S-1/A 1 d580473ds1a.htm FORM S-1/A Form S-1/A
Table of Contents

As filed with the Securities and Exchange Commission on October 25, 2013

Registration No. 333-191534

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

AMENDMENT NO. 2

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

Arc Logistics Partners LP

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   5171   36-4767846
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
 

(I.R.S. Employer

Identification Number)

725 Fifth Avenue, 19th Floor

New York, NY 10022

(212) 993-1290

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

 

Vincent Cubbage

725 Fifth Avenue, 19th Floor

New York, NY 10022

(212) 993-1290

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

 

Copies to:

Michael Swidler

Brenda Lenahan

Vinson & Elkins L.L.P.

666 Fifth Avenue, 26th Floor

New York, New York 10103

Tel: (212) 237-0000

Fax: (212) 237-0100

 

William J. Cooper

Andrews Kurth LLP

1350 I Street, NW

Suite 1100

Washington, DC 20005

(202) 662-2700

 

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, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

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

 

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

 

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

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities To Be Registered

  

Amount to be
Registered(1)

   Proposed
Maximum
Offering Price
Per Share(2)
  

Proposed
Maximum

Aggregate
Offering Price(1)(2)

   Amount of
Registration Fee(3)

Common units representing limited partner interests

   6,900,000    $21.00    $144,900,000    $18,664

 

 

(1)   Estimated pursuant to Rule 457(a) under the Securities Act of 1933, as amended. Includes common units issuable upon exercise of the underwriters’ option to purchase additional common units.
(2)   Estimated solely for the purpose of calculating the registration fee.
(3)   The Registrant previously paid $12,880 of the total registration fee in connection with the previous filing of this Registration Statement.

 

 

 

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.

 

 

 


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

 

Subject to Completion, dated October 25, 2013

 

PROSPECTUS

LOGO

Arc Logistics Partners LP

6,000,000 Common Units

Representing Limited Partner Interests

 

This is the initial public offering of our common units representing limited partner interests. We are offering 6,000,000 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 $19.00 and $21.00 per common unit. We have been approved to list our common units on the New York Stock Exchange under the symbol “ARCX.”

 

Investing in our common units involves risks. Please read “Risk Factors” beginning on page 21.

These risks include the following:

   

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

   

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

   

Our financial results depend on the supply and demand for the crude oil, petroleum products and chemicals that we store and distribute, among other factors.

   

We depend on a relatively limited number of customers for a significant portion of our revenues. The loss of, or material nonpayment or nonperformance by, any of our key customers could adversely affect our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders.

   

Lightfoot Capital Partners GP LLC owns and controls our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner and its affiliates, including Lightfoot Capital Partners GP LLC and its owners, have conflicts of interest with us and limited duties, and they may favor their own interests to the detriment of us and our unitholders.

   

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

   

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

   

Unitholders will experience immediate and substantial dilution of $7.06 per common unit.

   

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

   

Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as our not being subject to a material amount of entity-level taxation by individual states. If the Internal Revenue Service were to treat us as a corporation for federal income tax purposes or we were to become subject to material additional amounts of entity-level taxation for state tax purposes, then our cash available for distribution to our unitholders could be substantially reduced.

   

Our unitholders will be required to pay taxes on their share of our income even if they do not receive any cash distributions from us.

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—Emerging Growth Company Status.”

 

     Per Common Unit      Total  

Public Offering Price

   $                            $                    

Underwriting Discount(1)

   $         $     

Proceeds to Arc Logistics Partners LP (before expenses)

   $         $     

 

(1)   Excludes an aggregate structuring fee of 0.75% of the gross proceeds payable to Citigroup Global Markets Inc. and Barclays Capital Inc. and certain other reimburseable underwriting expenses paid by us. Please read “Underwriting.”

The underwriters may purchase up to an additional 900,000 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             , 2013 through the book-entry facilities of The Depository Trust Company.

 

Citigroup     Barclays
SunTrust Robinson Humphrey   Wells Fargo Securities

 

RBC Capital Markets  

Baird

  Stifel
Global Hunter Securities

 

Prospectus dated             , 2013


Table of Contents

 

LOGO


Table of Contents

You should rely only on the information contained in this prospectus, any free writing prospectus prepared by or on behalf of us or any other information to which we have referred you in connection with this offering. We have not, and the underwriters have not, authorized any other person to provide you with information different from that contained in this prospectus. Neither the delivery of this prospectus nor sale of our common units means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or solicitation of an offer to buy our common units in any circumstances under which the offer or solicitation is unlawful.

 

TABLE OF CONTENTS

 

SUMMARY

     1   

RISK FACTORS

     21   

Risks Inherent in Our Business

     21   

Risks Inherent in an Investment in Us

     33   

Tax Risks to Common Unitholders

     43   

USE OF PROCEEDS

     48   

CAPITALIZATION

     49   

DILUTION

     50   

CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     52   

General

     52   

Our Minimum Quarterly Distribution

     53   

Subordinated Units

     54   

Unaudited Pro Forma Cash Available for Distribution for the Year Ended December  31, 2012 and the Twelve Months Ended June 30, 2013

     55   

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

     57   

HOW WE MAKE DISTRIBUTIONS TO OUR PARTNERS

     64   

General

     64   

Operating Surplus and Capital Surplus

     64   

Capital Expenditures

     66   

Subordination Period

     67   

Distributions From Operating Surplus During the Subordination Period

     69   

Distributions From Operating Surplus After the Subordination Period

     69   

General Partner Interest

     69   

Incentive Distribution Rights

     70   

Percentage Allocations of Distributions From Operating Surplus

     70   

General Partner’s Right to Reset Incentive Distribution Levels

     71   

Distributions From Capital Surplus

     73   

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     74   

Distributions of Cash Upon Liquidation

     74   

SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

     77   

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

     79   

Overview

     79   

How We Generate Revenue

     79   

Factors That Impact Our Business

     80   

Future Trends and Outlook

     82   

Factors Impacting the Comparability of Our Financial Results

     83   

Overview of Our Results of Operations

     83   

Results of Operations

     85   

Liquidity and Capital Resources

     88   

Cash Flows

     90   

 

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Contractual Obligations

     91   

Capital Expenditures

     92   

Off-Balance Sheet Arrangements

     92   

Customer Concentration

     92   

Critical Accounting Policies and Estimates

     93   

Seasonality

     94   

Quantitative and Qualitative Disclosures About Market Risk

     94   

INDUSTRY OVERVIEW

     95   

Overview

     95   

Terminalling and Storage Industry’s Role in Crude Oil and Petroleum Products Supply Chain

     96   

Terminalling and Storage Services

     97   

Barriers to Entry

     98   

Parameters of Competition

     98   

Customers

     99   

Market Developments

     99   

BUSINESS

     102   

Overview

     102   

Assets and Operations

     103   

Business Strategies

     107   

Competitive Strengths

     108   

Relationship with Lightfoot

     109   

Customers

     109   

Contracts

     109   

Competition

     110   

Employees

     110   

Environmental and Occupational Safety and Health Regulation

     111   

Title to Properties and Permits

     115   

Insurance

     115   

Legal Proceedings

     115   

MANAGEMENT

     116   

Management of Arc Logistics Partners LP

     116   

Executive Officers and Directors of Our General Partner

     117   

Director Independence

     119   

Committees of the Board of Directors

     119   

EXECUTIVE COMPENSATION AND OTHER INFORMATION

     121   

Historical Compensation

     121   

Compensation Setting Process

     121   

Long-Term Incentive Plan

     122   

Director Compensation

     125   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     126   

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     127   

Distributions and Payments to Our General Partner and Its Affiliates

     127   

Agreements with Affiliates in Connection with the Transactions

     128   

Other Transactions with Related Persons

     129   

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

     130   

CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

     131   

Conflicts of Interest

     131   

Fiduciary Duties

     135   

DESCRIPTION OF THE COMMON UNITS

     138   

The Units

     138   

Transfer Agent and Registrar

     138   

Transfer of Common Units

     138   

 

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THE PARTNERSHIP AGREEMENT

     140   

Organization and Duration

     140   

Purpose

     140   

Cash Distributions

     140   

Capital Contributions

     140   

Voting Rights

     141   

Applicable Law; Forum, Venue and Jurisdiction

     142   

Limited Liability

     142   

Issuance of Additional Interests

     143   

Amendment of the Partnership Agreement

     144   

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

     146   

Dissolution

     146   

Liquidation and Distribution of Proceeds

     147   

Withdrawal or Removal of Our General Partner

     147   

Transfer of General Partner Interest

     148   

Transfer of Ownership Interests in the General Partner

     148   

Transfer of Subordinated Units and Incentive Distribution Rights

     148   

Change of Management Provisions

     149   

Limited Call Right

     149   

Non-Taxpaying Holders; Redemption

     149   

Non-Citizen Assignees; Redemption

     150   

Meetings; Voting

     150   

Voting Rights of Incentive Distribution Rights

     151   

Status as Limited Partner

     151   

Indemnification

     151   

Reimbursement of Expenses

     152   

Books and Reports

     152   

Right to Inspect Our Books and Records

     152   

UNITS ELIGIBLE FOR FUTURE SALE

     153   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     155   

Taxation of the Partnership

     155   

Tax Consequences of Unit Ownership

     157   

Tax Treatment of Operations

     161   

Disposition of Units

     162   

Uniformity of Units

     164   

Tax-Exempt Organizations and Other Investors

     164   

Administrative Matters

     165   

State, Local and Other Tax Considerations

     166   

INVESTMENT IN ARC LOGISTICS PARTNERS LP BY EMPLOYEE BENEFIT PLANS

     168   

UNDERWRITING

     169   

FINRA

     170   

Other Relationships

     171   

Selling Restrictions

     171   

VALIDITY OF OUR COMMON UNITS

     174   

EXPERTS

     174   

WHERE YOU CAN FIND MORE INFORMATION

     174   

FORWARD-LOOKING STATEMENTS

     175   

INDEX TO FINANCIAL STATEMENTS

     F-1   

APPENDIX A FORM OF FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF ARC LOGISTICS PARTNERS LP

     A-1   

APPENDIX B GLOSSARY OF TERMS

     B-1   

 

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SUMMARY

 

This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the historical and unaudited pro forma condensed combined 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 $20.00 per common unit (the mid-point of the price range set forth on the cover page of this prospectus) and, unless otherwise indicated, that the underwriters’ option to purchase additional common units is not exercised. You should read “Risk Factors” for information about important risks that you should consider before buying our common units.

 

References in this prospectus to “Predecessor,” “our predecessor,” “we,” “our,” “us” or like terms when used in a historical context refers to Arc Terminals LP and its subsidiaries, which our sponsor is contributing to us in connection with this offering. When used in the present tense or prospectively, those terms refer to Arc Logistics Partners LP and its subsidiaries. References in this prospectus to “our sponsor” or “Lightfoot” refer to Lightfoot Capital Partners, LP and its general partner, Lightfoot Capital Partners GP LLC. References to “our general partner” refer to Arc Logistics GP LLC, which owns a non-economic general partner interest in us, and will initially own all of our incentive distribution rights. References to “GCAC” refer to Gulf Coast Asphalt Company, L.L.C., who will contribute its preferred units in Arc Terminals LP to us upon the consummation of this offering. References to “Center Oil” refer to GP&W, Inc., d.b.a. Center Oil, and affiliates, including Center Terminal Company-Cleveland, who will contribute its limited partner interests in Arc Terminals LP to us upon the consummation of this offering. References to “Gulf LNG Holdings” refer to Gulf LNG Holdings Group, LLC and its subsidiaries, which own a liquefied natural gas regasification and storage facility in Pascagoula, MS, which we refer to as the “LNG Facility,” and in which we intend to use a portion of the proceeds from this offering to acquire a 10.3% limited liability company interest, which we refer to as the “LNG Interest.” We include as Appendix B a glossary of some of the terms used in this prospectus.

 

Unless the context otherwise requires, financial and operating data presented in this prospectus on a pro forma basis give effect to (i) the acquisition of Arc Terminals Mobile Holdings, LLC from GCAC, (ii) the contribution of Arc Terminals LP and Arc Terminals GP to us by our sponsor, GCAC and Center Oil and the issuance by us of common units and subordinated units in exchange and (iii) the issuance of common units to the public and the application of the net proceeds therefrom as described in “Use of Proceeds,” including the acquisition of the LNG Interest, as if each such event occurred on June 30, 2013 for pro forma balance sheet purposes and on January 1, 2012 for all other pro forma financial statement and operating data purposes.

 

Arc Logistics Partners LP

 

Overview

 

We are a fee-based, growth-oriented Delaware limited partnership formed by Lightfoot to own, operate, develop and acquire a diversified portfolio of complementary energy logistics assets. We are principally engaged in the terminalling, storage, throughput and transloading of crude oil and petroleum products. We intend to use a portion of the proceeds from this offering to acquire the LNG Interest. We are focused on growing our business through the optimization, organic development and acquisition of terminalling, storage, rail, pipeline and other energy logistics assets that generate stable cash flows.

 

Our primary business objective is to generate stable cash flows that enable us to pay quarterly cash distributions to our unitholders and, over time, increase our quarterly cash distributions. We intend to achieve this objective by evaluating long-term infrastructure needs in the areas we serve and by growing our network of energy logistics assets through expansion of our existing facilities, the construction of new facilities in existing or new markets and strategic acquisitions from our sponsor and third parties.

 

 

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Our cash flows are primarily generated by fee-based terminalling, storage, throughput and transloading services that we perform under multi-year contracts. As of June 30, 2013, the weighted average term remaining on our customer contracts was approximately three years, and our top 15 customers by revenue have been customers at our facilities for an average of more than five years. We generate our revenues through the following fee-based services to our customers:

 

   

Storage and Throughput Services Fees.    We generate revenues from our customers who reserve storage, throughput and transloading capacity at our facilities. Our services agreements typically allow us to charge our customers a number of activity fees, including for the receipt, storage, throughput and transloading of crude oil and petroleum products. Many of our services agreements contain take-or-pay provisions whereby we generate revenue regardless of our customers’ use of the facility. On a pro forma basis for the year ended December 31, 2012 and six months ended June 30, 2013, approximately 89% of our revenues were related to storage and throughput services fees. Of the storage and throughput services fees, approximately 83% and 77%, respectively, were attributable to take-or-pay provisions.

 

   

Ancillary Services Fees.    We generate revenues from ancillary services, such as heating, blending and mixing, associated with our customers’ activity. The revenues we generate from ancillary services vary based upon the activity levels of our customers. On a pro forma basis for the year ended December 31, 2012 and six months ended June 30, 2013, we generated approximately 11% of our revenues from ancillary services fees.

 

We believe that the high percentage of take-or-pay storage and throughput services fees generated from a diverse portfolio of multi-year contracts, coupled with little exposure to commodity price fluctuations, creates stable cash flow and substantially mitigates our exposure to volatility in supply and demand and other market factors.

 

We also expect to receive cash distributions from the LNG Interest we intend to acquire upon the closing of this offering, which we intend to account for using equity method accounting. These distributions are supported by two 20-year, terminal use agreements with firm reservation charges for all of the capacity of the LNG Facility with several integrated, multi-national oil and gas companies. For the year ended December 31, 2012 and the six months ended June 30, 2013, Gulf LNG Holdings generated $96.3 million and $65.0 million, respectively, of cash flows from operating activities. These cash flows, along with $63.2 million of cash on the balance sheet as of December 31, 2011, were primarily used to repay principal and accrued interest on an affiliate loan of $165.0 million, and pay distributions to the members of Gulf LNG Holdings (including the LNG Interest) of $41.4 million. The affiliate loan was fully repaid during the three months ended March 31, 2013.

 

On a pro forma basis for the year ended December 31, 2012, we generated revenues of approximately $34.5 million, net income of approximately $10.4 million and Adjusted EBITDA of approximately $23.1 million. On a pro forma basis for the six months ended June 30, 2013, we generated revenues of approximately $24.3 million, net income of approximately $20.8 million and Adjusted EBITDA of approximately $16.4 million. Please read “—Summary Historical and Pro Forma Financial and Operating Data” for the definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to our most directly comparable financial measure, calculated and presented in accordance with generally accepted accounting principles (“GAAP”).

 

Assets and Operations

 

Our energy logistics assets are strategically located in the East Coast, Gulf Coast and Midwest regions of the United States and supply a diverse group of third-party customers, including major oil and gas companies, independent refiners, crude oil and petroleum product marketers, distributors and various industrial manufacturers. Depending upon the location, our facilities possess pipeline, rail, marine and truck loading and unloading capabilities allowing our customers to receive and deliver product throughout North America. Our asset platform allows our customers to meet the specialized handling requirements that may be required by

 

 

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particular products. Our combination of diverse geographic locations and logistics platforms gives us the flexibility to meet the evolving demands of our existing customers and address those of prospective customers.

 

Our initial asset base will consist of:

 

   

14 terminals in nine states located in the East Coast, Gulf Coast and Midwest regions of the United States with approximately 5.0 million barrels of crude oil and petroleum product storage capacity;

 

   

two rail transloading facilities near Mobile, Alabama with approximately 23,000 bpd of throughput capacity, 17,000 bpd of which is currently dedicated to crude oil throughput; and

 

   

the LNG Interest in connection with the LNG Facility, which has 320,000 cubic meters of LNG storage, 1.5 bcf/d natural gas sendout capacity and interconnects to major natural gas pipeline networks.

 

The following table sets forth certain information regarding our assets:

 

Location

  

Principal Products

   Capacity    

Supply & Delivery Modes

Terminals:

       

Baltimore, MD(1)

   Gasoline; Distillates; Ethanol      442,000 bbls      Pipeline; Railroad; Marine; Truck

Blakeley, AL(2)

   Crude Oil; Asphalts; Fuel Oil      708,000 bbls      Marine; Truck

Brooklyn, NY

   Gasoline; Ethanol      63,000 bbls      Pipeline; Marine; Truck

Chickasaw, AL

   Crude Oil; Distillates; Fuel Oil; Crude Tall Oil      609,000 bbls      Railroad; Marine; Truck

Chillicothe, IL

   Gasoline; Distillates; Ethanol; Biodiesel      273,000 bbls      Truck

Cleveland, OH—North

   Gasoline; Distillates; Ethanol; Biodiesel      426,000 bbls      Pipeline; Railroad; Marine; Truck

Cleveland, OH—South

   Gasoline; Distillates; Ethanol; Biodiesel      191,000 bbls      Pipeline; Railroad; Marine; Truck

Madison, WI

   Gasoline; Distillates; Ethanol; Biodiesel      150,000 bbls      Pipeline; Truck

Mobile, AL—Main(3)

   Crude Oil; Fuel Oil; Asphalt      1,093,000 bbls      Marine; Truck

Mobile, AL—Methanol

   Methanol      294,000 bbls      Marine; Truck

Norfolk, VA(4)

   Gasoline; Distillates; Ethanol      212,600 bbls      Pipeline; Marine; Truck

Selma, NC

   Gasoline; Distillates; Ethanol; Biodiesel      171,000 bbls      Pipeline; Truck

Spartanburg, SC(1)

   Gasoline; Distillates; Ethanol      82,500 bbls      Pipeline; Truck

Toledo, OH

   Gasoline; Distillates; Aviation Gas; Ethanol; Biodiesel      244,000 bbls      Pipeline; Railroad; Marine; Truck
     

 

 

   

Total Terminals

     4,959,100 bbls     
     

 

 

   

Transloading Facilities:

       

Chickasaw, AL

   Crude Oil; Distillates; Fuel Oil; Crude Tall Oil      9,000 bpd     

Saraland, AL

   Crude Oil      14,000 bpd     
     

 

 

   

Total Transloading Facilities

     23,000 bpd     
     

 

 

   

LNG Facility:

       

Pascagoula, MS(5)

   LNG      320,000 M 3    Pipeline; Marine
     

 

 

   

 

(1)   The capacity represents our 50% share of the 884,000 barrels of available total storage capacity of the Baltimore, MD terminal and the 165,000 barrels of available total storage capacity of the Spartanburg, SC terminal. The terminals are co-owned with and operated by CITGO Petroleum Corporation (“CITGO”).
(2)   The physical location of this terminal is in Mobile, AL.
(3)   Reflects the construction of 150,000 bbls of storage completed in the third quarter of 2013.
(4)   The physical location of this terminal is in Chesapeake, VA.

