S-1 1 d738487ds1.htm S-1 S-1
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As filed with the Securities and Exchange Commission on August 29, 2014

Registration No. 333-            

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

USD Partners LP

(Exact name of Registrant as Specified in Its Charter)

 

Delaware   4610   30-0831007

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

811 Main Street, Suite 2800

Houston, Texas 77002

(281) 291-0510

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

 

Daniel K. Borgen

Chief Executive Officer and President

USD Partners LP

811 Main Street, Suite 2800

Houston, Texas 77002

(281) 291-0510

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

 

Copies to:

Sean T. Wheeler

Keith Benson

Latham & Watkins LLP

811 Main Street, Suite 3700

Houston, Texas 77002

(713) 546-5400

  

Douglas E. McWilliams

Sarah K. Morgan

Vinson & Elkins L.L.P.

1001 Fannin Street, Suite 2500

Houston, Texas 77002

(713) 758-2222

 

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

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

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

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

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

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

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

 

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

  $150,000,000   $19,320.00

 

 

(1)   Includes common units issuable upon exercise of the underwriters’ over-allotment option to purchase additional common units.
(2)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o).

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

 

SUBJECT TO COMPLETION, DATED AUGUST 29, 2014

PRELIMINARY PROSPECTUS

LOGO                                 

Common Units

Representing Limited Partner Interests

 

This is the initial public offering of our common units representing limited partner interests. We are offering              common units. Prior to this offering, there has been no public market for our common units. We currently expect the initial public offering price to be between $         and $         per common unit. We intend to apply to list our common units on the New York Stock Exchange under the symbol “USDP”.

 

Investing in our common units involves risks. Please read “Risk Factors” beginning on page 24.

These risks include the following:

   

We may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner, to enable us to pay the minimum quarterly distribution, or any distribution, to holders of our common and subordinated units.

   

On a pro forma basis, we would not have generated positive distributable cash flow for the twelve months ended June 30, 2014.

   

Our business could be adversely affected if service on the railroads is interrupted or if more stringent regulations are adopted regarding railcar design or the transportation of crude oil by rail.

   

The lack of diversification of our assets and geographic locations could adversely affect our ability to make distributions to our common unitholders.

   

We may not be able to compete effectively and our business is subject to the risk of a capacity overbuild of midstream infrastructure and the entrance of new competitors in the areas where we operate.

   

We serve customers who are involved in drilling for, producing and transporting crude oil and other liquid hydrocarbons. Adverse developments affecting the fossil fuel industry or drilling activity, including a decline in prices of crude oil or biofuels, reduced demand for crude oil products and increased regulation of drilling, production or transportation could cause a reduction of volumes transported through our rail terminals.

   

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

   

Unitholders have very limited voting rights and, even if they are dissatisfied, they cannot remove our general partner without its consent.

   

Our general partner has a limited call right that it may exercise at any time it or its affiliates own more than 80.0% of the outstanding limited partner interests and that may require you to sell your common units at an undesirable time or price.

   

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

   

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

   

We may choose to conduct a portion of our operations, which may not generate qualifying income, in a subsidiary that is treated as a corporation for U.S. federal income tax purposes and is subject to corporate-level income taxes.

In addition, we qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act of 1933, as amended, and, as such, are allowed to provide in this prospectus more limited disclosures than an issuer that would not so qualify. Furthermore, for so long as we remain an emerging growth company, we will qualify for certain limited exceptions from investor protection laws such as the Sarbanes-Oxley Act of 2002 and the Investor Protection and Securities Reform Act of 2010. Please read “Risk Factors” and “Summary—Implications of Being an Emerging Growth Company.”

 

     Per Common
Unit
     Total  

Public Offering Price

   $                    $                

Underwriting Discount(1)

   $                    $                

Proceeds to USD Partners LP (before expenses)

   $                    $                

 

(1)   Excludes an aggregate structuring fee of     % of the gross proceeds payable to Evercore Group L.L.C., Citigroup Global Markets Inc. and Barclays Capital Inc. and certain other reimbursable underwriting expenses paid by us. Please read “Underwriting.”

The underwriters may purchase up to an additional             common units from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments.

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

The underwriters expect to deliver the common units to purchasers on or about                     , 2014 through the book-entry facilities of The Depository Trust Company.

 

Citigroup   Barclays   Credit Suisse   BofA Merrill Lynch

 

 

 

Evercore  

        BMO Capital Markets

  Deutsche Bank Securities     RBC Capital Markets   

 

Janney Montgomery Scott

 

                    , 2014


Table of Contents

Hardisty Rail Terminal

 

LOGO

 

LOGO


Table of Contents

TABLE OF CONTENTS

 

SUMMARY

     1   

Overview

     1   

Industry Trends

     3   

Our Competitive Strengths

     4   

Our Business Strategies

     6   

Our Assets and Operations

     7   

Our Growth Opportunities—Hardisty Phase II and Phase III Expansions

     9   

Risk Factors

     10   

Our Management

     11   

Summary of Conflicts of Interest and Fiduciary Duties

     12   

Principal Executive Offices and Internet Address

     13   

Implications of Being an Emerging Growth Company

     13   

Formation Transactions

     14   

Simplified Organizational and Ownership Structure After this Offering

     14   

THE OFFERING

     16   

SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

     21   

RISK FACTORS

     24   

Risks Related to Our Business

     24   

Risks Inherent in an Investment in Us

     41   

Tax Risks

     51   

USE OF PROCEEDS

     57   

CAPITALIZATION

     58   

DILUTION

     59   

CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     61   

General

     61   

Our Minimum Quarterly Distribution

     63   

Unaudited Pro Forma Distributable Cash Flow for the Year Ended December  31, 2013 and the Twelve Months Ended June 30, 2014

     64   

Estimated Distributable Cash Flow for the Twelve Months Ending September 30, 2015

     67   

PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

     76   

Distributions of Available Cash

     76   

Operating Surplus and Capital Surplus

     77   

Capital Expenditures

     79   

Subordinated Units and Conversion to Common Units

     80   

Distributions from Operating Surplus While Any Subordinated Units are Outstanding

     81   

Distributions from Operating Surplus After All Subordinated Units have Converted into Common Units

     81   

General Partner Interest and Incentive Distribution Rights

     82   

Percentage Allocations from Operating Surplus

     83   

General Partner’s Right to Reset Incentive Distribution Levels

     83   

Distributions from Capital Surplus

     86   

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     86   

Distributions of Cash Upon Liquidation

     87   

SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL AND OPERATING DATA

     90   

Non-GAAP Financial Measures

     92   

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

     94   

Overview

     94   

How We Generate Revenue

     94   

How We Evaluate Our Operations

     96   

 

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Table of Contents

Factors That May Impact Future Results of Operations

     97   

Factors Affecting the Comparability of Our Financial Results

     99   

Results of Operations

     101   

Year ended December 31, 2013 compared to year ended December 31, 2012

     101   

Six months ended June 30, 2014 compared to six months ended June 30, 2013

     103   

Liquidity and Capital Resources

     107   

Off-Balance Sheet Arrangements

     111   

Credit Risk

     111   

Contractual Cash Obligations and Other Commitments

     112   

Critical Accounting Policies and Estimates

     113   

Quantitative and Qualitative Disclosures About Market Risk

     114   

INDUSTRY OVERVIEW

     115   

The Role of Rail in the Energy Industry

     117   

Safety and Regulation

     119   

BUSINESS

     121   

Overview

     121   

Our Competitive Strengths

     122   

Our Business Strategies

     124   

Our Assets and Operations

     125   

Our Growth Opportunities—Hardisty Phase II and Phase III Expansions

     127   

Commercial Agreements

     128   

Competition

     129   

Seasonality

     130   

Insurance

     130   

Safety and Maintenance

     130   

Environmental Regulation

     130   

Title to Real Property Assets

     136   

Headquarters

     137   

Employees

     137   

Legal Proceedings

     137   

MANAGEMENT

     138   

Management of USD Partners LP

     138   

Directors and Executive Officers of USD Partners GP LLC

     139   

Board Leadership Structure

     141   

Board Role in Risk Oversight

     141   

Executive Compensation

     141   

Compensation of Our Directors

     142   

Our Long-Term Incentive Plan

     142   

Class A Units

     144   

SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     147   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     148   

Distributions and Payments to Our General Partner and Its Affiliates

     148   

Agreements Governing the Transactions

     149   

Other Agreements with USD and Related Parties

     151   

Procedures for Review, Approval and Ratification of Related Person Transactions

     151   

CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

     152   

Conflicts of Interest

     152   

Fiduciary Duties

     156   

DESCRIPTION OF THE COMMON UNITS

     159   

The Units

     159   

Transfer Agent and Registrar

     159   

Transfer of Common Units

     159   

OUR PARTNERSHIP AGREEMENT

     161   

Organization and Duration

     161   

Purpose

     161   

 

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Cash Distributions

     161   

Capital Contributions

     161   

Voting Rights

     162   

Applicable Law; Forum, Venue and Jurisdiction

     163   

Limited Liability

     163   

Issuance of Additional Interests

     164   

Amendment of Our Partnership Agreement

     165   

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

     167   

Dissolution

     168   

Liquidation and Distribution of Proceeds

     168   

Withdrawal or Removal of Our General Partner

     168   

Transfer of General Partner Interest

     170   

Transfer of Ownership Interests in Our General Partner

     170   

Transfer of Subordinated Units and Incentive Distribution Rights

     170   

Change of Management Provisions

     170   

Limited Call Right

     171   

Non-Taxpaying Holders; Redemption

     171   

Non-Citizen Assignees; Redemption

     171   

Meetings; Voting

     172   

Voting Rights of Incentive Distribution Rights

     172   

Status as Limited Partner

     173   

Indemnification

     173   

Reimbursement of Expenses

     173   

Books and Reports

     173   

Right to Inspect Our Books and Records

     174   

Registration Rights

     174   

UNITS ELIGIBLE FOR FUTURE SALE

     175   

Rule 144

     175   

Our Partnership Agreement and Registration Rights

     175   

Lock-up Agreements

     176   

Registration Statement on Form S-8

     176   

MATERIAL FEDERAL INCOME TAX CONSEQUENCES

     177   

Partnership Status

     178   

Limited Partner Status

     179   

Tax Consequences of Unit Ownership

     179   

Tax Treatment of Operations

     185   

Disposition of Common Units

     186   

Uniformity of Units

     189   

Tax-Exempt Organizations and Other Investors

     189   

Administrative Matters

     190   

Recent Legislative Developments

     193   

State, Local, Foreign and Other Tax Considerations

     193   

NON-UNITED STATES TAX CONSEQUENCES

     195   

INVESTMENT IN USD PARTNERS LP BY EMPLOYEE BENEFIT PLANS

     198   

UNDERWRITING

     200   

VALIDITY OF THE COMMON UNITS

     206   

EXPERTS

     206   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     206   

FORWARD-LOOKING STATEMENTS

     207   

INDEX TO FINANCIAL STATEMENTS

     F-1   

APPENDIX A FORM OF SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF USD PARTNERS LP

     A-1   

APPENDIX B GLOSSARY OF TERMS

     B-1   

 

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You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. Neither we nor any of the underwriters have authorized anyone to provide you with information different from that contained in this prospectus and any free writing prospectus. When you make a decision about whether to invest in our common units, you should not rely upon any information other than the information in this prospectus and any free writing prospectus. Neither the delivery of this prospectus nor the sale of our common units means that information contained in this prospectus is correct after the date of this prospectus. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted.

 

Through and including                     , 2014 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions.

 

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

 

Industry and Market Data

 

The data included in this prospectus regarding the midstream energy industry, including descriptions of trends in the market and our position and the position of our competitors within the industry, is based on a variety of sources, including independent industry publications, government publications and other published independent sources, information obtained from customers, distributors, suppliers and trade and business organizations and publicly available information, as well as our good faith estimates, which have been derived from management’s knowledge and experience in the industry in which we operate. Based on management’s knowledge and experience, we believe that the third-party sources cited in this prospectus are reliable and that the third-party information included in this prospectus or in our estimates is reasonably accurate and complete.

 

iv


Table of Contents

SUMMARY

 

This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the historical and pro forma financial statements and the notes to those financial statements, before investing in our common units. The information presented in this prospectus assumes an initial public offering price of $         per common unit (the midpoint of the price range set forth on the cover page of this prospectus) and, unless otherwise noted, that the underwriters’ over-allotment option to purchase additional common units from us is not exercised. You should read “Risk Factors” for more information about important risks that you should consider carefully before buying our common units. Unless otherwise indicated, all references to “dollars” and “$” in this prospectus are to, and amounts are presented in, U.S. Dollars.

 

All references in this prospectus, unless the context otherwise indicates, to (i) “USD Partners,” “we,” “our,” “us,” and “the Partnership” refer to USD Partners LP, a Delaware limited partnership, and its subsidiaries; (ii) “our general partner” refer to USD Partners GP LLC, a Delaware limited liability company; (iii) “our sponsor” and “USD” refer to US Development Group LLC, a Delaware limited liability company, and where the context requires, its subsidiaries; and (iv) “USD Group LLC” refers to USD Group LLC, a Delaware limited liability company and currently the sole direct subsidiary of USD. We have provided definitions for some of the terms we use to describe our business and industry and other terms used in this prospectus in the “Glossary of Terms” beginning on page B-1 of this prospectus.

 

USD Partners LP

 

Overview

 

We are a fee-based, growth-oriented master limited partnership formed by US Development Group LLC to acquire, develop and operate energy-related rail terminals and other high-quality and complementary midstream infrastructure assets and businesses. Our initial assets consist primarily of: (i) an origination crude-by-rail terminal in Hardisty, Alberta, Canada, with capacity to load up to two 120-railcar unit trains per day and (ii) two destination unit train-capable ethanol rail terminals in San Antonio, Texas, and West Colton, California, with a combined capacity of approximately 33,000 barrels per day (bpd). Our rail terminals provide critical infrastructure allowing our customers to transport energy-related products from multiple supply regions to multiple demand markets. In addition, we provide railcar services through the management of a railcar fleet consisting of 3,799 railcars, as of August 1, 2014, that are committed to customers on a long-term basis. We generate substantially all of our operating cash flow by charging fixed fees for handling energy-related products and providing related services. We do not take ownership of the underlying commodities that we handle nor do we receive any payments from our customers based on the value of such commodities. Rail transportation of energy-related products provides efficient and flexible access to key demand markets on a relatively low fixed-cost basis, and as a result has become an important part of North American midstream infrastructure.

 

The following table provides a summary of our initial assets:

 

Terminal Name

  

Location

   Designed
Capacity
(Bpd)
   

Commodity

Handled

  

Primary

Customers

  

Terminal

Type

Hardisty rail terminal

   Alberta, Canada      ~172,629 (1)    Crude Oil   

Producers/Refiners

/Marketers

   Origination

San Antonio rail terminal

   Texas, U.S.      20,000      Ethanol    Refiners/Blenders    Destination

West Colton rail terminal

   California, U.S.      13,000      Ethanol    Refiners/Blenders    Destination
     

 

 

         
        205,629           

 

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(1)   Based on two 120-railcar unit trains comprised of 31,800 gallon (approximately 757 barrels) railcars being loaded at 95% of volumetric capacity per day. Actual amount of crude oil loading capacity may vary based on factors including the size of the unit trains, the size, type and volumetric capacity of the railcars utilized and the type and specifications of crude oil loaded, among other factors.

 

We generate the vast majority of our operating cash flow in connection with providing crude oil terminalling services at our Hardisty rail terminal. Substantially all of the capacity at our Hardisty rail terminal is contracted under multi-year, take-or-pay terminal services agreements with seven customers. Furthermore, approximately 83% of the contracted utilization at our Hardisty rail terminal is with subsidiaries of five investment grade companies including major integrated oil companies, refiners and marketers. Each of the terminal services agreements with our Hardisty rail terminal customers has an initial contract term of five years. The initial terms of six of these agreements commenced between June 30, 2014 and August 1, 2014, and the initial term of the seventh agreement will commence on October 1, 2014. Additionally, each of these agreements is subject to inflation-based rate escalators, and all but one agreement has automatic renewal provisions. In addition to terminalling services, we provide customers access to railcars under fleet services agreements which commit customers to railcars and fleet management services on a take-or-pay basis for periods ranging from five to nine years. These agreements are generally executed in conjunction with commitments to use our rail terminals.

 

For the six months ended June 30, 2014 and the year ended December 31, 2013, we had revenues of $10.9 million and $26.3 million, respectively, and net income (loss) of $(5.2) million and $6.4 million, respectively. These figures do not include the results of operations from our Hardisty rail terminal, which did not commence operations until June 30, 2014.

 

One of our key strengths is our relationship with our sponsor, USD. USD is an independent, growth-oriented developer, builder, operator and manager of energy-related infrastructure and was among the first companies to successfully develop the hydrocarbon-by-rail concept. USD has developed, built and operated 14 unit train-capable origination and destination terminals with an aggregate capacity of over 730,000 bpd. Ten of these terminals were subsequently divested in multiple transactions. From January 2006 through July 2014, USD has loaded and/or handled through its terminal network a total of over 75 MMbbls of crude oil and over 72 MMbbls of ethanol. Furthermore, USD has a nationally recognized safety record with no reportable spills at any of its terminals since its inception.

 

USD, through USD Group LLC, currently has several major growth projects underway, including the development of strategically located destination and origination rail terminals for crude oil and other energy-related products. Please read “—Our Growth Opportunities—Hardisty Phase II and Phase III Expansions.” At the closing of this offering, we will enter into an omnibus agreement with USD and USD Group LLC, pursuant to which USD Group LLC will grant us a right of first offer on existing expansion projects at our Hardisty rail terminal for a period of seven years after the closing of this offering. USD and USD Group LLC will also grant us a right of first offer during this seven-year period on any additional midstream infrastructure assets and businesses that they may develop, construct or acquire. We cannot assure you that USD or USD Group LLC will be able to develop or construct, or that we will be able to acquire, any other midstream infrastructure project including the Hardisty Phase II or Hardisty Phase III projects. Among other things, the ability of USD or USD Group LLC to develop the Hardisty Phase II and Hardisty Phase III projects, or any other project, and our ability to acquire such projects, will depend upon USD’s and our ability to raise additional equity and debt financing. We are under no obligation to make any offer, and USD and USD Group LLC are under no obligation to accept any offer we make, with respect to any asset subject to our right of first offer, including the Hardisty Phase II and Hardisty Phase III projects. If we are unable to acquire the Hardisty Phase II or Hardisty Phase III projects from USD Group LLC, these expansions may compete directly with our Hardisty rail terminal for future throughput volumes, which may impact our ability to enter into new terminal services agreements following the termination

 

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of our existing agreements or the terms thereof and our ability to compete for future spot volumes. Furthermore, cyclical changes in the demand for crude oil and other liquid hydrocarbons may cause USD or us to reevaluate any future expansion projects, including the Hardisty Phase II and Hardisty Phase III projects.

 

We believe USD intends for us to be its primary growth vehicle in North America. We intend to strategically expand our business by acquiring energy-related rail terminals and other high-quality and complementary midstream infrastructure assets and businesses from both USD and third parties. We also intend to grow organically by opportunistically pursuing growth projects and enhancing the profitability of our assets. We believe that USD’s successful project development and operating history, safety track record and industry relationships will allow us to execute our growth strategy.

 

Industry Trends

 

We expect to capitalize on the following trends in the energy industry:

 

   

New and growing supply sources.    U.S. and Canadian crude oil production has increased significantly in recent years. We expect this trend to continue as the U.S. Energy Information Administration (EIA) estimates that total U.S. crude oil production will grow 47.1% from 2012 to 2020. Similarly, the Canadian Association of Petroleum Producers (CAPP) estimates that total Canadian production of crude oil will grow 49.6% over the same time period. High-growth production areas in North America are often located at significant distances from refining centers, creating constantly evolving regional imbalances, which require the expedited development of flexible and sustainable transportation solutions. The extensive existing rail network, combined with rail transportation’s relatively low capital and fixed costs compared to other transportation alternatives, has strategically positioned rail as a long-term alternative transportation solution to the growing and evolving energy infrastructure needs.

 

   

Increased focus on flexibility, speed to market and sustainability.    The following benefits of rail have become a primary focus for producers, refiners, marketers and other energy-related market participants, and as such, have established, or have the potential to establish, rail as a preferred mode of transportation for crude oil as well as refined petroleum products, biofuels, natural gas liquids (NGLs) and frac sand/proppant:

 

   

Access to areas without existing or easily accessible transportation infrastructure.    Many of the emerging producing regions, such as the Western Canadian oil sands, have concentrated production in areas with either limited or virtually no existing cost-effective takeaway capacity. The extensive existing rail infrastructure network provides efficient takeaway capacity to these producing regions and access to multiple demand centers.

 

   

Faster deployment.    Rail terminals can be constructed at a fraction of the time required to lay a long-haul pipeline, providing a timely solution to meet new and evolving market demands. Relative to rail, new pipeline construction faces challenges such as lengthier build times and environmental permitting processes, geographic constraints and, in some cases, the lack of required political support.

 

   

Flexibility to deliver to different end markets.    Unlike pipelines, which typically transport product to a single demand market, rail offers producers and shippers access to many of the most advantageous demand centers throughout North America, enabling producers and shippers to obtain competitive prices for their products and to retain the flexibility to determine the ultimate destination until the time of transportation.

 

   

Comprehensive solution for refiners.    Rail provides refiners flexible access to multiple qualities and grades of crude oil (feedstock) from multiple production sources. Additionally,

 

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as refinery output grows, rail provides refiners access to the most attractive refined petroleum products and NGL markets.

 

   

Faster delivery to demand markets.    Rail can transport energy-related products to end markets much faster than pipelines, trucks or waterborne tankers. While a pipeline can take 30-45 days to transport crude oil to the Gulf Coast from Western Canada, unit trains can move crude oil along a similar path in approximately nine days.

 

   

Reduced shipper commitment requirements.    Whereas all of the pipeline transportation fee is typically subject to long-term shipper commitments, only a portion of rail transportation costs require long-term shipper commitments (railroads are typically contracted on a spot basis). Consequently, pipeline customers bear greater risk of shifts in regional price differentials and the location of demand markets.

 

   

Reduced shipper transportation cost.    Rail provides shippers significant operating cost advantages, particularly in situations where either (i) the amount of diluent required for the transportation of crude oil by pipeline is high, which is generally the case for production from the Canadian oil sands, or (ii) multiple modes of transportation are required to reach a particular end market.

 

   

Higher safety and regulatory standards.    Due to increased regulation and market focus on safety and reliability of operations, customers are placing additional value on utilizing established and reputable third-party providers to satisfy their rail terminalling and logistics needs. We believe this will allow us to increase market share relative to customer-owned operations or smaller operators that lack an established safety and regulatory compliance track record.

 

Our Competitive Strengths

 

We believe that we are well positioned to capitalize on these industry trends because of the following competitive strengths:

 

   

Our relationship with USD.    We believe USD intends for us to be its primary growth vehicle in North America. We believe that USD, as the indirect owner of a     % limited partner interest, a 2.0% general partner interest and all of our incentive distribution rights, will be motivated to promote and support the successful execution of our principal business objectives and to pursue projects that directly or indirectly enhance the value of our business through, for example, the following:

 

   

Acquisition opportunities from a proven developer of unit train-capable rail terminals.    USD was among the first companies to successfully develop the hydrocarbon-by-rail concept. USD has developed, built and operated 14 unit train-capable origination and destination terminals with an aggregate capacity of over 730,000 bpd. USD currently has several major growth projects underway, including multiple expansion projects at our Hardisty rail terminal and the development of other strategically located destination and origination rail terminals for crude oil and other energy-related products. Please read “—Our Growth Opportunities—Hardisty Phase II and Phase III Expansions.”

 

   

Market knowledge and industry relationships.    We believe that USD is an experienced innovator in the North American hydrocarbon-by-rail business and that its unique understanding of logistics and energy market trends as well as insights into business opportunities in our industry will help us identify, evaluate and pursue commercially attractive growth initiatives, which may include the acquisition of assets from our sponsor or third parties, the construction of new assets or the organic expansion of existing facilities. In addition, USD has established strong, long-standing relationships within the energy industry,

 

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which we believe will help us to grow and expand our business by creating opportunities with new customers and identifying new markets.

 

   

Longstanding strategic relationships with the railroads.    USD has extensive relationships with the railroads and is a significant revenue generator for several of them. Since its inception, USD has built 14 rail terminals that have provided service through connections to Class I railroads in North America, creating a strategic business relationship with the railroad industry. In addition, members of our senior executive management team have long distinguished careers with the railroads, including our Chief Operating Officer, who has over 40 years of experience working in key senior leadership roles on the Union Pacific and Missouri Pacific railroads and the Port Terminal Railroad Association. We believe these relationships will enable us to quickly identify and access strategic locations to grow our business.

 

   

Access to an experienced leadership team.    USD’s senior management team has an average of over 25 years of experience in the energy, transportation, railroad, refining, commodities trading, logistics and financial industries. Additionally, USD’s team has a demonstrated track record of sourcing and executing growth projects, as well as significant expertise with the financial, tax and legal structures required to effectively pursue acquisitions.

