbuild Jones Act tankers, which will increase the capacity of our initial fleet by up to an aggregate of 197,720 dwt, or approximately 80%. Our existing fleet will also provide us with considerable built-in cash flow growth as we have already entered into forward time charters on existing vessels at substantially higher daily hire rates than the existing time charters with MSC. We believe our option to purchase the State Class newbuild vessels, as well as future acquisition opportunities, and the new forward time charters we have entered into will allow us to grow our cash distributions.

 

   

Platform and financial flexibility to support our growth. We believe that we benefit from the relationships that our management and Sponsors have developed over time with leading charterers, financing sources and shipping and energy industry participants, although our management and Sponsors may have conflicts of interest as described under “—Summary of Conflicts of Interest and Fiduciary Duties.” We believe we will have access to the public debt and equity markets in order to pursue expansion opportunities. We expect to have a moderate level of indebtedness upon consummation of this offering and the application of the net proceeds therefrom. In addition, as of September 30, 2013, after giving effect to the formation transactions, this offering and the use of proceeds therefrom, we would have had approximately $             million of available borrowing capacity under our credit facility that could be used for working capital purposes and acquisitions.

 

   

Superior executive and technical management teams. Our executive management team has over 40 years of combined industry experience and retains all strategic and commercial management of our vessels, while the technical management of the vessels is outsourced to certain affiliates of Crowley Maritime Corporation (our “Vessel Manager”). Our Vessel Manager has significant Jones Act expertise, with over 120 years of history in the industry and a reputation for high standards of safety, operating performance and customer service.

We can provide no assurance, however, that we will be able to utilize our strengths described above. For further discussion of the risks that we face, please read “Risk Factors.”

 

 

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Business Strategies

Our primary business objective is to generate stable cash flows that will enable us to pay quarterly cash distributions to our unitholders and to increase these quarterly cash distributions over time by executing the following strategies:

 

   

Manage our fleet and deepen our customer relationships to provide a stable base of cash flows. We intend to maintain and grow our cash flows over time by emphasizing customer service and strengthening our relationships with our charterers. We will actively seek the extension and/or renewal of existing time charters in addition to new opportunities to serve our customers. We charter our existing fleet to a number of the world’s leading energy companies as well as an agency within the U.S. Navy. We believe our close relationships with these parties will provide attractive opportunities as domestic marine transportation-related activity is expected to grow in coming years. We will continue to stress the importance of safety, health, security and environmental stewardship as they relate to all aspects of our operation in order to satisfy our customers and fully comply with all applicable national and international rules and regulations.

 

   

Pursue strategic and accretive acquisitions of product tankers on long-term, fixed-rate time charters. We will seek to pursue strategic and accretive acquisitions. Under the option agreement that we will enter into with State Class Tankers upon the closing of this offering, we will have the option to purchase four State Class newbuild vessels, expected to be delivered to time charterers during 2015 and 2016. We expect to be able to capitalize on improved industry fundamentals and rising daily hire rates as the existing time charters on our initial fleet expire over the next several years.

We can provide no assurance, however, that we will be able to implement our business strategies described above. For further discussion of the risks that we face, please read “Risk Factors.”

Our Vessel Manager

Operationally, we will retain all strategic and commercial management of our vessels, while the technical management of the vessels will be outsourced to certain affiliates of Crowley Maritime Corporation, an entity unaffiliated with our Sponsors. We believe Crowley Maritime Corporation is one of the leading technical managers in the Jones Act tanker industry. Our Vessel Manager’s technical management services include crewing, maintenance and repair, purchasing, insurance and claims administration, and security as well as certain accounting and reporting services. Founded in 1892, our Vessel Manager is one of the oldest maritime transportation companies in the United States, employing approximately 5,300 employees across 92 office locations as of December 31, 2012. We benefit from our Vessel Manager’s operational expertise, purchasing power and relationships with vendors, suppliers and major labor organizations which are key to providing skilled and experienced crews.

Pursuant to the Vessel Management Agreements (as defined under “Business—Our Vessel Manager—Vessel Management Agreements”), we will reimburse our Vessel Manager for the reasonable costs and expenses incurred in connection with providing administrative and technical services to us. We expect that we will pay our Vessel Manager approximately $2.9 million in the aggregate under the Vessel Management Agreements for the twelve-month period ending September 30, 2014. For a more detailed description of our Vessel Manager and our relationship with it, please read “Business—Our Vessel Manager.”

Our Sponsors

We believe that one of our principal strengths is our relationship with our Sponsors. We believe we will benefit from our Sponsors’ experience in the energy industry, and from our Sponsors’ relationships with financing sources and

 

 

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suppliers of technical, commercial and managerial expertise. Our Sponsors will indirectly control us through their ownership of our general partner. Following this offering, our Sponsors will indirectly own an aggregate of a     % limited partnership interest in us, all of our incentive distribution rights and will control our general partner.

Blackstone is an affiliate of The Blackstone Group L.P. (the “Blackstone Group”), which was founded in 1985 and is one of the world’s leading investment and advisory firms. The Blackstone Group’s alternative asset management businesses include the management of private equity funds, real estate funds, funds of hedge funds, credit-oriented funds and closed end mutual funds. The Blackstone Group also provides various financial advisory services, including mergers and acquisition advisory, restructuring and reorganizational advisory and fund placement services.

GSO is the credit platform of the Blackstone Group and manages assets across multiple strategies within the leveraged finance marketplace.

Cerberus, founded in 1992 and headquartered in New York, manages assets across multiple strategies including control and non-control private equity, commercial middle-market direct lending, real estate-related investments and underperforming securities and assets.

Formation Transactions

General

We were formed on August 21, 2013 as a Delaware limited partnership to provide Jones Act marine transportation services for refined petroleum products and crude oil in the U.S. domestic trades. Prior to the closing of this offering, we will not own any vessels.

At or prior to the closing of this offering, the following transactions will occur:

 

   

we will issue to Holding, an entity owned and controlled by our Sponsors,                      common units and all of our subordinated units, representing a     % limited partner interest in us;

 

   

Holding will contribute to us the existing subsidiaries of Holding which directly or indirectly own the Golden State, the Pelican State, the Sunshine State, the Empire State and the Evergreen State;

 

   

we will issue to American Petroleum Tankers GP LLC, an entity owned and controlled by our Sponsors, a non-economic general partner interest in us and all of our incentive distribution rights, which will entitle American Petroleum Tankers GP LLC to increasing percentages of the cash we distribute in excess of $         per unit per quarter;

 

   

we will sell                      common units to the public in this offering, representing a     % limited partner interest in us; and

 

   

we will use the proceeds from this offering to repay a portion of the borrowings under our existing credit facility and to fund a cash distribution to Holding.

In addition, at or prior to the closing of this offering:

 

   

we will enter into an option agreement with State Class Tankers and our general partner governing our option to purchase the State Class newbuild vessels.

We refer to the transactions described above as the “formation transactions.” For further details on our agreements with Holding, State Class Tankers and their respective affiliates, including amounts involved, please read “Certain Relationships and Related Party Transactions.”

 

 

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Holding Company Structure

We are a holding entity and will conduct our operations and business through subsidiaries, as is common with publicly traded limited partnerships, to maximize operational flexibility. We believe that conducting our operations through a publicly traded limited partnership will offer us the following advantages:

 

   

access to the public equity and debt capital markets;

 

   

a lower cost of capital for expansion and acquisitions; and

 

   

an enhanced ability to use equity securities as consideration in future acquisitions.

Simplified Organizational and Ownership Structure After this Offering

The following diagram depicts our simplified organizational and ownership structure after giving effect to the offering and formation transactions, assuming no exercise of the underwriters’ option to purchase additional common units:

 

LOGO

 

(1) The diagram excludes APT New Intermediate Holdco LLC, which is the parent of American Petroleum Tankers Parent LLC and a guarantor under our existing credit facility.

 

 

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     Number of Units      Percentage Ownership  

Public Common Units(1)

     

Holding Common Units(1)

     

Holding Subordinated Units

     

Non-economic General Partner Interest

         —           —   (2) 
  

 

 

    

 

 

 
        100.0
  

 

 

    

 

 

 

 

(1) Assumes the underwriters do not exercise their option to purchase additional common units. If and to the extent the underwriters exercise their option to purchase additional common units, the number of common units purchased by the underwriters pursuant to such exercise will be sold to the public and the remainder of the          additional common units, if any, will be issued to Holding. Any such units issued to Holding will be issued for no additional consideration. If the underwriters’ option is exercised in full, then Holding would own                      common units, or     %, and the public would own                      common units, or     %. All of the net proceeds from any exercise of the underwriters’ option to purchase additional common units will be used to make an additional cash distribution to Holding.
(2) Our general partner will own a non-economic general partner interest in us.

Our Management

Our general partner will manage our operations and activities. Our Sponsors own and control our general partner. Our general partner will not receive any management fee or other compensation in connection with its activities as general partner, but will be entitled to reimbursement of all direct expenses incurred on our behalf. If specified requirements are met, our general partner will be entitled to distributions on its incentive distribution rights. Please read “Our Cash Distribution Policy and Restrictions on Distributions” and “Certain Relationships and Related Transactions.” Unlike stockholders in a publicly traded corporation, our unitholders will not be entitled to elect our general partner or its directors. In addition, both of the officers of our general partner are also officers of State Class Tankers and will spend a significant amount of time overseeing the management, operations, corporate development and future acquisition initiatives of both our business and the business of State Class Tankers.

Summary of Conflicts of Interest and Fiduciary Duties

Our general partner has a fiduciary duty to manage us in a manner beneficial to our unitholders, subject to significant contractual limitations set forth in our Partnership Agreement as described under “Conflicts of Interest and Fiduciary Duties.” However, conflicts of interest may arise between us and our unaffiliated limited partners on the one hand, and our Sponsors and their affiliates, including Holding and our general partner, on the other hand, or between us and our unaffiliated limited partners on the one hand, and State Class Tankers and its affiliates on the other hand. The resolution of these conflicts may not be in the best interest of us or our unaffiliated limited partners. In particular:

 

   

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, which entitles our general partner to consider only the interests and factors that it desires, and it has no duty or obligations to give any consideration to any interest of or factors affecting us, our affiliates or any unitholder; when acting in its individual capacity, our general partner may act without any fiduciary obligation to us or the unitholders whatsoever;

 

   

any agreement between us, on the one hand, and our general partner and its affiliates, on the other, 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;

 

 

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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: (i) enabling our general partner or its affiliates to receive distributions on any subordinated units held by them or the incentive distribution rights or (ii) hastening the expiration of the subordination period;

 

   

the holder or holders of a majority of our incentive distribution rights, which will initially be our general partner, have the right to reset the minimum quarterly distribution and the cash target distribution levels upon which the incentive distributions payable to such holder are based to higher levels without the approval of unitholders or the conflicts committee of our general partner’s board of directors at any time when there are not subordinated units outstanding and we have made cash distributions to the holders of the incentive distribution rights at the highest level of incentive distribution for each of the prior four consecutive fiscal quarters; in connection with such resetting and the corresponding relinquishment by such holder of incentive distribution payments based on the cash target distribution levels prior to the reset, such holder will be entitled to receive a number of newly issued common units based on a predetermined formula described under “How We Make Cash Distributions—Our General Partner’s Right to Reset Incentive Distribution Levels”;

 

   

both of our general partner’s officers will also serve as officers of State Class Tankers and its affiliates and, while acting in such capacity, may consider only the interests and factors that are beneficial to the equityholders of State Class Tankers, which may cause them to pursue business strategies that disproportionately benefit State Class Tankers or its affiliates or which otherwise are not in the best interests of us or our unitholders. In addition, State Class Tankers is owned and controlled by BCPV and, as GSO and Cerberus do not own any interests in State Class Tankers, there is a conflict of interest among our Sponsors with respect to transactions between us and State Class Tankers;

 

   

any of Holding, State Class Tankers or any of their affiliates may compete with us and could own and operate product tankers under time charters that may compete with our vessels;

 

   

the doctrine of corporate opportunity, or any analogous doctrine, will not apply to the general partner and its affiliates, and, as a result, neither the general partner nor any of its affiliates will have any obligation to present business opportunities to us;

 

   

in connection with the offering, we will enter into an option agreement with State Class Tankers and we may enter into additional agreements in the future with State Class Tankers, relating to the purchase of additional vessels, and other matters. In the performance of its obligations under these agreements, State Class Tankers is not held to a fiduciary duty standard of care to us, our general partner or our limited partners, but rather to the standard of care specified in these agreements; and

 

   

although the option agreement provides that the Related Entities will grant a right of first offer to us on certain Jones Act tanker vessels that they may own in the future (other than the State Class newbuild vessels), the Related Entities are under no obligation to sell, or offer to sell, to us any such Jones Act tanker vessel they own that is engaged in the Jones Act trade and operating under a time charter of less than three years.

For a more detailed description of our management structure, please read “Management—Directors and Executive Officers of our General Partner” and “Certain Relationships and Related Party Transactions.”

The board of directors of our general partner will initially be comprised of three members, all of whom will be designated by our Sponsors and one of whom will be independent in accordance with the requirements of the New York Stock Exchange (the “NYSE”). In compliance with the rules of the NYSE and the SEC, two additional independent directors will be appointed within twelve months of listing. Neither our general partner nor its board of directors will be elected by our unitholders. Our Sponsors own all of the equity interests of our general partner and will have the right to appoint our general partner’s board of directors, including the

 

 

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independent directors. In this prospectus, when we refer to our board of directors, we are referring to the board of directors of our general partner. Within 90 days of the date of this prospectus our general partner’s board of directors will have a conflicts committee composed of two independent directors. Our general partner may, but is not obligated to, seek approval of the conflicts committee for resolutions of conflicts of interest that may arise as a result of the relationships between Holding and its affiliates, on the one hand, and us and our unaffiliated limited partners, on the other. There can be no assurance that a conflict of interest will be resolved in favor of the Partnership or for the benefit of the limited partners.

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

Our partnership agreement limits the liability and reduces the fiduciary duties of our general partner to our unitholders. Our partnership agreement also restricts the remedies available to unitholders for actions that might otherwise constitute a breach of our general partner’s fiduciary duties owed to our unitholders. By purchasing a common unit, you are treated as having consented to various actions contemplated in the partnership agreement and to conflicts of interest that might otherwise be considered a breach of fiduciary or other duties under applicable state law. Please read “Conflicts of Interest and Fiduciary Duties—Fiduciary Duties of the General Partner” for a description of the fiduciary duties imposed on our general partner by Delaware law, the material modifications of these duties contained in our partnership agreement and certain legal rights and remedies available to our unitholders.

Risk Factors

An investment in our common units involves risks associated with our business, our partnership structure and the tax characteristics of our common units. These risks are described under “Risk Factors” beginning on page 24 of this prospectus and include:

Risks Inherent in Our Business

 

   

We have generated net losses in each of the last three fiscal years, and may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses to enable us to pay the minimum quarterly distribution on our common units and subordinated units.

 

   

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 actual results to differ materially from those forecasted.

 

   

Our ability to grow and to meet our financial needs may be adversely affected by our cash distribution policy.

 

   

We will derive all of our revenues from a limited number of customers and the loss of any of these customers or time charters with any of them could result in an adverse effect on our business and results of operations.

 

   

We will have a limited number of vessels and any loss of use of a vessel would adversely affect our results of operations.

 

   

Our business would be adversely affected if the Jones Act provisions on coastwise trade were waived, modified or repealed or if changes in international trade agreements or applicable law or government regulations were to occur or if the Oil Pollution Act of 1990 (“OPA 90”) were modified.

 

   

Marine transportation is inherently risky and an incident involving significant loss or environmental contamination by any of our vessels could harm our reputation and business.

 

 

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Decreases in United States refining activity, particularly in the U.S. Gulf Coast region, could adversely affect our business and financial condition.

 

   

A decrease in the cost of importing or transporting refined petroleum products could cause demand for U.S.-flag product carrier capacity and daily hire rates to decline, which would decrease our revenues and profitability.

 

   

An increase in the supply of Jones Act vessels without an increase in demand for such vessels could cause daily hire rates to decline.

 

   

We have high levels of fixed costs that will be incurred regardless of our level of business activity.

Risks Inherent in an Investment in Us

 

   

Our Sponsors own a controlling interest in us and have limited contractual and fiduciary duties to us and our common unitholders, and they may favor their own interests to the detriment of us and our other common unitholders.

 

   

Our Sponsors own a controlling interest in us and their interests may conflict with ours or yours in the future.

 

   

Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors, which could reduce the price at which the common units trade.

 

   

Our partnership agreement limits the duties our general partner may have to our unitholders and restricts the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

 

   

You will experience immediate and substantial dilution of $         per common unit on a tangible book value basis.

 

   

We may issue additional equity securities, including securities senior to the common units, without your approval, which would dilute your ownership interests.

 

   

Our partnership agreement limits the ownership of common units by individuals and entities that are not U.S. citizens within the meaning of the Jones Act. This may affect the liquidity of our common units and may result in non-U.S. citizens being required to disgorge profits, sell their units at a loss or relinquish their voting and distribution rights.

 

   

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

 

   

We are an “emerging growth company” and we are subject to reduced disclosure requirements applicable to emerging growth companies, which may make our common units less attractive to investors.

Tax Risks to Common Unitholders

 

   

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

 

   

You will be required to pay taxes on your share of our taxable income even if you do not receive any cash distributions from us.

 

 

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Implications of Being an Emerging Growth Company

We had less than $1.0 billion in revenue during our last fiscal year, which means that we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. The provisions we intend to avail ourselves of include:

 

   

exemption from the auditor attestation requirement in the assessment of the emerging growth company’s internal control over financial reporting;

 

   

exemption from new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies;

 

   

exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board (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 financial statements;

 

   

less extensive disclosure requirements about our executive compensation arrangements; and

 

   

no requirement for shareholder non-binding advisory votes on executive compensation or golden parachute arrangements.

We may take advantage of these provisions until the end of the fiscal year following the fifth anniversary of our initial public offering or such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company if we have more than $1.0 billion in annual revenues, have more than $700 million in market value of our common units held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period. For as long as we take advantage of the reduced reporting obligations, the information that we provide unitholders may be different than information provided by other public companies.

Principal Executive Offices and Internet Address; SEC Filing Requirements

Our principal executive offices are located at 600 W. Germantown Pike, Suite 400, Plymouth Meeting, PA 19462, and our phone number is (610) 940-1677. We expect to make our periodic reports and other information filed with or furnished to the United States Securities and Exchange Commission (the “SEC”) available, free of charge, through our website at http://www.americanpetroleumtankers.com, 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. Please read “Where You Can Find More Information” for an explanation of our reporting requirements.

 

 

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The Offering

 

Common units offered to the public

                 common units.

 

                       common units if the underwriters exercise in full their option to purchase additional common units.

 

Units outstanding after this offering

                     common units and                  subordinated units, representing a     % and     % limited partner interest in us, respectively. If and to the extent the underwriters exercise their option to purchase                  additional common units, the number of common units purchased by the underwriters pursuant to such exercise will be sold to the public, and the remainder of such common units, if any, will be issued to Holding. Any such units issued to Holding will be issued for no additional consideration. Accordingly, exercise of the underwriters’ option will not affect the total number of common units outstanding or the amount of cash needed to pay the minimum quarterly distribution on all units.

 

  In addition, our general partner will own a non-economic general partner interest in us.

 

Use of proceeds

We intend to use the net proceeds from this offering, after deducting underwriting discounts, the structuring fee and estimated offering expenses payable by us, to repay a portion of the borrowings under our existing credit facility and to fund a cash distribution to Holding.

 

  The net proceeds from any exercise of the underwriters’ option to purchase additional common units will be used to fund a cash distribution to Holding. See “Use of Proceeds.”

 

Cash distributions

We intend to make minimum quarterly distributions of $         per common unit ($         per unit on an annualized basis) 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. 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 $             plus any arrearages from prior quarters;

 

   

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

 

   

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

 

 

We must distribute all of our cash on hand at the end of each quarter, less reserves established by our general partner to provide for the proper conduct of our business, to comply with any applicable debt instruments or to provide funds for future distributions. We refer to this

 

 

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cash as “available cash,” and we define its meaning in our partnership agreement. The amount of available cash may be greater than or less than the aggregate amount of the minimum quarterly distribution to be distributed on all units.

 

  Within 45 days after the end of each fiscal quarter (beginning with the quarter ending December 31, 2013), we will distribute all of our available cash to unitholders of record on the applicable record date. We will adjust the minimum quarterly distribution for the period from the closing of the offering through December 31, 2013 based on the actual length of the period. Our ability to pay our minimum quarterly distribution is subject to various restrictions and other factors described in more detail under the caption “Our Cash Distribution Policy and Restrictions on Distributions.”

 

  If cash distributions to our unitholders exceed $             per unit in a quarter, holders of our incentive distribution rights (initially, our general partner) 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.”

 

  Pro forma cash available for distribution generated during the year ended December 31, 2012 and the twelve-month period ended September 30, 2013 was approximately $30.1 million and $30.4 million, respectively. The amount of available cash we will need to pay the minimum quarterly distribution for four quarters on our common units and subordinated units to be outstanding upon completion of this offering will be approximately $             (or an average of approximately $             per quarter). As a result, we would have generated available cash sufficient to pay the full minimum quarterly distribution of $             per unit per quarter ($             per unit on an annualized basis) on all of our common and subordinated units for the year ended December 31, 2012 and the twelve-month period ended on September 30, 2013. Please read “Our Cash Distribution Policy and Restrictions on Distributions—Unaudited Pro Forma Cash Available for Distribution for the Year Ended December 31, 2012 and the Twelve-Month Period Ended September 30, 2013.”

 

 

We believe, based on the estimates contained in and the assumptions listed under “Our Cash Distribution Policy and Restrictions on Distributions—Estimated Cash Available for Distribution for the Twelve-Month Period Ending September 30, 2014,” that we will have sufficient cash available for distribution to enable us to pay the minimum quarterly distribution of $             on all of our common and subordinated units for the twelve-month period ending September 30, 2014. However, we do not have a legal obligation to pay quarterly distributions at our minimum quarterly distribution rate or at any other rate. There is no guarantee that we will distribute quarterly cash distributions to our unitholders in any quarter. Unanticipated events may occur that could adversely affect the actual results we achieve during the forecast period. Consequently, our actual results of

 

 

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operations, cash flows and financial condition during the forecast period may vary from the forecast, and such variations may be material. Prospective investors are cautioned to not place undue reliance on the forecast and should make their own independent assessment of our future results of operations, cash flows and financial condition.

 

  Please read “Risk Factors” and “Our Cash Distribution Policy and Restrictions on Distributions—Estimated Cash Available for Distribution for the Twelve-Month Period Ending September 30, 2014.”

 

Subordinated units

Holding will initially own all of our subordinated units. The principal difference between our common units and subordinated units is that in any quarter during the subordination period the subordinated units are entitled to receive the minimum quarterly distribution of $             per unit only after the common units have received the minimum quarterly distribution and arrearages in the payment of the minimum quarterly distribution from prior quarters. If we do not pay distributions on our subordinated units, our subordinated units will not accrue arrearages for those unpaid distributions.

 

Conversion of subordinated units

The subordination period will end if:

 

   

we have earned and paid at least $         (the minimum quarterly distribution on an annualized basis) on each outstanding common and subordinated unit for any three consecutive non-overlapping four-quarter periods ending on or after December 31, 2016; or

 

   

we have earned and paid at least $         (150.0% of the annualized minimum quarterly distribution) on each outstanding unit for any four-quarter period ending on or before the date of determination;

 

  in each case, provided that there are no arrearages on our common units at that time.

 

  For purposes of determining whether the subordination period will end, the three consecutive four-quarter periods for which the determination is being made may include one or more quarters with respect to which arrearages in the payment of the minimum quarterly distribution on the common units have accrued, provided that all such arrearages have been repaid prior to the end of each such four-quarter period.

 

 

In addition, at any time on or after December 31, 2016, provided there are no arrearages in the payment of the minimum quarterly distribution on the common units and subject to approval by our conflicts committee, the holder or holders of a majority of our subordinated units will have the option to convert each subordinated unit into a number of common units at a ratio that may be less than one-to-one on a basis equal to the percentage of available cash from operating surplus paid out over the previous four-quarter period with respect to the subordinated units in relation to the total amount of

 

 

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distributions required to pay the minimum quarterly distribution in full over the previous four quarters with respect to the subordinated units.

 

  The subordination period will also end upon the removal of our general partner other than for cause if units held by our general partner and its affiliates are not voted in favor of such removal.