 

 

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(5)   The capacity represents the full capacity of the LNG Facility, which is owned by Gulf LNG Holdings. Upon completion of the offering, Gulf LNG Holdings will be owned 50% by Southern Gulf LNG Company, L.L.C., the operator and an affiliate of Kinder Morgan, Inc. (“Kinder Morgan”), 30% by an affiliate of GE Energy Financial Services (“GE EFS”), 9.7% by Lightfoot and 10.3% by us.

 

Business Strategies

 

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

 

   

Generate stable cash flows to support quarterly cash distributions.    We focus on servicing our customers under agreements that generate stable cash flows. We charge our customers based on their requirements to store, throughput and transload, as well as for ancillary services, such as heating, blending and mixing. Although commodity demand may have an impact on our revenue sources, we have little direct exposure to commodity prices as we do not take title to the products we handle for our customers. Additionally, a significant portion of our revenues is generated via long-term contracts with our customers. On a pro forma basis for the year ended December 31, 2012 and the six months ended June 30, 2013, 76% and 70%, respectively, of our revenue was generated pursuant to take-or-pay provisions in our services agreements with a weighted average term remaining of approximately three years. In addition, upon completion of this offering, we expect to receive cash distributions from our LNG Interest. These distributions are supported by two terminal use agreements with firm reservation charges that extend through September 2031. As we make future acquisitions, we intend to focus on businesses that generate stable, fee-based cash flows.

 

   

Optimize our energy logistics assets through organic growth opportunities.    We will continue to focus on the optimization of our energy logistics assets through organic growth opportunities. Since 2007, we have invested approximately $53 million to develop and enhance our existing or acquired energy logistics assets. As of June 30, 2013, our contracted utilization was approximately 70%, providing us with the opportunity to place the remaining available capacity under contract with existing and prospective customers. Additionally, we also have the ability to enhance our assets to develop incremental revenue opportunities for our customers’ needs. We have available land at several of our existing facilities to expand storage, rail, marine and truck rack capacity as needed by customer demand. We are currently pursuing a number of organic growth projects, including the development of a crude-by-rail unit train unloading facility in Mobile, Alabama. We will continue to identify and pursue organic growth opportunities to increase our capacity, asset utilization and operating efficiency.

 

   

Pursue accretive acquisitions of terminalling, storage, rail, pipeline and other energy logistics assets.    Since 2007, we have nearly tripled our storage capacity by acquiring over $165 million of additional energy logistics assets. We intend to implement an aggressive growth strategy of pursuing accretive acquisitions of energy storage, transportation and distribution assets that are complementary to those we currently own. We believe that our existing asset base provides multiple platforms for growth through strategic acquisitions. We also believe that our network of industry and customer contacts will help us identify acquisition candidates both within and adjacent to the geographic markets we serve, enabling us to leverage our financial and operating expertise to further increase the profitability and stability of cash flows acquired.

 

   

Continue to develop customer relationships to further diversify our customer base.    Since our Predecessor’s formation in 2007, we have added new customers and expanded the services and types of products stored across our asset base. Our expansion into new markets and offering of additional services and storage for various types of products has broadened our customer base and reduced our reliance on any single customer. We remain committed to this balanced customer approach, which we believe serves the long-term interests of our unitholders by enhancing stable cash flows.

 

 

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Competitive Strengths

 

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

 

   

We are a service provider and do not compete with our customer base.    We provide our customers with a wide variety of services under agreements where we assist in the receipt and delivery of products and accordingly do not take title to any product. As a result, we do not market any products that compete with our customers’ businesses and do not have direct exposure to commodity price fluctuations. Additionally, as an independent operator the reduced potential for conflicts with our customers broadens our potential customer access and resulting revenue base. Further, as diversified energy companies continue to divest their energy logistics assets, our independence allows for additional acquisition opportunities.

 

   

Our energy logistics assets are strategically located across diverse regional economies.    We own assets in ten states in the East Coast, Gulf Coast and Midwest regions of the United States. Our geographic diversity not only allows us to take advantage of regional opportunities, but also mitigates the impact of isolated regional economic disruptions, thereby increasing cash flow stability. Additionally, we believe the geographic diversity of our assets allows us the opportunity to provide our customers with additional flexibility to expand into new areas by providing access to multiple markets in the United States.

 

   

Our energy logistics assets offer customers multiple supply and delivery modes.    Our facilities are supplied by major petroleum product pipelines, rail, marine and truck with the ability to deliver product via rail, marine and truck. These multiple supply and delivery modes allow our customers substantial flexibility with the movement of their product and allow us to generate incremental revenues from product movements.

 

   

We offer a diverse slate of product storage options for our customers.    We provide storage alternatives for a wide array of products, including gasoline, distillates, aviation gas, asphalt, fuel oil, crude oil, ethanol, biodiesel and chemicals, such as methanol and crude tall oil. Many of our facilities have the flexibility to offer storage of additional products and have additional available capacity as customer demand changes. Many of the specialty products require special or segregated storage capabilities. Certain of our facilities have specialized tanks and tank systems or segregated storage for our customers, which allows us to handle specialty products and provides us with a competitive advantage. We possess the ability to upgrade and enhance our existing assets to meet the service needs of our customers. For example, our asphalt storage provides heated tankage to maintain the fluidity of the product for delivery. The diversity of the services that we offer provides us with the opportunity to attract a broad range of customers and to expand the services we can offer to existing customers.

 

   

In connection with this offering, we will have the financial flexibility to fund growth.    Immediately following the completion of this offering, we expect to amend and restate our existing credit facility (the “amended and restated credit facility”). Our amended and restated credit facility will be comprised of a $175 million revolver with a $100 million accordion feature to fund acquisitions. We expect the amended and restated credit facility will have $60 million of available borrowing capacity at the time of the offering. We believe our available borrowing capacity and our access to the capital markets should provide us with the financial flexibility necessary to pursue organic expansion and acquisition opportunities.

 

   

We have an experienced, proven and incentivized management team.    Each of the executive officers of our general partner has played an instrumental role in the successful acquisition and operation of our sponsor’s investments since its inception in 2007. Additionally, the executive officers have in excess of 50 years of combined experience in the management, financing, development and acquisition of energy-related assets. We believe the level of operational and financial expertise of our management team will prove critical in successfully executing our business strategies.

 

 

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Risk Factors

 

An investment in our common units involves risks. You should carefully consider the risks described in “Risk Factors” and the other information in this prospectus before deciding whether to invest in our common units.

 

Our Management

 

We are managed and operated by the board of directors and executive officers of our general partner, Arc Logistics GP LLC, a wholly owned subsidiary of our sponsor, Lightfoot. Following this offering, our sponsor will own approximately 1.1% of our outstanding common units and 84.6% of our outstanding subordinated units. As a result of owning our general partner, our sponsor will own all of our incentive distribution rights and will have the right to appoint all members of the board of directors of our general partner, including at least three independent directors meeting the independence standards established by the New York Stock Exchange (“NYSE”). At least one of our independent directors will be appointed prior to the date our common units are listed for trading on the NYSE. Our sponsor will appoint our second independent director within 90 days of the effectiveness of the registration statement of which this prospectus forms a part (the “effective date”) and our third independent director within one year of the effective date. Our unitholders will not be entitled to elect our general partner or its directors or otherwise directly participate in our management or operations. For more information about the executive officers and directors of our general partner, please read “Management.”

 

Upon the closing of this offering, we will not directly employ any of the executive officers responsible for managing our business. All of the executive officers that will be responsible for managing our day to day affairs are officers of Lightfoot and, therefore, will have responsibilities to each of us, our general partner and Lightfoot after this offering. We will enter into a services agreement with our general partner and Lightfoot in connection with this offering, which will provide, among other matters, that Lightfoot will make available to our general partner the services of its executive officers and employees who serve as our general partner’s executive officers, and that we, our general partner and our subsidiaries, as the case may be, will be obligated to reimburse Lightfoot for any allocated portion of the costs that Lightfoot incurs in providing compensation and benefits to such Lightfoot employees, with the exception of costs attributable to Lightfoot share-based compensation.

 

Following the consummation of this offering, neither our general partner nor our sponsor will receive any management fee or other compensation in connection with our general partner’s management of our business, but we will reimburse our general partner and its affiliates, including our sponsor, for all expenses they incur and payments they make on our behalf pursuant to our partnership agreement and the services agreement. Our partnership agreement will not limit the amount of expenses for which our general partner and its affiliates may be reimbursed. Our partnership agreement provides that our general partner will determine the expenses that are allocable to us. Please read “Certain Relationships and Related Transactions—Agreements with Affiliates in Connection with the Transactions.”

 

Relationship with Lightfoot

 

One of our principal attributes is our relationship with our sponsor, Lightfoot. Lightfoot is a private investment vehicle that focuses on investing directly in master limited partnership-qualifying businesses and assets. Lightfoot investors include affiliates of, and funds under management by, GE EFS, Atlas Energy, LP, BlackRock Investment Management, LLC, Magnetar Financial LLC, CorEnergy Infrastructure Trust, Inc. and Triangle Peak Partners Private Equity, LP. Lightfoot intends to utilize us as a growth vehicle for its energy logistics business to facilitate future organic expansion and acquisitions. Lightfoot has a significant interest in us through its ownership of a 42.9% limited partner interest, our general partner and all of our incentive distribution rights. After the expiration of the lock-up period (180 days after the date of this prospectus), certain investors in Lightfoot may cause the common units and subordinated units owned by Lightfoot to be distributed to the owners of Lightfoot.

 

 

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Lightfoot’s stated strategy is to make investments by partnering with, promoting and supporting strong management teams to build growth-oriented businesses or industry verticals. Lightfoot provides extensive financial and industry relationships and significant master limited partnership experience, which assist in growth via acquisitions and development projects by identifying:

 

   

efficient operating platforms with deep industry relationships;

 

   

significant expansion opportunities through add-on acquisitions and development projects;

 

   

stable cash flows with fee-based income streams, limited commodity exposure and long-term contracts; and

 

   

scalable platforms and opportunities with attractive fundamentals and visible future growth.

 

Our relationship and access to our sponsor’s expertise in mergers and acquisition transactions will be a significant attribute to achieving our growth objectives.

 

Conflicts of Interest and Fiduciary Duties

 

Our general partner has a legal duty to manage us in a manner that it believes is not adverse to our interest. However, the officers and directors of our general partner also have a duty to manage our general partner in a manner beneficial to our sponsor, Lightfoot, the owner of our general partner. As a result, conflicts of interest may arise in the future between us or our unitholders, on the one hand, and our sponsor and our general partner, on the other hand.

 

Our partnership agreement limits the liability of and replaces the default fiduciary duties that would otherwise be owed by our general partner to our unitholders. The effect of these provisions is to restrict the remedies available to our unitholders for actions that might otherwise constitute a breach of duties of our general partner or its directors or officers. Our partnership agreement also provides that affiliates of our general partner, including Lightfoot and its owners, are not restricted from competing with us and have no obligation to present business opportunities to us. By purchasing a common unit, the purchaser agrees to be bound by the terms of our partnership agreement, and each unitholder is treated as having consented 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 Delaware law.

 

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

 

Principal Executive Offices

 

Our principal executive offices are located at 725 Fifth Avenue, 19th Floor, New York, NY 10022, and our phone number is (212) 993-1290. Our website is www.arcxlp.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 a part of this prospectus.

 

 

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Emerging Growth Company Status

 

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (“JOBS Act”). For as long as we are an emerging growth company, unlike other public companies, we will not be required to:

 

   

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

 

   

provide five years of selected financial data;

 

   

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

 

   

comply with any new requirements adopted by the Public Company Accounting Oversight Board (the “PCAOB”) after April 5, 2012, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and our financial statements, unless the SEC determines otherwise;

 

   

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

 

   

provide a separate unitholder vote on certain golden parachute arrangements at meetings in which unitholders are being asked to approve a merger or similar transaction.

 

We will cease to be an “emerging growth company” upon the earliest of:

 

   

the last day of the fiscal year in which we have $1.0 billion or more in annual revenues;

 

   

the date on which we are deemed to be a “large accelerated filer,” as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which generally requires more than $700 million in market value of our common units held by non-affiliates as of June 30 of the year such determination is made;

 

   

the date on which we issue more than $1.0 billion of non-convertible debt over a three-year period; or

 

   

the last day of the fiscal year following the fifth anniversary of this offering.

 

We may choose to take advantage of some but not all of these reduced obligations. We have availed ourselves of the reduced reporting obligations with respect to financial statements, selected financial data, management’s discussion and analysis of financial condition and results of operations and executive compensation disclosure in this prospectus and expect to continue to avail ourselves of the reduced reporting obligations available to emerging growth companies in future filings. For as long as we take advantage of the reduced reporting obligations, the information that we provide unitholders may be different than information provided by other public companies in which you hold equity interests.

 

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

 

Formation Transactions and Partnership Structure

 

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

 

   

our sponsor and Center Oil will contribute all of their limited partner interests in Arc Terminals LP and all of the limited liability company interests in Arc Terminals GP to us;

 

 

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GCAC will contribute its preferred units in Arc Terminals LP to us;

 

   

in exchange for these contributions, we will issue 68,617 common units and 5,146,264 subordinated units to our sponsor, 11,685 common units and 876,391 subordinated units to Center Oil, and 779 common units and 58,426 subordinated units to GCAC;

 

   

Arc Terminals GP LLC and Arc Terminals LP will merge with Arc Terminals GP LLC surviving and then changing its name to “Arc Logistics LLC”;

 

   

we intend to issue 6,000,000 common units to the public and will receive net proceeds of $107.9 million at an assumed initial offering price of $20.00 per unit after deducting the estimated underwriting discount, structuring fee and offering expenses;

 

   

we intend to use the net proceeds to fund the purchase of the LNG Interest from an affiliate of GE EFS, to make a distribution to GCAC as partial consideration for the contribution of its preferred units in Arc Terminals LP as set forth in the second bullet above, to repay intercompany payables owed to our sponsor and to reduce amounts outstanding under our amended and restated credit facility; and

 

   

we intend to amend and restate our existing credit facility in respect of our outstanding indebtedness.

 

We have granted the underwriters a 30-day option to purchase up to an aggregate of 900,000 additional common units. Any net proceeds received from the exercise of this option will be used to further reduce amounts outstanding under our amended and restated credit facility.

 

 

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Organizational Structure

 

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

 

LOGO

 

(1)   In connection with the closing of this offering, our Predecessor will merge with Arc Terminals GP LLC with Arc Terminals GP LLC surviving. The surviving entity will then change its name to “Arc Logistics LLC.”

 

 

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Public Unitholders

     6,000,000         49.3

Interests of GCAC:

     

Common Units

     779         0.0

Subordinated Units

     58,426         0.5

Interests of Center Oil:

     

Common Units

     11,685         0.1

Subordinated Units

     876,391         7.2

Interests of Lightfoot:

     

Common Units

     68,617         0.6

Subordinated Units

     5,146,264         42.3

Non-economic General Partner Interest

     0.0         0.0

Incentive Distribution Rights

     —           —   (a) 
  

 

 

    

 

 

 
     12,162,162         100.0
  

 

 

    

 

 

 

 

(a)   Incentive distribution rights represent a variable interest in distributions and thus are not expressed as a fixed percentage. Please read “How We Make Distributions To Our Partners—Incentive Distribution Rights.”

 

 

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The Offering

 

Common units offered to the public

6,000,000 common units.

 

  6,900,000 common units if the underwriters exercise their option to purchase additional common units in full.

 

Units outstanding after this offering

6,081,081 common units and 6,081,081 subordinated units, each representing an aggregate 50.0% limited partner interest in us (6,981,081 common units and 6,081,081 subordinated units if the underwriters exercise their option to purchase additional units in full). In addition, our general partner will own a non-economic general partner interest in us.

 

Use of proceeds

We intend to use the estimated net proceeds of approximately $107.9 million from this offering (based on an assumed initial offering price of $20.00 per common unit, the mid-point of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discount, structuring fee and offering expenses, to fund the purchase of the LNG Interest from an affiliate of GE EFS, to make a cash distribution to GCAC as partial consideration for the contribution of its preferred units in Arc Terminals LP to us, to repay intercompany payables owed to our sponsor and to reduce amounts outstanding under our amended and restated credit facility.

 

  If the underwriters exercise their option to purchase additional common units in full, the additional net proceeds would be approximately $16.8 million (based upon the mid-point of the price range set forth on the cover page of this prospectus). The net proceeds from any exercise of such option will be used to further reduce amounts outstanding under our amended and restated credit facility.

 

  SunTrust Robinson Humphrey, Inc., Wells Fargo Securities, LLC and Citigroup Global Markets Inc. or their affiliates are lenders under our existing credit facility and will receive a portion of the net proceeds from this offering for the repayment of a portion of outstanding borrowings under our existing credit facility. In addition, SunTrust Robinson Humphrey, Inc. will be lead arranger and book manager under our amended and restated credit facility and affiliates of certain of the underwriters may be agents and lenders under our amended and restated credit facility. Please read “Use of Proceeds.”

 

Cash distributions

We intend to make a minimum quarterly distribution of $0.3875 per unit ($1.5500 per unit on an annualized basis) to the extent we have sufficient cash after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates.

 

 

Although it is our intent to distribute each quarter an amount at least equal to the minimum quarterly distribution on all of our units, we are not obligated to make distributions in that amount or at all. However, with respect to any quarter during the subordination period, if we do

 

 

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not make quarterly distributions on our common units in an amount at least equal to the minimum quarterly distribution (plus any arrearages accumulated from prior periods), then the subordinated unitholders will not be entitled to receive any distributions from operating surplus until we have made distributions to common unitholders in an aggregate amount equal to the minimum quarterly distribution, plus all arrearages accumulated from prior periods.

 

  For the quarter in which this offering closes, we will pay a prorated distribution on our units covering the period after the completion of this offering through December 31, 2013, based on the actual length of that period.

 

  Our partnership agreement generally provides that we will distribute cash each quarter in the following manner:

 

   

first, to the holders of common units, until each common unit has received the minimum quarterly distribution of $0.3875 plus any arrearages from prior quarters;

 

   

second, to the holders of subordinated units, until each subordinated unit has received the minimum quarterly distribution of $0.3875; and

 

   

third, to all unitholders pro rata, until each has received a distribution of $0.3875.

 

  If cash distributions to our unitholders exceed $0.3875 per unit in any quarter, our unitholders and our general partner, as the initial holder of our incentive distribution rights, will receive distributions according to the following percentage allocations:

 

Total Quarterly

Distribution

Target Amount

   Marginal Percentage
Interest
in Distributions
 
   Unitholders     General 
Partner
 

above $0.3875 up to $0.4456

     100.0     0.0

above $0.4456 up to $0.4844

     85.0     15.0

above $0.4844 up to $0.5813

     75.0     25.0

above $0.5813

     50.0     50.0

 

  We refer to additional increasing distributions to our general partner as “incentive distributions.” Please read “How We Make Distributions To Our Partners—Incentive Distribution Rights.”

 

 

Pro forma cash available for distribution generated during the year ended December 31, 2012 and the twelve months ended June 30, 2013 was approximately $6.2 million and $14.4 million, respectively. The amount of available cash we need to pay the minimum quarterly distribution for four quarters on our common units and subordinated units to be outstanding immediately after this offering is approximately $18.9 million (or an average of approximately $4.7 million per quarter). As a result, for the year ended December 31, 2012, we would have generated cash available for distribution

 

 

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sufficient to pay 65.8% of the minimum quarterly distribution on all of our common units and none on our subordinated units. For the twelve months ended June 30, 2013, we would have generated cash available for distribution sufficient to pay the minimum quarterly distribution on all of our common units and 52.6% of the minimum quarterly distribution on our subordinated units.

 

  We believe, based on our financial forecast and related assumptions included in “Cash Distribution Policy and Restrictions on Distributions,” that we will generate sufficient cash available for distribution to pay the minimum quarterly distribution of $0.3875 on all of our common units and subordinated units for each quarter in the twelve months ending September 30, 2014. However, we do not have a legal or contractual obligation to pay quarterly distributions at our minimum quarterly distribution rate or at any other rate and there is no guarantee that we will pay distributions to our unitholders in any quarter. Please read “Cash Distribution Policy and Restrictions on Distributions.”

 

Subordinated units

Our sponsor, GCAC and Center Oil will initially own all of our subordinated units. The principal difference between our common units and subordinated units is that in any quarter during the subordination period, holders of the subordinated units are not entitled to receive any distribution from operating surplus until the common units have received the minimum quarterly distribution for such quarter plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units will not accrue arrearages.