 

   

Strong safety record.    USD has a nationally recognized record for safety. Its tradition of excellence in safety has been recognized by the National Safety Council, which has awarded USD its Superior Safety Performance Award, among others, for nine consecutive years from 2006 to 2014. USD also received two consecutive Stewardship Awards from Burlington Northern Santa Fe Railway for having zero incidents involving a hazardous spill or release. Additionally, it recently received the Safe Shipper Award from Canadian Pacific Railways. USD has loaded and/or handled through its terminal network a total of over 147 MMbbls of liquid hydrocarbons with no reportable spills as defined by the U.S. Department of Transportation (DOT) Pipeline and Hazardous Materials Safety Administration (PHMSA) at any of its terminals since its inception.

 

   

Strategically located assets.    Our initial assets are located in critical supply and demand centers. Our Hardisty rail terminal offers strategic and flexible access to most North American refining markets to producers in Alberta’s Crude Oil Basin through the Hardisty hub. The Hardisty hub is one of the major crude oil supply centers in North America, serving as a large aggregation center for various grades of Canadian crude oil, and is an origination point for crude oil export pipelines to the United States. Our Hardisty rail terminal is the only unit train-capable crude-by-rail terminal located in the Hardisty hub and is ideally positioned to benefit from the continued growth in Western Canadian oil sands production, which has increased from 1.2 MMbpd in 2008 to 2.0 MMbpd in 2013 and is expected to reach 3.2 MMbpd by 2020 according to CAPP. Our San Antonio rail terminal is located within five miles of San Antonio’s gasoline blending terminals and is the only ethanol rail terminal in a 20-mile radius. Our West Colton rail terminal is located less than one mile from gasoline blending terminals that supply the greater San Bernardino and Riverside County-Inland Empire region of Southern California and is the only ethanol rail terminal in a five-mile radius.

 

   

Stable and predictable cash flows.    Substantially all of the capacity at our Hardisty rail terminal is contracted under multi-year, take-or-pay agreements with seven customers. Approximately 83% of the contracted utilization at our Hardisty rail terminal is with subsidiaries of five investment grade companies. Each of the terminal services agreements with our Hardisty rail terminal customers has an initial term of five years. The initial terms of six of these agreements commenced between June 30, 2014 and August 1, 2014, and the initial term of the seventh agreement will commence on October 1, 2014. Additionally, each of these

 

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agreements is subject to inflation-based rate escalators, and all but one agreement has automatic renewal provisions.

 

   

Financial flexibility.    In connection with this offering, we intend to enter into a new $300.0 million senior secured credit agreement comprised of a $100.0 million term loan (drawn in Canadian dollars) and a $200.0 million revolving credit facility, which can expand to $300.0 million proportionately as the term loan principal is reduced. The revolving credit facility can be expanded further by $100.0 million, subject to receipt of additional lender commitments. The revolving credit facility will be undrawn at closing of this offering. In addition, we intend to retain a significant portion of the proceeds from this offering as cash on our balance sheet to fund potential future growth initiatives and general partnership purposes. We believe that this liquidity, combined with access to debt and equity capital markets, will provide us significant financial flexibility to execute our growth strategy effectively, efficiently and at competitive terms.

 

Our Business Strategies

 

Our primary business objective is to increase the quarterly cash distribution we pay to our unitholders over time. We intend to accomplish this objective by executing the following business strategies:

 

   

Generate stable and predictable fee-based cash flows.    Substantially all of the operating cash flow we expect to generate is attributable to multi-year, take-or-pay agreements. We intend to continue to seek stable and predictable cash flows by executing fee-based agreements with existing and new customers.

 

   

Pursue accretive acquisitions.    We intend to pursue strategic and accretive acquisitions of energy-related rail terminals and high-quality and complementary midstream infrastructure assets and businesses from USD and third parties. We will consistently evaluate and monitor the marketplace to identify acquisitions within our existing geographies and in new regions that may be pursued independently or jointly with USD. We have not entered into, or begun to negotiate, any agreements to acquire any additional assets, including the Hardisty Phase II and Hardisty Phase III projects.

 

   

Pursue organic growth initiatives.    We intend to pursue organic growth projects and seek operational efficiencies that complement, optimize or improve the profitability of our assets. For example, we are currently in the process of seeking permits to construct a pipeline directly from our West Colton rail terminal to local gasoline blending terminals, which if approved and constructed, may result in additional long-term volume commitments and cash flows.

 

   

Maintain a conservative capital structure.    We intend to maintain a conservative capital structure which, when combined with our focus on stable, fee-based cash flows, should afford us efficient and effective access to capital at a competitive cost. Consistent with our disciplined financial approach, we intend to fund the capital required for expansion and acquisition projects through a balanced combination of equity and debt financing. We believe this approach will provide us the flexibility to effectively pursue accretive acquisitions and organic growth projects as they become available.

 

   

Maintain safe, reliable and efficient operations.    We are committed to safe, efficient and reliable operations that comply with environmental and safety regulations. We will seek to improve operating performance through our commitment to technologically-advanced logistics and operations systems, employee training programs and other safety initiatives and programs with railroads, railcar producers and first responders. All of our facilities currently meet or exceed all government safety regulations and are in compliance with all recently enacted orders regarding the movement of crude-by-rail. We believe these objectives are integral to the success of our business as well as to our access to growth opportunities.

 

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Our Assets and Operations

 

Hardisty Rail Terminal

 

Our Hardisty rail terminal is an origination terminal that commenced operations on June 30, 2014 and loads various grades of Canadian crude oil received from Alberta’s Crude Oil Basin through the Hardisty hub, which is one of the major crude oil supply centers in North America and is an origination point for export pipelines to the United States. The Hardisty rail terminal can load up to two 120-railcar unit trains per day and consists of a fixed loading rack with 30 railcar loading positions, a unit train staging area and loop tracks capable of holding five unit trains simultaneously. This facility is also equipped with an onsite vapor management system that allows our customers to minimize hydrocarbon loss while improving safety during the loading process. Our Hardisty rail terminal is designed to receive inbound deliveries of crude oil directly through a newly-constructed pipeline connected to the Gibson Energy Inc. (Gibson) Hardisty storage terminal. Gibson, which is one of the largest independent midstream companies in Canada, has 4.3 MMbbls of storage in Hardisty and has access to most of the major pipeline systems in the Hardisty hub. Gibson has announced that it is constructing an additional 2.3 MMbbls of storage capacity at its Hardisty terminal, with 1.7 MMbbls of additional capacity expected to be in service by early 2015 and an additional 0.6 MMbbls of capacity expected to be in service by early 2016. Pursuant to our facilities connection agreement with Gibson and subject to certain limited exceptions regarding manifest train facilities, our Hardisty rail terminal is the exclusive means by which crude oil from Gibson’s storage terminal can be transported by rail. The direct pipeline connection, in conjunction with USD’s terminal location, provides our Hardisty rail terminal with efficient access to the major producers in the region. Our Hardisty rail terminal is connected to Canadian Pacific Railroad’s North Main Line, which is a high capacity line with the ability to connect to all the key refining markets in North America.

 

Substantially all of the capacity at our Hardisty rail terminal is contracted under multi-year, take-or-pay terminal services agreements with seven customers. Approximately 83% of our Hardisty rail terminal’s utilization is contracted with subsidiaries of five investment grade companies, including major integrated oil companies, refiners and marketers. Each of the terminal services agreements with our Hardisty rail terminal customers has an initial contract term of five years. The initial terms of six of these agreements commenced between June 30, 2014 and August 1, 2014, and the initial term of the seventh agreement will commence on October 1, 2014. Additionally, each of these agreements is subject to inflation-based rate escalators and all but one agreement has automatic renewal provisions.

 

San Antonio Rail Terminal

 

Our San Antonio rail terminal, completed in April 2010, is a unit train-capable destination terminal that transloads ethanol received by rail from Midwestern producers onto trucks to meet local ethanol demand in San Antonio and Austin, Texas. Our San Antonio rail terminal is located within five miles of San Antonio’s gasoline blending terminals and is the only ethanol rail terminal within a 20-mile radius. Due to corrosion concerns unique to biofuels such as ethanol, the long-haul transportation of biofuels by multi-product pipelines is less efficient and less economical than rail, which combined with our proximity to local demand markets, we believe positions our San Antonio rail terminal to benefit from anticipated changes in environmental and gasoline blending regulations that will make the role of ethanol more pervasive in the fuel for transportation market.

 

The San Antonio rail terminal can transload up to 20,000 bbls of ethanol per day with 20 railcar offloading positions and three truck loading positions. The facility receives inbound deliveries exclusively by rail from Union Pacific Railroad’s high speed line. We have entered into a terminal services agreement with a subsidiary of an investment grade company for our San Antonio rail terminal pursuant to which our customer pays us per gallon fees based on the amount of ethanol offloaded at the terminal. The San Antonio terminal services agreement will expire in August 2015, at which point the agreement will automatically renew for two subsequent three-year terms unless notice is provided by our customer. The current agreement entitles the customer to 100%

 

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of the terminal’s capacity, subject to our right to seek additional customers if minimum volume usage thresholds are not met.

 

West Colton Rail Terminal

 

Our West Colton rail terminal, completed in November 2009, is a unit train-capable destination terminal that transloads ethanol received by rail from regional and other producers onto trucks to meet local ethanol demand in the greater San Bernardino and Riverside County-Inland Empire region of Southern California. Our West Colton rail terminal is located less than one mile from gasoline blending terminals that supply the greater San Bernardino and Riverside County-Inland Empire region and is the only ethanol rail terminal within a five-mile radius. Additionally, like our San Antonio rail terminal, we believe our West Colton rail terminal is strategically positioned to benefit from any increases in the utilization of ethanol in the fuel for transportation market.

 

The West Colton rail terminal can transload up to 13,000 bbls of ethanol per day with 20 railcar offloading positions and three truck loading positions. The facility receives inbound deliveries exclusively by rail from Union Pacific Railroad’s high speed line. After receipt at our West Colton rail terminal, ethanol is then transported to end users by truck. We have been operating under a terminal services agreement at West Colton with a subsidiary of an investment grade company since July 2009, which is terminable at any time by either party. Under this agreement, we receive a per gallon, fixed-fee based on the amount of ethanol offloaded at the rail terminal. We are currently in the process of seeking permits to construct an approximately one-mile pipeline directly from our West Colton rail terminal to Kinder Morgan Energy Partners, L.P.’s gasoline blending terminals, which, if approved and constructed, may result in additional long-term volume commitments and cash flows.

 

Railcar Fleet

 

We provide fleet services for a railcar fleet consisting of 3,799 railcars as of August 1, 2014, of which 988 railcars are in production or on order. We do not own any railcars. Affiliates of USD lease 3,096 of the railcars in our fleet from third parties. We directly lease 703 railcars from third parties. We have entered into master fleet services agreements with a number of customers for the use of the 703 railcars in our fleet, that we lease directly, on a take-or-pay basis for periods ranging from five to nine years. We have also entered into services agreements with the affiliates of USD for the provision of fleet services with respect to the 3,096 railcars which they lease from third parties. Under our master fleet services agreements with our customers and the services agreements with the affiliates of USD, we provide customers with railcar-specific fleet services associated with the transportation of crude oil, which may include, among other things, the provision of relevant administrative and billing services, the maintenance of railcars in accordance with standard industry practice and applicable law, the management and tracking of the movement of railcars, the regulatory and administrative reporting and compliance as required in connection with the movement of railcars, and the negotiation for and sourcing of railcars. We typically charge our customers, including the affiliates of USD, monthly fees per railcar that include a component for railcar use (in the case of our directly-leased railcar fleet) and a component for fleet services. Approximately 65% of our current railcar fleet is dedicated to customers of our terminals. The remaining 35% of the railcar fleet is dedicated to a customer of terminals belonging to subsidiaries previously sold by our predecessor. We believe that our ability to provide customers with access to railcars provides an incentive to customers that do not otherwise have access to high-quality railcars to contract terminalling capacity at our facilities. We believe that the generally longer terms of fleet services agreements will incentivize our customers to extend their initial terminal services agreements with us.

 

Approximately 65% of our currently in-service railcars were constructed in 2013 and 2014. The average age of our currently in-service fleet is approximately four years as compared to the estimated 50-year life associated with these types of railcars. We have partnered with leaders in the railcar supply industry, such as CIT Rail,

 

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Union Tank Car Company, Trinity Industries and others. We believe that our strong relationships with these industry leaders enable us to obtain railcar market insight and to procure railcars on more advantageous terms, with shorter lead times than our competitors. Our current railcars are designed to a DOT Specification 111 (DOT-111) railcar standard and are built to carry between 28,000 to 31,800 gallons of bulk liquid volume. All of our railcar fleet is currently permitted to transport crude oil in the United States and Canada. Nearly 70% of our railcars are equipped with the most recent safety enhancements including thicker, more puncture-resistant tank shells, extra protective head shields and greater top fittings protection.

 

As of August 1, 2014, our railcar fleet consisted of a mix of 2,108 coiled and insulated (C&I) railcars and 1,691 non-coiled, non-insulated railcars. Our C&I railcars can reheat heavy viscous crude oil grades, reducing the need to blend these heavier crude grades with costly diluents. Of our 3,799 railcar fleet, 988 C&I railcars were in production as of August 1, 2014 and are scheduled to be delivered by March 2015, and 474 legacy non-coiled, non-insulated railcars will be retired by the end of 2015. Additionally, we have the option to procure another 425 new C&I railcars as well as 500 pressurized railcars designed to transport crude oil, condensate and various natural gas liquids. The 925 railcars that we have the option to procure are scheduled for delivery in late 2015.

 

Our Growth Opportunities—Hardisty Phase II and Phase III Expansions

 

Our sponsor currently owns the right to construct and develop additional infrastructure at the Hardisty rail terminal, which could expand the number of 120-railcar unit trains that can be loaded from two unit trains to up to five unit trains per day. We refer to these expansion projects as Hardisty Phase II and Hardisty Phase III. USD is currently in the process of contracting, designing, engineering and permitting Hardisty Phase II, which would expand the capacity for handling and transportation of crude oil by two 120-railcar unit trains per day which we expect would be contracted under similar multi-year take-or-pay agreements to what we currently have in place at our Hardisty rail terminal. Subject to receiving required regulatory approvals and obtaining required permits on a timely basis, successful contracting of the expanded capacity, and the absence of unanticipated delays in construction, USD currently anticipates that Hardisty Phase II will commence operations in late 2015 or early 2016. Hardisty Phase III would expand capacity by one 120-railcar unit train per day and would target the loading of bitumen with very limited amount of diluent through the use of C&I railcars, which otherwise could not be transported by pipeline. Hardisty Phase III requires additional infrastructure to be designed, engineered, permitted and constructed. Subject to receiving required regulatory approvals and obtaining required permits on a timely basis, successful contracting of the expanded capacity, and the absence of unanticipated delays in construction, we currently anticipate that Hardisty Phase III will commence operations during 2016. We will enter into an omnibus agreement with USD and USD Group LLC that will grant us a right of first offer on Hardisty Phase II and Hardisty Phase III for a period of seven years after the closing of this offering. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement.

 

We cannot assure you that USD will be able to develop or construct, or that we will be able to acquire, any other midstream infrastructure project, including the Hardisty Phase II or Hardisty Phase III projects. Among other things, the ability of USD to develop the Hardisty Phase II and Hardisty Phase III projects, or any other project, and our ability to acquire such projects, will depend upon USD’s and our ability to raise additional equity and debt financing. We are under no obligation to make any offer, and USD and USD Group LLC are under no obligation to accept any offer we make, with respect to any asset subject to our right of first offer, including the Hardisty Phase II and Hardisty Phase III projects. If we are unable to acquire the Hardisty Phase II or Hardisty Phase III projects from USD Group LLC, these expansions may compete directly with our Hardisty rail terminal for future throughput volumes, which may impact our ability to enter into new terminal services agreements, including with our existing customers, following the termination of our existing agreements or the terms thereof and our ability to compete for future spot volumes. Furthermore, cyclical changes in the demand for crude oil and other liquid hydrocarbons may cause USD or us to reevaluate any future expansion projects, including the Hardisty Phase II and Hardisty Phase III projects.

 

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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. Please read carefully the risks described under “Risk Factors.”

 

Risks Inherent in Our Business

 

   

We may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner, to enable us to pay the minimum quarterly distribution, or any distribution, to holders of our common and subordinated units.

 

   

On a pro forma basis, we would not have generated positive distributable cash flow for the twelve months ended June 30, 2014.

 

   

The assumptions underlying the forecast of distributable cash flow that we include in “Cash Distribution Policy and Restrictions on Distributions” 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 business could be adversely affected if service on the railroads is interrupted or if more stringent regulations are adopted regarding railcar design or the transportation of crude oil by rail.

 

   

The lack of diversification of our assets and geographic locations could adversely affect our ability to make distributions to our common unitholders.

 

   

We may not be able to compete effectively and our business is subject to the risk of a capacity overbuild of midstream infrastructure and the entrance of new competitors in the areas where we operate.

 

   

We serve customers who are involved in drilling for, producing and transporting crude oil and other liquid hydrocarbons. Adverse developments affecting the fossil fuel industry or drilling activity, including a decline in prices of crude oil or biofuels, reduced demand for crude oil products and increased regulation of drilling, production or transportation could cause a reduction of volumes transported through our rail terminals.

 

   

Any reduction in our or our customers’ capability to utilize third-party pipelines, railroads or trucks that interconnect with our rail terminals or to continue utilizing them at current costs could cause a reduction of volumes transported through our rail terminals.

 

   

The fees charged to customers under our agreements with them for the transportation of crude oil may not escalate sufficiently to cover increases in costs, and the agreements may be temporarily suspended or terminated in some circumstances, which would affect our profitability.

 

   

We operate in a highly regulated industry and increased costs of compliance with, or liability for violation of, existing or future laws, regulations and other requirements could significantly increase our costs of doing business, thereby adversely affecting our profitability.

 

   

Our contracts subject us to renewal risks.

 

   

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

 

   

Exposure to currency exchange rate fluctuations will result in fluctuations in our cash flows and operating results.

 

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Risks Inherent in an Investment in Us

 

   

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

 

   

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

 

   

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

 

   

Unitholders have very limited voting rights and, even if they are dissatisfied, they cannot remove our general partner without its consent.

 

   

Affiliates of our general partner, including USD, may compete with us, and neither our general partner nor its affiliates have any obligation to present business opportunities to us.

 

   

Our general partner has a limited call right that it may exercise at any time it or its affiliates own more than 80.0% of the outstanding limited partner interests and that may require you to sell your common units at an undesirable time or price.

 

Tax Risks to Common Unitholders

 

   

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

 

   

Notwithstanding our treatment for U.S. federal income tax purposes, we will be subject to certain non-U.S. taxes. If a taxing authority were to successfully assert that we have more tax liability than we anticipate or legislation were enacted that increased the taxes to which we are subject, the distributable cash flow to our unitholders could be further reduced.

 

   

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

 

   

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

 

   

We may choose to conduct a portion of our operations, which may not generate qualifying income, in a subsidiary that is treated as a corporation for U.S. federal income tax purposes and is subject to corporate-level income taxes.

 

Our Management

 

We are managed by the board of directors and executive officers of USD Partners GP LLC, our general partner. USD is the indirect owner of our general partner and has the ability to appoint the entire board of directors of our general partner, including the independent directors appointed in accordance with the listing standards of the New York Stock Exchange (NYSE). Unlike shareholders in a publicly traded corporation, our common unitholders are not entitled to elect our general partner or the board of directors of our general partner. Many of the executive officers and directors of our general partner also currently serve as executive officers of USD. For more information about the directors and executive officers of our general partner, please read “Management—Directors and Executive Officers of USD Partners GP LLC.”

 

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In order to maintain operational flexibility, our operations will be conducted through, and our operating assets will be owned by, various operating subsidiaries. However, neither we nor our subsidiaries will have any employees. Our general partner has the sole responsibility for providing the personnel necessary to conduct our operations, whether through directly hiring employees or by obtaining the services of personnel employed by others. All of the personnel that will conduct our business immediately following the closing of this offering will be employed or contracted by our general partner and its affiliates, but we sometimes refer to these individuals in this prospectus as our employees because they provide services directly to us.

 

In August 2014, the board of directors of our general partner granted 250,000 Class A Units to certain executive officers and other key employees of our general partner and its affiliates who provide services to us. The Class A Units are limited partner interests in our partnership that entitle the holder to distributions that are equivalent to the distributions paid in respect of our common units (excluding any arrearages of unpaid minimum quarterly distributions from prior quarters). The Class A Units do not have voting rights, but contain a conversion right, which, after vesting of the Class A Units, allows for the conversion of Class A Units into common units based on a conversion factor that will grow as our annualized distributions grow and could range between one and ten common units per Class A Unit.

 

The Class A Units are intended as long-term equity incentives for our executive officers and other key employees and to align the economic interests of these executives and employees with the interests of our unitholders. By tying increases in the conversion factor of the Class A Units to annualized distribution increases, the ultimate value attained by the Class A Unit holders will correspond closely to annualized distribution increases and capital appreciation for our public unitholders. The Class A Unit grants will also promote the retention of our key executives and employees as a result of the four or five year cliff vesting provisions that will accompany these units. Please read “Management—Class A Units.”

 

Summary of Conflicts of Interest and Fiduciary Duties

 

General

 

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

 

Partnership Agreement Replacement of Fiduciary Duties

 

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

 

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Our Sponsor May Compete Against Us

 

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

 

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

 

Principal Executive Offices and Internet Address

 

Our principal executive offices are located at 811 Main Street, Suite 2800, Houston, Texas 77002, and our telephone number at that address is (281) 291-0510. Following the completion of this offering, our website will be located at www.usdpartners.com. We expect to make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission (SEC) available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute part of this prospectus.

 

Implications of Being an Emerging Growth Company

 

Our predecessor had less than $1.0 billion in revenue during its last fiscal year, which means that we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other obligations that are otherwise applicable generally to public companies. These provisions include:

 

   

the ability to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in the registration statement of its initial public offering;

 

   

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; and

 

   

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

 

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. We may choose to take advantage of some, but not all, of these reduced burdens. 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. We are choosing to “opt out” of the extended transition period relating to the exemption from new or revised financial accounting standards and, as a result, we will comply with new or revised financial accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised financial accounting standards is irrevocable.

 

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Formation Transactions

 

General

 

We were formed on June 5, 2014 as a Delaware limited partnership.

 

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

 

   

USD Group LLC will convey to us its ownership interests in each of its subsidiaries that own or operate the Hardisty, San Antonio and West Colton rail terminals and our railcar business;

 

   

we will issue to USD Group LLC              common units and all of our subordinated units, which will represent a     % limited partner interest in us following the issuance and sale of common units in this offering;

 

   

we will issue to USD Partners GP LLC, a wholly owned subsidiary of USD Group LLC,              general partner units, representing a 2.0% general partner interest in us, and all of our incentive distribution rights, which will entitle USD Partners GP LLC to increasing percentages of the cash we distribute in excess of $         per unit per quarter;

 

   

we will enter into a new $300.0 million senior secured credit agreement comprised of a $200.0 million revolving credit facility (undrawn) and a $100.0 million term loan (fully drawn in Canadian dollars);

 

   

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 and borrowings under our term loan as set forth under “Use of Proceeds.”

 

In addition, at or prior to the closing of this offering, we will enter into an omnibus agreement with USD and USD Group LLC, our general partner and other affiliates of USD Group LLC governing, among other things:

 

   

USD and USD Group LLC’s grant of a right of first offer to us to acquire the Hardisty Phase II and Hardisty Phase III projects, and any additional midstream infrastructure assets and businesses that it may develop, construct or acquire, for a period of seven years after the closing of the offering, should USD decide to sell them;

 

   

USD Group LLC’s provision of certain indemnities to us; and

 

   

USD Group LLC’s provision of management and administrative services to us.

 

For further details on our agreements with USD and its affiliates, including amounts involved, please read “Certain Relationships and Related Party Transactions.”

 

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Simplified Organizational and Ownership Structure After this Offering

 

After giving effect to our formation transactions, assuming the underwriters’ over-allotment option to purchase additional common units from us is not exercised, our units will be held as follows:

 

     Number of
Units
     Percentage
Ownership
 

Public Common Units(1)

     

USD Common Units

     

Class A Units

     250,000      

USD Subordinated Units

     

General Partner Interest

        2.0
  

 

 

    

 

 

 
        100.0
  

 

 

    

 

 

 

 

(1)   Excludes up to              common units that may be purchased by certain of our officers, directors, employees and other persons associated with us pursuant to a directed unit program, as described in more detail in “Underwriting.”

 

The following simplified diagram depicts our organizational structure after giving effect to our formation transactions.

 

LOGO

 

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THE OFFERING

 

Common units offered to the public

             common units; or

 

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

 

Units outstanding after this offering

             common units and              subordinated units, each representing a 49.0% limited partner interest in us. Our general partner will own              general partner units, representing a 2.0% general partner interest in us. Certain of our general partner’s executive management also own 250,000 Class A Units.