 

  When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis (or, on or after December 31, 2016, at the option of the holder or holders of a majority of our subordinated units, at a ratio that may be less than one-to-one), and the common units will no longer be entitled to arrearages and the converted units will then participate pro rata with the other common units in distributions of available cash.

 

  Please read “How We Make Cash Distributions—Subordination Period.”

 

Our general partner’s right to reset the target distribution levels

The holder or holders of a majority of our incentive distribution rights, which will initially be our general partner, have the right, at a time when there are no subordinated units outstanding, if they have received incentive distributions at the highest level to which they are entitled (50.0%) for each of the prior four consecutive fiscal quarters and the amount of the total distribution of available cash for each quarter did not exceed adjusted operating surplus for such quarter, to reset the initial cash target distribution levels at higher levels based on the distribution at the time of the exercise of the reset election. 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 (we refer to such amount as the “reset minimum quarterly distribution amount”), and the target distribution levels will be reset to correspondingly higher levels based on the same percentage increases above the reset minimum quarterly distribution amount as our current target distribution levels.

 

  In connection with resetting these target distribution levels, the holder or holders of our incentive distribution rights will be entitled to receive a number of common units equal to that number of common units whose aggregate quarterly cash distributions equaled the average of the distributions on the incentive distribution rights in the prior two quarters. For a more detailed description of the right of the holder or holders of a majority of our incentive distribution rights to reset the target distribution levels upon which the incentive distribution payments are based and the concurrent right of such holder or holders to receive common units in connection with this reset, please read “How We Make Cash Distributions— Our General Partner’s Right to Reset Incentive Distribution Levels.”

 

Issuance of additional units

Our partnership agreement authorizes us to issue an unlimited number of additional units, including units that are senior to the common units

 

 

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in rights of distribution, liquidation and voting, on the terms and conditions determined by our general partner, without the consent of our unitholders. Please read “Units Eligible for Future Sale” and “The Partnership Agreement—Issuance of Additional Partnership Interests.”

 

Limited voting rights

Except as otherwise described herein, each outstanding common unit is entitled to one vote on matters subject to a vote of common unitholders.

 

  Unlike stockholders in a publicly traded corporation, our unitholders will not be entitled to elect our general partner or its directors. 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 or any of its affiliates, voting together as a single class. Upon consummation of this offering (assuming that the underwriters do not exercise their option to purchase additional common units), Holding will own                      of our common units and all of our subordinated units, representing a     % limited partner interest in us. If the underwriters’ option to purchase additional common units is exercised in full, Holding will own                  of our common units and all of our subordinated units, representing a     % limited partner interest in us. As a result, you will initially be unable to remove our general partner without its or Holding’s consent, because Holding will own sufficient units upon completion of this offering to be able to prevent the general partner’s removal. Please read “The Partnership Agreement—Voting Rights.”

 

Jones Act ownership limitation

Our partnership agreement restricts ownership of our common units by non-U.S. citizens within the meaning of the Jones Act to a percentage of not greater than 19.9% of our outstanding common units.

 

  Our partnership agreement provides for a number of procedures to effect this ownership limitation. Please read “The Partnership Agreement—Ownership by Non-U.S. Citizens.”

 

Limited call right

If at any time our general partner and its affiliates (including Holding) own more than 80% of the outstanding common units, our general partner has the right, but not the obligation, to purchase all, but not less than all, of the remaining common units at a price equal to not less than the current market price of the common units, as calculated pursuant to the terms of our partnership agreement. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon the exercise of this limited call right. Please read “The Partnership Agreement—Limited Call Right.”

 

U.S. federal income tax considerations

We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ending                     , you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be     % or less of the cash distributed to you with respect to that period. Please read “Material U.S. Federal Income Tax Considerations—Tax Consequences to Unitholders—Ratio of Taxable Income to Distributions.”

 

 

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

 

Exchange listing

We have applied to list the common units on the NYSE under the symbol “JAT.”

 

 

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Summary Historical Financial and Operating Data

The following table presents, in each case for the periods and as of the dates indicated, all of the summary historical financial and operating data of Holding, which includes the subsidiaries that own the vessels in the initial fleet and all of their related assets, liabilities, revenues, expenses and cash flows. The formation transactions will be accounted for as a reorganization under common control and assets will be recorded at Holding’s historical book values. Our summary historical financial data for the years ended December 31, 2012, 2011 and 2010 and as of December 31, 2012 and 2011 have been derived from our audited consolidated financial statements which are included elsewhere in this prospectus. Our summary historical financial data for the nine months ended September 30, 2013 and 2012 and as of September 30, 2013 have been derived from our unaudited condensed consolidated financial statements which are included elsewhere in this prospectus. Our summary historical balance sheet data as of September 30, 2012 has been derived from our unaudited condensed consolidated financial statements not included in this prospectus. In the opinion of management, such unaudited condensed consolidated financial data for the nine months ended September 30, 2013 and 2012 reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the results for those periods. However, operating results for interim periods are not necessarily indicative of the results that may be expected for the entire fiscal year.

The following financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Capitalization,” our consolidated financial statements and the notes thereto, in each case included elsewhere in this prospectus. For information regarding our pro forma balance sheet after giving effect to this offering and the formation transactions, including the application of the net proceeds from this offering, please see “Capitalization” and our pro forma balance sheet as of September 30, 2013 and December 31, 2012, each as included elsewhere in this prospectus.

Our results of operations, cash flows and financial condition presented below may not be indicative of our future operating results or financial performance.

 

     American Petroleum Tankers Holding LLC  
     For Year Ended December 31,     For the Nine Months
Ended September 30,
 
(dollars in thousands)    2012     2011     2010     2013      2012  

Statement of Operations Data:

           

Revenues

   $ 94,827      $ 106,282      $ 63,600        $73,386       $ 71,524   

Expenses:

           

Vessel operating expenses

     35,405        34,306        24,771        27,954         26,402   

General and administrative expenses

     2,797        2,246        2,058        2,141         1,661   

Depreciation and amortization

     23,786        23,749        17,302        17,840         17,840   

Vessel management expenses

     2,760        2,969        2,489        2,117         2,061   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total expenses

     64,748        63,270        46,620        50,052         47,964   

Other income(1)

     —          —          —          1,500         —    
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Operating income

     30,079        43,012        16,980        24,834         23,560   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Interest income

     2        7        125        —          1   

Interest expense

     (80,245     (75,710     (50,312     (29,923)         (59,631

Debt extinguishment expense

     —          (2,220     (7,640     (15,540)         —    

Write-off of Title XI deferred financing costs(2)

     (1,536     —          —          —          —    

Derivative (losses) gains

     (223     (718     (1,561     8         (212
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net loss

   $ (51,923   $ (35,629   $ (42,408     $(20,621)       $ (36,282
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

 

 

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     American Petroleum Tankers Holding LLC  
     For Year Ended December 31,     For the Nine Months
Ended September 30,
 
(dollars in thousands, except Average Daily Results)    2012     2011     2010     2013     2012  

Balance Sheet Data (at end of period):

          

Cash and cash equivalents

   $ 61,148      $ 31,402      $ 18,241      $ 333      $ 59,348   

Vessels and equipment, net

     645,558        669,260        692,178        627,781        651,483   

Total assets

     726,909        726,408        745,718        649,534        734,777   

Long-term debt (net of current portion)(3)

     710,130        659,141        639,985        244,556        696,831   

Members’ equity(3)

     2,099        54,022        89,651        392,942        17,740   

Cash Flow Data:

          

Net cash provided by operating activities

   $ 30,661      $ 35,414      $ 18,438      $ 19,984      $ 28,494   

Net cash provided by (used in) investing activities

     —          6,665        (175,510     (118      

Net cash provided by (used in) financing activities

     (915     (28,918     167,420        (80,681     (548

Other Financial Data:

          

EBITDA(4)

   $ 52,106      $ 63,823      $ 25,081      $ 27,142      $ 41,188   

Adjusted EBITDA(4)

     54,139        66,545        33,134        41,860        41,473   

Capital expenditures

     —          1,258        170,387        118         

As Adjusted Data(5):

          

Total Debt

         $       

Ratio of total debt to Adjusted EBITDA(4)(6)

           x     

Fleet Data:

          

Operating days for fleet(7)

     1,808        1,825        1,253        1,363        1,349   

Ownership days for fleet(8)

     1,830        1,825        1,276        1,365        1,370   

Fleet utilization(9)

     98.8     100.0     98.2     99.9     98.5

Average Daily Results:

          

Time charter equivalent(10)

   $ 52,449      $ 58,237      $ 50,637      $ 53,843      $ 53,020   

Direct vessel operating expense(11)

     19,347        18,798        19,398        20,479        19,272   

 

(1) Other income in the nine months ended September 30, 2013 was due to the final settlement of the construction contract and warranty claims with NASSCO.
(2) Represents fees incurred due to application for U.S. Title XI Federal Ship Financing Program loan guarantees, which was denied in November 2012. See “Business—Legal Proceedings.”
(3) In the nine months ended September 30, 2013, we refinanced the remaining $258.0 million principal amount of the 2015 Notes. Concurrently with such refinancing, we converted the balance of $468.5 million outstanding under the sponsor facility into Class A member interests of Holding.
(4) EBITDA and Adjusted EBITDA. EBITDA, Adjusted EBITDA and ratios derived from these amounts are non-GAAP financial measures. EBITDA is defined as earnings before interest expense, income tax expense, depreciation and amortization. Adjusted EBITDA is defined EBITDA, adjusted to remove or add back certain unusual and non-cash charges. EBITDA is used as a supplemental financial measure by management and external users of financial statements to assess our financial and operating performance. Adjusted EBITDA is used as a supplemental financial measure by management and external users of financial statements, such as investors, to assess our financial and operating performance. We believe that Adjusted EBITDA assists our management and investors by increasing the comparability of our performance from period to period and against the performance of other companies in our industry that provide Adjusted EBITDA information. This increased comparability is achieved by excluding the potentially disparate effects between periods or companies of interest, other financial items, depreciation and amortization and taxes, which items are affected by various and possibly changing financing methods, capital structure and historical cost basis and which items may significantly affect net income between periods. We believe that
  including Adjusted EBITDA as an operating measure benefits investors in (a) selecting between investing in

 

 

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  us and other investment alternatives and (b) monitoring our ongoing operational strength in assessing whether to continue to hold common units. However, EBITDA and Adjusted EBITDA have important limitations as analytical tools. These limitations include, but are not limited to, the following:

 

   

EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

   

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;

 

   

EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; and

 

   

EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs.

EBITDA and Adjusted EBITDA should not be considered alternatives to net income, operating income, cash flow from operating activities or any other measure of financial performance presented in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA exclude some, but not all, items that affect net income, and these measures may vary among other companies. Therefore, EBITDA and Adjusted EBITDA as presented below may not be comparable to similarly titled measures of other companies. The following tables reconcile EBITDA and Adjusted EBITDA to net income (loss), the most directly comparable U.S. GAAP financial measure, for the periods presented:

 

     American Petroleum Tankers Holding LLC  
     Year Ended December 31,     Nine Months Ended
September 30,
 
     2012     2011     2010     2013     2012  
    

(dollars in thousands)

 

Reconciliation to net loss:

          

Net loss

   $ (51,923   $ (35,629   $ (42,408   $ (20,621   $ (36,282

Less:

          

Interest income

     (2     (7     (125     —          (1

Add:

          

Interest expense

     80,245        75,710        50,312        29,923        59,631   

Depreciation and amortization

     23,786        23,749        17,302        17,840        17,840   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 52,106      $ 63,823      $ 25,081      $ 27,142      $ 41,188   

Add:

          

Straight-line charter revenues

     (30     (216     (1,148     (26     73   

Other income(A)

     —          —          —          (1,500     —     

Debt extinguishment expense

     —          2,220        7,640        15,540        —     

Write-off of Title XI deferred financing costs(B)

     1,536        —          —          —          —     

Derivative losses (gains)

     223        718        1,561        (8     212   

MarAd expenses(C)

     304        —          —          712        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 54,139      $ 66,545      $ 33,134      $ 41,860      $ 41,473   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (A) Other income in the nine months ended September 30, 2013 was due to the final settlement of the construction contract and warranty claims with NASSCO.
  (B) Represents fees incurred due to application for U.S. Title XI Federal Ship Financing Program loan guarantees, which was denied in November 2012.
  (C) Represents one-time expenses related to litigation with MarAd in connection with the U.S. Title XI Federal Ship Financing Program application, which expenses were included in general and administrative expenses.

 

 

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(5) As adjusted data reflects the completion of this offering and the use of proceeds therefrom as set forth under “Use of Proceeds.”
(6) Represents as adjusted total debt divided by Adjusted EBITDA for the year ended December 31, 2012 and the nine months ended September 30, 2013.
(7) Operating days represent the number of days in a period that the vessels were operating and earning revenue.
(8) Ownership days represent the aggregate number of days in a period during which each vessel in the initial fleet was owned by Holding.
(9) Fleet utilization is calculated by dividing the number of our operating days during a period by the number of our ownership days during that period.
(10) Time charter equivalent rates (“TCE”) represent our charter revenues less voyage expenses (including fuel and port charges to the extent we are responsible for them) during a period divided by the number of operating days during the period.
(11) Direct vessel operating expenses include the costs for crewing, insurance, lubricants, spare parts, provisions, stores, repairs, maintenance, statutory and classification society expense, dry docking, intermediate and special surveys and other miscellaneous items. Daily vessel operating expenses are calculated by dividing total vessel operating expenses by ownership days for the relevant period. These expenses are borne by us as the owner of the vessel. Fuel and port charges are borne by the charterers under the time charter arrangements.

 

 

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RISK FACTORS

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. You should carefully consider the following risk factors together with all of the other information included in this prospectus in evaluating an investment in our common units.

If any of the following risks were actually to occur, our business, financial condition, results of operations and ability to make cash distributions to our unitholders could be materially adversely affected. In that case, we might not be able to make distributions on our common units, the trading price of our common units could decline and you could lose all or part of your investment.

Risks Inherent in Our Business

We have generated net losses in each of the last three fiscal years, and may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses to enable us to pay the minimum quarterly distribution on our common units and subordinated units.

In order to pay the minimum quarterly distribution of $             per unit, or $             per unit on an annualized basis, we will require available cash of approximately $             million per quarter, or $             million per year, based on the number of common and subordinated units to be outstanding immediately after completion of this offering. We may not have sufficient cash from operations to pay the minimum quarterly distribution. The amount of cash we can distribute on our units principally depends upon the amount of cash we generate from our operations, which may fluctuate from quarter to quarter based on the risks described in this section, including, among other things:

 

   

the rates we obtain from our time charters;

 

   

the price and level of production of, and demand for, crude oil and refined products;

 

   

the level of our operating costs, such as the cost of crews and insurance and overhead costs, including payments to our general partner;

 

   

the number of off-hire days for our fleet and the timing of, and number of days required for, drydocking of vessels;

 

   

the supply of and demand for Jones Act product tankers;

 

   

prevailing global and regional economic and political conditions;

 

   

changes in local income tax rates; and

 

   

the effect of governmental regulations and maritime self-regulatory organization standards on the conduct of our business.

In addition, the actual amount of cash we will have available for distribution will depend on other factors, including:

 

   

the level of capital expenditures we make, including for drydocking, retrofit repairs, replacing vessels, building new vessels, acquiring existing vessels and complying with regulations;

 

   

our debt service requirements, including fluctuations in interest rates, and restrictions on distributions contained in our debt instruments, including our credit agreement;

 

   

the restrictions imposed on us pursuant to our credit agreement or any future financing agreements and their potential to impair our ability to pay distributions to our unitholders or take advantage of strategic opportunities to grow our business;

 

   

the level of debt we may incur if we exercise our option to purchase the State Class newbuild vessels;

 

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fluctuations in our working capital needs;

 

   

our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, restructuring, acquisitions, including to purchase the State Class newbuild vessels, or general corporate purposes may be impaired, which could be exacerbated by further volatility in the credit markets; and

 

   

the amount of any cash reserves, including reserves for future maintenance and replacement capital expenditures, working capital and other matters, established by our general partner.

The amount of cash we generate from our operations may differ materially from our profit or loss for the period, which will be affected by non-cash items. For example, in each of the years ended December 31, 2011 and 2012 and the nine months ended September 30, 2013, we had net losses of $35.6 million, $51.9 million and $20.6 million, respectively. However, of these amounts, $44.0 million, $49.5 million and $12.9 million were a result of non-cash, paid-in-kind interest expense relating to the sponsor facility, where all outstanding debt amounts were converted into Class A member interests of Holding in April 2013. In addition, we incurred debt extinguishment expense of $15.5 million in the nine months ended September 30, 2013. As a result of this and the other factors mentioned above, we may make cash distributions during periods when we record losses and may not make cash distributions during periods when we record net income. For a description of additional restrictions and factors that may affect our ability to make cash distributions, please read “Our Cash Distribution Policy and Restrictions on Distributions.”

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 actual results to differ materially from those forecasted.

The forecast of cash available for distribution set forth in “Our Cash Distribution Policy and Restrictions on Distributions” includes our forecasted results of operations, Adjusted EBITDA and cash available for distribution for the twelve-month period ending September 30, 2014. We estimate that our total cash available for distribution for the twelve-month period ending September 30, 2014 will be approximately $29.5 million, as compared to $30.1 million and $30.4 million of pro forma cash available for distribution for the year ended December 31, 2012 and the twelve-month period ended September 30, 2013, respectively. The financial forecast has been prepared by management and we have not received an opinion or report on it from our or any other independent auditor. The assumptions underlying the forecast are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those forecasted. We expect that any significant variances between actual revenues during the forecast period and forecasted revenues in any period will be primarily driven by the level of demand for Jones Act product tanker services, the daily hire rate earned by our vessels, the number of vessels owned by us and the number of off-hire days during such period, each of which may be higher or lower than forecasted, as well the failure of any charterer to exercise any extension option which we expect to be exercised or the early termination of any of our time charters.

If we do not achieve the forecasted results, we may not be able to pay the full minimum quarterly distribution or any amount on our common units, in which event the market price of the common units may decline materially.

Our ability to grow and to meet our financial needs may be adversely affected by our cash distribution policy.

Our cash distribution policy, which is consistent with our partnership agreement, requires us to distribute all of our available cash (as defined in our partnership agreement) each quarter. Please read “How We Make Cash Distributions.” Accordingly, our growth may not be as fast as businesses that reinvest their available cash to expand ongoing operations.

 

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In determining the amount of cash available for distribution, our general partner approves the amount of cash reserves to set aside, including reserves for future maintenance and replacement capital expenditures, working capital and other matters. We also rely upon external financing sources, including commercial borrowings, to fund our capital expenditures. Accordingly, to the extent we do not have sufficient cash reserves or are unable to obtain financing, our cash distribution policy may significantly impair our ability to meet our financial needs or to grow.

If capital expenditures are financed through cash from operations or by issuing debt or equity securities, our ability to make cash distributions may be diminished, our financial leverage could increase or our unitholders may be diluted.

Use of cash from operations to expand or maintain our fleet will reduce cash available for distribution to unitholders. Our ability to obtain bank financing or to access the capital markets for future offerings may be limited by our financial condition at the time of any such financing or offering as well as by adverse market conditions resulting from, among other things, general economic conditions and contingencies and uncertainties that are beyond our control. Our failure to obtain the funds for future capital expenditures could have a material adverse effect on our business, financial condition, results of operations and ability to make cash distributions to our unitholders. Even if we are successful in obtaining necessary funds, the terms of such financings could limit our ability to pay cash distributions to unitholders. In addition, incurring additional debt may significantly increase our interest expense and financial leverage, and issuing additional equity securities may result in significant unitholder dilution and would increase the aggregate amount of cash required to maintain our current level of quarterly distributions to unitholders, both of which could have a material adverse effect on our ability to make cash distributions.

Our debt levels may limit our flexibility in obtaining additional financing, pursuing other business opportunities and paying distributions to you.

As of September 30, 2013, after giving effect to the formation transactions and the use of proceeds from this offering, we estimate that our total debt will be approximately $             million. Following this offering, we will continue to have the ability to incur additional indebtedness, which could exacerbate the risks that we and our subsidiaries face. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Borrowing Activities.” Our 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;

 

   

we will need a substantial portion of our cash flow to make principal and interest payments on our debt, reducing the funds that would otherwise be available for operations, future business opportunities and distributions to unitholders;

 

   

our debt level may make us more vulnerable than our competitors with less debt to competitive pressures or a downturn in our industry or the economy generally;

 

   

our debt level may limit our flexibility in responding to changing business and economic conditions; and

 

   

if we are unable to satisfy the restrictions included in our credit agreement or any future financing agreements or are otherwise in default under any of those agreements, as a result of our debt levels or otherwise, we will not be able to make cash distributions to you, notwithstanding our stated cash distribution policy.

Our ability to service our debt depends 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 our

 

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current or 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, restructuring or refinancing our debt, or seeking additional equity capital or bankruptcy protection. We may not be able to effect any of these remedies on satisfactory terms, or at all.

We may not be able to generate sufficient cash to service all of our indebtedness and to pay distributions on our units, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments or to refinance our debt obligations and to pay distributions on our units depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flow from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or seek to restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service and other obligations. Our credit agreement restricts our ability to sell certain of our assets. We may not be able to consummate those asset sales to raise capital or sell assets at prices that we believe are fair and proceeds that we do receive may not be adequate to meet any debt service obligations then due.

Financing agreements, including our credit agreement, containing operating and financial restrictions may restrict our business and financing activities.

The operating and financial restrictions and covenants in our credit agreement and any future financing agreements could adversely affect our ability to finance future operations or capital needs or to engage, expand or pursue our business activities. For example, such financing agreements may restrict the ability of us and our subsidiaries to:

 

   

incur additional indebtedness, make guarantees and enter into hedging arrangements;

 

   

create or permit liens to exist on assets;

 

   

engage in mergers or consolidations or other fundamental changes;

 

   

transfer, sell or otherwise dispose of assets;

 

   

pay dividends and distributions on, and repurchases of, capital stock;

 

   

make investments, loans and advances, including acquisitions;

 

   

engage in certain transactions with affiliates;

 

   

make changes in nature of business; and

 

   

make prepayments of junior debt.

In addition, our credit agreement requires us to comply with certain financial ratios and tests, including, among others, the requirement to maintain a maximum net total leverage ratio not to exceed 6.50 to 1.00. Our ability to comply with the restrictions and covenants, including financial ratios and tests, contained in our credit agreement and any future financing agreements is dependent on future performance and may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired.

 

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If we are unable to comply with the restrictions and covenants in our credit agreement or any future financing agreements, there could be a default or event of default under the terms of those agreements. If an event of default occurs under these agreements, lenders could terminate their commitments to lend and/or accelerate the outstanding loans and declare all other outstanding amounts due and payable. We and our subsidiaries have pledged our vessels and substantially all of our other tangible and intangible assets as security for the outstanding indebtedness under our credit agreement. If our lenders were to foreclose on our vessels and/or such other tangible and intangible property upon an event of default, this may adversely affect our ability to finance future operations or capital needs or to engage, expand or pursue our business activities. If any of these events occur, we cannot guarantee that our assets will be sufficient to repay in full all of our outstanding indebtedness, and our unitholders could experience a partial or total loss of their investment. In addition, we may be unable to find alternative financing. Even if we could obtain alternative financing, that financing might not be on terms that are favorable or acceptable to us. Any of these events would adversely affect our ability to make distributions to our unitholders and cause a decline in the market price of our common units. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Borrowing Activities.”

Restrictions in our credit agreement and future debt agreements may prevent us or our subsidiaries from paying distributions.

Our ability to make distributions to our unitholders is principally dependent on the amount of cash our subsidiaries dividend or otherwise distribute to us. Our credit agreement prohibits the payment of distributions upon the occurrence of any of the following events, among others:

 

   

failure to pay any principal, interest, fees, expenses or other amounts when due;

 

   

breach of negative covenants and certain affirmative covenants;

 

   

failure to observe any other agreement, security instrument, obligation or covenant beyond specified cure periods in certain cases;

 

   

failure of any representation or warranty to be correct;

 

   

default under other indebtedness;

 

   

bankruptcy or insolvency events;

 

   

a change of control, as defined in our credit agreement; and

 

   

certain ERISA events, as defined in our credit agreement.

The ability of our subsidiaries to make such distributions may be further limited by their failure to maintain a minimum consolidated total net leverage ratio after giving effect to any distributions.