 

Conversion of subordinated units

The subordination period will end on the first business day after we have earned and paid at least (1) $1.5500 (the minimum quarterly distribution on an annualized basis) on each outstanding common unit and subordinated unit for each of three consecutive, non-overlapping four quarter periods ending on or after September 30, 2016 or (2) $2.3250 (150.0% of the annualized minimum quarterly distribution) on each outstanding common unit and subordinated unit and the related distribution on the incentive distribution rights for a four-quarter period ending immediately preceding such date, in each case provided there are no arrearages on our common units at that time.

 

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

 

  When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and all common units thereafter will no longer be entitled to arrearages. Please read “How We Make Distributions to Our Partners—Subordination Period.”

 

 

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Issuance of additional units

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

 

General partner’s right to reset the target distribution levels

Our general partner, as the initial holder of our incentive distribution rights, has the right, at any time when there are no subordinated units outstanding and it has received incentive distributions at the highest level to which it is entitled (50.0%) for the prior four consecutive whole fiscal quarters, to reset the initial target distribution levels at higher levels based on our cash distributions at the time of the exercise of the reset election. If our general partner transfers all or a portion of our incentive distribution rights in the future, then the holder or holders of a majority of our incentive distribution rights will be entitled to exercise this right. The following assumes that our general partner holds all of the incentive distribution rights at the time that a reset election is made.

 

  Following a reset election, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution, and the target distribution levels will be reset to correspondingly higher levels based on the same percentage increases above the reset minimum quarterly distribution as the current target distribution levels.

 

  In the event of a reset of target distribution levels, our general partner will be entitled to receive the number of common units equal to that number of common units which would have entitled their holder to an average aggregate quarterly cash distribution in the prior two quarters equal to the average of the distributions to our general partner on the incentive distribution rights in the prior two quarters. Please read “How We Make Distributions To Our Partners—General Partner’s Right to Reset Incentive Distribution Levels.”

 

Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our business. Our unitholders will have no right to elect our general partner or its directors on an annual or other continuing basis. Our general partner may not be removed except by a vote of the holders of at least 66 2/3% of the outstanding units, including any units owned by our general partner and its affiliates, voting together as a single class. Upon consummation of this offering, our sponsor will own an aggregate of 42.9% of our outstanding units (or 39.9% of our outstanding units, if the underwriters exercise their option to purchase additional common units in full). This will give our sponsor the ability to prevent the removal of our general partner. Please read “The Partnership Agreement—Voting Rights.”

 

 

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Limited call right

If at any time our general partner and its affiliates own more than 80% of the outstanding common units, our general partner has the right, but not the obligation, to purchase all of the remaining common units at a price equal to the greater of (1) the average of the daily closing price of the common units over the 20 trading days preceding the date that is three business days before notice of exercise of the call right is first mailed and (2) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed.

 

  Please read “The Partnership Agreement—Limited Call Right.”

 

Estimated ratio of taxable income to distributions

We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ending December 31, 2016, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be less than 30% of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $1.5500 per unit, we estimate that your average allocable federal taxable income per year will be no more than approximately $0.4650 per unit. Thereafter, the ratio of allocable taxable income to cash distributions to you could substantially increase. Please read “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership” for the basis of this estimate.

 

Material federal income tax consequences

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

 

Exchange listing

We have been approved to list our common units on the NYSE under the symbol “ARCX”.

 

 

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Summary Historical and Pro Forma Financial and Operating Data

 

Arc Logistics Partners LP was formed in July 2013 and does not have historical financial statements. Therefore, in this prospectus we present the historical consolidated financial statements of Arc Terminals LP, which will be transferred to Arc Logistics Partners LP upon the closing of this offering, which we refer to as “Predecessor.” The following table presents summary historical financial and operating data of the Predecessor and summary unaudited pro forma condensed combined financial and operating data of Arc Logistics Partners LP as of the dates and for the periods indicated.

 

The summary historical financial data of the Predecessor presented as of and for the years ended December 31, 2012 and 2011 are derived from the audited historical consolidated financial statements of the Predecessor that are included elsewhere in this prospectus. The summary historical financial data presented as of and for the six months ended June 30, 2013 and for the six months ended June 30, 2012 are derived from the unaudited historical condensed consolidated financial statements of the Predecessor included elsewhere in this prospectus.

 

The summary unaudited pro forma condensed combined financial data presented for the year ended December 31, 2012 and as of and for the six months ended June 30, 2013 are derived from our unaudited pro forma condensed combined financial statements included elsewhere in this prospectus. Our unaudited pro forma condensed combined financial statements give pro forma effect to the following:

 

   

the acquisition of Arc Terminals Mobile Holdings, LLC from GCAC in February 2013 (which is reflected only in the statements of operations for the year ended December 31, 2012 and the six months ended June 30, 2013);

 

   

the contribution of all of the limited partner interests in Arc Terminals LP and limited liability company interests in Arc Terminals GP LLC to us by our sponsor and Center Oil and of the preferred units in Arc Terminals LP by GCAC and the issuance by us to these entities of an aggregate of 81,081 common units and 6,081,081 subordinated units;

 

   

the issuance of 6,000,000 common units to the public and the application of the net proceeds therefrom as described in “Use of Proceeds,” including the acquisition of the LNG Interest; and

 

   

amending and restating our existing credit facility in respect of our outstanding indebtedness.

 

The unaudited pro forma condensed combined balance sheet as of June 30, 2013 assumes the events listed above occurred as of June 30, 2013 (other than the acquisition of Arc Terminals Mobile Holdings, LLC from GCAC). The unaudited pro forma condensed combined statements of operations data for the year ended December 31, 2012 and the six months ended June 30, 2013 assume the events listed above occurred as of January 1, 2012.

 

We have not given pro forma effect to incremental selling, general and administrative expenses of approximately $2.9 million that we expect to incur annually as a result of operating as a publicly traded partnership, such as expenses associated with SEC reporting requirements, including annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, Sarbanes-Oxley Act compliance, NYSE listing, independent auditor fees, legal fees, investor relations activities, registrar and transfer agent fees, director and officer insurance and director compensation.

 

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

 

 

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The following table presents the non-GAAP financial measure of Adjusted EBITDA, which we use in our business as an important supplemental measure of our performance. Adjusted EBITDA represents net income before interest expense, income taxes and depreciation and amortization expense, as further adjusted for other non-cash charges and unusual or non-recurring charges. Adjusted EBITDA is not calculated or presented in accordance with GAAP. We explain this measure under “—Non-GAAP Financial Measure” below and reconcile Adjusted EBITDA to its most directly comparable financial measure calculated and presented in accordance with GAAP.

 

     Predecessor Historical     Arc Logistics Partners LP
Pro Forma(1)
 
     Year Ended
December 31,
    Six Months Ended
June 30,
    Year Ended
December 31,
    Six Months
Ended June 30,
 
     2012     2011     2013     2012     2012     2013  
     (in thousands, except per unit and operating data)  

Statement of Operations Data:

            

Revenues:

            

Third party customers

   $ 13,201      $ 10,588      $ 18,683      $ 7,032      $ 24,806      $ 20,284   

Related parties

     9,663        10,441        4,021        5,006        9,663        4,021   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     22,864        21,029        22,704        12,038        34,469        24,305   

Expenses:

            

Operating expenses

     7,266        6,957        9,132        3,527        13,746        9,824   

Selling, general and administrative(2)

     2,283        2,179        4,793        1,377        3,019        1,779   

Selling, general and administrative—affiliate

     2,592        2,614        1,218        1,287        2,592        1,218   

Depreciation

     3,317        2,749        2,605        1,651        4,742        2,753   

Amortization

     624        649        2,135        319        4,510        2,540   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     16,082        15,148        19,883        8,161        28,609        18,114   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     6,782        5,881        2,821        3,877        5,860        6,191   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

            

Gain on bargain purchase of business

     —          —          11,777        —          —          11,777   

Equity earnings from the LNG Interest

     —          —          —          —          7,802        4,806   

Gain on fire/oil spill

     —          —          —          —          888        —     

Other income

     4        1        47        —          156        68   

Interest expense

     (1,320     (491     (3,433     (619     (4,284     (2,009
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (1,316     (490     8,391        (619     4,562        14,642   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

     5,466        5,391        11,212        3,258        10,422        20,833   

Income taxes

     43        25        15        37        43        15   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 5,423      $ 5,366      $ 11,197      $ 3,221      $ 10,379      $ 20,818   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per limited partner unit:

            

Common unit

           $ 0.85      $ 1.71   
          

 

 

   

 

 

 

Subordinated unit

           $ 0.85      $ 1.71   
          

 

 

   

 

 

 

Statement of Cash Flow Data:

            

Net cash provided by (used in):

            

Operating activities

   $ 6,754      $ 7,551        8,496        3,315       

Investing activities

     (10,552     (10,756     (89,253     (7,863    

Financing activities

     3,278        3,755        81,055        3,752       

Other Financial Data:

            

Adjusted EBITDA(3)

   $ 10,862      $ 9,280      $ 10,750      $ 5,878      $ 23,070      $ 16,358   

Maintenance capital expenditures(4)

     917        635        661        223        2,096        661   

Expansion capital expenditures(5)

     11,784        11,176        88,603        8,141        15,237        88,603   

Balance Sheet Data (at period end):

            

Cash and cash equivalents

   $ 1,429      $ 1,948      $ 1,726          $ 1,726   

Total assets

     131,764        122,895        263,223            334,881   

Long-term debt (including current portion)

     30,500        20,000        115,375            115,034   

Total liabilities

     34,221        24,694        124,830            121,469   

Preferred units

     —          —          30,600            —     

Partners’ capital

     97,543        98,201        107,792            213,412   

Operating Data:

            

Storage capacity (bbls)

     3,509,100        3,119,100        4,809,100        3,207,100        4,746,100        4,809,100   

Throughput (mbpd)

     40.9        30.7        68.7        40.0        53.2        71.0   

 

 

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(1)   Pro forma selling, general and administrative expenses exclude any expenses associated with the acquisition of the Mobile, AL, Saraland, AL and Brooklyn, NY facilities incurred on behalf of either our Predecessor or GCAC in the transactions that were completed in February 2013.
(2)   Includes $0.1 million and $3.1 million of transaction related expenses incurred by our Predecessor for the year ended December 31, 2012 and the six months ended June 30, 2013, respectively, to acquire the Mobile, AL, Saraland, AL and Brooklyn, NY facilities in February 2013.
(3)   For more information, please read “—Non-GAAP Financial Measure” below.
(4)   Maintenance capital expenditures are capital expenditures made to maintain our long-term operating capacity or operating income. Please read “How We Make Distributions to Our Partners—Capital Expenditures.”
(5)   Expansion capital expenditures are capital expenditures expected to increase our long-term operating capacity or operating income whether through construction, development or acquisitions. Please read “How We Make Distributions to Our Partners—Capital Expenditures.”

 

Non-GAAP Financial Measure

 

We define Adjusted EBITDA as net income before interest expense, income taxes and depreciation and amortization expense, as further adjusted for other non-cash charges and unusual or non-recurring charges. Adjusted EBITDA is not a presentation made in accordance with GAAP.

 

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

 

   

the performance of our assets without regard to the impact of financing methods, capital structure or historical cost basis of our assets;

 

   

the viability of capital expenditure projects and the overall rates of return on alternative investment opportunities;

 

   

our ability to make distributions;

 

   

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

 

   

our ability to incur additional expenses.

 

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

 

 

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

 

     Predecessor Historical      Arc Logistics Partners LP
Pro Forma(1)
 
     Year Ended
December 31,
     Six Months Ended
June 30,
     Year Ended
December 31,
    Six Months
Ended
June 30,
 
     2012      2011      2013     2012      2012     2013  
     (in thousands)  

Reconciliation of Adjusted EBITDA to net income

               

Net income

   $ 5,423       $ 5,366       $ 11,197      $ 3,221       $ 10,379      $ 20,818   

Depreciation

     3,317         2,749         2,605        1,651         4,742        2,753   

Amortization

     624         649         2,135        319         4,510        2,540   

Interest expense

     1,320         491         3,433        619         4,284        2,009   

Income taxes

     43         25         15        37         43        15   

Gain on bargain purchase of business

     —           —           (11,777     —           —          (11,777

Gain on fire/oil spill

     —           —           —          —           (888     —     

One-time transaction expenses(2)

     135         —           3,142        31         —          —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Adjusted EBITDA

   $ 10,862       $ 9,280       $ 10,750      $ 5,878       $ 23,070      $ 16,358   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1)   Pro forma net income has been adjusted to exclude any expenses associated with the acquisitions of the Mobile, AL, Saraland, AL and Brooklyn, NY facilities incurred on behalf of either our Predecessor or GCAC.
(2)   The one-time transaction expenses incurred by our Predecessor relate to the due diligence and acquisition expenses associated with the purchase of the Mobile, AL, Saraland, AL and Brooklyn, NY facilities. These expenses have been excluded from pro forma net income.

 

 

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RISK FACTORS

 

Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. You should carefully consider the following risk factors together with all of the other information included in this prospectus in evaluating an investment in our common units.

 

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

 

Risks Inherent in Our Business

 

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

 

We may not have sufficient cash each quarter to pay the full amount of our minimum quarterly distribution of $0.3875 per unit, or $1.5500 per unit per year, which will require us to have available cash of approximately $4.7 million per quarter, or $18.9 million per year, based on the number of common and subordinated units to be outstanding after the completion of this offering. The amount of cash we can distribute on our common and subordinated units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:

 

   

the volumes of crude oil, petroleum products and chemicals that we handle;

 

   

the terminalling, storage, throughput, transloading and ancillary services fees with respect to volumes that we handle;

 

   

the price of, and demand for, crude oil and petroleum products in the markets we serve;

 

   

pressures from competitors in our geographic markets;

 

   

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

 

   

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

 

   

planned or unplanned shutdowns of the facilities owned by or supplying our customers;

 

   

prevailing economic and market conditions;

 

   

the risk of contract non-renewal or failure to perform by our customers, and our ability to replace such contracts and/or customers;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

changes in tax laws; and

 

   

force majeure events.

 

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

 

   

the level of capital expenditures we make;

 

   

the cost of acquisitions;

 

   

our debt service requirements and other liabilities;

 

   

fluctuations in our working capital needs;

 

   

our ability to borrow funds and access capital markets;

 

   

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

 

   

the amount of cash reserves established by our general partner.

 

Other additional restrictions and factors may also affect our ability to pay cash distributions.

 

On a pro forma basis, we would not have had sufficient cash available for distribution to pay the full minimum quarterly distribution on all of our units for the year ended December 31, 2012 or the twelve months ended June 30, 2013.

 

We must generate approximately $18.9 million of cash available for distribution to pay the aggregate minimum quarterly distributions for four quarters on all units that will be outstanding immediately following this offering. The amount of pro forma cash available for distribution generated during the year ended December 31, 2012 was $6.2 million, which would have allowed us to pay only 65.8% of the aggregate minimum quarterly distribution on our common units during that period and none of the aggregate minimum quarterly distribution on our subordinated units during that period. The amount of pro forma cash available for distribution generated during the twelve months ended June 30, 2013 was $14.4 million, which would have allowed us to pay 100% of the aggregate minimum quarterly distribution on our common units during that period and 52.6% of the aggregate minimum quarterly distribution on our subordinated units during that period. For a calculation of our ability to make cash distributions to our unitholders based on our historical results, please read “Cash Distribution Policy and Restrictions on Distributions.” If we are not able to generate additional cash for distribution to our unitholders in future periods, we may not be able to pay the full minimum quarterly distribution or any amount on our common or subordinated units, in which event the market price of our common units may decline materially.

 

The assumptions underlying our forecast of cash available for distribution are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause cash available for distribution to differ materially from our estimates.

 

The forecast of cash available for distribution includes our forecast of our results of operations and cash available for distribution for the twelve months ending September 30, 2014. Our ability to pay the full minimum quarterly distribution in the forecast period is based on a number of assumptions that may not prove to be correct.

 

Our forecast of cash available for distribution has been prepared by management, and we have not received an opinion or report on it from any independent registered public accountants. The assumptions underlying our forecast of cash available for distribution are inherently uncertain and are subject to significant business, economic, financial, regulatory, and competitive risks and uncertainties that could cause cash available for distribution to differ materially from that which is forecasted. If we do not achieve our forecasted results, we may not be able to pay the full minimum quarterly distribution or any amount on our common units or subordinated units, in which event the market price of our common units may decline materially. Please read “Cash Distribution Policy and Restrictions on Distributions.”

 

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The amount of cash we have available for distribution to unitholders depends primarily on our cash flow and not solely on profitability, which may prevent us from making cash distributions during periods when we record net income.

 

The amount of cash we have available for distribution depends primarily on our cash flow from operations, including working capital borrowings, 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 and may not make cash distributions during periods when we record net income.

 

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

 

We are dependent upon the uninterrupted operations of certain facilities owned, operated, managed or supplied by our customers, such as the exploration sites, refineries and chemical production facilities. Operations at our facilities and at the facilities owned, operated, or supplied by our suppliers and customers could be partially or completely shut down, temporarily or permanently, as the result of any number of circumstances that are not within our control, such as:

 

   

catastrophic events, including hurricanes and floods;

 

   

environmental remediation;

 

   

labor difficulties; and

 

   

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

 

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

 

Our services agreements with many of our key customers provide that if any of a number of events occur, including certain of those events described above, which we refer to as events of force majeure, and such event significantly delays or renders performance impossible with respect to one of our facilities, usually for a specified minimum period of days, our customer’s obligations would be temporarily suspended with respect to that facility. In that case, a significant customer’s minimum storage and throughput fees may be reduced or suspended, even if we are contractually restricted from recontracting out the storage space in question during such force majeure period, or the contract may be subject to termination. There can be no assurance that we are adequately insured against such risks. As a result, any significant interruption at one of our facilities or inability to transport products to or from these facilities or to or from our customers for any reason would adversely affect our results of operations, cash flow, and ability to make distributions to our unitholders.

 

Our ownership in each of the Baltimore, MD and Spartanburg, SC terminals represents a 50% ownership interest without the right to be the operator of the facilities, giving us limited influence on daily operating decisions.

 

We own a 50% undivided interest in each of the Baltimore, MD and Spartanburg, SC terminals whereby the co-owner and operator, CITGO, operates the terminals pursuant to an operating agreement, and in the future we may acquire interests in other terminals in which we do not serve as operator. In these situations, we are dependent upon the operator to operate the terminals efficiently and in compliance with applicable regulations. If the operator does not operate the terminals in a manner that minimizes operating expenses and prevents service interruptions, our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders could be materially affected.

 

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Our ownership in the LNG Facility will represent a minority interest in Gulf LNG Holdings and our rights are limited. A decision could be made at Gulf LNG Holdings without requiring our approval and could have a material adverse effect on cash distributions from our LNG Interest.

 

Upon the consummation of this offering, we will own a 10.3% interest in Gulf LNG Holdings, while an affiliate of Kinder Morgan will own 50%, an affiliate of GE EFS will own 30% and our sponsor will own a 9.7% interest. Gulf LNG Holdings indirectly owns the LNG Facility. Kinder Morgan is the manager and operator of the LNG Facility and has the authority to manage and control the affairs of Gulf LNG Holdings. The governing documents relating to Gulf LNG Holdings require a supermajority vote on certain matters including:

 

   

the sale of substantially all the assets;

 

   

any proposed merger;

 

   

incurrence of additional indebtedness not already approved by the existing equity holders;

 

   

amendment to the organizational documents; and

 

   

the filing of a voluntary petition in bankruptcy.

 

The supermajority vote requires one or more of the members, which, in the aggregate, hold more than 70% of the ownership interests of Gulf LNG Holdings. Due to these provisions and our limited ownership interest, a decision could be made at Gulf LNG Holdings without our approval that could have a material adverse effect on the business, financial condition and results of operations of Gulf LNG Holdings and cash distributions from our LNG Interest.

 

Gulf LNG Holdings has been exploring the development of a liquefaction project adjacent to the LNG Facility. The cash distributions we expect to receive from our LNG Interest could be materially and adversely affected if the majority of the members of Gulf LNG Holdings approve to use the cash received from the LNG Facility to support the liquefaction project as opposed to paying distributions to the members of Gulf LNG Holdings.

 

Our financial results depend on the supply and demand for the crude oil, petroleum products and chemicals that we store and distribute, among other factors.

 

Any sustained decrease in demand for crude oil, petroleum products and chemicals in the markets served by our facilities could result in a significant reduction in storage, throughput or transloading in our facilities, which would reduce our cash flow and our ability to make distributions to our unitholders.