 

Use of proceeds

We intend to use the net proceeds from this offering (approximately $         million, after deducting underwriting discounts and commissions and structuring fees), together with borrowings under our new term loan facility, as follows:

 

   

to make a cash distribution to USD Group LLC of $         million;

 

   

to repay $         million of existing indebtedness; and

 

   

to pay $         million of fees and expenses in connection with our new revolving credit agreement and term loan.

 

The remaining approximately $         million will be retained by us for general partnership purposes, including to fund potential future acquisitions from USD and third parties and for funding potential future growth projects.

 

  An affiliate of an underwriter participating in this offering is a lender under the current USD credit facility and will receive a portion of the proceeds from this offering pursuant to the repayment of borrowings thereunder. Please read “Underwriting—Certain Relationships.”

 

  If the underwriters exercise their over-allotment option to purchase additional common units, we will use the net proceeds from that exercise to redeem from USD Group LLC a number of common units equal to the number of common units issued upon such exercise of the option at a price per unit equal to the net proceeds per common unit in this offering before expenses but after deducting underwriting discounts, commissions and the structuring fee. Please read “Underwriting.”

 

Cash distributions

We intend to make minimum quarterly distributions of $         per unit ($         per unit on an annualized basis) to the extent we have sufficient cash from operations after the establishment of cash reserves and payment of fees and expenses, including payments to our general partner.

 

  We will adjust the amount of our distribution for the period from and including the closing date of this offering through December 31, 2014, based on the actual length of that period.

 

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

 

   

first, 98.0% to the holders of common units and Class A Units, pro rata, and 2.0% to our general partner, until each common unit

 

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and Class A Unit has received a minimum quarterly distribution of $         plus any arrearages on our common units (but not Class A Units) from prior quarters;

 

   

second, 98.0% to the holders of subordinated units and 2.0% to our general partner, until each subordinated unit has received a minimum quarterly distribution of $        ; and

 

   

third, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unit has received a distribution of $        .

 

  Our ability to pay our minimum quarterly distribution is subject to various restrictions and other factors described in more detail under the caption “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, USD Group LLC) will receive increasing percentages, up to 48.0%, of the cash we distribute in excess of that amount. We refer to these distributions as “incentive distributions.” We must distribute all of our cash on hand at the end of each quarter, less reserves established by our general partner’s board of directors 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 cash as “available cash,” and we define its meaning in our partnership agreement. The board of directors of our general partner has broad discretion in setting the amount of cash reserves that may be established each quarter. 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.

 

  If we had completed the transactions contemplated in this prospectus on January 1, 2013, we would not have generated positive pro forma distributable cash flow. Our unaudited pro forma distributable cash flow includes the estimated incremental expenses of being a public company as well as pre-operational costs related to our Hardisty rail terminal, without the corresponding revenues from that terminal. Our Hardisty rail terminal commenced operations on June 30, 2014, and we expect to generate the vast majority of our operating cash flow in connection with providing crude oil terminalling services at our Hardisty rail terminal. Please read “Cash Distribution Policy and Restrictions on Distributions—Unaudited Pro Forma Distributable Cash Flow for the Year Ended December 31, 2013 and the Twelve Months Ended June 30, 2014.”

 

 

We believe, based on the estimates contained in and the assumptions listed under “Cash Distribution Policy and Restrictions on Distributions—Estimated Distributable Cash Flow for the Twelve Months Ending September 30, 2015,” that we will have sufficient distributable cash flow to enable us to pay the minimum quarterly distribution of $         on all of our common units, Class A Units and

 

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subordinated units for each quarter through September 30, 2015. However, unanticipated events may occur that could adversely affect the actual results we achieve during the forecast period. Consequently, our actual results of 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 not to place undue reliance on the forecast and should make their own independent assessment of our future results of operations, cash flows and financial condition.

 

Class A Units

Our partnership has issued 250,000 Class A Units to certain executive officers and other key employees of our general partner and its affiliates who provide services to us. The Class A Units are limited partner interests in our partnership that entitle the holder to distributions that are equivalent to the distributions paid in respect of our common units (excluding any arrearages of unpaid minimum quarterly distributions from prior quarters). The Class A Units do not have voting rights, but contain a conversion right, which, after vesting of the Class A Units, allows for the conversion of Class A Units into common units based on a conversion factor that will grow as our annualized distributions grow and could range between one and ten common units per Class A Unit. Please read “Management—Class A Units.”

 

Subordinated units

USD Group LLC will initially own all of our subordinated units. The principal difference between our common units and subordinated units is that in any quarter prior to their conversion into common units, 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. Subordinated units will not accrue arrearages.

 

 

Subordinated units will convert into common units on a one-for-one basis in separate sequential tranches. Each tranche will be comprised of 20.0% of the subordinated units outstanding immediately following this offering. A separate tranche will convert on each business day occurring on or after October 1, 2015 (but no more than once in any twelve-month period), provided on that date (i) distributions of available cash from operating surplus on each of the outstanding common units, subordinated units and general partner units equaled or exceeded $         (the annualized minimum quarterly distribution) for the four quarter period immediately preceding that date; (ii) the adjusted operating surplus generated during the four quarter period immediately preceding that date equaled or exceeded the sum of $         (the annualized minimum quarterly distribution) on all of the common units, subordinated units and general partner units outstanding during that period on a fully diluted basis; and (iii) there are no arrearages in the payment of the minimum quarterly distribution on the common units. For each successive tranche, the four quarter period specified in clauses (i) and (ii) above must

 

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commence after the four quarter period applicable to any prior tranche of subordinated units. Accordingly, a tranche of subordinated units will not convert into common units more than once a year.

 

  Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordinated Units and Conversion to Common Units.”

 

USD Group LLC’s right to reset the target distribution levels

USD Group LLC, as the initial holder of all of our incentive distribution rights, has the right, at a time when there are no subordinated units outstanding and it has received incentive distributions at the highest level to which it is entitled (48.0%) for each of the prior four consecutive fiscal quarters, 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. If USD Group LLC transfers all or a portion of the incentive distribution rights it holds in the future, then the holder or holders of a majority of our incentive distribution rights will be entitled to exercise this right. Following a reset election by USD Group LLC, the minimum quarterly distribution amount will be reset to an amount equal to the cash distribution amount per common unit for the fiscal quarter 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, USD Group LLC will be entitled to receive a number of common units equal to the quotient determined by dividing the amount of cash distributions received by USD Group LLC in respect of its incentive distribution rights for the fiscal quarter immediately prior to the date of such reset election by the amount of cash distributed per common unit for such quarter. For a more detailed description of USD Group LLC’s right to reset the target distribution levels upon which the incentive distribution payments are based, please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—General Partner’s Right to Reset Incentive Distribution Levels.”

 

Issuance of additional units

We can issue an unlimited number of additional units, including units that are senior to the common units in rights of distribution, liquidation and voting, on the terms and conditions determined by our general partner’s board of directors, without the consent of our unitholders. Please read “Units Eligible for Future Sale” and “Our Partnership Agreement—Issuance of Additional Interests.”

 

Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our businesses. Our unitholders will

 

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have no right to elect our general partner or its directors on an annual or other continuing basis. Our general partner may not be removed except by a vote of the holders of at least 66 2/3% of the outstanding units, including any units owned by our general partner and its affiliates, voting together as a single class. Upon consummation of this offering, USD Group LLC will own              of our common units and all of our subordinated units, representing a     % limited partner interest in us. If the underwriters’ over-allotment option to purchase additional common units is exercised in full, USD Group LLC 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 consent, because USD Group LLC will own sufficient units upon completion of this offering to be able to prevent the general partner’s removal. Please read “Our Partnership Agreement—Voting Rights.”

 

Limited call right

If at any time our general partner and its affiliates own more than 80.0% of the outstanding limited partner interests of any class, 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 the greater of (x) the average of the daily closing prices of the common units over the 20 trading days preceding the date three days before the notice of exercise of the call right is first mailed and (y) the highest price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. The partnership agreement will not obligate our general partner 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.

 

Material tax consequences

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

 

Directed unit program

At our request, the underwriters have reserved up to     % of the units offered hereby at the initial public offering price for officers, directors, employees and certain other persons associated with us. The number of units available for sale to the general public will be reduced to the extent such persons purchase such reserved units. Any reserved units not so purchased will be offered by the underwriters to the general public on the same basis as the other units offered hereby. The directed unit program will be arranged through one of our underwriters, Barclays Capital, Inc.

 

Exchange listing

We intend to apply to list the common units on the New York Stock Exchange under the symbol “USDP”.

 

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

 

The following table presents, in each case for the periods and as of the dates indicated, summary historical combined financial and operating data of our Predecessor and summary pro forma combined financial and operating data of USD Partners LP.

 

Our Predecessor consists of the assets, liabilities and results of operations of the wholly owned subsidiaries of USD that operate our Hardisty rail terminal, our San Antonio rail terminal, our West Colton rail terminal and that manage our railcar fleet. These subsidiaries will be conveyed to us in connection with this offering. Our Predecessor also includes the membership interests in five subsidiaries of USD which operated crude oil rail terminals that were sold in December 2012. The results of operations of these subsidiaries are reflected in our Predecessor’s summary historical combined financial and operating data as discontinued operations.

 

The summary historical combined financial and operating data of our Predecessor as of and for the years ended December 31, 2013 and 2012 are derived from the audited combined financial statements of our Predecessor included elsewhere in this prospectus. The summary historical combined financial and operating data of our Predecessor as of June 30, 2014 and for the six months ended June 30, 2014 and 2013 are derived from the unaudited combined financial statements of our Predecessor included elsewhere in this prospectus.

 

The summary pro forma combined financial data presented in the following table for the year ended December 31, 2013 and as of and for the six months ended June 30, 2014, respectively, are derived from the unaudited pro forma combined financial data included elsewhere in this prospectus. The pro forma combined financial data assumes that the transactions to be effected at the closing of the offering and described under “—Formation Transactions” had taken place on June 30, 2014, in the case of the pro forma balance sheet, and on January 1, 2013, in the case of the pro forma statement of operations for the year ended December 31, 2013 and the six months ended June 30, 2014. These transactions primarily include, and the pro forma financial data give effect to, the following:

 

   

the issuance of 250,000 Class A Units in August 2014 to certain executive officers of our general partner and to other key employees of our general partner and its affiliates who provide services to us.

 

   

USD Group LLC’s contribution to us of all of our initial assets and operations, including the Hardisty rail terminal, the San Antonio rail terminal, the West Colton rail terminal and our railcar business;

 

   

the issuance of              common units to the public,              general partner units and the incentive distribution rights to our general partner, and              common units and              subordinated units to USD Group LLC in connection with this offering; and

 

   

our entry into a new $300.0 million senior secured credit agreement comprised of a $200.0 million revolving credit facility (undrawn) and a $100.0 million term loan (fully drawn in Canadian dollars);

 

   

the payment of underwriting discounts and commissions and a structuring fee;

 

   

the cash distribution to USD Group LLC of $         million;

 

   

the repayment of $97.8 million of indebtedness under USD’s current credit facility, which bears interest at a rate of LIBOR plus an applicable margin, which equaled 3.90% as of June 30, 2014 and matures in March 2015; and

 

   

the payment of $             million of fees and expenses in connection with our new senior secured credit agreement, which is comprised of a revolving credit facility and a term loan.

 

The pro forma combined financial data does not give effect to the estimated $2.1 million in incremental annual general and administrative expenses that we expect to incur as a result of being a publicly traded partnership.

 

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The following financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the historical combined financial statements of our Predecessor and the notes thereto and our unaudited pro forma combined financial statements and the notes thereto, in each case included elsewhere in this prospectus. Among other things, those historical and pro forma combined financial statements include more detailed information regarding the basis of presentation for the information in the following table. Our financial position, results of operations and cash flows could differ from those that would have resulted if we operated autonomously or as an entity independent of USD in the periods for which historical financial data are presented below, and such data may not be indicative of our future operating results or financial performance.

 

The following table presents Adjusted EBITDA, a financial measure that is not presented in accordance with generally accepted accounting principles in the United States, or GAAP. For a reconciliation of Adjusted EBITDA to net income attributable to our Predecessor and us and cash flows from operating activities, the most directly comparable financial measures calculated in accordance with GAAP, please read “Selected Historical and Pro Forma Financial and Operating Data—Non-GAAP Financial Measures” beginning on page 88. For a discussion of how we use Adjusted EBITDA to evaluate our operating performance, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—How We Evaluate Our Operations—Adjusted EBITDA and Distributable Cash Flow” beginning on page 92.

 

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    USD Partners LP
Predecessor
    USD Partners LP
Pro Forma
 
    Year Ended
December 31,
    Six Months
Ended June 30,
    Year Ended
December 31,
    Six Months
Ended June 30,
 
    2013     2012     2014     2013     2013     2014  
    (in thousands)  
                (unaudited)     (unaudited)  

Statement of Operations

           

Revenues:

           

Terminalling services

  $ 7,130      $ 8,703      $ 3,448      $ 3,691      $ 7,130      $
3,448
  

Fleet leases

    13,572        15,964        4,596        8,546        13,572        4,596   

Fleet services

    1,197        5        956        375        1,197        956   

Freight and other reimbursables

    4,402        203        1,921        768        4,402        1,921   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    26,301        24,875        10,921        13,380        26,301        10,921   

Operating Costs:

           

Operating costs other than freight and other reimbursables

    20,430        21,541        10,772        11,785        20,430        10,772   

Freight and other reimbursables

    4,402        203        1,921        768        4,402        1,921   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs

    24,832        21,744        12,693        12,553        24,832        12,693   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    1,469        3,131        (1,772     827        1,469        (1,772

Interest expense

    3,241        2,050        1,984        1,645        4,884        2,418   

Loss on derivative contracts

   

  
   

  
    802                      802   

Other expenses and provision for income taxes

    69        26        712        17        488        1,047   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    (1,841     1,055        (5,270     (835     (3,903     (6,039

Discontinued operations income and gain

    8,243        459,522        31        6,903       
 

 

 

   

 

 

   

 

 

   

 

 

     

Net income (loss)

  $ 6,402      $ 460,577      $ (5,239   $ 6,068       
 

 

 

   

 

 

   

 

 

   

 

 

     

General partner’s interest in net income (loss)

          $        $     

Limited partner’s interest in net income (loss)

           

Common units

          $        $     

Subordinated units

          $        $     

Net income (loss) per limited partner unit

           

Common units

          $        $     

Subordinated units

          $        $     

Weighted average units outstanding

           

Common units

          $        $     

Subordinated units

          $        $     

Statement of Cash Flows

           

Net cash provided by operating activities

  $ 9,239      $ 1,798      $ 1,667      $ 2,064       

Net cash used in investing activities

    (56,114     (773     (30,327     (6,129    

Net cash provided by (used in) financing activities

    44,885        (25,227     26,999        10,134       

Net cash provided by discontinued operations

    5,168        25,687        26,941        643       

Operating Information

           

Average daily terminal throughput (bpd)

    15,533        15,871        14,099        15,909       

Non-GAAP Measures

           

Adjusted EBITDA

  $ 1,971      $ 3,621      $ (1,518   $ 1,078      $ 1,971      $ (1,518
    As of
December 31,
    As of
June 30,
                Pro forma
As of June 30,
 
    2013     2012     2014                 2014  
    (in thousands)                 (in thousands)  
                (unaudited)                 (unaudited)  

Balance Sheet

           

Property and equipment, net

  $ 61,364      $ 7,881      $ 92,394          $   92,394   

Total assets

    107,268        58,934        137,548         

Total liabilities

    104,665        45,548        126,696         

Owner’s equity

    2,603        13,386        10,852         

 

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RISK FACTORS

 

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

 

Risks Related to Our Business

 

We may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner, to enable us to pay the minimum quarterly distribution, or any distribution, to holders of our common and subordinated units.

 

In order to pay the minimum quarterly distribution of $         per unit per quarter, 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 available cash from operating surplus each quarter to enable us 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 will fluctuate from quarter to quarter based on, among other things:

 

   

our entitlement to minimum monthly payments associated with our take-or-pay terminal services agreements;

 

   

the rates and terminalling fees we charge for the volumes we handle;

 

   

the volume of crude oil and other liquid hydrocarbons we handle;

 

   

damage to terminals, railroads, pipelines, facilities, related equipment and surrounding properties caused by hurricanes, earthquakes, floods, fires, severe weather, explosions and other natural disasters and acts of terrorism including damage to third party pipelines, railroads or facilities upon which we rely for transportation services;

 

   

leaks or accidental releases of products or other materials into the environment, including explosions, chemical fumes or other similar events, whether as a result of human error or otherwise;

 

   

prevailing economic and market conditions;

 

   

the level of our operating, maintenance and general and administrative costs; and

 

   

regulatory action affecting railcar design or the transportation of crude oil by rail, as well as the supply of, or demand for, crude oil and other liquid hydrocarbons, the maximum transportation rates we can charge at our rail terminals, our existing contracts, our operating costs or our operating flexibility.

 

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

 

   

the level and timing of capital expenditures we make;

 

   

the cost of acquisitions, if any;

 

   

our debt service requirements and other liabilities;

 

   

fluctuations in our working capital needs;

 

   

our ability to borrow funds and access capital markets;

 

   

restrictions contained in our debt agreements;

 

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the amount of cash reserves established by our general partner; and

 

   

other business risks affecting our cash levels.

 

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

 

On a pro forma basis, we would not have generated positive distributable cash flow for the twelve months ended June 30, 2014.

 

We must generate approximately $         million of distributable cash flow to pay the aggregate minimum quarterly distributions for four quarters on all units that will be outstanding immediately following this offering. We would not have generated positive distributable cash flow during the twelve months ended June 30, 2014 on a pro forma basis, and would have not been able to pay a distribution from operating surplus on any of our common units, Class A Units or subordinated units for that period. Our ability to pay the minimum quarterly distribution is subject to various restrictions and other factors described in more detail under the caption “Cash Distribution Policy and Restrictions on Distributions.” We may not be able to pay the full minimum quarterly distribution or any amount on our common units, Class A Units or subordinated units, which may cause the market price of our common units to decline materially.

 

The assumptions underlying the forecast of distributable cash flow that we include in “Cash Distribution Policy and Restrictions on Distributions” 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 distributable cash flow set forth in “Cash Distribution Policy and Restrictions on Distributions” includes our forecasted results of operations, Adjusted EBITDA and distributable cash flow for the twelve months ending September 30, 2015. 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, financial, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those forecasted. 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 or subordinated units, in which event the market price of our common units may decline materially.

 

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

 

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

 

Our business could be adversely affected if service on the railroads is interrupted or if more stringent regulations are adopted regarding railcar design or the transportation of crude oil by rail.

 

We do not own or operate the railroads on which crude-oil-carrying railcars are transported; however, we do manage a railcar fleet, which is subject to regulations governing railcar design and manufacture. As a result of hydraulic fracturing and other improvements in extraction technologies, there has been a substantial increase in the volume of crude oil and liquid hydrocarbons produced and transported in North America, and a geographic shift in that production versus historical production. The increase in volume and shift in geography has resulted in a growing percentage of crude oil being transported by rail. Recent high-profile accidents in Quebec, North

 

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Dakota and Virginia in July 2013, December 2013 and April 2014, respectively (all involving crude-oil-carrying trains), have raised concerns about the environmental and safety risks associated with crude oil transport by rail and the associated risks arising from railcar design.

 

In August 2013, the U.S. Department of Transportation (DOT) Federal Railroad Administration (FRA) issued both an Action Plan for Hazardous Materials Safety and an order imposing new standards on railroads for properly securing rolling equipment. In August 2013, the FRA and the DOT Pipeline Hazardous Materials Safety Administration (PHMSA) began conducting inspections of crude-oil-carrying railcars from the Bakken formation to make sure cargo is properly identified to railroads and emergency responders. In November 2013, the rail industry voluntarily called on the PHMSA to require that railcars used to transport flammable liquids, including crude oil, be retrofitted with enhanced safety features or be phased-out. In January 2014, the DOT (including the PHMSA and FRA) met with oil and rail industry leaders to develop strategies to prevent train derailments and reduce the risk of fire and explosions. As a result of those meetings, the DOT and transportation industry agreed in February 2014 to certain voluntary measures designed to enhance the safety of crude oil shipments by rail, which include lowering speed limits for crude oil unit trains traveling in high-risk areas, modifying routes to avoid such high-risk areas, increasing the frequency of track inspections, implementing improved breaking mechanisms and improving the training of certain emergency responders. On February 25, 2014, the DOT issued another order, immediately requiring all carriers who transport crude oil from the Bakken region by rail to ensure that the product is properly tested and classified in accordance with federal safety regulations, and further requiring that all crude oil shipments be designated in the two highest risk categories, effectively mandating that crude oil be transported in more robust railcars. Similarly, in February 2014, the Canadian Department of Transport (Transport Canada) finalized new regulations requiring shippers and carriers of crude oil by rail to properly sample, classify, certify and disclose certain characteristics of the crude oil being shipped, and gave shippers and carriers six months to comply with these new regulatory procedures. On April 23, 2014, the Canadian Minister of Transport, which oversees Transport Canada, announced a series of directives and other actions to address the Transportation Safety Board of Canada’s initial recommendations on rail safety. Effective immediately, Transport Canada prohibited the least crash-resistant DOT-111 railcars from carrying dangerous goods. Additionally, Transport Canada ordered that DOT-111 railcars used to transport crude oil and ethanol that are not compliant with required safety standards must be phased out or retrofitted within three years (by May 2017). We currently provide fleet services for 463 railcars that are subject to this directive, but which have leases that will expire before May 2017, and 383 railcars that will still be under contract and will be required to be retrofitted pursuant to this directive. We do not own any of the railcars in our railcar fleet and are not directly responsible for costs associated with the retrofitting of DOT-111 railcars. However, costs associated with the retrofitting of railcars would increase the incremental monthly cost of the applicable railcar lease, which cost would get passed through to our customers and could affect demand for our services. We intend to work with our railcar suppliers on modification scheduling in an attempt to avoid major disruptions. Transport Canada also identified key routes and revised operating practices put in place for the transportation of crude oil on those routes. On May 7, 2014, the DOT issued another order, immediately requiring railroads operating trains carrying more than one million gallons of Bakken crude oil to notify State Emergency Response Commissions (SERCs) regarding the estimated volume, frequency, and transportation route of those shipments. Also on May 7, 2014, the FRA and PHMSA issued a joint Safety Advisory to the rail industry advising those shipping or offering Bakken crude oil to use railcar designs with the highest available level of integrity, and to avoid using older legacy DOT-111 or CTC-111 railcars. On July 2, 2014, Transport Canada adopted the CPC-1232 technical standards as the minimum safety threshold for railcars transporting dangerous goods after May 2017. Transport Canada also proposed a new class of railcar (TC-140) specifically developed for the transport of flammable liquids in Canada, as well as a retrofit schedule for legacy DOT-111 and CPC-1232 railcars. The proposal is open for comment until September 1, 2014. Once the comments have been reviewed, the Canadian government will issue final regulations for the specifications of these railcars. On July 23, 2014, the DOT issued a Notice of Proposed Rulemaking and a companion Advanced Notice of Proposed Rulemaking addressing liquid flammable railcar requirements. This proposed rulemaking also addressed areas such as train speeds and oil testing, and other important issues such as emergency and spill response along the routes for flammable liquid unit trains. The newly proposed tank car standards would apply to railcars constructed after October 1, 2015 that are used to

 

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transport flammable liquids. The DOT proposed three options for this new standard. Under the proposal, existing railcars that are used to transport flammable liquids would be retrofitted to meet the selected option for performance requirements. Those not retrofitted would be retired, repurposed, or operated under speed restrictions for up to five years, based on packing group assignment of the flammable liquids being shipped by rail. The proposal is open for comment until September 30, 2014. Once the comments have been reviewed, the U.S. government will issue final regulations for the specifications of these flammable liquid railcars. Nearly 70% of our fleet was manufactured in 2013 and 2014 and has been constructed to the CPC-1232 standard. Were DOT to adopt more strict specifications for tank cars, it would likely result in increased difficulty and costs to obtain compliant cars after the applicable phase-out dates. While we may be able to pass some of these costs on to our customers, there may be additional costs that we cannot pass on. We will continue to monitor the railcar regulatory landscape and remain in close contact with railcar suppliers and other industry stakeholders to stay informed of railcar regulation rulemaking developments. Our ability to transport crude oil under our existing contracts could be affected if the final rulings result in more stringent design requirements and compressed compliance timelines than we currently anticipate. If the final rulings result in more stringent design requirements and compressed compliance timelines, then our ability to transport these volumes could be affected by a delay in the railcar industry’s ability to provide adequate railcar modification repair services. We may not have access to a sufficient number of compliant cars to transport the required volumes under our existing contracts. This may lead to a decrease in revenues and other consequences.