In addition, our credit agreement requires mandatory prepayments of the outstanding term loans upon the occurrence of certain events, as well as mandatory annual prepayments of the outstanding term loans with a portion of excess cash flow. Each such mandatory prepayment (and the payment of principal and interest generally on our debt) will reduce the amount available for distribution to us and on our units.

We expect that any future financing agreements will contain similar provisions. For more information regarding our credit agreement, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Borrowing Activities.”

The failure to consummate or integrate acquisitions in a timely and cost-effective manner could have an adverse effect on our financial condition and results of operations.

Acquisitions that expand our fleet are an important component of our strategy, in particular our plan to exercise our option to purchase the State Class newbuild vessels. Under the option agreement that we will enter

 

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into with State Class Tankers in connection with the closing of this offering, we will have an option to purchase each of the State Class newbuild vessels, at an exercise price with respect to each of the State Class newbuild vessels as determined pursuant to the procedure set forth in the option agreement. The decision to purchase a State Class newbuild vessel, the exercise price to be paid for a State Class newbuild vessel, and any other terms of our purchase must be approved by our conflicts committee. Our conflicts committee may determine that the exercise price, as determined pursuant to the procedure set forth in the option agreement, is too high or other material terms are unfavorable to us and recommend that we elect not to purchase a State Class newbuild vessel. We are under no obligation to buy the State Class newbuild vessels or any other vessels and, accordingly, we may not complete the purchase of any of such vessels.

In addition, there are no assurances that we will be able to obtain adequate financing on terms that are acceptable to us. We could decide to finance the purchase in whole or in part by issuing additional common units, which would dilute your ownership interest in us. We could also use cash from operations, incur borrowings or issue debt securities to fund these capital expenditures. Use of cash from operations will reduce cash available for distributions. Our ability to obtain bank financing or issue debt securities may be limited by our financial condition at the time of any such financing and adverse market conditions resulting from, among other things, general economic conditions, contingencies and uncertainties that are beyond our control. Even if we are successful in obtaining necessary funds, the terms of such financing could reduce or eliminate our cash distributions.

We believe that other acquisition opportunities may arise from time to time, and any such acquisition could be significant. Any acquisition of a vessel or business may not be profitable at or after the time of acquisition and may not generate cash flow sufficient to justify the investment. In addition, our acquisition growth strategy exposes us to risks that may harm our business, financial condition, results of operations and ability to make cash distributions to our unitholders, including risks that we may:

 

   

fail to realize anticipated benefits, such as new customer relationships, cost-savings or cash flow enhancements;

 

   

be unable to contract with vessel managers who are able to attract, hire, train or retain qualified shore and seafaring personnel to manage and operate our growing business and fleet;

 

   

decrease our liquidity by using a significant portion of available cash or borrowing capacity to finance acquisitions;

 

   

significantly increase our interest expense or financial leverage if we incur additional debt to finance acquisitions;

 

   

incur or assume unanticipated liabilities, losses or costs associated with the business or vessels acquired; or

 

   

incur other significant charges, asset devaluation or restructuring charges.

In addition, we may in the future acquire existing vessels, which typically do not carry warranties as to their condition. While we would expect to generally inspect existing vessels prior to purchase, such an inspection would normally not provide us with as much knowledge of a vessel’s condition as we would possess if it had been built for us and operated by us during its life. Repairs and maintenance costs for existing vessels are difficult to predict and may be substantially higher than for vessels we have operated since they were built. These costs could decrease our cash flow and reduce our liquidity.

Certain acquisition and investment opportunities may not result in the consummation of a transaction. In addition, we may not be able to obtain acceptable terms for the required financing for any such acquisition or investment that arises. We cannot predict the effect, if any, that any announcement or consummation of an acquisition would have on the trading price of our common units. Our future acquisitions could present a number of risks, including the risk of incorrect assumptions regarding the future results of acquired vessels or businesses or expected cost reductions or other synergies expected to be realized as a result of acquiring vessels or

 

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businesses, the risk of failing to successfully and timely integrate the operations or management of any acquired vessels or businesses and the risk of diverting management’s attention from existing operations or other priorities. If we fail to consummate and integrate our acquisitions in a timely and cost-effective manner, our business, financial condition, results of operations and cash available for distribution could be adversely affected.

Delays in deliveries of the State Class newbuild vessels may affect our ability to grow and could harm our results of operations.

Under the option agreement that we will enter into with State Class Tankers upon the closing of this offering, we will have the option to purchase each of the State Class newbuild vessels during a period of at least six months prior to and up to nine months following such vessel’s delivery from NASSCO, expected during 2015 and 2016. If the delivery of these vessels is delayed or canceled, the expected revenues from these vessels will be delayed or eliminated.

Delivery of any of the State Class newbuild vessels could be delayed or canceled due to:

 

   

the failure by State Class Tankers to make construction payments on a timely basis or otherwise comply with its construction contracts with NASSCO;

 

   

quality control or engineering problems;

 

   

changes in governmental regulations or maritime self-regulatory organization standards;

 

   

work stoppages or other labor disturbances at the shipyard;

 

   

U.S. Government directives regarding the prioritization of NASSCO’s resources for work performed for the U.S. Government;

 

   

bankruptcy or other financial difficulties of NASSCO;

 

   

weather interference or catastrophic event, such as a major hurricane or fire;

 

   

NASSCO failing to deliver the vessels in accordance with State Class Tankers’ vessel specifications;

 

   

any requests by State Class Tankers for changes to the original vessel specifications;

 

   

shortages of or delays in the receipt of necessary construction materials, such as steel;

 

   

State Class Tankers’ inability to finance the construction of the newbuild vessels; or

 

   

State Class Tankers’ inability to obtain requisite permits or approvals.

We have high levels of fixed costs that will be incurred regardless of our level of business activity.

Our business has high fixed costs that continue even if our vessels are not in service. In addition, low utilization due to reduced demand or other causes or a significant decrease in daily hire rates could have a significant negative effect on our business and results of operations.

We will derive all of our revenues from a limited number of customers and the loss of any of these customers or time charters with any of them could result in an adverse effect on our business and results of operations.

Upon completion of the offering, our fleet will consist of five Jones Act product tankers. We will initially derive all of our revenues through time charters with four customers: MSC, BP, Chevron and Shell. For the year ended December 31, 2012, these four customers represented approximately 43%, 22%, 14% and 10% of our revenues, respectively. We could lose a charterer or the benefits of a time charter because of disagreements with a customer or if a customer exercises specific limited rights to terminate a time charter. The loss of any of our customers or time charter with them, or a decline in payments under our time charters, could have an adverse effect on our revenues and results of operations.

 

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Our time charters with our existing customers are scheduled to expire at the earliest of: with respect to BP, January 2016; with respect to Shell, July 2015; with respect to Chevron, December 2016, and with respect to MSC, September 2014. Generally, the time charters provide for termination by our customers prior to the expiration date if the vessel experiences a prolonged period of off-hire or we breach certain terms of the time charters. Furthermore, the time charters with MSC are subject to termination for default based upon performance or termination for the convenience of the U.S. Government. Although the terms of our charters with MSC provide that MSC must pay us cancellation fees in the event of an early termination, those fees would not adequately cover our inability to enter into a substitute charter. Furthermore, although we have contracted with Phillips 66 and Tesoro to charter our vessels currently chartered to MSC following the expiration of its time charters (which we expect to occur in August 2015), there can be no assurance that, if we fail to renew our agreements or if our agreements are terminated prior to their expiration dates, we will be successful in negotiating and entering into substitute agreements with third parties and, even if we succeed in doing so, the terms and conditions of these new agreements, individually or in the aggregate, may be significantly less favorable to us than the terms and conditions of our existing agreements, which may adversely affect our results of operations and financial condition. If any of our vessels are unable to generate revenues as a result of the expiration or termination of its time charter or sustained periods of off-hire time, our results of operations and financial condition could be materially adversely affected. Furthermore, if we do enter into substitute time charters with third parties, changes in our operations to comply with the requirements of these new agreements may cause disruptions to our business, which could be significant, and may result in additional costs and expenses. For more information regarding the termination of our time charters, please read “Business—Our Customers and Charters.”

We will have a limited number of vessels and any loss of use of a vessel would adversely affect our results of operations.

Immediately upon consummation of this offering, we will own and rely exclusively on the revenues generated by the five vessels in our existing fleet, which will be operating under time charters. In the event any of our vessels has to be taken out of service for more than a few days, we may be unable to fulfill our obligations under our time charters with our remaining vessels. If we are unable to fulfill such obligations, we would have to contract with a third party for use of a vessel, at our expense, to transport the charterer’s products, which may not be possible on acceptable terms or at all, or default under the contract, which would allow the charterer to terminate the contract.

Due to our limited number of vessels and our lack of business diversification, an adverse development in our business or involving our fleet would have a significantly greater impact on our business and results of operations than if we maintained and operated a more diverse business.

We depend on U.S. Government contracts, and our time charter with MSC could be materially reduced, extended, or terminated as a result of the government’s continuing assessment of priorities, changes in government priorities or the implementation of sequestration.

We derived 43% of our revenues in 2012 from our time charters with MSC. We expect to continue to derive a similar level of our revenues from MSC through the terms of the MSC time charters. Those contracts are conditioned upon the continuing availability of U.S. Congressional appropriations. The U.S. Congress usually appropriates funds on a fiscal-year basis even though contract performance may extend over many years. However, upon redelivery from MSC, we have contracted with Phillips 66 and Tesoro to charter the vessels currently chartered to MSC.

Our contracts with MSC must compete with other programs and policy imperatives for consideration during the budget and appropriation process. In August 2011, the Budget Control Act (the “Budget Act”) reduced the U.S. defense top line budget by approximately $490 billion through 2021. The Budget Act further reduced the defense top line budget by an additional $500 billion through 2021 if the U.S. Congress did not enact $1.2 trillion in further budget reductions by January 15, 2012. Should the U.S. Congress in future years provide funding above the yearly spending limits of the Budget Act, sequestration will automatically take effect. The annual

 

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spending limits of the Budget Act will remain in place until current law is changed. On March 1, 2013, sequestration was implemented for the U.S. Government fiscal year 2013 (“GFY2013”), canceling $42.7 billion of planned U.S. defense budgetary spending.

The U.S. Department of Defense (“DoD”) is in the process of identifying specific program and contract reductions required by the GFY2013 sequestration order. As such, at this time we cannot determine how sequestration will impact our MSC time charters. Any reductions, cancellations or delays impacting existing contracts or programs could have a material effect on our results of operations, financial position and/or cash flows.

In addition, in years when the U.S. Government does not complete its budget process before the end of its fiscal year (September 30), government operations typically are funded through a continuing resolution that authorizes agencies of the U.S. Government to continue to operate, but does not authorize new spending initiatives. When the U.S. Government operates under a continuing resolution, delays can occur in contract awards due to lack of funding.

As a U.S. Department of Defense contractor, we are subject to a number of procurement rules and regulations.

We must comply with and are affected by laws and regulations relating to the award, administration, and performance the of DoD contracts. Laws and regulations applicable to U.S. Government contracts, including those with DoD, affect how we do business with DoD and, in some instances, impose added costs on our business. A violation of specific laws and regulations could result in the imposition of fines and penalties, the termination of our DoD contracts, or debarment from bidding on future DoD contracts. We face significant exposure to rules and regulations relating to DoD contracts, as our time charters with MSC represented approximately 43% of our revenues for the year ended December 31, 2012.

In some instances, these laws and regulations impose terms or rights that are more favorable to the DoD than those typically available to commercial parties in negotiated transactions. For example, the U.S. Navy may terminate our MSC time charters at its convenience or for default based on performance. Upon termination for convenience, we normally are entitled, subject to negotiation, to receive the purchase price for certain delivered items, reimbursement for allowable costs for work-in-process, and an allowance for profit on the contract or adjustment for loss if completion of performance would have resulted in a loss. Our ability to recover is subject to the U.S. Congress having appropriated sufficient funds to cover the termination costs. As funds are typically appropriated on a fiscal-year basis and as the costs of a termination for convenience may exceed the costs of continuing a program in a given fiscal year, many on-going programs do not have sufficient funds appropriated to cover the termination costs were the U.S. Government to terminate them for convenience. The U.S. Congress is not required to appropriate additional funding under these circumstances.

A termination arising out of our default may expose us to liability and have a material adverse effect on our ability to compete for future contracts and orders with the U.S. Government.

Our business could be adversely affected by a negative audit by the U.S. Government.

U.S. Government agencies, including the Defense Contract Audit Agency and various agency inspectors general, routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure, and compliance with applicable laws, regulations, and standards. The U.S. Government also reviews the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s management, purchasing, property, estimating, compensation, accounting, and information systems. Any costs found to be misclassified may be subject to repayment. If an audit or investigation uncovers improper or illegal activities, we may be subject to civil or criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or prohibition from doing business with the U.S. Government. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us.

 

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Our business would be adversely affected if the Jones Act provisions on coastwise trade were waived, modified or repealed or if changes in international trade agreements or applicable law or government regulations were to occur or if OPA 90 were modified.

We are subject to the Jones Act, which generally restricts U.S. point-to-point maritime shipping to vessels operating under the U.S. flag, built in the United States, owned and operated by U.S.-organized companies that are controlled and at least 75% owned by U.S. citizens and manned by predominately U.S. crews. Further, we are also subject to OPA 90, which sets forth various technical and operating requirements for tankers operating in U.S. waters. If the restrictions contained in the Jones Act or OPA 90 were repealed, amended, modified or altered, the maritime transportation of cargo between U.S. ports could be opened to foreign-flag, foreign-built or foreign-owned vessels or vessels not satisfying OPA 90 standards. The Secretary of the Department of Homeland Security (the “Secretary”) is vested with the authority and discretion to waive the coastwise laws if the Secretary deems that such action is necessary in the interest of national defense. On two occasions during 2005, the Secretary, at the direction of the President of the United States, issued limited waivers of the Jones Act for the transportation of crude oil and refined petroleum products in response to the extraordinary circumstances created by Hurricanes Katrina and Rita and their effect on Gulf Coast refineries and petroleum product pipelines. A limited waiver was also granted in 2012 in response to the extraordinary circumstances caused by storm Sandy. Any waiver of the coastwise laws, whether in response to natural disasters or otherwise, could result in increased competition from foreign product tanker operators.

Furthermore, interest groups have lobbied the U.S. Congress in the past to repeal or modify the Jones Act in order to facilitate foreign-flag competition for trades and cargoes currently reserved for U.S.-flag vessels under the Jones Act or applicable law or government regulations. Foreign-flag vessels generally have lower construction costs and generally operate at significantly lower costs than we do in U.S. markets or under contract to the U.S. Government, which would likely result in reduced daily hire rates. We believe that continued efforts may be made to modify or repeal the Jones Act. If these efforts are successful, foreign-flag vessels could be permitted to trade in the United States coastwise trade and significantly increase competition with our fleet, which could adversely affect our business and results of operations. There can be no assurance as to the occurrence or timing of any future amendment, suspension, repeal or waivers of or to the Jones Act or applicable law or government regulations.

Additionally, the Jones Act restrictions on maritime cabotage services are not currently subject to certain international trade agreements, including the General Agreement on Trade in Services and the North American Free Trade Agreement. If maritime cabotage services were included in the General Agreement on Trade in Services, the North American Free Trade Agreement or other international trade agreements, the transportation of maritime cargo between U.S. ports could be opened to foreign-flag, foreign-built or foreign-owned vessels. Because foreign vessels may have lower construction costs and operate at significantly lower costs than we do in U.S. markets, this could significantly increase competition in the coastwise trade, which could have a material adverse effect on our business, results of operations and financial condition and our ability to pay interest on, and principal of, our indebtedness.

Compliance with the Jones Act, including restrictions on ownership by non-U.S. citizens of our vessels, could limit our ability to sell any portion of our business or result in the forfeiture of our vessels.

Our business would be adversely affected if we fail to comply with the Jones Act provisions on coastwise trade. The Jones Act contains requirements concerning the non-U.S. ownership interests in the entities that directly or indirectly own the vessels which we operate. If we do not comply with any of these requirements, we would be prohibited from operating our vessels in the U.S. coastwise trade and, under certain circumstances, we could be deemed to have undertaken an unapproved transfer to non-U.S. citizens that could result in severe penalties, including permanent loss of U.S. coastwise trading rights for our vessels, fines or forfeiture of vessels.

If we were to seek to sell any portion of our business that owns any of our vessels, we would have fewer potential purchasers, since some potential purchasers might be unable or unwilling to satisfy the restrictions on ownership by non-U.S. citizens described above. As a result, the sales price for that portion of our business may not attain the amount that could be obtained in an unregulated market.

 

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Marine transportation is inherently risky and an incident involving significant loss or environmental contamination by any of our vessels could harm our reputation and business.

The operation of vessels that carry crude oil or refined petroleum products carries with it an inherent risk of catastrophic maritime disaster, mechanical failure, collision, and loss of or damage to cargo. Our vessels and their cargoes are at risk of being damaged or lost because of events such as:

 

   

marine disasters;

 

   

bad weather and natural disasters (including hurricanes in the U.S. Gulf of Mexico, particularly during the period ranging from June to November);

 

   

mechanical failures;

 

   

grounding, fire, explosions and collisions;

 

   

human error; and

 

   

war and terrorism.

An accident involving any of our vessels could result in any of the following:

 

   

death or injury to persons, loss of property (including vessels);

 

   

oil spills or other environmental damage;

 

   

rerouting or delays in the delivery of cargo;

 

   

our vessels being placed off-hire, which may lead to loss of revenues from or termination of time charters;

 

   

governmental fines, penalties or restrictions on conducting business;

 

   

private claims for damages and other compensation;

 

   

higher insurance rates; and

 

   

damage to our reputation and customer relationships.

The transportation of crude oil and petroleum products exposes us to additional risks, such as spills and explosions. The risk of loss from accidents, natural disasters or other incidents is heightened when such accidents, disasters or incident involve crude oil or petroleum products. For example, in July 2013 a train transporting crude oil through Lac-Megantic, Quebec, Canada crashed, with the resulting explosion and fire caused by the crude oil cargo causing significant damage and loss of life. Also, in the course of the operation of our vessels, business interruption due to political or other developments or labor disputes and strikes could result in loss of revenue and suspension of operations.

A decrease in shipping volume in our markets will adversely affect our business.

Demand for our shipping services depends on levels of shipping in our markets, as well as on economic growth and logistics. Cyclical or other recessions in the continental United States or in our markets can negatively affect our operating results as customers may decrease the shipping volume of crude oil and refined petroleum products. We cannot predict whether or when such downturns will occur.

According to Navigistics, Jones Act product tanker demand (including large articulated tug barges) reached a peak of 19.9 million barrels of vessel capacity in 2006, and then began a decline with the onset of the financial crisis, falling to 17.9 million barrels of capacity in 2010. However, demand for Jones Act product tankers (and large articulated tug barges) began to recover and in 2012 reached a supply constrained 19.1 million barrels of capacity, due to the economic recovery and increased demand for domestic transportation of crude oil in the lower 48 states.

 

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Decreases in United States refining activity, particularly in the U.S. Gulf Coast region, could adversely affect our business and financial condition.

The demand for our services is heavily influenced by the level of refinery capacity in the United States, particularly in the U.S. Gulf Coast region where three of our five vessels operate, where either the Empire State or the Evergreen State are expected to operate when the forward time charters to Phillips 66 and Tesoro begin in 2014 or 2015 and where we expect the State Class newbuild vessels to operate. We expect either the Empire State or the Evergreen State to operate on the U.S. West Coast once it begins its forward charter in 2014 or 2015. Any decline in refining capacity on the U.S. Gulf Coast or the West Coast, even on a temporary basis, may significantly reduce the demand for waterborne movements of crude oil and refined petroleum products. For example, following Hurricanes Katrina and Rita in 2005, movements of refined petroleum products from the U.S. Gulf Coast were significantly reduced in 2005 and 2006, with repairs to hurricane-damaged U.S. Gulf Coast refineries being completed in late 2006. In 2009, we saw proposed refinery expansions being delayed or not completed. While we expect that these refinery expansions will increase demand for waterborne transportation of refined petroleum products, if refining capacity is not expanded or decreases from current levels, demand for our vessels could decrease.

A decrease in the cost of importing or transporting refined petroleum products could cause demand for U.S.-flag product carrier capacity and daily hire rates to decline, which would decrease our revenues and profitability.

The demand for U.S.-flag product carriers is influenced by the cost of importing refined petroleum products. Historically, daily hire rates for vessels qualified to participate in the U.S. coastwise trade under the Jones Act have been higher than daily hire rates for foreign-flag vessels. This is due to the higher construction and operating costs of U.S.-flag vessels under the Jones Act, which requires that such vessels must be built in the United States and manned predominately by U.S. crews. This has made it less expensive for certain areas of the United States that are underserved by pipelines or which lack local refining capacity, such as in the Northeast, to import refined petroleum products carried aboard foreign-flag vessels than to obtain them from U.S. refineries. If the cost of importing refined petroleum products decreases to the extent that it becomes less expensive to import refined petroleum products to other regions of the East Coast and the West Coast than to produce such products in the United States and transporting them on U.S.-flag vessels, demand for our vessels, and the daily hire rates for them, could decrease.

A decline in demand for, and the level of consumption of, crude oil and refined petroleum products could cause demand for tanker capacity and daily hire rates to decline, which would decrease our revenues and profitability.

A long-term global recession could reduce the demand for domestic crude oil and refined petroleum transportation services, and could increase costs, thus adversely affecting our results of operations. Any of these factors could adversely affect the demand for tanker capacity and daily hire rates. Any decrease in demand for tanker capacity or decrease in daily hire rates could adversely affect our business, financial condition and results of operations.

The U.S.-flag shipping industry is unpredictable and historically volatile, which may lead to lower daily hire rates and over time, vessel values may fluctuate substantially and, if these values are lower at a time when we are attempting to dispose of a vessel, we may incur a loss.

The nature, timing and degree of changes in U.S.-flag shipping industry conditions are unpredictable and may result in significant fluctuations in the amount of daily hire we earn. Daily hire rates may fluctuate over time due to changes in the demand for U.S.-flag product carriers. In the past decade, we estimate that daily hire rates for U.S.-flag product tankers have ranged from a low of approximately $35,000 on average in 2003 to a high of approximately $65,000 on average for the period from January 1, 2013 to September 30, 2013. The factors that influence the demand for U.S.-flag product carriers include:

 

   

the level of crude oil refined in the United States;

 

   

the demand for refined petroleum products in the United States;

 

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environmental concerns and regulations;

 

   

new pipeline construction and expansions;

 

   

weather;

 

   

competition from alternative sources of energy; and

 

   

competition from other types of vessels, including tank barges.

Vessel values for our fleet can fluctuate substantially over time due to a number of additional different factors, including:

 

   

the prevailing and expected levels of daily hire rates;

 

   

number of newbuild deliveries;

 

   

the age of our vessels;

 

   

types and sizes of vessels;

 

   

the capacity of U.S. pipelines;

 

   

the capacity of U.S. refineries;

 

   

changes in global commodity supply and demand;

 

   

the number of vessels in the Jones Act fleet;

 

   

the efficiency of the Jones Act fleet; and

 

   

the cost of retrofitting or modifying existing vessels as a result of technological advances in vessel design or equipment, changes in applicable environmental or other regulations or standards or otherwise.

Our inability to dispose of a vessel at a certain value could result in a loss on its sale. Pursuant to a settlement agreement we entered into in 2009 to settle litigation between U.S. Shipping Partners L.P. (“USS”), certain of its affiliates and our Sponsors, USS and certain of its affiliates have a right of first offer to purchase the vessels in our initial fleet to the extent we determine to sell such vessels in the future. Declining vessel values could adversely affect our liquidity by limiting our ability to raise cash by arranging debt secured by our vessels or refinancing such debt. In such instances, if we are unable to pledge additional collateral to offset the decline in vessel values, our lenders could accelerate our debt and foreclose on our vessels pledged as collateral for the loans.

An increase in the supply of Jones Act vessels without an increase in demand for such vessels could cause daily hire rates to decline.