 

Factors that could lead to a decrease in market demand include:

 

   

lower supply of crude oil due to a decline in drilling activity in the United States and Canada due to a decrease in the market price for crude oil or for other reasons;

 

   

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

 

   

lower demand by consumers for petroleum products as a result of recession or other adverse economic conditions or due to higher prices caused by an increase in the market price of crude oil;

 

   

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

 

   

higher fuel taxes or other governmental or regulatory actions that increase, directly or indirectly, the cost of motor fuels;

 

   

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

 

   

the increased use of alternative fuel sources, such as ethanol, biodiesel, fuel cells, and solar, electric and battery-powered engines.

 

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The ability of our LNG Interest to generate cash is substantially dependent upon two terminal use agreements, and we will be materially and adversely affected if either customer fails to perform its contract obligations for any reason.

 

The distributions that we expect to receive from the LNG Interest are dependent on the future financial results of the LNG Facility. The LNG Facility generates revenues on firm contracted capacity from its two customers, ENI USA Gas Marketing L.L.C. and Angola LNG Supply Services, LLC (which is a joint venture of several integrated, multi-national oil and gas companies), each of which has entered into a terminal use agreement with Gulf LNG Holdings and agreed to pay firm reservation and operating fees regardless of whether LNG is delivered, stored or regasified. Our cash distributions from the LNG Interest are dependent upon the LNG Facility and each customer’s willingness to perform its contractual obligations under its respective terminal use agreement. The contractual obligations under the terminal use agreement with ENI USA Gas Marketing are supported by a parent guarantee, and the contractual obligations under the terminal use agreement with Angola LNG Supply Services are supported by parent guarantees from the consortium members that each cover a portion of the obligations thereunder. Each of the terminal use agreements contains various termination rights. For example, each customer may terminate its terminal use agreement as a result of breaches of customary commercial covenants or if the LNG Facility:

 

   

experiences a force majeure delay for longer than 18 months;

 

   

fails to redeliver a specified amount of natural gas in accordance with the customer’s redelivery nominations; or

 

   

fails to accept and unload a specified number of the customer’s proposed LNG cargoes.

 

We may not be able to replace these terminal use agreements on desirable terms, or at all, if they are terminated.

 

Due to global LNG supply/demand economics, the customers of Gulf LNG Holdings are not shipping LNG to the LNG Facility for storage and regasification services. Due to lower natural gas prices in the United States, the customers have an economic advantage in redirecting LNG vessels to other locations around the world. However, the contractual obligations of the terminal use agreements require the customers to continue paying the firm reservation and operating fees. This dynamic could result in non-performance from the customers to pay the firm reservation and operating fees under the terminal use agreements. While Gulf LNG Holdings would seek recourse under the customers’ parent guarantees, our business, financial conditions and results of operations and our ability to make quarterly distributions to our unitholders could be materially and adversely affected.

 

We are also exposed to the credit risk of each customer’s parent guarantor in the event that Gulf LNG Holdings is required to seek recourse under a customer’s parent guarantee. If either customer or its parent guarantor fails to perform its financial obligations under the terminal use agreement or the parent guarantee, respectively, our business, financial condition and results of operations and our ability to make quarterly distributions to our unitholders could be materially and adversely affected.

 

We depend on a relatively limited number of customers for a significant portion of our revenues. The loss of, or material nonpayment or nonperformance by, any of our key customers could adversely affect our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders.

 

A significant portion of our revenue is attributable to a relatively limited number of customers. On a pro forma basis, approximately 61.4% and 50.4% of our revenues for the year ended December 31, 2012 and the six months ended June 30, 2013, respectively, were attributable to our five largest customers, which includes our largest customer, Center Oil. Some of our customers may have material financial and liquidity issues or operational incidents. We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers. Our credit procedures and policies may not be adequate to fully eliminate customer credit risk. Any material nonpayment or nonperformance by any of our key customers and our inability to re-market or otherwise use the affected storage capacity could have a material adverse effect on our revenue and cash flows and our

 

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ability to make cash distributions to our unitholders. We expect our exposure to concentrated risk of non-payment or non-performance to continue as long as we remain substantially dependent on a relatively limited number of customers for a substantial portion of our revenue.

 

We periodically evaluate whether the carrying values of our terminals may be impaired and could be required to recognize non-cash charges in future periods.

 

Accounting rules require us to write down, as a non-cash charge to earnings, the carrying value of our terminals as well as any other long-lived assets in the event we have impairments. We are required to perform impairment tests on our assets periodically and whenever events or changes in circumstances warrant a review of our assets. To the extent such tests indicate a reduction of the estimated future cash flows of a long-lived asset, the carrying value may not be recoverable and, therefore, requires a write-down. The future cash flow estimates are based on historical results, adjusted to reflect our best estimate of future market and operating conditions. Accordingly, estimated future cash flows for our terminals can be impacted by demand for the petroleum products and crude oil that we store for our customers, volatility and pricing of crude oil and its impact on petroleum products prices, the level of domestic oil production and potential future sources of cash flows. For example, the Buckeye Pipeline, which provided petroleum products through a common carrier pipeline to our Chillicothe, IL terminal, ceased product deliveries during the first quarter of 2013. While the Chillicothe, IL terminal remains capable of receiving petroleum product through other modes, the inability to receive product via the common carrier pipeline has resulted in a strategic reevaluation of the Chillicothe, IL terminal. If we are unable to repurpose the terminal or address the common carrier pipeline issue, we might be forced to take a non-cash, asset impairment charge. We may incur impairment charges in the future, which could have a material adverse effect on our results of operations in the period incurred and may impact our ability to borrow funds under our amended and restated credit facility, which in turn may adversely affect our ability to make cash distributions to our unitholders.

 

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

 

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

 

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

 

The LNG Facility is no longer in a cryogenic state, but remains fully operational to receive, unload and regasify LNG vessels on behalf of its customers. However, because the LNG Facility is no longer in a cryogenic state, the process and timing to receive and unload an LNG vessel could trigger certain provisions in the terminal use agreements, which could adversely affect the profitability of our LNG Interest.

 

Since October 2012, the storage tanks and other equipment in the LNG Facility have not been in a cryogenic state. While the LNG Facility remains operationally ready to receive and process LNG vessels on behalf of its

 

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customers, the current status of the facility could increase the timing requirements to receive and process any LNG vessels as the LNG Facility returns to a cryogenic state. The terminal use agreements include provisions whereby the increased timing to receive and process LNG vessels could trigger demurrage and/or excess boil-off penalties. The amount of any such penalty will vary based upon the commencement of the unloading process, the actual time it takes to unload the vessel as it relates to the allotted unloading time and the size of the LNG vessel.

 

Reduced volatility in energy prices, certain market conditions or new government regulations could discourage our storage customers from holding positions in crude oil, petroleum products or chemicals, which could adversely affect the demand for our storage and throughput services.

 

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

 

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

 

Some of our services agreements currently in effect are operating in the automatic renewal phase of the contract that begins upon the expiration of the primary contract term. Our services agreements generally have primary contract terms that range from one month up to ten years. Upon expiration of the primary contract term, these agreements renew automatically for successive renewal terms that range from one month to three years unless earlier terminated by either party upon the giving of the requisite notice, generally ranging from two to six months prior to the expiration of the applicable renewal term. On a pro forma basis for the six months ended June 30, 2013, 70% of our revenue was generated pursuant to take-or-pay provisions in our services agreements with a weighted average term remaining of approximately three years. Services agreements that account for an aggregate of 33% of our expected revenues for the twelve months ending September 30, 2014 could be terminated by our customers without penalty within the same period. If any one or more of our services agreements is terminated and we are unable to secure comparable alternative arrangements, we may not be able to generate sufficient additional revenue from third parties to replace any shortfall in revenue or increase in costs. Additionally, we may incur substantial costs if modifications to our terminals are required by a new or renegotiated services agreement. The occurrence of any one or more of these events could have a material impact on our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders.

 

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

 

We face competition from other facilities that may be able to supply our customers with integrated services on a more competitive basis, including access to pipeline delivery services in which we have limited connections. We compete with national, regional, and local terminal and storage companies, including major integrated oil companies, of widely varying sizes, financial resources and experience. Our ability to compete could be harmed by factors we cannot control, including:

 

   

prices offered by our competitors;

 

   

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

 

   

the perception that another company may provide better service; and

 

   

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

 

Any combination of these factors could result in our customers utilizing the assets and services of our competitors instead of our assets and services or us being required to lower our prices or increase our costs to retain our customers, either of which could adversely affect our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders.

 

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

 

A portion of our strategy to grow and increase distributions to unitholders is dependent on our ability to expand existing assets and to construct additional assets. The construction of a new facility, or the expansion of an existing facility, such as increasing capacity or otherwise, involves numerous regulatory, environmental, political and legal uncertainties, most of which are beyond our control. Moreover, we may not receive sufficient long-term contractual commitments from customers to provide the revenue needed to support such projects. As a result, we may construct new facilities that are not able to attract enough storage or throughput customers to achieve our expected investment return, which could adversely affect our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders.

 

If we undertake these projects, they may not be completed on schedule or at all or at the budgeted cost. Even if we receive sufficient multi-year contractual commitments from customers to provide the revenue needed to support such projects and we complete our construction projects as planned, we may not realize an increase in revenue for an extended period of time. For example, if we build a new terminal, the construction will occur over an extended period of time and we will not receive any material increases in revenues until after completion of the project. Any of these circumstances could adversely affect our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders.

 

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

 

A portion of our strategy is also dependent on our ability to make acquisitions that result in an increase in our cash available for distribution per unit. If we are unable to make acquisitions because we are unable to identify attractive acquisition candidates or negotiate acceptable purchase agreements, or we are unable to obtain financing for these acquisitions on economically acceptable terms or we are outbid by competitors, our future

 

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growth and ability to increase distributions will be limited. Furthermore, even if we do consummate acquisitions that we believe will be accretive, they may in fact result in a decrease in our cash available for distribution per unit. Any acquisition involves potential risks, some of which are beyond our control, including, among other things:

 

   

mistaken assumptions about revenues and costs, including synergies;

 

   

an inability to integrate successfully the businesses we acquire;

 

   

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

 

   

the assumption of unknown liabilities;

 

   

limitations on rights to indemnity from the seller;

 

   

mistaken assumptions about the overall costs of equity or debt;

 

   

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

 

   

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

 

   

customer or key employee losses at the acquired businesses.

 

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

 

Revenues we generate from storage and throughput services fees vary based upon the level of activity at our facilities by our customers. Any decrease in the demand for the crude oil, petroleum products or chemicals we handle or any interruptions to the operations of certain of our customers could reduce the amount of cash we generate and adversely affect our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders.

 

A substantial portion of our revenues is based on the throughput activity levels of our customers. The revenues we generate from storage and throughput services fees vary based upon the underlying services agreements and the volumes of products handled at our facilities. Our customers may not be obligated to pay us any storage or throughput services fees unless we move volumes of products across our truck loading racks, marine facilities or rail assets on their behalf. If one or more of our customers were to slow or suspend its operations, have difficulty supplying their products to our terminals or otherwise experience a decrease in demand for our services, our revenues under our agreements with such customers would be reduced or suspended, resulting in a decrease in the revenues we generate.

 

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

 

The customers of our facilities are dependent upon connections to third-party pipelines and railroads to receive and deliver crude oil, petroleum products and chemicals. Any interruptions or reduction in the capabilities of these interconnecting pipelines or railroads 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 terminals. Similarly, if additional shippers begin transporting volume over interconnecting pipelines or railroads, the allocations to our existing shippers on these interconnecting pipelines could be reduced, which could reduce volumes transported through our terminals. Allocation reductions of this nature are not infrequent and are beyond our control. In addition, if the costs to us or our storage and throughput service customers to access these third-party pipelines or railroads significantly increase, our profitability could

 

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be reduced. Any such increases in cost, interruptions, or allocation reductions that, individually or in the aggregate, are material or continue for a sustained period of time could have a material adverse effect on our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders.

 

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

 

Our facilities are generally long-lived assets. As a result, some of those assets have been in service for many decades. While we have implemented inspection programs in accordance the American Petroleum Institute, the age and condition of these assets could result in increased maintenance expenditures or remediation projects, such as in the case where we acquire terminal storage assets that have not been maintained to that standard. Any significant increase in these expenditures could adversely affect our business, results of operations, financial condition, and ability to make cash distributions to our unitholders.

 

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

 

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

 

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

 

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

 

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

 

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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 numerous permits and authorizations under various federal and state laws and regulations. These authorizations and permits are subject to revocation, renewal or modification and can require operational changes or incremental capital investments 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 negative effect on our business, results of operations and cash flows.

 

Increased regulation of greenhouse gas emissions could result in increased operating costs and reduced demand for petroleum products as a fuel source, which could in turn reduce demand for our services and adversely affect our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders.

 

Combustion of fossil fuels, such as the crude oil and petroleum products we store and distribute, results in the emission of carbon dioxide into the atmosphere. In December 2009, the Environmental Protection Agency (the “EPA”) published its findings that emissions of carbon dioxide and other greenhouse gases present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth’s atmosphere and other climatic changes, and the EPA has begun to regulate greenhouse gases (“GHG”) emissions pursuant to the Clean Air Act. Many states and regions have adopted GHG initiatives and it is possible that federal legislation could be adopted in the future to restrict GHG emissions.

 

There are many regulatory approaches currently in effect or being considered to address GHG, including possible future U.S. treaty commitments, new federal or state legislation that may impose a carbon emissions tax or establish a cap-and-trade program and regulation by the EPA. Future international, federal, and state initiatives to control carbon dioxide emissions could result in increased costs associated with crude oil and petroleum products consumption, such as costs to install additional controls to reduce carbon dioxide emissions or costs to purchase emissions reduction credits to comply with future emissions trading programs. Such increased costs could result in reduced demand for crude oil and petroleum products and some customers switching to alternative sources of fuel which could have a material adverse effect on our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders.

 

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

 

Various federal and state agencies prescribe specific product quality specifications for petroleum products, including vapor pressure, sulfur content, ethanol content and biodiesel content. Depending upon the services agreement, changes in product quality specifications or blending requirements could reduce our throughput volume, require us to incur additional handling costs or require capital expenditures. If we are unable to recover these costs through increased revenues, our cash flows and ability to pay cash distributions to our unitholders could be adversely affected. Violations of product quality laws attributable to our operations could subject us to significant fines and penalties as well as negative publicity.

 

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

 

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

 

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Mergers among our customers and competitors could result in lower levels of activity at our terminals, thereby reducing the amount of cash we generate.

 

Mergers between our existing customers and our competitors could provide strong economic incentives for the combined entities to utilize their existing systems instead of ours in those markets where the systems compete. As a result, we could lose some or all of the activity and associated revenues from these customers, and we could experience difficulty in replacing those lost volumes and revenues. Because most of our operating costs are fixed, a reduction in activity would result not only in less revenue but also a decline in cash flow of a similar magnitude, which would adversely affect our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders.

 

Restrictions in our credit agreement could adversely affect our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders as well as the value of our common units.

 

Upon the consummation of this offering, we intend to amend and restate our existing credit agreement. 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 credit agreement and any future financing agreements could restrict our ability to finance future operations or capital needs or expand or pursue our business, which may, in turn, adversely affect our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders. For example, we expect that our amended and restated credit agreement will restrict our ability to, among other things:

 

   

make cash distributions;

 

   

incur indebtedness;

 

   

create liens;

 

   

make investments;

 

   

engage in transactions with affiliates;

 

   

make any material change to the nature of our business;

 

   

dispose of assets; and

 

   

merge with another company or sell all or substantially all of our assets.

 

Furthermore, our credit agreement will contain covenants requiring us to maintain certain financial ratios.

 

The provisions of our credit agreement may affect our ability to obtain future financing for 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 credit agreement could result in an event of default which could enable our lenders, subject to the terms and conditions of our credit agreement, to declare the outstanding principal of that debt, together with accrued interest, to be immediately due and payable. If we were unable to repay the accelerated amounts, our lenders could proceed against the collateral granted to them to secure such debt. If the payment of our debt is accelerated, defaults under our other debt instruments, if any, may be triggered and our assets may be insufficient to repay such debt in full, and the holders of our units could experience a partial or total loss of their investment.

 

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

 

Interest rates may increase in the future. As a result, interest rates on our amended and restated credit facility or future credit facilities and debt offerings could be higher than current levels, causing our financing costs to increase accordingly. As with other yield-oriented securities, our unit price will be impacted by our level of our

 

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cash distributions and implied distribution yield. The distribution yield is often used by investors to compare and rank yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our units, and a rising interest rate environment could have an adverse impact on our unit price and our ability to issue equity or incur debt for acquisitions or other purposes and to make cash distributions at our intended levels.

 

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

 

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

 

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

 

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

 

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

 

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

 

Risks Inherent in an Investment in Us

 

Our sponsor owns and controls our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner and its affiliates, including our sponsor, have conflicts of interest with us and limited duties, and they may favor their own interests to the detriment of us and our unitholders.

 

Following the offering, our sponsor, Lightfoot, will own and control our general partner and will appoint all of the directors of our general partner. Although our general partner has a duty to manage us in a manner that it believes is not adverse to our interest, the executive officers and directors of our general partner also have a duty to manage our general partner in a manner beneficial to our sponsor. Therefore, conflicts of interest may arise between our sponsor or any of its affiliates, including our general partner, on the one hand, and us or any of our unitholders, on the other hand. In resolving these conflicts of interest, our general partner may favor its own interests and the interests of its affiliates, including our sponsor and its owners, over the interests of our common unitholders. These conflicts include the following situations, among others:

 

   

our general partner is allowed to take into account the interests of parties other than us, such as our sponsor, in exercising certain rights under our partnership agreement, which has the effect of limiting its duty to our unitholders;

 

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neither our partnership agreement nor any other agreement requires our sponsor to pursue a business strategy that favors us;

 

   

our partnership agreement replaces the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing its duties, limits our general partner’s liabilities and restricts the remedies available to our unitholders for actions that, without such 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 determines the amount and timing of asset purchases and sales, borrowings, issuances of additional partnership securities and the level of reserves, each of which can affect the amount of cash that is distributed to our unitholders;

 

   

our general partner determines the amount and timing of any capital expenditure and whether an expenditure is classified as a maintenance capital expenditure, which reduces operating surplus, or an expansion capital expenditure, which does not reduce operating surplus. Please read “How We Make Distributions to Our Partners—Capital Expenditures” for a discussion on when a capital expenditure constitutes a maintenance capital expenditure or an expansion capital expenditure. This determination can affect the amount of cash from operating surplus that is distributed to our unitholders, which, in turn, may affect the ability of the subordinated units to convert. Please read “How We Make Distributions to Our Partners—Subordination Period”;

 

   

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

 

   

our partnership agreement permits us to distribute up to $12.2 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 the incentive distribution rights;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

our general partner controls the enforcement of obligations that it and its affiliates owe to us;

 

   

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

 

   

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 or the unitholders. This election may result in lower distributions to the common unitholders in certain situations.

 

In addition, our sponsor, its owners and entities in which they have an interest may compete with us. Please read “—Our sponsor, its owners and other affiliates of our general partner may compete with us” and “Conflicts of Interest and Fiduciary Duties.”

 

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Our partnership agreement does not require us to pay any distributions at all. The board of directors of our general partner may modify or revoke our cash distribution policy at any time at its discretion.

 

Our partnership agreement does not require us to pay distributions at any time or in any amount. Instead, the board of directors of our general partner will adopt a cash distribution policy pursuant to which we intend to distribute quarterly at least $0.3875 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 and could elect not to pay distributions for one or more quarters. Please read “Cash Distribution Policy and Restrictions on Distributions.”

 

Investors are cautioned not to place undue reliance on the permanence of such a 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, if any, and the decision to make any distribution at all 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.

 

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

 

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

 

It is our policy to distribute a significant portion of our cash available for distribution to our partners, which could limit our ability to grow and make acquisitions.

 

We plan to distribute most of our cash available for distribution, which may cause our growth to proceed at a slower pace than that of businesses that reinvest their 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 on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which, in turn, may impact the cash that we have available to distribute to our unitholders.

 

Our partnership agreement replaces our general partner’s fiduciary duties to holders of our units.