 

The adoption of additional federal, state, provincial or local laws or regulations, including any voluntary measures by the rail industry regarding railcar design or crude oil and liquid hydrocarbon rail transport activities, or efforts by local communities to restrict or limit rail traffic involving crude oil, could affect our business by increasing compliance costs and decreasing demand for our services, which could adversely affect our financial position and cash flows. Moreover, any disruptions in the operations of railroads, including those due to shortages of railcars, weather-related problems, flooding, drought, accidents, mechanical difficulties, strikes, lockouts or bottlenecks, could adversely impact our customers’ ability to move their product and, as a result, could affect our business.

 

Because we have a limited operating history, you may have difficulty evaluating our ability to pay cash distributions to our unitholders or our ability to be successful in implementing our business strategy.

 

We are dependent on our Hardisty rail terminal as our primary source of cash flow. As a newly constructed rail terminal, the operating performance of the Hardisty rail terminal over the short term and long term is not yet proven. We may encounter risks and difficulties frequently experienced by companies whose performance is dependent upon newly constructed facilities, such as the rail terminal not functioning as expected, higher than expected operating costs, breakdown or failures of equipment and operational errors.

 

Because of our limited operating history and performance record at the Hardisty rail terminal, it may be difficult for you to evaluate our business and results of operations to date and to assess our future prospects. Further, our historical financial statements present a period of limited operations, and therefore do not provide a meaningful basis for you to evaluate our operations or our ability to achieve our business strategy. We may be less successful in achieving a consistent operating level at the Hardisty rail terminal capable of generating cash flows from our operations sufficient to regularly pay a cash distribution or to pay any cash distribution to our unitholders than a company whose major facilities have had longer operating histories. Finally, we may be less equipped to identify and address operating risks and hazards in the conduct of our business at the Hardisty rail terminal than those companies whose major facilities have had longer operating histories.

 

The lack of diversification of our assets and geographic locations could adversely affect our ability to make distributions to our common unitholders.

 

Initially, our rail terminals will be located in Texas, California and Alberta, Canada. We generate the vast majority of our operating cash flow in connection with providing crude oil terminalling services at our Hardisty rail terminal. Due to our lack of diversification in assets and geographic location, an adverse development in our

 

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businesses or areas of operations, especially to our Hardisty rail terminal, including adverse developments due to catastrophic events, weather, regulatory action or decreases in demand for crude oil, could have a significantly greater impact on our results of operations and distributable cash flow to our common unitholders than if we maintained more diverse assets and locations.

 

The dangers inherent in our operations could cause disruptions and could expose us to potentially significant losses, costs or liabilities and reduce our liquidity. We are particularly vulnerable to disruptions in our operations because most of our rail terminalling operations are conducted at the Hardisty rail terminal.

 

Our operations are subject to significant hazards and risks inherent in transporting and storing crude oil, intermediate products and refined products. These hazards and risks include, but are not limited to, natural disasters, fires, explosions, pipeline or railcar ruptures and spills, third party interference and mechanical failure of equipment at our rail terminals, any of which could result in disruptions, pollution, personal injury or wrongful death claims and other damage to our properties and the property of others. There is also risk of mechanical failure and equipment shutdowns both in the normal course of operations and following unforeseen events. Because most of our cash flow is generated from our rail terminalling operations conducted at our Hardisty rail terminal, any sustained disruption at the Hardisty rail terminal or the Gibson storage terminal, which is the source of all of the crude oil handled by our Hardisty rail terminal, would have a material adverse effect on our business, financial condition, results of operations and cash flows and, as a result, our ability to make distributions.

 

We may not be able to compete effectively and our business is subject to the risk of a capacity overbuild of midstream infrastructure and the entrance of new competitors in the areas where we operate.

 

We face competition in all aspects of our business and can give no assurances that we will be able to compete effectively. Our competitors include, but are not limited to, crude oil pipelines, ocean going tankers, major integrated oil companies, independent gatherers, trucking companies and crude oil marketers of widely varying sizes, financial resources and experience. We compete against these companies on the basis of many factors, including geographic proximity to production areas, market access, rates, terms of service, connection costs and other factors. Some of our competitors have capital resources many times greater than ours.

 

A significant driver of competition in some of the markets where we operate is the rapid development of new midstream infrastructure capacity driven by the combination of (i) significant increases in oil and gas production and development in the applicable production areas, both actual and anticipated, (ii) low barriers to entry and (iii) generally widespread access to relatively low cost capital. This environment exposes us to the risk that these areas become overbuilt, resulting in an excess of midstream infrastructure capacity. Most midstream projects require several years of “lead time” to develop and companies like us that develop such projects are exposed (to varying degrees depending on the contractual arrangements that underpin specific projects) to the risk that expectations for oil and gas development in the particular area may not be realized or that too much capacity is developed relative to the demand for services that ultimately materializes. In addition, as an established player in some markets, we also face competition from potential new entrants to the market. If we experience a significant capacity overbuild in one or more of the areas where we operate, it could have a material adverse effect on our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders.

 

We serve customers who are involved in drilling for, producing and transporting crude oil and other liquid hydrocarbons. Adverse developments affecting the fossil fuel industry or drilling activity, including a decline in prices of crude oil or biofuels, reduced demand for crude oil products and increased regulation of drilling, production or transportation could cause a reduction of volumes transported through our rail terminals.

 

Our business depends on our customers’ willingness to make operating and capital expenditures to develop and produce crude oil and other liquid hydrocarbons. Our customers’ willingness to engage in drilling and production of crude oil and other liquid hydrocarbons depends largely upon the markets for and prices of crude

 

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oil and other commodities, which depend on factors that are beyond our control. These factors include the supply of and demand for these commodities, which fluctuate with changes in market and economic conditions, and other factors, including:

 

   

worldwide economic conditions;

 

   

worldwide political events, including actions taken by foreign oil producing nations;

 

   

worldwide and local weather events and conditions, including natural disasters and seasonal changes that could decrease crude oil supply or demand;

 

   

the levels of domestic and international production and consumer demand;

 

   

the availability of transportation systems with adequate capacity;

 

   

fluctuations in demand for crude oil, such as those caused by refinery downtime or shutdowns;

 

   

fluctuations in the price of crude oil, which may have an impact on the spot prices for the transportation of crude oil by pipeline or railcar;

 

   

increased government regulation or prohibition of the transportation hydrocarbons by rail;

 

   

the volatility and uncertainty of world crude oil prices as well as regional pricing differentials;

 

   

fluctuations in gasoline consumption;

 

   

the price and availability of alternative fuels;

 

   

changes in mandates to blend renewable fuels, such as ethanol, into petroleum fuels;

 

   

the price and availability of the raw materials used to produce ethanol, such as corn;

 

   

the effect of energy conservation measures, such as more efficient fuel economy standards for automobiles;

 

   

the nature and extent of governmental regulation and taxation, including the amount of subsidies for ethanol;

 

   

fluctuations in demand from electric power generators and industrial customers; and

 

   

the anticipated future prices of oil and other commodities.

 

If our customers’ expenditures decline, our business is likely to be adversely affected.

 

Any reduction in our or our customers’ capability to utilize third-party pipelines, railroads or trucks that interconnect with our rail terminals or to continue utilizing them at current costs could cause a reduction of volumes transported through our rail terminals.

 

We and the customers of our rail terminals are dependent upon access to third-party pipelines, railroads and truck fleets to receive and deliver crude oil and other liquid hydrocarbons to or from us. The continuing operation of such third-party pipelines, railroads and other midstream facilities or assets is not within our control. Any interruptions or reduction in the capabilities of these third parties due to testing, line repair, reduced operating pressures, or other causes in the case of pipelines, or track repairs, in the case or railroads, could result in reduced volumes transported through our rail terminals. In particular, we entered into a facilities connection agreement with Gibson whereby Gibson would construct a pipeline to provide our Hardisty rail terminal with exclusive pipeline access to Gibson’s storage terminal, which is the source of all of the crude oil handled by our Hardisty rail terminal. Any disruption at Gibson’s storage terminal or at this newly-constructed pipeline could have a material adverse effect on our business, financial condition, results of operations and cash flows. Similarly, if additional shippers begin transporting volume over interconnecting pipelines, the allocations to our existing shippers on these interconnecting pipelines could be reduced, which could reduce volumes transported through

 

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our rail terminals. Allocation reductions of this nature are not infrequent and are beyond our control. Any such increases in cost, interruptions, or allocation reductions that, individually or in the aggregate, are material or continue for a sustained period of time could have a material adverse effect on our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders.

 

We do not own some of the land on which our rail terminals are located, which could disrupt our operations.

 

We do not own the land on which our West Colton and San Antonio rail terminals are located, and we are therefore subject to the possibility of more onerous terms and/or increased costs to retain necessary land use if we do not have valid rights-of-way or leases or if such rights-of-way or leases lapse or terminate at those facilities. We sometimes obtain the rights to land owned by railroads for a specific period of time. Our loss of these rights, through our inability to renew right-of-way contracts or leases, or otherwise, could cause us to cease operations on the affected land, increase costs related to continuing operations elsewhere and reduce our revenue.

 

A shortage in rail locomotives or railroad crews or increases in the price of diesel fuel may adversely affect our results of operations.

 

Transporters of hydrocarbons by rail compete with other parties, such as coal, grain and corn, which ship their product by rail. The increased demand for transportation of crude or other products by rail has recently caused shortages in available locomotives and railroad crews. Such shortages may ultimately increase the cost to transport hydrocarbons by rail. Additionally, diesel fuel costs generally fluctuate with increasing and decreasing world crude oil prices, and accordingly are subject to political, economic and market factors that are outside of our control. Diesel fuel prices are a significant component of the costs to our customers of shipping hydrocarbons by rail. Increased costs to ship hydrocarbons by rail either as a result of a shortage of locomotives or railroad crews or increased diesel fuel costs could curtail demand for shipment of hydrocarbons by rail which would have an adverse effect on our results of operations and cash flows.

 

The fees charged to customers under our agreements with them for the transportation of crude oil may not escalate sufficiently to cover increases in costs, and the agreements may be temporarily suspended or terminated in some circumstances, which would affect our profitability.

 

We generate the vast majority of our operating cash flow in connection with providing crude oil terminalling services at our Hardisty rail terminal. Substantially all of the capacity at our Hardisty rail terminal is contracted under multi-year, take-or-pay terminal services agreements, which are subject to inflation-based rate escalators. Our costs may increase at a rate greater than the rate that the fees that we charge to customers increase pursuant to such inflation-based escalators. Additionally, some customers’ obligations under their agreements with us may be temporarily suspended upon the occurrence of certain events, some of which are beyond our control, or may be terminated in the case of uninterrupted force majeure events of over one year wherein the supply of crude oil is curtailed or cut off. Force majeure events include (but are not limited to) revolutions, wars, acts of enemies, embargoes, import or export restrictions, strikes, lockouts, fires, storms, floods, acts of God, explosions, mechanical or physical failures of our equipment or facilities of our customers, or any cause or causes of any kind or character (except financial) reasonably beyond the control of the party failing to perform. If the escalation of fees is insufficient to cover increased costs or if any customer suspends or terminates its contracts with us, our profitability could be materially and adversely affected.

 

Our right of first offer to acquire certain of USD’s assets and projects it will retain after the offering and certain assets or businesses that it may develop, construct or acquire in the future is subject to risks and uncertainty, and ultimately we may not acquire any of those assets or businesses.

 

Our omnibus agreement provides us with a right of first offer for a period of seven years after the closing of this offering on certain of USD’s existing assets and projects as well as any additional midstream infrastructure

 

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assets or businesses that it may develop, construct or acquire in the future, subject to certain exceptions. The consummation and timing of any future acquisitions pursuant to this right will depend upon, among other things, USD’s continued development of midstream infrastructure projects and successful execution of such projects, USD’s willingness to offer assets for sale and obtain any necessary consents, our ability to negotiate acceptable purchase agreements and commercial agreements with respect to such assets and our ability to obtain financing on acceptable terms. We can offer no assurance that we will be able to successfully consummate any future acquisitions or successfully integrate assets acquired pursuant to our right of first offer. Furthermore, USD is under no obligation to accept any offer that we may choose to make. In addition, we may decide not to exercise our right of first offer if and when any assets are offered for sale, and our decision will not be subject to unitholder approval. In addition, our right of first offer may be terminated by USD at any time in the event that it no longer controls our general partner. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement.”

 

If we are unable to make acquisitions on economically acceptable terms from USD or third parties, our future growth would be limited, and any acquisitions we may make may reduce, rather than increase, our cash flows and ability to make distributions to unitholders.

 

A portion of our strategy to grow our business and increase distributions to unitholders is dependent on our ability to make acquisitions that result in an increase in cash flow. If we are unable to make acquisitions from USD or third parties, because we are unable to identify attractive acquisition candidates or negotiate acceptable purchase agreements, we are unable to obtain financing for these acquisitions on economically acceptable terms, we are outbid by competitors or we or the seller are unable to obtain any necessary consents, our future growth and ability to increase distributions to unitholders will be limited. Furthermore, even if we do consummate acquisitions that we believe will be accretive, we may not realize the intended benefits, and the acquisition may in fact result in a decrease in cash flow. Any acquisition involves potential risks, including, among other things:

 

   

mistaken assumptions about revenues and costs, including synergies;

 

   

the assumption of unknown liabilities;

 

   

limitations on rights to indemnity from the seller;

 

   

mistaken assumptions about the overall costs of equity or debt;

 

   

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

 

   

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

 

   

customer or key employee losses at the acquired businesses.

 

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

 

We may be unsuccessful in integrating any future acquisitions with our existing operations, and in realizing all or any part of the anticipated benefits of any such acquisitions.

 

From time to time, we evaluate and acquire assets and businesses that we believe complement our existing assets and businesses. Acquisitions may require substantial capital or the incurrence of substantial indebtedness. Our capitalization and results of operations may change significantly as a result of future acquisitions. Acquisitions and business expansions involve numerous risks, including difficulties in the assimilation of the assets and operations of the acquired businesses, inefficiencies and difficulties that arise because of unfamiliarity with new assets and the businesses associated with them and new geographic areas and the diversion of management’s attention from other business concerns. Further, unexpected costs and challenges may arise whenever businesses with different operations or management are combined, and we may experience

 

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unanticipated delays in realizing the benefits of an acquisition. Also, following an acquisition, we may discover previously unknown liabilities associated with the acquired business or assets for which we have no recourse under applicable indemnification provisions.

 

Growing our business by constructing new rail terminals subjects us to construction risks and risks that supplies for such systems and facilities will not be available upon completion thereof.

 

One of the ways we intend to grow our business is through the construction of new rail terminals. The construction of such facilities requires the expenditure of significant amounts of capital, which may exceed our resources, and involves numerous regulatory, environmental, political and legal uncertainties. If we undertake these projects, we may not be able to complete them on schedule or at all or at the budgeted cost. Moreover, our revenues may not increase upon the expenditure of funds on a particular project. For instance, if we build a new rail terminal, the construction will occur over an extended period of time, and we will not receive any material increases in revenues until at least after completion of the project, if at all. Moreover, we may construct rail terminals to capture anticipated future growth in production in a region in which anticipated production growth does not materialize or for which we are unable to acquire new customers. We may also rely on estimates of proved, probable or possible reserves in our decision to build new rail terminals, which may prove to be inaccurate because there are numerous uncertainties inherent in estimating quantities of proved, probable or possible reserves. As a result, new rail terminals may not be able to attract enough product to achieve our expected investment return, which could materially and adversely affect our results of operations and financial condition.

 

USD and its controlled affiliates, including us, are subject to a noncompete agreement that may limit our growth opportunities.

 

USD and certain of its controlled affiliates, including us, are subject to a noncompete agreement until December 2016 with respect to rail terminals we sold in 2012 in Carr, Colorado, Cotulla, Texas, Van Hook, North Dakota, Bakersfield, California and St. James Parish, Louisiana. The noncompete agreement prohibits us from owning, managing, operating or engaging in business activities related to terminalling services within a 200-mile radius of each of these facilities with respect to grades of crude oil and condensate historically handled by the facilities, or a 100-mile radius with respect to all other grades of crude oil or condensate. As a result of this noncompete agreement, our future growth may be limited during the term of the noncompete agreement.

 

We operate in a highly regulated industry and increased costs of compliance with, or liability for violation of, existing or future laws, regulations and other requirements could significantly increase our costs of doing business, thereby adversely affecting our profitability.

 

Our industry is subject to laws, regulations and other requirements including, but not limited to, those relating to the environment, safety, employment, labor, immigration, minimum wages and overtime pay, health care and benefits, working conditions, public accessibility and other requirements. These laws and regulations are enforced by federal agencies including the U.S. Environmental Protection Agency (EPA), the DOT, PHMSA, the FRA, the Federal Motor Carrier Safety Administration (FMCSA), the Occupational Safety and Health Administration (OSHA), and state and Canadian agencies such as the Texas Commission on Environmental Quality, the Railroad Commission of Texas, the California Environmental Protection Agency (Cal/EPA), the California Public Utilities Commission (CPUC), the Canadian Department of the Environment (Environment Canada) and Transport Canada as well as numerous other state and federal agencies. Ongoing compliance with, or a violation of, these laws, regulations and other requirements could have a material adverse effect on our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders.

 

In addition, these laws and regulations, and the interpretation or enforcement thereof, are subject to frequent change by regulatory authorities, and we are unable to predict the ongoing cost to us of complying with these laws and regulations or the future impact of these laws and regulations on our operations. Violation of environmental laws, regulations and permits can result in the imposition of significant administrative, civil and criminal penalties, injunctions and construction bans or delays.

 

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Under various federal, state, provincial and local environmental requirements, as the owner or operator of terminals, we may be liable for the costs of removal or remediation of contamination at our existing locations, whether we knew of, or were responsible for, the presence of such contamination. The failure to timely report and properly remediate contamination may subject us to liability to third parties and may adversely affect our ability to sell or rent our property or to borrow money using our property as collateral. Additionally, we may be liable for the costs of remediating third-party sites where hazardous substances from our operations have been transported for treatment or disposal, regardless of whether we own or operate that site. In the future, we may incur substantial expenditures for investigation or remediation of contamination that has not yet been discovered at our current or former locations or locations that we may acquire.

 

A discharge of hydrocarbons or hazardous substances into the environment could, to the extent the event is not insured or insurance is not otherwise available, subject us to substantial expense, including the cost to respond in compliance with applicable laws and regulations, fines and penalties, natural resource damages and claims made by employees, neighboring landowners and other third parties for personal injury and property damage. We may experience future catastrophic sudden or gradual releases into the environment from our terminals or discover historical releases that were previously unidentified or not assessed. Although our inspection and testing programs are designed to prevent, detect and address these releases promptly, damages and liabilities incurred due to any future environmental releases from our assets have the potential to substantially affect our business. Such discharges could also subject us to media and public scrutiny that could have a negative effect on the value of our common units.

 

Environmental regulation is becoming more stringent, and new environmental laws and regulations are continuously being enacted or proposed and interpretations of existing requirements change from time to time. While it is impractical to predict the impact that future environmental, health and safety requirements or changed interpretations of existing requirements may have, such future activity may result in material expenditures to ensure our continued compliance. Such future activity could also adversely affect our ability to expand production, result in damaging publicity about us, or reduce demand for our products.

 

We could incur substantial costs or disruptions in our business if we cannot obtain or maintain necessary permits and authorizations or otherwise comply with health, safety, environmental and other laws and regulations.

 

Our operations require authorizations and permits that are subject to revocation, renewal or modification and can require operational changes to limit impacts or potential impacts on the environment and/or health and safety. A violation of authorization or permit conditions or other legal or regulatory requirements could result in substantial fines, criminal sanctions, permit revocations, injunctions, and/or facility shutdowns. In addition, major modifications of our operations could require modifications to our existing permits or upgrades to our existing pollution control equipment. Any or all of these matters could have a material adverse effect on our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders.

 

The adoption of derivatives legislation by the United States Congress could have an adverse effect on our ability to use derivatives contracts to reduce the effect of commodity price, interest rate and other risks associated with our business.

 

The United States Congress in 2010 adopted the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, which, among other things, established federal oversight and regulation of the over-the-counter derivatives market and entities that participate in that market. In connection with the Dodd-Frank Act, the Commodity Futures Trading Commission (CFTC) adopted regulations to set position limits for certain futures and option contracts in the major energy markets. Although these regulations were vacated by the U.S. District Court for the District of Columbia and the matter was remanded to the CFTC, the CFTC has appealed the District Court’s decision and that appeal is pending. The legislation may require the counterparties to our derivatives contracts to transfer or assign some of their derivatives contracts to a separate entity, which may not

 

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be as creditworthy as the current counterparty. The legislation and any new regulations could significantly increase the cost of derivatives contracts (including through requirements to post collateral), materially alter the terms of derivatives contracts, and reduce the availability of derivatives to protect against risks we encounter, reduce our ability to monetize or restructure our existing derivatives contracts, and increase our exposure to less creditworthy counterparties. If we reduce our use of derivatives as a result of the legislation and regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures. Any of these consequences could have a material adverse effect on us, our financial condition and our results of operations.

 

Our contracts subject us to renewal risks.

 

We provide crude oil and other liquid hydrocarbon rail terminalling services under contracts with terms of various durations and renewal. Each of the seven terminal services agreements with our Hardisty rail terminal customers has an initial contract term of five years. The initial terms of six of these agreements commenced between June 30, 2014 and August 1, 2014, and the initial term of a seventh agreement will commence on October 1, 2014. Our sole customer contract for our San Antonio rail terminal has an initial term of three years that began in 2012 and will automatically renew for two additional three-year terms unless notice is provided by our customer. Our sole customer contract for our West Colton rail terminal is terminable at any time.

 

As these contracts expire, we may have to negotiate extensions or renewals with existing suppliers and customers or enter into new contracts with other suppliers and customers. We may not be able to obtain new contracts on favorable commercial terms, if at all. We also may be unable to maintain the economic structure of a particular contract with an existing customer or maintain the overall mix of our contract portfolio if, for example, prevailing crude oil prices have decreased significantly. Depending on prevailing market conditions at the time of a contract renewal, customers with fee-based contracts may desire to enter into contracts under different fee arrangements. To the extent we are unable to renew our existing contracts on terms that are favorable to us or successfully manage our overall contract mix over time, our revenue and cash flows could decline and our ability to make cash distributions to our unitholders could be materially and adversely affected.

 

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

 

We generate the vast majority of our operating cash flow in connection with providing crude oil terminalling services at our Hardisty rail terminal. Substantially all of the capacity at our Hardisty rail terminal is contracted under multi-year, take-or-pay terminal services agreements. One customer has the right, but not the obligation, to exclusively use all of our capacity at our San Antonio rail terminal under a three-year contract that commenced in 2012, and was also the sole customer under contract at our West Colton rail terminal. The West Colton agreement is terminable at any time. If we were unable to renew our contracts with one or more of these customers on favorable terms, we may not be able to replace any of these customers in a timely fashion, on favorable terms or at all. In addition, some of our customers may have material financial or liquidity issues or may, as a result of operational incidents or other events, be disproportionately affected as compared to larger, better-capitalized companies. Any material nonpayment or nonperformance by any of our key customers could have a material adverse effect on our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders. We expect our exposure to concentrated risk of non-payment or non-performance to continue as long as we remain substantially dependent on a relatively limited number of customers for a substantial portion of our revenue.

 

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Our business involves many hazards and operational risks, some of which may not be fully covered by insurance. If a significant accident or event occurs for which we are not adequately insured, or if we fail to recover anticipated insurance proceeds for significant accidents or events for which we are insured, our operations and financial results could be adversely affected.

 

Our operations are subject to all of the risks and hazards inherent in the provision of rail terminalling services, including:

 

   

damage to railroads and rail terminals, related equipment and surrounding properties caused by natural disasters, acts of terrorism and actions by third parties;

 

   

damage from construction, vehicles, farm and utility equipment or other causes;

 

   

leaks of crude oil and other hydrocarbons or regulated substances or losses of oil as a result of the malfunction of equipment or facilities;

 

   

ruptures, fires and explosions; and

 

   

other hazards that could also result in personal injury and loss of life, pollution and suspension of operations.

 

These and similar risks could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of property and equipment and pollution or other damage. These risks may also result in curtailment or suspension of our operations. A natural disaster or other hazard affecting the areas in which we operate could also have a material adverse effect on our operations. We are not fully insured against all risks inherent in our business. In addition, although we are insured for environmental pollution resulting from environmental accidents that occur on a sudden and accidental basis, we may not be insured against all environmental accidents that might occur, some of which may result in claims for remediation, damages to natural resources or injuries to personal property or human health. If a significant accident or event occurs for which we are not fully insured, it could adversely affect our operations and financial condition. Furthermore, we may not be able to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies may substantially increase. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage.

 

Terrorist or cyber-attacks and threats, escalation of military activity in response to these attacks or acts of war could have a material adverse effect on our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

 

Terrorist attacks and threats, cyber-attacks, escalation of military activity or acts of war may have significant effects on general economic conditions, fluctuations in consumer confidence and spending and market liquidity, each of which could materially and adversely affect our business. Future terrorist or cyber-attacks, rumors or threats of war, actual conflicts involving the United States or its allies, or military or trade disruptions may significantly affect our operations and those of our customers. Strategic targets, such as energy-related assets and transportation assets, may be at greater risk of future attacks than other targets in the United States. We do not maintain specialized insurance for possible liability resulting from a cyber-attack on our assets that may shut down all or part of our business. Disruption or significant increases in energy prices could result in government-imposed price controls. It is possible that any of these occurrences, or a combination of them, could have a material adverse effect on our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders.

