F-1 1 d705169df1.htm FORM F-1 Form F-1
Table of Contents

As filed with the Securities and Exchange Commission on June 19, 2014

Registration No. 333-            

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

VTTI Energy Partners LP

(Exact name of Registrant as specified in its charter)

 

Republic of the Marshall Islands   5171   N/A

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

25-27 Buckingham Palace Road

London, SW1W 0PP, United Kingdom

+44 20 7973 4200

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

 

CT Corporation System

111 Eighth Avenue

New York, New York 10011

(212) 590-9338

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

 

Copies to:

 

Sean T. Wheeler   Douglass M. Rayburn
Latham & Watkins LLP   Baker Botts L.L.P.
811 Main Street, Suite 3700   2001 Ross Avenue
Houston, Texas 77002   Dallas, Texas 75201
(713) 546-5400   (214) 953-6500

 

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

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

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

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

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

 

CALCULATION OF REGISTRATION FEE

 

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

Common units representing limited partner interests

  $420,000,000   $54,096

 

 

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

 

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

 

 

 


Table of Contents

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

 

SUBJECT TO COMPLETION, DATED JUNE 19, 2014

 

PRELIMINARY PROSPECTUS

 

LOGO

 

VTTI Energy Partners LP

 

Common Units

Representing Limited Partner Interests

$         per common unit

 

 

 

This is the initial public offering of our common units. VTTI MLP Partners B.V., the selling unitholder, is selling             common units. We will not receive any proceeds from the sale of the common units by the selling unitholder. Prior to this offering, there has been no public market for our common units.

 

We currently expect the initial public offering price to be between $         and $         per common unit. We intend to apply to list the common units on the New York Stock Exchange under the symbol “VTTI”.

 

We are an “emerging growth company”, and we are eligible for reduced reporting requirements. See “Prospectus Summary—Implications of Being an Emerging Growth Company”.

 

The selling unitholder has granted the underwriters an option to purchase up to              additional common units on the same terms and conditions as set forth above if the underwriters sell more than              common units in this offering. Our indirect parent, VTTI B.V., and the selling unitholder are each an underwriter with respect to the common units that the selling unitholder will sell in the offering.

 

 

 

Investing in our common units involves risks. See “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, to enable us to pay the minimum quarterly distribution to our unitholders.

 

   

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

 

   

Our financial results depend on the demand for refined petroleum products and crude oil, among other factors, and general economic downturns could result in lower demand for these products for a sustained period of time.

 

   

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

 

   

Our general partner and its affiliates, including our indirect parent, VTTI B.V., have conflicts of interest with us and limited fiduciary and contractual duties, and they may favor their own interests to the detriment of us and our unitholders.

 

   

Our partnership agreement restricts the remedies available to holders of our common and subordinated 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.

 

   

U.S. tax authorities could treat us as a “passive foreign investment company” under certain circumstances, which would have adverse U.S. federal income tax consequences to U.S. unitholders.

 

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

 

 

 

     Per Common
Unit
     Total  

Public Offering Price

   $                    $                

Underwriting Discount(1)

   $         $     

Proceeds to the selling unitholder (before expenses)(1)

   $         $     

 

(1)   Excludes an aggregate structuring fee of $         million payable to Citigroup Global Markets Inc. and J.P. Morgan Securities, LLC. See “Underwriting” for a description of all underwriting compensation payable in connection with this offering.

 

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

 

 

 

Joint Book-Running Managers

 

Citigroup

   

J.P. Morgan

 

                    , 2014


Table of Contents

LOGO


Table of Contents

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

 

 

 

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1  

VTTI Energy Partners LP

     1  

Our Operations

     4  

Our Business Strategies

     5  

Our Competitive Strengths

     7  

Risk Factors

     8  

Our Management

     8  

Summary of Conflicts of Interest and Duties

     9  

Principal Executive Offices and Internet Address

     10  

Implications of Being an Emerging Growth Company

     10  

Formation Transactions

     11  

Simplified Organizational and Ownership Structure After this Offering

     13  

The Offering

     14  

Summary Historical Financial and Operating Data

     19  

RISK FACTORS

     21  

Risks Inherent in Our Business

     21  

Risks Inherent in an Investment in Us

     36  

Tax Risks

     50  

FORWARD-LOOKING STATEMENTS

     53  

USE OF PROCEEDS

     55  

CAPITALIZATION

     56  

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     57  

General

     57  

Forecasted Results of Operations for the Twelve Months Ending June 30, 2015

     59  

Forecast Assumptions and Considerations

     62  

Forecasted Cash Available for Distribution

     64   

HOW WE MAKE CASH DISTRIBUTIONS

     67   

Distributions of Available Cash

     67   

Operating Surplus and Capital Surplus

     68   

Subordination Period

     70   

Distributions of Available Cash From Operating Surplus During the Subordination Period

     72   

Distributions of Available Cash From Operating Surplus After the Subordination Period

     72   

General Partner Interest

     72   

Incentive Distribution Rights

     72   

Percentage Allocations of Available Cash From Operating Surplus

     73   

Our General Partner’s Right to Reset Incentive Distribution Levels

     74   

Distributions From Capital Surplus

     77   

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     77   

Distributions of Cash Upon Liquidation

     78   

SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

     79   

 

i


Table of Contents

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

     82   

Overview

     82   

How We Generate Revenues

     83   

Factors That Impact Our Business

     83   

Factors Impacting the Comparability of Our Financial Results

     85   

Overview of Our Results of Operations

     86   

Results of Operations

     87   

Liquidity and Capital Resources

     90   

Cash Flows

     92   

Off-Balance Sheet Arrangements

     94   

Critical Accounting Policies and Estimates

     94   

Quantitative and Qualitative Disclosures About Market Risk

     96   

Seasonality

     97   

Future Trends and Outlook

     98   

THE INTERNATIONAL INDEPENDENT TERMINAL INDUSTRY OVERVIEW

     99   

Historical Overview

     99   

Role of Terminals

     102   

Parameters of Competition

     102   

Global Supply and Demand Imbalances

     103   

International Supply and Demand Hubs

     104   

Barriers to Entry

     108   

BUSINESS

     110   

Our Assets

     110   

Our Operations

     113   

Our Business Strategies

     113   

Our Competitive Strengths

     114   

Our Terminals

     116   

Customers

     120   

Contracts

     120   

Competition

     121   

Environmental and Occupational Safety and Health Regulation

     122   

Title to Properties and Permits

     126   

Safety and Maintenance

     126   

Seasonality

     126   

Insurance

     126   

Properties

     127   

Legal Proceedings

     127   

Taxation of the Partnership

     127   

Marshall Islands

     127   

Netherlands

     127   

United Kingdom

     128   

United States

     128   

Other Jurisdictions and Additional Information

     128   

MANAGEMENT

     129   

Management of VTTI Energy Partners LP

     129   

Directors and Executive Officers of VTTI Energy Partners GP LLC

     130   

Board Leadership Structure

     132   

Board Role in Risk Oversight

     132   

Reimbursement of Expenses of Our General Partner

     132   

Executive Compensation

     132   

 

ii


Table of Contents

Compensation of Directors

     134   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     136   

SELLING UNITHOLDER

     137   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     138   

Distributions and Payments to our General Partner and its Affiliates

     138   

Agreements Governing the Transactions

     139   

Terminaling Services Agreements with Vitol

     143   

Other Related Party Transactions

     143   

CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

     145   

Conflicts of Interest

     145   

Fiduciary Duties

     148   

DESCRIPTION OF THE COMMON UNITS

     152   

The Units

     152   

Transfer Agent and Registrar

     152   

Transfer of Common Units

     152   

THE PARTNERSHIP AGREEMENT

     154   

Organization and Duration

     154   

Purpose

     154   

Cash Distributions

     154   

Capital Contributions

     154   

Voting Rights

     154   

Applicable Law; Forum, Venue and Jurisdiction

     156   

Limited Liability

     156   

Issuance of Additional Interests

     157   

Tax Status

     158   

Amendment of the Partnership Agreement

     158   

Merger, Sale, Conversion or Other Disposition of Assets

     160   

Termination and Dissolution

     160   

Liquidation and Distribution of Proceeds

     161   

Withdrawal or Removal of our General Partner

     161   

Transfer of General Partner Interest

     162   

Transfer of Ownership Interests in General Partner

     162   

Transfer of Incentive Distribution Rights

     163   

Change of Management Provisions

     163   

Limited Call Right

     163   

Meetings; Voting

     163   

Status as Limited Partner or Assignee

     164   

Indemnification

     164   

Reimbursement of Expenses

     165   

Books and Reports

     165   

Right to Inspect Our Books and Records

     165   

Registration Rights

     165   

UNITS ELIGIBLE FOR FUTURE SALE

     166   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     167   

Election to Be Treated as a Corporation

     167   

U.S. Federal Income Taxation of U.S. Holders

     168   

U.S. Federal Income Taxation of Non-U.S. Holders

     172   

Backup Withholding and Information Reporting

     172   

NON-UNITED STATES TAX CONSEQUENCES

     174   

Marshall Islands Tax Consequences

     174   

Netherlands Tax Consequences

     174   

 

iii


Table of Contents

United Kingdom Tax Consequences

     175   

UNDERWRITING

     177   

Option to Purchase Additional Common Units

     177   

No Sales of Similar Securities

     178   

Listing

     178   

Commissions and Discounts

     178   

Price Stabilization, Short Positions and Penalty Bids

     179   

Conflicts of Interest

     179   

Selling Legends

     180   

SERVICE OF PROCESS AND ENFORCEMENT OF CIVIL LIABILITIES

     183   

LEGAL MATTERS

     184   

EXPERTS

     184   

EXPENSES RELATED TO THIS OFFERING

     185   

WHERE YOU CAN FIND MORE INFORMATION

     185   

INDUSTRY AND MARKET DATA

     186   

INDEX TO FINANCIAL STATEMENTS

     P-1  

APPENDIX A—Form of First Amended and Restated Agreement of Limited Partnership of VTTI Energy Partners LP

     A-1   

APPENDIX B—Glossary of Terms

     B-1   

 

iv


Table of Contents

PROSPECTUS SUMMARY

 

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

 

All references in this prospectus, unless the context otherwise indicates, to (i) “VTTI Energy Partners”, “we”, “our”, “us”, and “the Partnership” refer to VTTI Energy Partners LP, a Marshall Islands limited partnership, including VTTI MLP B.V., a company incorporated in the Netherlands, and its subsidiaries; (ii) “VTTI Operating” when used in a historical context refer to the businesses of the predecessor companies of VTTI MLP B.V. and their subsidiaries, and when used in the present tense or prospectively refer to VTTI MLP B.V. and its subsidiaries, collectively, or to VTTI MLP B.V. individually, as the context may require; (iii) “our general partner” refer to VTTI Energy Partners GP LLC, a Marshall Islands limited liability company; (iv) “our sponsors” refer to Vitol Holding B.V., a company incorporated in the Netherlands, which we refer to as “Vitol”, and MISC Berhad, a company incorporated in Malaysia, which we refer to as “MISC”; (v) “VTTI” refer to VTTI B.V., a company incorporated in the Netherlands, that is owned equally by Vitol and MISC; (vi) “the selling unitholder” refer to VTTI MLP Partners B.V., a company incorporated in the Netherlands and a wholly-owned subsidiary of VTTI; and (vii) “Predecessor” refer to VTTI Energy Partners LP Predecessor, our predecessor for accounting purposes. We have provided definitions for some of the terms we use to describe our business and industry and other terms used in this prospectus in the “Glossary of Terms” beginning on page B-1 of this prospectus.

 

VTTI Energy Partners LP

 

We are a fee-based, growth-oriented limited partnership formed in April 2014 by VTTI, one of the world’s largest independent energy terminaling businesses, to own, operate, develop and acquire refined petroleum product and crude oil terminaling and related energy infrastructure assets on a global scale. Our initial assets consist of a 36% interest in VTTI Operating, which owns a portfolio of 6 terminals with 396 tanks and 35.5 million barrels of refined petroleum product and crude oil storage capacity located in Europe, the Middle East, Asia, and North America. Our network of terminal facilities represents one of the largest independent portfolios of refined petroleum product and crude oil terminaling assets in the world when measured by total storage capacity. Since inception in 2006, our parent VTTI has increased its operating storage capacity by 47.6 million barrels through a balance of organic development projects, greenfield construction and third party acquisitions. Capitalizing on our relationship with VTTI and its owners, Vitol and MISC, we intend to continue our growth through acquisitions from VTTI or third parties, organic development opportunities, greenfield construction and optimization of our existing assets, and we have a management team dedicated to executing this growth strategy.

 

Our primary business objective is to generate stable and predictable cash flows that will enable us to pay quarterly cash distributions to our unitholders and to increase those distributions over time. We generate substantially all of our revenue from long-term, fee-based, take-or-pay contracts for the terminal storage and throughput of refined petroleum products and crude oil. Our contracts have a weighted average remaining tenor

 

1


Table of Contents

of more than four years as of June 30, 2014, including the guarantee period described below under “—Our Assets—Our Initial Assets”. The counterparties to our terminal contracts are primarily major energy industry participants with strong credit profiles. We do not have direct commodity price exposure because we do not own the underlying commodities being stored at our terminals and do not engage in the trading of any commodities.

 

One of our principal strengths is our relationship with Vitol and MISC. Vitol, founded in 1966, formed VTTI in 2006, created a joint venture with MISC at VTTI’s Malaysian terminal in 2008, and added MISC as an equal partner in VTTI in 2010. Vitol is one of the world’s largest independent energy traders, trading over 5 million barrels of refined petroleum products and crude oil every day. Vitol has maintained a private, investment grade credit rating from at least one of the major credit rating agencies since 1994 and has rapidly expanded into a broad group of complementary businesses engaged in finding, extracting, refining, trading, storing and transporting resources. Vitol employs more than 5,400 people globally and has approximately 40 offices worldwide. Our relationship with Vitol is the source of the majority of our revenues, representing approximately 76% and 79% of our revenues for the year ended December 31, 2013 and the three months ended March 31, 2014, respectively. MISC is one of the world’s leading maritime logistics providers specializing in the transportation of refined petroleum products and crude oil and is also rated investment grade. MISC owns or time charters more than 120 in-charter vessels and has a fleet capacity of approximately 13 million dead weight tonnes. MISC’s controlling shareholder is Petroliam Nasional Berhad (Petronas), the national oil company of Malaysia. Our relationship with Vitol and MISC provides us with unique market insights into global industry dynamics, product flows and customer demand.