The supply of vessels generally increases with deliveries of new vessels and decreases with the scrapping of older vessels. Crowley Maritime Corporation and Aker Philadelphia Shipyard recently announced a joint venture to build four new product tankers to be delivered in 2015 and 2016, with an option to build up to four additional tankers. In the first quarter of 2013, VT Halter Marine, Inc., a subsidiary of VT Systems, Inc., announced new contracts to build two articulated tug barges for Bouchard Transportation Co., Inc., with scheduled delivery dates in mid-2015. In addition, in September 2013, NASSCO entered into a contract with Seabulk Tankers, Inc., a wholly-owned subsidiary of SEACOR Holdings Inc., to design and construct two 50,000 dwt product tankers to be delivered in 2016 and 2017 and in November 2013, entered into an additional contract with Seabulk Tankers, Inc. to construct one additional 50,000 dwt product tanker to be delivered in the fourth quarter of 2016 with an option for one additional vessel. No assurance can be given that the order book will not increase further in proportion to the existing fleet. If the number of newbuild vessels delivered exceeds the number of vessels being scrapped, capacity will increase. In addition, any retrofitting of existing vessels may result in additional capacity that the market will not be able to absorb at the anticipated demand levels. If supply increases and demand does not, the daily hire rates for our vessels could decline significantly.

 

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We may face increased competition from Jones Act vessels built at an additional U.S. shipyard.

Currently, only two U.S. shipyards are building large product tankers for the Jones Act trade: the NASSCO shipyard of General Dynamics and the Aker Philadelphia Shipyard. Industry trade publications recently reported that the Avondale Shipyard (owned by Huntington Ingalls Industries), located in Louisiana, is in discussions with private equity interests to build up to eight MR Jones Act tankers and is negotiating with Samsung Heavy Industries, a Korean Shipyard, to provide Avondale with design, engineering and procurement support to enable Avondale to fulfill the potential order. In addition, other U.S. shipyards could, in the future, enter the market to build Jones Act tankers. If Avondale or U.S. additional shipyards are able to enter the market to build new Jones Act tankers, the overall capacity of the Jones Act product tankers fleet would likely increase, and the market may not be able to absorb that increased capacity. This could lead to lower daily hire rates and lower revenues for us. In addition, if the new vessels are built for lower costs or have lower operating costs than ours, we could be at a disadvantage in bidding for new charters, and our existing charterers could decide not to exercise extension options or could seek the early termination of our time charters. This could adversely affect our business, results of operations and financial condition and our ability to pay interest on, and principal of, our indebtedness and the full minimum quarterly distribution or any amount on our common units, in which event the market price of the common units may decline materially.

Our business depends on our ability to compete successfully against other shipping companies, as well as other sources of transportation.

While long-term time charters have the potential to provide income at pre-determined rates over the duration of the time charters, the competition for such time charters is intense and obtaining such time charters generally requires a lengthy and time consuming screening and bidding process that may extend for months. In addition to the availability, quality, age and suitability of the vessel, long-term time charters tend to be awarded based upon a variety of factors relating to the vessel operator, including the operator’s:

 

   

environmental, health and safety record;

 

   

compliance with regulatory and industry standards;

 

   

reputation for customer service and technical and operating expertise;

 

   

shipping experience and quality of ship operations, including cost-effectiveness;

 

   

ability to finance vessels at competitive rates and overall financial stability;

 

   

relationships with shipyards and the ability to obtain suitable berths;

 

   

construction management experience;

 

   

willingness to accept operational risks pursuant to the time charter; and

 

   

competitiveness of the bid price.

Some of our competitors may have greater financial resources and larger operating staffs than we do. Accordingly, they may be able to react quicker to changes in market dynamics, potentially to our detriment.

We also compete with pipelines that carry refined petroleum products and crude oil. Long-haul transportation of refined petroleum products and crude oil is generally less costly by pipeline than by vessel. The construction of new pipelines to carry refined petroleum products and crude oil into the markets we serve, including pipeline segments that connect with existing pipelines, the expansion of existing pipelines and the conversion of pipelines that do not currently carry refined products and crude oil, while costly, could adversely affect our ability to compete in particular locations. For example, the U.S. Government is currently considering revised proposals to extend the Keystone pipeline to the U.S. Gulf of Mexico. The extension of the Keystone pipeline or construction of other pipelines in the future could decrease demand for our vessels and cause our daily hire rates to decline.

 

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Rising fuel prices may adversely affect our profits in the future.

Fuel is a significant vessel operating expense for our industry. Under our current time charters, the charterer bears the risk of fuel prices. However, if our time charters change or we trade under consecutive voyage charters, contracts of affreightment or in the spot market, we would bear the risk of rising fuel prices. As a result, an increase in the price of fuel may adversely affect our results of operations. For future charters, there can be no assurance that our customers will agree to bear any fuel surcharges without a reduction in their volumes of business with us nor any assurance that our future fuel hedging efforts (if any) will be successful. The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including geopolitical developments, supply and demand for oil and gas, actions by the Organization of Petroleum Exporting Countries and other oil and gas producers, war and unrest in oil producing countries and regions, regional production patterns and environmental concerns.

We are subject to complex laws and regulations, including environmental regulations, which can adversely affect the cost, manner or feasibility of doing business and which may affect our ability to sell, lease, charter or otherwise transfer our vessels.

Our operations are subject to significant U.S. federal, state and local regulations, as well as international conventions and the laws of foreign jurisdictions where we operate. Increasingly stringent federal, state and local laws and regulations governing worker health and safety, environmental protection, insurance requirements and the manning, operation and transfer of vessels significantly affect our operations. Many aspects of the marine transportation industry are subject to extensive governmental regulation by the U.S. Coast Guard, U.S. Customs and Border Protection (“Customs”), the International Maritime Organization (“IMO”), the U.S. Department of Homeland Security, the U.S. Environmental Protection Agency (“EPA”) and the U.S. Maritime Administration, as well as to regulation by private industry organizations such as the American Bureau of Shipping (“ABS”). The U.S. Coast Guard and the National Transportation Safety Board set safety standards and are authorized to investigate marine casualties and recommend improved safety standards. The U.S. Coast Guard is authorized to inspect vessels at will.

Our operations are specifically subject to federal, state, local laws and regulations and international conventions that regulate and control the discharge and emission of pollutants into the environment or otherwise relate to environmental protection. Compliance with such laws, regulations and conventions may require installation of costly equipment or operational changes. Failure to comply with applicable laws, regulations and conventions may result in administrative and civil penalties, criminal sanctions or the suspension or termination of our operations. Some environmental laws impose strict liability for removal costs and damages related to releases of oil and hazardous substances, which could subject us to liability without regard to whether we were negligent or at fault. Under OPA 90, owners, operators and bareboat charterers are jointly and severally strictly liable for the removal costs and damages resulting from the discharge of oil within the 200-mile exclusive economic zone around the United States. Additionally, an oil spill could result in significant liability, including fines, penalties, criminal liability and costs for natural resource and other damages under other federal and state laws or civil actions. The potential for these releases could increase as we increase our fleet capacity. Many states bordering on a navigable waterway have enacted legislation more stringent than OPA 90, providing for potentially unlimited liability for the discharge of pollutants within their waters.

In order to maintain compliance with existing and future laws, we incur, and expect to continue to incur, substantial costs in meeting maintenance and inspection requirements, developing and implementing emergency preparedness procedures, and obtaining insurance coverage or other required evidence of financial responsibility sufficient to address pollution incidents. Non-compliance with these laws can:

 

   

reduce the economic value of our vessels;

 

   

require a reduction in cargo carrying capacity or other structural or operational changes;

 

   

make our vessels less desirable to potential charterers;

 

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lead to decreases in available insurance coverage for affected vessels; or

 

   

result in the denial of access to certain ports.

We believe that regulation of the shipping industry will continue to become more stringent and more expensive for us and our competitors. Further, a serious marine incident occurring in U.S. waters that results in significant oil pollution could result in additional regulation. Future environmental and other requirements, as well as more stringent enforcement policies, may be adopted that could limit our ability to operate, require us to incur substantial additional costs or otherwise have a material adverse effect on our business, results of operations or financial condition. See “Business—Regulation—Environmental.”

Climate change and greenhouse gas restrictions may adversely impact our operations and markets.

Due to concern over the risk of climate change, a number of countries, including the United States, and the IMO have adopted, or are considering the adoption of, regulatory frameworks to reduce greenhouse gas emissions from vessels. These regulatory measures include, among others, adoption of cap and trade regimes, carbon taxes, increased efficiency standards and incentives or mandates for renewable energy. Compliance with changes in laws, regulations and obligations relating to climate change could increase our costs related to operating and maintaining our vessels and require us to install new emission controls, acquire allowances or pay taxes related to our greenhouse gas emissions or administer and manage a greenhouse gas emissions program. Revenue generation and strategic growth opportunities may also be adversely affected.

Adverse effects upon the oil industry relating to climate change, including growing public concern about the environmental impact of climate change, may also adversely affect demand for our tanker services. Although we do not expect that demand for oil will lessen dramatically over the short term, in the long-term climate change may reduce the demand for oil or increased regulation of greenhouse gases may create greater incentives for use of alternative energy sources. Any long-term material adverse effect on the oil industry could have a significant financial and operational adverse impact on our business that we cannot predict with certainty at this time.

We may be required to make maintenance and capital expenditures to maintain the operating capacity of our fleet, which will reduce cash available for distribution. In addition, each quarter we are required to deduct estimated maintenance and replacement capital expenditures from operating surplus, which may result in less cash available to unitholders than if actual maintenance and replacement capital expenditures were deducted.

In general, capital expenditures and other costs necessary for maintaining a vessel in good operating condition increase as the age of the vessel increases. Accordingly, as the age of our vessels increases it is likely that our operating costs will increase. Our initial estimated maintenance and replacement capital expenditures for purposes of establishing a maintenance and replacement capital expenditure reserve will be $13.5 million for the twelve-month period ending September 30, 2014. Maintenance and replacement capital expenditures include capital expenditures associated with the removal of a vessel from the water for inspection, maintenance and/or repair of submerged parts (or drydocking) and modifying an existing vessel or acquiring a new vessel to the extent these expenditures are incurred to maintain or replace the operating capacity of our fleet. These expenditures could vary significantly from quarter to quarter and could increase as a result of changes in:

 

   

the cost of labor and materials;

 

   

customer requirements;

 

   

the size of our fleet;

 

   

the cost of replacement vessels;

 

   

length of time charters;

 

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governmental regulations and maritime self-regulatory organization standards relating to safety, security or the environment; and

 

   

competitive standards.

Our partnership agreement requires our general partner to deduct estimated, rather than actual, maintenance and replacement capital expenditures from operating surplus each quarter in an effort to reduce fluctuations in operating surplus (as defined in our partnership agreement). The amount of estimated maintenance and replacement capital expenditures deducted from operating surplus is subject to review and change by our conflicts committee at least once a year. In years when estimated maintenance and replacement capital expenditures are higher than actual maintenance and replacement capital expenditures, the amount of cash available for distribution to unitholders will be lower than if actual maintenance and replacement capital expenditures were deducted from operating surplus. If our general partner underestimates the appropriate level of estimated maintenance and replacement capital expenditures, we may have less cash available for distribution in future periods when actual capital expenditures exceed our previous estimates.

Drydocking of our vessels may require substantial expenditures and may result in the vessels being off-hire for significant periods of time.

Each of our vessels must undergo scheduled and, on occasion, unscheduled shipyard maintenance.

The U.S. Coast Guard requires our vessels to be drydocked for inspection and maintenance twice every five years. However, up until the fifteenth year of operation, we are permitted to do an underwater hull inspection of the vessel in lieu of one of these drydockings. In addition, vessels may have to be drydocked in the event of accidents or other unforeseen damage or for capital improvements. Costs for drydocking are difficult to estimate and may be higher than we currently anticipate. Vessels in drydock will generally not generate any income.

In addition, the time when a vessel is out of service for maintenance is determined by a number of factors including regulatory deadlines, market conditions, shipyard availability and customer requirements. Because U.S. shipyards have limited availability for drydocking a vessel, they may not have the capacity to perform drydock maintenance on our vessels at the times required, particularly in the event of an unscheduled drydock due to accident. This may require us to have the work performed at an overseas shipyard and result in the vessel being off-hire for a longer period of time.

We do not maintain and do not intend to purchase off-hire insurance, which covers the loss of revenues during extended vessel off-hire periods, such as for unscheduled drydocking due to damage to vessels from accidents. Accordingly, we will not be compensated for any off-hire periods that may arise and any extended vessel off-hire period could have a material adverse effect on our business, results of operations and financial condition and our ability to pay distributions on our units.

We are subject to, and may in the future be subject to, legal or other proceedings that could have a material adverse effect on us.

The nature of our business exposes us to the potential for legal or other proceedings from time to time relating to labor and employment matters, personal injury and property damage, environmental matters and other matters, as discussed in the other risk factors herein. Results of legal proceedings cannot be predicted with certainty. Irrespective of their merits, legal proceedings may be both lengthy and disruptive to our operations and may cause significant expenditure and diversion of management attention. We may be faced with significant monetary damages or injunctive relief against us that could have a material adverse effect on a portion of our business operations or a material adverse effect on our financial condition and results of operations.

 

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Our insurance may be insufficient to cover losses that may occur to our property or result from our operations and we may face increased insurance costs in the future.

The operation of vessels that carry crude oil or refined petroleum products is inherently risky. Although we carry insurance to protect against most of the accident-related risks involved in the conduct of our business, risks may arise for which we are not adequately insured. For example, a catastrophic spill could exceed our insurance coverage. Any particular claim may not be paid by our insurance and any claims covered by insurance would be subject to deductibles, the aggregate amount of which could be material. Any uninsured or underinsured loss could harm our business and financial condition and have a material adverse effect on our operations. In addition, our insurance may be voidable by the insurers as a result of negligence on our part or certain of our actions, such as our vessels failing to maintain certification with applicable maritime self-regulatory organizations. Furthermore, even if insurance coverage is adequate to cover our losses, we may not be able to obtain a replacement ship in a timely manner in the event of a loss.

Because we obtain our insurance through protection and indemnity associations, we may be subject to calls, or premiums, in amounts based not only on our own claim records, but also the claim records of all other members of the protection and indemnity associations through which we receive insurance coverage for tort liability, including pollution-related liability. Our payment of these calls could result in significant expenses to us, which could reduce our profits or cause losses. Moreover, the protection and indemnity clubs and other insurance providers reserve the right to make changes in insurance coverage with little or no advance notice.

In addition, we may not be able to procure adequate insurance coverage at commercially reasonable rates in the future. In the past, new and stricter environmental regulations have led to higher costs for insurance covering environmental damage or pollution and new regulations could lead to similar increases, or even make this type of insurance unavailable. Changes in the insurance markets attributable to terrorist attacks may also make certain types of insurance more difficult to obtain. The insurance that may be available to us in the future may be significantly more expensive than our existing coverage.

Please read “Business—Insurance and Risk Management.”

The loss or insufficient attention of key personnel could negatively impact our results of operations and ability to make distributions to our unitholders.

Our success will be largely dependent upon the continued services of the chief executive officer of our general partner, Mr. Robert K. Kurz and the chief financial officer of our general partner, Philip J. Doherty. Mr. Kurz and Mr. Doherty have significant experience in our business and have developed strong relationships with a broad range of industry participants. The loss of any of these executives could have a material adverse effect on our relationships with these industry participants, our results of operations and our ability to make distributions to our unitholders. We may not be able to locate or employ on acceptable terms qualified replacements for senior management or key employees if their services were no longer available. We do not carry any key man insurance on any of our employees.

We currently depend on a third party to manage the technical operations of our business.

Pursuant to the Vessel Management Agreements, we outsource substantially all of our technical operations to our Vessel Manager. Our Vessel Manager provides us with technical and administrative services, crewing, purchasing, insurance, safety, security, quality and environmental administration services, shipyard supervision, accounting and reporting functions and other support services.

Two of the Vessel Management Agreements will expire in July 2014, the third will expire in November 2014, the fourth will expire in June 2015 and the fifth will expire in November 2015. If during the term of these agreements we fail to make our payment obligations to our Vessel Manager or breach certain terms of these agreements, our Vessel Manager has the right to terminate the agreements prior to their expiration dates. If we

 

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fail to renew any of these agreements upon or prior to their expirations, the requirements of our business will necessitate that we enter into substitute agreements with third parties for the services contemplated under the existing agreements. There can be no assurance that we will be successful in negotiating and entering into substitute agreements with third parties and, even if we succeed in doing so, the terms and conditions of these new agreements, individually or in the aggregate, may be significantly less favorable to us than the terms and conditions of our existing Vessel Management Agreements. Furthermore, if we do enter into substitute agreements with third parties, changes in our operations to comply with the requirements of these new agreements may cause disruptions to our business, which could be significant and may adversely affect our business and results of operations.

Our operational success and ability to execute our growth strategy, including our ability to enter into new time charters and expand our customer relationships, will depend significantly upon the satisfactory performance by our Vessel Manager of the services required to be performed by it and our business will be harmed if our Vessel Manager fails to perform these services satisfactorily. Our Vessel Manager also owns and operates product tankers for its own account and may continue to directly compete with us in the future. For example, our Vessel Manager recently announced a joint venture with Aker Philadelphia Shipyard to build four new product tankers to be delivered in 2015 and 2016, with an option to build up to four additional tankers. In addition, our Vessel Manager provides technical management services to other customers who may also be our competitors. Accordingly, we face conflicts of interest with our Vessel Manager and could face conflicts of interest with the other businesses to which it provides services. Furthermore, if our Vessel Manager suffers material damage to its reputation, relationships or business generally, it may harm our ability to:

 

   

renew existing time charters upon their expiration;

 

   

obtain new time charters;

 

   

interact successfully with shipyards;

 

   

obtain financing on commercially acceptable terms;

 

   

attract, hire, train or retain qualified shore and seafaring personnel to manage and operate our fleet;

 

   

maintain satisfactory relationships with suppliers and other third parties; or

 

   

effectively operate our vessels.

In addition, although the fees payable to our Vessel Manager under the Vessel Management Agreements are fixed, the expenses incurred by our Vessel Manager and which we are obligated to reimburse depend upon a variety of factors, many of which are beyond our or our Vessel Manager’s control. Some of these costs may increase in the future. Increases in any of these costs would decrease our earnings, cash flows and the amount of cash available for distributions to our unitholders. Further, it is possible that the level of our operating costs may materially change following any renewal of the Vessel Management Agreements or pursuant to a change in vessel managers. Any increase in the costs and expenses associated with the provision of these services by our Vessel Manager in the future, such as the condition and age of our vessels, costs of crews for our time chartered vessels and insurance, will lead to an increase in the fees we would have to pay to our Vessel Manager or another third party under any new agreements we enter into.

We indirectly depend upon unionized labor for the provision of our services. Any work stoppages or labor disturbances could disrupt our business.

Our Vessel Manager provides us with technical and administrative services for each of our vessels and our general partner will directly employ only its chief executive officer, its chief financial officer and its controller. See “—We currently depend on a third party to manage the technical operations of our business.” The shore-based and seagoing personnel that service our vessels are directly employed by our Vessel Manager. All unlicensed marine personnel are employed by our Vessel Manager under a collective bargaining agreement with

 

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the Seafarers International Union (“SIU”). The SIU collective bargaining agreement expires (i) in July 2017, with respect to crewing for Golden State, Pelican State, and Sunshine State and (ii) in September 2015 with respect to crewing for Empire State and Evergreen State. All licensed officers, including our captains, are employed by our Vessel Manager under a collective bargaining agreement with the American Maritime Officers Union (“AMO”). The AMO collective bargaining agreement expires (i) on April 30, 2014 with respect to crewing for Golden State, Pelican State, and Sunshine State and (ii) in September 2015 with respect to Empire State and Evergreen State. Any work stoppages or other labor disturbances could have a material adverse effect on our business, results of operations and financial condition and our ability to pay distributions on our units.

Maritime claimants could arrest our vessels.

Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against that vessel for unsatisfied debts, claims or damages. In many jurisdictions, a maritime lien holder may enforce its lien by arresting a vessel through foreclosure proceedings. The arrest or attachment of one or more of our vessels could adversely affect our business and results of operations and require us to pay whatever amount may be required to have the arrest lifted.

The U.S. Government could requisition our vessels during a period of war or emergency without adequate compensation.

The U.S. Government could requisition one or more of our vessels for title or for hire. Requisition for title occurs when a government takes control of a vessel and becomes its owner. Requisition for hire occurs when a government takes control of a vessel and effectively becomes its charterer at dictated daily hire rates. Generally, requisitions occur during periods of war or emergency, although the U.S. Government may elect to requisition vessels in other circumstances. Although we would be entitled to compensation in the event of a requisition of one or more of our vessels, the amount and timing of payment would be uncertain.

Terrorist attacks have resulted in increased costs for our industry and any new attacks could disrupt our business.

Heightened awareness of security needs after the terrorist attacks of September 11, 2001 has caused the U.S. Coast Guard, Customs, the IMO and the states and local ports to adopt heightened security procedures relating to ports and vessels. Complying with these procedures, as well as conducting security assessments and developing security plans for our vessels required by the Maritime Transportation Security Act of 2002 (“MTSA”), imposes costs on us.

Any future terrorist attacks could disrupt harbor operations in the ports in which we operate, and lead to, among other things, bodily injury or loss of life, vessel or other property damage, increased vessel operating costs, including insurance costs, and the inability to transport crude oil and refined petroleum products to or from certain locations. Terrorist attacks, war or other events beyond our control that adversely affect the distribution, production or transportation of crude oil and refined petroleum products to be shipped by us could entitle our customers to terminate the time charters for our vessels. The long-term impact that terrorist attacks and the threat of terrorist attacks may have on the petroleum industry in general, and on us in particular, is not known at this time. Uncertainty surrounding continued hostilities in the Middle East (including the recent events in Egypt and the ongoing civil war in Syria) or other sustained military campaigns may affect our operations in unpredictable ways, including disruptions of petroleum supplies and markets, and the possibility that infrastructure facilities could be direct targets of, or indirect casualties of, an act of terror.

Changes in the insurance markets attributable to terrorist attacks may make certain types of insurance more difficult for us to obtain. Moreover, the insurance that may be available to us may be significantly more expensive than our existing insurance coverage. Instability in the financial markets as a result of terrorism or war could affect our ability to raise capital.

 

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Risks Inherent in an Investment in Us

Our Sponsors own a controlling interest in us and have limited contractual and fiduciary duties to us and our common unitholders, and they may favor their own interests to the detriment of us and our other common unitholders.

Following this offering, the Sponsors, through Holding, will own a     % limited partnership interest in us, assuming no exercise of the underwriters’ over-allotment option. Our Sponsors will also control us through their control of our general partner. As such, our Sponsors will appoint all of the officers and directors of our general partner. As a result of these relationships, conflicts of interest may arise between us and our unaffiliated limited partners on the one hand, and our Sponsors and their affiliates, including Holding and our general partner, on the other hand, or between us and our unaffiliated limited partners on the one hand, and State Class Tankers and its affiliates on the other hand. The resolution of these conflicts may not be in the best interest of us or our limited partners. Please read “—Our partnership agreement limits the duties our general partner may have to our unitholders and restricts the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.” These conflicts include, among others, the following situations:

 

   

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, which entitles our general partner to consider only the interests and factors that it desires, including its own interests, and it has no duty or obligations to give any consideration to any interest of or factors affecting us, our affiliates or any unitholder; when acting in its individual capacity, our general partner may act without any fiduciary obligation to us or the unitholders whatsoever;

 

   

any agreement between us, on the one hand, and our general partner and its affiliates, on the other, 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;

 

   

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: (i) enabling our general partner or its affiliates to receive distributions on any subordinated units or incentive distribution rights held by them or (ii) hastening the expiration of the subordination period;

 

   

our general partner has limited its liability and reduced its fiduciary duties under the partnership agreement, while also restricting the remedies available to our unitholders for actions that, without these limitations, might constitute breaches of fiduciary duty;

 

   

our general partner determines the amount and timing of asset purchases and sales, capital expenditures, borrowings, issuances of additional partnership securities, and the establishment, increase or decrease in the amounts of reserves, each of which can affect the amount of cash that is distributed to our unitholders;

 

   

our general partner (with the concurrence of the conflicts committee) determines the amount and timing of any capital expenditures and whether a capital expenditure is 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 the ability of the subordinated units to convert to common units;

 

   

our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered on terms that are fair and reasonable to us or entering into additional contractual arrangements with any of these entities on our behalf;

 

   

our general partner may exercise its right to call and purchase our common units if it and its affiliates own more than 80% of our common units;

 

   

our general partner may incur costs that are reimbursable by us;

 

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our general partner intends to limit its liability regarding our contractual and other obligations and, in some circumstances, is entitled to be indemnified by us;

 

   

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

 

   

our partnership agreement permits us to classify up to $         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 incentive distribution rights;

 

   

our general partner may transfer its incentive distribution rights (in whole or in part) at any time without unitholder approval;

 

   

our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon the exercise of its limited call right;

 

   

The holder or holders of a majority of our incentive distribution rights, which initially will be our general partner, 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 the board of directors of our general partner or our unitholders. This election may result in lower distributions to our common unitholders in certain situations;

 

   

certain of our general partner’s directors and both of our general partner’s officers will also serve as directors or officers of affiliates of State Class Tankers and will have fiduciary duties to manage State Class Tankers in a manner beneficial to its equityholders, which may cause them to pursue business strategies that disproportionately benefit State Class Tankers or its affiliates or which otherwise are not in the best interests of us or our unitholders;

 

   

State Class Tankers is owned and controlled by BCPV and, as GSO and Cerberus do not own interests in State Class Tankers, there is a conflict of interest among our Sponsors with respect to transactions between us and State Class Tankers;

 

   

although we have the option to purchase the State Class newbuild vessels, we may not complete such purchases and State Class Tankers and its affiliates may compete with us and could own and operate the State Class newbuild vessels or additional vessels under time charters that may compete with our vessels;

 

   

the doctrine of corporate opportunity, or any analogous doctrine, will not apply to the general partner and its affiliates and, as a result, neither the general partner nor any of its affiliates will have any obligation to present business opportunities to us; and

 

   

in connection with the offering, we will enter into an option agreement with State Class Tankers, and we may enter into additional agreements in the future with State Class Tankers, relating to the purchase of additional vessels, and other matters. In the performance of its obligations under these agreements, State Class Tankers is not held to a fiduciary duty standard of care to us, our general partner or our limited partners, but rather to the standard of care specified in these agreements.