 

The credit and risk profile of our general partner and its owner, USD Group LLC, could adversely affect our credit ratings and risk profile, which could increase our borrowing costs or hinder our ability to raise capital and additionally have a direct impact on our ability to pay our minimum quarterly distribution

 

The credit and business risk profiles of our general partner and USD Group LLC, neither of which has a rating from any credit agency, may be factors considered in credit evaluations of us. This is because our general

 

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partner, which is owned by USD Group LLC, controls our business activities, including our cash distribution policy and growth strategy. Any adverse change in the financial condition of USD Group LLC, including the degree of its financial leverage and its dependence on cash flow from us to service its indebtedness may adversely affect our credit ratings and risk profile. If we were to seek a credit rating in the future, our credit rating may be adversely affected by the leverage of our general partner or USD Group LLC, as credit rating agencies such as Standard & Poor’s Ratings Services and Moody’s Investors Service may consider the leverage and credit profile of USD Group LLC and its affiliates because of their ownership interest in and control of us. Any adverse effect on our credit rating would increase our cost of borrowing or hinder our ability to raise financing in the capital markets, which would impair our ability to grow our business and make distributions to common unitholders.

 

Our growth strategy requires access to new capital. Tightened capital markets or increased competition for investment opportunities could impair our ability to grow.

 

We continuously consider and enter into discussions regarding potential acquisitions or growth capital expenditures. Any limitations on our access to new capital will impair our ability to execute this strategy. If the cost of such capital becomes too expensive, our ability to develop or acquire strategic and accretive assets will be limited. We may not be able to raise the necessary funds on satisfactory terms, if at all. The primary factors that influence our initial cost of equity include market conditions, including our then current unit price, fees we pay to underwriters and other offering costs, which include amounts we pay for legal and accounting services. The primary factors influencing our cost of borrowing include interest rates, credit spreads, covenants, underwriting or loan origination fees and similar charges we pay to lenders.

 

Weak economic conditions and the volatility and disruption in the financial markets could increase the cost of raising money in the debt and equity capital markets substantially while diminishing the availability of funds from those markets. Also, as a result of concerns about the stability of financial markets generally and the solvency of counterparties specifically, the cost of obtaining money from the credit markets generally has increased as many lenders and institutional investors have increased interest rates, enacted tighter lending standards, refused to refinance existing debt at maturity at all or on terms similar to our current debt and reduced and, in some cases, ceased to provide funding to borrowers. These factors may impair our ability to execute our growth strategy.

 

In addition, we are experiencing increased competition for the types of assets we contemplate purchasing. Weak economic conditions and competition for asset purchases could limit our ability to fully execute our growth strategy.

 

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

 

Following the closing of this offering, we will have the ability to incur additional debt, including under our new senior secured credit facilities that we will enter into in connection with this offering. Our future level of debt could have important consequences for us, including the following:

 

   

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

 

   

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

 

   

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

 

   

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

 

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

 

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

 

We expect to enter into a new senior secured credit agreement comprised of a $200.0 million revolving credit facility and a $100.0 million term in loan connection with the closing of this offering. We will be dependent upon the earnings and cash flow generated by our operations in order to meet our debt service obligations and to allow us to make cash distributions to our unitholders. The operating and financial restrictions and covenants in our new senior secured credit agreement and any future financing agreements could restrict our ability to finance future operations or capital needs or to expand or pursue our business activities, which may, in turn, limit our ability to make cash distributions to our unitholders. Our new senior secured credit agreement is likely to limit our ability to, among other things:

 

   

incur or guarantee additional debt;

 

   

make distributions on or redeem or repurchase units;

 

   

make certain investments and acquisitions;

 

   

incur certain liens or permit them to exist;

 

   

enter into certain types of transactions with affiliates;

 

   

merge or consolidate with another company; and

 

   

transfer, sell or otherwise dispose of assets.

 

Our new senior secured credit agreement also will include covenants requiring us to maintain certain financial ratios. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet those ratios and tests.

 

The provisions of our new senior secured credit agreement may affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the provisions of our new senior secured credit agreement could result in a default or an event of default that could enable our lenders to declare the outstanding principal of that debt, together with accrued and unpaid interest, to be immediately due and payable. If the payment of our debt is accelerated, our assets may be insufficient to repay such debt in full, and our unitholders could experience a partial or total loss of their investment.

 

Increased regulation of hydraulic fracturing could result in reductions or delays in oil production by our customers, which could adversely impact our revenues

 

A portion of our customers’ oil production is developed from unconventional sources, such as shales, that require hydraulic fracturing as part of the completion process. Hydraulic fracturing is an essential and common practice in the oil industry used to stimulate production of oil from dense subsurface rock formations in the U.S. and Canada. Hydraulic fracturing involves using water, sand, and a small amount of certain chemicals to fracture the hydrocarbon-bearing rock formation to allow the flow of hydrocarbons into the wellbore. The process is typically regulated by state and provincial oil and natural gas commissions.

 

Hydraulic fracturing has been subject to increased scrutiny due to public concerns that it could result in contamination of drinking water supplies, and there have been a variety of legislative and regulatory proposals to

 

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prohibit, restrict or more closely regulate various forms of hydraulic fracturing. For instance, on October 20, 2011, the EPA announced its intention to propose federal Clean Water Act regulations governing wastewater discharges from hydraulic fracturing and certain other natural gas operations by 2014. On January 9, 2014, the EPA published a rule requiring oil and gas companies using hydraulic fracturing off the coast of California to disclose the chemicals they discharge into the ocean. On August 16, 2012, the EPA published final regulations under the Clean Air Act that establish new air emissions controls for oil production operations. On May 24, 2013, the U.S. Bureau of Land Management (BLM) published a revised proposed rule that would continue to require public disclosure of chemicals used in hydraulic fracturing on federal and Indian lands, confirmation that wells used in fracturing operations meet appropriate construction standards, and development of appropriate plans for managing flowback water that returns to the surface. In addition, several U.S. states, including California and Texas, have adopted or are considering adopting additional regulatory programs or requirements governing hydraulic fracturing.

 

Increased regulation and attention given to the hydraulic fracturing process could lead to greater opposition, including litigation, to oil production activities using hydraulic fracturing techniques. Additional legislation or regulation could also lead to increased operating costs in the production of oil or could make it more difficult to perform hydraulic fracturing, either of which could have an adverse effect on our operations. The adoption of any federal, state, provincial or local laws or the implementation of regulations regarding hydraulic fracturing could potentially cause a decrease in the completion of new oil wells, increasing compliance costs and decreasing demand for our terminalling and other services, which could adversely affect our financial position, results of operations and cash flows.

 

We are subject to stringent environmental laws and regulations that may expose us to significant costs and liabilities.

 

Our operations are subject to stringent and complex federal, state, provincial and local environmental laws and regulations that govern the discharge of materials into the environment or otherwise relate to environmental protection.

 

These laws and regulations may impose numerous obligations that are applicable to our operations, including the acquisition of permits to conduct regulated activities, the incurrence of capital or operating expenditures to limit or prevent releases of materials from railcars and rail terminals, and the imposition of substantial liabilities and remedial obligations for pollution resulting from our operations or at locations currently or previously owned or operated by us. Numerous governmental authorities, such as the EPA, Environment Canada and analogous state and provincial agencies, have the power to enforce compliance with these laws and regulations and the permits issued under them, oftentimes requiring difficult and costly corrective actions or costly pollution control measures. Failure to comply with these laws, regulations and permits may result in the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations and the issuance of injunctions limiting or preventing some or all of our operations. In addition, we may experience a delay in obtaining or be unable to obtain required permits or regulatory authorizations, which may cause us to lose potential and current customers, interrupt our operations and limit our growth and revenue.

 

There is a risk that we may incur significant environmental costs and liabilities in connection with our operations due to historical industry operations and waste disposal practices, our handling of hydrocarbon and other wastes and potential emissions and discharges related to our operations. Joint and several, strict liability may be incurred, without regard to fault, under certain of these environmental laws and regulations in connection with discharges or releases of hydrocarbon wastes on, under or from our properties and rail terminals. In addition, changes in environmental laws occur frequently, and any such changes that result in additional permitting obligations or more stringent and costly waste handling, storage, transport, disposal or remediation requirements could have a material adverse effect on our operations or financial position. We may not be able to recover all or any of these costs from insurance. Please read “Business—Environmental Regulation” for more information.

 

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Climate change legislation, regulatory initiatives and litigation could result in increased operating costs and reduced demand for the oil services we provide.

 

In response to recent studies suggesting that emissions of carbon dioxide, methane and certain other gases may be contributing to warming of the Earth’s atmosphere, Canada agreed to limit emissions of these greenhouse gases (GHG) pursuant to the 1997 United Nations Framework Convention on Climate Change, also known as the Kyoto Protocol. In December 2011, Canada withdrew from the Kyoto Protocol, but signed the Durban Platform committing it to a legally binding treaty to reduce GHG emissions, the terms of which are to be defined by 2015 and are to become effective in 2020.

 

While not a signatory to the Kyoto Protocol or the Durban Platform, the U.S. Congress has considered legislation to restrict or regulate emissions of GHGs. It presently appears unlikely that comprehensive climate legislation will be passed by either house of Congress in the near future, although additional energy legislation and other initiatives may be proposed that address GHG and related issues. In addition, almost half of the states (including California and Texas, in which we operate), either individually or through multi-state regional initiatives, have begun to address GHG emissions, primarily through the planned development of emission inventories or regional GHG cap and trade programs. In California, the AB 32 program created a statewide cap on GHG emissions and requires that the state return to 1990 emission levels by 2020. AB 32 focuses on using market mechanisms, such as a cap-and-trade program and a low-carbon fuel standard (LCFS) to achieve emission reduction targets. Although most of the state-level initiatives have to date been focused on large sources of GHG emissions, such as electric power plants, it is possible that smaller sources could become subject to GHG-related regulation. Depending on the particular program, we could be required to control emissions or to purchase and surrender allowances for GHG emissions resulting from our operations, and to the extent measures such as the LCFS are successful in reaching hydrocarbon fuel usage, they could have an indirect effect on our business.

 

Independent of Congress, the EPA is beginning to adopt regulations controlling GHG emissions under its existing Clean Air Act authority. For example, in 2009, the EPA adopted rules regarding regulation of GHG emissions from motor vehicles. In addition, in September 2009, the EPA issued a final rule requiring the monitoring and reporting of GHG emissions from specified large GHG emission sources in the United States and, in November 2010, expanded this existing GHG emissions reporting rule for petroleum facilities, requiring reporting of GHG emissions by regulated petroleum facilities to the EPA beginning in 2012 and annually thereafter. We monitor and report our GHG emissions. However, operational or regulatory changes could require additional monitoring and reporting at some or all of our other facilities at a future date. In 2010, the EPA also issued a final rule, known as the “Tailoring Rule,” that makes certain large stationary sources and modification projects subject to permitting requirements for GHG emissions under the Clean Air Act. Several of the EPA’s GHG rules are being challenged in pending court proceedings and, depending on the outcome of such proceedings, such rules may be modified or rescinded or the EPA could develop new rules.

 

Although it is not possible at this time to accurately estimate how potential future laws or regulations addressing GHG emissions would impact our business, any future federal, state or provincial laws or implementing regulations that may be adopted to address GHG emissions could require us to incur increased operating costs and could adversely affect demand for the crude oil and other liquid hydrocarbons we handle in connection with our services. The potential increase in the costs of our operations resulting from any legislation or regulation to restrict emissions of GHGs could include new or increased costs to operate and maintain our facilities, install new emission controls on our facilities, acquire allowances to authorize our GHG emissions, pay any taxes related to our GHG emissions and administer and manage a GHG emissions program. While we may be able to include some or all of such increased costs in the rates charged by our rail terminals, such recovery of costs is uncertain. Moreover, incentives to conserve energy or use alternative energy sources could reduce demand for oil, resulting in a decrease in demand for our services. We cannot predict with any certainty at this time how these possibilities may affect our operations.

 

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Our ability to operate our business effectively could be impaired if we fail to attract and retain key management personnel.

 

We are managed and operated by the board of directors and executive officers of our general partner. All of the personnel that conduct our business are employed by affiliates of our general partner, but we sometimes refer to these individuals as our employees. Our ability to operate our business and implement our strategies will depend on our continued ability and the ability of affiliates of our general partner to attract and retain highly skilled management personnel. Competition for these persons is intense. Given our size, we may be at a disadvantage, relative to our larger competitors, in the competition for these personnel. We or affiliates of our general partner may not be able to attract and retain qualified personnel in the future, and the failure to retain or attract senior executives and key personnel could have a material adverse effect on our ability to effectively operate our business. Neither we nor our general partner maintains key person life insurance policies for any of our senior management team.

 

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

 

Prior to this offering, we have not been required to file reports with the SEC. Upon the completion of this offering, we will become subject to the public reporting requirements of the Exchange Act. We prepare our financial statements in accordance with GAAP, but our internal accounting controls may not currently meet all standards applicable to companies with publicly traded securities. Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and to operate successfully as a publicly traded partnership. Our efforts to develop and maintain our internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future or to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002, which we refer to as Section 404. For example, Section 404 will require us, among other things, to annually review and report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal controls over financial reporting.

 

Although we will be required to disclose changes made in our internal control and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until our annual report for the fiscal year ending December 31, 2015.

 

Any failure to develop, implement or maintain effective internal controls or to improve our internal controls could harm our operating results or cause us to fail to meet our reporting obligations. Given the difficulties inherent in the design and operation of internal controls over financial reporting, we can provide no assurance as to our, or our independent registered public accounting firm’s conclusions about the effectiveness of our internal controls, and we may incur significant costs in our efforts to comply with Section 404. Ineffective internal controls will subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business and would likely have a material adverse effect on the trading price of our common units.

 

For as long as we are an emerging growth company, we will not be required to comply with certain disclosure requirements that apply to other public companies.

 

For as long as we remain an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports. 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

 

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revenues in a fiscal year, have more than $700.0 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.

 

In addition, the JOBS Act provides that an emerging growth company can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected to “opt out” of this exemption and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

To the extent that we rely on any of the exemptions available to emerging growth companies, you will receive less information about our executive compensation and internal control over financial reporting than issuers that are not emerging growth companies. If some investors find our common units to be less attractive as a result, there may be a less active trading market for our common units and our trading price may be more volatile.

 

Exposure to currency exchange rate fluctuations will result in fluctuations in our cash flows and operating results.

 

Currency exchange rate fluctuations could have an adverse effect on our results of operations. A substantial majority of the cash flows from our current assets will be generated in Canadian dollars, but we intend to make distributions to our unitholders in U.S. dollars. As such, a portion of our distributable cash flow will be subject to currency exchange rate fluctuations between U.S. dollars and Canadian dollars. For example, if the Canadian dollar weakens significantly, the corresponding distributable cash flow in U.S. dollars could be less than what is necessary to pay our minimum quarterly distribution.

 

A significant strengthening of the U.S. dollar could result in an increase in our financing expenses and could materially affect our financial results under GAAP. In addition, because we report our operating results in U.S. dollars, changes in the value of the U.S. dollar also result in fluctuations in our reported revenues and earnings. In addition, under GAAP, all foreign currency-denominated monetary assets and liabilities such as cash and cash equivalents, accounts receivable, restricted cash, accounts payable, long-term debt and capital lease obligations are revalued and reported based on the prevailing exchange rate at the end of the reporting period. This revaluation may cause us to report significant non-monetary foreign currency exchange gains and losses in certain periods.

 

Some of our customers’ operations cross the U.S./Canada border and are subject to cross-border regulation.

 

Our customers’ cross border activities subject them to regulatory matters, including import and export licenses, tariffs, Canadian and U.S. customs and tax issues and toxic substance certifications. Such regulations include the Short Supply Controls of the Export Administration Act, the North American Free Trade Agreement and the Toxic Substances Control Act. Violations of these licensing, tariff and tax reporting requirements could result in the imposition of significant administrative, civil and criminal penalties on our customers. Our revenue and cash flows could decline and our ability to make cash distributions to our unitholders could be materially and adversely affected.

 

Risks Inherent in an Investment in Us

 

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

 

Following the offering, USD will indirectly own a     % limited partner interest and will indirectly own and control our general partner, which will own a 2.0% general partner interest in us. Although our general partner has a duty to manage us in a manner that is not adverse to the best interests of our partnership and our unitholders, the directors and officers of our general partner also have a duty to manage our general partner in a manner that is not adverse to the best interests of its owner, USD. Conflicts of interest may arise between USD

 

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and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts, the general partner may favor its own interests and the interests of its affiliates, including USD, over the interests of our common unitholders. These conflicts include, among others, the following situations:

 

   

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

 

   

USD may be constrained by the terms of its debt instruments from taking actions, or refraining from taking actions, that may be in our best interests;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

our general partner will determine which costs incurred by it are reimbursable by us;

 

   

our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units, to make incentive distributions, to affect the conversion ratio of Class A Units to common units or to satisfy the conditions required to convert subordinated units to common units;

 

   

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 to our general partner in respect of the general partner interest or the incentive distribution rights;

 

   

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

 

   

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

 

   

our general partner may exercise its right to call and purchase all of the common units not owned by it and its affiliates if it and its affiliates own more than 80.0% of the common units;

 

   

our general partner controls the enforcement of obligations owed to us by our general partner and its affiliates;

 

   

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

 

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our general partner may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to our general partner’s incentive distribution rights without the approval of the conflicts committee of the board of directors of our general partner, which we refer to as our conflicts committee, or our unitholders. This election may result in lower distributions to our common unitholders in certain situations.

 

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

 

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

 

Our partnership agreement requires that we distribute all of our available cash, as that term is defined in our partnership agreement, to our unitholders. As a result, we expect to rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, to fund our acquisitions and expansion capital expenditures. Therefore, to the extent we are unable to finance our growth externally, our cash distribution policy will significantly impair our ability to grow. In addition, because we will distribute all of our available cash, our growth may not be as fast as that of businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement or our new senior secured credit agreement on our ability to issue additional units, including units ranking senior to the common units as to distribution or liquidation, and our unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such additional units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which, in turn, may reduce the amount of cash available to distribute to our unitholders.

 

The board of directors of our general partner may modify or revoke our cash distribution policy at any time at its discretion.

 

The board of directors of our general partner will adopt a cash distribution policy pursuant to which we intend to distribute quarterly at least $         per unit on all of our units to the extent we have sufficient cash after the establishment of cash reserves and the payment of our expenses, including payments to our general partner and its affiliates. However, the board may change such policy at any time at its discretion. Please read “Our Cash Distribution Policy and Restrictions on Distributions.” Our general partner’s board of directors has broad discretion in setting the amount of cash reserves each quarter. Investors are cautioned not to place undue reliance on the permanence of our cash distribution policy in making an investment decision. Any modification or revocation of our cash distribution policy could substantially reduce or eliminate the amounts of distributions to our unitholders. The amount of distributions we make and the decision to make any distribution will be determined by the board of directors of our general partner, whose interests may differ from those of our common unitholders. Our general partner has limited duties to our unitholders, which may permit it to favor its own interests or the interests of our sponsor or its affiliates to the detriment of our common unitholders.

 

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

 

Our partnership agreement contains provisions that eliminate the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law and replaces those duties with several different contractual standards. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, free of any duties to us and our unitholders. This provision entitles our general partner to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. By purchasing a common unit, a unitholder is treated as having consented to the provisions in our partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Fiduciary Duties—Fiduciary Duties.”

 

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

 

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

 

   

provides that whenever our general partner makes a determination or takes, or declines to take, any other action in its capacity as our general partner, our general partner is required to make such determination, or take or decline to take such other action, in good faith and will not be subject to any higher standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation, or at equity;

 

   

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

 

   

provides that our general partner will not be in breach of its obligations under our partnership agreement or its fiduciary duties to us or our limited partners if a transaction with an affiliate or the resolution of a conflict of interest is approved in accordance with, or otherwise meets the standards set forth in, our partnership agreement.

 

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

 

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

 

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

 

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If you are not both a citizenship eligible holder and a rate eligible holder, your common units may be subject to redemption.

 

In order to avoid (1) any material adverse effect on the maximum applicable rates that can be charged to customers by our subsidiaries on assets that are subject to rate regulation by the FERC or analogous regulatory body, and (2) any substantial risk of cancellation or forfeiture of any property, including any governmental permit, endorsement or other authorization, in which we have an interest, we have adopted certain requirements regarding those investors who may own our common units. Citizenship eligible holders are individuals or entities whose nationality, citizenship or other related status does not create a substantial risk of cancellation or forfeiture of any property, including any governmental permit, endorsement or authorization, in which we have an interest, and will generally include individuals and entities who are U.S. citizens. Rate eligible holders are individuals or entities subject to U.S. federal income taxation on the income generated by us or entities not subject to U.S. federal income taxation on the income generated by us, so long as all of the entity’s owners are subject to such taxation. Please read “Description of the Common Units—Transfer of Common Units.” If you are not a person who meets the requirements to be a citizenship eligible holder and a rate eligible holder, you run the risk of having your units redeemed by us at the market price as of the date three days before the date the notice of redemption is mailed. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner. In addition, if you are not a person who meets the requirements to be a citizenship eligible holder, you will not be entitled to voting rights. Please read “Our Partnership Agreement—Non-Citizen Assignees; Redemption.”

 

Cost reimbursements, which will be determined in our general partner’s sole discretion, and fees due to our general partner and its affiliates for services provided will be substantial and will reduce our distributable cash flow to you.

 

Under our partnership agreement, we are required to reimburse our general partner and its affiliates for all costs and expenses that they incur on our behalf for managing and controlling our business and operations. Except to the extent specified under our omnibus agreement, our general partner determines the amount of these expenses. Under the terms of the omnibus agreement we will be required to reimburse USD for providing certain general and administrative services to us. Our general partner and its affiliates also may provide us other services for which we will be charged fees. Payments to our general partner and its affiliates will be substantial and will reduce the amount of distributable cash flow to unitholders. For the twelve months ending September 30, 2015, we estimate that these expenses will be approximately $         million, which includes, among other items, compensation expense for all employees required to manage and operate our business. For a description of the cost reimbursements to our general partner, please read “Our Partnership Agreement—Reimbursement of Expenses” and “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement.”

 

Unitholders have very limited voting rights and, even if they are dissatisfied, they cannot remove our general partner without its consent.

 

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 did not elect our general partner or the board of directors of our general partner and will have no right to elect our general partner or the board of directors of our general partner on an annual or other continuing basis. The board of directors of our general partner is chosen by the members of our general partner, which is indirectly owned by USD. 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 our common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.

 

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 the offering to be able to prevent its removal.

 

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The vote of the holders of at least 66 2/3% of all outstanding units voting together as a single class is required to remove our general partner. At closing, our general partner and its affiliates will own     % of the common units and subordinated units (excluding common units purchased by certain of our officers, directors, employees and certain other persons affiliated with us under our directed unit program). Also, if our general partner is removed without cause during the time any subordinated units are outstanding and the subordinated units held by our general partner and its affiliates are not voted in favor of that removal, all remaining subordinated units will automatically be converted into common units, and any existing arrearages on the common units will be extinguished. 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. Furthermore, all of the outstanding Class A Units will convert into common units based on a conversion factor that would be determined as if the date of the change in control was the vesting date. This conversion would adversely affect the common units by prematurely eliminating the liquidation preference of common units over the Class A Units, which would have otherwise continued while certain conditions remained unsatisfied.

 

“Cause” is narrowly defined under our partnership agreement to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding the general partner liable for actual fraud or willful misconduct in its capacity as our general partner. Cause does not include most cases of charges of poor management of the business, so the removal of our general partner because of the unitholders’ dissatisfaction with our general partner’s performance in managing our partnership will most likely result in the automatic conversion to common units of all remaining outstanding subordinated units.

 

Furthermore, unitholders’ voting rights are further restricted by the partnership agreement provision providing that any units held by a person that owns 20.0% or more of any class of units then outstanding, other than our general partner, 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.

 

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.

 

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

 

Our general partner may transfer its general partner interest to a third party at any time without the consent of the unitholders. Furthermore, there is no restriction in our partnership agreement on the ability of USD Group LLC to transfer its membership interest in our general partner to a third party. The new partners of our general partner would then be in a position to replace the board of directors and officers of our general partner with their own choices and to control the decisions taken by the board of directors and officers.

 

The incentive distribution rights of our general partner may be transferred to a third party without unitholder consent.

 

Our general partner may transfer its incentive distribution rights to a third party at any time without the consent of our unitholders. If our general partner transfers its incentive distribution rights to a third party but retains its general partner interest, our general partner may not have the same incentive to grow our partnership and increase quarterly distributions to unitholders over time as it would if it had retained ownership of its incentive distribution rights. For example, a transfer of incentive distribution rights by our general partner could reduce the likelihood of USD selling or contributing additional midstream infrastructure assets and businesses to us, as USD would have less of an economic incentive to grow our business, which in turn would impact our ability to grow our asset base.