 

Our Assets

 

Our initial assets consist of a 36% interest in VTTI Operating, which owns a portfolio of modern and geographically diverse terminal facilities. Following the completion of this offering, VTTI will own the remaining 64% interest in VTTI Operating as well as a portfolio of terminaling and other assets held outside of VTTI Operating. Furthermore, at the closing of this offering, we will enter into an omnibus agreement under which VTTI will offer us the right to acquire additional energy infrastructure assets that it currently owns or will own in the future, including additional equity interests in VTTI Operating, before offering to sell any such assets to any third party. We refer to these rights as our “ROFO Assets”.

 

2


Table of Contents

Our Initial Assets

 

Our terminals are generally located in major international supply and demand centers for refined petroleum products and crude oil and provide critical midstream infrastructure services to our customers at these key international market hubs. A variety of transportation interconnections are available to move our customers’ products to and from our terminal facilities such as ships and barges, roads, railroads and pipelines. As of the time of this offering, our parent VTTI employs approximately 970 people of over 35 nationalities operating in 11 countries who provide effective, cost-efficient local management of each respective terminal. The following table sets forth information regarding our terminals as of March 31, 2014:

 

Terminal Location

  Products   Gross Storage
Capacity
(MMBbls)
    # of Tanks     Maximum
Draft

(feet)
    Connectivity  

EUROPE

         

Amsterdam,

The Netherlands

  Refined Petroleum
Products
    8.4        211        46        Ship, barge, road, railroad   

Rotterdam,

The Netherlands(1)

  Refined Petroleum
Products
    7.0        28        69       
 
Ship, barge, road, railroad,
pipeline
  
  

Antwerp, Belgium

  Crude Oil, Refined
Petroleum Products
    4.2        45        46       
 
Ship, barge, road, railroad,
pipeline
  
  

MIDDLE EAST

         

Fujairah,

United Arab Emirates(2)

  Crude Oil, Refined
Petroleum Products
    7.4        47        54        Ship, barge, road, pipeline   

ASIA

         

Johore, Malaysia

Phase One

  Refined Petroleum
Products
    5.6        41        56        Ship, barge, road   

NORTH AMERICA

         

Seaport Canaveral,

United States of America

  Refined Petroleum
Products
    2.8        24        39        Ship, barge, road, pipeline   

 

   

 

 

   

 

 

     

TOTAL

      35.5        396       

 

(1)   VTTI owns 90% of the economic interest in the Rotterdam terminal; SK Terminal B.V. owns the remaining 10%.
(2)   VTTI owns 90% of the economic interest in the Fujairah terminal; Fujairah Petroleum Co. owns the remaining 10%.

 

In addition, while we believe that each of our terminals will be contracted for the foreseeable future at a rate not less than the respective rate in effect as of the date of this prospectus, we will enter into an omnibus agreement with VTTI in connection with this offering under which VTTI will guarantee the rates of certain capacity currently contracted by Vitol for a specified period of time after the Vitol terminaling services agreements expire. This will result in an overall weighted average contract tenor as of June 30, 2014 of more than four years. Although we will make every effort to renew existing contracts or seek new customers upon the expiration of existing terminaling services agreements, if we are unable to do so, we believe that this guarantee arrangement will provide us with stable and predictable cash flows for an extended period of time. For more on this guarantee arrangement, see “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement—Guarantees”.

 

3


Table of Contents

Our ROFO Assets

 

At the closing of this offering, VTTI will retain a significant interest in us through its indirect ownership of a    % limited partner interest, a 2% general partner interest, and all of our incentive distribution rights. Given its significant ownership interest in us following this offering, we believe that VTTI will be motivated to facilitate our growth by using us as its primary vehicle for global terminaling expansion.

 

At the closing of this offering, we will enter into an omnibus agreement with VTTI pursuant to which VTTI will grant us a right of first offer on:

 

   

the remaining 64% ownership of VTTI Operating; and

 

   

all other currently owned and future terminaling and related energy infrastructure assets held by VTTI.

 

Pursuant to this right, for as long as VTTI retains its ownership interest in our general partner, VTTI will be required to offer us the first opportunity to acquire the ROFO Assets if it decides to sell any of them. The consummation and timing of any acquisition of assets owned by VTTI will depend upon, among other things, VTTI’s willingness to offer the asset for sale and obtain any necessary third party consents, the determination that the asset is suitable for our business at that particular time, our ability to agree on a mutually acceptable price, our ability to negotiate an acceptable purchase agreement with respect to the asset and our ability to obtain financing on acceptable terms. While VTTI is not obligated to sell us any assets or promote and support the successful execution of our growth plan and strategy, we believe that VTTI’s significant economic stake in us following the completion of this offering provides it with a strong incentive to do so. We do not have a current agreement or understanding with VTTI to purchase any ROFO Assets. For additional information about the ROFO Assets, see “Business—Our Assets—Our ROFO Assets”.

 

Our Operations

 

We provide long-term, fee-based terminaling services for third party companies engaged in the production, processing, distribution, and marketing of refined petroleum products and crude oil. We generate 100% of our revenue through the provision of fee-based services to our customers. The types of fees we charge are:

 

   

Storage and Throughput Fees.    Our customers pay us fixed monthly fees for storage and associated liquid throughput handling, even if the actual capacity they use or the amount of product that we receive is less than the amount reserved. Storage and throughput fees generated approximately 88% and 93% of our revenues for the year ended December 31, 2013 and the three months ended March 31, 2014, respectively.

 

   

Excess Throughput and Ancillary Fees.    Our customers pay excess throughput fees if the actual product handled is more than the amount agreed in the contract and pay us additional fees for ancillary services such as mixing, blending, heating and transferring products between our tanks or to rail or truck. For the year ended December 31, 2013 and the three months ended March 31, 2014, we generated approximately 12% and 7% of our revenues, respectively, from excess throughput and ancillary service fees.

 

We believe our high percentage of fixed storage and throughput fees generated from multi-year contracts with a portfolio of longstanding customers will generate stable and predictable cash flow for the Partnership and substantially mitigate our exposure to market and commodity volatility. For additional information about our contracts, see “Business—Contracts”.

 

Industry Trends

 

The terminal industry has evolved from a vertically integrated element of the oil majors’ supply chain in the 1970s to a specialized industry today. Presently, the independent terminal industry serves not only the oil majors but also national oil companies, independent refiners and marketing companies, resulting in independent terminal

 

4


Table of Contents

companies owning 20% of global terminal capacity in 2013 according to PortStorage Group. In parallel with these changes, the volume of global petroleum consumption has grown from 60 MMBpd to 89 MMBpd from 1982 to 2012 according to the U.S. Energy Information Administration.

 

Terminal capacity has expanded to meet the growing global demand for refined petroleum products and crude oil. International supply and demand hubs have formed along export routes of a supply source or at well-situated demand centers. Major hubs include the Amsterdam-Rotterdam-Antwerp region of Europe, Fujairah in the Middle East, Singapore in Asia and the United States Gulf Coast in North America. These hubs provide a physical location where large flows converge and have the logistical support to export excess products or import in areas where there is a shortage of products. Various factors, such as growth in the developing world, aging and inefficient refineries in Europe, Japan, Australia and Africa, political unrest in key oil producing countries such as Iraq and Iran, and the shale oil boom in the United States have contributed to increased trade of refined petroleum products and crude oil. We anticipate that the growing trend of supply and demand imbalances will continue and that independent terminals in strategic locations with flexible infrastructure will be well suited to meet market needs.

 

The concentration of ownership in the terminal industry has evolved differently in the United States than in international markets. In the United States, the proliferation of master limited partnerships has provided a capital-efficient vehicle to concentrate the ownership of midstream assets with independent terminal owners. However, the ownership of terminals in the international market remains relatively fragmented. The following graph illustrates the relative concentration of independent terminal ownership between the United States and international markets.

 

US Terminal Capacity Ownership   Non-US Terminal Capacity Ownership
 
LOGO     LOGO  

 

Source: PortStorage Group—OPIS/STALSBY TankTerminals.com Database

 

Our Business Strategies

 

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

 

   

Procure long-term, fee-based, take-or-pay agreements.    We are focused on generating stable and predictable cash flows by providing fee-based, take-or-pay terminaling services to our customers under

 

5


Table of Contents
 

long-term agreements. Our contracts have a weighted average remaining tenor of more than four years as of June 30, 2014, after giving effect to the guarantee period described above under “Our Assets—Our Initial Assets”. We do not have direct commodity price exposure because we do not own the underlying commodities being stored at our terminals and do not engage in the trading of any commodities.

 

   

Pursue growth through strategic acquisitions of additional energy infrastructure assets from VTTI.    We plan to pursue accretive acquisitions of additional energy infrastructure assets that VTTI may offer us in the future. At the closing of this offering, we will enter into an omnibus agreement under which VTTI will offer us the right to acquire additional assets that it currently owns or will own in the future, including additional equity interests in VTTI Operating, before offering to sell any such assets to any third party. VTTI is currently in varying stages of evaluation and development of numerous additional terminaling projects and we believe such projects may provide growth opportunities for us in the future.

 

   

Capitalize on international terminaling market fragmentation through strategic acquisitions from third parties.    We believe that the terminaling business outside the United States is highly fragmented and presents an attractive and immediate opportunity for large scale, well-capitalized companies to capture significant market share, achieve economies of scale and build brand equity. We intend to pursue such acquisition opportunities both independently and jointly with VTTI or third parties, particularly when the third party partners have expertise in certain industries or geographies. We believe that our base of operations provides multiple platforms for strategic growth through acquisitions.

 

   

Pursue organic development opportunities and greenfield construction projects.    Our assets are generally located in the major international supply and demand centers for refined petroleum products and crude oil and have a high degree of interconnectivity and physical integration with major refinery complexes. We will continually evaluate organic development opportunities to expand the capacity of our existing assets, which can be accomplished at several of our terminals without purchasing additional property. Additionally, since 2006, VTTI has designed, constructed and contracted terminal storage of approximately 30.8 million barrels through greenfield and brownfield construction. We will continue to pursue development of new terminals independently of, or in partnership with, VTTI in order to meet increasing demand for our services.

 

   

Continuous enhancement of customer service to retain our competitive position.     Our terminals have been constructed with our customers’ business objectives in mind. Accordingly, we strive to maximize the utilization of our terminals by providing access to multiple modes of transportation, advanced blending and loading technology and high capacity throughput and storage equipment such as tanks, pumps and berths in order to provide our customers with maximum flexibility and optionality. Furthermore, we continually seek to identify and pursue opportunities to increase our utilization, improve our operating efficiency and expand our service offerings to our customers.

 

   

Maintain sound financial practices and flexibility to ensure our long-term viability.    We are committed to disciplined financial practices and a balanced capital structure, which we believe will serve the long-term interests of our unitholders. We believe our conservative capital structure, when combined with our stable, fee-based cash flows, should afford us efficient access to capital markets at a competitive cost of capital.

 

   

Maintain safe and reliable operations.    We believe that providing safe, reliable and efficient services is a key component in generating stable cash flows, and we are committed to maintaining the safety, reliability and efficiency of our operations. We strive to implement advanced technology to facilitate the management and standardization of our health, safety, and environmental policies and procedures across our global terminal network, supported by our commitment to continuous improvement and to eliminating incidents across our terminal network. When an effective safety practice is developed at a particular terminal, we seek to deploy this best practice across our global network.

 

6


Table of Contents

Our Competitive Strengths

 

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

 

   

Long-term, fee-based, take-or-pay contracts with creditworthy counterparties.    Our terminals generate revenue primarily under multi-year fee-based, take-or-pay arrangements with numerous creditworthy counterparties, including Vitol. While we believe that each of our terminals will be contracted for the foreseeable future at a rate not less than the respective rate in effect as of the date of this prospectus, we will enter into an omnibus agreement with VTTI in connection with this offering under which VTTI will guarantee the rates of certain capacity currently contracted by Vitol for a specified period of time after the Vitol terminaling services agreements expire. This will result in an overall weighted average contract tenor as of June 30, 2014 of more than four years. We believe the nature of our contracts with our customers and our guarantee arrangement with VTTI enhances our cash flow stability and predictability.

 

   

Strategic relationship with Vitol, MISC and VTTI.    We have a strategic relationship with Vitol, one of the world’s largest independent energy traders, MISC, one of the world’s leading international shipping and logistics companies, and VTTI, one of the world’s largest independent energy terminaling businesses. We believe that Vitol, MISC and VTTI, as the indirect owners of our general partner, a     % limited partner interest in us and all of our incentive distribution rights, will be motivated to promote and support the successful execution of our principal business objectives and to pursue projects that directly or indirectly enhance the value of our assets.

 

   

Critical midstream infrastructure assets in major global energy market hubs.     At the closing of this offering, we will own a 36% interest in a network of 6 terminals with 396 tanks and 35.5 million barrels of refined petroleum product and crude oil storage capacity across key geographic markets in Europe, the Middle East, Asia and North America. Our assets are strategically located and generally have a high degree of interconnectivity and physical integration with refinery complexes and other significant energy infrastructure in locations where global oil and refined petroleum product flows converge.

 

   

Experienced, knowledgeable leadership team with a proven track record of management and growth.     Our officers and key managers have substantial experience in the management and operation of terminal facilities and associated assets with an average of over 20 years of experience in the energy industry. This team has demonstrated an ability to navigate diverse local markets and effectively identify appropriate business opportunities. They have experience operating an international organization, leading our parent VTTI’s 970 employees across 5 continents and 11 countries. Our management team also has demonstrated expertise in acquiring and integrating assets and in executing growth strategies in the refined petroleum product and crude oil logistics industry, having grown VTTI into one of the leading terminal companies in the world since its founding.

 

   

High barriers to entry.     Our potential competitors face high barriers to entry including high construction costs, less effective location options due to lack of access to navigable waterways and proximity to refining complexes and other significant energy infrastructure, a lack of existing relationships with local customers, the costs of industry regulations and the need for operational expertise. We believe these barriers offer us a competitive advantage, as our potential competitors will find it difficult to replicate our strategic geographic locations, knowledge of local markets and integration of our terminals. In addition, many of our terminals have the ability to add storage capacity, which could be constructed at a significantly lower cost compared to a greenfield project due to the investment that has already been made in the infrastructure of the existing assets.

 

   

High quality, flexible, well maintained asset base.     Our terminals have the logistical capability to accommodate various types of products and are supported by numerous interconnections of sea, road, pipelines, and railroad that provide our customers a variety of options for the delivery and receipt of their

 

7


Table of Contents
 

products. In addition, many of our terminal facilities are newly constructed or recently retrofitted, containing fully automated, advanced technology and high-capacity transfer and transportation infrastructure and interconnections that decrease labor costs. Three of our six terminals have been constructed since 2006 and significant capital has been invested in the remaining three terminals to expand capacity and enhance our operating capabilities.