 

Our partnership agreement contains provisions that eliminate and replace the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, or otherwise free of fiduciary duties to us and our unitholders. This entitles our general partner to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. Examples of decisions that our general partner may make in its individual capacity include:

 

   

how to allocate business opportunities among us and its affiliates;

 

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whether to exercise its call right;

 

   

how to exercise its voting rights with respect to the units it owns;

 

   

whether to elect to reset target distribution levels; and

 

   

whether or not to consent to any merger or consolidation of the partnership or amendment to the partnership agreement.

 

By purchasing a common unit, a unitholder is treated as having consented to the provisions in the 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 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 other or different standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation, or at equity;

 

   

our general partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as it acted in good faith, meaning that it believed that the decision was not adverse to the interest of the partnership;

 

   

our general partner and its officers and directors will not be liable for monetary damages or otherwise 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 such losses or liabilities were the result of conduct in which our general partner or its officers or directors engaged in bad faith, willful misconduct or fraud or, with respect to any criminal conduct, with knowledge that such conduct was unlawful; and

 

   

our general partner will not be in breach of its obligations under the partnership agreement or its duties to us or our limited partners if a transaction with an affiliate or the resolution of a conflict of interest is:

 

  (1)   approved by the conflicts committee of the board of directors of our general partner, although our general partner is not obligated to seek such approval; or

 

  (2)   approved by the vote of a majority of the outstanding common units, excluding any common units owned by our general partner and its affiliates.

 

In connection with a situation involving a transaction with an affiliate or a conflict of interest, any determination by our general partner must be made in good faith. If an affiliate transaction or the resolution of a conflict of interest is not approved by our common unitholders or the conflicts committee then it will be presumed that, in making its decision, taking any action or failing to act, the board of directors acted in good faith, and 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 sponsor, its owners and other affiliates of our general partner may compete with us.

 

Our partnership agreement provides that our general partner will be restricted from engaging in any business activities other than acting as our general partner and those activities incidental to its ownership interest in us.

 

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However, affiliates of our general partner, including our sponsor and its owners, are not prohibited from engaging in other businesses or activities, including those that might be in direct competition with us. Any investments or acquisitions by affiliates of our general partner, including our sponsor and its owners, may include entities or assets that we would have been interested in acquiring. In addition, our sponsor and its owners may acquire interests in other publicly traded partnerships. Therefore, our sponsor and its affiliates may compete with us for investment opportunities and may own an interest in entities that compete with us.

 

Pursuant to 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 and directors, our sponsor and its 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, including our sponsor and its owners, and result in less than favorable treatment of us and our unitholders. Please read “Conflicts of Interest and Fiduciary Duties.”

 

Our general partner and, following a transfer, a majority of the holders of our incentive distribution rights may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to its incentive distribution rights, without the approval of the conflicts committee of its board of directors 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, as the initial holder of our incentive distribution rights, at any time when there are no subordinated units outstanding and it has received incentive distributions at the highest level to which it is entitled (50.0%) for 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 by our general partner, 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. In the event of a reset of target distribution levels, it will be entitled to receive the number of common units equal to that number of common units which would have entitled their holder to an average aggregate quarterly cash distribution for the prior two quarters equal to the average of the distributions to our general partner on the incentive distribution rights in the prior two quarters. 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 incentive 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 our common unitholders would have otherwise received had we not issued new common units to our general partner in connection with resetting the target distribution levels.

 

Our general partner may transfer all or a portion of the incentive distribution rights in the future. After any such transfer, the holder or holders of a majority of our incentive distribution rights will be entitled to exercise the right to reset the target distribution levels. Please read “How We Make Distributions to Our Partners—General Partner’s Right to Reset Incentive Distribution Levels.”

 

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

 

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

 

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

 

If our unitholders are dissatisfied with the performance of our general partner, they will have limited ability to remove our general partner. Unitholders initially will be unable to remove our general partner without its consent because our general partner and its affiliates will own sufficient units upon the completion of this offering to be able to prevent its removal. The vote of the holders of at least 66  2/3% of all outstanding common and subordinated units voting together as a single class is required to remove our general partner. Following the closing of this offering, our sponsor will own an aggregate of 42.9% of our common and subordinated units (or 39.9% of our common and subordinated units, if the underwriters exercise their option to purchase additional common units in full). Also, if our general partner is removed without cause during the subordination period and no units held by the holders of the subordinated units or their affiliates are voted in favor of that removal, all remaining subordinated units will automatically be converted into common units and any existing arrearages on the common units will be extinguished. Cause is narrowly defined in our partnership agreement to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding our general partner liable for actual fraud or willful or wanton misconduct in its capacity as our general partner. Cause does not include most cases of charges of poor management of the business.

 

Unitholders will experience immediate and substantial dilution of $7.06 per common unit.

 

The assumed initial public offering price of $20.00 per common unit (the mid-point of the price range set forth on the cover page of this prospectus) exceeds our pro forma net tangible book value of $12.94 per common unit. Based on the assumed initial public offering price of $20.00 per common unit, unitholders will incur immediate and substantial dilution of $7.06 per common unit. This dilution results primarily because the assets contributed to us by affiliates of our general partner are recorded at their historical cost in accordance with GAAP, and not their fair value. Please read “Dilution.”

 

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

 

Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of our unitholders. Furthermore, our partnership agreement does not restrict the ability of our sponsor as the sole member of our general partner to transfer its membership interests in our general partner to a third party. After any such transfer, the new member or members of our general partner would then be in a position to replace the board of directors and executive officers of our general partner with their own designees and thereby exert significant control over the decisions taken by the board of directors and executive officers of our general partner. This effectively permits a “change of control” without the vote or consent of the unitholders.

 

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The incentive distribution rights held by our general partner, or indirectly held by our sponsor, may be transferred to a third party without unitholder consent.

 

Our general partner or our sponsor may transfer the incentive distribution rights to a third party at any time without the consent of our unitholders. If our sponsor transfers the incentive distribution rights to a third party but retains its ownership interest in our general partner, 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 our sponsor had retained ownership of the incentive distribution rights. For example, a transfer of incentive distribution rights by our sponsor could reduce the likelihood of our sponsor accepting offers made by us relating to assets owned by it, as it would have less of an economic incentive to grow our business, which in turn would impact our ability to grow our asset base.

 

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

 

If at any time our general partner and its affiliates own more than 80% of the common units, our general partner will have the right, 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 equal to the greater of (1) the average of the daily closing price of the common units over the 20 trading days preceding the date three days before notice of exercise of the call right is first mailed and (2) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. As a result, unitholders may be required to sell their common units at an undesirable time or price and may not receive any return or a negative return on their investment. Unitholders may also incur a tax liability upon a sale of their units. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon exercise of the limited call right. There is no restriction in our partnership agreement that prevents our general partner from issuing additional common units and exercising its call right. If our general partner exercised its limited call right, the effect would be to take us private and, if the units were subsequently deregistered, we would no longer be subject to the reporting requirements of the Exchange Act. Upon consummation of this offering, our sponsor will own an aggregate of 42.9% of our common and subordinated units. At the end of the subordination period, assuming no additional issuances of units (other than upon the conversion of the subordinated units), our sponsor will own 42.9% of our common units. For additional information about the limited call right, please read “The Partnership Agreement—Limited Call Right.”

 

Our general partner may amend our partnership agreement, as it determines necessary or advisable, to permit the general partner to redeem the units of certain unitholders.

 

Our general partner may amend our partnership agreement, as it determines necessary or advisable, to obtain proof of the U.S. federal income tax status and/or the nationality, citizenship or other related status of our limited partners (and their owners, to the extent relevant) and to permit our general partner to redeem the units held by any person (i) whose tax status has or is reasonably likely to have a material adverse effect on the maximum applicable rates chargeable to our customers, (ii) whose nationality, citizenship or related status creates substantial risk of cancellation or forfeiture of any of our property and/or (iii) who fails to comply with the procedures established to obtain such proof. The redemption price in the case of such a redemption will be the average of the daily closing prices per unit for the 20 consecutive trading days immediately prior to the date set for redemption. Please read “The Partnership Agreement—Non-Taxpaying Holders; Redemption” and “The Partnership Agreement—Non-Citizen Assignees; Redemption.”

 

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

 

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

 

   

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

 

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

 

   

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

 

   

the ratio of taxable income to distributions may increase;

 

   

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

 

   

the market price of the common units may decline.

 

There are no limitations in our partnership agreement on our ability to issue units ranking senior to the common units.

 

In accordance with Delaware law and the provisions of our partnership agreement, we may issue additional partnership interests that are senior to the common units in right of distribution, liquidation and voting. The issuance by us of units of senior rank may (i) reduce or eliminate the amount of cash available for distribution to our common unitholders; (ii) diminish the relative voting strength of the total common units outstanding as a class; or (iii) subordinate the claims of the common unitholders to our assets in the event of our liquidation.

 

The market price of our common units could be adversely affected by sales of substantial amounts of our common units in the public or private markets.

 

After this offering, we will have 6,081,081 common units and 6,081,081 subordinated units outstanding, which includes the 6,000,000 common units we are selling in this offering that may be resold in the public market immediately. All of the subordinated units will convert into common units on a one-for-one basis at the end of the subordination period. All of the common and subordinated units that are issued to our sponsor will be subject to resale restrictions under a 180-day lock-up agreement with the underwriters. Each of the lock-up agreements with the underwriters may be waived in the discretion of certain of the underwriters. Sales by holders of a substantial number of our common units in the public markets following this offering, or the perception that such sales might occur, could have a material adverse effect on the price of our common units or could impair our ability to obtain capital through an offering of equity securities. In addition, we have agreed to provide registration rights to our sponsor. Please read “Units Eligible for Future Sale.”

 

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

 

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

 

Cost reimbursements due to our general partner and its affiliates for services provided to us or on our behalf will reduce cash available for distribution to our unitholders. The amount and timing of such reimbursements will be determined by our general partner.

 

Prior to making any distribution on the common units, we will reimburse our general partner and its affiliates for all expenses they incur and payments they make on our behalf. Our partnership agreement does not set a limit on the amount of expenses for which our general partner and its affiliates may be reimbursed. These expenses include salary, bonus, incentive compensation and other amounts paid to persons who perform services for us or on our behalf and expenses allocated to our general partner by its affiliates. Our partnership agreement provides that our general partner will determine the expenses that are allocable to us. The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates will reduce the amount of cash available for distribution to our unitholders. Please read “Cash Distribution Policy and Restrictions on Distributions.”

 

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

 

Prior to this offering, there has been no public market for the common units. After this offering, there will be only 6,000,000 publicly traded common units. We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. Unitholders may not be able to resell their common units at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.

 

The initial public offering price for our common units will be determined by negotiations between us and the 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;

 

   

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

 

   

future sales of our common units; and

 

   

the other factors described in these “Risk Factors.”

 

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

 

A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to the general partner. Our partnership is organized under Delaware law, and we conduct business in a number of other states. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some jurisdictions. You could be liable for our obligations as if you were a general partner if a court or government agency were to determine that:

 

   

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

 

   

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

 

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

 

Unitholders may have liability to repay distributions and in certain circumstances may be personally liable for the obligations of the partnership.

 

Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act (the “Delaware Act”), we may not make a distribution to our unitholders if the distribution would cause our liabilities to exceed the fair

 

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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. Liabilities to partners on account of their partnership interests and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

 

For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.

 

In April 2012, President Obama signed into law the JOBS Act. The JOBS Act contains provisions that, among other things, relax certain reporting requirements for “emerging growth companies,” including certain requirements relating to accounting standards and compensation disclosure. We are classified as an emerging growth company. For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, we will not be required to, among other things, (1) 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(b) of the Sarbanes-Oxley Act of 2002, (2) comply with any new requirements adopted by 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 the financial statements of the issuer, (3) comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise or (4) provide certain disclosure regarding executive compensation required of larger public companies.

 

If we fail to establish and maintain effective internal control over financial reporting, our ability to accurately report our financial results could be adversely affected.

 

We are not currently required to comply with the SEC’s rules implementing Section 404 of the Sarbanes-Oxley Act of 2002, and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Though we will be required to disclose material changes made to our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. To comply with the requirements of being a publicly traded partnership, we will need to implement additional internal controls, reporting systems and procedures and hire additional accounting, finance and legal staff. Furthermore, we are not required to have our independent registered public accounting firm attest to the effectiveness of our internal controls until our first annual report subsequent to our ceasing to be an “emerging growth company” within the meaning of Section 2(a)(19) of the Securities Act. Accordingly, we may not be required to have our independent registered public accounting firm attest to the effectiveness of our internal controls until our annual report for the year ending December 31, 2018. Once it is required to do so, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed, operated or reviewed.

 

If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential unitholders could lose confidence in our financial reporting, which would harm our business and the trading price of our units.

 

Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. We cannot be certain that our efforts to develop and maintain our internal controls will be successful, that we will be able to maintain adequate controls over our financial processes and reporting in the future or that we will be able to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002. Any failure to develop or maintain effective internal controls, or difficulties encountered in implementing or improving our internal controls, could harm our operating results or cause us to fail to meet our reporting obligations. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our units.

 

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

 

We have been approved to list our common units on the NYSE. Because we will be a publicly traded 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 certain corporations that are subject to all of the NYSE corporate governance requirements. Please read “Management.”

 

Our management team does not have substantial experience managing our business as a stand-alone publicly traded partnership, and if they are unable to manage our business as a publicly traded partnership our business may be affected.

 

Our management team does not have substantial experience managing our business as a publicly traded partnership. Unlike private companies, publicly traded entities are subject to substantial rules and regulations, including rules and regulations promulgated by the SEC and rules governing listed entities on the NYSE. If we are unable to manage and operate our partnership as a publicly traded partnership, our business and results of operations will be adversely affected.

 

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

 

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

 

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

 

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

 

We estimate that we will incur approximately $2.9 million of incremental costs per year associated with being a publicly traded partnership; however, it is possible that our actual incremental costs of being a publicly traded partnership will be higher than we currently estimate.

 

Tax Risks to Common Unitholders

 

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

 

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Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as our not being subject to a material amount of entity-level taxation by individual states. If the Internal Revenue Service were to treat us as a corporation for federal income tax purposes or we were to become subject to material additional amounts of entity-level taxation for state tax purposes, then our cash available for distribution to you could 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.

 

Despite the fact that we are organized as 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. Although we do not believe, based upon our current operations, that we will be so treated, a change in our business or a change in current law could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.

 

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

 

Gulf LNG Holdings may change its business or operations in a way that does not generate qualifying income without our consent. In that event, we would likely elect to hold the LNG Interest in a subsidiary treated as a corporation for federal income tax purposes, which would reduce cash available for distribution to our unitholders from the assets and operations of the LNG Facility.

 

Despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a publicly traded partnership such as ours to be treated as a corporation for 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 the importance of satisfying the qualifying income requirement, please read “Material U.S. Federal Income Tax Consequences—Taxation of the Partnership—Partnership Status.”

 

Because we have a minority interest in Gulf LNG Holdings, without our consent, Gulf LNG Holdings may change their existing business or conduct other businesses in the future in a manner that does not generate qualifying income. If we determine such a change is likely or has occurred, we may elect to hold the LNG Interest in a subsidiary treated as a corporation for federal income tax purposes. In such case, this corporate subsidiary would be subject to corporate-level tax on its taxable income at the applicable federal corporate income tax rate, currently 35%, as well as any applicable state income tax rates. Imposition of a corporate level tax would significantly reduce the anticipated cash available for distribution from the Gulf LNG Holdings assets and operations to us and, in turn, would reduce our cash available for distribution to our unitholders. For a more thorough discussion of the risks related to our minority interest in Gulf LNG, please read “Risks Inherent in Our Business—Our ownership in the LNG Facility will represent a minority interest in Gulf LNG Holdings and our rights are limited. A decision could be made at Gulf LNG Holdings without requiring our approval and could have a material adverse effect on cash distributions from our LNG Interest.”

 

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

 

The present federal income tax treatment of publicly-traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial changes or differing interpretations at any time. For example, from time to time, members of Congress propose and consider substantive changes to the existing federal income tax laws that affect publicly-traded partnerships. Any modification to the federal income tax laws may be applied retroactively and could make it more difficult or impossible to meet the exception for certain publicly-traded partnerships to be treated as partnerships for federal income tax purposes. We are unable to predict whether any of these changes, or other proposals will ultimately be enacted. Any such changes could negatively impact the value of an investment in our common units.

 

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

 

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

 

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

 

We will be considered to have constructively terminated as a partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. Immediately following this offering, affiliates of our sponsor will directly and indirectly own more than 42.9% of the total interests in our capital and profits. Therefore, a transfer by affiliates of our sponsor of all or a portion of their interests in us, along with transfers by other unitholders, could result in a termination of us as a partnership for federal income tax purposes. Our termination would, among other things, result in the closing of our taxable year for all unitholders 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 the calendar year, 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, after our termination 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 and could be subject to penalties if we are unable to determine that a termination occurred. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Units—Constructive Termination” for a discussion of the consequences of our termination for federal income tax purposes.

 

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

 

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

 

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

 

Investments in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (or “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 U.S. federal income tax returns and pay tax on their shares of our taxable income. If you are a tax-exempt entity or a non-U.S. person, you should consult your tax advisor before investing in our common units.

 

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

 

The Internal Revenue Service (the “IRS”) may adopt positions that differ from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we take. A court may not agree with some or all of the positions we take. Any contest by the IRS, and the outcome of any IRS contest, may materially and adversely impact the market for our common units and the price at which they trade. Our costs of any contest by the IRS will be borne indirectly by our unitholders and our general partner because the costs will reduce our cash available for distribution.

 

We will treat each purchaser of our 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, 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. Our counsel is unable to opine as to the validity of this approach. 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 U.S. 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 will prorate our items of income, gain, loss and deduction 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 generally prorate our items of income, gain, loss and deduction between transferors and transferees of our common units each month based upon the ownership of our common units on the first day of each month, instead of on the basis of the date a particular common unit is transferred. Nonetheless, we will allocate certain deductions for depreciation of capital additions based upon the date the underlying property is placed in service. The use of this proration method may not be permitted under existing Treasury Regulations, and although the U.S. Treasury Department issued proposed Treasury Regulations allowing a similar monthly simplifying convention, such regulations are not final and do not specifically authorize the use of the proration method we will adopt. Accordingly, our counsel is unable to opine as to the validity of this method. If the IRS were to successfully challenge our proration method, we may be required to change the allocation of items of income, gain, loss, and deduction among our unitholders. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Units—Allocations Between Transferors and Transferees.”

 

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A unitholder whose common units are the subject of a securities loan (e.g., a loan to a “short seller” to cover 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 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 there are no specific rules governing the federal income tax consequences of loaning a partnership interest, a unitholder whose common units are the subject of a securities loan may be considered as having disposed of the loaned units. In that case, 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, 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. Our counsel has not rendered an opinion regarding the treatment of a unitholder whose common units are the subject of a securities loan. 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 borrowing their common units.

 

You will likely be subject to state and local taxes and return filing requirements in states where you do not live as a result of investing in our common units.

 

In addition to federal income taxes, you 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 own property now or in the future, even if you do not live in any of those jurisdictions. We will initially own assets and conduct business in several states, each of which currently imposes a personal income tax and also imposes income taxes on corporations and other entities. You may be required to file state and local income tax returns and pay state and local income taxes in these states. Further, you may be subject to penalties for failure to comply with those requirements. As we make acquisitions or expand our business, we may own assets or conduct business in additional states or foreign jurisdictions that impose a personal income tax. It is your responsibility to file all U.S. federal, foreign, state and local tax returns. Our counsel has not rendered an opinion on the foreign, state or local tax consequences of an investment in our common units.

 

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USE OF PROCEEDS

 

We expect the net proceeds from this offering will be approximately $107.9 million (based on an assumed initial offering price of $20.00 per common unit, the mid-point of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discount, structuring fee and offering expenses.

 

We intend to use the net proceeds from this offering:

 

   

to purchase the LNG Interest from an affiliate of GE EFS for approximately $73.0 million;

 

   

to make a distribution to GCAC of $29.6 million as partial consideration for the contribution of its preferred units in Arc Terminals LP;

 

   

to repay $3.0 million intercompany payables owed to our sponsor; and

 

   

to repay $0.3 million of indebtedness outstanding under our amended and restated credit facility.

 

Borrowings under our existing credit facility were primarily made in connection with the Blakeley, AL expansion projects and the acquisition of the Mobile, AL, Saraland, AL and Brooklyn, NY facilities. As of June 30, 2013, we had borrowings outstanding of $115.4 million under our existing credit facility. Indebtedness under our existing credit facility bore interest at an average rate of approximately 4.3% during the six months ended June 30, 2013. We will amend and restate our existing credit facility in connection with this offering to refinance our outstanding indebtedness. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facility.”