 

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

 

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

 

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

 

At any time, we may issue an unlimited number of limited partner interests of any type without the approval of our unitholders and our unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such limited partner interests. Further, neither our partnership agreement nor our new senior secured credit agreement prohibits the issuance of equity securities that may effectively rank senior to our common units as to distributions or liquidations. 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 distributable cash flow on each unit may decrease;

 

   

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

 

   

the ratio of taxable income to distributions may increase;

 

   

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

 

   

the market price of our common units may decline.

 

USD Group LLC may sell our units in the public or private markets, and such sales could have an adverse impact on the trading price of the common units.

 

After the sale of the common units offered by this prospectus, USD Group LLC will hold             common units and subordinated units. All of the subordinated units will convert into common units on a one-for-one basis in separate, sequential tranches, with each tranche comprising of 20.0% of the subordinated units outstanding immediately following this offering. A separate tranche will convert on each business day occurring on or after October 1, 2015 (but not more than once in any twelve-month period), assuming the conditions for conversion are satisfied. Additionally, we have agreed to provide USD Group LLC with certain registration rights. Please read “Units Eligible for Future Sale.” The sale of these units in the public or private markets could have an adverse impact on the price of the common units or on any trading market that may develop.

 

Our general partner’s discretion in establishing cash reserves may reduce the amount of distributable cash flow to unitholders.

 

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

 

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Affiliates of our general partner, including USD, may compete with us, and neither our general partner nor its affiliates have any obligation to present business opportunities to us.

 

Neither our partnership agreement nor our omnibus agreement will prohibit USD or any other affiliates of our general partner from owning assets or engaging in businesses that compete directly or indirectly with us. In addition, USD and other affiliates of our general partner may acquire, construct or dispose of additional midstream infrastructure assets and businesses in the future without any obligation to offer us the opportunity to purchase any of those assets. For example, USD Group LLC currently owns the right to construct and develop Hardisty Phase II and Hardisty Phase III at our Hardisty rail terminal. USD Group LLC currently anticipates that Hardisty Phase II will commence operations in late 2015 or early 2016, and Hardisty Phase III will commence operations during 2016. If we are unable to acquire these facilities from USD Group LLC, these expansions may compete directly with our Hardisty rail terminal for future throughput volumes, which may impact our ability to enter into new terminal services agreements, including with our existing customers, following the termination of our existing agreements or the terms thereof and our ability to compete for future spot volumes. As a result, competition from USD and other affiliates of our general partner could materially adversely impact our results of operations and distributable cash flow to unitholders.

 

Our general partner may cause us to borrow funds in order to make cash distributions, even where the purpose or effect of the borrowing benefits the general partner or its affiliates.

 

In some instances, our general partner may cause us to borrow funds under our revolving credit facility, from USD or otherwise from third parties in order to permit the payment of cash distributions. These borrowings are permitted even if the purpose and effect of the borrowing is to enable us to make a distribution on the subordinated units, to make incentive distributions or to satisfy the conditions required to convert subordinated units into common units.

 

Our general partner has a limited call right that it may exercise at any time it or its affiliates own more than 80.0% of the outstanding limited partner interests and 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 own more than 80.0% of the then issued and outstanding limited partner interests of any class, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than their then-current market price. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. At the completion of this offering and assuming no exercise of the underwriters’ over-allotment option to purchase additional common units, our general partner and its affiliates will own approximately     % of our common units (excluding common units purchased by certain of our officers, directors, employees and certain other persons affiliated with us under our directed unit program). After all subordinated units have converted into common units (which could occur as early as                 , 2019), assuming no additional issuances of common units (other than upon the conversion of the subordinated units) and no exercise of the underwriters’ over-allotment option to purchase additional common units, our general partner and its affiliates will own approximately     % of our common units (excluding common units purchased by certain of our officers, directors, employees and certain other persons affiliated with us under our directed unit program). For additional information about the call right, please read “Our Partnership Agreement—Limited Call Right.”

 

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

 

A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made non-recourse to the general partner. Our partnership is organized under Delaware law, and we conduct business in a number of other states. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership

 

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have not been clearly established in some jurisdictions. You could be liable for our obligations as if you were a general partner if a court or government agency were to determine that:

 

   

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

 

   

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

 

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

 

Unitholders may have to repay distributions that were wrongfully distributed to them.

 

Under certain circumstances, 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 you 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, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Transferees of common units are liable for the obligations of the transferor to make contributions to the partnership that are known to the transferee at the time of the transfer and for unknown obligations if the liabilities could be determined from our partnership agreement. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

 

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 our common units. After this offering, there will be          publicly traded common units. In addition, USD Group LLC will own          common units and          subordinated units, representing an aggregate     % limited partner interest in us. All of the common units held by USD Group LLC will be subject to resale restrictions under a 180-day lock-up agreement with the underwriters, which may be waived in the discretion of certain of the underwriters. 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 offered hereby was 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:

 

   

our quarterly distributions;

 

   

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

 

   

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

 

   

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

 

   

general economic conditions;

 

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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.”

 

Because our common units will be yield-oriented securities, increases in interest rates could adversely impact our unit price, our distributable cash flow, our ability to issue equity or incur debt for acquisitions or other purposes and our ability to make cash distributions at our intended levels.

 

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

 

The holder of our incentive distribution rights may elect to cause us to issue common units and general partner units to it in connection with a resetting of the target distribution levels related to its incentive distribution rights, without the approval of our conflicts committee or the holders of our common units. This could result in lower distributions to holders of our common units.

 

Our general partner has the right, at any time when there are no subordinated units outstanding and it has received distributions on its incentive distribution rights at the highest level to which it is entitled (48.0%, in addition to distributions paid on its 2.0% general partner interest) for each of the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on our distributions at the time of the exercise of the reset election. Following a reset election, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution, and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution.

 

If our general partner elects to reset the target distribution levels, it will be entitled to receive a number of common units and general partner units. The number of common units to be issued to our general partner will be equal to that number of common units that would have entitled the general partner to a quarterly cash distribution equal to distributions to our general partner on the incentive distribution rights in the prior quarter. Our general partner will also be issued the number of general partner units necessary to maintain our general partner’s interest in us at the level that existed immediately prior to the reset election. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per common unit without such conversion. It is possible, however, that our general partner could exercise this reset election at a time when it is experiencing, or expects to experience, declines in the cash distributions it receives related to its incentive distribution rights and may, therefore, desire to be issued common units rather than retain the right to receive distributions based on the initial target distribution levels. This risk could be elevated if our incentive distribution rights have been transferred to a third party. As a result, a reset election may cause our common unitholders to experience a reduction in the amount of cash distributions that they would have otherwise received had we not issued new common units and general partner units in connection with resetting the target distribution levels. Additionally, our general partner has the right to transfer all or any portion of our incentive distribution rights at any time, and such transferee shall have the same rights as the general partner relative to resetting target distributions if our general partner concurs that the tests for resetting target distributions have been fulfilled. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—General Partner’s Right to Reset Incentive Distribution Levels.”

 

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

 

We intend to apply to list our common units on the NYSE. Because we will be a publicly traded limited partnership, the NYSE does not require us to have a majority of independent directors on our general partner’s board of directors or to establish a compensation committee or a nominating and corporate governance committee. Accordingly, unitholders will not have the same protections afforded to shareholders of corporations that are subject to all of the NYSE corporate governance requirements. Please read “Management—Management of USD Partners LP.”

 

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

 

We have no history operating as a publicly traded partnership. As a publicly traded partnership, we will incur significant legal, accounting and other expenses that we did not incur prior to this offering. For example, the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC and the NYSE, require publicly traded entities to adopt various corporate governance practices that will further increase our costs, including requirements to have at least three independent directors, create an audit committee and adopt policies regarding internal controls and disclosure controls and procedures, including the preparation of reports on internal controls over financial reporting.

 

In addition, following this offering, we will become subject to the public reporting requirements of the Exchange Act. We expect these rules and regulations to increase certain of our legal and financial compliance costs and to make certain activities more time-consuming and costly.

 

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

 

We estimate that we will incur approximately $2.1 million of estimated incremental external costs per year and additional internal costs associated with being a publicly traded partnership. However, it is possible that our actual incremental costs of being a publicly traded partnership will be higher than we currently estimate. Before we are able to make distributions to our unitholders, we must first pay or reserve cash for our expenses, including the costs of being a publicly traded partnership. As a result, the amount of cash we have available for distribution to our unitholders will be reduced by the costs associated with being a public company.

 

Tax Risks

 

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

 

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

 

The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a partnership for federal income tax purposes. We have not requested a ruling from the IRS with respect to our treatment as a partnership for 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 federal income tax purposes. A change in our business or a change in current law could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.

 

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

 

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

 

Notwithstanding our treatment for U.S. federal income tax purposes, we will be subject to certain non-U.S.-taxes. If a taxing authority were to successfully assert that we have more tax liability than we anticipate or legislation were enacted that increased the taxes to which we are subject, the distributable cash flow to our unitholders could be further reduced.

 

Some of our business operations and subsidiaries will be subject to income, withholding and other taxes in the non-U.S. jurisdictions in which they are organized or from which they receive income, reducing the amount of distributable cash flow. In computing our tax obligation in these non-U.S. jurisdictions, we are required to take various tax accounting and reporting positions on matters that are not entirely free from doubt and for which we have not received rulings from the governing tax authorities, such as whether withholding taxes will be reduced by the application of certain tax treaties. Upon review of these positions the applicable authorities may not agree with our positions. A successful challenge by a taxing authority could result in additional tax being imposed on us, reducing the distributable cash flow to our unitholders. In addition, changes in our operations or ownership could result in higher than anticipated tax being imposed in jurisdictions in which we are organized or from which we receive income and further reduce the distributable cash flow. Although these taxes may be properly characterized as foreign income taxes, you may not be able to credit them against your liability for U.S. federal income taxes on your share of our earnings. For more details please read “Material Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Foreign Tax Credits.”

 

If we were subjected to a material amount of additional entity-level taxation by individual states, counties or cities, it would reduce our distributable cash flow to our unitholders.

 

Changes in current state, county or city law may subject us to additional entity-level taxation by individual states, counties or cities. 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 taxes may substantially reduce the distributable cash flow to you and the value of our common units could be negatively impacted. Our partnership agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to entity-level taxation, the minimum quarterly distribution amount and the target distribution levels may be adjusted to reflect the impact of that law on us.

 

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

 

The present federal income tax treatment of publicly traded partnerships, companies with multinational operations, or an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time. For example, from time to time, members of Congress propose and consider

 

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substantive changes to the existing federal income tax laws that affect publicly traded partnerships, including the elimination of the qualifying income exception upon which we rely for our treatment as a partnership for federal income tax purposes. Any modification to the federal income tax laws and interpretations thereof may or may not be retroactively applied and could make it more difficult or impossible to meet the exception for us to be treated as a partnership for federal income tax purposes. Please read “Material Federal Income Tax Consequences—Partnership Status.” We are unable to predict whether any such changes will ultimately be enacted. However, it is possible that a change in law could affect us, and any such changes could negatively impact the value of an investment in our common units.

 

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

 

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

 

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

 

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

 

We may choose to conduct a portion of our operations, which may not generate qualifying income, in a subsidiary that is treated as a corporation for U.S. federal income tax purposes and is subject to corporate-level income taxes. Corporate federal income tax would reduce our cash available for distribution.

 

A portion of our business, relating to the railcar fleet services, may be conducted by a subsidiary that is treated as a corporation for U.S. federal income tax purposes.

 

In order to maintain our status as a partnership for U.S. federal income tax purposes, 90% or more of our gross income in each tax year must be qualifying income under Section 7704 of the Internal Revenue Code. For a discussion of qualifying income, please read “Material Federal Income Tax Consequences—Partnership Status.” Latham & Watkins LLP is unable to opine as to the qualifying nature of the income generated by certain portions of our business related to the railcar fleet services. Consequently, we are in the process of requesting a ruling from the IRS upon which, if granted, we may rely with respect to the qualifying nature of such income. In an attempt to ensure that 90% or more of our gross income in each tax year is qualifying income, we may conduct the portion of our business related to these operations in a separate subsidiary. If the IRS is unwilling or unable to provide a favorable ruling in a timely manner with respect to our income from these assets and operations, it may be necessary for us to elect to treat this subsidiary as a corporation for U.S. federal income tax purposes.

 

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Any subsidiary that we elect to treat as a corporation for U.S. federal income tax purposes will be subject to corporate-level tax, which would reduce the cash available for distribution to us and, in turn, to our unitholders. If the IRS were to successfully assert that any subsidiary treated as a corporation for U.S. federal income tax purposes has more tax liability than we anticipate or legislation were enacted that increased the corporate tax rate, our cash available for distribution to our unitholders would be further reduced.

 

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

 

If our unitholders sell common units, they will recognize a gain or loss for federal income tax purposes equal to the difference between the amount realized and their tax basis in those common units. Because distributions in excess of their allocable share of our net taxable income decrease their tax basis in their common units, the amount, if any, of such prior excess distributions with respect to the common units a unitholder sells will, in effect, become taxable income to the unitholder if it sells such common units at a price greater than its tax basis in those common units, even if the price received is less than its original cost. Furthermore, a substantial portion of the amount realized on any sale of your common units, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, a unitholder that sells common units, may incur a tax liability in excess of the amount of cash received from the sale. Please read “Material Federal Income Tax Consequences—Disposition of Common Units—Recognition of Gain or Loss” for a further discussion of the foregoing.

 

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

 

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

 

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

 

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

 

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

 

We will prorate our items of income, gain, loss and deduction for federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first day of each

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We will be considered to have technically terminated our partnership for federal income tax purposes if there is a sale or exchange of 50.0% or more of the total interests in our capital and profits within a twelve-month period. Immediately after this offering, USD Group LLC will own     % of the total interests in our capital and profits. Therefore, a transfer by USD Group LLC of all or a portion of its interests in us could result in a termination of us as a partnership for federal income tax purposes. For purposes of determining whether the 50.0% threshold has been met, multiple sales of the same interest will be counted only once. Our technical termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns (and our unitholders could receive two Schedules K-1 if relief was not available, as described below) for one fiscal year and could result in a deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. Our termination currently would not affect our classification as a partnership for federal income tax purposes, but instead we would be treated as a new partnership for federal income tax purposes. If treated as a new partnership, we must make new tax elections, including a new election under Section 754 of the Internal Revenue Code, and could be subject to penalties if we are unable to determine that a termination occurred. The IRS has provided a publicly traded partnership technical termination relief program whereby, if a publicly traded partnership that technically terminated requests publicly traded partnership technical termination relief and such relief is granted by the IRS, among other things, the partnership will only have to provide one Schedule K-1 to unitholders for the year notwithstanding two partnership tax years. Please read “Material Federal Income Tax Consequences—Disposition of Common Units—Constructive Termination” for a discussion of the consequences of our termination for federal income tax purposes.

 

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

 

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

 

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USE OF PROCEEDS

 

We expect to receive net proceeds of approximately $         million from the sale of             common units offered by this prospectus, based on an initial public offering price of $         per common unit (the midpoint of the price range set forth on the cover of this prospectus), after deducting underwriting discounts, commissions and structuring fees. We intend to use these proceeds, together with the proceeds from borrowings under our new term loan facility, as follows:

 

   

to make a cash distribution to USD Group LLC of $         million;

 

   

to repay $         million of indebtedness under USD’s current credit facility; and

 

   

to pay $         million of fees and expenses in connection with our new senior secured credit agreement, which will be comprised of a revolving credit facility and a term loan.

 

The remaining approximately $             million will be retained by us for general partnership purposes, including potentially to fund future acquisitions from USD and third parties and potentially for funding future growth projects, such as the potential acquisition from USD Group LLC of the Hardisty Phase II and Phase III projects on which we have been granted rights of first offer. USD has not offered these assets to us, and we are under no obligation to acquire these assets from USD with the proceeds of this offering, or otherwise. We do not presently have definitive agreements with USD or any third parties with respect to acquisitions. The consummation and timing of any future acquisitions of our right of first offer assets are subject to various contingencies, including USD’s successful development of such projects, USD’s willingness to offer such projects for sale and obtain any necessary consents, our ability to negotiate acceptable purchase agreements and commercial agreements with respect to such acquisitions and our ability to obtain financing on acceptable terms. See “Risk Factors—Our right of first offer to acquire certain of USD’s assets and projects it will retain after the offering and certain assets or businesses that it may develop, construct or acquire in the future is subject to risks and uncertainty, and ultimately we may not acquire any of those assets or businesses.” We may also consider the acquisition of other assets from USD and third parties. Any such acquisitions, however, will also depend on various contingencies, including our ability to identify attractive acquisition candidates and successfully negotiate acceptable acquisition agreements and our ability to obtain financing.

 

USD’s current credit facility bears interest at LIBOR plus an applicable premium which equates to 3.90% as of June 30, 2014. An affiliate of an underwriter participating in this offering is a lender under the current USD credit facility and will receive a portion of the proceeds from this offering pursuant to the repayment of borrowings thereunder. Please read “Underwriting—Certain Relationships.” In April 2014, our Canadian subsidiary which owns our Hardisty rail terminal borrowed $67.8 million under the current credit facility to fund the repayment of $67.0 million of intercompany indebtedness owed to USD.

 

The net proceeds from any exercise of the underwriters’ over-allotment option to purchase additional common units (approximately $         million, if exercised in full, after deducting the underwriting discounts and commissions and structuring fees) will be used to redeem from USD Group LLC a number of common units equal to the number of common units issued upon such exercise of the option at a price per unit equal to the net proceeds per common unit in this offering before expenses but after deducting underwriting discounts, commissions and the structuring fee. Please read “Underwriting.”

 

An increase or decrease in the initial public offering price of $1.00 per common unit would cause the net proceeds from the offering, after deducting underwriting discounts, the structuring fee and offering expenses, to increase or decrease by $             million, based on an assumed initial public offering price of $             per common unit. If the proceeds increase due to a higher initial public offering price or an increase in the number of units issued, or decrease due to a lower initial public offering price or a decrease in the number of units issued, then the amount of cash retained by us for general partnership purposes will increase or decrease accordingly.

 

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CAPITALIZATION

 

The following table shows:

 

   

the historical cash and cash equivalents and capitalization of our predecessor as of June 30, 2014;

 

   

our pro forma as adjusted cash and cash equivalents and capitalization as of June 30, 2014, after giving effect to the following transactions:

 

   

the issuance of 250,000 Class A Units to certain executive officers and other key employees of our general partner and its affiliates who provide services to us;

 

   

USD Group LLC’s contribution to us of its ownership interests in each of its subsidiaries that own or operate the Hardisty, San Antonio and West Colton rail terminals and our railcar business;

 

   

our entry into a new $300.0 million senior secured credit agreement comprised of a $200.0 million revolving credit facility and a $100.0 million term loan facility and the borrowing of the full $100.0 million under such term loan facility;

 

   

the issuance of          common units and          subordinated units to USD Group LLC; and

 

   

the issuance to USD Partners GP LLC, a wholly owned subsidiary of USD Group LLC,          general partner units, representing a 2.0% general partner interest in us and all of our incentive distribution rights; and

 

   

our pro forma as further adjusted cash and cash equivalents and capitalization as of June 30, 2014, after giving effect to the issuance and sale of          common units in this offering at an assumed initial public offering price of $         per common unit (based on the mid-point of the price range set forth on the cover of this prospectus) and the application of the net proceeds therefrom and from the borrowings under our new term loan facility as described under “Use of Proceeds.”

 

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

 

     As of June 30, 2014  
     Predecessor
Historical
     Pro Forma
As Adjusted
     Pro Forma
As Further
Adjusted
 
    

(unaudited)

(in millions)

 

Cash and cash equivalents

   $ 32.4       $         $                
  

 

 

    

 

 

    

 

 

 

Debt:

        

Existing credit facility

     97.8         97.8      

New term loan

             100.0         100.0   

New revolving credit facility

                       
  

 

 

    

 

 

    

 

 

 

Total long-term debt (including current maturities)

     97.8         197.8         100.0   
  

 

 

    

 

 

    

 

 

 

Owner’s equity:

        

Owner’s equity

     10.9         10.9      

Common Units—public (no units on an actual basis;              units on pro forma as adjusted basis; and              units on a pro forma as further adjusted basis)

             

Common Units—USD Group LLC (no units on an actual basis;              units on pro forma as adjusted basis; and              units on a pro forma as further adjusted basis)

             

Class A Units—management (no units on an actual basis; 250,000 units on a pro forma as adjusted basis; and 250,000 units on a pro forma as further adjusted basis)

             

Subordinated Units—USD Group LLC (no units on an actual basis;              units on pro forma as adjusted basis; and              units on a pro forma as further adjusted basis)

             

General partner equity (no units on an actual basis;              units on pro forma as adjusted basis; and              units on a pro forma as further adjusted basis)

             
  

 

 

    

 

 

    

 

 

 

Total equity

     10.9         
  

 

 

    

 

 

    

 

 

 

Total capitalization

   $ 108.7       $                    $     
  

 

 

    

 

 

    

 

 

 

 

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DILUTION

 

Dilution is the amount by which the offering price per common unit in this offering will exceed the pro forma net tangible book value per unit after the offering. On a pro forma basis as of June 30, 2014, after giving effect to the offering of common units and the related transactions, our net tangible book value was approximately $         million, or $         per unit. Purchasers of common units in this offering will experience substantial and immediate dilution in pro forma net tangible book value per common unit for financial accounting purposes, as illustrated in the following table.

 

Assumed initial public offering price per common unit(1)

      $                

Pro forma net tangible book value per unit before the offering(2)

     

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

     

Decrease in net tangible book value per unit attributable to distributions made to USD Group LLC(3)

     
  

 

  

Less: Pro forma net tangible book value per unit after the offering(4)

     
     

 

 

 

Immediate dilution in net tangible book value per common unit to purchasers in the offering(5)

      $     
     

 

 

 

 

(1)   The mid-point of the price range set forth on the cover of this prospectus.
(2)   Determined by dividing the number of units (             common units,              subordinated units and              general partner units) to be issued to USD Group LLC, the general partner and their affiliates for their contribution of assets and liabilities to us into the pro forma net tangible book value of the contributed assets and liabilities. Does not include 250,000 Class A Units, which will not have any liquidation value immediately following the completion of this offering.
(3)   Determined by dividing the number of units to be outstanding after this offering (             common units,              subordinated units and              general partner units) and the distribution to be made to USD Group LLC of $         million as well as the dilution of USD Group LLC’s investment. Does not include 250,000 Class A Units, which will not have any liquidation value immediately following the completion of this offering.
(4)   Determined by dividing the number of units to be outstanding after this offering (             total common units,              subordinated units and              general partner units) and the application of the related net proceeds into our pro forma net tangible book value after giving effect to the application of the net proceeds of this offering. Does not include 250,000 Class A Units, which will not have any liquidation value immediately following the completion of this offering.
(5)   Because the total number of units outstanding following this offering will not be impacted by any exercise of the underwriters’ over-allotment option to purchase additional common units and any net proceeds from such exercise will not be retained by us, there will be no change to the dilution in net tangible book value per common unit to purchasers in this offering due to any such exercise of the option.

 

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

 

     Units Acquired     Total
Consideration
 
     Number    %     Amount      %  
     (in millions)          (in millions)         

USD Group LLC, general partner and their affiliates(1)(2)(3)

                   $                              

Purchasers in this offering

          
  

 

  

 

 

   

 

 

    

 

 

 

Total

                   $                   
  

 

  

 

 

   

 

 

    

 

 

 

 

(1)  

Upon the consummation of the transactions contemplated by this prospectus, USD Group LLC, our general partner and their affiliates will own              common units,              subordinated units and              general

 

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partner units. Does not include 250,000 Class A Units, which will not have any liquidation value immediately following the completion of this offering. We did not receive any cash consideration in exchange for the issuance of the Class A Units.

(2)   Assumes the underwriters’ over-allotment option to purchase additional common units is not exercised.
(3)   The assets contributed by USD Group LLC, the general partner and its affiliates were recorded at historical cost in accordance with accounting principles generally accepted in the United States. Book value of the consideration provided by USD Group LLC, the general partner and its affiliates, as of June 30, 2014, after giving effect to the application of the net proceeds of the offering, is as follows:

 

     (in millions)  

Book value of net assets contributed

   $                

Less: Distribution to USD Group LLC from net proceeds of this offering

  
  

 

 

 

Total consideration

   $     
  

 

 

 

 

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CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

 

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

 

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

 

General

 

Rationale for our Cash Distribution Policy

 

Our intent is to distribute to our unitholders an amount of cash each quarter that is equal to or greater than the minimum quarterly distribution of $     per unit, or $         per unit on an annualized basis. To that end, our partnership agreement requires us to distribute all of our available cash quarterly. Generally, our available cash is our (i) cash on hand at the end of a quarter after the payment of our expenses and the establishment of cash reserves and (ii) cash on hand resulting from working capital borrowings made after the end of the quarter. Our general partner’s board of directors has broad discretion in setting the amount of cash reserves each quarter. Because we are not subject to an entity-level federal income tax in the United States, we expect to have more cash to distribute to our unitholders than would be the case were we subject to federal income tax in the United States.