 

Risk Factors

 

An investment in our common units involves risks associated with our business, our partnership structure and the tax characteristics of our common units. Those risks are described under “Risk Factors” beginning on page 21 of this prospectus.

 

Our Management

 

We are managed by the board of directors and executive officers of VTTI Energy Partners GP LLC, our general partner. VTTI is the indirect owner of our general partner and has the right to appoint the entire board of directors of our general partner, including the independent directors appointed in accordance with the listing standards of the New York Stock Exchange (“NYSE”). Unlike shareholders in a publicly traded corporation, our common unitholders are not entitled to elect our general partner or the board of directors of our general partner. 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 of our general partner that will be responsible for managing our day to day affairs are officers of VTTI and, therefore, will have responsibilities to each of us, our general partner and VTTI after this offering. For more information about the directors and executive officers of our general partner, see “Management—Directors and Executive Officers of VTTI Energy Partners GP LLC”.

 

In order to maintain operational flexibility, our operations will be conducted through, and our operating assets will be owned by, various operating subsidiaries. VTTI Operating, of which we will own a 36% interest upon completion of this offering, will employ most of the personnel who work at our terminaling facilities. Our general partner has the sole responsibility for providing the remaining personnel necessary to conduct our operations, whether through directly hiring employees or by obtaining the services of personnel employed by VTTI or others.

 

Neither we nor our general partner employ any of the individuals who serve as executive officers of our general partner and are responsible for managing our business. Our general partner’s executive officers are employed by VTTI MLP Services Ltd, or VTTI Services, a wholly-owned subsidiary of the selling unitholder, and will be made available to VTTI MLP Holdings Ltd, or VTTI Holdings, pursuant to the terms of a secondment agreement that VTTI Services will enter into with VTTI Holdings upon completion of this offering. Pursuant to the applicable provisions of the secondment agreement, VTTI Holdings will, on a cost-plus basis, reimburse VTTI Services for the costs that it incurs in providing compensation and benefits to its employees made available to VTTI Holdings, including the executive officers of our general partner. Pursuant to the applicable provisions of the administrative services agreement that we will enter into with VTTI Holdings, upon completion of this offering, we will pay VTTI Holdings a fixed fee of approximately $3.0 million per year for, among other things, the services of our general partner’s executive officers and other personnel operating our business and for the provision of certain administrative services, such as accounting and financial services. In addition, our partnership agreement will provide that we will reimburse our general partner for the other expenses relating to the management of the Partnership. In such case, under our partnership agreement, there is no limit on expense reimbursements we may be required to pay our general partner. See “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Administrative Services Agreement” and “—Secondment Agreement” and “The Partnership Agreement—Reimbursement of Expenses.”

 

8


Table of Contents

Summary of Conflicts of Interest and Duties

 

Our general partner will have a legal duty to manage us in a manner it subjectively believes is in our best interests, subject to the limitations described under “Conflicts of Interest and Fiduciary Duties”. This legal duty is commonly referred to as a “fiduciary duty”. However, because our general partner is indirectly owned by VTTI, the officers and directors of our general partner also have a duty to manage us in a manner beneficial to VTTI. As a result of these relationships, conflicts of interest may arise between us and our unaffiliated limited partners on the one hand, and VTTI and its affiliates, including our general partner, on the other hand. The resolution of these conflicts may not be in the best interest of us or our unitholders. In particular:

 

   

certain of our directors will also serve as directors of VTTI or its affiliates and as such will have fiduciary duties to VTTI or its affiliates that may cause them to pursue business strategies that disproportionately benefit VTTI or its affiliates or which otherwise are not in the best interests of us or our unitholders;

 

   

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

 

   

VTTI and its affiliates may compete with us;

 

   

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

 

   

borrowings by us and our affiliates do not constitute a breach of any duty owed by our general partner or our directors to our unitholders, including borrowings that have the purpose or effect of: (1) enabling our general partner or its affiliates to receive distributions on any subordinated units held by them or the incentive distribution rights or (2) hastening the expiration of the subordination period;

 

   

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

 

   

in connection with the offering, we will enter into agreements, including the omnibus agreement, and may enter into additional agreements, with VTTI and certain of its subsidiaries, relating to the purchase of certain assets, the provision of certain services to us by VTTI and its affiliates and other matters. In the performance of their obligations under these agreements, VTTI and its subsidiaries, other than our general partner, are not held to a fiduciary duty standard of care to us, our general partner or our limited partners, but rather to the standard of care specified in these agreements.

 

For a more detailed description of our management structure, please read “Management—Directors and Executive Officers of VTTI Energy Partners GP LLC” and “Certain Relationships and Related Party Transactions”.

 

9


Table of Contents

VTTI has the authority to appoint our general partner’s directors, who in turn appoint our general partner’s officers. Our board of directors will have a conflicts committee composed of independent directors. Our board of directors may, but is not obligated to, seek approval of the conflicts committee for resolutions of conflicts of interest that may arise as a result of the relationships between VTTI and its affiliates, on the one hand, and us and our unaffiliated limited partners, on the other. There can be no assurance that a conflict of interest will be resolved in favor of us.

 

In addition, our partnership agreement contains provisions that restrict the standards to which our general partner would otherwise be held under Marshall Islands law. For example, our partnership agreement limits the liability and restricts the fiduciary duties of our general partner to our unitholders. Our partnership agreement also restricts the remedies available to unitholders. By purchasing a common unit, you are agreeing to the modified standard of fiduciary duties and to certain actions that may be taken by our general partner, all as set forth in the partnership agreement. Please read “Conflicts of Interest and Fiduciary Duties” for a description of the fiduciary duties that would otherwise be imposed on our general partner under Marshall Islands law, the material modifications of those duties contained in our partnership agreement and certain legal rights and remedies available to our unitholders under Marshall Islands law. These provisions of our partnership agreement do not waive or diminish your rights under U.S. federal securities laws.

 

For a description of other relationships we have with our affiliates, please read “Certain Relationships and Related Party Transactions”.

 

VTTI, Vitol and MISC May Compete Against Us

 

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

 

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

 

Principal Executive Offices and Internet Address

 

Our principal executive offices are located at 25-27 Buckingham Palace Road, London, SW1W 0PP, United Kingdom, and our telephone number is +44 20 7973 4200. Following the completion of this offering, our website will be located at www.vttienergypartners.com. We expect to make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission, or SEC, available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute part of this prospectus. See “Where You Can Find More Information” for an explanation of our reporting requirements as a foreign private issuer.

 

Implications of Being an Emerging Growth Company

 

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

 

   

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

 

10


Table of Contents
   

exemption from the auditor attestation requirement in the assessment of the emerging growth company’s internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002;

 

   

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

 

   

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

 

We may take advantage of these provisions until the end of the fiscal year following the fifth anniversary of our initial public offering or such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company if we have more than $1.0 billion in annual revenues, have more than $700 million in market value of our common units held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some, but not all, of these reduced burdens. For as long as we take advantage of the reduced reporting obligations, the information that we provide unitholders may be different than information provided by other public companies.

 

Section 107 of the JOBS Act provides that an emerging growth company can use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards. This permits an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other companies.

 

Formation Transactions

 

We were formed on April 11, 2014 as a Marshall Islands limited partnership to own and operate a portion of the businesses that have historically been owned by VTTI.

 

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

 

   

VTTI will convey its equity interests in VTTI Nederland B.V., VTTI Americas B.V., VTTI SE Asia B.V., Eurotank Belgium B.V. and Fosco Holding Ltd. (collectively, the “Holding Companies”), which own equity interests in Antwerp Terminal & Processing Company N.V., ATT Tanjung Bin Sdn. Bhd., ETT Jetty Operations B.V., ETT Pipeline Operations B.V., Eurotank Amsterdam B.V., Euro Tank Terminal B.V., Seaport Canaveral Corp. and VTTI Fujairah Terminals Ltd (collectively, the “Operating Companies”) to VTTI Operating;

 

   

VTTI will convey to the selling unitholder all of the equity interests in VTTI Operating, including shares that represent an economic interest in VTTI Operating (“profit shares”) and shares with voting rights (“voting shares”);

 

   

the selling unitholder will convey 0.79% of its profit shares in VTTI Operating to the general partner;

 

   

the selling unitholder will convey 38.71% of its profit shares and 51% of its voting shares in VTTI Operating to us in exchange for              common units and                subordinated units;

 

   

the general partner will convey its profit shares in VTTI Operating to us in exchange for maintaining its 2% general partner interest in us;

 

   

we will convey all of our voting and profit shares (constituting a 36% economic interest and a 51% voting interest) in VTTI Operating to VTTI Holdings;

 

11


Table of Contents
   

we will issue to our general partner the incentive distribution rights, which entitle the holder to increasing percentages, up to a maximum of 48.0%, of the cash we distribute in excess of our minimum quarterly distribution of $         per unit per quarter, as described under “Our Cash Distribution Policy and Restrictions on Distributions”;

 

   

the selling unitholder will offer             common units to the public in this offering (             common units if the underwriters exercise their option to purchase             additional common units in full), representing a     % limited partner interest in us;

 

   

VTTI Operating will enter into a new $680.0 million revolving credit facility, or the VTTI Operating Revolving Credit Facility;

 

   

VTTI Operating will repay $380.4 million in intercompany loans with VTTI using drawdowns from the new VTTI Operating Revolving Credit Facility;

 

   

VTTI will convert $233.5 million in intercompany loans with VTTI Operating to equity in VTTI Operating; and

 

   

we will enter into agreements with our general partner and certain of its affiliates, pursuant to which they will agree to, among other things, provide us administrative services, indemnify us for certain liabilities and grant us a right of first offer to acquire the ROFO Assets. See “Certain Relationships and Related Party Transactions”.

 

12


Table of Contents

Simplified Organizational and Ownership Structure After this Offering

 

The following diagram depicts our simplified organizational and ownership structure after giving effect to the offering and related transactions described above:

 

LOGO

 

(1)   VTTI Operating will own 100% of the Operating Companies, except for the Fujairah terminal and the Rotterdam terminal, in which VTTI Operating will own 90% of the economic interest in each of those two terminals, and Fujairah Petroleum Co. and SK Terminal B.V. own the remaining 10%, respectively.

 

     Number of
Units
   Percentage
Ownership
 

Public Common Units(1)

     

Selling Unitholder Common Units(1)

     

Selling Unitholder Subordinated Units

     

General Partner Interest

        2.0
  

 

  

 

 

 
        100.0
  

 

  

 

 

 

 

(1)   Assumes the underwriters do not exercise their option to purchase              additional common units. If the underwriters exercise any part of their option to purchase additional common units, the number of common units shown to be owned by the selling unitholder will be reduced, and the number of common units shown to be owned by the public will be increased, by the number of common units purchased in connection with any such exercise. Accordingly, the exercise of the underwriters’ option will not affect the total number of common units outstanding. If the underwriters’ option is exercised in full, then the selling unitholder would own     % of the common units and the public would own     % of the common units.

 

13


Table of Contents

The Offering

 

Common units offered to the public

            common units; or

 

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

 

Units outstanding after this offering

            common units and             subordinated units, representing a     % and     % limited partner interest in us, respectively. If the underwriters exercise any part of their option to purchase additional common units, the number of common units owned by the selling unitholder will be reduced, and the number of common units owned by the public will be increased, by the number of common units purchased in connection with any such exercise. Accordingly, the exercise of the underwriters’ option will not affect the total number of common units outstanding. In addition, our general partner will own a 2.0% general partner interest in us.

 

Use of proceeds

We will not receive any proceeds from the sale of common units by the selling unitholder in this offering. See “Use of Proceeds” and “Selling Unitholder”.

 

Cash distributions

We intend to make minimum quarterly distributions of $         per common unit ($         per unit on an annualized basis) to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner. In general, we will pay any cash distributions we make each quarter in the following manner:

 

   

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

 

   

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

 

   

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

 

  Within 45 days after the end of each fiscal quarter (beginning with the quarter ending September 30, 2014), we will distribute all of our available cash to unitholders of record on the applicable record date. We will adjust the minimum quarterly distribution for the period from the closing of this offering through September 30, 2014 based on the actual length of the period. Our ability to pay our minimum quarterly distribution is subject to various restrictions and other factors described in more detail under the caption “Our Cash Distribution Policy and Restrictions on Distributions”.

 

 

If cash distributions to our unitholders exceed $         per unit in a quarter, holders of our incentive distribution rights (initially, our general partner) will receive increasing percentages, up to 48.0%, of

 

14


Table of Contents
 

the cash we distribute in excess of that amount. We refer to these distributions as “incentive distributions”. We must distribute all of our cash on hand at the end of each quarter, less reserves established by our general partner’s board of directors to provide for the proper conduct of our business, to comply with any applicable debt instruments or to provide funds for future distributions. We refer to this cash as “available cash”, and we define its meaning in our partnership agreement. The amount of available cash may be greater than or less than the aggregate amount of the minimum quarterly distribution to be distributed on all units.

 

  We believe, based on the estimates contained in and the assumptions listed under “Our Cash Distribution Policy and Restrictions on Distributions—Forecasted Cash Available for Distribution”, that we will have sufficient cash available for distribution to enable us to pay the minimum quarterly distribution of $         on all of our common and subordinated units for each quarter through June 30, 2015. However, unanticipated events may occur that could adversely affect the actual results we achieve during the forecast period. Consequently, our actual results of operations, cash flows and financial condition during the forecast period may vary from the forecast, and such variations may be material. Prospective investors are cautioned not to place undue reliance on the forecast and should make their own independent assessment of our future results of operations, cash flows and financial condition.

 

  See “Our Cash Distribution Policy and Restrictions on Distributions—Forecasted Cash Available for Distribution”.

 

Subordinated units

The selling unitholder will initially own all of our subordinated units. The principal difference between our common units and subordinated units is that in any quarter during the subordination period the subordinated units are entitled to receive the minimum quarterly distribution of $         per unit only after the common units have received the minimum quarterly distribution and arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units will not accrue arrearages. The subordination period generally will end if we have earned and paid at least (1) $         (the minimum quarterly distribution on an annualized basis) on each outstanding common and subordinated unit and the corresponding distribution on the general partner’s 2.0% interest for any three consecutive, non-overlapping four-quarter periods ending on or after June 30, 2017 or (2) $           (150.0% of the annual minimum quarterly distribution) on each outstanding common unit and subordinated unit and the incentive distribution rights for the four-quarter period immediately preceding that date, in each case provided there are no arrearages on our common units at that time. If the subordination period ends as a result of us having met the tests described above, all subordinated units will convert into common units on a one-for-one basis, and the common units will no longer be entitled to arrearages.

 

15


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

 

  See “How We Make Cash Distributions—Subordination Period”.