 

If the underwriters exercise their option to purchase 900,000 additional common units in full, the additional net proceeds would be approximately $16.8 million (based upon the mid-point of the price range set forth on the cover page of this prospectus). The net proceeds from any exercise of such option will be used to further reduce amounts outstanding under our amended and restated credit facility.

 

Affiliates of certain of our underwriters are lenders under our existing credit facility and will be under our amended and restated credit facility and, as such, will receive a portion of the proceeds of this offering. Please read “Underwriting.”

 

A $1.00 increase or decrease in the assumed initial public offering price of $20.00 per common unit would cause the net proceeds from this offering, after deducting the estimated underwriting discount, structuring fee and offering expenses payable by us, to increase or decrease, respectively, by approximately $5.6 million. In addition, we may also increase or decrease the number of common units we are offering. Each increase of 1.0 million common units offered by us, together with a concomitant $1.00 increase in the assumed public offering price to $21.00 per common unit, would increase net proceeds to us from this offering by approximately $25.2 million. Similarly, each decrease of 1.0 million common units offered by us, together with a concomitant $1.00 decrease in the assumed initial offering price to $19.00 per common unit, would decrease the net proceeds to us from this offering by approximately $23.3 million. In the event of a decrease in net proceeds, we will apply the proceeds in the order of the bullet points in the second paragraph of this section so that the amount of indebtedness repaid under our amended and restated credit facility would be reduced first. Conversely, in the event of an increase in net proceeds, we will repay additional indebtedness under our amended and restated credit facility.

 

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CAPITALIZATION

 

The following table shows our capitalization as of June 30, 2013:

 

   

on an actual basis for the Predecessor; and

 

   

on pro forma basis to reflect the offering of our common units, the other transactions described under “Summary—Formation Transactions and Partnership Structure” and the application of the net proceeds from this offering as described under “Use of Proceeds.”

 

This table is derived from, and should be read together with, the historical and unaudited pro forma condensed combined financial statements and the accompanying notes included elsewhere in this prospectus. You should also read this table in conjunction with “Summary—Formation Transactions and Partnership Structure,” “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     Predecessor      Arc Logistics
Partners LP
 
     Actual      Pro Forma  
     (in thousands)  

Cash and cash equivalents

   $ 1,726       $ 1,726   
  

 

 

    

 

 

 

Long-term debt (including current maturities):

     

Existing credit facility(1)

     115,375         —     

Amended and restated credit facility

     —           115,034   
  

 

 

    

 

 

 

Total long-term debt

     115,375         115,034   

Preferred units

     30,600         —     

Partners’ capital:

     

Arc Terminals LP

     

General partner

     107         —     

Limited partners

     107,685         —     

Arc Logistics Partners LP

     

Public common unitholders

        106,282   

Common unitholders

     —           1,409   

Subordinated unitholders

     —           105,721   
  

 

 

    

 

 

 

Total partners’ capital

     107,792         213,412   
  

 

 

    

 

 

 

Total capitalization(2)

   $ 253,767       $ 328,446   
  

 

 

    

 

 

 

 

(1)   As of September 30, 2013, we had approximately $112.6 million of total long-term debt outstanding.
(2)   A $1.00 increase or decrease in the assumed initial public offering price of $20.00 per common unit would cause the net proceeds from this offering, after deducting the estimated underwriting discount, structuring fee and offering expenses payable by us, to increase or decrease, respectively, by approximately $5.6 million. In addition, we may also increase or decrease the number of common units we are offering. Each increase of 1.0 million common units offered by us, together with a concomitant $1.00 increase in the assumed public offering price to $21.00 per common unit, would increase net proceeds to us from this offering by approximately $25.2 million. Similarly, each decrease of 1.0 million common units offered by us, together with a concomitant $1.00 decrease in the assumed initial offering price to $19.00 per common unit, would decrease the net proceeds to us from this offering by approximately $23.3 million.

 

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DILUTION

 

Dilution is the amount by which the offering price paid by the purchasers of common units sold in this offering will exceed the net tangible book value per common unit after the offering. Assuming an initial public offering price of $20.00 per common unit (the mid-point of the price range set forth on the cover page of this prospectus), on a pro forma basis as of June 30, 2013, after giving effect to the offering of common units and the related transactions, our net tangible book value would have been approximately $157.4 million, or $12.94 per common unit. Purchasers of our common units in this offering will experience substantial and immediate dilution in net tangible book value per common unit for financial accounting purposes, as illustrated in the following table.

 

Assumed initial public offering price per common unit

     $ 20.00   

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

   $ 13.36     

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

   $ (0.42  
  

 

 

   

 

 

 

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

     $ 12.94   
  

 

 

   

 

 

 

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

     $ 7.06   
  

 

 

   

 

 

 

 

(1)   Determined by dividing the pro forma net tangible book value of the contributed assets and liabilities by the number of units (81,081 common units and 6,081,081 subordinated units) to be issued to our general partner and its affiliates for their contribution of assets and liabilities to us.
(2)   Determined by dividing our pro forma net tangible book value, after giving effect to the use of the net proceeds of the offering, by the total number of units (6,081,081 common units and 6,081,081 subordinated units) to be outstanding after the offering.
(3)   Each $1.00 increase or decrease in the assumed public offering price of $20.00 per common unit would increase or decrease, respectively, our pro forma net tangible book value by approximately $5.6 million, or approximately $0.46 per common unit, and dilution per common unit to investors in this offering by approximately $0.54 per common unit, after deducting the estimated underwriting discount, structuring fee and offering expenses payable by us. We may also increase or decrease the number of common units we are offering. An increase of 1.0 million common units offered by us, together with a concomitant $1.00 increase in the assumed offering price to $21.00 per common unit, would result in a pro forma net tangible book value of approximately $182.5 million, or $13.87 per common unit, and dilution per common unit to investors in this offering would be $7.13 per common unit. Similarly, a decrease of 1.0 million common units offered by us, together with a concomitant $1.00 decrease in the assumed public offering price to $19.00 per common unit, would result in an pro forma net tangible book value of approximately $134.1 million, or $12.01 per common unit, and dilution per common unit to investors in this offering would be $6.99 per common unit. The information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

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The following table sets forth the number of units that we will issue and the total consideration contributed to us by our sponsor, GCAC and Center Oil and by the purchasers of our common units in this offering upon consummation of the transactions contemplated by this prospectus.

 

     Units     Total Consideration  
     Number      Percent     Amount      Percent  

Lightfoot, GCAC and Center Oil(1)(2)(3)

     6,162,162         50.7   $ 123,243,240         50.7

Purchasers in the offering

     6,000,000         49.3   $ 120,000,000         49.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     12,162,162         100   $ 243,243,240         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)   Upon the consummation of the transactions contemplated by this prospectus, our sponsor, GCAC and Center Oil will own 81,081 common units and 6,081,081 subordinated units.
(2)   The assets contributed by our sponsor, GCAC and Center Oil will be recorded at historical cost. Book value of the assets contributed as of June 30, 2013 would have been approximately $263.2 million.
(3)   Assumes the underwriters’ option to purchase additional common units is not exercised.

 

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CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

 

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

 

For additional information regarding our historical and unaudited pro forma condensed combined results of operations, you should refer to the Predecessor’s audited historical consolidated financial statements as of and for the years ended December 31, 2012 and 2011 and unaudited historical condensed consolidated financial statements as of and for the six months ended June 30, 2013 and for the six months ended June 30, 2012, as well as our unaudited pro forma condensed combined financial statements for the year ended December 31, 2012 and as of and for the six months ended June 30, 2013, included elsewhere in this prospectus.

 

General

 

Our Cash Distribution Policy

 

The board of directors of our general partner will adopt a cash distribution policy to be effective as of the closing of this offering that will set forth our general partner’s intention with respect to the distributions to be made to unitholders. As set forth in this cash distribution policy, we expect to make cash distributions to our unitholders on a quarterly basis in an amount of at least the minimum quarterly distribution of $0.3875 per unit ($1.5500 per unit on an annualized basis) 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. Furthermore, we expect that if we are successful in executing our business strategy, we will grow our business in a steady and sustainable manner and distribute to our unitholders a portion of any increase in our cash available for distribution resulting from such growth. Our cash distribution policy reflects a judgment that our unitholders will be better served by our distributing cash available for distribution rather than retaining it.

 

However, the board of directors of our general partner may change the foregoing distribution policy at any time and from time to time.

 

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

 

There is no guarantee that we will distribute quarterly cash distributions to our unitholders. We do not have a legal or contractual obligation under our partnership agreement or otherwise to pay distributions in any amount or at any time. In addition, our cash distribution policy is subject to certain restrictions and may be changed at any time. The reasons for such uncertainties in our stated cash distribution policy include the following factors:

 

   

Our cash distribution policy will be subject to restrictions on distributions under our amended and restated credit facility, which contains financial tests and covenants that we must satisfy. These financial tests and covenants are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facility.” Should we be unable to satisfy these restrictions or if we are otherwise in default under our amended and restated credit facility, we will be prohibited from making cash distributions to you notwithstanding our stated cash distribution policy.

 

   

Our general partner will have the authority to establish cash reserves for the prudent conduct of our business, including 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 cash distribution policy does not set a limit on the amount of cash reserves that our general partner may establish. Any decision to establish cash reserves made by our general partner in good faith will be binding on our unitholders.

 

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Prior to making any distribution on the common units, we will reimburse our general partner and its affiliates for all direct and indirect expenses they incur on our behalf. Our partnership agreement does not set a limit on the amount of expenses for which our general partner and its affiliates may be reimbursed. These expenses include salary, bonus, incentive compensation and other amounts paid to persons who perform services for us or on our behalf and expenses allocated to our general partner by its affiliates. Our partnership agreement provides that our general partner will determine the expenses that are allocable to us. The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates will reduce the amount of cash available for distribution to pay distributions to our unitholders.

 

   

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

 

   

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

 

   

We may lack sufficient cash to pay distributions to our unitholders due to cash flow shortfalls attributable to a number of operational, commercial or other factors as well as increases in our operating or general and administrative expenses, principal and interest payments on our outstanding debt, tax expenses, working capital requirements and anticipated cash needs.

 

   

If we make distributions out of capital surplus, as opposed to operating surplus, any such distributions would constitute a return of capital and would result in a reduction in the minimum quarterly distribution and the target distribution levels. Please read “How We Make Distributions To Our Partners—Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels.” We do not anticipate that we will make any distributions from capital surplus.

 

   

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

 

Our Ability to Grow may be Dependent on Our Ability to Access External Expansion Capital

 

We expect to generally distribute a significant percentage of our cash from operations to our unitholders on a quarterly basis, after the establishment of cash reserves and payment of our expenses. Therefore, our growth may not be as fast as businesses that reinvest most or all of their cash to expand ongoing operations. Moreover, our future growth may be slower than our historical growth. We expect that we will rely primarily upon external financing sources, including bank borrowings and issuances of debt and equity interests, to fund our expansion capital expenditures. To the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow.

 

Our Minimum Quarterly Distribution

 

Upon completion of this offering, our partnership agreement will provide for a minimum quarterly distribution of $0.3875 per unit for each whole quarter, or $1.550 per unit on an annualized basis. The payment of the full minimum quarterly distribution on all of the common units and subordinated units to be outstanding after completion of this offering would require us to have cash available for distribution of approximately $4.7 million per quarter, or $18.9 million per year, assuming that the underwriters do not exercise their option to purchase additional common units. 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.” The table below sets forth the amount of common units and subordinated units that will be outstanding immediately after this offering, and the cash available for distribution

 

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needed to pay the aggregate minimum quarterly distribution on all of such units for a single fiscal quarter and a four quarter period:

 

            Distributions  
     Number of Units      One Quarter      Annualized  

Publicly held common units(1)

     6,000,000       $ 2,325,000       $ 9,300,000   

Units held by GCAC:

        

Common units

     779         302         1,208   

Subordinated units

     58,426         22,640         90,560   

Units held by Center Oil:

        

Common units

     11,685         4,528         18,112   

Subordinated units

     876,391         339,602         1,358,408   

Units held by our sponsor:

        

Common units

     68,817         26,589         106,356   

Subordinated units

     5,146,264         1,994,177         7,976,708   
  

 

 

    

 

 

    

 

 

 

Total

     12,162,162       $ 4,712,838       $ 18,851,352   
  

 

 

    

 

 

    

 

 

 

 

(1)   If the underwriters exercise their option to purchase additional common units in full, the number of publicly held common units will be 6,900,000 and the amount of distributions of the publicly held common units will be $2.7 million for one quarter and $10.7 million on an annualized basis.

 

Our general partner will initially hold the incentive distribution rights, which entitle the holder to increasing percentages, up to a maximum of 50.0%, of the cash we distribute in excess of $0.5813 per unit per quarter.

 

We expect to pay our distributions on or about the last day of each of February, May, August and November to holders of record on or about the 15th day of each such month. If the distribution date does not fall on a business day, we will make the distribution on the business day immediately preceding the indicated distribution date. We will adjust the quarterly distribution for the period after the closing of this offering through December 31, 2013, based on the actual length of the period.

 

Subordinated Units

 

Our sponsor, GCAC and Center Oil will initially own 84.6%, 1.0% and 14.4%, respectively, of our subordinated units. The principal difference between our common units and subordinated units is that in any quarter during the subordination period, holders of the subordinated units are not entitled to receive any distribution from operating surplus until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units will not accrue arrearages. When the subordination period ends, all of the subordinated units will convert into an equal number of common units.

 

To the extent we do not pay the minimum quarterly distribution on our common units, our common unitholders will not be entitled to receive such payments in the future except during the subordination period. To the extent we have cash available for distribution in any future quarter during the subordination period in excess of the amount necessary to pay the minimum quarterly distribution to holders of our common units, we will use this excess cash available for distribution to pay any distribution arrearages on common units related to prior quarters before any cash distribution is made to holders of subordinated units. Please read “How We Make Distributions To Our Partners—Subordination Period.”

 

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Unaudited Pro Forma Cash Available for Distribution for the Year Ended December 31, 2012 and the Twelve Months Ended June 30, 2013

 

If we had completed the transactions contemplated in this prospectus on January 1, 2012, our pro forma cash available for distribution for the year ended December 31, 2012 would have been approximately $6.2 million. This amount would have been insufficient to pay the full minimum quarterly distribution on all of our common and subordinated units by $3.2 million and $9.4 million, respectively, for the year ended December 31, 2012. If we had completed the transactions contemplated in this prospectus on July 1, 2012, our pro forma cash available for distribution for the twelve months ended June 30, 2013 would have been approximately $14.4 million. This amount would have been insufficient to pay the full minimum quarterly distribution on all of our common units and insufficient to pay the full minimum quarterly distribution on all of our subordinated units by $4.5 million. The shortfalls are primarily attributable to the following factors:

 

   

Neither period reflects the full year impact of the acquisitions and associated operating synergies of the Mobile, AL, Saraland, AL and Brooklyn, NY facilities;

 

   

Neither period reflects the full year impact of the completion of the Blakeley, AL truck rack and marine facility expansion projects;

 

   

Neither period reflects the full year impact of the completion of the Saraland, AL and the Chickasaw, AL crude-by-rail transloading expansion projects;

 

   

Neither period reflects the full year impact of newly executed customer agreements in Baltimore, MD, Blakeley, AL, Chickasaw, AL, Cleveland, OH, Selma, NC and Saraland, AL to increase take-or-pay storage and throughput services fees; and

 

   

Neither period reflects the full year impact of the cash distributions payable on the LNG Interest as Gulf LNG Holdings was using cash flow from operations and cash on the balance sheet to repay interest and principal on an affiliate loan.

 

The unaudited pro forma condensed combined financial statements, upon which pro forma cash available for distribution is based, do not purport to present our results of operations had the transactions contemplated in this prospectus actually been completed as of the date indicated. Furthermore, cash available for distribution is a cash concept, while our unaudited pro forma condensed combined financial statements have been prepared on an accrual basis. We derived the amounts of pro forma cash available for distribution in the manner described in the table below. As a result, the amount of pro forma cash available for distribution should only be viewed as a general indication of the amount of cash available for distribution that we might have generated had we been formed in an earlier period.

 

Following the completion of this offering, we estimate that we will incur $2.9 million of incremental selling, general and administrative expenses per year as a result of operating as a publicly traded partnership, which includes expenses associated with SEC reporting requirements, including annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, Sarbanes-Oxley Act compliance, NYSE listing, independent auditor fees, legal fees, investor relations activities, registrar and transfer agent fees, director and officer insurance and director compensation.

 

Our unaudited pro forma condensed combined financial statements are derived from the audited and unaudited historical financial statements of the Predecessor, included elsewhere in this prospectus. Our unaudited pro forma condensed combined financial statements should be read together with “Selected Historical Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited and unaudited historical financial statements of the Predecessor and the notes to those statements included elsewhere in this prospectus.

 

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The following table illustrates, on a pro forma basis for the year ended December 31, 2012 and twelve months ended June 30, 2013, the amount of cash that would have been available for distribution to our unitholders, assuming that the transactions contemplated in this prospectus had been consummated on January 1, 2012. Certain of the adjustments reflected or presented below are explained in the footnotes to such adjustments.

 

     Year Ended
December 31, 2012
    Twelve Months
Ended June 30, 2013
 
     (in millions, except per unit data)  

Revenues:

    

Third parties

   $ 24.8      $ 32.6   

Related parties

     9.7        8.7   
  

 

 

   

 

 

 
     34.5        41.3   

Expenses:

    

Operating expenses

     13.7        17.0   

Selling, general and administrative

     3.0        3.0   

Selling, general and administrative—affiliate

     2.6        2.5   

Depreciation

     4.7        5.1   

Amortization

     4.5        4.8   
  

 

 

   

 

 

 

Total expenses

     28.5        32.4   
  

 

 

   

 

 

 

Operating income

     6.0        8.9   
  

 

 

   

 

 

 

Other income (expense):

    

Gain on bargain purchase of business

     —          11.8   

Equity earnings from the LNG Interest

     7.8        8.9   

Gain on fire/oil spill

     0.9        0.4   

Other income

     —          0.2   

Interest expense(1)(2)

     (4.3     (4.2
  

 

 

   

 

 

 

Total other income (expense)

     4.4        17.1   
  

 

 

   

 

 

 

Income (loss) before taxes

   $ 10.4        26.0   

Income taxes

     —          —     
  

 

 

   

 

 

 

Pro forma net income

   $ 10.4      $ 26.0   

Add:

    

Depreciation

     4.7        5.1   

Amortization

     4.5        4.8   

Interest expense(1)(2)

     4.3        4.2   

Income taxes

     —          —     

Gain on bargain purchase of business

     —          (11.8

Gain on fire/oil spill

     (0.9     (0.4
  

 

 

   

 

 

 

Pro forma Adjusted EBITDA(3)

   $ 23.0      $ 27.9   

Less:

    

Incremental selling, general and administrative expenses(4)

     2.9        2.9   

Cash interest expense(1)(2)

     4.0        4.0   

Cash income taxes

     —          —     

Maintenance capital expenditures(5)

     2.1        2.0   

Equity earnings from the LNG Interest(6)

     7.8        8.9   

Expansion capital expenditures(5)

     15.2        92.7   

Plus:

    

Cash distributions from the LNG Interest(6)

     —          4.3   

Borrowings to offset expansion capital expenditures(5)

     15.2        92.7   
  

 

 

   

 

 

 

Pro forma cash available for distribution

   $ 6.2      $ 14.4   
  

 

 

   

 

 

 

Minimum annual distribution per unit (based on a minimum quarterly distribution rate of $0.3875 per unit)(2)

   $ 0.5082      $ 1.1803   

Annual distributions to:

    

Public common unitholders(2)

     6.200        9.300   

GCAC:

    

Common units

     —          0.0010   

Subordinated units

     —          0.0480   

Center Oil:

    

Common units

     —          0.0100   

Subordinated units

     —          0.7250   

Our sponsor:

    

Common units

     —          0.0570   

Subordinated units

     —          4.2590   
  

 

 

   

 

 

 

Total distributions to GCAC, Center Oil and our sponsor

     —          5.1000   
  

 

 

   

 

 

 

Total distributions to our unitholders at the minimum distribution rate(2)

   $ 18.8512      $ 18.8512   
  

 

 

   

 

 

 

Shortfall(2)

   $ (12.6512   $ (4.4512
  

 

 

   

 

 

 

 

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(1)   Interest expense and cash interest expense have been adjusted to account for the commitment and administrative agent fees on our amended and restated credit facility that we expect to enter into in connection with the closing of this offering. Interest expense also includes the amortization of debt issuance costs incurred in connection with our amended and restated credit facility that we expect to enter into in connection with the closing of this offering.
(2)   The table assumes that the underwriters do not exercise their option to purchase additional common units. If any such exercise occurs, we intend to use the net proceeds of such exercise to repay borrowings under our amended and restated credit facility. If the underwriters exercised their option to purchase additional units in full, we estimate that pro forma cash available for distribution for the year ended December 31, 2012 and twelve months ended June 30, 2013 would increase to $6.6 million and $14.8 million, respectively, as a result of respective decreases of $0.5 million and $0.4 million in interest expense and cash interest expense resulting from the repayment of borrowings under our amended and restated credit facility. In such case, annual distributions to our public unitholders for the year ended December 31, 2012 and twelve months ended June 30, 2013 would increase to approximately $6.6 million and $10.7 million, respectively, our total distributions to our unitholders at the minimum distribution rate for such periods would increase to approximately $6.6 million and $14.8 million, respectively, and the shortfall of pro forma cash available for distribution over total annualized minimum quarterly cash distributions would equal $13.6 million and $5.4 million, respectively.
(3)   For more information, please read “Summary—Summary Historical and Pro Forma Financial and Operating Data—Non-GAAP Financial Measure.”
(4)   Reflects incremental selling, general and administrative expenses that we expect to incur as a result of operating as a publicly traded partnership that are not reflected in our unaudited pro forma condensed combined financial statements.
(5)   Under our partnership agreement, maintenance capital expenditures are capital expenditures made to maintain our long-term operating capacity or operating income, while expansion capital expenditures are capital expenditures that we expect will increase our long-term operating capacity or our operating income. Examples of maintenance capital expenditures are those made to repair, refurbish and replace storage, terminalling and pipeline infrastructure, to maintain equipment reliability, integrity and safety and to comply with environmental laws and regulations. In contrast, expansion capital expenditures are those made to acquire additional assets to grow our business, such as additional storage, terminalling or pipeline capacity.