By purchasing a common unit, you are treated as having consented to the modified standard of fiduciary duties, various actions contemplated in the partnership agreement and conflicts of interest that might otherwise be considered a breach of fiduciary or other duties under applicable state law, all as set forth in the partnership agreement. Please read “Conflicts of Interest and Fiduciary Duties—Fiduciary Duties of the General Partner” for a description of the fiduciary duties imposed on our general partner by Delaware law, the material modifications of these duties contained in our partnership agreement and certain legal rights and remedies available to our unitholders.

 

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Our Sponsors own a controlling interest in us and their interests may conflict with ours or yours in the future.

Immediately following this offering, our Sponsors will beneficially own a         % limited partnership interest in us, or approximately         % if the underwriters exercise in full their option to purchase additional units. In addition, our Sponsors own our general partner and will have the ability to elect all of the members of its board of directors and thereby control our policies and operations, including the appointment of management, future issuances of our common units or other securities, the payment of distributions on our common units, the incurrence of debt by us, amendments to our partnership agreement and the entering into of extraordinary transactions, and their interests may not in all cases be aligned with your interests. In addition, our Sponsors may have an interest in pursuing acquisitions, divestitures and other transactions, including through State Class Tankers in the case of certain Sponsors, that, in their judgment, could enhance their investments, even though such transactions might involve risks to you or expose us to competition. For example, our Sponsors could cause us to make acquisitions that increase our indebtedness or cause us to sell revenue-generating assets. Our Sponsors are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Our option agreement will provide that none of our Sponsors, any of their respective affiliates or any of our general partner’s directors or his or her affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. Our Sponsors also may pursue acquisition opportunities independently, through State Class Tankers or through entities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. So long as our Sponsors continue to own a significant amount of our and our general partner’s combined voting power, even if such amount is less than 50%, they will continue to be able to strongly influence or effectively control our decisions. In addition, our Sponsors will be able to determine the outcome of all matters requiring unitholder approval after the subordination period ends and will be able to cause or prevent a change of control of our general partner or a change in the composition of our general partner’s board of directors and could preclude any unsolicited acquisition of the Partnership. The concentration of ownership could deprive you of an opportunity to receive a premium for your common units as part of a sale of our Partnership’s businesses and ultimately might affect the market price of our common units.

Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors, which could reduce the price at which the common units trade.

Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Unitholders will have no right to elect our general partner or its board of directors on an annual or ongoing basis. The board of directors of our general partner is chosen entirely by our Sponsors. Furthermore, if the unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. 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 control premium in the trading price. Our partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.

Certain of our officers face conflicts in the allocation of their time to our business.

Certain of our officers and employees are not required to work full-time on our affairs and also perform services for other companies, including State Class Tankers. Robert K. Kurz, who is our general partner’s Chief Executive Officer, also provides services in a similar capacity for State Class Tankers. In addition, Philip J. Doherty, who is our general partner’s Chief Financial Officer, also acts as the Chief Financial Officer of State Class Tankers. State Class Tankers may conduct substantial businesses and activities of their own in which we have no economic interest. As a result, there could be material competition for the time and effort of our officers and employees who also provide services to other companies, which could have a material adverse effect on our business, results of operations and financial condition. Please read “Management—Management of American Petroleum Tankers Partners LP.”

 

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Our partnership agreement limits the duties our general partner may have to our unitholders and restricts the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

Our partnership agreement contains provisions that replace the standards to which our general partner would otherwise be held by state fiduciary duty law with 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 or our unitholders other than the implied contractual covenant of good faith and fair dealing. This entitles our general partner to consider only the interests and factors that it desires, including its own interests, and it has no duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or any limited partner. Examples include the exercise of its limited call right, the exercise of its rights to transfer or vote the units it owns, the exercise of its registration rights, whether, as the initial holder of all of our incentive distribution rights, to reset target distribution levels or to transfer the incentive distribution rights or any units it owns to a third party, and its determination whether or not to consent to any merger or consolidation of the Partnership or amendment to the partnership agreement;

 

   

provides that our general partner will not have any liability to us or our unitholders for decisions made in its capacity as general partner, as long as it acted in good faith, meaning that it subjectively believed the decision was in the best interests of our Partnership, and, except as specifically provided by our partnership agreement, will not be subject to any other or different standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation or at equity;

 

   

generally provides that affiliated transactions and resolutions of conflicts of interest not approved by the conflicts committee of the board of directors of our general partner and not involving a vote of unitholders must be on terms no less favorable to us than those generally being provided to or available from unrelated third parties or be “fair and reasonable” to us and that, in determining whether a transaction or resolution is “fair and reasonable,” our general partner may consider the totality of the relationships between the parties involved, including other transactions that may be particularly favorable or advantageous to us;

 

   

provides that our general partner, its affiliates and their officers and directors will not be liable for monetary damages to us or our limited partners for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or those other persons acted in bad faith or engaged in fraud, willful misconduct or, in the case of a criminal matter, acted with knowledge that such conduct was criminal;

 

   

provides that in resolving conflicts of interest, it will be presumed that in making its decision the general partner acted in good faith, and in any proceeding brought by or on behalf of any limited partner or us, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption; and

 

   

provides that our general partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisers selected by it, and any act or omission by our general partner in reliance upon the advice or opinion of such persons as to matters that our general partner reasonably believes to be within such person’s professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such advice or opinion, and our general partner will not have any liability to us or the unitholders for such reliance made in good faith.

By purchasing a common unit, a unitholder will become bound by the provisions of our partnership agreement, including the provisions described above. Please read “Description of the Common Units—Transfer of Common Units.”

 

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Our partnership agreement contains provisions that may have the effect of discouraging a person or group from attempting to remove our current management or our general partner, and even if public unitholders are dissatisfied, they will be unable to remove our general partner without Holding’s consent, unless Holding’s ownership interest in us is decreased, all of which could diminish the trading price of our common units.

Our partnership agreement contains provisions that may have the effect of discouraging a person or group from attempting to remove our current management or our general partner.

 

   

The unitholders will be unable initially to remove our general partner without its consent because our general partner and its affiliates will own sufficient units upon completion of this offering to be able to prevent its removal. The vote of the holders of at least 66 2/3% of all outstanding common and subordinated units voting together as a single class is required to remove the general partner. At the closing of this offering, Holding will own                      common units and all of our subordinated units, representing a     % limited partnership interest in us, assuming no exercise of the underwriters’ option to purchase additional common units. This will give Holding the ability to initially prevent the involuntary removal of our general partner.

 

   

If our general partner is removed without “cause” during the subordination period and units held by Holding are not voted in favor of that removal, all subordinated units not voted in favor of such removal will automatically convert into common units on a one-for-one basis, any existing arrearages on the common units will be extinguished, and the holders of the incentive distribution rights will have the right to convert such incentive distribution rights into common units or to receive cash in exchange for those interests based on the fair market value of those interests at the time. A removal of our general partner under these circumstances would adversely affect the common units by prematurely eliminating their distribution and liquidation preference over the subordinated units, which would otherwise have continued until we had met certain distribution and performance tests. Any conversion of our incentive distribution rights would be dilutive to existing unitholders. Furthermore, any cash payment in lieu of such conversion could be prohibitively expensive. 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 misconduct in its capacity as our general partner. Cause does not include most cases of poor management of the business, so the removal of the general partner because of the unitholder’s dissatisfaction with our general partner’s performance in managing our Partnership will most likely result in the termination of the subordination period and conversion of all subordinated units to common units.

There are no restrictions in our partnership agreement on our ability to issue equity securities. The effect of these provisions may be to diminish the price at which the common units will trade.

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 the unitholders. In addition, our partnership agreement does not restrict the ability of the members of our general partner from transferring their respective membership interests in our general partner to a third party. The new owner of our general partner would then be in a position to replace the board of directors and officers of our general partner with its own designees and thereby exert significant control over the decisions made by the board of directors and officers. This effectively permits a “change of control” without the vote or consent of the unitholders.

Substantial future sales of our common units in the public market could cause the price of our common units to fall.

We will grant registration rights to our Sponsors and certain of their affiliates. See “Certain Relationships and Related Party Transactions—Agreements Governing the Formation Transactions—Registration Rights Agreement.” These unitholders will have the right, subject to some conditions, to require us to file registration

 

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statements covering any of our common, subordinated or other equity securities owned by them or to include those securities in registration statements that we may file for ourselves or other unitholders. Upon the closing of this offering and assuming no exercise of the underwriters’ option to purchase additional common units, our Sponsors will own through Holding and our general partner                      common units and all of our subordinated units, representing a         % limited partnership interest in us, and all of the incentive distribution rights. Following their registration and sale under the applicable registration statement, those securities will become freely tradable. By exercising their registration rights and selling a large number of common units or other securities, these unitholders could cause the price of our common units to decline.

You will experience immediate and substantial dilution of $             per common unit on a tangible book value basis.

The assumed initial public offering price of $             per common unit exceeds pro forma net tangible book value of $             per common unit. Based on the assumed initial public offering price, you will incur immediate and substantial dilution of $             per common unit. This dilution results primarily because the assets contributed by Holding and its affiliates are recorded at their historical cost, and not their fair value, in accordance with U.S. GAAP. Please read “Dilution.”

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

We have applied to list our common units on the NYSE. Unlike most corporations, we are not required by the rules of the exchange to have, and we do not intend to have, a majority of independent directors on our general partner’s board of directors, a compensation committee or a nominating and corporate governance committee. Additionally, any future issuance of additional common units or other securities, including to affiliates, will not be subject to the exchange’s shareholder approval rules. Accordingly, unitholders will not have the same protections afforded to certain corporations that are subject to all of the corporate governance requirements of the exchange. Please read “Management.”

The holder or holders of a majority of our incentive distribution rights, which initially will be our general partner, may elect to cause us to issue additional common units to them in connection with a resetting of the minimum quarterly distribution and the target distribution levels related to our incentive distribution rights without the approval of the conflicts committee of our general partner’s board of directors or holders of our common units and subordinated units. This may result in lower distributions to holders of our common units in certain situations.

The holder or holders of a majority of our incentive distribution rights, which initially will be our general partner, have the right, at a time when there are no subordinated units outstanding and the holders of our incentive distribution rights have received incentive distributions at the highest level to which they are entitled (50%), for each of the prior four consecutive fiscal quarters, to reset the minimum quarterly distribution and initial cash target distribution levels at higher levels based on the distribution at the time of the exercise of the reset election. 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 (such amount is referred to as 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 amount.

In connection with resetting the minimum quarterly distributions and the target distribution levels, the holder of the incentive distribution rights will be entitled to receive a number of common units equal to that number of common units whose aggregate quarterly cash distributions equaled the average of the distributions to our general partner on the incentive distribution rights in the prior two quarters. We anticipate that the holder or holders of a majority of our incentive distribution rights would exercise this reset right in order to facilitate

 

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acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per common unit without such conversion; however, it is possible that such holder or holders could exercise this reset election at a time when they are experiencing, or may be expected to experience, declines in the cash distributions they receive related to their incentive distribution rights and may therefore desire to be issued our common units, rather than retain the right to receive incentive distributions based on the initial target distribution levels. This risk could be elevated if our incentive distribution rights have been transferred to any third party. As a result, a reset election may cause our common unitholders to experience dilution in the amount of cash distributions that they would have otherwise received had we not issued additional common units to the holder or holders of our incentive distribution rights in connection with resetting the target distribution levels. Please read “How We Make Cash Distributions—General Partner Interest and Incentive Distribution Rights” and “How We Make Cash Distributions—Our General Partner’s Right to Reset Incentive Distribution Levels.”

We may issue additional equity securities, including securities senior to the common units, without your approval, which would dilute your ownership interests.

We may, without the approval of our unitholders, issue an unlimited number of additional units or other equity securities. In addition, we may issue an unlimited number of units that are senior to the common units in right of distribution, liquidation and voting. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:

 

   

our 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;

 

   

because the amount payable to holders of our incentive distribution rights is based on a percentage of the total cash available for distribution, the distributions to holders of our incentive distribution rights will increase even if the per unit distribution on common units remains the same;

 

   

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.

Upon the expiration of the subordination period, the subordinated units will convert into common units and will then participate pro rata with other common units in distributions of available cash.

During the subordination period, which we define elsewhere in this prospectus, the common units will have the right to receive distributions of available cash from operating surplus in an amount equal to the minimum quarterly distribution of $             per unit, 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. Distribution arrearages do not accrue on the subordinated units. The purpose of the subordinated units is to increase the likelihood that during the subordination period there will be available cash from operating surplus to be distributed on the common units. Upon the expiration of the subordination period, the subordinated units will convert into common units on a one-for-one basis (or, on or after                     , 2016, at the option of the holder or holders of a majority of our subordinated units, at a ratio that may be less than one-to-one) and will then participate pro rata with other common units in distributions of available cash. See “How We Make Cash Distributions—Subordination Period” and “How We Make Cash Distributions—Distributions of Available Cash From Operating Surplus After the Subordination Period.”

 

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Our partnership agreement limits the ownership of common units by individuals and entities that are not U.S. citizens within the meaning of the Jones Act. This may affect the liquidity of our common units and may result in non-U.S. citizens being required to disgorge profits, sell their units at a loss or relinquish their voting and distribution rights.

We are subject to the Jones Act and, as a result, at least 75% of the outstanding units of each class or series of our limited partnership interests must be owned and controlled by U.S. citizens within the meaning of the Jones Act. To maintain our compliance with the Jones Act, our partnership agreement includes provisions limiting the rights of non-U.S. citizens to own our common units. Our partnership agreement limits such ownership of our common units to no more than 19.9% of our outstanding common units. Certain provisions of our partnership agreement are intended to facilitate compliance with this requirement and may have an adverse effect on holders of our common units.

Under the provisions of our partnership agreement, any transfer, or attempted transfer, of any common units of our limited partnership interests will be void if the effect of such transfer, or attempted transfer, would be to cause one or more non-U.S. citizens in the aggregate to own (of record or beneficially) in excess of 19.9% of the outstanding common units or a single non-U.S. citizen (and any other non-U.S. citizen whose ownership position would be aggregated with such non-U.S. citizen) to own in excess of 4.9% of the outstanding common units. However, in order for us to comply with the conditions to listing specified by the NYSE, our partnership agreement provides that nothing therein, such as the foregoing restrictions regarding transfers, precludes the settlement of any transaction entered into through the facilities of the NYSE or any other national securities exchange or automated inter-dealer quotation service so long as our common units are listed on the                     . To the extent such restrictions voiding transfers are effective, the liquidity or market value of our common units may be adversely impacted.

In the event such restrictions voiding transfers would be ineffective for any reason, our partnership agreement provides additional protective provisions in the circumstance that any transfer would otherwise result in the number of common units owned (of record or beneficially) in the aggregate by non-U.S. citizens being in excess of 19.9% of the outstanding common units or a single non-U.S. citizen (and any other non-U.S. citizen whose ownership position would be aggregated with such non-U.S. citizen) to own in excess of 4.9% of the outstanding common units, including that:

 

   

such transfer will cause such excess units to be automatically transferred to a trust for the benefit of one or more charitable beneficiaries that are U.S. citizens, or

 

   

to the extent that the trust transfer provisions would be ineffective for any reason, we, in our sole discretion, shall be entitled to redeem all or any portion of such units most recently acquired (as determined by the board of directors of our general partner in accordance with guidelines that are set forth in our partnership agreement), including common units offered pursuant to this prospectus, by non-U.S. citizens in excess of the applicable permitted percentage at a redemption price based on a fair market value formula.

As a result of the above provisions, a proposed transferee (including a proposed transferee of common units offered pursuant to this prospectus) that is a non-U.S. citizen or a record or beneficial owner whose citizenship status change results in excess units may sustain a loss.

In addition, our partnership agreement permits us to require that any record or beneficial owner of any units of our limited partnership interests provide us from time to time with certain documentation concerning such owner’s citizenship. In the event that a person does not submit such requested or required documentation to us, our partnership agreement provides us with certain remedies, including the suspension of the voting rights of such person’s units of our limited partnership interests and the payment of distributions with respect to those units into an escrow account. See “The Partnership Agreement—Ownership by Non-U.S. Citizens.”

 

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In addition to the risks described above, the foregoing restrictions on ownership of our units by non-U.S. citizens could delay, defer or prevent a transaction or change in control that might involve a premium price for our common unit or otherwise be in the best interest of our unitholders.

In establishing cash reserves, our general partner may reduce the amount of cash available for distribution to you.

Our partnership agreement provides that our general partner will approve the amount of reserves from our consolidated cash flow that will be retained by us to fund its future operating and capital expenditures. Our partnership agreement requires our general partner to deduct from operating surplus cash reserves that it determines are necessary to fund our future operating and capital expenditures. These reserves also will affect the amount of cash available for distribution by us to our unitholders. In addition, our general partner may establish reserves for distributions on the subordinated units, but only if those reserves will not prevent us from distributing the full minimum quarterly distribution, plus any arrearages, on the common units for the following four quarters. As described above in “—Risks Inherent in Our Business—We may be required to make maintenance and capital expenditures to maintain the operating capacity of our fleet, which will reduce cash available for distribution. In addition, each quarter we are required to deduct estimated maintenance and replacement capital expenditures from operating surplus, which may result in less cash available to unitholders than if actual maintenance and replacement capital expenditures were deducted,” our partnership agreement requires our general partner each quarter to deduct from operating surplus estimated maintenance and replacement capital expenditures, as opposed to actual maintenance and replacement capital expenditures, which could reduce the amount of available cash for distribution. The amount of estimated maintenance and replacement capital expenditures deducted from operating surplus is subject to review and change by our general partner at least once a year, provided that any change must be approved by the conflicts committee of our general partner.

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

If at any time our general partner and its affiliates (including Holding) 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 not less than the then-current market price of our common units. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon the exercise of this limited call right. 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. For additional information about the limited call right, please read “The Partnership Agreement—Limited Call Right.”

At the completion of this offering and assuming no exercise of the underwriters’ over-allotment option, Holding will own     % of our common units. At the end of the subordination period, assuming no additional issuances of common units, no exercise of the underwriters’ over-allotment option, no repurchases or redemptions of common units and the conversion of our subordinated units into common units, Holding will own     % of our common units.

Our partnership agreement restricts the voting rights of unitholders (other than our general partner and its affiliates) owning 20% or more of any class of our units.

Our partnership agreement restricts unitholders’ voting rights by providing that any units held by a person 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. The partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.

 

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Increases in interest rates may cause the market price of our common units to decline.

An increase in interest rates may cause a corresponding decline in demand for equity investments in general, and in particular for yield-based equity investments such as our common units. Any such increase in interest rates or reduction in demand for our common units resulting from other relatively more attractive investment opportunities may cause the trading price of our common units to decline.

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 you could lose all or part of your investment.

Prior to this offering, there has been no public market for the common units. Immediately after this offering, there will be only                      publicly traded common units, assuming no exercise of the underwriters’ option to purchase additional common units. 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. You may not be able to resell your 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 the common units will be determined by negotiations between us and the representatives 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:

 

   

the level of our quarterly distributions;

 

   

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

 

   

the loss of a large customer;

 

   

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

 

   

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

 

   

other factors described in these “Risk Factors.”

We are an “emerging growth company” and we are subject to reduced disclosure requirements applicable to emerging growth companies, which may make our common units less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” as described under “Summary—Implications of Being an Emerging Growth Company.” We cannot predict if investors will find our common units less attractive because we may rely on these exemptions. If some investors find our common units less attractive as a result, there may be a less active trading market for our common units and our unit price may be more volatile. We will remain an emerging growth company for up to five years, although we will lose that status sooner if we have more than $1.0 billion of revenues in a fiscal year, have more than $700 million in market value of our limited partner interests held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period.

Under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of the our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley

 

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Act of 2002 for so long as we are an emerging growth company. For as long as we take advantage of the reduced reporting obligations, the information that we provide unitholders may be different than information provided by other public companies. In addition, pursuant to the JOBS Act, as an “emerging growth company,” we have elected to take advantage of the extended transition period for any new or revised accounting standards that may be issued by the Public Company Accounting Oversight Board (PCAOB) or the SEC. This means that when a standard is issued or revised and it has different application dates for public or private companies, we can, for so long as we are an “emerging growth company,” adopt the standard for private companies. This may make comparison of our financial statements with any other public company that either is not an “emerging growth company” or has opted out of using the extended transition period difficult or impossible as a result of our use of different accounting standards.

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

While American Petroleum Tankers Parent LLC (“APT Parent”) has previously filed reports with the SEC on a voluntary basis, we have no history as an entity with publicly traded equity securities. In addition to the SEC’s reporting requirements, as a publicly traded partnership, we will be required to comply with certain corporate governance and related requirements of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), the SEC and the NYSE. We expect these rules and regulations to increase 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 will be required to have at least three independent directors within a year of the date of this prospectus. In addition, we will incur significant legal, accounting and other expenses in complying with these and other applicable regulations. 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. We anticipate that our incremental general and administrative expenses as a publicly traded limited partnership will be approximately $2.0 million annually and will include costs associated with annual and quarterly reporting, tax return and Schedule K-1 preparation and distribution expenses, Sarbanes-Oxley compliance, listing on the NYSE, investor relations, registrar and transfer agent fees, incremental auditing and legal costs, incremental director and officer liability insurance expenses, director compensation and non-cash equity incentive compensation expense.

You may not have limited liability 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 contractual obligations of the partnership that are expressly made without recourse to the general partner. We are organized under Delaware law, and we conduct business in other states. As a limited partner in a partnership organized under Delaware law, you could be held liable for our obligations to the same extent as a general partner if a court determined that the right or the exercise of the right by our unitholders as a group to remove or replace our general partner, to approve some amendments to the partnership agreement or to take other action under our partnership agreement constituted participation in the “control” of our business. In addition, limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in many jurisdictions. Please read “The Partnership Agreement—Limited Liability.”

You may have liability to repay distributions wrongfully made.

Under certain circumstances, our unitholders may have to repay amounts wrongfully distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to our unitholders if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that, for a period of three years from the date of the impermissible distribution, partners who received such a distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the Partnership for the distribution amount. Liabilities to partners on account of their partner interests and liabilities that are non-recourse to the Partnership are not counted for purposes of determining whether a distribution is permitted.

 

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We can borrow money to pay distributions, which would reduce the amount of credit available to operate our business.

Our partnership agreement allows us to make working capital borrowings to pay distributions. Accordingly, if we have available borrowing capacity, we can make distributions on all our units even though cash generated by our operations may not be sufficient to pay such distributions. Any working capital borrowings by us to make distributions will reduce the amount of working capital borrowings we can make for operating our business. For more information, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Tax Risks to Common Unitholders

In addition to reading the following risk factors, you should read “Material U.S. Federal Income Tax Considerations” for a more complete discussion of the expected material U.S. federal income tax considerations of owning and disposing of common units.

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

The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a partnership for U.S. federal income tax purposes.

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 U.S. 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 U.S. federal income tax purposes or otherwise subject us to taxation as an entity.