 

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

Our general partner, as the initial holder of all of our incentive distribution rights, has the right, at a time when there are no subordinated units outstanding and it has received incentive distributions at the highest level to which it is entitled (48%) for each of the prior four consecutive fiscal quarters, to reset the initial cash target distribution levels at higher levels based on the distribution at the time of the exercise of the reset election. If our general partner transfers all or a portion of the incentive distribution rights it holds in the future, then the holder or holders of a majority of our incentive distribution rights will be entitled to exercise this right. Following a reset election by our general partner, the minimum quarterly distribution amount will be reset to an amount equal to the average cash distribution amount per common unit for the two fiscal quarters immediately preceding the reset election (we refer to such amount as the “reset minimum quarterly distribution amount”), and the target distribution levels will be reset to correspondingly higher levels based on the same percentage increases above the reset minimum quarterly distribution amount as our current target distribution levels.

 

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

 

Issuance of additional units

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

 

Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our businesses. Our unitholders will have no right to elect our general partner or its directors on an annual

 

16


Table of Contents
 

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, the selling unitholder will own     % of our outstanding units (or     % of our outstanding units if the underwriters’ option to purchase additional common units is exercised in full). As a result, you will initially be unable to remove our general partner without its consent, because the selling unitholder will own sufficient units upon completion of this offering to be able to prevent the general partner’s removal. See “The Partnership Agreement—Voting Rights”.

 

Limited call right

If at any time our general partner and its affiliates own more than 80.0% of the outstanding common units, our general partner has the right, but not the obligation, to purchase all, but not less than all, of the remaining common units at a price equal to the greater of (x) the average of the daily closing prices of the common units over the 20 trading days preceding the date three days before the notice of exercise of the call right is first mailed and (y) the highest price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon the exercise of this limited call right.

 

U.S. federal income tax consequences

Although we are organized as a partnership, we have elected to be treated as a corporation solely for U.S. federal income tax purposes. Consequently, all or a portion of the distributions you receive from us will constitute dividends for such purposes. The remaining portion of such distributions will be treated first as a non-taxable return of capital to the extent of your tax basis in your common units and, thereafter, as capital gain. We estimate that if you hold the common units that you purchase in this offering through the period ending December 31,         , the distributions you receive, on a cumulative basis, that will constitute dividends for U.S. federal income tax purposes will be approximately     % of the total cash distributions you receive during that period. See “Material U.S. Federal Income Tax Consequences—U.S. Federal Income Taxation of U.S. Holders—Ratio of Dividend Income to Distributions” for the basis of this estimate. See also “Risk Factors—Tax Risks” for a discussion relating to the taxation of dividends. For a discussion of other material U.S. federal income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States, see “Material U.S. Federal Income Tax Consequences”.

 

Non-U.S. tax consequences

We and our general partner have been organized under the laws of the Republic of the Marshall Islands and are expected to be managed and controlled in the United Kingdom. VTTI Operating has been organized under the laws of the Netherlands.

 

17


Table of Contents
  For a discussion of material Marshall Islands, Dutch and U.K. income tax consequences that may be relevant to prospective unitholders and for a discussion of the risk that unitholders may be attributed the activities we undertake in various jurisdictions for taxation purposes, see “Non-United States Tax Consequences” and “Risk Factors—Tax Risks”.

 

Exchange listing

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

 

18


Table of Contents

Summary Historical Financial and Operating Data

 

We were formed in April 2014 and do not have historical financial statements. Therefore, in this prospectus we present the historical financial and operating data of VTTI Energy Partners LP Predecessor, consisting of the combined financial statements of the Holding Companies and the Operating Companies. We refer to our predecessor for accounting purposes as our “Predecessor”.

 

Upon completion of the formation transactions described under “—Formation Transactions”, the Holding Companies and the Operating Companies will become subsidiaries of VTTI Operating and we will own 36% of the profit shares and 51% of the voting shares of VTTI Operating. Since we will control VTTI Operating’s assets and operations through our majority voting interest, our future consolidated financial statements will include VTTI Operating, the Holding Companies and the Operating Companies as consolidated subsidiaries, and the selling unitholder’s 64% interest will be reflected as a non-controlling interest.

 

The summary historical financial data of our Predecessor as of and for the years ended December 31, 2012 and 2013 and the three months ended March 31, 2013 and 2014 has been derived from the audited historical combined carve-out financial statements of our Predecessor and the unaudited condensed combined interim financial statements of our Predecessor, respectively, prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, which are included elsewhere in this prospectus.

 

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

 

Our results of operations, cash flows and financial conditions could differ from those that would have resulted if we operated autonomously or as an entity independent of VTTI in the periods for which historical financial data is presented below, and such data may not be indicative of our future operating results or financial performance.

 

     VTTI Energy Partners LP Predecessor  
     December 31,
2012
    December 31,
2013
    Three Months
Ended
March 31,
2013
    Three Months
Ended
March 31,
2014
 
     (in US$ millions, except operating data)  

Statement of Operations Data:

        

Revenues

   $ 257.6      $ 299.2      $ 71.0      $ 73.5   

Operating costs and expenses:

        

Operating costs

     80.9        88.9        21.7        23.6   

Depreciation and amortization

     55.5        67.4        16.5        17.5   

Selling, general and administrative

     20.7        22.9        5.4        6.0   

Other operating expenses

     0.6        0.9        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     157.7        180.1        43.6        47.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income

     99.9        119.1        27.4        26.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

        

Interest expense, including affiliates

     (18.9     (30.0     (7.4     (7.5

Other expenses

     (0.7     (1.4     (0.4     (0.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (19.6     (31.4     (7.8     (7.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     80.3        87.7        19.6        18.6   

Income tax expense

     (14.2     (17.7     (3.6     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 66.1      $ 70.0      $ 16.0      $ 18.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-controlling interest

     (5.2     (5.5     (1.3     (1.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to parents’ equity

   $ 60.9      $ 64.5      $ 14.7      $ 17.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents
    VTTI Energy Partners LP Predecessor  
    December 31,
2012
    December 31,
2013
    Three Months
Ended

March  31,
2013
    Three Months
Ended

March  31,
2014
 
                (unaudited)     (unaudited)  
    (in US$ millions, except operating data)  

Statement of Cash Flow Data:

       

Net cash provided by operating activities

  $ 121.1      $ 149.9      $ 30.6      $ 27.7   

Net cash used in investing activities

    (146.1     (84.7     (19.0)        (11.9)   

Net cash provided by (used in) financing activities

    54.5        (51.0     3.5        (13.4)   

Other Financial Data:

       

Adjusted EBITDA(1)

  $ 155.4      $ 186.5      $ 43.9      $ 43.9   

Balance Sheet Data (at period end):

       

Cash and cash equivalents

  $ 38.7      $ 54.5        $ 56.8   

Total assets

    1,584.4        1,658.5          1,660.0   

Total liabilities

    880.8        1,012.8          1,007.2   

Total owner’s equity

    703.6        645.7          652.8   

Operating Data:

       

Gross storage capacity, end of period (MMBbls)

    35.3        35.5          35.5   

 

(1)   We define Adjusted EBITDA as net income (loss) before interest expense, income tax expense and depreciation and amortization expense, as further adjusted to reflect certain other non-cash and non-recurring items.

 

Adjusted EBITDA is a non-GAAP supplemental financial measure that management and external users of our combined financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess our operating performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or financing methods, and the viability of acquisitions and other capital expenditure projects and the returns on investment in various opportunities.

 

We believe that the presentation of Adjusted EBITDA in this prospectus provides useful information to management in assessing our financial condition and results of operations. The U.S. 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 U.S. 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 U.S. GAAP. Because Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of Adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing its utility. The following table reconciles Adjusted EBITDA to net income for each of the periods indicated.

 

     Year Ended
December 31,
2012
     Year Ended
December 31,
2013
     Three  Months
Ended

March 31,
2013
     Three  Months
Ended

March 31,
2014
 
                   (unaudited)      (unaudited)  
     (in US$ millions)  

Net income

   $             66.1       $             70.0       $         16.0       $         18.6   

Interest expense, including affiliates

     18.9         30.0         7.4         7.5   

Other financial items(a)

     0.7         1.4         0.4         0.3   

Depreciation and amortization

     55.5         67.4         16.5         17.5   

Income tax expense

     14.2         17.7         3.6         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 155.4       $ 186.5       $ 43.9       $ 43.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (a)   Other financial items consist of other finance expense, realized and unrealized loss on derivative instruments and net loss on foreign currency transactions.

 

20


Table of Contents

RISK FACTORS

 

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

 

Risks Inherent in Our Business

 

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

 

We may not have sufficient cash each quarter to pay the full amount of our minimum quarterly distribution of $         per unit, or $         per unit per year, which will require us to have available cash of approximately $         million per quarter, or $         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 refined petroleum products and crude oil we handle;

 

   

the terminaling services fees with respect to volumes that we handle;

 

   

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

 

   

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

 

   

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

 

   

prevailing economic and market conditions;

 

   

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

 

   

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

 

   

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

 

   

changes in tax laws;

 

   

weather conditions; and

 

   

force majeure.

 

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;

 

21


Table of Contents
   

our ability to borrow funds and access capital markets;

 

   

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

 

   

the amount of cash reserves established by our general partner.

 

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

 

Our pro forma cash available for distribution for the four most recent fiscal quarters and for the fiscal year ended December 31, 2013, may not have been sufficient to pay 100% of the aggregate minimum quarterly distribution on all of our common and subordinated units during those periods.

 

We must generate approximately $             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. Because we have not prepared a pro forma condensed statement of income to demonstrate what our pro forma cash available for distribution would have been for the four most recent fiscal quarters and for the fiscal year ended December 31, 2013, it is possible that such amounts may not have been sufficient to pay 100% of the aggregate minimum quarterly distribution on all of our common and subordinated units during those periods. For a calculation of our ability to make future cash distributions to our unitholders based on our historical as adjusted results, please read “Cash Distribution Policy and Restrictions on Distributions.” If we are not able to generate additional cash for distribution to our unitholders in future periods, we may not be able to pay the full minimum quarterly distribution or any amount on our common or subordinated units, in which event the market price of our common units may decline materially.

 

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

 

The forecast of cash available for distribution set forth in “Our Cash Distribution Policy and Restrictions on Distributions” includes our forecast of our results of operations and cash available for distribution for the twelve months ending June 30, 2015. Our ability to pay the full minimum quarterly distribution in the forecast period is based on a number of assumptions that may not prove to be correct, which are discussed in “Our Cash Distribution Policy and Restrictions on Distributions”.

 

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

 

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

 

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

 

22


Table of Contents

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

 

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

 

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 terminaling services agreements may be reduced, suspended or terminated, which would adversely affect our financial condition and results of operations.

 

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

 

   

catastrophic events, including hurricanes and floods;

 

   

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

 

   

environmental remediation;

 

   

labor difficulties; and

 

   

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

 

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

 

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

 

Our financial results depend on the demand for refined petroleum products and crude oil, and general economic downturns could result in lower demand for these products for a sustained period of time.

 

There has historically been a strong link between the development of the world economy and demand for energy, including oil and natural gas. The world economy is currently facing a number of challenges. Any sustained decrease in demand for refined petroleum products and crude oil in the markets served by our terminals could result in a significant reduction in storage usage in our terminals, which would reduce our cash flow and our ability to make distributions to our unitholders. Due to our lack of diversification in asset type, an adverse development in this business could have a significantly greater impact on our results of operations and cash available for distribution to our unitholders than if we maintained more diverse assets.

 

23


Table of Contents

Our financial results may also be affected by uncertain or changing economic conditions within certain regions, including the challenges that have recently affected the economic conditions in Europe and the United States. If economic and market conditions remain uncertain or adverse conditions persist, spread or deteriorate further, we may experience material impacts on our business, financial condition and results of operations.

 

Furthermore, if global events were to change international trade patterns and shift the global flow of oil to other regions of the world, our terminals may no longer be strategically located. Large independent terminal operators are strategically located near major supply and demand hubs which naturally form along export routes of a supply-source or at well-situated demand centers. If macroeconomic events, such as a severe economic recession or depression, were to shift the global flow of oil to other regions of the world and away from the regions we currently service, our terminals may not be optimally positioned to service the new centers. Such shifts could adversely affect our results of operations and financial condition and our ability to make distributions to our unitholders.

 

Other factors that could lead to a sustained decrease in market demand for refined petroleum products and crude oil include:

 

   

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

 

   

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

 

   

a sustained increase in the market price of crude oil or shortage of refining capacity that leads to higher refined petroleum product prices;

 

   

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.

 

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

 

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

 

As of June 30, 2014, after giving effect to VTTI’s guarantee pursuant to the omnibus agreement of the rates of certain capacity currently contracted by Vitol for a specified period of time after the Vitol terminaling services agreements expire, the average remaining tenor of our terminaling services agreements was more than four years. Terminaling services agreements that account for an aggregate of 1.6% of our expected revenues for the twelve months ending June 30, 2015, including agreements with Vitol, could expire or be terminated by our customers without penalty within the same period. If any one or more of our key customers does not renew or extend its terminaling services agreement after expiration of the applicable commitment, or if we are unable to renew or extend such agreement at comparable or higher pricing, our ability to make cash distributions to unitholders will be reduced. Additionally, we may incur substantial costs if modifications to our terminals are required by a new or renegotiated terminal services agreement. The occurrence of any one or more of these events could have a material impact on our financial condition and results of operations.

 

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

 

We are subject to the risk of loss resulting from nonpayment or nonperformance by VTTI and our customers. Our credit procedures and policies may not be adequate to fully eliminate customer credit risk. If we

 

24


Table of Contents

fail to adequately assess the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our inability to re-market or otherwise use the storage capacity could have a material adverse effect on our business, financial condition, results of operations and ability to pay distributions to our unitholders. In addition, some of our customers may have material financial and liquidity issues or may, as a result of operational incidents or other events, be disproportionately affected as compared to larger, better capitalized companies. Also, pursuant to the omnibus agreement that we will enter into in connection with the closing of this offering, VTTI will guarantee the rates of certain capacity currently contracted by Vitol for a specified period of time after the Vitol terminaling services agreements expire. Any material nonpayment or nonperformance by VTTI or any of our key customers could have a material adverse effect on our revenue and cash flows and our ability to make cash distributions to our unitholders.

 

We depend on Vitol and a relatively limited number of our other key customers for a significant portion of our revenues.