 

     For the year ended December 31, 2012, our pro forma capital expenditures totaled $17.3 million. Approximately $2.1 million of our pro forma capital expenditures were maintenance capital expenditures and approximately $15.2 million of our pro forma capital expenditures were expansion capital expenditures. Expansion capital expenditures for the year ended December 31, 2012 consisted of $6.4 million to acquire additional land in Mobile, AL, $4.2 million to construct a truck rack, upgrade the marine facilities and modify existing storage tanks in Blakeley, AL, $0.4 million to rebuild the marine facilities in Norfolk, VA, $1.2 million to acquire additional storage in Baltimore, MD, $2.5 million related to the construction of new tanks in Mobile, AL and $0.5 million to construct a 10-car rail spur at the Saraland, AL facility.

 

     For the twelve months ended June 30, 2013, our pro forma capital expenditures totaled $94.7 million. Approximately $2.0 million of our pro forma capital expenditures were maintenance capital expenditures, and approximately $92.7 million of our pro forma capital expenditures were expansion capital expenditures. Expansion capital expenditures for the twelve months ended June 30, 2013 consisted of $55.0 million to acquire the Mobile, AL and Saraland, AL facilities, $27.0 million to acquire the Brooklyn, NY terminal, $5.8 million to construct a truck rack, upgrade the marine facilities and modify existing storage tanks in Blakeley, AL, $0.1 million to rebuild the marine facilities in Norfolk, VA, $1.8 million related to the construction of new tanks in Mobile, AL, $1.8 million to expand rail car spur at the Saraland, AL facility, $0.6 million to build a crude by rail off-loading facility in Chickasaw, AL, $0.1 million to install a marine diesel injection system in Baltimore, MD and $0.5 million to upgrade the environmental policies and procedures in Mobile, AL.

 

     We have assumed for purposes of calculating our pro forma available cash that we funded our expansion capital expenditures during the year ended December 31, 2012 and the twelve months ended June 30, 2013 with borrowings under our amended and restated credit facility that we expect to enter into in connection with the closing of this offering. We expect that in the future, our expansion capital expenditures will primarily be funded through external financing sources, including commercial borrowings and the issuance of debt and equity securities.

 

(6)   For the year ended December 31, 2012, Gulf LNG Holdings allocated net income to the members of Gulf LNG Holdings, but no cash distributions were paid to the members of Gulf LNG Holdings as a result of the principal and interest payments made on an affiliate loan. For the six months ended June 30, 2013, Gulf LNG Holdings allocated net income to the members of Gulf LNG Holdings and paid a distribution to the members of Gulf LNG Holdings following the repayment of the outstanding principal and interest on an affiliate loan.

 

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

 

We forecast that our cash available for distribution generated for the twelve months ending September 30, 2014 will be approximately $22.6 million. This amount would exceed the amount needed to pay the total annualized minimum quarterly distribution on all of our common and subordinated units by $3.8 million.

 

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Our estimated cash available for distribution 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, 2014. The assumptions disclosed under “—Assumptions and Considerations” below are those that we believe are significant to our ability to generate such estimated cash available for distribution. We believe our actual results of operations and cash flows for the twelve months ending September 30, 2014 will be sufficient to generate our estimated cash available for distribution for such period; however, we can give you no assurance that such estimated cash available for distribution will be achieved. When considering the estimated cash available for distribution set forth below, you should keep in mind the risk factors and other cautionary statements under “Risk Factors.” Any of the risks discussed in this prospectus could cause our actual results of operations to vary significantly from those supporting such estimated available cash. Accordingly, there can be no assurance that the forecast is indicative of our future performance. There will likely be differences between our estimated cash available for distribution for the twelve months ending September 30, 2014 and our actual results for such period and those differences could be material. If we fail to generate the estimated cash available for distribution for the twelve months ending September 30, 2014, we may not be able to pay cash distributions on our common units at the minimum quarterly distribution rate or at any rate. Inclusion of the forecast in this prospectus is not a representation by any person, including us or the underwriters, that the results in the forecast will be achieved.

 

We do not as a matter of course make public projections as to future operations, earnings or other results. However, management has prepared the forecast of estimated cash available for distribution and assumptions and considerations set forth below to substantiate our belief that we will have sufficient cash available for distribution to allow us to pay the total annualized minimum quarterly distribution on all of our outstanding common and subordinated units for the twelve months ending September 30, 2014. This forecast is a forward-looking statement and should be read together with our Predecessor’s historical consolidated financial statements and the accompanying notes included elsewhere in this prospectus, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This prospective financial information was not prepared with a view toward compliance with guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of 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 the estimated cash available for distribution necessary to pay the total annualized minimum quarterly distribution on all of our outstanding common and subordinated units for the twelve months ending September 30, 2014. However, this information is not historical fact and should not be relied upon as being necessarily indicative of future results, and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information.

 

The prospective financial information included in this prospectus has been prepared by, and is the responsibility of, our management. Neither PricewaterhouseCoopers LLP nor any other independent accountants have examined, compiled nor performed any procedures with respect to the accompanying prospective financial information, and accordingly, neither PricewaterhouseCoopers LLP nor any other independent accountants express an opinion or any other form of assurance with respect thereto. None of the reports of PricewaterhouseCoopers LLP or any other independent accountants included in this prospectus extends to this prospective financial information and should not be read to do so.

 

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We do not undertake any obligation to release publicly the results of any future revisions we may make to the assumptions used in generating our estimated cash available for distribution for the twelve months ending September 30, 2014 or to update those assumptions to reflect events or circumstances after the date of this prospectus. Therefore, you are cautioned not to place undue reliance on this information.

 

    Three Months Ending     Twelve
Months
Ending
September 30,
2014
 
    December 31,
2013
    March 31,
2014
    June 30,
2014
    September 30,
2014
   
    (in millions, except per unit data)  

Revenues:

         

Third parties

  $ 10.6      $ 10.4      $ 10.5      $ 10.5      $ 42.0   

Related parties

    2.1        2.1        2.0        2.0        8.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    12.7        12.5        12.5        12.5        50.2   

Expenses:

         

Operating expenses

    5.0        5.0        5.0        5.0        20.0   

Selling, general and administrative(1)

    0.5        0.5        0.5        0.5        2.0   

Selling, general and administrative–affiliate

    1.1        1.2        1.1        1.1        4.5   

Depreciation

    1.5        1.5        1.5        1.5        6.0   

Amortization

    1.3        1.3        1.3        1.3        5.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    9.4        9.5        9.4        9.4        37.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    3.3        3.0        3.1        3.1        12.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

         

Equity earnings from the LNG Interest

    2.3        2.3        2.3        2.3        9.2   

Other income

    —          —          —          —          —     

Interest expense(2)

    (1.0     (1.0     (1.0     (1.0     (4.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    1.3        1.3        1.3        1.3        5.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

    4.6        4.3        4.4        4.4        17.7   

Income taxes

    —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 4.6      $ 4.3      $ 4.4      $ 4.4      $ 17.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments to reconcile net income to Adjusted EBITDA and estimated cash available for distribution:

         

Plus:

         

Depreciation

    1.5        1.5        1.5        1.5        6.0   

Amortization

    1.3        1.3        1.3        1.3        5.2   

Interest expense(2)

    1.0        1.0        1.0        1.0        4.0   

Income taxes(3)

    —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(4)

  $ 8.4      $ 8.1      $ 8.2      $ 8.2      $ 32.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less:

         

Incremental selling, general and administrative expenses

    0.7        0.7        0.7        0.8        2.9   

Cash interest expense(2)

    0.9        1.0        1.0        1.0        3.9   

Cash income taxes(3)

    —          —          —          —          —     

Maintenance capital expenditures

    0.7        0.8        0.7        0.8        3.0   

Equity earnings from the LNG Interest

    2.3        2.3        2.3        2.3        9.2   

Plus:

         

Cash distributions received from the LNG Interest

    2.4        1.4        2.4        2.5        8.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated cash available for distribution

  $ 6.2      $ 4.7      $ 5.9      $ 5.8      $ 22.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total units outstanding

         

Estimated cash available for distribution per unit

         

Minimum annual distribution per unit (based on a minimum quarterly distribution rate of $0.3875 per unit)

  $ 0.5071      $ 0.3893      $ 0.4824      $ 0.4738      $ 1.8526   

Annual distributions to:

         

Public common unitholders(2)

    2.3250        2.3250        2.3250        2.3250        9.3000   

GCAC:

         

Common units

    0.0003        0.0003        0.0003        0.0003        0.0012   

Subordinated units

    0.0226        0.0226        0.0226        0.0226        0.0904   

Center Oil:

         

Common units

    0.0045        0.0045        0.0045        0.0045        0.0180   

Subordinated units

    0.3396        0.3396        0.3396        0.3396        1.3584   

Our sponsor:

         

Common units

    0.0266        0.0266        0.0266        0.0266        0.1064   

Subordinated units

    1.9942        1.9942        1.9942        1.9942        7.9768   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total distributions to GCAC, Center Oil and our sponsor

  $ 2.3878      $ 2.3878      $ 2.3878      $ 2.3878      $ 9.5512   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total distributions to our unitholders at the minimum distribution rate(2)

  $ 4.7128      $ 4.7128      $ 4.7128      $ 4.7128      $ 18.8512   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess of cash available for distribution over total annualized minimum quarterly cash distributions(2)

  $ 1.4739      $ 0.0369.      $ 1.1724      $ 1.0671      $ 3.7503   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1)   Excludes costs associated with being a publicly traded partnership.
(2)   We intend to use the net proceeds, if any, from the exercise by the underwriters of their option to purchase additional units to repay borrowings under our amended and restated credit facility. If the underwriters exercise their option to purchase additional units in full, we estimate that cash available for distribution for the twelve months ending September 30, 2014 will increase to $23.3 million as a result of a $0.7 million decrease in interest expense and cash interest expense resulting from the repayment of borrowings under our amended and restated credit facility. In such case, annual distributions to our public unitholders would increase to approximately $10.7 million, total distributions to our unitholders at the minimum distribution rate would increase to approximately $20.2 million and the excess of cash available for distributions over total annualized minimum quarterly cash distributions would equal $3.1 million.
(3)   Incurred an immaterial amount of income taxes for the period presented.
(4)   For more information, please read “Summary—Summary Historical and Pro Forma Financial and Operating Data—Non-GAAP Financial Measure.”

 

Assumptions and Considerations

 

We believe that our cash available for distribution for the twelve months ending September 30, 2014 will not be less than $22.6 million. This amount of estimated cash available for distribution is approximately $16.4 million and $8.2 million more than pro forma cash available for distribution for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively, due in part to neither period reflecting the full year impact of the following:

 

   

the acquisitions and associated operating synergies of the Mobile, AL, Saraland, AL and Brooklyn, NY facilities;

 

   

the completion of the Blakeley, AL truck rack and marine facility expansion projects;

 

   

the completion of the Saraland, AL and the Chickasaw, AL crude-by-rail transloading expansion projects;

 

   

newly executed customer agreements in Baltimore, MD, Blakeley, AL, Chickasaw, AL, Cleveland, OH, Selma, NC and Saraland, AL to increase take-or-pay storage and throughput service fees; and

 

   

the cash distributions payable on the LNG Interest as Gulf LNG Holdings was using cash flow from operations and cash on the balance sheet to repay interest and principal on an affiliate loan.

 

In this section, we present in detail the basis for our belief that we will be able to fully fund our minimum quarterly distribution of $0.3875 per unit for the forecast period with the significant assumptions upon which this forecast is based. While the assumptions disclosed in this prospectus are not all-inclusive, the assumptions listed below are 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 likely will be differences between our forecast and the actual results, and those differences could be material. If our forecast is not achieved, we may not be able to pay cash distributions on our common units at the minimum distribution rate or at all.

 

Storage Capacity

 

We estimate that our storage capacity for the twelve months ending September 30, 2014 will be approximately 5.0 million bbls, as compared to pro forma storage capacity of approximately 4.8 million bbls and 4.8 million bbls for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively. The increase in storage capacity is attributable to the acquisition of the Brooklyn, NY terminal and the construction of 150,000 barrels of storage in Mobile, AL that will be placed into service during the third quarter of 2013.

 

Throughput Activity

 

We estimate that our total throughput activity for the twelve months ending September 30, 2014 will be approximately 76.3 mbpd, as compared to pro forma total throughput activity of approximately 53.2 mbpd and

 

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61.9 mpbd for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively. The increase in throughput activity is largely attributable to the acquisition of the Brooklyn, NY terminal, new services agreements in Blakeley, AL, Chickasaw, AL, Saraland, AL and Baltimore, MD and throughput activity by existing customers at the Blakeley, AL, Mobile, AL and Brooklyn, NY terminals.

 

Revenues

 

We estimate that our total revenue for the twelve months ending September 30, 2014 will be approximately $50.2 million, as compared to pro forma total revenue of approximately $34.5 million and $41.3 million for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively. Our forecast is based primarily on the following assumptions:

 

   

Storage and Throughput Services Fees.    We generate revenues from our customers who reserve storage, throughput and transloading capacity in our facilities. Our services agreements typically allow us to charge our customers with a number of activity fees including for the receipt, storage, throughput and transloading of crude oil and petroleum products. We estimate that for the twelve months ending September 30, 2014 approximately 93%, or approximately $46.9 million, of our total revenues will be attributable to storage and throughput services fees. This compares to approximately 89%, or approximately $30.7 million, and approximately 89%, or approximately $36.6 million, of our pro forma total revenues that were attributable to storage and throughput services fees for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively. The increase in revenues from storage and throughput services fees is attributable to new services agreements executed at the Blakeley, AL, Chickasaw, AL, Saraland, AL Baltimore, MD and Brooklyn, NY facilities, contractual increases in rates, storage capacity and throughput capacity and increased throughput and transloading activity at a number of our facilities.

 

   

Ancillary Services Fees.    Ancillary services fees are fees associated with ancillary services such as blending, heating, and mixing, associated with our customers’ activity within our logistics network. The revenues we generate from ancillary services fees vary based upon the activity level of our customers. We estimate that for the twelve months ending September 30, 2014 approximately 6%, or approximately $3.2 million, of our total revenues will be attributable to ancillary services fees. This compares to approximately 11%, or approximately $3.8 million, and approximately 11%, or approximately $4.7 million, of our pro forma total revenues that were attributable to ancillary services fees for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively. The reduction in ancillary services fees is related to lower heating and mixing requirements for storage and throughput activity.

 

Forecasted related-party revenues are attributable to our services agreements with GCAC and Center Oil. Our forecasted revenues do not include the results of our LNG Interest which is accounted for under equity method accounting. Please see “—Equity Earnings from the LNG Interest” below.

 

Expenses

 

Operating Expenses.    Our operating expenses consist of labor expenses, utility costs, additive expenses, insurance premiums, repair and maintenance expenses, health, safety and environmental compliance and property taxes, amongst others. We estimate that our operating expenses will be approximately $20.0 million for the twelve months ending September 30, 2014, as compared to approximately $13.7 million and $17.0 million of pro forma operating expenses for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively. The increase in operating expenses is related to the acquisition of the Brooklyn, NY terminal, increased contract labor costs associated with the Chickasaw, AL and Saraland, AL crude-by-rail expansion projects and incremental operating costs associated with the completion of the construction projects at the Blakeley, AL terminal offset by operating synergies realized at the Mobile, AL terminal.

 

Selling, General and Administrative Expenses.    Selling, general and administrative (“SG&A”) and SG&A-affiliate expenses include costs not directly attributable to the operations of our facilities and include

 

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costs, such as professional services, compensation of non-operating personnel, employee benefits, reimbursements to our general partner and its affiliates of SG&A expenses incurred in connection with our operations and expenses of overall administration. We estimate that SG&A expenses (inclusive of the incremental costs of becoming a publicly traded partnership) will be approximately $9.4 million for the twelve months ending September 30, 2014, as compared to approximately $8.5 million and $8.4 million of pro forma SG&A expenses for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively. Included in the estimated SG&A expenses is approximately $2.0 million for SG&A expenses, approximately $4.5 million of SG&A-affiliate expenses and approximately $2.9 million in expenses we will incur as a result of becoming a publicly traded partnership, including expenses associated with SEC reporting requirements, including annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, Sarbanes-Oxley Act compliance, NYSE listing, independent auditor fees, legal fees, investor relations activities, registrar and transfer agent fees, director and officer insurance and director compensation.

 

Depreciation and Amortization Expense.    We estimate that depreciation and amortization expense will be approximately $11.2 million for the twelve months ending September 30, 2014, as compared to approximately $9.2 million and $9.9 million of pro forma depreciation and amortization expense for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively. Depreciation expense is expected to increase for the twelve months ending September 30, 2014 compared to the year ended December 31, 2012 and the twelve months ended June 30, 2013 as a result of the full year impact of the Brooklyn, NY acquisition, the growth capital projects that will be completed prior to this offering and the incremental maintenance capital expenditures expected during this period.

 

Financing.    We estimate that interest expense will be approximately $4.0 million for the twelve months ending September 30, 2014, as compared to approximately $4.3 million and $4.2 million pro forma interest expense for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively. Upon the consummation of this offering, we expect to amend and restate our existing credit facility, which will have an initial term of five years and $175 million of borrowing capacity. Our interest expense for the twelve months ending September 30, 2014 is based on the following assumptions:

 

   

After amending and restating our existing credit facility in respect of our outstanding indebtedness, we expect to have an average of approximately $116.4 million outstanding under our amended and restated credit facility during the forecast period, which we expect to bear interest at a weighted average interest rate of approximately 3.6%;

 

   

Through September 30, 2014, we will fund our anticipated expansion capital expenditures primarily under our amended and restated credit facility, with an estimated weighted average rate of 3.2%. This rate is based on a forecast of LIBOR rates during the period plus the margin and associated commitment fees under our amended and restated credit facility;

 

   

Interest expense includes commitment fees for the unused portion of our amended and restated credit facility at an assumed rate of 0.5% per annum;

 

   

Interest expense also includes the amortization of debt issuance costs incurred in connection with our amended and restated credit facility; and

 

   

We will remain in compliance with the financial and other covenants in our amended and restated credit facility.

 

Our forecasted expenses do not include the results of our LNG Interest which is accounted for under equity method accounting. Please see “—Equity Earnings from the LNG Interest” below.