If we were treated as a corporation for U.S. federal income tax purposes, we would pay U.S. federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%, and we likely would pay state and local taxes as well at varying rates. Distributions to you would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to you. Because a tax would be imposed upon us as a corporation, the cash available for distributions to you may be materially reduced. Therefore, treatment of us as a corporation could result in a material reduction in the anticipated cash flow and after-tax return to you, and thus could result in 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, the minimum quarterly distribution amount and the target distribution amounts may be adjusted to reflect the impact of that law on us.

If we were subjected to additional entity-level taxation by individual states, it would reduce our cash available for distribution to you.

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 partnerships to entity-level taxation through the imposition of state income, franchise and other forms of taxation. Imposition of any such additional tax on us by a state would 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 amounts may be adjusted to reflect the impact of that law on us.

 

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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 of applicable law, possibly on a retroactive basis.

The present U.S. federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units, may be modified by legislative, judicial or administrative changes or interpretations of applicable law at any time. For example, from time to time, members of the U.S. Congress propose and consider substantive changes to the existing U.S. federal income tax laws that affect publicly traded partnerships. One such recent legislative proposal would have eliminated the qualifying income exception upon which we rely for our treatment as a partnership for U.S. federal income tax purposes. Please read “Material U.S. Federal Income Tax Considerations—Partnership Status.” We are unable to predict whether any of these changes or any other proposals that are adverse to us or our unitholders will be reintroduced or will ultimately be enacted or whether judicial or administrative interpretations of applicable law will change. Any such changes could negatively impact the value of an investment in our common units. Any modification to the U.S. federal income tax laws may be applied retroactively and could make it more difficult or impossible to meet the exception allowing certain publicly traded partnerships to be treated as partnerships for U.S. federal income tax purposes.

You will be required to pay taxes on your share of our taxable income even if you do not receive any cash distributions from us.

Because our unitholders will be treated as partners to whom we will allocate taxable income, which could be different in amount from the cash that we distribute, you will be required to pay U.S. federal income taxes and, in some cases, state and local income taxes on your share of our taxable income even if you do not receive any cash distributions from us. You may not receive cash distributions from us equal to your share of our taxable income or even equal to the actual tax liability which results from your share of our taxable income.

A successful IRS contest of the U.S. federal income tax positions that we take may adversely impact the market for our common units, and the costs of any contests will be borne by our unitholders and our general partner.

The IRS may adopt positions that differ from the conclusions of our counsel expressed in this prospectus or from the positions that we take, even positions taken with advice of counsel, 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 the positions that we take. A court may not agree with some or all of the positions that we take. Any contest with the IRS, and the outcome of any IRS contest, may materially and adversely impact the market for our common units and the price which they trade. In addition, the costs of any contest with the IRS (principally legal, accounting and related fees) 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 different than expected.

If you sell common units, you will recognize gain or loss equal to the difference between the amount realized and your tax basis in those common units. Prior distributions to you in excess of the total net taxable income a unitholder is allocated for a common unit, which decreased your tax basis in that common unit, will, in effect, become taxable income to you if the common unit is sold at a price greater than your tax basis in that common unit, even if the price you receive is less than your original cost. Furthermore, a substantial portion of the amount realized, whether or not representing gain, may be ordinary income to you due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, if you sell your common units, you may incur a tax liability in excess of the amount of cash you receive from the sale. Please read “Material U.S. Federal Income Tax Considerations—Disposition of Common Units—Recognition of Gain or Loss” for a further discussion of the foregoing.

 

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

Investment in common units by tax-exempt entities, such as individual retirement accounts (IRAs), and by non-U.S. persons, raises issues unique to them. For example, virtually all of our income allocated to organizations exempt from U.S. 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 U.S. 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 are urged to consult a tax advisor before investing in our common units.

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

Because we cannot match transferors and transferees of common units, we will adopt depreciation and amortization positions that may not conform with all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to our common unitholders. It also could affect the timing of these tax benefits or the amount of gain from a sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to the common unitholders’ tax returns.

We will prorate our items of income, gain, loss and deduction for U.S. 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 U.S. 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 although the U.S. Department of the Treasury issued proposed Treasury Regulations allowing a similar monthly simplifying convention, such regulations are not final and do not specifically authorize the use of the proration method we have adopted. 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. Our counsel has not rendered an opinion with respect to our monthly convention for allocating taxable income and losses. Please read “Material U.S. Federal Income Tax Considerations—Disposition of Common Units—Allocations Between Transferors and Transferees.”

A unitholder whose common units are loaned to a “short seller” to cover a short sale of common units may be considered as having disposed of those common units. If so, the unitholder would no longer be treated for U.S. 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 cover a short sale of common units may be considered as having disposed of the loaned common units, the unitholder may no longer be treated for U.S. federal income tax purposes as a partner with respect to those common units during the period of the loan to the short seller and may recognize gain or loss from such disposition. As a result, 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 common unitholder and any cash distributions received by the unitholder as to those common units could be fully taxable as ordinary income. Our counsel has not rendered an opinion regarding the treatment of a unitholder where common units are loaned to a short seller to cover a short sale of common units; therefore,

 

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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 U.S. 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.

An IRS audit of our information return may result in an audit of your own tax return.

We may be audited by the IRS. Adjustments resulting from an IRS audit may require you to adjust a prior year’s tax liability and possibly may result in an audit of your own tax return. Any audit of your tax return could result in adjustments not related to our tax returns as well as those related to our tax returns.

You will likely be subject to state and local taxes and return filing requirements as a result of an investment in our common units.

In addition to U.S. federal income taxes, you will likely be subject to other taxes, including state and local income taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we do business or own property now or in the future, even if you do not live in any of these jurisdictions. You 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. Furthermore, you may be subject to penalties for failure to comply with those requirements. We may own property or conduct business in other states or foreign countries in the future. It is your responsibility to file all U.S. federal, state and local tax returns. Our counsel has not rendered an opinion on the state and local tax consequences of an investment in our common units.

The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the termination of our Partnership for U.S. federal income tax purposes.

Our Partnership will be considered to have terminated for U.S. federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. A constructive termination would result in the close of our taxable year for all unitholders and could result in a deferral of depreciation deductions allowable in computing our taxable income. Please read “Material U.S. Federal Income Tax Considerations—Administrative Matters—Constructive Termination” for a discussion of the considerations relating to a constructive termination of our Partnership for U.S. federal income tax purposes.

 

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FORWARD-LOOKING STATEMENTS

Statements included in this prospectus concerning plans and objectives of management for future operations or economic performance, or assumptions related thereto, including our financial forecast, contain forward-looking statements. In addition, we and our representatives may from time to time make other oral or written statements that are also forward-looking statements. Such statements include, in particular, statements about our plans, strategies, business prospects, changes and trends in our business, and the markets in which we operate as described in this prospectus. In some cases, you can identify the forward-looking statements by the use of words such as “may,” “could,” “should,” “would,” “expect,” “plan,” “anticipate,” “intend,” “forecast,” “believe,” “estimate,” “predict,” “propose,” “potential,” “continue” or the negative of these terms or other comparable terminology.

Forward-looking statements appear in a number of places and include statements with respect to, among other things, those set forth herein under “Risk Factors.” These and other forward-looking statements are made based upon management’s current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and therefore involve a number of risks and uncertainties. The risks, uncertainties and assumptions involve known and unknown risks and are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.

We undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict all of these factors. Further, we cannot assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement.

 

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USE OF PROCEEDS

We expect to receive net proceeds of approximately $             million from the sale of            common units offered by this prospectus, assuming an initial public offering price of $             per unit (the mid-point of the range set forth on the cover of this prospectus) and after deducting underwriting discounts, the structuring fee and estimated offering expenses payable by us. We will use approximately $             million of the net proceeds from this offering to repay term loan borrowings under our existing credit facility and approximately $             million to fund a cash distribution to Holding.

Term loan borrowings under our credit facility mature on October 2, 2019 and during the nine months ended September 30, 2013 bore interest at a weighted average interest rate of 4.75% per annum. Term loan borrowings under our credit facility were incurred on April 2, 2013 and the proceeds thereof were used to refinance our 2015 Notes. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources—Borrowing Activities” for a description of our existing credit agreement.

If and to the extent the underwriters exercise their option to purchase additional common units, the number of common units purchased by the underwriters pursuant to such exercise will be sold to the public, and the remainder of the                      common units, if any, will be issued to Holding. Any such units issued to Holding will be issued for no additional consideration. Accordingly, exercise of the underwriters’ option will not affect the total number of common units outstanding or the amount of cash needed to pay the minimum quarterly distribution on all units. If the underwriters exercise their option to purchase additional common units in full, the additional net proceeds would be approximately $             million. The net proceeds from any exercise of the underwriters’ option to purchase additional common units will be distributed to Holding. Please read “Underwriting.”

A $1.00 increase or decrease in the assumed initial public offering price of $             per common unit would cause the net proceeds from this offering, after deducting the underwriting discounts, the structuring fee and estimated offering expenses payable by us, to increase or decrease, respectively, by approximately $             million. In addition, we may also increase or decrease the number of common units we are offering. Each increase of 100,000 common units offered by us, together with a concomitant $1.00 increase in the assumed initial public offering price to $             per common unit, would increase net proceeds to us from this offering by approximately $             million. Similarly, each decrease of 100,000 common units offered by us, together with a concomitant $1.00 decrease in the assumed initial public offering price to $             per common unit, would decrease the net proceeds to us from this offering by approximately $             million.

 

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CAPITALIZATION

The following table shows:

 

   

our historical cash and capitalization as of September 30, 2013; and

 

   

our as adjusted cash and capitalization as of September 30, 2013, after giving effect to this offering and the formation transactions, including the application of the net proceeds from this offering as described under “Use of Proceeds.”

This table is derived from and should be read together with our historical consolidated financial statements and the accompanying notes contained elsewhere in this prospectus. You should also read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of September 30, 2013  
     Historical      As Adjusted  
     (dollars in thousands)  

Cash and cash equivalents

   $ 333       $                
  

 

 

    

 

 

 

Debt(1):

     

Term loan

   $ 247,256      
  

 

 

    

Total debt

     247,256      
  

 

 

    

 

 

 

Equity:

     

Members’ equity

   $ 392,942       $     

Partners’ equity:

     

Held by public:

     

Common units

     —        

Held by Holding and our general partner:

     —        

Common units — Holding

     —        

Subordinated units — Holding

     —        

General partner interest

     —        
  

 

 

    

 

 

 

Equity attributable to Holding

     392,942      
  

 

 

    

 

 

 

Total capitalization(2)

   $ 640,198       $   (3) 
  

 

 

    

 

 

 

 

(1) All of our outstanding debt is secured by our vessels. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Borrowing Activities.”
(2) A $1.00 increase or decrease in the assumed initial public offering price of $             per common unit would cause the net proceeds from this offering, after deducting the underwriting discounts, the structuring fee and estimated offering expenses payable by us, to increase or decrease, respectively, by approximately $             million. In addition, we may also increase or decrease the number of common units we are offering. Each increase of 100,000 common units offered by us, together with a concomitant $1.00 increase in the assumed initial public offering price to $             per common unit, would increase net proceeds to us from this offering by approximately $             million. Similarly, each decrease of 100,000 common units offered by us, together with a concomitant $1.00 decrease in the assumed initial public offering price to $             per common unit, would decrease the net proceeds to us from this offering by approximately $             million.
(3) Does not reflect any write-off of deferred financing fees associated with the prepayment of our term loan borrowings.

 

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DILUTION

Dilution is the amount by which the offering price will exceed the net tangible book value per common unit after this offering. Based on the assumed initial public offering price of $             per common unit, on a pro forma basis as of September 30, 2013, after giving effect to this offering of common units, the formation transactions and the application of the net proceeds in the manner described under “Use of Proceeds”, our net tangible book value would have been $             million, or $             per common unit. Purchasers of common units in this offering will experience substantial and immediate dilution in 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

      $                

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

   $                   

Increase in net tangible book value per common unit attributable to purchasers in this offering

     
  

 

 

    

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

     
     

 

 

 

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

      $     
     

 

 

 

 

(1) Determined by dividing the total number of units (                     common units and                      subordinated units) to be issued to Holding for its contribution of assets and liabilities to us into the net tangible book value of the contributed assets and liabilities.
(2) Determined by dividing the total number of units to be outstanding after this offering (                     common units and                      subordinated units) into our pro forma net tangible book value, after giving effect to the application of the net proceeds of this offering.
(3) Each $1.00 increase or decrease in the assumed initial public offering price of $             per common unit would increase or decrease, respectively, our pro forma net tangible book value by approximately $             million, or approximately $             per common unit, and dilution per common unit to investors in this offering by approximately $             per common unit, after deducting the underwriting discounts, the structuring fee and estimated offering expenses payable by us. We may also increase or decrease the number of common units we are offering. An increase of 100,000 common units offered by us, together with a concomitant $1.00 increase in the assumed initial public offering price to $             per common unit, would result in a pro forma net tangible book value of approximately $             million, or $             per common unit, and dilution per common unit to investors in this offering would be $             per common unit. Similarly, a decrease of 100,000 common units offered by us, together with a concomitant $1.00 decrease in the assumed initial public offering price to $             per common unit, would result in a pro forma net tangible book value of approximately $             million, or $             per common unit, and dilution per common unit to investors in this offering would be $             per common unit. The information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.
(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 exercise of the underwriters’ option.

 

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

 

     Units Acquired     Total Consideration  
      Number    Percent     Amount      Percent  

Holding and its affiliates(1)(2)

                   $                              

New investors

          
  

 

  

 

 

   

 

 

    

 

 

 

Total

        100   $           100
  

 

  

 

 

   

 

 

    

 

 

 

 

(1) Upon consummation of the formation transactions and this offering, Holding will own an aggregate of                      common units and            subordinated units, representing a     % limited partnership interest in us. The assets contributed by Holding and its affiliates were recorded at historical book value, rather than fair value, in accordance with U.S. GAAP.
(2) Assumes the underwriters’ option to purchase additional units is not exercised.

 

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OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

You should read the following discussion of our cash distribution policy and restrictions on distributions in conjunction with specific assumptions included in this section. In addition, you should read “Forward-Looking Statements” and “Risk Factors” for information regarding statements that do not relate strictly to historical or current facts and certain risks inherent in our business. For additional information regarding our historical operating results, you should refer to our historical financial statements and related notes included elsewhere in this prospectus.

General

Rationale for Our Cash Distribution Policy

Our cash distribution policy reflects a judgment that our unitholders will be better served by our distributing our available cash rather than retaining it. Because we believe we will generally finance any expansion capital expenditures from external financing sources, we believe that our investors are best served by our distributing all of our available cash. Our cash distribution policy is consistent with the terms of our partnership agreement, which requires that we distribute all of our available cash quarterly. Our partnership agreement generally defines available cash as the sum of (i) our cash on hand at the end of a quarter after the payment of our expenses and the establishment of cash reserves and (ii) if our general partner so determines, all or any portion of the cash on hand immediately prior to the date of distribution of available cash for the quarter, including cash on hand resulting from working capital borrowings made at 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 to unitholders than would be the case if we were subject to entity-level federal income tax.

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

There is no guarantee that unitholders will receive quarterly distributions from us. We do not have a legal obligation to pay the minimum quarterly distributions or any other distribution except as provided in our partnership agreement. Our distribution policy is subject to certain restrictions and may be changed at any time, including:

 

   

We will be subject to restrictions on distributions under our credit agreement and any future financing agreements. Our credit agreement contains material financial tests and covenants that must be satisfied in order to pay distributions. If we are unable to satisfy the restrictions included in our credit agreement or any future financing agreements or are otherwise in default under any of those agreements, as a result of our debt levels or otherwise, we will not be able to make cash distributions to you, notwithstanding our stated cash distribution policy. These financial tests and covenants are described in this prospectus in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

   

We are required to make substantial capital expenditures to maintain and replace our fleet. These expenditures may fluctuate significantly over time, particularly as our vessels near the end of their useful lives. In order to minimize these fluctuations, our partnership agreement requires us to deduct estimated, as opposed to actual, maintenance and replacement capital expenditures from the amount of cash that we would otherwise have available for distribution to our unitholders. In years when estimated maintenance and replacement capital expenditures are higher than actual maintenance and replacement capital expenditures, the amount of cash available for distribution to unitholders will be lower than if actual maintenance and replacement capital expenditures were deducted.

 

   

Our general partner is entitled to reimbursement of all direct and indirect expenses incurred on our behalf. Our partnership agreement provides that our general partner will determine in good faith the expenses that are allocable to us.

 

   

Although our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including provisions contained therein requiring us to make cash distributions, may be amended. Our partnership agreement generally may not be amended during the subordination period

 

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without the approval of non-affiliated unitholders, except in certain circumstances when our general partner can amend our partnership agreement without unitholder approval. After the subordination period has ended, our partnership agreement can be amended with the consent of our general partner and the approval of a majority of the outstanding common units. At the closing of this offering, assuming no exercise of the underwriters’ option to purchase additional units, Holding will own                 common units and all of our subordinated units, representing a         % limited partner interest in us. Please read “The Partnership Agreement—Amendment of the Partnership Agreement.”

 

   

Even if our cash distribution policy is not modified or revoked, the amount of distributions we pay under our cash distribution policy and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement.

 

   

Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act (the “Delaware Act”), we may not make a distribution to our unitholders 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 decreases in total operating revenues, decreases in daily hire rates, the loss of a vessel, increases in operating or general and administrative expenses, principal and interest payments on outstanding debt, taxes, working capital requirements, maintenance and replacement capital expenditures or unanticipated cash needs. Please read “Risk Factors” for a discussion of these factors.

 

   

If and to the extent our cash available for distribution materially declines, we may elect to reduce our quarterly cash distributions in order to service or repay our debt or fund expansion capital expenditures.

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 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 $         million cash basket, that represent non-operating sources of cash. Accordingly, it is possible that return of capital distributions could be made from operating surplus. Any cash distributed by us in excess of 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, which is a return of capital. We do not anticipate that we will make any distributions from capital surplus.

Our Ability to Grow Depends on Our Ability to Access External Expansion Capital

Because we distribute all of our available cash, we may not grow as quickly as businesses that reinvest their available cash to expand ongoing operations. We expect that we will rely primarily upon external financing sources, including bank borrowings and the issuance of debt and equity securities, to fund acquisitions and expansion and investment capital expenditures. As a result, to the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow. To the extent we issue additional units in connection with any acquisitions or other capital expenditures, the payment of distributions on those additional units and any 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 on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional borrowings or other debt by us to finance our growth would result in increased interest expense, which in turn may affect the available cash that we have to distribute to our unitholders.

Our Minimum Quarterly Distribution

Upon completion of this offering, our partnership agreement will provide for a minimum quarterly distribution of $         per unit for each whole quarter, or $        per unit on an annualized basis. This equates to an

 

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aggregate cash distribution of $        million per quarter, or $        million per year, in each case based on the number of common units and subordinated units outstanding immediately after completion of this offering.

If and to the extent the underwriters exercise their option to purchase additional common units, the number of units purchased by the underwriters pursuant to such exercise will be sold to the public and the remainder, if any, will be issued to Holding. Accordingly, the 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.

Our ability to make cash distributions at the minimum quarterly distribution rate pursuant to this policy 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 quarter, on or about the 15th of each of February, May, August and November, 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 following the indicated distribution date. We will adjust our first distribution for the period from the closing of this offering through December 31, 2013 based on the actual length of the period.

The table below sets forth the number of outstanding common units and subordinated units upon the closing of this offering and the aggregate distribution amounts payable on such units during the year following the closing of this offering at our minimum quarterly distribution rate of $        per unit per quarter ($        per unit on an annualized basis).

 

     Number of
Units
   Distributions  
      One Quarter     Four Quarters  

Publicly held Common Units(1)

      $        $     

Common units held by Holding(1)

       

Subordinated units held by Holding

       

Non-economic General Partner Interest(2)

       
  

 

  

 

 

   

 

 

 

Total

      $                  (3)    $                    
  

 

  

 

 

   

 

 

 

 

(1) Assumes no exercise of the underwriters’ option to purchase additional common units.
(2) Our general partner will own a non-economic general partner interest in us.
(3) Actual payments of distributions on the common units and subordinated units are expected to be approximately $                 for the period between the estimated closing date of this offering and the end of the fiscal quarter in which the closing date of this offering occurs.

During the subordination period, before we make any quarterly distributions to subordinated unitholders, our common unitholders are entitled to receive payment of the full minimum quarterly distribution plus any arrearages in distributions from prior quarters. Please read “How We Make Cash Distributions—Subordination Period.” We cannot guarantee, however, that we will pay the minimum quarterly distribution or any amount on the common units in any quarter. Except during the subordination period, if distributions on our common units are not paid at the minimum quarterly distribution rate during any fiscal quarter, our common unitholders will not be entitled to receive minimum quarterly distributions in arrears.

Our general partner will initially hold the incentive distribution rights, which entitle the holder to increasing percentages, up to a maximum of 50.0%, of the cash we distribute in excess of $         per unit per 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 decision made by our general partner in its capacity as our general partner must be made in good faith and that any such decision 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

 

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decision by our general partner to be made in “good faith,” our general partner must subjectively believe that the decision is in the best interest of the Partnership. Please read “Conflicts of Interest and Fiduciary Duties.”

Our cash distribution policy, as expressed in our partnership agreement, may not be modified or repealed without amending our partnership agreement. 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 and the amount of reserves our general partner establishes in accordance with our partnership agreement as described above.

Unaudited Pro Forma Cash Available for Distribution for the Twelve-Month Period Ended September 30, 2013 and the Year Ended December 31, 2012

If we had completed this offering and related transactions on January 1, 2012, our unaudited pro forma cash available for distribution would have been approximately $30.1 million and $30.4 million for the year ended December 31, 2012 and the twelve-month period ended September 30, 2013, respectively. These amounts would have been sufficient to pay the minimum quarterly distribution of $         per unit per quarter ($         per unit on an annualized basis) on all of our common units and subordinated units for such period. These amounts would have exceeded by $         million and $         million, respectively, the amounts needed to pay the aggregate annualized minimum quarterly distribution of $         per unit on all of our common and subordinated units for the twelve-month period ending September 30, 2014.

Our unaudited pro forma available cash for the year ended December 31, 2012 and the twelve-month period ended September 30, 2013 includes $2.0 million of estimated incremental general and administrative expenses that we expect to incur annually as a result of becoming a publicly traded partnership. Incremental general and administrative expenses related to being a publicly traded partnership include costs associated with annual and quarterly reporting, tax return and Schedule K-1 preparation and distribution expenses, Sarbanes-Oxley compliance, listing on the NYSE, investor relations, registrar and transfer agent fees, incremental auditing and legal costs, incremental director and officer liability insurance expenses, director compensation and non-cash equity incentive compensation expense. Our incremental general and administrative expense is not reflected in Holdings’ historical financial statements.

We have based the pro forma assumptions upon currently available information and specific estimates and assumptions. The pro forma amounts below do not purport to present the results of our operations had the transactions contemplated in this prospectus actually been completed as of the dates indicated. Moreover, the pro forma adjustments made below contain adjustments that may be in addition to or different from the adjustments made to our pro forma financial statements appearing elsewhere in this prospectus.

In addition, cash available to pay distributions is primarily a cash accounting concept, while our historical financial statements included elsewhere in this prospectus have been prepared on an accrual basis. As a result, you should view the amount of historical as adjusted pro forma cash available for distribution 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. The pro forma amounts below are presented on an annual basis or twelve-month basis, and there is no guarantee that we would have had available cash sufficient to pay the full minimum quarterly distribution on all of our outstanding common units and subordinated units for each quarter within such periods presented.

The following table illustrates, on a pro forma basis, for the twelve-month period ended September 30, 2013 and the year ended December 31, 2012, the amount of cash that would have been available for distribution to our unitholders, assuming that this offering and the related formation transactions had been completed on October 1, 2012 and January 1, 2012, respectively. Each of the adjustments reflected or presented below is explained in the footnotes to such adjustment.