 

A significant percentage of our revenue is attributable to a relatively limited number of customers, including Vitol. Our top five customers accounted for approximately 93% and 94% of our revenue for the year ended December 31, 2013 and the three months ended March 31, 2014, respectively. Vitol individually accounted for approximately 76% and 79% of our revenue for the year ended December 31, 2013 and the three months ended March 31, 2014, respectively. Because of Vitol’s position as a major customer of our business, events which adversely affect Vitol’s creditworthiness may, in particular, adversely affect our financial condition or results of operations. If we acquire additional terminals from VTTI pursuant to our right of first offer or otherwise, or if we enter into new or expanded agreements, the percentage of our revenue generated by Vitol may increase and our exposure to these risks would increase. Further, if Vitol does not renew certain terminaling services agreements, at the end of any such agreement’s duration, VTTI will either contract a third-party customer to replace Vitol’s commitments at that terminal or reimburse us for any losses resulting from Vitol’s expiring contract for a certain period. If such were to occur, we would then rely on VTTI for an increased percentage of our revenue. 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.

 

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

 

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

 

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

 

Furthermore, we may be unable to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies

 

25


Table of Contents

have increased and could escalate further. In addition sub-limits have been imposed for certain risks. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we are not fully insured, it could have a material adverse effect on our financial condition, results of operations and cash available for distribution to unitholders.

 

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

 

Because we do not own any of the crude oil or refined petroleum products that we handle and do not engage in the trading of refined petroleum products or crude oil, we have minimal direct exposure to risks associated with fluctuating commodity prices. These risks do, however, indirectly influence our activities and results of operations over the long term. Petroleum product prices may be contango (future prices higher than current prices) or backwardated (future prices lower than current prices) depending on market expectations for future supply and demand. In either situation, our customers regularly move products through our terminals. However, if the prices of refined products and crude oil become relatively stable, the market remains in a prolonged backwardated state, or if federal or state regulations are passed that discourage our customers from storing those commodities, demand for our terminaling services could decrease, in which case we may be unable to renew contracts for our terminaling services or be forced to reduce the rates we charge for our terminaling services, either of which would reduce the amount of cash we generate. Further, changes in product specifications could reduce the need for our customers to contract for terminal services.

 

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

 

We compete with terminal and storage companies, including major integrated oil companies, of widely varying sizes, financial resources and experience that may be able to supply our customers with terminaling services on a more competitive basis. Our ability to compete could be harmed by factors we cannot control, including:

 

   

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

 

   

the perception that another company may provide better service; and

 

   

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

 

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

 

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

 

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

 

26


Table of Contents

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

 

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

 

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

 

   

mistaken assumptions about revenues and costs, including synergies;

 

   

an inability to integrate successfully the businesses we acquire;

 

   

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

 

   

the assumption of unknown liabilities;

 

   

limitations on rights to indemnity from the seller;

 

   

mistaken assumptions about the overall costs of equity or debt;

 

   

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

 

   

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

 

   

customer or key employee losses at the acquired businesses.

 

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

 

We will enter into an omnibus agreement with VTTI that exposes us to various risks and uncertainties.

 

In connection with the closing of this offering, we will enter into an omnibus agreement with VTTI. Pursuant to this agreement, we will have a right of first offer to purchase the remaining 64% of the profit shares of VTTI Operating and other currently owned and future terminaling and related energy infrastructure assets held by VTTI, which assets we refer to as our “ROFO Assets”, if VTTI decides to sell them. See “Business—Our Assets—Our ROFO Assets”. The consummation and timing of any future acquisitions pursuant to this right will depend upon, among other things, VTTI’s willingness to offer a subject asset for sale and obtain any necessary consents, the determination that the asset is suitable for our business at that particular time, our ability to agree on a mutually acceptable price, our ability to negotiate an acceptable purchase agreement and terminal services agreement with respect to the asset and our ability to obtain financing on acceptable terms. We can offer no assurance that we will be

 

27


Table of Contents

able to successfully consummate any future acquisitions pursuant to our right of first offer, and VTTI is under no obligation to accept any offer that we may choose to make. In addition, we may decide not to exercise our right of first offer if and when any ROFO Assets are offered for sale, and our decision will not be subject to unitholder approval.

 

Also pursuant to the omnibus agreement, VTTI will guarantee the rates of certain capacity currently contracted by Vitol for a specified period of time after the Vitol terminaling services agreements expire, resulting in an overall weighted average contract tenor as of June 30, 2014, of more than four years. In addition, VTTI will agree, for a period of five years from the closing of this offering, to make us whole, in certain circumstances, for certain environmental liabilities, tax liabilities and defects in title to the assets contributed to us by VTTI. See “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement”. If VTTI is unable or unwilling to perform such guarantee or indemnification, it could have a material adverse effect on our financial position, results of operations or cash flows and our ability to make cash distributions to unitholders will be reduced.

 

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

 

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

 

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

 

For the year ended December 31, 2013 and the three months ended March 31, 2014, we generated approximately 12% and 7% of our revenues, respectively, from excess throughput and ancillary fees. Our storage customers pay us excess throughput fees to receive product volume on their behalf that exceeds the base storage services contemplated in their agreed upon monthly storage services fee. Our storage customers pay us ancillary fees for services such as mixing, blending and heating petroleum products and transferring products between our tanks or to rail or truck.

 

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

 

28


Table of Contents

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

 

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

 

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

 

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

 

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

 

Our operations involve the transport and storage of refined petroleum products and crude oil and are subject to international, 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 international, 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, in the ordinary course of business, accidental spills, discharges or other releases of petroleum or hazardous substances into the environment and neighboring areas may occur, 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 in certain regions, such as the United States and Europe, our industry is experiencing greater scrutiny. The cost of compliance with these requirements can be expected to increase over time. These expenditures or costs for environmental, health, and safety compliance could have a material adverse effect on our financial condition, results of operations or cash flows.

 

We could incur significant costs and liabilities in responding to contamination that has or will occur at our facilities.

 

Many of our terminal facilities have been used for transportation, storage and distribution of refined petroleum products and crude oil for a number of years. Although we have utilized operating and disposal

 

29


Table of Contents

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, certain of our 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. Our terminal properties are subject to international, federal, state and local laws that impose investigatory and remedial obligations, some of which are joint and several or strict liability obligations without regard to fault, to address and prevent environmental contamination. We may incur significant costs and liabilities in responding to any soil and groundwater contamination that occurs on our properties, even if the contamination was caused by prior owners and operators of our facilities.

 

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

 

There is a growing belief that emissions of greenhouse gases, or GHGs, such as carbon dioxide and methane, may be linked to climate change. Climate change and the costs that may be associated with its impacts and the regulation of GHGs have the potential to affect our business in many ways, including negatively impacting the costs we incur in providing our services and the demand for our services (due to change in both costs and weather patterns). In February 2005, the Kyoto Protocol to the United Nations Framework Convention on Climate Change, or the Kyoto Protocol, entered into force. Many of the countries in which we do business (but not the United States) ratified the Kyoto Protocol, and we have been subject to its requirements, particularly in the European Union. The first commitment period of the Kyoto Protocol ended in 2012, and in December 2009, many nations (including the United States), entered into the Copenhagen Accord, which may result in a new international climate change treaty in the future. If so, we may become subject to different and more restrictive regulation on climate change to the extent the countries in which we do business implement such a new treaty. Further, it is not clear yet what countries in the European Union (or the United States) may do to implement the Copenhagen Accord or subsequent commitment periods under the Kyoto Protocol.

 

Although it is not possible at this time to accurately estimate how potential future laws or regulations addressing GHG emissions would impact our business, any future international or federal laws or implementing regulations that may be adopted to address GHG emissions could require us to incur increased operating costs and could adversely affect demand for the refined petroleum products and crude oil we store. The potential increase in the costs of our operations resulting from any legislation or regulation to restrict emissions of GHGs could include new or increased costs to operate and maintain our facilities, install new emission controls on our facilities, acquire allowances to authorize our greenhouse gas emissions, pay any taxes related to our GHG emissions and administer and manage a GHG emissions program. While we may be able to include some or all of such increased costs in the rates charged for our services, such recovery of costs is uncertain. Moreover, incentives to conserve energy or use alternative energy sources could reduce demand for our services. We cannot predict with any certainty at this time how these possibilities may affect our operations. Many scientists have concluded that increasing concentrations of GHGs in the Earth’s atmosphere may produce climate change that could have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climatic events; if such effects were to occur, they could have an adverse effect on our operations.

 

Debt that we, VTTI or our subsidiaries incur in the future may limit our flexibility to obtain financing and to pursue other business opportunities.

 

In connection with the closing of this offering, we expect that VTTI Operating will enter into the VTTI Operating Revolving Credit Facility. Further, a subsidiary of VTTI Operating, ATT Tanjung Bin Sdn. Bhd., or ATB, has entered into a $230 million loan agreement, the Johore Facility, to finance the construction of our Johore terminal. We refer to the VTTI Operating Revolving Credit Facility and the Johore Facility as our Credit Facilities. Our future level of debt and the future level of debt of VTTI or our subsidiaries could have important consequences to us, including the following:

 

   

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

 

30


Table of Contents
   

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

 

   

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

 

   

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

 

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

 

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

 

The operating and financial restrictions and covenants in our Credit Facilities could limit our and our subsidiaries’ ability to, among other things:

 

   

incur or guarantee additional debt;

 

   

make distributions on or redeem or repurchase units;

 

   

make certain investments and acquisitions;

 

   

make capital expenditures;

 

   

abandon ongoing capital expenditures;

 

   

incur certain liens or permit them to exist;

 

   

enter into certain types of transactions with affiliates;

 

   

merge or consolidate with another company; and

 

   

transfer, sell or otherwise dispose of assets.

 

Due to its ownership and control of our general partner, VTTI has the ability to prevent VTTI Operating and us from taking actions that would cause VTTI to violate any covenants in, or otherwise to be in default under, the VTTI Revolving Credit Facility. In deciding whether to prevent VTTI Operating or us from taking any such action, VTTI will have no fiduciary duty to us or our unitholders. Moreover, if we desire to take any action, to the extent such action would not be permitted under the VTTI Revolving Credit Facility, VTTI would be required to seek the consent of the lenders under its revolving credit facility. VTTI’s compliance with the covenants in its revolving credit facility may restrict our ability to undertake certain actions that might otherwise be considered beneficial to us, including borrowing under the VTTI Operating Revolving Credit Facility to finance operations or expansions or to distribute cash to our unitholders.

 

Any debt instruments that VTTI or any of its affiliates enter into in the future, including any amendments to our Credit Facilities, may include additional or more restrictive limitations that may impact our ability to conduct our business. These additional restrictions could adversely affect our ability to finance our future operations or capital needs or engage in, expand or pursue our business activities.

 

We expect that the VTTI Revolving Credit Facility and the VTTI Operating Revolving Credit Facility will contain covenants requiring it to maintain certain financial ratios. Its ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that it will meet those ratios and tests.

 

31


Table of Contents

In addition, we expect that the VTTI Revolving Credit Facility and the VTTI Operating Revolving Credit Facility will contain events of default customary for transactions of this nature, including:

 

   

failure to make payments;

 

   

failure to comply with covenants and financial ratios;

 

   

institution of insolvency or similar proceedings; and

 

   

occurrence of a change of control.

 

We also expect that the VTTI Revolving Credit Facility and the VTTI Operating Revolving Credit Facility will have cross default provisions that apply to any other material indebtedness that we may have.

 

The provisions of our Credit Facilities may affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the provisions of our Credit Facilities could result in a default or an event of default that could enable its lenders to declare the outstanding principal of that debt, together with accrued and unpaid interest, to be immediately due and payable. Such event of default would also permit lenders to foreclose on our assets serving as collateral for the obligations under our Credit Facilities. If the payment of the debt is accelerated, its assets may be insufficient to repay such debt in full. As a result, our results of operations and, therefore, our ability to distribute cash to unitholders, could be materially and adversely affected, and our unitholders could experience a partial or total loss of their investment. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Our Credit Facilities”.

 

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

 

The adoption of derivatives legislation could have an adverse impact on our and our customers’ ability to hedge business risks.

 

Certain countries have adopted or are considering adopting legislation that regulates derivative transactions, which include certain instruments used in our risk management activities. For example, in the United States the Dodd-Frank Act was signed into law in July 2010. The Dodd-Frank Act requires the Commodity Futures Trading Commission, or the CFTC, and the SEC to promulgate rules and regulations relating to, among other things, swaps, participants in the derivatives markets, clearing of swaps and reporting of swap transactions. In general, the Dodd-Frank Act subjects swap transactions and participants to greater regulation and supervision by the CFTC and the SEC and will require many swaps to be cleared through a CFTC- or SEC-registered clearing facility and executed on a designated exchange or swap execution facility. Among the other provisions of the Dodd-Frank Act that may affect derivative transactions are those relating to the establishment of capital and margin requirements for certain derivative participants; establishment of business conduct standards, recordkeeping and reporting requirements; and imposition of position limits. Legislation and regulations such as the Dodd-Frank Act 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.

 

32


Table of Contents

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

 

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

 

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

 

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

 

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

 

Although we will be required to disclose changes made in our internal control and procedures on an annual basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the fiscal year ending December 31, 2015. In addition, pursuant to the recently enacted JOBS Act, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an “emerging growth company”, which may be up to five full fiscal years following this offering.

 

Our international operations involve additional risks, which could adversely affect our business.

 

As a result of our international operations, we may be exposed to economic, political and other uncertainties, including risks of:

 

   

terrorist acts, armed hostilities, war and civil disturbances;

 

   

significant governmental influence over many aspects of local economies;

 

   

seizure, nationalization or expropriation of property or equipment;

 

   

repudiation, nullification, modification or renegotiation of contracts;

 

   

limitations on insurance coverage, such as war risk coverage, in certain areas;

 

   

political unrest;

 

33


Table of Contents
   

foreign and U.S. monetary policy and foreign currency fluctuations and devaluations;

 

   

the inability to repatriate income or capital;

 

   

complications associated with repairing and replacing equipment in remote locations;

 

   

import-export quotas, wage and price controls, imposition of trade barriers;

 

   

U.S. and foreign sanctions or trade embargoes;

 

   

regulatory or financial requirements to comply with foreign bureaucratic actions;

 

   

changing taxation policies, including confiscatory taxation;

 

   

other forms of government regulation and economic conditions that are beyond our control; and

 

   

governmental corruption.

 

Any disruption caused by these factors could have a material adverse effect on the growth of our business, financial condition, results of operations and ability to make distributions to unitholders.

 

Fluctuations in exchange rates or exchange controls could result in losses to us.

 

As a result of our international operations, we are exposed to fluctuations in foreign exchange rates due to revenues being received and operating expenses paid in currencies other than U.S. dollars. Accordingly, we may experience currency exchange losses if we have not fully hedged our exposure to a foreign currency, or if revenues are received in currencies that are not readily convertible. We may also be unable to collect revenues because of a shortage of convertible currency available to the country of operation, controls over the repatriation of income or capital or controls over currency exchange.