 

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

 

Although our partnership agreement requires that we distribute all of our available cash quarterly, there is no guarantee that we will make quarterly cash distributions to our unitholders at our minimum quarterly distribution rate or at any other rate, and we have no legal or contractual obligation to do so. Our current cash distribution policy is subject to certain restrictions, as well as the discretion of our general partner, which may change our cash distribution policy at any time from time to time without a vote from unitholders. The following factors will affect our ability to make cash distributions, as well as the amount of any cash distributions we make:

 

   

Our cash distribution policy will be subject to restrictions on cash distributions under our new senior secured revolving credit agreement. One such restriction would prohibit us from making cash distributions while an event of default has occurred and is continuing under our revolving credit agreement, notwithstanding our cash distribution policy. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Agreement.”

 

   

The amount of cash that we distribute and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement. Our general partner may change our cash distribution policy at any time from time to time without a vote from unitholders. Specifically, our general partner will have the authority to establish cash reserves for the prudent conduct of our business and for future cash distributions to our unitholders, and the establishment of or increase in those reserves could result in a reduction in cash distributions from levels we currently anticipate pursuant to our stated cash distribution policy. Our general partner’s board of directors has broad discretion in setting the amount of cash reserves each quarter. Any decision to establish cash reserves made by our general partner in good faith will be binding on our unitholders.

 

   

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

 

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We may lack sufficient cash to pay distributions to our unitholders due to cash flow shortfalls attributable to a number of operational, commercial or other factors as well as increases in our operating or general and administrative expenses, principal and interest payments on our debt, tax expenses, working capital requirements and anticipated cash needs. Our distributable cash flow is directly impacted by our cash expenses necessary to run our business and will be reduced dollar-for-dollar to the extent such uses of cash increase. For the twelve months ending September 30, 2015, we estimate that our general and administrative expenses will be approximately $         million, which includes, among other items, compensation expense for all employees required to manage and operate our business. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Distributions of Available Cash,” “Our Partnership Agreement—Reimbursement of Expenses” and “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement.”

 

   

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

 

   

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

 

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

 

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

 

Our partnership agreement requires us to distribute all of our available cash to our unitholders on a quarterly basis. As a result, we expect that we will rely primarily upon external financing sources, including borrowings under our revolving credit facility and the issuance of debt and equity securities, to fund future acquisitions and other expansion capital expenditures. To the extent we are unable to finance growth with external sources of capital, the requirement in our partnership agreement to distribute all of our available cash and our current cash distribution policy will significantly impair our ability to grow. In addition, because we will distribute all of our available cash, our growth may not be as fast as businesses that reinvest all of their available cash to expand ongoing operations. Our revolving credit facility and term loan will restrict our ability to incur additional debt, including through the issuance of debt securities. Please read “Risk Factors—Risks Related to Our Business—Restrictions in our new credit facility and term loan could adversely affect our business, financial condition, results of operations, ability to make distributions to unitholders and value of our common units.” To the extent we issue additional units, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our cash distributions per unit. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to our common units, and our unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such additional units. If we incur additional debt (under our revolving credit facility or otherwise) to finance our growth strategy, we will have increased interest expense, which in turn will reduce the available cash that we have to distribute to our unitholders. Please read “Risk Factors—Risks Related to Our Business—Debt we incur in the future may limit our flexibility to obtain financing and to pursue other business opportunities.”

 

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Our Minimum Quarterly Distribution

 

Pursuant to our distribution policy, we intend to declare a minimum quarterly distribution of $         per unit for each whole quarter, or $         per unit on an annualized basis. Our ability to make cash distributions at the minimum quarterly distribution rate will be subject to the factors described above under “—General—Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy.” Our partnership agreement requires that, on or about the last day of each of February, May, August and November, we distribute all of our available cash to unitholders of record on the applicable record date. If the distribution date does not fall on a business day, we will make the distribution on the first business day immediately preceding the indicated distribution date. We do not expect to make distributions for the period that begins on July 1, 2014 and ends on the day prior to the closing of this offering other than the distribution to be made to USD Group LLC in connection with the closing of this offering as described in “Summary—Formation Transactions” and “Use of Proceeds.” We will pro rate the amount of our first distribution for the period from the closing of this offering through December 31, 2014 based on the actual length of the period. The amount of available cash needed to pay the minimum quarterly distribution on all of our common units, Class A Units, subordinated units and general partner units to be outstanding immediately after this offering for one quarter and on an annualized basis is summarized in the table below:

 

    No Exercise of Option to Purchase
Additional Common  Units
    Full Exercise of Option to Purchase
Additional Common  Units
 
          Minimum Quarterly
Distributions
          Minimum Quarterly
Distributions
 
          (in millions)           (in millions)  
    Number of Units     One Quarter     Annualized
(Four
Quarters)
    Number of Units     One Quarter     Annualized
(Four
Quarters)
 

Publicly held common units

    $                   $                     $                   $                

Common units held by USD Group LLC

           

Class A Units

    250,000            250,000       

Subordinated units held by USD Group LLC

           

General partner units

           
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $                   $                     $                   $                
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

As of the date of this offering, our general partner will be entitled to 2.0% of all distributions that we make prior to our liquidation. Our general partner’s initial 2.0% interest in these distributions may be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us in order to maintain its initial 2.0% general partner interest. Our general partner will also hold the incentive distribution rights, which entitle the holder to increasing percentages, up to a maximum of 48.0%, of the cash we distribute in excess of $         per unit per quarter.

 

While any subordinated units are outstanding, before we make any quarterly distributions to our subordinated unitholders, our common unitholders and holders of our Class A Units are entitled to receive payment of the full minimum quarterly distribution for such quarter plus, with respect to our common units, any arrearages in distributions of the minimum quarterly distribution from prior quarters. We cannot guarantee, however, that we will pay the minimum quarterly distribution on our common units in any quarter. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordinated Units and Conversion to Common Units.”

 

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

 

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the determination is not adverse to the best interests of our partnership. Please read “Conflicts of Interest and Fiduciary Duties.”

 

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

 

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

 

In the sections that follow, we present in detail the basis for our belief that we will be able to fully fund our annualized minimum quarterly distribution of $        per unit for the twelve months ending September 30, 2015. In those sections, we present two tables, consisting of:

 

   

“Unaudited Pro Forma Distributable Cash Flow for the Year Ended December 31, 2013 and the Twelve Months Ended June 30, 2014,” in which we present our distributable cash flow for the year ended December 31, 2013 and the twelve months ended June 30, 2014, respectively, derived from our unaudited pro forma financial data that are included in this prospectus, as adjusted to give pro forma effect to this offering and the related formation transactions; and

 

   

“Estimated Distributable Cash Flow for the Twelve Months Ending September 30, 2015,” in which we provide our estimated forecast of our ability to generate sufficient distributable cash flow for us to pay the minimum quarterly distribution on all units for the twelve months ending September 30, 2015.

 

Unaudited Pro Forma Distributable Cash Flow for the Year Ended December 31, 2013 and the Twelve Months Ended June 30, 2014

 

If we had completed the transactions contemplated in this prospectus on January 1, 2013, we would not have generated positive pro forma distributable cash flow. Our unaudited pro forma distributable cash flow includes the estimated incremental expenses of being a public company as well as pre-operational costs related to our Hardisty rail terminal, without the corresponding revenues from that terminal. Our Hardisty rail terminal commenced operations on June 30, 2014, and we expect to generate the vast majority of our Adjusted EBITDA and distributable cash flow in connection with providing crude oil terminalling services at our Hardisty rail terminal.

 

As discussed above, our unaudited pro forma distributable cash flow for the year ended December 31, 2013 and the twelve months ended June 30, 2014 includes $2.1 million of estimated incremental annual general and administrative expenses that we expect to incur as a result of becoming a publicly traded partnership. This

 

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amount is an estimate, and our general partner will ultimately determine the actual amount of these incremental annual general and administrative expenses to be reimbursed by us in accordance with our partnership agreement. Incremental annual general and administrative expenses related to being a publicly traded partnership include expenses associated with annual, quarterly and current reporting; tax return and Schedule K-1 preparation and distribution expenses; Sarbanes-Oxley compliance expenses; expenses associated with listing on the NYSE; independent auditor fees; legal fees; investor relations expenses; registrar and transfer agent fees, outside director fees and director and officer insurance expenses. These expenses are not reflected in our or our Predecessor’s historical financial statements.

 

The adjusted amounts below do not present our results of operations as if the transactions contemplated in this prospectus had actually been completed on January 1, 2013. In addition, cash available to pay distributions is primarily a cash accounting concept, while distributable cash flows is based on our historical combined financial statements which have been prepared on an accrual basis. As a result, you should view the amount of pro forma historical distributable cash flow 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 January 1, 2013.

 

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The following table illustrates, on a pro forma basis, for the six months ended June 30, 2013, the year ended December 31, 2013, the six months ended June 30, 2014 and the twelve months ended June 30, 2014, the amount of cash that would have been available for distribution to our unitholders, assuming that this offering had been completed on January 1, 2013.

 

USD PARTNERS LP

Unaudited Pro Forma Distributable Cash Flow

 

    Six
Months
Ended
June 30,
2013
    Year Ended
December 31,
2013
    Six
Months
Ended
June 30,
2014
    Twelve
Months
Ended
June 30,
2014(1)
 
    (in thousands)  

Revenues:

       

Terminalling services

  $ 3,691      $ 7,130      $ 3,448      $ 6,887   

Fleet leases

    8,546        13,572        4,596        9,622   

Fleet services

    99        235        238        374   

Fleet services—related party

    276        962        718        1,404   

Freight and other reimbursables

    768        1,778        1,702        2,712   

Freight and other reimbursables—related party

           2,624        219        2,843   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    13,380        26,301        10,921        23,842   

Operating Costs:

       

Subcontracted rail services

    944        1,898        2,109        3,063   

Fleet leases

    8,546        13,572        4,596        9,622   

Freight and other reimbursables

    768        4,402        1,921        5,555   

Selling, general & administrative

    2,044        4,458        3,813        6,227   

Depreciation

    251        502        254        505   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    12,553        24,832        12,693        24,972   

Operating Income (Loss)

    827        1,469        (1,772     (1,130

Interest expense(2)

    2,418        4,884        2,418        4,884   

Loss on derivative contracts

                  802        802   

Other expense, net

           39        688        727   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for state income taxes

    (1,591     (3,454     (5,680     (7,543

Provision for income taxes

    148        449        359        660   
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro Forma Net Loss

    (1,739     (3,903     (6,039     (8,203

Add:

       

Depreciation and amortization expense

    251        502        254        505   

Interest expense(2)

    2,418        4,884        2,418        4,884   

Loss on derivative contracts

                  802        802   

Other expense, net

           39        688        727   

Provision for income taxes

    148        449        359        660   
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro Forma Adjusted EBITDA(3)

    1,078        1,971        (1,518     (625

Less:

       

Provision for income taxes

    (148     (449     (359     (660

Cash interest expense(2)

    (2,217     (4,481     (2,217     (4,481

Maintenance capital expenditures(4)

                           

Expansion capital expenditures(4)

    (6,129     (56,114     (30,327     (80,312

Incremental general and administrative expenses of being a publicly traded partnership(5)

    (1,068     (2,135     (1,068     (2,135

Add:

       

Available cash and borrowings to fund expansion capital expenditures

    6,129        56,114        30,327        80,312   
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma distributable cash flow deficit

  $ (2,354   $ (5,094   $ (5,161   $ (7,901
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1)   Represents the combination of the results for the year ended December 31, 2013 and the six months ended June 30, 2014, less the results of the six months ended June 30, 2013.
(2)   Interest expense and cash interest expense both include commitment fees and interest expense that would have been paid by our predecessor had our new senior secured credit agreement been in place during the period presented and we had borrowed $100.0 million under the term loan facility at the beginning of the period. Interest expense, net also includes the amortization of debt issuance costs incurred in connection with our new senior secured credit agreement. Cash interest expense excludes the amortization of debt issuance costs.
(3)   We define Adjusted EBITDA and provide a reconciliation to its most directly comparable financial measures calculated and presented in accordance with GAAP in “Selected Historical and Pro Forma Financial and Operating Data—Non-GAAP Financial Measures.”
(4)   Historically we did not necessarily distinguish between maintenance capital expenditures and expansion capital expenditures in the same manner that will be required under our partnership agreement following the closing of this offering. For purposes of this pro forma presentation, we have retroactively reclassified our total capital expenditures as either maintenance capital expenditures or expansion capital expenditures in the same manner that will be required prospectively under our partnership agreement following the closing of this offering. Based on the nature of our operations, our assets typically require minimal to no maintenance capital expenditures. Maintenance capital expenditures, as defined in our partnership agreement, are recorded in Other operating costs. For a discussion of maintenance and expansion capital expenditures, please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Capital Expenditures.”
(5)   Reflects an adjustment for estimated cash expenses associated with being a publicly traded partnership, such as expenses associated with annual and quarterly reporting; tax return and Schedule K-1 preparation and distribution expenses; expenses associated with listing on the NYSE; independent auditor fees; legal fees; investor relations expenses; registrar and transfer agent fees; director and officer insurance expenses; and incremental costs associated with operating our logistics assets as a growth-oriented business.

 

Estimated Distributable Cash Flow for the Twelve Months Ending September 30, 2015

 

We forecast that our estimated distributable cash flow for the twelve months ending September 30, 2015 will be approximately $27.1 million. This amount would exceed by $         million the amount of distributable cash flow we must generate to support the payment of the minimum quarterly distributions for four quarters on our common units, Class A Units and subordinated units and the corresponding distributions on our general partner units, in each case to be outstanding immediately after this offering, for the twelve months ending September 30, 2015.

 

We have not historically made public projections as to future operations, earnings or other results. However, management has prepared the forecast of estimated distributable cash flow for the twelve months ending September 30, 2015, and related assumptions set forth below to substantiate our belief that we will have sufficient distributable cash flow to pay the full minimum quarterly distributions on our common units, Class A Units and subordinated units and the corresponding distributions on our general partner units for the twelve months ending September 30, 2015. Please read below under “—Significant Forecast Assumptions” for further information as to the assumptions we have made for the financial forecast. This forecast is a forward-looking statement and should be read together with our historical combined financial statements and accompanying notes included elsewhere in this prospectus, our unaudited pro forma combined financial statements and accompanying notes included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This forecast was not prepared with a view toward complying with the published guidelines of the SEC or guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of our management, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of management’s knowledge and belief, the assumptions on which we base our belief that we can generate sufficient distributable cash flow to pay the full

 

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minimum quarterly distributions on our common units, Class A Units and subordinated units and the corresponding distributions on our general partner units for the twelve months ending September 30, 2015. However, this information is not fact and should not be relied upon as being necessarily indicative of our future results, and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information.

 

The prospective financial information included in this registration statement has been prepared by, and is the responsibility of, our management. UHY LLP has neither compiled nor performed any procedures with respect to the accompanying prospective financial information and, accordingly, UHY LLP does not express an opinion or any other form of assurance with respect thereto. The UHY LLP report included in this registration statement relates to our historical financial information. It does not extend to the prospective financial information and should not be read to do so.

 

When considering our financial forecast, you should keep in mind the risk factors and other cautionary statements under “Risk Factors.” Any of the risks discussed in this prospectus, to the extent they are realized, could cause our actual results of operations to vary significantly from those that would enable us to generate our estimated distributable cash flow.

 

We do not undertake any obligation to release publicly the results of any future revisions we may make to the forecast or to update this forecast to reflect events or circumstances after the date of this prospectus. Therefore, you are cautioned not to place undue reliance on this prospective financial information.

 

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USD Partners LP

Estimated Distributable Cash Flow

for the Twelve Months Ending September 30, 2015

(unaudited)

 

    Pro Forma
Twelve  Months
Ended
    Three Months Ending     Twelve
Months
Ending
 
($ in millions)   June 30,
2014(6)
    December 31,
2014
    March 31,
2015
    June 30,
2015
    September 30,
2015
    September 30,
2015
 

Revenues:

           

Terminalling services(1)

  $ 6.9      $ 20.3      $ 20.3      $ 20.3      $ 20.6      $ 81.6   

Fleet leases

    9.6        3.8        4.3        2.3        1.8        12.1   

Fleet services

    1.8        1.0        1.1        1.0        0.8        3.9   

Freight and other reimbursables

    5.5        1.9        1.9        0.5        0.1        4.4   

Total revenues

  $ 23.8      $ 27.2      $ 27.6      $ 24.0      $ 23.3      $ 102.0   

Operating costs:

           

Subcontracted rail services

  $ (3.1   $ (2.4   $ (2.4   $ (2.4   $ (2.4   $ (9.7

Fleet leases

    (9.6     (3.8     (4.3     (2.3     (1.8     (12.1

Freight and other reimbursables

    (5.6     (1.9     (1.9     (0.5     (0.1     (4.4

Pipeline fee(1)

    —          (5.6     (5.7     (5.7     (5.8     (22.8

Other operating costs(2)

    —          (1.8     (1.8     (1.8     (1.8     (7.3

Selling, general & administrative(3)

    (6.2     (1.8     (1.8     (1.8     (1.8     (7.0

Depreciation

    (0.5     (1.2     (1.2     (1.2     (1.2     (5.0

Total operating costs

  $  (25.0   $ (18.6   $ (19.1   $ (15.7   $ (14.9   $ (68.3

Operating income (loss)

    (1.2     8.5        8.5        8.3        8.4        33.7   

Interest expense, net(4)

    (4.9     (0.9     (0.8     (0.8     (0.8     (3.3

Other expense, net

    (1.5     —          —          —          —          —     

Income (loss) from continuing operations before provision for income taxes

    (7.5     7.7        7.6        7.5        7.6        30.4   

Provision for income and withholding taxes(5)

    (0.7     (2.2     (2.2     (2.2     (2.2     (8.7

Net income (loss)

  $ (8.2   $ 5.5      $ 5.4      $ 5.4      $ 5.4      $ 21.7   

Plus:

           

Provision for income and withholding taxes(5)

  $ 0.7      $ 2.2      $ 2.2      $ 2.2      $ 2.2      $ 8.7   

Interest expense, net(4)

    4.9        0.9        0.8        0.8        0.8        3.3   

Depreciation expense

    0.5        1.2        1.2        1.2        1.2        5.0   

Other expense, net

    1.5        —          —          —          —          —     

Estimated Adjusted EBITDA

  $ (0.7   $ 9.8      $ 9.7      $ 9.6      $ 9.6      $ 38.7   

Less:

           

Provision for income and withholding taxes(5)

  $ (0.7   $ (2.2   $ (2.2   $ (2.2   $ (2.2   $ (8.7

Cash interest paid, net

    (4.5     (0.8     (0.7     (0.7     (0.7     (2.9

Maintenance capital expenditures(2)

    —          —          —          —          —          —     

Incremental general and administrative expenses of being a publicly traded partnership(3)

    (2.1          

Estimated distributable cash flow (deficit)

  $ (7.9   $ 6.8      $ 6.8      $ 6.7      $ 6.7      $ 27.1   

Pro forma cash distributions:

           

Minimum annual distribution per unit (based on minimum quarterly distribution rate of $             per unit)

           

Annual distributions to:

           

Public common unitholders

           

US Development Group:

           

Common units

           

Class A Units

           

Subordinated units

           

General partner units

           

Total distributions to US Development Group

           

Total distributions to our unitholders and general partner at the minimum distribution rate

  $        $        $        $        $        $     

Excess (shortfall) of cash available for distribution over aggregate minimum quarterly distributions

           

 

(1)   Does not include an aggregate of CAD $12.5 million of revenues associated with incentive payments from railroads and resulting pipeline fees and tax impacts. Please read “—Revenues—Railroad Incentive Payments.”
(2)   We record our routine maintenance expenses associated with our assets in Other operating costs, which are forecasted to be $0.6 million for the twelve months ending September 30, 2015.
(3)   Selling, general & administrative expense for the pro forma twelve months period ended June 30, 2014 does not include estimated incremental general and administrative expenses of being a publicly traded partnership. We estimate incurring an aggregate of $2.1 million of such additional expenses during the forecast periods, and added an equivalent amount of expenses to the presentation of estimated distributable cash flow for the twelve months ended June 30, 2014 in order to improve comparability to the forecast periods.

 

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(4)   Includes $0.4 million of amortized financing costs based on a $2.0 million financing cost associated with our new $300.0 million senior secured credit agreement. Interest expense for the pro forma twelve months ended June 30, 2014 is calculated based on an estimated interest rate of 3.48% (comprised of a base rate of 0.2307% plus an applicable margin of 3.25%). Interest expense for the twelve months ending September 30, 2015 is calculated based on an estimated interest rate for the five months ending February 28, 2015 of 2.76% (comprised of a base rate of 0.26% plus an applicable margin of 2.50%) and then based on an estimated interest rate for the seven months ending September 30, 2015 of 2.76% (comprised of a base rate of 0.51% plus an applicable margin of 2.25%), which corresponds with the expected pricing under our new senior secured credit agreement. Forecasted interest expense includes a commitment fee based on 0.375% of the amount undrawn on our revolving credit facility. This also includes interest income generated from cash on the balance sheet at an assumed rate of 0.50%.
(5)   Represents provision for Canadian income and withholding taxes on distributions from our Canadian subsidiary which owns the Hardisty terminal. Also includes $1.4 million of income and withholding tax expense on revenues from our railcar business. We are currently seeking a ruling from the IRS on the qualifying nature of the revenues generated by our railcar business. We are assuming for purposes of this forecast that we will not receive the ruling in a timely manner and will elect to pay taxes on the revenues generated by our railcar business. See “Risk Factors—We may choose to conduct a portion of our operations, which may not generate qualifying income, in a subsidiary that is treated as a corporation for U.S. federal income tax purposes and is subject to corporate-level income taxes. Corporate federal income tax would reduce our cash available for distribution.” If we receive the ruling in a timely manner, we will not incur these income tax expenses and our distributable cash flow will increase by a corresponding amount.
(6)   The pro forma results for the twelve months ended June 30, 2014 give pro forma effect to the transactions to be effected at the closing of this offering described under “Summary—Formation Transactions.” For a further discussion of the pro forma adjustments, please see the Unaudited Pro Forma Combined Financial Statements appearing elsewhere in this prospectus.

 

Significant Forecast Assumptions

 

The forecast has been prepared by and is the responsibility of management. The 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 months ending September 30, 2015. While the assumptions discussed below are not all-inclusive, they include those that we believe are material to our forecasted results of operations, and any assumptions not discussed below were not deemed to be material. We believe we have a reasonable, objective basis for these assumptions. We believe our actual results of operations will approximate those reflected in our forecast, but we can give no assurance that our forecasted results will be achieved. There will likely be differences between our forecast and our actual results and those differences could be material. If the forecasted results are not achieved, we may not be able to make cash distributions on our common units at the minimum quarterly distribution rate.

 

General Considerations

 

We believe that our estimated distributable cash flow for the twelve months ending September 30, 2015 will not be less than $27.1 million. As we discuss in further detail below, the commencement of operations at our Hardisty rail terminal on June 30, 2014 will result in us generating significant distributable cash flow for the twelve months ending September 30, 2015. As discussed above, we did not generate positive distributable cash flow on a pro forma basis for the year ended December 31, 2013 or the twelve months ended June 30, 2014.

 

We intend to pay our unitholders distributions based on the cash flow generated from both our U.S. and Canadian-based assets and businesses. The vast majority of our cash flow is projected to be generated from our Hardisty rail terminal, which is Canadian dollar denominated. The performance of the Canadian dollar relative to the U.S. dollar could positively or negatively affect our earnings. As a result, we have entered into certain put and call options that will be in effect during the forecast period to secure a Canadian dollar to U.S. dollar exchange rate of at least 0.91 on approximately 97.3% of our forecasted Canadian dollar cash flow to substantially mitigate the impact of changes in foreign exchange rates. We have assumed for the purposes of the twelve months ending September 30, 2015 that Canadian dollars are converted into U.S. dollars at an average exchange rate of 0.91, which is the low end of the hedge mentioned above. The spot rate in effect as of August 26, 2014 was 0.9121.

 

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The following table shows the relative contribution to distributable cash flow for each of our terminals as well as our fleet services business, which represents cash flows net of items directly associated with our assets including general and administrative expenses, income and withholding taxes and maintenance capital expenditures:

 

     Three Months Ending     Twelve
Months
Ending
 
     December 31,
2014
    March 31,
2015
    June 30,
2015
    September 30,
2015
    September 30,
2015
 

Hardisty rail terminal

   $ 7.5      $ 7.3      $ 7.3      $ 7.5      $  29.6   

West Colton rail terminal

     0.2        0.2        0.2        0.2        0.8   

San Antonio rail terminal

     0.4        0.4        0.4        0.4        1.7   

Fleet services

     0.7        0.7        0.6        0.5        2.5   

Partnership general and administrative expenses(1)

     (1.2     (1.2     (1.2     (1.2     (4.6

Cash interest paid, net

     (0.8     (0.7     (0.7     (0.7     (2.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Distributable Cash Flow

   $ 6.8      $ 6.8      $ 6.7      $ 6.7      $ 27.1   

 

(1)   Represents $2.5 million administrative fee payable to USD Group LLC and $2.1 million of additional general and administrative expenses associated with being a publicly traded partnership. Does not include general and administrative expenses directly associated with our assets.