 

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AMERICAN PETROLEUM TANKERS PARTNERS LP

UNAUDITED PRO FORMA CASH AVAILABLE FOR DISTRIBUTION

 

     Twelve-Month
Period Ended
September 30, 2013
    Year Ended
December 31, 2012
 

(dollars in thousands except per unit items)

    

(unaudited)

    

Revenues(1)

   $ 96,689      $ 94,827   

Expenses:

    

Vessel operating expenses

     36,957        35,405   

General and administrative expenses

     5,277        4,797   

Depreciation and amortization

     23,786        23,786   

Vessel management expenses

     2,816        2,760   
  

 

 

   

 

 

 

Total expenses

     68,836        66,748   

Other income(2)

     1,500        —     
  

 

 

   

 

 

 

Operating income

     29,353        28,079   
  

 

 

   

 

 

 

Interest income

     —          —     

Interest expense(3)

     (9,724     (9,731

Write-off of Title XI deferred financing costs(4)

     (1,536     (1,536
  

 

 

   

 

 

 

Net income attributable to partners

   $ 18,093      $ 16,812   
  

 

 

   

 

 

 

Plus:

    

Interest expense(3)

     9,724        9,731   

Depreciation and amortization

     23,786        23,786   
  

 

 

   

 

 

 

EBITDA(5)

   $ 51,603      $ 50,329   
  

 

 

   

 

 

 

Plus:

    

Straight-line charter revenues(6)

     (129     (30

Other income(2)

     (1,500     —     

Write-off of Title XI deferred financing costs(4)

     1,536        1,536   

MarAd expenses(7)

     1,016        304   
  

 

 

   

 

 

 

Adjusted EBITDA(5)

   $ 52,526      $ 52,139   
  

 

 

   

 

 

 

Less:

    

Interest income

     —          —     

Cash interest expense

     (8,571     (8,578

Drydocking capital expenditure reserve

     (2,000     (2,000

Replacement capital expenditure reserve

     (11,511     (11,511
  

 

 

   

 

 

 

Cash available for distribution

   $ 30,444      $ 30,050   
  

 

 

   

 

 

 

Distribution per unit

    

Distributions to our public common unitholders

    

Distributions to Holding—common units

    

Distributions to Holding—subordinated units

    

Total distribution

    

Excess (shortfall)

    

Annualized minimum quarterly distribution per unit

    

Aggregate distributions based on an annualized minimum quarterly distribution

    

 

(1) Revenues presented on a GAAP basis (including the impact of straight-line adjustment).
(2) Other income in the twelve months ended September 30, 2013 was due to the final settlement of the construction contract and warranty claims with NASSCO.

 

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(3) Assumes a term loan balance of approximately $180.0 million after repaying a portion of the borrowings under our existing credit facility with net proceeds from this offering and an average interest rate of approximately 5.0% per annum. Assumes the April 2013 refinancing occurred on January 1, 2012. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Borrowing Activities—April 2013 Refinancing.” Includes deferred financing costs associated with entering into our senior secured credit facility in April 2013, which are adjusted to reflect the partial prepayment of term loans in connection with this offering.
(4) Represents fees incurred due to application for U.S. Title XI Federal Ship Financing Program loan guarantees, which was denied in November 2012. See “Business—Legal Proceedings.”
(5) EBITDA and Adjusted EBITDA are non-GAAP financial measures. EBITDA is defined as earnings before interest expense, income tax expense, depreciation and amortization. Adjusted EBITDA is defined EBITDA, adjusted to remove or add back certain unusual and non-cash charges. EBITDA is used as a supplemental financial measure by management and external users of financial statements to assess our financial and operating performance. Adjusted EBITDA is used as a supplemental financial measure by management and external users of financial statements, such as investors, to assess our financial and operating performance. We believe that Adjusted EBITDA assists our management and investors by increasing the comparability of our performance from period to period and against the performance of other companies in our industry that provide Adjusted EBITDA information. This increased comparability is achieved by excluding the potentially disparate effects between periods or companies of interest, other financial items, depreciation and amortization and taxes, which items are affected by various and possibly changing financing methods, capital structure and historical cost basis and which items may significantly affect net income between periods. We believe that including Adjusted EBITDA as an operating measure benefits investors in (a) selecting between investing in us and other investment alternatives and (b) monitoring our ongoing operational strength in assessing whether to continue to hold common units. However, EBITDA and Adjusted EBITDA have important limitations as analytical tools. These limitations include, but are not limited to, the following:

 

   

EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

   

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;

 

   

EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; and

 

   

EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs.

 

     EBITDA and Adjusted EBITDA should not be considered alternatives to net income, operating income, cash flow from operating activities or any other measure of financial performance presented in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA exclude some, but not all, items that affect net income, and these measures may vary among other companies. Therefore, EBITDA and Adjusted EBITDA as presented below may not be comparable to similarly titled measures of other companies.

 

(6) Non-cash adjustment for multi-year charter revenues, as required by GAAP.
(7) Represents one-time expenses related to litigation with MarAd in connection with the U.S. Title XI Federal Ship Financing Program application, which expenses were included in general and administrative expenses.

 

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Estimated Cash Available for Distribution for the Twelve-Month Period Ending September 30, 2014

In this section, we present in detail the basis for our belief that we will be able to pay our minimum quarterly distribution on all of our outstanding common units and subordinated units for the twelve-month period ending September 30, 2014. Based on our estimate of cash available for distribution and related assumptions set forth below, we forecast that our cash available for distribution generated during the twelve-month period ending September 30, 2014 will be approximately $29.5 million, as compared to approximately $30.1 million and approximately $30.4 million for the year ended December 31, 2012 and the twelve-month period ended September 30, 2013, respectively. This amount would be sufficient to pay 100% of the minimum quarterly distribution of $             per unit on all of our common units and subordinated units for the twelve-month period ending September 30, 2014. Actual payments of distributions on the common units and subordinated units are expected to be $             million for the period between the estimated closing date of this offering and the end of the fiscal quarter in which the closing date of this offering occurs.

The financial forecast has been prepared by, and is the responsibility of, our management. Our financial forecast reflects our judgment, as of the date of this prospectus, of conditions we expect to exist and the course of action we expect to take during the twelve-month period ending September 30, 2014. Our financial forecast is based on assumptions that we believe to be reasonable with respect to the forecast period as a whole. The assumptions and estimates used in the financial forecast are inherently uncertain and represent those that we believe are significant to our financial forecast. We believe that we have a reasonable objective basis for those assumptions. To the extent that there is a shortfall during any quarter in the forecast period, we believe we would be able to make working capital borrowings to pay distributions in such quarter and would be able to repay such borrowings in a subsequent quarter, because we believe the total cash available for distribution for the forecast period will be more than sufficient to pay the aggregate minimum quarterly distribution to all unitholders. We believe our actual results of operations will approximate those reflected in our financial forecast, but we can give no assurance that our forecasted results will be achieved. There will likely be differences between our financial forecast and the actual results and those differences could be material. Our operations are subject to numerous risks that are beyond our control. If the financial forecast is not achieved, we may not be able to pay cash distributions on our units at the minimum quarterly distribution rate of $             per unit per quarter ($             per unit on an annualized basis) or at all.

Our financial forecast is a forward-looking statement and should be read together with our audited consolidated financial statements, our unaudited condensed consolidated financial statements and the accompanying notes included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We do not, as a matter of course, make public projections as to future revenues, earnings or other results. However, our management has prepared the financial forecast set forth below in support of our belief that we will have sufficient cash available to allow us to pay the minimum quarterly distribution on all of our outstanding common units and subordinated units during the twelve-month period ending September 30, 2014. The accompanying prospective financial information was not 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 management, the accompanying financial forecast was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of our knowledge and belief, the expected course of action and our expected future financial performance. 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 financial forecast.

Neither our independent registered public accounting firm, nor any other independent registered public accounting firm, has compiled, examined or performed any procedures with respect to the forecasted financial information contained herein, nor has it expressed any opinion or given any other form of assurance on such information or its achievability, and it assumes no responsibility for such forecasted financial information. Our

 

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independent registered public accounting firm’s report included in this prospectus relates to our audited consolidated financial information. That report does not extend to the tables and the related forecasted financial information contained in this section 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 included under the heading “Risk Factors” elsewhere in this prospectus. Any of the risks discussed in this prospectus or unanticipated events could cause our actual results of operations, cash flows and financial condition to vary significantly from the financial forecast and such variations may be material. Prospective investors are cautioned to not place undue reliance on the financial forecast and should make their own independent assessment of our future results of operations, cash flows and financial condition.

We are providing the financial forecast to supplement our audited consolidated financial statements and our unaudited condensed consolidated financial statements in support of our belief that we will have sufficient cash available to allow us to pay cash distributions on all of our units for the twelve-month period ending September 30, 2014 at our minimum quarterly distribution rate of $             per unit per quarter. Our forecast is based on those material assumptions and reflects our judgment of conditions we expect to exist and the course of action we expect to take. The assumptions disclosed in our financial forecast are those that we believe are significant to generate the forecasted Adjusted EBITDA. Please read “—Forecast Assumptions and Considerations—Summary of Significant Forecast Assumptions” for further information as to the assumptions we have made for the financial forecast.

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 the financial forecast to reflect events or circumstances after the date of this prospectus, even in the event that any or all of the underlying assumptions are shown to be in error. Therefore, we caution you not to place undue reliance on this information.

Our forecast presents, to the best of our knowledge and belief, our expected results of operations for the forecast period. Although we anticipate exercising our option to purchase each of the State Class newbuild vessels, the expected completion of such purchases is after the forecast period. As a result, our forecast does not reflect the expected results of operations or related financing of any of such vessels.

 

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AMERICAN PETROLEUM TANKERS PARTNERS LP

UNAUDITED ESTIMATED CASH AVAILABLE FOR DISTRIBUTIONS

 

     Twelve-Month Period
Ending September  30,
2014
 

(dollars in thousands except per unit items)

(unaudited)

      

Revenues(1)

   $ 95,926   

Expenses:

  

Vessel operating expenses(2)

     37,810   

General and administrative expenses(3)

     4,418   

Depreciation and amortization

     24,268   

Vessel management expenses

     2,904   
  

 

 

 

Total expenses

     69,400   
  

 

 

 

Operating income

     26,526   

Interest expense(4)

     (9,849
  

 

 

 

Net income attributable to partners

   $ 16,677   
  

 

 

 

Plus:

  

Interest expense(4)

     9,849   

Depreciation and amortization

     24,268   
  

 

 

 

EBITDA(5)

   $ 50,794   
  

 

 

 

Plus:

  

Straight-line charter revenues(6)

     902   
  

 

 

 

Adjusted EBITDA(5)

   $ 51,696   
  

 

 

 

Less:

  

Cash interest paid, net of interest income(7)

     (8,696

Drydocking capital expenditure reserve

     (2,000

Replacement capital expenditure reserve

     (11,511
  

 

 

 

Estimated cash available for distribution

   $ 29,489   
  

 

 

 

Annualized Distribution per unit

  

Distributions to our public common unitholders

  

Distributions to Holding—common units

  

Distributions to Holding—subordinated units

  

Total distribution

  

Excess (shortfall)

  

Annualized minimum quarterly distribution per unit

  

Aggregate distributions based on an annualized minimum quarterly distribution

  

 

(1) Revenues presented on a GAAP basis (including the impact of straight-line adjustment).
(2) The most significant direct vessel operating expenses are manning costs, vessel maintenance and repairs and insurance expenses.
(3) General and administrative expenses consist of employment costs for shoreside staff and cost of facilities as well as legal, audit and other administrative expenses. Forecasted general and administrative expenses for the twelve-month period ending September 30, 2014 include $2.0 million in incremental costs related to being a publicly traded partnership, including costs associated with annual and quarterly reporting, tax return and Schedule K-1 preparation and distribution expenses, Sarbanes-Oxley compliance, listing on the NYSE, investor relations, registrar and transfer agent fees, incremental auditing and legal costs, incremental director and officer liability insurance expenses, director compensation and non-cash equity incentive compensation expense.

 

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(4) Assumes a term loan balance of approximately $180.0 million after repaying a portion of the borrowings under our existing credit facility with net proceeds from this offering and an average interest rate of approximately 5.0% per annum. Assumes the April 2013 refinancing occurred on January 1, 2012. See Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Borrowing Activities—April 2013 Refinancing.” Includes deferred financing costs associated with entering into our senior secured credit facility in April 2013, which are adjusted to reflect the partial prepayment of term loans in connection with this offering.
(5) EBITDA and Adjusted EBITDA are non-GAAP financial measures. EBITDA is defined as earnings before interest expense, income tax expense, depreciation and amortization. Adjusted EBITDA is defined EBITDA, adjusted to remove or add back certain unusual and non-cash charges. EBITDA is used as a supplemental financial measure by management and external users of financial statements to assess our financial and operating performance. Adjusted EBITDA is used as a supplemental financial measure by management and external users of financial statements, such as investors, to assess our financial and operating performance. We believe that Adjusted EBITDA assists our management and investors by increasing the comparability of our performance from period to period and against the performance of other companies in our industry that provide Adjusted EBITDA information. This increased comparability is achieved by excluding the potentially disparate effects between periods or companies of interest, other financial items, depreciation and amortization and taxes, which items are affected by various and possibly changing financing methods, capital structure and historical cost basis and which items may significantly affect net income between periods. We believe that including Adjusted EBITDA as an operating measure benefits investors in (a) selecting between investing in us and other investment alternatives and (b) monitoring our ongoing operational strength in assessing whether to continue to hold common units. However, EBITDA and Adjusted EBITDA have important limitations as analytical tools. These limitations include, but are not limited to, the following:

 

   

EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

   

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;

 

   

EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; and

 

   

EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs.

 

     EBITDA and Adjusted EBITDA should not be considered alternatives to net income, operating income, cash flow from operating activities or any other measure of financial performance presented in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA exclude some, but not all, items that affect net income, and these measures may vary among other companies. Therefore, EBITDA and Adjusted EBITDA as presented below may not be comparable to similarly titled measures of other companies.

 

(6) Non-cash adjustment for multi-year charter revenues, as required by GAAP.
(7) Consists of interest expense less assumed amortization of deferred financing costs of approximately $1.2 million associated with entering into our senior secured credit agreement in April 2013, which are adjusted to reflect the partial prepayment of term loans in connection with this offering and amortized over the term of the related financing.

Please read the accompanying summary of significant accounting policies and forecast assumptions.

 

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Forecast Assumptions and Considerations

Basis of Presentation

The accompanying financial forecast and related notes present our estimated cash available for the twelve-month period ending September 30, 2014 based on the assumption that:

 

   

we will issue to Holding, an entity owned and controlled by our Sponsors,                  common units and all of our subordinated units, representing a     % limited partner interest in us;

 

   

we will issue to our general partner, an entity owned and controlled by our Sponsors, a non-economic general partner interest in us and all of our incentive distribution rights, which will entitle our general partner to increasing percentages of the cash we distribute in excess of $             per unit per quarter;

 

   

Holding will contribute to us the existing subsidiaries of Holding which directly or indirectly own the Golden State, the Pelican State, the Sunshine State, the Empire State and the Evergreen State;

 

   

we will sell                  common units to the public in this offering, representing a     % limited partner interest in us; and

 

   

we will use approximately $             million of the proceeds from this offering to repay a portion of the borrowings under our existing credit facility, and to fund a cash distribution to Holding.

Significant accounting policies are discussed in Note 2 (Summary of Significant Accounting Policies) of the notes to our audited consolidated financial statements appearing elsewhere in this prospectus.

Summary of Significant Forecast Assumptions

Vessels. The forecast assumes the following regarding our fleet:

 

   

342 days of operations under a time charter for the Golden State;

 

   

342 days of operations under a time charter for the Pelican State;

 

   

362 days of operations under a time charter for the Sunshine State;

 

   

362 days of operations under a time charter for the Empire State; and

 

   

361 days of operations under a time charter for the Evergreen State.

We have assumed that we will not make any acquisitions during the forecast period.

Revenues. We estimate that we will generate revenues of approximately $96.0 million for the twelve-month period ending September 30, 2014, compared to revenues of approximately $94.8 million for the year ended December 31, 2012, an increase of approximately $1.2 million, or approximately 1%. Our forecasted revenues are based on contracted daily charter rates for each vessel, including the relevant straight-line adjustment, and the total number of days our vessels are expected to be on-hire during the forecast period as noted above. We expect each of our vessels to be employed under time charter contracts during the twelve-month period ending September 30, 2014, consistent with the year ended December 31, 2012. The hire rate on our time charters is fixed and increases annually by a fixed percentage to enable us to offset expected increases in operating costs. We expect the average daily hire rate for our vessels to be approximately $54,200 for the twelve-month period ending September 30, 2014, compared to approximately $54,000 for the year ended December 31, 2012, an increase of less than 1%.

We have assumed three base off-hire days for each vessel that is not undergoing a routine drydock for the twelve-month period ending September 30, 2014 to account for unexpected operating interruptions, compared to an average of 4.4 unscheduled off-hire days per vessel for the year ended December 31, 2012. Our off-hire days in 2012 were higher than prior periods as a result of unexpected mechanical issues with our vessels. In contrast,

 

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we had less than eight hours of total off-hire time across our fleet in 2011 and have only had two off-hire days in our fleet for the first nine months of 2013. In addition, we expect the Golden State and the Pelican State to undergo drydocking during the quarters ending March 31, 2014 and June 30, 2014, respectively, with each drydocking resulting in 21 off-hire days per vessel, plus 2 additional off-hire days for unexpected operating interruptions. In the year ended December 31, 2012, no ships underwent a routine drydocking. Furthermore, we expect the Evergreen State to undergo an intermediate underwater survey in the twelve-month period ending September 30, 2014, resulting in one additional off-hire day for the period. In the year ended December 31, 2012, the Pelican State and the Sunshine State underwent an intermediate underwater survey, resulting in approximately 0.8 off-hire days for each surveyed vessel during such period. When a vessel is off-hire, or not available for service, our customers are generally not required to pay the daily hire rate, and we are responsible for all costs.

As a result of the expected drydocking of the Golden State and the Pelican State during the first half of 2014, we expect that cash available for distributions in the first quarter of 2014 and the second quarter of 2014 will be less than the minimum quarterly distributions for such periods. However, to the extent that there is a shortfall during such quarters, we believe we would be able to make working capital borrowings to pay distributions in such quarters. We believe that the total cash available for distribution for the twelve-month period ending September 30, 2014 will be sufficient to pay the aggregate minimum quarterly distribution to all unitholders for such period.

The actual number of off-hire days could vary and will depend upon, among other things, the time a vessel spends in drydocking for repairs, maintenance or inspection, equipment breakdowns or delays due to accidents, crewing strikes, certain vessel detentions or similar problems as well as failure to maintain the vessel in compliance with its specifications and contractual standards or to provide the required crew.

Vessel Operating Expenses. We estimate that we will incur vessel operating expenses of approximately $37.8 million for the twelve-month period ending September 30, 2014, compared to approximately $35.4 million for the year ended December 31, 2012, an increase of approximately $2.4 million, or approximately 7%.

Our forecasted vessel operating expenses are based on the applicable estimated daily vessel operating expense rate and the total number of days in the forecast period. The most significant direct vessel operating expenses we expect to incur during the forecast period include manning costs, vessel maintenance and repairs (including underwater hull inspection surveys, but excluding drydocking) and insurance. Labor and related costs are forecasted based upon inflation expectations and estimated headcount and contractual unionized wage rates. Insurance costs are estimated based upon anticipated premiums.

Based on the terms of our time charters, expenses such as fuel, port charges, canal dues, and cargo handling operations are either paid by the customer or paid by us and reimbursed by the customer. Such expenses, if paid by us, are presented net of reimbursements from customers.

General and Administrative Expenses. We estimate that we will incur general and administrative expenses of approximately $4.4 million for the twelve-month period ending September 30, 2014, compared to approximately $2.8 million for the year ended December 31, 2012, an increase of approximately $1.6 million, or approximately 58%.

Our forecasted general and administrative expenses consist of our estimates of employment costs for shoreside staff and cost of facilities as well as legal, audit and other administrative costs in addition to the assumption that we will incur approximately $2.0 million annually in incremental expenses as a result of being a publicly traded limited partnership. These incremental expenses include costs associated with annual and quarterly reporting, tax return and Schedule K-1 preparation and distribution expenses, Sarbanes-Oxley compliance, listing on the New York Stock Exchange, investor relations, registrar and transfer agent fees, incremental auditing and legal costs, incremental director and officer liability insurance expenses, director compensation and non-cash equity incentive compensation expense.

 

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Depreciation and Amortization. We estimate that we will incur depreciation and amortization of approximately $24.3 million (including $0.4 million in amortization of capitalized drydocking costs) for the twelve-month period ending September 30, 2014, compared to approximately $23.8 million for the year ended December 31, 2012, an increase of approximately $0.5 million, or approximately 2%. Our forecasted depreciation expense is based on the cost of our initial fleet less the estimated residual value and calculated on a straight-line basis over the fleet’s economic useful life. Vessels and equipment are recorded at cost, including capitalized interest and transaction fees where appropriate, and depreciated to scrap value using the straight-line method. Amortization of capitalized drydocking costs is calculated on a straight-line basis over the estimated period between drydockings. The aggregate number of drydockings undertaken in a given period and the nature of the work performed determine the level of drydocking expenditures.

Vessel Management Expenses. Our forecasted vessel management expenses consist of fees we pay to certain affiliates of Crowley Maritime Corporation for crewing, maintenance and repairs, purchasing, insurance and claims administration and security, as well as certain accounting and reporting services pursuant to the terms of the Vessel Management Agreements (as defined below). We estimate that we will incur vessel management expenses of approximately $2.9 million for the twelve-month period ending September 30, 2014, compared to approximately $2.8 million for the year ended December 31, 2012, an increase of approximately $0.1 million, or approximately 5%.

Interest Expense. We estimate that we will incur interest expense of approximately $9.8 million for the twelve-month period ending September 30, 2014, compared to interest expense of approximately $80.2 million in the year ended December 31, 2012, a decrease of approximately $70.4 million, or approximately 88%. Our forecast for the twelve-month period ending September 30, 2014 assumes we will have an average outstanding term loan balance of approximately $180.0 million, after repaying a portion of the borrowings under our existing credit facility with the net proceeds from this offering, and an average interest rate of approximately 5.0% per annum. We also expect to incur a commitment fee of 0.50% per annum on the unused portion of our revolving credit facility, which we assume to be $10.0 million throughout the forecast period.

Our forecasted interest expense includes assumed deferred financing costs of approximately $1.2 million associated with entering into our senior secured credit agreement in April 2013, which are adjusted to reflect the partial prepayment of term loans in connection with this offering and amortized over the term of the related financing.

 

Taxes. We have assumed that we will not incur any income tax expense during the forecast period. We did not incur any income taxes during the year ended December 31, 2012.

Maintenance and Replacement Capital Expenditure Reserve. Our partnership agreement requires our general partner to deduct from operating surplus each quarter estimated maintenance and replacement capital expenditures, as opposed to actual maintenance and replacement capital expenditures, in order to reduce disparities in operating surplus caused by fluctuating maintenance and replacement capital expenditures, such as drydocking and vessel replacement. Our general partner, with the approval of the conflicts committee of its board of directors, may determine that one or more of our assumptions should be revised, which could cause our general partner to increase the amount of estimated maintenance and replacement capital expenditures. We may elect to finance some or all of our maintenance and replacement capital expenditures through the issuance of additional common units, which could be dilutive to our existing unitholders. Please read “Risk Factors—Risks Inherent in Our Business—We may be required to make maintenance and capital expenditures to maintain the operating capacity of our fleet, which will reduce cash available for distribution. In addition, each quarter we are required to deduct estimated maintenance and replacement capital expenditures from operating surplus, which may result in less cash available to unitholders than if actual maintenance and replacement capital expenditures were deducted.”

Because of the substantial capital expenditures we are required to make to maintain our fleet, our initial estimated maintenance and replacement capital expenditures for purposes of establishing a maintenance and

 

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replacement capital expenditure reserve will be $13.5 million for the twelve-month period ending September 30, 2014, which is comprised of a $2.0 million drydocking capital expenditure reserve and a $11.5 million replacement capital expenditure reserve, which includes financing costs for replacing our vessels at the end of their useful lives.

Drydocking Capital Expenditure Reserve. Our initial annual estimated drydocking capital expenditure reserve for our vessels will be approximately $2.0 million for the twelve-month period ending September 30, 2014, compared to no capital expenditure reserve for the year ended December 31, 2012.

ABS and the U.S. Coast Guard establish drydocking schedules. The U.S. Coast Guard requires our vessels to be drydocked for inspection and maintenance twice every five years. However, up until the fifteenth year of operation, we are permitted to do an underwater hull inspection of the vessel in lieu of one of these drydockings. In addition, vessels may have to be drydocked in the event of accidents or other unforeseen damage or for capital improvements. Vessels in drydock will generally not generate any charter revenues.

Our estimate assumes that our vessels are placed in drydock only as required by ABS and the U.S. Coast Guard inspection schedules. Our estimates for the forecast period include expenses for routine drydocking of the Golden State and the Pelican State and a routine intermediate underwater hull inspection survey of the Evergreen State. Because we assume that two of our vessels will undergo routine drydocking in the twelve-month period ending September 30, 2014, we expect our cash expenditures for drydocking in the period to be approximately $4.0 million.