 

We are exposed with respect to our terminals in Europe which receive their revenue in Euro. Although we are currently offsetting our Euro revenues with our operating costs denominated in Euro, if, in the future, we are required to receive a greater portion of our revenues in Euro, we may be unable to offset such revenue with operating expenses owed in Euro and, as a result, may incur substantial foreign exchange losses. We also have operating expenses in other currencies, such as the Malaysian Ringgit and the UAE dirham. Exchanges at market rates may result in substantial foreign exchange losses.

 

Failure to comply with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and other similar statutes in the countries in which we operate could result in fines, criminal penalties, drilling contract terminations and an adverse effect on our business.

 

VTTI currently operates its terminals in a number of countries throughout the world, including some with developing economies. Also, the existence of state or government-owned oil-related enterprises puts VTTI in contact with persons who may be considered “foreign officials” or “foreign public officials” under the U.S. Foreign Corrupt Practices Act of 1977, or the FCPA, and the Bribery Act 2010 of the Parliament of the United Kingdom, or the U.K. Bribery Act, respectively. We are committed to doing business in accordance with all applicable anti-corruption laws and have adopted a code of business conduct and ethics, as well as recordkeeping and internal accounting controls, which are consistent and in full compliance with the FCPA and the U.K. Bribery Act. We are subject, however, to the risk that we, VTTI, our affiliated entities or our or their respective officers, directors, employees and agents may take actions determined to be in violation of such anti-corruption laws, including the FCPA and the U.K. Bribery Act. Any such violation could result in substantial fines, sanctions, civil and/or criminal penalties, curtailment of VTTI’s operations in certain jurisdictions, and might adversely affect our business, results of operations or financial condition. In addition, actual or alleged violations could damage our reputation and ability to do business. Furthermore, detecting, investigating and resolving actual or alleged violations would be expensive and consume significant time and attention of our senior management.

 

34


Table of Contents

In order to effectively compete in some foreign jurisdictions, we may utilize local agents and/or establish joint ventures with local operators or strategic partners. All of these activities involve interaction by our agents with non-U.S. government officials. Even though some of our agents and partners may not themselves be subject to the FCPA, the U.K. Bribery Act or other anti-bribery laws to which we may be subject, if our agents or partners make improper payments to non-U.S. government officials in connection with engagements or partnerships with us, we could be investigated and potentially found liable for violation of such anti-bribery laws and could incur civil and criminal penalties and other sanctions, which could have a material adverse effect on our business, financial position, results of operations and cash flows.

 

If VTTI’s business activities involve countries, entities and individuals that are subject to restrictions imposed by the U.S. or other governments, we could be subject to enforcement action and our reputation and the market for our common units could be adversely affected.

 

U.S. sanctions have been tightened in recent years to target the activities of non-U.S. companies, such as us. In particular, sanctions against Iran have been significantly expanded. In 2010, the U.S. enacted the Comprehensive Iran Sanctions Accountability and Divestment Act, or CISADA, which expanded the scope of the Iran Sanctions Act. Among other things, CISADA expands the prohibitions applicable to non-U.S. companies, such as us, and introduces limits on the ability of companies and persons to do business or trade with Iran when such activities relate to the investment, supply or export of refined petroleum or petroleum products.

 

On August 10, 2012, the U.S. signed into law the Iran Threat Reduction and Syria Human Rights Act of 2012, or the Iran Threat Reduction Act, which places further restrictions on the ability of non-U.S. companies to do business or trade with Iran and Syria. Perhaps the most significant provision in the Iran Threat Reduction Act is that prohibitions in the existing Iran sanctions applicable to U.S. persons will now apply to any foreign entity owned or controlled by a U.S. person (essentially making the U.S. sanctions against Iran as expansive as U.S. sanctions against Cuba). However, we do not believe this provision is applicable to us, as we are primarily owned and controlled by non-U.S. persons.

 

The other major provision in the Iran Threat Reduction Act is that issuers of securities must disclose to the SEC in their annual and quarterly reports filed after February 6, 2013 if the issuer or “any affiliate” has “knowingly” engaged in certain activities involving Iran or other sanctioned entities during the timeframe covered by the report. The disclosure must describe the nature and extent of the activity in detail and the SEC will publish the disclosure on its website. For certain disclosed activities, the President must then initiate an investigation and determine whether sanctions on the issuer or its affiliate will be imposed. Such negative publicity and the possibility that sanctions could be imposed would present a risk for any issuer that is knowingly engaged in disclosable conduct or that has an affiliate that is knowingly engaged in such conduct. At this time, we are not aware of any activity on the part of VTTI that would trigger an SEC disclosure requirement, although if we or any of our affiliates engage in any of these activities, VTTI, as an issuer, would be required to make a disclosure under the Iran Threat Reduction Act.

 

In addition to the sanctions against Iran, U.S. law continues to restrict U.S. owned or controlled entities from doing business with Cuba and various U.S. sanctions have certain other extraterritorial effects that need to be considered by non-U.S. companies. Moreover, any U.S. persons who serve as officers, directors or employees of VTTI would be fully subject to U.S. sanctions. It should also be noted that other governments are more frequently implementing versions of U.S. sanctions. VTTI does not currently have any contracts or plans to initiate any contracts involving operations in countries or with government-controlled entities that are subject to sanctions and embargoes imposed by the U.S. government and/or identified by the U.S. government as state sponsors of terrorism. However, from time to time, VTTI may enter into contracts with customers, including affiliates, who have operations in countries or who contract with government-controlled entities that are subject to sanctions and embargoes imposed by the U.S. government and/or identified by the U.S. government as state sponsors of terrorism in cases where entering into such customer contracts would not violate U.S. law. This could

 

35


Table of Contents

negatively affect our ability to obtain investors, which could adversely affect our reputation and the market for our common units. As stated above, we believe that we are in compliance with all applicable sanctions and embargo laws and regulations, and intend to maintain such compliance. However, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations. Any such violation could result in fines or other penalties and could result in some investors deciding, or being required, to divest their interest, or not to invest, in our common units. Investor perception of the value of our common units may also be adversely affected by the consequences of war, the effects of terrorism, civil unrest and governmental actions in these and surrounding countries.

 

Tax liabilities associated with indirect taxes on the products we service could result in losses to us.

 

In the majority of jurisdictions in which we operate, the refined petroleum products and crude oil that we store for our customers are subject to numerous duties or taxes that are not based on income, sometimes referred to as “indirect taxes”, including import duties, excise duties, environmental levies and sales or value-added taxes. In these jurisdictions, we may be found jointly liable for taxes arising from non-compliance with reporting or record keeping requirements relating to these indirect taxes. Where feasible, we have obtained permits from the relevant customs or tax authorities to suspend such duties and taxes and, under the general terms and conditions of our terminaling services agreements, we are typically entitled to pass these costs on to our customers. Tax liabilities may still occur, however, and could result in an adverse effect on our results of operation and cash flow.

 

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

 

Our facilities may be subject to terrorist attacks. Any terrorist attack at our facilities, those of our customers and, in some cases, those of other pipelines, refineries, or terminals could materially and adversely affect our financial condition, results of operations or cash flows.

 

Risks Inherent in an Investment in Us

 

Our general partner and its affiliates, including VTTI, 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 indirect parent, VTTI, will indirectly own a     % limited partner interest in us, will indirectly own and control our general partner and will appoint all of the directors and officers of our general partner, some of whom will also be directors and officers of VTTI. Although the directors and officers of our general partner have a duty to manage us in a manner that they subjectively believe is in our best interests, they also have a duty to manage us in a manner that is beneficial to VTTI. Therefore, conflicts of interest may arise between VTTI and our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts of interest, our general partner may favor its own interests and the interests of VTTI 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 VTTI, in resolving conflicts of interest, which has the effect of limiting its duties to our unitholders;

 

   

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

 

   

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. Specifically, our general partner will be considered to be acting in its individual capacity if it exercises its call right, pre-emptive rights or registration rights, consents or withholds consent to any merger or consolidation of the partnership, appoints any directors or votes for the election of any director, votes or refrains from voting on

 

36


Table of Contents
 

amendments to our partnership agreement that require a vote of the outstanding units, voluntarily withdraws from the partnership, transfers (to the extent permitted under our partnership agreement) or refrains from transferring its units or general partner interest or votes upon the dissolution of the partnership;

 

   

our general partner and our directors have limited their liabilities and restricted their fiduciary duties under the laws of the Marshall Islands, while also restricting the remedies available to our unitholders, and, as a result of purchasing common units, unitholders are treated as having agreed to the modified standard of fiduciary duties and to certain actions that may be taken by our general partner and our directors, all as set forth in the partnership agreement;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

our partnership agreement permits us to distribute up to $         million as operating surplus, even if it is generated from asset sales, non-working capital borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions on our subordinated units or to our general partner in respect of the 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 all of the common units not owned by it and its affiliates if it and its affiliates own more than 80% of the common units and our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon the exercise of such right;

 

   

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

 

   

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

 

Under the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our general partner or any of its affiliates, including its executive officers, directors and owners. Any such person or entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Any such person or entity will not be liable to us or to any limited partner for breach of any fiduciary duty

 

37


Table of Contents

or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not communicate such opportunity or information to us. This may create actual and potential conflicts of interest between us and affiliates of our general partner and result in less than favorable treatment of us and our unitholders. See “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement” and “Conflicts of Interest and Fiduciary Duties”.

 

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

 

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

 

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

 

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

 

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

 

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

 

   

the amount and timing of asset purchases and sales;

 

   

cash expenditures;

 

   

borrowings;

 

   

the issuance of additional units; and

 

   

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

 

Our general partner determines the amount and timing of any capital expenditures and whether a capital expenditure is classified as a maintenance capital expenditure, which reduces operating surplus, or an expansion

 

38


Table of Contents

capital expenditure, which does not reduce operating surplus. This determination can affect the amount of cash that is distributed to our unitholders and to our general partner and the ability of the subordinated units to convert into common units.

 

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

 

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

 

   

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

 

   

accelerating the expiration of the subordination period.

 

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

 

Our partnership agreement limits our general partner’s and our directors’ fiduciary duties to holders of our common units.

 

Our partnership agreement contains provisions that restrict the standards to which our general partner and directors would otherwise be held by Marshall Islands 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. Where our partnership agreement permits, our general partner may consider only the interests and factors that it desires, and in such cases it has no fiduciary duty or obligation to give any consideration to any interest of, or factors affecting us, our affiliates or our unitholders. Decisions made by our general partner in its individual capacity will be made by its board of directors, which will be appointed by VTTI. Specifically, pursuant to our partnership agreement, our general partner will be considered to be acting in its individual capacity if it exercises its call right, pre-emptive rights or registration rights, consents or withholds consent to any merger or consolidation of the partnership, appoints any directors or votes for the election of any director, votes or refrains from voting on amendments to our partnership agreement that require a vote of the outstanding units, voluntarily withdraws from the partnership, transfers (to the extent permitted under our partnership agreement) or refrains from transferring its units or general partner interest or votes upon the dissolution of the partnership;

 

   

provides that our general partner and our directors are entitled to make other decisions they subjectively believe are in our best interests;

 

   

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

 

   

provides that neither our general partner nor our officers or our directors will be liable for monetary damages to us, our limited partners or assignees for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or our officers or directors or those other persons engaged in actual fraud or willful misconduct.

 

39


Table of Contents

In order to become a limited partner of our partnership, a common unitholder is required to agree to be bound by the provisions in the partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Fiduciary Duties—Fiduciary Duties”.

 

VTTI 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. Affiliates of our general partner, including VTTI, are not prohibited from engaging in other businesses or activities, including those that might be in direct competition with us. VTTI currently holds interests in other terminals and may make investments in, develop or purchase additional terminals. These investments and acquisitions may include entities or assets that we would have been interested in acquiring. Therefore, VTTI may compete with us for investment opportunities and may own interests in entities that compete with us.

 

Our general partner, as the initial owner 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 the 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, as the initial owner of our incentive distribution rights, has the right, at any time when there are no subordinated units outstanding and payments have been paid on incentive distributions at the highest level to which they are entitled (48.0%) for each of the prior four consecutive whole fiscal quarters and the amount of each such distribution did not exceed the adjusted operating surplus for such quarter, to reset the initial target distribution levels at higher levels based on our cash distributions at the time of the exercise of the reset election. Following a reset election by our 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 the same percentage increases above the reset minimum quarterly distribution as the current target distribution levels.

 

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

 

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

 

Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Our unitholders will have no right on an annual or ongoing basis to elect our general partner or its board of directors. The board of directors of our general partner, including the independent directors, is chosen entirely by VTTI,

 

40


Table of Contents

as a result of its owning our general partner, and not by our unitholders. See “Management—Management of VTTI Energy Partners LP” and “Certain Relationships and Related Party Transactions”. Unlike publicly traded corporations, we will not conduct annual meetings of our unitholders to elect directors or conduct other matters routinely conducted at annual meetings of stockholders of corporations. As a result of these limitations, the price at which the common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.

 

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

 

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

 

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

 

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

 

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

 

Our general partner may transfer its incentive distribution rights to a third party at any time without the consent of our unitholders. If our general partner transfers its incentive distribution rights to a third party but retains its other direct or indirect interests in us, 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 general partner had retained ownership of its incentive distribution rights. For example, a transfer of incentive distribution rights by our general partner could reduce the likelihood of VTTI selling or contributing additional terminaling assets to us, as VTTI 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 limited call right that may require unitholders to sell their common units at an undesirable time or price.

 

If at any time our general partner and its affiliates own more than 80% of the common units, our general partner will have the right, which it may assign to any of its affiliates or to us, but not the obligation, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price that is not less than their

 

41


Table of Contents

then-current market price, as calculated pursuant to the terms of our partnership agreement. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. At the closing of this offering, and assuming no exercise of the underwriters’ option to purchase additional common units, VTTI will own, directly or indirectly, approximately     % of our             outstanding common units. At the end of the subordination period, assuming no additional issuances of common units (other than upon the conversion of the subordinated units), VTTI will own, directly or indirectly, approximately     % of our outstanding common units. For additional information about this right, see “The Partnership Agreement—Limited Call Right”.

 

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

 

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

 

   

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

 

   

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

 

   

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

 

   

the ratio of taxable income to distributions may increase;

 

   

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

 

   

the market price of the common units may decline. See “The Partnership Agreement—Issuance of Additional Interests”.

 

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

 

After this offering, we will have              common units and              subordinated units outstanding, which includes the common units the selling unitholder is selling in this offering that may be resold in the public market immediately (             if the underwriters exercise in full their option to purchase additional common units). 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 units (             if the underwriters exercise in full their option to purchase additional common units) that are held by the selling unitholder will be subject to resale restrictions under a 180-day lock-up agreement with the underwriters. Each of the lock-up agreements with the underwriters may be waived in the discretion of certain of the underwriters. Sales by the selling unitholder or other large 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 the selling unitholder. Under our partnership agreement, our general partner and its affiliates have registration rights relating to the offer and sale of any units that they hold, subject to certain limitations. See “Units Eligible for Future Sale”.