 

The assumptions and estimates we have made to support our ability to generate the minimum estimated distributable cash flow are set forth below.

 

Revenues

 

We estimate that we will generate revenue of $102.0 million for the twelve months ending September 30, 2015, as compared to pro forma revenue of $23.8 million for the twelve months ended June 30, 2014.

 

Terminalling Services.    For the twelve months ending September 30, 2015, we expect to generate approximately $81.6 million in Terminalling services revenue. The majority of our Terminalling services revenue is associated with our Hardisty rail terminal which was not in operation in historical periods.

 

   

Hardisty rail terminal.    For the twelve months ending September 30, 2015, we expect to generate approximately $74.8 million in revenue from our Hardisty rail terminal. For the twelve months ending September 30, 2015, we have assumed that approximately 98.0% of our Hardisty rail terminalling revenues are derived from minimum monthly payments from our customers under existing contracts. We expect that the remaining revenue will be generated by throughput fees from barrels of crude oil loaded in excess of the minimum volume commitments, based on preliminary volume indications from our customers; however, these volumes are not contractually committed and are subject to change. The operations of our Hardisty rail terminal commenced on June 30, 2014 and as such, there are no relevant periods to provide for comparability.

 

   

Railroad incentive payments.    Historically, we have received incentive payments from railroads in connection with events that are projected to increase incremental traffic on their network such as large capital projects. With respect to our Hardisty rail terminal, we have the right to receive up to CAD $12.5 million in gross incentive payments payable based on the number of railcars loaded. A portion of these incentive payments increases the pipeline fees payable to Gibson. We have not included in the forecast the effect of any of these incentive payments. We estimate the net impact to our distributable cash flow of these incentive payments over the next three to five years to be $7.5 million, which is net of Canadian income and withholding taxes and the related pipeline fees to Gibson. We and our sponsor expect to seek additional incentive payments in the future.

 

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West Colton rail terminal.    For the twelve months ending September 30, 2015, we expect to generate approximately $2.9 million in revenue from our West Colton rail terminal, as compared to pro forma revenue of $2.8 million for the twelve months ended June 30, 2014. Our projected volumes of 4.6 thousand barrels of ethanol transloaded per day (5.9 million gallons per month) are based on actual historical volumes and preliminary indications from our customer.

 

   

San Antonio rail terminal.    For the twelve months ending September 30, 2015, we expect to generate approximately $3.9 million in revenue from our San Antonio rail terminal, as compared to pro forma revenue of $3.9 million for the twelve months ended June 30, 2014. Our projected volumes are based on actual historical volumes of 10.1 thousand barrels of ethanol transloaded per day (13.1 million gallons per month) and preliminary indications from our customer.

 

Throughput.    Aggregate terminalling throughput is forecasted to substantially increase between the historical period and the twelve months ending September 30, 2015, primarily as a result of the completion and commencement of operations at our Hardisty rail terminal on June 30, 2014.

 

The following table compares forecasted throughput for the twelve months ending September 30, 2015, to actual volumes for the twelve months ended June 30, 2014.

 

    

Actual

Twelve Months

    

Forecasted

Twelve Months

 
     Ended
June 30, 2014
     Ending
September 30,  2015
 
     (Throughput in Mbpd)  

Terminals

     

Hardisty rail terminal

     N/A         130.1   

West Colton rail terminal

     4.6         4.6   

San Antonio rail terminal

     10.1         10.1   

 

Fleet leases.    For the twelve months ending September 30, 2015, we expect to generate approximately $12.1 million in Fleet leases revenue from lease payments under existing contracts from customers that lease railcars directly from us. During the twelve months ended June 30, 2014 the pro forma revenue with respect to these railcars was $9.6 million. The increase is primarily due to an increased number of railcars leased in conjunction with the commencement of operations of the Hardisty rail terminal.

 

Fleet services.    For the twelve months ending September 30, 2015, we expect to generate approximately $3.9 million in Fleet services revenue from providing management services to customers. During the twelve months ended June 30, 2014, the pro forma fleet services revenue was $1.8 million. The increase is primarily due to the fact that most of the railcars in our fleet are contracted in conjunction with Hardisty rail terminal services agreements and the Hardisty rail terminal was not in operation in the historical periods.

 

Freight and other reimbursables.    For the twelve months ending September 30, 2015, we expect to generate $4.4 million in Freight and other reimbursables revenue from customer reimbursement of railroad freight fees. During the twelve months ended June 30, 2014, the pro forma freight and other reimbursables revenue was $5.5 million. The decrease is primarily due to a reduction in the number of new railcars being added to the fleet during the forecast period. Freight and other reimbursables revenue are offset by costs payable by us to railroads.

 

Operating Costs

 

We estimate that we will incur total operating costs of $68.3 million for the twelve months ending September 30, 2015, compared to pro forma total operating costs of $25.0 million for the twelve months ended June 30, 2014. The increase in our forecasted operating costs as compared to the pro forma twelve months ended June 30, 2014 is primarily due to the commencement of operations at our Hardisty rail terminal. Our forecasted operating costs for Hardisty are based on management’s historical experience with operating costs associated with similar types of terminals owned and operated in the past.

 

Terminalling services.    Operating costs associated with our Terminalling services business are comprised of labor expenses, rail service subcontracting costs, rent and utility costs and insurance premiums. Our subcontracting costs represent a large portion of our operating cost as a result of utilizing a subcontractor for in-plant rail switching and associated services at each of our terminals.

 

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In addition, at our Hardisty rail terminal, we entered into a facilities connection agreement with Gibson whereby Gibson would construct a pipeline to provide our Hardisty rail terminal with exclusive pipeline access to Gibson’s storage terminal in exchange for a pipeline fee to Gibson. For the twelve months ending September 30, 2015, we expect to pay Gibson a pipeline fee of approximately $22.8 million. Our forecasted subcontracting costs, Gibson pipeline fee and insurance premiums are based on our current agreements with our subcontractors, the Gibson facilities connection agreement and our insurance policies, respectively.

 

Fleet leases.    As part of the operating expenses related to our Fleet leases business, we incur a monthly fleet lease rental expense for the railcars that we have under lease. Forecasted Fleet leases expenses represent contractual lease payments payable to third parties.

 

Freight and other reimbursables.    We pay railroad freight costs for arranging the shipment of railcars on behalf of our customers. These costs are offset and reimbursed by our customers.

 

Selling, General & Administrative Expenses

 

We estimate that our total selling, general and administrative expenses will be $7.0 million for the twelve months ending September 30, 2015 as compared to pro forma selling, general and administrative expenses of $6.2 million for the twelve months ended June 30, 2014. These expenses consist of:

 

   

an annual fee of $2.5 million per year that we will pay to USD Group LLC under the omnibus agreement for the provision of various centralized administrative services for our benefit;

 

   

approximately $2.1 million of incremental annual expenses as a result of being a separate publicly traded partnership, including costs associated with annual and quarterly reports to unitholders, financial statement audit, tax return and Schedule K-1 preparation and distribution, investor relations, activities, registrar and transfer agent fees, incremental director and officer liability insurance premiums, independent director compensation, and incremental costs associated with operating our assets as a growth-oriented business; and

 

   

approximately $2.4 million in direct general and administrative expenses associated with our terminals, which we forecast based on historical expenses, existing contracts and management estimates.

 

Income and Withholding Taxes

 

Our income earned in Canada by our Canadian subsidiaries will be subject to Canadian income taxes at statutory rate of 25%. Furthermore, our Canadian subsidiaries will be required to withhold and remit Canadian withholding taxes equal to 5% on any dividends paid to us, subject to possible reduction under any applicable income tax treaty or convention. The Canadian subsidiaries are direct wholly owned subsidiaries of a Luxembourg Societe a Responsabilite Limitee (SARL). As such, we are of the view that the Canada-Luxembourg Treaty applies to the extent that dividends are paid by the Canadian subsidiaries to a SARL.

 

We have assumed a combined Canadian federal/provincial corporate income tax rate of 25% on our income earned in Canada during the forecast period. We have assumed that no Canadian distributions (such as dividends), other than an immaterial amount relating to our railcar business, will be made to the non-resident parent companies during the forecast period, and therefore no applicable withholding tax, other than an immaterial amount relating to our railcar business, will be payable, as we anticipate that all of the cash flow generated by our Canadian subsidiaries will be used to repay borrowings under the $100.0 million term loan (fully drawn in Canadian dollars). We expect to repay approximately $27.2 million of borrowings under our term loan during the twelve months ending September 30, 2015.

 

We have also assumed $1.4 million of income and withholding tax expense on revenues from our railcar business. We are currently seeking a ruling from the IRS on the qualifying nature of the revenues generated by our railcar business. We are assuming for purposes of this forecast that we will not receive the ruling in a timely manner and will elect to pay taxes on the revenues generated by our railcar business. See “Risk Factors—We may choose to conduct a portion of our operations, which may not generate qualifying income, in a subsidiary

 

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that is treated as a corporation for U.S. federal income tax purposes and is subject to corporate-level income taxes. Corporate federal income tax would reduce our cash available for distribution.” If we receive the ruling in a timely manner, we will not incur these income tax expenses and our distributable cash flow will increase by a corresponding amount.

 

Depreciation Expense

 

We estimate that depreciation expense will be approximately $5.0 million for the twelve months ending September 30, 2015, compared to pro forma depreciation expense of $0.5 million for the twelve months ended June 30, 2014. We have assumed property and equipment being recorded at historical cost, with interest on borrowings for construction being capitalized and depreciated when the asset is available for service. Forecasted depreciation is calculated using the straight-line method over the estimated useful lives of depreciable assets with a total cost basis of $94.5 million, which range from 5 to 20 years. Depreciation expense is expected to increase due to completion of the construction of the Hardisty rail terminal.

 

Financing

 

We estimate that net interest expense for the twelve months ending September 30, 2015 will be approximately $3.3 million based on the following assumptions:

 

   

We will enter into a new $300.0 million senior secured credit agreement comprised of a $200.0 million revolving credit facility and a $100.0 million term loan (borrowed in Canadian dollars). Borrowings under the credit agreement bear interest based on pre-determined pricing grids that allow us to choose between base rate loans or London Interbank Offered Rate (LIBOR) rate loans. We have assumed interest rates of 2.76% for the five months ending February 28, 2015 (comprised of a base rate of 0.26% plus an applicable margin of 2.50%) and 2.76% for the seven months ending September 30, 2015 (comprised of a base rate of 0.51% plus an applicable margin of 2.25%) for projections related to the revolving credit facility and term loan. We assume that there is a $2.0 million financing cost associated with our $300.0 million credit agreement that is amortized over five years. We assume that there will be $86.4 million in average borrowings under the term loan and no borrowings under the revolving credit facility during the forecast period;

 

   

Our interest expense will include annual commitment fees associated with undrawn capacity on our revolving credit facility, as well as the amortization of estimated deferred issuance costs incurred in connection with our new senior secured credit agreement;

 

   

Interest income generated from cash on the balance sheet at an assumed rate of 0.50%; and

 

   

We will remain in compliance with the financial and other covenants in our new senior secured credit agreement.

 

Interest expense for the pro forma twelve months ended June 30, 2014 is calculated based on an estimated interest rate of 3.48% (comprised of a base rate of 0.2307% plus an applicable margin of 3.25%). Interest expense for the twelve months ending September 30, 2015 is calculated based on an estimated interest rate for the five months ending February 28, 2015 of 2.76% (comprised of a base rate of 0.26% plus an applicable margin of 2.50%) and then based on an estimated interest rate for the seven months ending September 30, 2015 of 2.76% (comprised of a base rate of 0.51% plus an applicable margin of 2.25%), which corresponds with the expected pricing under our new senior secured credit agreement. Forecasted interest expense includes a commitment fee based on 0.375% of the amount undrawn on our revolving credit facility. This also includes interest income generated from cash on the balance sheet at an assumed rate of 0.50%. The decrease in interest expense for the twelve months ending September 30, 2015 compared to the pro forma twelve months ended June 30, 2014 is primarily due to an improvement in the leverage ratio for the twelve months ending September 30, 2015 as compared to the leverage ratio for the pro forma twelve months ended June 30, 2014 which resulted in a lower interest rate.

 

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Capital Expenditures

 

We do not forecast incurring any maintenance capital expenditures during the twelve months ending September 30, 2015, and we did not incur any maintenance capital expenditures during the twelve months ended June 30, 2014. Based on the nature of our operations, our assets typically require minimal to no maintenance capital expenditures. We record our routine maintenance expenses associated with our assets in other operating costs, which are forecasted to be $0.6 million for the twelve months ending September 30, 2015 and none for the twelve months ended June 30, 2014. Management estimates our maintenance costs based on experience with similar types of terminals owned and operated in the past, taking into account average estimated asset useful life, average throughput and regulatory safety requirements. Management also includes certain expenses that are necessary to maintain operating capacity as well as safe operations at its terminals in its projections.

 

For the twelve months ending September 30, 2015, we are not currently projecting any growth capital expenditures. Our total growth capital expenditures for the twelve months ended June 30, 2014 were $80.3 million and were primarily in connection with the construction of our Hardisty rail terminal. We have not included any future acquisitions in our budgeted capital expenditures for the twelve months ending September 30, 2015.

 

Regulatory, Industry and Economic Factors

 

Our forecast of estimated Adjusted EBITDA for the twelve months ending September 30, 2015 is based on the following significant assumptions related to regulatory, industry and economic factors:

 

   

Our third-party customers and our sponsor will not default under or terminate any of our commercial agreements, or reduce, suspend or terminate their obligations thereunder, nor will any events occur that would be deemed a force majeure event under such agreements;

 

   

there will not be any new federal, state or local regulation, or any interpretation of existing regulation, of the portions of the refining or transportation and logistics industries in which we operate that will be materially adverse to our business;

 

   

there will not be any material accidents, weather-related incidents, unscheduled downtime or similar unanticipated events with respect to our assets;

 

   

there will not be a shortage of skilled labor; and

 

   

there will not be any material adverse changes in the refining industry, the transportation and logistics sector or market, or overall economic conditions.

 

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PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

 

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

 

Distributions of Available Cash

 

General

 

Our partnership agreement requires that, on or about the last day of each of February, May, August and November, beginning with either the quarter in which the closing of this offering occurs or the following quarter (as set forth elsewhere in this prospectus), we distribute all of our available cash to unitholders of record on the applicable record date. We will adjust the amount of our distribution for the period from and including the closing date of this offering through December 31, 2014 based on the actual length of the period.

 

Definition of Available Cash

 

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

 

   

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

 

   

provide for the proper conduct of our business (including cash reserves for our future capital expenditures and anticipated future debt service requirements subsequent to that quarter);

 

   

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

 

   

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

 

   

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

 

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

 

General Partner Interest and Incentive Distribution Rights

 

Initially, our general partner will be entitled to 2.0% of all quarterly distributions from inception that we make prior to our liquidation. This general partner interest will be represented             by general partner units. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us to maintain its current general partner interest. The general partner’s initial 2.0% interest in these distributions will be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us to maintain its 2.0% general partner interest.

 

Our general partner also currently holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 48.0%, of the cash we distribute from operating surplus (as defined below) in excess of $         per unit per quarter. The maximum distribution of 48.0% does not include any distributions that our general partner or its affiliates may receive on common, Class A, subordinated or general partner units that they own. Please read “—General Partner Interest and Incentive Distribution Rights” for additional information.

 

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Class A Units

 

In August 2014, the board of directors of our general partner granted 250,000 Class A Units to certain executive officers and other key employees of our general partner and its affiliates who provide services to us. The Class A Units are limited partner interests in our partnership that entitle the holders to distributions that are equivalent to the distributions paid in respect of our common units (excluding any arrearages of unpaid minimum quarterly distributions from prior quarters). The Class A Units do not have voting rights, but contain a conversion right, which, after vesting of the Class A Units, allows for the conversion of Class A Units into common units based on a conversion factor that will grow as our annualized distributions grow and could range between one and ten common units per Class A Unit.

 

The Class A Unit recipients will be entitled to the same distributions, on a per unit (one-for-one) basis, as the holders of our common units, except that Class A Units will not be entitled to receive any distributions that relate to arrearages of unpaid minimum quarterly distributions from prior quarters.

 

Operating Surplus and Capital Surplus

 

General

 

Any distributions we make will be characterized as made from “operating surplus” or “capital surplus.” Distributions from operating surplus are made differently than cash distributions that we would make from capital surplus. Operating surplus distributions will be made to our unitholders and, if we make quarterly distributions above the first target distribution level described below, to the holder of our incentive distribution rights. We do not anticipate that we will make any distributions from capital surplus. In such an event, however, any capital surplus distribution would be made pro rata to all unitholders, but the holder of the incentive distribution rights would generally not participate in any capital surplus distributions with respect to those rights.

 

Operating Surplus

 

We define operating surplus as:

 

   

$         million (as described below); plus

 

   

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

 

   

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

 

   

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

 

   

cash distributions (including incremental distributions on incentive distribution rights) paid in respect of equity issued, other than equity issued in this offering, to pay interest and related fees on debt incurred, or to pay distributions on equity issued, to finance the expansion capital expenditures referred to in the prior bullet; less

 

   

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

 

   

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

 

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

 

   

any cash loss realized on disposition of an investment capital expenditure.

 

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 our 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 interests in operating surplus will be to increase operating surplus by the amount of any such cash distributions. As a result, we may also distribute as operating surplus up to the amount of any such cash that we receive from non-operating sources.

 

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

 

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

 

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

 

   

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

 

   

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

 

   

expansion capital expenditures;

 

   

investment capital expenditures;

 

   

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

 

   

distributions to our partners; or

 

   

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

 

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Capital Surplus

 

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

 

   

borrowings other than working capital borrowings;

 

   

sales of our equity and debt securities; and

 

   

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

 

Characterization of Cash Distributions

 

Our partnership agreement requires that we 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. Our partnership agreement requires that we treat any amount distributed in excess of operating surplus, regardless of its source, as capital surplus. We do not anticipate that we will make any distributions from capital surplus.

 

Capital Expenditures

 

Expansion capital expenditures are cash expenditures incurred for acquisitions or capital improvements that we expect will increase our operating income or operating capacity over the long term. Examples of expansion capital expenditures include the acquisition of terminals and railcars from USD or third parties and the construction or development of new terminals or additional capacity at our existing rail terminals to the extent such capital expenditures are expected to expand our operating capacity or operating income. Expansion capital expenditures include interest payments (and related fees) on debt incurred to finance all or a portion of expansion capital expenditures in respect of the period from the date that we enter into a binding obligation to commence the construction, development, replacement, improvement or expansion of a capital asset and ending on the earlier to occur of the date that such capital improvement commences commercial service and the date that such capital improvement is abandoned or disposed of. Expansion capital expenditures are not included in operating expenditures and thus will not reduce operating surplus.

 

Maintenance capital expenditures are cash expenditures made to maintain, over the long term, our operating capacity or operating income. Examples of maintenance capital expenditures are expenditures to repair, refurbish and replace of terminals. Maintenance capital expenditures are included in operating expenditures and thus will reduce operating surplus.

 

Investment capital expenditures are those capital expenditures that are neither maintenance 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 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 or development of facilities that are in excess of the maintenance of our existing operating capacity or operating income, but that are not expected to expand our operating capacity or operating income over the long term.

 

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

 

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Subordinated Units and Conversion to Common Units

 

General

 

Our partnership agreement provides that, while any subordinated units remain outstanding, the common units and Class A Units will have the right to receive distributions of available cash from operating surplus each quarter in an amount equal to $         per unit, which amount is defined in our partnership agreement as the minimum quarterly distribution, plus (with respect to the common units) any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. These units are deemed “subordinated” prior to their conversion into common units. The subordinated units will not be entitled to receive any distributions until the common units and Class A Units have received the minimum quarterly distribution plus (with respect to the common units) any arrearages on the common units from prior quarters. Furthermore, no arrearages will be paid on the subordinated units. The practical effect of the subordinated units is to increase the likelihood that, while the subordinated units are outstanding, there will be available cash to be distributed on the common units.

 

The subordinated units will convert into common units on a one-for-one basis in separate, sequential tranches as described below. Each tranche will be comprised of 20.0% of the subordinated units outstanding immediately following this offering. A separate tranche will convert on each business day occurring on or after October 1, 2015 (but not more than once in any twelve-month period), provided that on such date the following conditions are satisfied:

 

   

distributions of available cash from operating surplus on each of the outstanding common units, Class A Units, subordinated units and general partner units equaled or exceeded $         (the annualized minimum quarterly distribution) for the four quarter period immediately preceding that date;

 

   

the adjusted operating surplus generated during the four quarter period immediately preceding that date equaled or exceeded the sum of $         (the annualized minimum quarterly distribution) on all of the common units, Class A Units, subordinated units and general partner units outstanding during that period on a fully diluted basis; and

 

   

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

 

For each successive tranche, the four quarter period specified in the first and second bullet above must commence after the four quarter period applicable to any prior tranche of subordinated units.

 

If more than one person owns our subordinated units, our general partner will determine which subordinated units will be converted on each conversion date.

 

Conversion upon Removal of the General Partner

 

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

 

   

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

 

   

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

 

   

our general partner will have the right to convert its general partner interest and its incentive distribution rights into common units or to receive cash in exchange for those interests.

 

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Adjusted Operating Surplus

 

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

Distributions from Operating Surplus While Any Subordinated Units are Outstanding

 

If we make a distribution of cash from operating surplus for any quarter while any subordinated units remain outstanding, our partnership agreement requires we make the distribution in the following manner:

 

   

first, 98.0% to the common unitholders and Class A Unitholders, and 2.0% to our general partner, until we distribute for each outstanding common unit and Class A Unit an amount equal to the minimum quarterly distribution for that quarter;

 

   

second, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, 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;

 

   

third, 98.0% to the subordinated unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding subordinated unit an amount equal to the minimum quarterly distribution for that quarter; and

 

   

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

 

The preceding discussion is based on the assumptions that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of equity securities.

 

Distributions from Operating Surplus After All Subordinated Units have Converted into Common Units

 

If we make a distribution from operating surplus for any quarter after all subordinated units have converted into common units, our partnership agreement requires that we make the distribution in the following manner:

 

   

first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, 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 discussion is based on the assumptions that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of equity securities.

 

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General Partner Interest and Incentive Distribution Rights

 

Our partnership agreement provides that our general partner initially will be entitled to 2.0% of all distributions that we make prior to our liquidation. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us in order to maintain its 2.0% general partner interest if we issue additional units. Our general partner’s 2.0% interest, and the percentage of our cash distributions to which it is entitled from such 2.0% interest, will be proportionately reduced if we issue additional units in the future (other than the issuance of common units upon exercise by the underwriters of their over-allotment option to purchase additional common units in this offering, the issuance of common units upon conversion of outstanding subordinated units or the issuance of common units upon a reset of the incentive distribution rights) and our general partner does not contribute a proportionate amount of capital to us in order to maintain its 2.0% general partner interest. Our partnership agreement does not require that our general partner fund its capital contribution with cash. Our general partner may instead fund its capital contribution by the contribution to us of common units or other property.

 

Incentive distribution rights represent the right to receive an increasing percentage (13.0%, 23.0% and 48.0%) of quarterly distributions from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. Our general partner currently holds the incentive distribution rights, but may transfer these rights at any time.

 

The following discussion assumes that our general partner maintains its 2.0% general partner interest, and that our general partner continues to own the incentive distribution rights.

 

If for any quarter:

 

   

we have distributed cash from operating surplus to the common unitholders, holders of our Class A Units and subordinated unitholders in an amount equal to the minimum quarterly distribution; and

 

   

we eliminate any cumulative arrearages in payment of the minimum quarterly distribution;

 

then, we will make additional distributions from operating surplus for that quarter among the unitholders and our general partner in the following manner:

 

   

first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, 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 our general partner, 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 our general partner, 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 our general partner.

 

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Percentage Allocations from Operating Surplus

 

The following table illustrates the percentage allocations of distributions from operating surplus between the unitholders and our general partner based on the specified target distribution levels. The amounts set forth under “Marginal Percentage Interest in Distributions” are the percentage interests of our general partner and the unitholders in any distributions from operating surplus we distribute up to and including the corresponding amount in the column “Total Quarterly Distribution Per Unit Target Amount.” The percentage interests shown for our unitholders and our general partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests set forth below for our general partner include its 2.0% general partner interest and assume that our general partner has contributed any additional capital necessary to maintain its 2.0% general partner interest that our general partner has not transferred its incentive distribution rights and that there are no arrearages on common units.

 

     Total Quarterly Distribution
Per Unit Target Amount
     Marginal Percentage Interest in
Distributions
 
      Unitholders     General Partner  

Minimum Quarterly Distribution