In connection with such routine drydockings, we may elect to make additional discretionary investments, which we believe will lead to improved profitability over the long term. Costs for drydocking are difficult to estimate and may be higher than we currently anticipate.

Replacement Capital Expenditure Reserve. We did not make any replacement capital expenditures in the year ended December 31, 2012. The $11.5 million for future vessel replacement is based on assumptions and estimates regarding the remaining useful lives of the vessels, a long-term net investment rate equivalent to our current expected long-term borrowing costs, vessel replacement values based on current market conditions and residual value of the vessels at the end of their useful lives based on current steel prices. The actual cost of replacing the vessels in our fleet will depend on a number of factors, including prevailing market conditions, daily hire rates and the availability and cost of financing at the time of replacement.

Regulatory, Industry and Economic Factors. Our financial forecast for the twelve-month period ending September 30, 2014 is based on the following assumptions related to regulatory, industry and economic factors:

 

   

no material nonperformance or credit-related defaults by suppliers, customers or vendors;

 

   

no new regulation or interpretation of existing regulations or governmental action that, in either case, would be materially adverse to our business;

 

   

no material accidents, environmental incidents, releases, weather-related incidents, unscheduled downtime or similar unanticipated events;

 

   

no major adverse change in the markets in which we operate resulting from oil production an refinery disruptions, reduced demand for oil or significant changes in the market price for oil; and

 

   

no material changes to market, regulatory and overall economic conditions or in prevailing interest rates.

Compliance with Debt Covenants. Our ability to make distributions could be affected if we do not remain in compliance with the restrictions and covenants of our credit agreement or any future financing agreements. Our fleet is subject to our existing credit agreement. We have assumed that we will be in compliance with all of the covenants in such credit agreement during the forecast period. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Borrowing Activities” for a further description of our credit agreement, including these financial covenants.

 

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HOW WE MAKE CASH DISTRIBUTIONS

Set forth below is a summary of the significant provisions of our partnership agreement that relate to cash distributions. This summary assumes that we do not issue additional classes of equity interests. Statements of percentages of cash and allocations of gain and loss paid or allocated to our general partner assume that our general partner does not transfer any incentive distribution rights.

Distributions of Available Cash

General

Within 45 days after the end of each quarter, beginning with the quarter ending                     , 2013, we will distribute all of our available cash (defined below) to unitholders of record on the applicable record date (including participants holding awards granted under our 2013 Omnibus Incentive Plan that include distribution or distribution equivalent rights). We will adjust the minimum quarterly distribution for the period from the closing of this offering through                     , 2013, based on the actual length of the period.

Definition of Available Cash

Available cash generally means, for each fiscal quarter, all cash on hand at the end of the quarter (including our proportionate share of cash on hand of subsidiaries we do not wholly own):

 

   

less, the amount of cash reserves (including our proportionate share of cash reserves of subsidiaries we do not wholly own) established by our general partner and our subsidiaries to:

 

   

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

 

   

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

 

   

provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters;

 

   

plus, if our general partner so determines, all cash on hand (including our proportionate share of cash on hand of subsidiaries we do not wholly own) on the date of determination of available cash for the quarter resulting from (1) working capital borrowings made after the end of the quarter and (2) cash distributions received after the end of the quarter from any equity interest in any person (other than a subsidiary of us), which distributions are paid by such person in respect of operations conducted by such person during such quarter. Working capital borrowings are generally borrowings that are made under a revolving credit facility and in all cases are used solely for working capital purposes or to pay distributions to partners.

Intent to Distribute the Minimum Quarterly Distribution

We intend to distribute to the holders of common units and subordinated units on a quarterly basis at least the minimum quarterly distribution of $         per unit, or $         per unit per year, to the extent we have sufficient cash on hand to pay the distribution after we establish cash reserves and pay fees and expenses. The amount of available cash from operating surplus needed to pay the minimum quarterly distribution for one quarter on all units outstanding immediately after this offering is approximately $         million.

There is no guarantee that we will pay the minimum quarterly distribution on the common units and subordinated units in any quarter. Even if our cash distribution policy is not modified or revoked, 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. We will be prohibited from making any distributions to unitholders if it would cause an event of default, or an event of default is then existing, under our

 

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credit agreement. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Borrowing Activities” for a discussion of the restrictions contained in our credit agreement that may restrict our ability to make distributions.

General Partner Interest and Incentive Distribution Rights

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

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 general partner will initially hold all of the incentive distribution rights but may transfer these rights following completion of this offering, subject to restrictions in the partnership agreement. Any transfer by our general partner of the incentive distribution rights would not change the percentage allocations of quarterly distributions with respect to such rights.

Operating Surplus and Capital Surplus

General

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

Definition of Operating Surplus

Operating surplus for any period generally means:

 

   

the sum of the following items, without duplication:

 

   

$         million (as described below);

 

   

all of our cash receipts (including our proportionate share of cash receipts of subsidiaries we do not wholly own) after the closing of this offering (provided that cash receipts from the termination of an interest rate, currency or commodity hedge contract prior to its specified termination date will be included in operating surplus in equal quarterly installments over the remaining scheduled life of such hedge contract), excluding cash from (1) 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, (2) sales of equity and debt securities, (3) sales or other dispositions of assets outside the ordinary course of business, (4) capital contributions or (5) corporate reorganizations or restructurings;

 

   

working capital borrowings (including our proportionate share of working capital borrowings for subsidiaries we do not wholly own) made after the end of a quarter but before the date of determination of operating surplus for the quarter;

 

   

interest paid on debt incurred (including periodic net payments under related hedge contracts) and cash distributions paid on equity securities issued (including the amount of any incremental distributions made to the holders of our incentive distribution rights and our proportionate share of such interest and cash distributions paid by subsidiaries we do not wholly own), in each case, to finance all or any portion of the construction, replacement or improvement of a capital asset (such as a vessel) in respect of the period from such financing until the earlier to occur of the date the capital asset is put into service or the date that it is abandoned or disposed of; and

 

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interest paid on debt incurred (including periodic net payments under related hedge contracts) and cash distributions paid on equity securities issued (including the amount of any incremental distributions made to the holders of our incentive distribution rights and our proportionate share of such interest and cash distributions paid by subsidiaries we do not wholly own), in each case, to pay the construction period interest on debt incurred (including periodic net payments under related interest rate swap agreements), or to pay construction period distributions on equity issued, to finance the construction projects described in the immediately preceding bullet;

 

   

less the following items, without duplication:

 

   

all of our “operating expenditures” (which includes estimated maintenance and replacement capital expenditures and is further described below) of us and our subsidiaries (including our proportionate share of operating expenditures by subsidiaries we do not wholly own) immediately after the closing of this offering;

 

   

the amount of cash reserves (including our proportionate share of cash reserves for subsidiaries we do not wholly own) established by our general partner to provide funds for future operating expenditures;

 

   

any cash loss realized on dispositions of assets acquired using investment capital expenditures; and

 

   

all working capital borrowings (including our proportionate share of working capital borrowings by subsidiaries we do not wholly own) not repaid within twelve months after having been incurred.

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 a working capital borrowing, which increases operating surplus, is not repaid during the twelve-month period following the borrowing, it will be deemed repaid at the end of such period, thus decreasing operating surplus at such time. When such outstanding working capital borrowing is in fact repaid, it will not be treated as a reduction in operating surplus because operating surplus will have been previously reduced by the deemed repayment.

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 $         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 securities or interest payments on debt in operating surplus would be to increase operating surplus by the amount of any such cash distributions or interest payments. As a result, we may also distribute as operating surplus up to the amount of any such cash distributions or interest payments we receive from non-operating sources.

Operating expenditures generally means all of our cash expenditures, including but not limited to taxes, employee and director compensation, reimbursement of expenses to our general partner and its affiliates, repayment of working capital borrowings, debt service payments and payments made under any interest rate, currency or commodity hedge contracts (provided that payments made in connection with the termination of any hedge contract prior to the expiration of its specified termination date be included in operating expenditures in equal quarterly installments over the remaining scheduled life of such hedge contract and amounts paid in connection with the initial purchase of a hedge contract will be amortized over the life of such hedge contract), provided, however, that operating expenditures will not include:

 

   

deemed repayments of working capital borrowings deducted from operating surplus pursuant to the last bullet point of the definition of operating surplus above when such repayment actually occurs;

 

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

 

   

expansion capital expenditures, investment capital expenditures or actual maintenance and replacement capital expenditures (which are discussed in further detail under “—Capital Expenditures” below);

 

   

payment of transaction expenses (including taxes) relating to interim capital transactions;

 

   

distributions to partners; or

 

   

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

Capital Expenditures

For purposes of determining operating surplus, maintenance and replacement capital expenditures are those capital expenditures required to maintain over the long term the operating capacity of or the revenue generated by our capital assets, and expansion capital expenditures are those capital expenditures that increase the operating capacity of or the revenue generated by our capital assets. In our partnership agreement, we refer to these maintenance and replacement capital expenditures as “maintenance capital expenditures.” To the extent, however, that capital expenditures associated with acquiring a new vessel or improving an existing vessel increase the revenues or the operating capacity of our fleet, those capital expenditures would be classified as expansion capital expenditures.

Investment capital expenditures are those capital expenditures that are neither maintenance and replacement capital expenditures nor expansion capital expenditures. Investment capital expenditures largely will consist of capital expenditures made for investment purposes. Examples of investment capital expenditures include traditional capital expenditures for investment purposes, such as purchases of equity securities, as well as other capital expenditures that might be made in lieu of such traditional investment capital expenditures, such as the acquisition of a capital asset for investment purposes.

Examples of maintenance and replacement capital expenditures include capital expenditures associated with drydocking, modifying an existing vessel or acquiring a new vessel to the extent such expenditures are incurred to maintain the operating capacity of or the revenue generated by our fleet. Maintenance and replacement capital expenditures will also include interest (and related fees) on debt incurred and distributions on equity issued (including the amount of any incremental distributions made to the holders of our incentive distribution rights) to finance the construction of a replacement vessel and paid in respect of the construction period, which we define as the period beginning on the date that we enter into a binding construction contract and ending on the earlier of the date that the replacement vessel commences commercial service or the date that the replacement vessel is abandoned or disposed of. Debt incurred to pay or equity issued to fund construction period interest payments, and distributions on such equity (including the amount of any incremental distributions made to the holders of our incentive distribution rights), will also be considered maintenance and replacement capital expenditures.

Because our maintenance and replacement capital expenditures can be very large and vary significantly in timing, the amount of our actual maintenance and replacement capital expenditures may differ substantially from period to period, which could cause similar fluctuations in the amounts of operating surplus, adjusted operating surplus and available cash for distribution to our unitholders than if we subtracted actual maintenance and replacement capital expenditures from operating surplus each quarter. Accordingly, to eliminate the effect on operating surplus of these fluctuations, our partnership agreement will require that an amount equal to an estimate of the average quarterly maintenance and replacement capital expenditures necessary to maintain the operating capacity of or the revenue generated by our capital assets over the long term be subtracted from operating surplus each quarter, as opposed to the actual amounts spent. In our partnership agreement, we refer to these estimated maintenance and replacement capital expenditures to be subtracted from operating surplus as “estimated maintenance capital expenditures.” The amount of estimated maintenance and replacement capital

 

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expenditures deducted from operating surplus is subject to review and change by our general partner at least once a year, provided that any change must be approved by our conflicts committee. The estimate will be made at least annually and whenever an event occurs that is likely to result in a material adjustment to the amount of our maintenance and replacement capital expenditures, such as a major acquisition or the introduction of new governmental regulations that will affect our fleet. For purposes of calculating operating surplus, any adjustment to this estimate will be prospective only. For a discussion of the amounts we have allocated toward estimated maintenance and replacement capital expenditures, please read “Our Cash Distribution Policy and Restrictions on Distributions.”

The use of estimated maintenance and replacement capital expenditures in calculating operating surplus will have the following effects:

 

   

it will reduce the risk that actual maintenance and replacement capital expenditures in any one quarter will be large enough to make operating surplus less than the minimum quarterly distribution to be paid on all the units for that quarter and subsequent quarters;

 

   

it may reduce the need for us to borrow to pay distributions;

 

   

it will be more difficult for us to raise our distribution above the minimum quarterly distribution and pay incentive distributions to our general partner; and

 

   

it will reduce the likelihood that a large maintenance and replacement capital expenditure in a period will prevent Holding from being able to convert some or all of its subordinated units into common units since the effect of an estimate is to spread the expected expense over several periods, mitigating the effect of the actual payment of the expenditure on any single period.

Definition of Capital Surplus

Capital surplus generally will be generated only by:

 

   

borrowings other than working capital borrowings;

 

   

sales of debt and equity securities; and

 

   

sales or other dispositions of assets for cash, other than inventory, accounts receivable and other current assets sold in the ordinary course of business or non-current assets sold as part of normal retirements or replacements of assets.

Characterization of Cash Distributions

We will treat all available cash distributed as coming from operating surplus until the sum of all available cash distributed 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 will treat any amount distributed in excess of operating surplus, regardless of its source, as capital surplus. As described above, operating surplus does not reflect actual cash on hand that is available for distribution to our unitholders. For example, it includes a provision that will enable us, if we choose, to distribute as operating surplus up to $         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. We do not anticipate that we will make any distributions from capital surplus.

Subordination Period

General

During the subordination period, which we define below, the common units will have the right to receive distributions of available cash from operating surplus in an amount equal to the minimum quarterly distribution

 

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of $         per unit, 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. Distribution arrearages do not accrue on the subordinated units. The purpose of the subordinated units is to increase the likelihood that during the subordination period there will be available cash from operating surplus to be distributed on the common units.

Definition of Subordination Period

Except as described below, the subordination period will begin on the closing date of this offering and will extend until the second business day following the distribution of available cash from operating surplus in respect of any quarter, ending on or after                     , 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 and any other outstanding units that are senior or equal in right of distribution to the subordinated units equaled or exceeded the sum of the 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 the minimum quarterly distributions on all of the outstanding common units and subordinated units and any other outstanding units that are senior or equal in right of distribution to the subordinated units during those periods on a fully diluted weighted average basis during those periods; and

 

   

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

For purposes of determining whether the tests in the bullets above have been met, the three consecutive, non-overlapping four-quarter periods for which the determination is being made may include one or more quarters with respect to which arrearages in the payment of the minimum quarterly distribution on the common units have accrued, provided that all such arrearages have been repaid prior to the end of each such four-quarter period.

Early termination of subordination period

Notwithstanding the foregoing, the subordination period will automatically terminate on the first business day after the distribution to unitholders in respect of any quarter, if each of the following has occurred:

 

   

Distributions from cash from operating surplus on each of the outstanding common and subordinated units and any other outstanding units that are senior or equal in right of distribution to the subordinated units equaled or exceeded $                 (150.0% of the annualized minimum quarterly distribution) for the four-quarter period immediately preceded that date;

 

   

the “adjusted operating surplus” (as defined below) generated during the four-quarter period immediately preceding that date equaled or exceeded $                 (150.0% of the annualized minimum quarterly distribution) on all of the outstanding common units and subordinated units and any other outstanding units that are senior or equal in right of distribution to the subordinated units on a fully diluted weighted average basis and the related distributions on the incentive distribution rights; and

 

   

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

If the unitholders remove our general partner without cause, the subordination period may end before                     , 2016.

If the expiration of the subordination period occurs as a result of us having met the tests described above, each outstanding subordinated unit will convert into one common unit and will then participate pro rata with the other common units in distributions of available cash.

 

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In addition, at any time on or after                     , 2016, provided that there are no outstanding arrearages in payment of the minimum quarterly distribution on the common units and with the approval of our general partner’s conflicts committee, the holder or holders of a majority of our outstanding subordinated units will have the option to convert each subordinated unit into a number of common units determined by multiplying the number of outstanding subordinated units to be converted by a fraction, (i) the numerator of which is equal to the aggregate amount of distributions of available cash from operating surplus (not to exceed adjusted operating surplus) on the outstanding subordinated units (“historical distributions”) for the four fiscal quarters preceding the date of conversion (the “measurement period”) and (ii) the denominator of which is equal to the aggregate amount of distributions that would have been required during the measurement period to pay the minimum quarterly distribution on all outstanding subordinated units during such four-quarter period; provided, that if the forecasted distributions to be paid from forecasted operating surplus (not to exceed forecasted adjusted operating surplus) on the outstanding subordinated units for the four fiscal quarter period immediately following the measurement period (“forecasted distributions”), as determined by our general partner’s conflicts committee, is less than historical distributions, then the numerator shall be forecasted distributions; provided, further, however, that the subordinated units may not convert into common units at a ratio that is greater than one-to-one. If the option to convert the subordinated units into common units is exercised as described above, the outstanding subordinated units will convert into the prescribed number of common units and will then participate pro rata with other common units in distributions of available cash.

Definition of Adjusted Operating Surplus

Adjusted operating surplus, for any period, generally means:

 

   

the sum of the following items, without duplication:

 

   

operating surplus generated with respect to that period (excluding any amounts attributable to the item described in the second bullet point under “—Operating Surplus and Capital Surplus—Definition of Operating Surplus” above);

 

   

the amount of any net decrease in working capital borrowings (including our proportionate share of any changes in working capital borrowings of any subsidiaries we do not wholly own) with respect to that period;

 

   

the amount of any net increase in cash reserves for operating expenditures (including our proportionate share of cash reserves of any subsidiaries we do not wholly own) over that period required by any debt instrument for the repayment of principal, interest or premium; and

 

   

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

 

   

Less the following items, without duplication:

 

   

the amount of any net increase in working capital borrowings (including our proportionate share of any changes in working capital borrowings of any subsidiaries we do not wholly own) with respect to that period; and

 

   

the amount of any net reduction in cash reserves for operating expenditures (including our proportionate share of cash reserves of any subsidiaries we do not wholly own) over that period not relating to an operating expenditure made during that period.

Adjusted operating surplus is intended to reflect the cash generated from operations during a particular period and therefore excludes net increases in working capital borrowings and net drawdowns of reserves of cash generated in prior periods.

 

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Effect of Removal of Our General Partner on the Subordination Period

If the unitholders remove our general partner other than for cause and units held by our general partner and its affiliates are not voted in favor of such removal:

 

   

the subordination period will end and each subordinated unit held by any person who did not, and whose affiliates did not, vote any units in favor of the removal of our general partner will immediately convert into one common unit and will then participate pro rata with the other common units in distributions of available cash; and

 

   

any existing arrearages in payment of the minimum quarterly distribution on the common units will be extinguished.

Distributions of Available Cash From Operating Surplus During the Subordination Period

We will make distributions of available cash from operating surplus for any quarter wholly 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;

 

   

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

 

   

thereafter, in the manner described in “—General Partner Interest and Incentive Distribution Rights” below.

The preceding paragraph is based on the assumption 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 “—General Partner Interest and Incentive Distribution Rights” below.

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

General Partner Interest and Incentive Distribution Rights

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

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 general partner will initially hold all of the

 

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incentive distribution rights but may transfer these rights following completion of this offering, subject to restrictions in the partnership agreement. Any transfer by our general partner of the incentive distribution rights would not change the percentage allocations of quarterly distributions with respect to such rights.

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 $         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 $         per unit for that quarter (the “second target distribution”);

 

   

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 $         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 distribution 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 the additional 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.

 

    

Total Quarterly Distribution
Per Unit Target Amount

   Marginal Percentage
Interest in Cash Distributions
 
      Unitholders     Holders of IDRs  

Minimum Quarterly Distribution

   $                  100.0     —     

First Target Distribution

   up to $              100.0     —     

Second Target Distribution

   above $         up to $              85.0     15.0

Third Target Distribution

   above $         up to $              75.0     25.0

Thereafter

   above $              50.0     50.0

 

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Our General Partner’s Right to Reset Incentive Distribution Levels

The holder or holders of a majority of our incentive distribution rights have the right under our partnership agreement, subject to certain conditions, to elect to relinquish the right of the holders of our incentive distribution rights to receive incentive distribution payments based on the initial cash target distribution levels and to reset, at higher levels, the minimum quarterly distribution amount and cash target distribution levels upon which the incentive distribution payments to our general partner would be set. The incentive distribution rights may be transferred at any time. The right to reset the minimum quarterly distribution amount and the cash target distribution levels upon which the incentive distributions payable are based may be exercised, without approval of our unitholders or the conflicts committee of our general partner, at any time when there are no subordinated units outstanding and we have made cash distributions to the holders of the incentive distribution rights at the highest level of incentive distribution for each of the prior four consecutive fiscal quarters and the amount of each such distribution did not exceed adjusted operating surplus for such quarter. If at the time of any election to reset the minimum quarterly distribution amount and the cash target distribution levels our general partner and its affiliates are not the holders of a majority of our incentive distribution rights, then any such election to reset shall be subject to the prior written concurrence of our general partner that the conditions described in the immediately preceding sentence have been satisfied. The reset minimum quarterly distribution amount and cash target distribution levels will be higher than the minimum quarterly distribution amount and the cash target distribution levels prior to the reset such that there will be no incentive distributions paid under the reset cash target distribution levels until cash distributions per unit following this event increase as described below. We anticipate that our general partner or another holder 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.

In connection with the resetting of the minimum quarterly distribution amount and the cash target distribution levels and the corresponding relinquishment of incentive distribution payments based on the cash target distribution levels prior to the reset, the holder or holder of a majority of our incentive distribution rights will be entitled to receive an aggregate 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 for the two quarters prior to the reset event, as compared to the average cash distributions per common unit during this period.

The number of common units that the holder or holder of a majority of our incentive distribution rights would be entitled to receive from us in connection with a resetting of the minimum quarterly distribution amount and the cash target distribution levels then in effect would be equal to (x) the average amount of cash distributions made by us in respect of the incentive distribution rights during the two consecutive fiscal quarters ended immediately prior to the date of such reset election divided by (y) the average of the amount of cash distributed per common unit during each of these two quarters. The issuance of the additional common units will be conditioned upon approval of the listing or admission for trading of such common units by the national securities exchange on which the common units are then listed or admitted for trading. If the national securities exchange on which the common units are then listed or admitted for trading has not approved the listing or admission for trading of the common units to be issued in connection with a resetting of the minimum quarterly distribution amount, then the holder or holders of a majority of our incentive distribution rights shall have the right to either rescind its election or elect to receive other partnership interests having such terms as our general partner may approve, with the approval of the conflicts committee.

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 (such amount is referred to as the “reset minimum quarterly distribution”) and the cash 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;

 

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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 an amount per unit equal to 125.0% of the reset minimum quarterly distribution for that 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 that quarter; and

 

   

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

The following table illustrates the percentage allocation of available cash from operating surplus between the unitholders and the holders of the incentive distribution rights at various levels of cash distribution levels pursuant to the cash distribution provision of our partnership agreement in effect at the closing of this offering as well as following a hypothetical reset of the minimum quarterly distribution and cash 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 $            .

 

    

Quarterly
Distribution per
Unit
Prior to Reset

   Marginal Percentage
Interest in Cash Distributions
   

Quarterly
Distribution per
Unit
following
Hypothetical
Reset

      Unitholders     Holders of
IDRs
   

Minimum Quarterly Distribution

   $          100.0     —        $    

First Target Distribution

   up to $      100.0     —        Up to $(1)

Second Target Distribution

  

above $

up to $

     85.0     15.0  

above $

up to $(2)

Third Target Distribution

  

above $

up to $

     75.0     25.0  

above $

up to $(3)

Thereafter

   above $      50.0     50.0   above $

 

(1) This amount is 115% of the hypothetical reset minimum quarterly distribution.
(2) This amount is 125% of the hypothetical reset minimum quarterly distribution.
(3) This amount is 150% 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 the holders of the incentive distribution rights based on an average of the amounts distributed per quarter for the two quarters immediately prior to the reset. The table assumes that, immediately prior to the reset, there are                  common units outstanding, and that the average distribution to each common unit is $         for the two quarters prior to the reset. The assumed number of outstanding units assumes the conversion of all subordinated units into common units and no additional unit issuances.

 

     Quarterly
Distribution
per Unit
Prior to Reset
     Common
Unitholders
Cash
Distributions
Prior to
Reset
     Additional
Common
Units
   IDR
Holders Cash
Distributions
Prior to Reset
     Total
Distributions
 
            IDRs      Total     

Minimum Quarterly Distribution

   $         $            $         $         $     

First Target Distribution

   $                    

Second Target Distribution

   $                    

Third Target Distribution

   $