 

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

 

During the subordination period, which we define elsewhere in this prospectus, the common units will have the right to receive distributions of available cash from operating surplus in an amount equal to the minimum quarterly distribution of $         per unit, plus any arrearages in the payment of the minimum quarterly distribution

 

42


Table of Contents

on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. Distribution arrearages do not accrue on the subordinated units. The purpose of the subordinated units is to increase the likelihood that during the subordination period there will be available cash from operating surplus to be distributed on the common units. Upon the expiration of the subordination period, the subordinated units will convert into common units and will then participate pro rata with other common units in distributions of available cash. See “How We Make Cash Distributions”.

 

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.

 

Fees and cost reimbursements, which VTTI Services will determine pursuant to the terms of a secondment agreement, will be payable regardless of our profitability and will reduce our cash available for distribution to you.

 

Our general partner’s executive officers are employed by VTTI Services and will be made available to VTTI Holdings, our wholly-owned subsidiary, pursuant to the terms of a secondment agreement that VTTI Services will enter into with VTTI Holdings upon completion of this offering. Pursuant to the applicable provisions of the secondment agreement, VTTI Holdings will reimburse VTTI Services for the costs that it incurs in providing compensation and benefits to its employees who are made available to VTTI Holdings, including the executive officers of our general partner, with a cost markup of 5% applied to the salaries of back-office staff, 10% applied to the salaries of executive officers and 12.5% applied to executive officer bonuses. The fees and expenses payable pursuant to the secondment agreement will be payable without regard to our business, results of operation and financial condition. The payment of fees to and the reimbursement of expenses of VTTI Services could adversely affect our ability to pay cash distributions to you.

 

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

 

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

 

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

 

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

 

43


Table of Contents

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

 

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

 

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              publicly traded common units held by our public unitholders (             common units if the underwriters exercise their option to purchase additional common units in full). We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. Unitholders may not be able to resell their common units at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.

 

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

 

   

our quarterly distributions;

 

   

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

 

   

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

 

   

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

 

   

general economic conditions;

 

   

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

 

   

future sales of our common units; and

 

   

the other factors described in these “Risk Factors”.

 

44


Table of Contents

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

 

A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made non-recourse to the general partner. Our limited partnership is organized under the laws of the Marshall Islands, and we conduct business in other jurisdictions. 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 jurisdiction but had not complied with that particular jurisdiction’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.

 

See “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.

 

Under some circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under the Marshall Islands Limited Partnership Act, or the Marshall Islands Act, we may not make a distribution to you if the distribution would cause our liabilities, other than liabilities to partners on account of their partnership interest and liabilities for which the recourse of creditors is limited to specified property of ours, to exceed the fair value of our assets, except that the fair value of property that is subject to a liability for which the recourse of creditors is limited will be included in our assets only to the extent that the fair value of that property exceeds that liability. Marshall Islands 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 Marshall Islands law will be liable to the limited partnership for the distribution amount. Assignees who become substituted limited partners are liable for the obligations of the assignor to make contributions to the partnership that are known to the assignee at the time it became a limited partner and for unknown obligations if the liabilities could be determined from the partnership agreement.

 

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

 

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

the distribution of our cash;

 

45


Table of Contents
   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

Our partnership agreement provides that our general partner must act in “good faith” when making decisions on our behalf, and our partnership agreement further provides that in order for a determination to be made in “good faith”, our general partner must subjectively believe that the determination is in the best interests of our partnership. See “The Partnership Agreement—Voting Rights” for information regarding matters that require unitholder approval.

 

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

 

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

 

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

 

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

 

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

 

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

 

The attorneys, independent accountants and others who perform services for us have been retained by our general partner. Attorneys, independent accountants and others who perform services for us are selected by our general partner or our conflicts committee and may perform services for our general partner and its affiliates. We

 

46


Table of Contents

may retain separate counsel for ourselves or the holders of common units in the event of a conflict of interest between our general partner and its affiliates, on the one hand, and us or the holders of common units, on the other, depending on the nature of the conflict. We do not intend to do so in most cases.

 

As a foreign private issuer, we are permitted to, and we will, rely on exemptions from certain disclosure and corporate governance standards applicable to U.S. issuers.

 

After the consummation of this offering, we will be a “foreign private issuer” under the securities laws of the United States and the rules of the NYSE. Under U.S. securities laws, “foreign private issuers” are subject to different disclosure requirements than U.S. domiciled registrants, as well as different financial reporting requirements. Under NYSE rules, a “foreign private issuer” is also subject to less stringent corporate governance requirements.

 

As a foreign private issuer, we are not subject to the same disclosure and procedural requirements as domestic U.S. registrants under the Exchange Act, and unitholders will accordingly not have access to such level of information. For instance, we are not required to prepare and file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act, we are exempt from the proxy requirements under Section 14 of the Exchange Act, and we are not generally subject to Regulation FD, which restricts the selective disclosure of material non-public information. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act. Moreover, even if we were to lose our emerging growth company status, we would still be permitted to provide reduced disclosure on certain issues, including disclosing compensation information for our executive officers on an aggregate, rather than an individual, basis because individual disclosure is not required under Marshall Islands law. We do, however, intend to furnish our unitholders with annual reports containing financial statements audited by our independent auditors and to make available to our unitholders quarterly reports containing unaudited financial information for each of the first three quarters of each fiscal year.

 

We are also exempt from certain corporate governance standards applicable to U.S. issuers. Subject to certain exceptions, the rules of the NYSE permit a “foreign private issuer” to follow its home country practice in lieu of the listing requirements of the NYSE. Additionally, because we will be a publicly traded partnership, the NYSE does not require us to have, and we will not have, a majority of independent directors on our general partner’s board of directors or to establish a compensation committee or a nominating and corporate governance committee. Accordingly, unitholders will not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements. See “Management—Management of VTTI Energy Partners LP”.

 

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

 

We have no history operating as a publicly traded partnership. As a publicly traded partnership, we will incur significant legal, accounting and other expenses that we did not incur prior to this offering. In addition, the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC and the NYSE, requires 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 partnership, we are required to have at least three independent directors, create an audit committee and adopt policies regarding internal controls and disclosure

 

47


Table of Contents

controls and procedures, including the preparation of reports on internal controls over financial reporting. In addition, we will incur additional costs associated with our SEC reporting requirements.

 

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

 

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

 

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, that apply to other public companies.

 

We are classified as an emerging growth company. The JOBS Act contains provisions that, among other things, relax certain reporting requirements for emerging growth companies, including certain requirements relating to accounting standards. 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 (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 Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer or (3) comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise.

 

Section 107 of the JOBS Act provides that an emerging growth company can use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards. This permits an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other companies.

 

We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common units less attractive to investors.

 

We are an emerging growth company, as defined in the JOBS Act, and we intend to take advantage of certain temporary exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies”, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. We cannot predict if investors will find our common units less attractive if we rely on this exemption. If some investors find our common units less attractive as a result, there may be a less active trading market for our common units, and the secondary market price of our common units may be more volatile.

 

We have been organized as a limited partnership under the laws of the Marshall Islands, which does not have a well-developed body of partnership law.

 

Our partnership affairs are governed by our partnership agreement and by the Marshall Islands Act. The provisions of the Marshall Islands Act resemble the limited partnership laws of a number of states in the United States, most notably Delaware. The Marshall Islands Act also provides that it is to be applied and construed to make it uniform with the Delaware Revised Uniform Partnership Act and, so long as it does not conflict with the Marshall Islands Act or decisions of the Marshall Islands courts, the non-statutory law (or case law) of the State of Delaware is adopted as the law of the Marshall Islands. There have been, however, few, if any, court cases in the Marshall Islands

 

48


Table of Contents

interpreting the Marshall Islands Act, in contrast to Delaware, which has a fairly well-developed body of case law interpreting its limited partnership statute. Accordingly, we cannot predict whether Marshall Islands courts would reach the same conclusions as the courts in Delaware. For example, the rights of our unitholders and the fiduciary responsibilities of our General Partner under Marshall Islands law are not as clearly established as under judicial precedent in existence in Delaware. As a result, unitholders may have more difficulty in protecting their interests in the face of actions by our General Partner and its officers and directors than would unitholders of a similarly organized limited partnership in the United States. See “Service of Process and Enforceability of Civil Liabilities”.

 

Because we are organized under the laws of the Marshall Islands, it may be difficult for our unitholders to receive any recovery if we were to go bankrupt.

 

We are a Marshall Islands limited partnership and have limited operations in the United States and maintain limited assets in the United States. Consequently, in the event of any bankruptcy, insolvency, liquidation, dissolution, reorganization or similar proceeding involving us or any of our subsidiaries, bankruptcy laws other than those of the United States could apply. The Republic of the Marshall Islands does not have a bankruptcy statute or general statutory mechanism for insolvency proceedings. If we become a debtor under U.S. bankruptcy law, bankruptcy courts in the United States may seek to assert jurisdiction over all of our assets, wherever located, including property situated in other countries. There can be no assurance, however, that we would become a debtor in the United States, or that a U.S. bankruptcy court would be entitled to, or accept, jurisdiction over such a bankruptcy case, or that courts in other countries that have jurisdiction over us and our operations would recognize a U.S. bankruptcy court’s jurisdiction if any other bankruptcy court would determine it had jurisdiction. These factors may delay or prevent us from entering bankruptcy in the United States and may affect the ability of our unitholders to receive any recovery following our bankruptcy.

 

Because we are organized under the laws of the Marshall Islands and located in the United Kingdom, it may be difficult to serve us with legal process or enforce judgments against us, our directors or our management.

 

We are organized under the laws of the Marshall Islands, are located in the United Kingdom and the substantial majority of our assets are located outside of the United States. In addition, our general partner is a Marshall Islands limited liability company, our directors and officers generally are or will be non-residents of the United States, and all or a substantial portion of the assets of these non-residents are located outside the United States. As a result, you may have difficulty serving legal process within the United States upon us. You may also have difficulty enforcing, both in and outside the United States, including in a Marshall Islands or United Kingdom court, judgments you may obtain in U.S. courts against us in any action, including actions based upon the civil liability provisions of U.S. federal or state securities laws. Furthermore, there is substantial doubt that the courts of the Republic of the Marshall Islands, of the United Kingdom or of the non-U.S. jurisdictions in which our offices are located would enter judgments in original actions brought in those courts predicated on U.S. federal or state securities laws. As a result, it may be difficult or impossible for you to bring an original action against us or against these individuals in a Marshall Islands or United Kingdom court in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise because the Marshall Islands and United Kingdom courts may not have subject matter jurisdiction to entertain such a suit.

 

Our partnership agreement designates the Court of Chancery of the State of Delaware as the sole and exclusive forum, unless otherwise provided for by Marshall Islands law, for certain litigation that may be initiated by our unitholders, which could limit our unitholders’ ability to obtain a favorable judicial forum for disputes with us.

 

Our partnership agreement provides that, unless otherwise provided for by Marshall Islands law, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for any claims that:

 

   

arise out of or relate in any way to the partnership agreement (including any claims, suits or actions to interpret, apply or enforce the provisions of the partnership agreement or the duties, obligations or

 

49


Table of Contents
 

liabilities among limited partners or of limited partners to us, or the rights or powers of, or restrictions on, the limited partners or us);

 

   

are brought in a derivative manner on our behalf;

 

   

assert a claim of breach of a fiduciary duty owed by any director, officer or other employee of us or our general partner, or owed by our general partner, to us or the limited partners;

 

   

assert a claim arising pursuant to any provision of the Marshall Islands Act; or

 

   

assert a claim governed by the internal affairs doctrine

 

regardless of whether such claims, suits, actions or proceedings sound in contract, tort, fraud or otherwise, are based on common law, statutory, equitable, legal or other grounds, or are derivative or direct claims. Any person or entity purchasing or otherwise acquiring any interest in our common units shall be deemed to have notice of and to have consented to the provisions described above. This forum selection provision may limit our unitholders’ ability to obtain a judicial forum that they find favorable for disputes with us or our directors, officers or other employees or unitholders.

 

Tax Risks

 

In addition to the following risk factors, you should read “Business—Taxation of the Partnership”, “Material U.S. Federal Income Tax Consequences” and “Non-United States Tax Consequences” for a more complete discussion of the expected material U.S. federal and non-U.S. income tax consequences relating to us and the ownership and disposition of our common units.

 

We will be subject to taxes, which will reduce our cash available for distribution to you.

 

We and our subsidiaries will be subject to tax in the jurisdictions in which we are organized or operate, reducing the amount of cash available for distribution. In computing our tax obligation in these jurisdictions, we are required to take various tax accounting and reporting positions on matters that are not entirely free from doubt and for which we have not received rulings from the governing authorities. We cannot assure you that upon review of these positions the applicable authorities will agree with our positions. A successful challenge by a tax authority could result in additional tax imposed on us or our subsidiaries, further reducing the cash available for distribution. In addition, changes in our operations, ownership or organizational structure could result in additional tax being imposed on us or our subsidiaries in jurisdictions in which operations are conducted. See “Business—Taxation of the Partnership”.

 

Changes in foreign taxes (including withholding taxes) could adversely affect our results of operations.

 

We conduct a portion of our operations in Belgium, Cyprus, Malaysia, the Netherlands, the United Arab Emirates, the United Kingdom and the United States, and may in the future expand our business into other foreign countries. We are subject to risks that foreign countries may impose additional withholding taxes or otherwise tax our foreign income. Currently, distributions of earnings and other payments, including interest, to us from our foreign subsidiaries may be subject to withholding and other taxes imposed by the jurisdiction in which such entities are formed or operating, which will reduce the amount of after-tax cash we can receive. If those taxes are increased, the amount of after-tax cash we receive will be further reduced.

 

U.S. tax authorities could treat us as a “passive foreign investment company” under certain circumstances, which would have adverse U.S. federal income tax consequences to U.S. unitholders.

 

A non-U.S. entity treated as a corporation for U.S. federal income tax purposes will be treated as a “passive foreign investment company”, or “PFIC”, for U.S. federal income tax purposes if at least 75% of its gross income for any taxable year consists of “passive income” or at least 50% of the average value of its assets produce, or are

 

50


Table of Contents

held for the production of, passive income. For purposes of these tests, passive income includes dividends, interest, gains from the sale or exchange of investment property, and rents and royalties other than rents and royalties that are received from unrelated parties in connection with the active conduct of a trade or business. For purposes of these tests, income derived from the performance of services does not constitute passive income. U.S. unitholders of a PFIC are subject to a disadvantageous U.S. federal income tax regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC, and the gain, if any, they derive from the sale or other disposition of their interests in the PFIC.