 

Equity Earnings from the LNG Interest

 

We estimate that $9.2 million of Gulf LNG Holdings’ net income will be attributable to our 10.3% interest in Gulf LNG Holdings for the twelve months ending September 30, 2014 as compared to $7.8 million and $8.9 million for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively. This

 

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increase in net income is attributable to the reduction of outstanding indebtedness at the LNG Facility and Gulf LNG Holdings and reduced operating expenses at the LNG Facility. In addition, we estimate that the LNG Interest will generate $8.7 million in cash distributions for the twelve months ending September 30, 2014 compared to no distributions for the year ended December 31, 2012 and $4.3 million of cash distributions for the twelve months ended June 30, 2013. This increase in cash distributions is related to the full repayment of an affiliate loan.

 

Capital Expenditures

 

Pro forma capital expenditures for the year ended December 31, 2012 and the twelve months ended June 30, 2013 were $17.3 million and $94.7 million, respectively. Our forecast for the twelve months ending September 30, 2014 is based on the following assumptions:

 

   

Maintenance Capital Expenditures. Our maintenance capital expenditures will be $3.0 million for the twelve months ending September 30, 2014, as compared to pro forma maintenance capital expenditures of approximately $2.1 million and $2.0 million for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively. The increase of $0.9 million and $1.0 million from December 31, 2012 and the twelve months ended June 30, 2013, respectively, is reflective of implementing the American Petroleum Institute 653 Tank Inspection Program at the Mobile, AL terminal, which had not been previously utilized by the prior owner. We expect to fund maintenance capital expenditures from cash generated by our operations.

 

   

Expansion Capital Expenditures. We are continually evaluating growth opportunities for new and existing customers, many of which involve the deployment of capital. We generally focus on expansion projects that are supported by take-or-pay storage and through services fees or will enhance our assets through improved operating costs. We are currently evaluating the installation of butane blending systems, the construction of incremental storage capacity, installation of additional rail infrastructure to further support our crude-by-rail unloading strategy and upgrading existing storage capacity for existing and new customers. We estimate that our expansion capital expenditures could be between $5 million and $15 million for the twelve months ending September 30, 2014, and we intend to fund any expansion capital expenditures with borrowings under our amended and restated credit facility. However, given that the current status of these projects is still under development with the customers, we have not included any expansion capital expenditures, the cost of related borrowings or cash flows associated with completed projects in our estimated cash available for distribution for the twelve months ending September 30, 2014.

 

Regulatory, Industry and Economic Factors

 

Our forecast of our results of operations for the twelve months ending September 30, 2014 is based on the following assumptions related to regulatory, industry and economic factors:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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HOW WE MAKE DISTRIBUTIONS TO OUR PARTNERS

 

General

 

Cash Distribution Policy

 

Our partnership agreement provides that our general partner will make a determination no less frequently than every quarter as to whether to make a distribution, but our partnership agreement does not require us to pay distributions at any time or in any amount. Instead, the board of directors of our general partner will adopt a cash distribution policy to be effective as of the closing of this offering that will set forth our general partner’s intention with respect to the distributions to be made to unitholders. Pursuant to our cash distribution policy, within 60 days after the end of each quarter, beginning with the quarter ending December 31, 2013, we expect to distribute to the holders of common and subordinated units on a quarterly basis at least the minimum quarterly distribution of $0.3875 per unit, or $1.5500 per unit on an annualized basis, to the extent we have sufficient cash after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates. We will prorate the distribution for the period after the closing of the offering through December 31, 2013.

 

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

 

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

 

General Partner Interest

 

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

 

Incentive Distribution Rights

 

Our general partner also currently holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 50.0%, of the cash we distribute from operating surplus (as defined below) in excess of $0.5813 per unit per quarter. The maximum distribution of 50.0% does not include any distributions that our general partner may receive on any limited partner units that it owns.

 

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.

 

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Operating Surplus

 

We define operating surplus as:

 

   

$12.2 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 any hedge contract prior to its stipulated settlement or termination date will be included in equal quarterly installments over the remaining scheduled life of such hedge contract had it not been terminated; plus

 

   

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

 

   

cash distributions paid in respect of equity issued (including incremental distributions on incentive distribution rights), other than equity issued in this offering, to finance all or a portion of a capital improvement in respect of the period from such financing until the earlier to occur of the date the capital improvement commences commercial service and the date that it is abandoned or disposed of; plus

 

   

cash distributions paid in respect of equity issued (including incremental distributions on incentive distribution rights), other than equity issued in this offering, to pay the construction period interest and related fees on debt incurred to finance a capital improvement referred to above, in each case, in respect of the period from such financing until the earlier to occur of the date the capital improvement is placed in service and the date that it is abandoned or disposed of; less

 

   

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

 

   

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

 

   

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

 

   

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

 

Disbursements made, cash received (in addition to working capital borrowings) or cash reserves established, increased or reduced after the end of a period but on or before the date on which cash or cash equivalents will be distributed with respect to such period shall be deemed to have been made, received, established, increased or reduced, for purposes of determining operating surplus, within such period if our general partner so determines.

 

Furthermore, cash received from an interest for which we account for using the equity method may not exceed our proportionate share of that person’s operating surplus (calculated as if the definition of operating surplus applied to such person from the date of our acquisition of such an interest without any basket similar to described in the first bullet above).

 

As described above, operating surplus does not reflect cash generated from operations. For example, it includes a basket of $12.2 million that will enable us, if we choose, to distribute as operating surplus 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 made. However, if a working capital borrowing is not repaid during the twelve-month period following the borrowing, it will be deemed repaid at the end of such period, thus decreasing operating surplus at such time. When such working capital borrowing is in fact repaid, it will be excluded from operating expenditures because operating surplus will have been previously reduced by the deemed repayment.

 

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We define operating expenditures in our partnership agreement, and it generally means all of our cash expenditures, including, but not limited to, taxes, reimbursement of expenses to our general partner or its affiliates, payments made under interest rate hedge agreements or commodity hedge agreements (provided that (1) with respect to amounts paid in connection with the initial purchase of an interest rate hedge contract or a commodity hedge contract, such amounts will be amortized over the life of the applicable interest rate hedge contract or commodity hedge contract and (2) payments made in connection with the termination of any interest rate hedge contract or commodity hedge contract prior to the expiration of its stipulated settlement or termination date 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), officer compensation, repayment of working capital borrowings, debt service payments and maintenance capital expenditures (as discussed in further detail below), provided that operating expenditures will not include:

 

   

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

 

   

payments (including prepayments and prepayment penalties and the purchase price of indebtedness that is repurchased and cancelled) of principal of and premium on indebtedness, other than working capital borrowings;

 

   

expansion capital expenditures;

 

   

investment capital expenditures;

 

   

payment of transaction expenses relating to interim capital transactions;

 

   

distributions to our partners (including distributions in respect of our incentive distribution rights); or

 

   

repurchases of equity interests except to fund obligations under employee benefit plans.

 

Capital Surplus

 

Capital surplus is defined in our partnership agreement as any cash distributed in excess of our operating surplus. Accordingly, capital surplus would generally be generated only by the following (which we refer to as “interim capital transactions”):

 

   

borrowings other than working capital borrowings;

 

   

sales of our equity interests and long-term borrowings; and

 

   

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

 

Characterization of Cash Distributions

 

Our partnership agreement requires that we treat all cash distributed as coming from operating surplus until the sum of all cash distributed since the closing of this offering equals the operating surplus from the closing of this offering (other than any distributions of proceeds 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 distributions of capital surplus. As described above, operating surplus includes up to $12.2 million, which does not reflect cash generated from operations. Rather, it is a provision that will enable us, if we choose, to distribute as operating surplus up to this amount that would otherwise be distributed as capital surplus. We do not anticipate that we will make any distributions from capital surplus.

 

Capital Expenditures

 

Maintenance capital expenditures reduce operating surplus, but expansion capital expenditures and investment capital expenditures do not. Maintenance capital expenditures are those capital expenditures made to maintain our long-term operating capacity or operating income. Examples of maintenance capital expenditures

 

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include expenditures to repair, refurbish and replace storage, terminalling and pipeline infrastructure, to maintain equipment reliability, integrity and safety and to comply with environmental laws and regulations to the extent such expenditures are made to maintain our long-term operating capacity or operating income. Capital expenditures made solely for investment purposes will not be considered maintenance capital expenditures.

 

Expansion capital expenditures are those capital expenditures, including transaction expenses, that we expect will increase our operating capacity or operating income over the long term. Examples of expansion capital expenditures include the acquisition of equipment or the construction, development or acquisition of additional storage, terminalling or pipeline capacity to the extent such capital expenditures are expected to increase our long-term operating capacity or operating income. Expansion capital expenditures will also include interest (and related fees) on debt incurred and distributions on equity issued (including incremental distributions on incentive distribution rights) to finance all or any portion of such acquisition, construction or development in respect of the period that commences when we enter into a binding obligation to commence an acquisition, construction or development and ending on the earlier to occur of the date the asset acquired, constructed or developed commences commercial service and the date that it is disposed of or abandoned. Capital expenditures made solely for investment purposes will not be considered expansion capital expenditures.

 

Investment capital expenditures are those capital expenditures, including transaction expenses, 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 an asset for investment purposes or development of assets that are in excess of the maintenance of our existing operating capacity, but which are not expected to expand, for more than the short term, our operating capacity.

 

As described above, neither investment capital expenditures nor expansion capital expenditures are included in operating expenditures, and thus will not reduce operating surplus. Because expansion capital expenditures include interest payments (and related fees) on debt incurred to finance all or a portion of an acquisition, development or expansion of a capital asset in respect of a period that begins when we enter into a binding obligation to commence an acquisition, development or expansion and ending on the earlier to occur of the date the asset acquired, constructed or developed commences commercial service and the date that it is abandoned or disposed of, such interest payments also do not reduce operating surplus. Losses on disposition of an investment capital expenditure will reduce operating surplus when realized and cash receipts from an investment capital expenditure will be treated as a cash receipt for purposes of calculating operating surplus only to the extent the cash receipt is a return on principal.

 

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.

 

Subordination Period

 

General

 

Our partnership agreement provides that, during the subordination period (which we describe below), the common units will have the right to receive distributions from operating surplus each quarter in an amount equal to $0.3875 per common unit, which amount is defined in our partnership agreement as the minimum quarterly distribution, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions from operating surplus may be made on the subordinated units. These units are deemed “subordinated” because for a period of time, referred to as the subordination period, the subordinated units will not be entitled to receive any distributions from operating surplus until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly

 

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distribution from prior quarters. Furthermore, no arrearages will be paid on the subordinated units. The practical effect of the subordinated units is to increase the likelihood that during the subordination period there will be sufficient cash from operating surplus to pay the minimum quarterly distribution on the common units.

 

Determination of Subordination Period

 

Except as described below, the subordination period will begin on the closing date of this offering and expire on the first business day after the distribution to unitholders in respect of any quarter, beginning with the quarter ending September 30, 2016, if each of the following has occurred:

 

   

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

 

   

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

 

   

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

 

For the period after closing of this offering through December 31, 2013, we will prorate the distribution based on the actual length of the period, and use such prorated distribution for all purposes, including in determining whether the tests described above has been satisfied.

 

Early Termination of Subordination Period

 

Notwithstanding the foregoing, the subordination period will automatically terminate, and all of the subordinated units will convert into common units on a one-for-one basis, on the first business day after the distribution to unitholders in respect of any quarter, beginning with the quarter ending September 30, 2014, if each of the following has occurred:

 

   

distributions from operating surplus exceeded $0.5813 (150.0% of the minimum quarterly distribution) on all outstanding common units and subordinated units, plus the related distributions on the incentive distribution rights for a four-quarter period immediately preceding that date;

 

   

the “adjusted operating surplus” (as defined below) generated during the four-quarter period immediately preceding that date equaled or exceeded the sum of $2.3250 (150.0% of the annualized minimum quarterly distribution) on all of the outstanding common and subordinated units during that period on a fully diluted weighted average basis, plus the related distribution on the incentive distribution rights; and

 

   

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

 

Expiration Upon Removal of the General Partner

 

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

 

   

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

 

   

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

 

Expiration of the Subordination Period

 

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

 

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Adjusted Operating Surplus

 

Adjusted operating surplus is intended generally to reflect the cash generated from operations during a particular period and, therefore, excludes net increases in working capital borrowings and net drawdowns of reserves of cash generated in prior periods if not utilized to pay expenses during that period. Adjusted operating surplus for any period consists of:

 

   

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

 

   

any net increase during that period in working capital borrowings; less

 

   

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

 

   

any net decrease during that period in working capital borrowings; plus

 

   

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

 

   

any net decrease made in subsequent periods in cash reserves for operating expenditures initially established during such period to the extent such decrease results in a reduction of adjusted operating surplus in subsequent periods pursuant to the third bullet point above.

 

Any disbursements received, cash received (including working capital borrowings) or cash reserves established, increased or reduced after the end of a period that the general partner determines to deem as included in operating surplus for such period shall also be deemed to have been made, received or established, increased or reduced in such period for purposes to determining adjusted operating surplus for such period.

 

Distributions From Operating Surplus During the Subordination Period

 

If we make a distribution from operating surplus for any quarter during the subordination period, our partnership agreement requires that we make the distribution in the following manner:

 

   

first, to the common unitholders, pro rata, until we distribute for each common unit an amount equal to the minimum quarterly distribution for that quarter and any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters;

 

   

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

 

   

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

 

Distributions From Operating Surplus After the Subordination Period

 

If we make distributions of cash from operating surplus for any quarter after the subordination period, our partnership agreement requires that we make the distribution in the following manner:

 

   

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

 

   

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

 

General Partner Interest

 

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

 

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Incentive Distribution Rights

 

Incentive distribution rights represent the right to receive increasing percentages (15.0%, 25.0% and 50.0%) 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 separately from its general partner interest.

 

If for any quarter:

 

   

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

 

   

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

 

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

 

   

first, to all unitholders, pro rata, until each unitholder receives a total of $0.4456 per unit for that quarter (the “first target distribution”);

 

   

second, 85.0% to all common unitholders and subordinated unitholders, pro rata, and 15.0% to the holders of our incentive distribution rights, until each unitholder receives a total of $0.4844 per unit for that quarter (the “second target distribution”);

 

   

third, 75.0% to all common unitholders and subordinated unitholders, pro rata, and 25.0% to the holders of our incentive distribution rights, until each unitholder receives a total of $0.5813 per unit for that quarter (the “third target distribution”); and

 

   

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

 

Percentage Allocations of Distributions 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 the column heading “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 Common Unit and Subordinated Unit.” 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 assume our general partner has not transferred its incentive distribution rights and there are no arrearages on common units.

 

    

Total Quarterly Distribution Per
Common Unit and Subordinated
Unit

  Marginal Percentage Interest
in Distributions
 
       Unitholders     General Partner  

Minimum Quarterly Distribution

   $0.3875     100.0     0

First Target Distribution

   above $0.3875 up to $0.4456     100.0     0

Second Target Distribution

   above $0.4456 up to $0.4844     85.0     15.0

Third Target Distribution

   above $0.4844 up to $0.5813     75.0     25.0

Thereafter

   above $0.5813     50.0     50.0

 

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General Partner’s Right to Reset Incentive Distribution Levels

 

Our general partner, as the holder of our incentive distribution rights, has the right under our partnership agreement to elect to relinquish the right to receive incentive distribution payments based on the initial target distribution levels and to reset, at higher levels, the target distribution levels upon which the incentive distribution payments to our general partner would be set. If our general partner transfers all or a portion of the incentive distribution rights in the future, then the holder or holders of a majority of our incentive distribution rights will be entitled to exercise this right. The following discussion assumes that our general partner holds all of the incentive distribution rights at the time that a reset election is made. The right to reset the target distribution levels upon which the incentive distributions are based may be exercised, without approval of our unitholders or the conflicts committee of our general partner, at any time when there are no subordinated units outstanding and we have made cash distributions to the holders of the incentive distribution rights at the highest level of incentive distribution for the most recent four consecutive fiscal quarters. The reset target distribution levels will be higher than the target distribution levels prior to the reset such that there will be no incentive distributions paid under the reset target distribution levels until cash distributions per unit following the reset event increase as described below. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would otherwise not be sufficiently accretive to cash distributions per common unit, taking into account the existing levels of incentive distribution payments being made.

 

In connection with the resetting of the target distribution levels and the corresponding relinquishment by our general partner of incentive distribution payments based on the target cash distributions prior to the reset, our general partner will be entitled to receive a number of newly issued common units based on the formula described below that takes into account the “cash parity” value of the average cash distributions related to the incentive distribution rights for the two quarters prior to the reset event as compared to the cash distribution per common unit in such quarter.

 

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

 

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

 

   

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

 

   

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

 

   

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

 

   

thereafter, 50.0% to all common unitholders, pro rata, and 50.0% to our general partner.

 

Because a reset election can only occur after the subordination period expires, the reset minimum quarterly distribution will have no significance except as a baseline for the target distribution levels.

 

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The following table illustrates the percentage allocation of distributions from operating surplus between the unitholders and our general partner at various distribution levels (1) pursuant to the distribution provisions of our partnership agreement in effect at the closing of this offering, as well as (2) following a hypothetical reset of the target distribution levels based on the assumption that the average quarterly distribution amount per common unit during the two fiscal quarters immediately preceding the reset election was $0.6500.

 

    

Quarterly Distribution Per Unit
Prior to Reset

  Unitholders     General
Partner
   

Quarterly Distribution Per Unit
Following Hypothetical Reset

Minimum Quarterly Distribution

   up to $0.3875     100.0     0.0   up to $0.6500                          (1)

First Target Distribution

   above $0.3875 up to $0.4456     100.0     0.0   above $0.6500 up to $0.7475 (2)

Second Target Distribution

   above $0.4456 up to $0.4844     85.0     15.0   above $0.7475 up to $0.8125 (3)

Third Target Distribution

   above $0.4844 up to $0.5813     75.0     25.0   above $0.8125 up to $0.9750 (4)

Thereafter

   above $0.5813     50.0     50.0                  above $0.9750        (4)

 

(1)   This amount is equal to the hypothetical reset minimum quarterly distribution.
(2)   This amount is 115.0% of the hypothetical reset minimum quarterly distribution.
(3)   This amount is 125.0% of the hypothetical reset minimum quarterly distribution.
(4)   This amount is 150.0% of the hypothetical reset minimum quarterly distribution.

 

The following table illustrates the total amount of distributions from operating surplus that would be distributed to the unitholders and our general partner, in respect of its incentive distribution rights, based on an average of the amounts distributed per quarter for the two quarters immediately prior to the reset. The table assumes that immediately prior to the reset there would be common units outstanding and the average distribution to each common unit would be $0.6500 for the two quarters prior to the reset.

 

    

Quarterly Distribution
per Unit Prior to Reset

  Cash
Distributions to
Common
Unitholders
Prior to Reset
    Cash
Distributions to
General Partner
Prior to Reset
    Total
Distributions
 

Minimum Quarterly Distribution

   up to $0.3875   $ 4,712,838      $             —        $ 4,712,838   

First Target Distribution

   above $0.3875 up to $0.4456     706,925        —          706,925   

Second Target Distribution

   above $0.4456 up to $0.4844     471,284        83,168        554,452   

Third Target Distribution

   above $0.4844 up to $0.5813     1,178,210        392,737        1,570,947   

Thereafter

   above $0.5813     836,148        836,148        1,672,296   
    

 

 

   

 

 

   

 

 

 
     $ 7,905,405      $ 1,312,053      $ 9,217,458   
    

 

 

   

 

 

   

 

 

 

 

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The following table illustrates the total amount of distributions from operating surplus that would be distributed to the unitholders and our general partner in respect of its incentive distribution rights, with respect to the quarter in which the reset occurs, assuming that the distribution per unit in respect of such quarter equals the average distribution per unit for the two quarters immediately prior to the reset. The table reflects that as a result of the reset there would be 14,180,705 common units outstanding and the distribution to each common unit would be $0.6500. The number of common units to be issued upon the reset was calculated by dividing (1) the average of the amounts received by our general partner in respect of the incentive distribution rights for the two quarters prior to the reset as shown in the table above, or $1,312,053, by (2) the average amounts of cash distributed on each common unit for the two quarters prior to the reset as shown in the table above, or $0.6500.

 

         Cash
Distributions
to Common
Unitholders
Prior to Reset
    Cash Distributions to General Partner
After Reset
    Total
Distributions
 
    

Quarterly Distribution
per Unit Prior to Reset

    Common
Units(1)
    Incentive
Distribution
Rights