 

Based on our current and projected method of operation, and an opinion of our U.S. counsel, Latham & Watkins LLP, we believe that we should not be a PFIC for our current taxable year, and we expect that we will not be treated as a PFIC for any future taxable year. We have received an opinion of our U.S. counsel in support of this position that concludes that the income our subsidiaries earn from providing terminal handling, storage, and related services should not constitute passive income for purposes of determining whether we are a PFIC. In addition, we have represented to our U.S. counsel that we expect that more than 25% of our gross income for our current taxable year and each future year will arise from such terminal services activities or other income our U.S. counsel has opined does not constitute passive income, and more than 50% of the average value of our assets for each such year will be held for the production of such nonpassive income. Assuming the composition of our income and assets is consistent with these expectations, and assuming the accuracy of other representations we have made to our U.S. counsel for purposes of their opinion, our U.S. counsel is of the opinion that we should not be a PFIC for our current taxable year or any future year. This opinion is based and its accuracy is conditioned on representations, valuations and projections provided by us regarding our assets and income to our U.S. counsel. While we believe these representations, valuations and projections to be accurate, the portion of our income that is nonpassive and the value of our assets held for the production of such nonpassive income may change from time to time and no assurance can be given that they will continue to be accurate at any time in the future.

 

We have not sought, and we do not expect to seek, an IRS ruling on the treatment of income generated from our provision of terminal storage, terminal handling and related services, and the opinion of our counsel is not binding on the IRS or any court. As a result, the IRS or a court could disagree with our position. No assurance can be given that this result will not occur. In addition, although we intend to conduct our affairs in a manner to avoid, to the extent possible, being classified as a PFIC with respect to any taxable year, we cannot assure you that the nature of our operations will not change in the future, or that we will not be a PFIC in the future. If the IRS were to find that we are or have been a PFIC for any taxable year (and regardless of whether we remain a PFIC for any subsequent taxable year), our U.S. unitholders would face adverse U.S. federal income tax consequences. See “Material U.S. Federal Income Tax Consequences—U.S. Federal Income Taxation of U.S. Holders—PFIC Status and Significant Tax Consequences” for a more detailed discussion of the U.S. federal income tax consequences to U.S. unitholders if we are treated as a PFIC.

 

You may be subject to income tax in one or more non-U.S. jurisdictions as a result of owning our common units if, under the laws of any such jurisdiction, we are considered to be carrying on business there. Such laws may require you to file a tax return with, and pay taxes to, those jurisdictions.

 

We intend to conduct our affairs and cause each of our subsidiaries to operate its business in a tax efficient manner. Furthermore, we intend to conduct our affairs and cause each of our subsidiaries to operate its business in a manner that minimizes the risk that unitholders may be treated as having a permanent establishment or taxable presence in a jurisdiction where we or our subsidiaries conduct activities simply by virtue of their ownership of our common units. However, because we are organized as a partnership, there is a risk in some jurisdictions that our activities or the activities of our subsidiaries may be attributed to our unitholders for tax purposes if, under the laws of such jurisdiction, we are considered to be carrying on business or have a permanent establishment there. If you are attributed such a taxable presence in a jurisdiction, you may be required to file a tax return with, and to pay tax in, that jurisdiction based on your allocable share of our income. We may be required to reduce distributions to you on account of any tax withholding obligations imposed upon us by that

 

51


Table of Contents

jurisdiction in respect of such allocation to you. In addition, we may be required to obtain information from you in the event a tax authority requires such information. The United States may not allow a tax credit for any foreign income taxes that you directly or indirectly incur by virtue of an investment in us.

 

We have obtained confirmation from HM Revenue & Customs (the United Kingdom tax authority) that they should not treat unitholders as carrying on a trade in the United Kingdom merely by virtue of ownership of our common units. Moreover, unitholders should not be required to pay tax in the United Kingdom merely by virtue of ownership of our common units. We have obtained an Advance Tax Ruling from the Dutch tax authorities that non-Dutch resident common unitholders will not incur Dutch non-resident tax liability (or be required to file Dutch tax returns) merely by virtue of their ownership of our common units. See “Non-United States Tax Consequences—Netherlands Tax Consequences—Advance Tax Ruling”.

 

With respect to countries other than the Netherlands, the United Kingdom and the United States, we believe we can conduct our activities and the activities of our subsidiaries in a manner so that our common unitholders should not be considered to be carrying on business or having a permanent establishment in such other countries solely as a consequence of the acquisition, holding, disposition or redemption of our common units. However, the question of whether either we or any of our subsidiaries will be treated as carrying on business in any country (including the Netherlands and the United Kingdom) will largely be a question of fact determined through an analysis of contractual arrangements, including the services agreements we and the Operating Companies will enter into with our customers, and the way we and our subsidiaries conduct business or operations, all of which may change over time. See “Non-United States Tax Consequences”. The laws of any country may also change, which could cause the country’s taxing authorities to determine that we or our subsidiaries are carrying on business or have a permanent establishment in such country and are subject to its taxation laws.

 

The ratio of dividend income to distributions on our common units is subject to business, economic and other uncertainties as well as tax reporting positions with which the IRS or any other tax authority may disagree, which could result in a higher ratio of dividend income to distributions and adversely affect the value of our common units.

 

We estimate that approximately     % of the total cash distributions made to a purchaser of common units in this offering who owns those units from the date of this offering through December 31        , will constitute dividend income for U.S. tax purposes. The remaining portion of the distributions will be treated first as a nontaxable return of capital to the extent of the purchaser’s tax basis in its common units and thereafter as capital gain. These estimates are based on certain assumptions that are subject to business, economic, regulatory, competitive and political uncertainties beyond our control. In addition, these estimates are based on current U.S. federal income tax law and tax reporting positions that we will adopt and with which the IRS could disagree. As a result of these uncertainties, these estimates may be incorrect and the actual percentage of total cash distributions that will constitute dividend income could be higher, and any difference could adversely affect the value of the common units. See “Material U.S. Federal Income Tax Consequences—U.S. Federal Income Taxation of U.S. Holders—Ratio of Dividend Income to Distributions”.

 

52


Table of Contents

FORWARD-LOOKING STATEMENTS

 

Statements included in this prospectus concerning plans and objectives of management for future operations or economic performance, or assumptions related thereto, including our financial forecast, contain forward-looking statements. In addition, we and our representatives may from time to time make other oral or written statements that are also forward-looking statements. The disclosure and analysis set forth in this prospectus includes assumptions, expectations, projections, intentions and beliefs about future events in a number of places, particularly in relation to our operations, cash flows, financial position, plans, strategies, business prospects, changes and trends in our business and the markets in which we operate. These statements are intended as “forward-looking statements”. In some cases, predictive, future-tense or forward-looking words such as “believe”, “intend”, “anticipate”, “estimate”, “project”, “forecast”, “plan”, “potential”, “may”, “should”, “could” and “expect” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. In addition, we and our representatives may from time to time make other oral or written statements which are forward-looking statements, including in our periodic reports that we will file with the SEC, other information sent to our unitholders, and other written materials.

 

Forward-looking statements include, but are not limited to, such matters as:

 

   

forecasts of our ability to make cash distributions on the units and the amount of any borrowings that may be necessary to make such distributions;

 

   

our expectations relating to making distributions and our ability to make such distributions;

 

   

future operating or financial results and future revenues and expenses;

 

   

our future financial condition and liquidity;

 

   

significant interruptions in the operations of our customers;

 

   

future supply of, and demand for, refined petroleum products and crude oil;

 

   

our ability to renew or extend terminaling services agreements;

 

   

the credit risk of our customers;

 

   

our ability to retain our key customers, including Vitol;

 

   

operational hazards and unforeseen interruptions, including interruptions from terrorist attacks, hurricanes, floods or severe storms;

 

   

reduced volatility in energy prices;

 

   

competition from other terminals;

 

   

changes in trade patterns and the global flow of oil;

 

   

future or pending acquisitions of terminals or other assets, business strategy, areas of possible expansion and expected capital spending or operating expenses;

 

   

the ability of our customers to obtain access to shipping, barge facilities, third party pipelines or other transportation facilities;

 

   

maintenance or remediation capital expenditures on our terminals;

 

   

environmental and regulatory conditions, including changes in such laws relating to climate change or greenhouse gases;

 

   

health and safety regulatory conditions, including changes in such laws;

 

   

costs and liabilities in responding to contamination at our facilities;

 

   

our ability to obtain financing;

 

53


Table of Contents
   

restrictions in our Credit Facilities;

 

   

fluctuations in currencies and interest rates;

 

   

the adoption of derivatives legislation by Congress;

 

   

our ability to retain key officers and personnel;

 

   

the expected cost of, and our ability to comply with, governmental regulations and self-regulatory organization standards, as well as standard regulations imposed by our customers applicable to our business;

 

   

risks associated with our international operations;

 

   

compliance with the U.S. Foreign Corrupt Practices Act or the U.K. Bribery Act;

 

   

risks associated with VTTI’s potential business activities involving countries, entities, and individuals subject to restrictions imposed by U.S. or other governments;

 

   

tax liabilities associated with indirect taxes on the products we service; and

 

   

other factors discussed in the “Risk Factors” section of this prospectus.

 

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

 

We undertake no obligation to update or revise any forward-looking statements contained in this prospectus, whether as a result of new information, future events, a change in our views or expectations or otherwise. New factors emerge from time to time, and it is not possible for us to predict all of these factors. Further, we cannot assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement.

 

54


Table of Contents

USE OF PROCEEDS

 

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

 

The selling unitholder will pay all offering expenses, underwriting discounts and commissions and structuring fees incurred in connection with this offering and any exercise by the underwriters of their option to purchase additional common units.

 

55


Table of Contents

CAPITALIZATION

 

The following table shows:

 

   

the historical cash and cash equivalents and capitalization of our Predecessor as of March 31, 2014; and

 

   

our pro forma capitalization as of March 31, 2014, giving effect to the pro forma adjustments described in our unaudited pro forma consolidated financial data included elsewhere in this prospectus, including this offering and the other transactions described under “Prospectus Summary—Formation Transactions”.

 

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

 

     As of March 31, 2014  
         Historical              Pro Forma      
     (in US$ millions)  

CASH

     

Cash and cash equivalents

   $ 56.8         13.0   
  

 

 

    

 

 

 

DEBT

     

VTTI Operating Revolving Credit Facility

     —           600.0   

Term loan (Johore Facility)

   $ 193.2         —     

Total long-term debt—affiliates

     613.9         —     

Other long-term debt

     1.4         —     
  

 

 

    

 

 

 

Total debt

     808.5         600.0   

EQUITY

     

Owner’s equity

   $ 652.8         —     

Limited partners:

     

Common units—public

     —        

Common units—selling unitholder

     —        

Subordinated units—selling unitholder

     —        

General partner

     —        
  

 

 

    

 

 

 

Total owner’s/partner’s equity

     652.8      
  

 

 

    

Total capitalization

   $ 1,461.3      
  

 

 

    

 

 

 

 

56


Table of Contents

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

 

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

 

General

 

Rationale for Our Cash Distribution Policy

 

Our cash distribution policy reflects a judgment that our unitholders will be better served by our distributing our available cash (after deducting expenses, including maintenance and replacement capital expenditures and reserves) rather than retaining it. Because we believe we will generally finance any expansion capital expenditures from external financing sources, we believe that our investors are best served by our distributing all of our available cash. Our cash distribution policy is consistent with the terms of our partnership agreement, which requires that we distribute all of our available cash quarterly (after deducting expenses, including maintenance and replacement capital expenditures and reserves).

 

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

 

There is no guarantee that unitholders will receive quarterly distributions from us. Our distribution policy is subject to certain restrictions and may be changed at any time, including:

 

   

Our unitholders have no contractual or other legal right to receive distributions other than the obligation under our partnership agreement to distribute available cash on a quarterly basis, which is subject to the broad discretion of our general partner to establish reserves and other limitations.

 

   

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

 

   

Although our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including provisions contained therein requiring us to make cash distributions, may be amended. During the subordination period, with certain exceptions, our partnership agreement may not be amended without the approval of non-affiliated common unitholders. After the subordination period has ended, our partnership agreement can be amended with the approval of a majority of the outstanding common units. VTTI will indirectly own approximately     % of our common units and all of our subordinated units outstanding immediately after the closing of this offering. See “The Partnership Agreement—Amendment of the Partnership Agreement”.

 

   

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

 

   

Under Section 51 of the Marshall Islands Act, we may not make a distribution to you if the distribution would cause our liabilities, other than liabilities to partners on account of their partnership interest and liabilities for which the recourse of creditors is limited to specified property of ours, to exceed the fair value of our assets, except that the fair value of property that is subject to a liability for which the recourse of creditors is limited shall be included in our assets only to the extent that the fair value of that property exceeds that liability.

 

57


Table of Contents
   

We may lack sufficient cash to pay distributions to our unitholders due to decreases in total operating revenues, decreases in hire rates, increases in operating or general and administrative expenses, principal and interest payments on outstanding debt, taxes, working capital requirements, maintenance and replacement capital expenditures or anticipated cash needs. See “Risk Factors” for a discussion of these factors.

 

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 existing and future indebtedness, applicable limited partnership and limited liability company laws in the Marshall Islands and other laws and regulations.

 

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

 

Because we distribute all of our available cash, we may not grow as quickly as businesses that reinvest their available cash to expand ongoing operations. We expect that we will rely upon external financing sources, including bank borrowings and the issuance of debt and equity securities, to fund acquisitions and expansion and investment capital expenditures. As a result, to the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow. To the extent we issue additional units in connection with any acquisitions or other capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level, which in turn may affect the available cash that we have to distribute on each unit. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional borrowings or other debt by us to finance our growth would result in increased interest expense, which in turn may affect the available cash that we have to distribute to our unitholders.

 

Initial Distribution Rate

 

Upon completion of this offering, we will declare an initial quarterly distribution of $         per unit for each complete quarter, or $         per unit on an annualized basis, to be paid no later than 45 days after the end of each fiscal quarter (beginning with the quarter ending September 30, 2014). This equates to an aggregate cash distribution of $         million per quarter, or $         million per year, in each case based on the number of common units, subordinated units and general partner units outstanding immediately after completion of this offering. Our ability to make cash distributions at the initial distribution rate pursuant to this policy will be subject to the factors described above under “—General—Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy”.

 

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

 

          Distributions  
     Number of
Units
   One Quarter     Four
Quarters
 

Common units

      $        $                

Subordinated units

       

General partner units(1)

       

Total

      $              (2)    $     
  

 

  

 

 

   

 

 

 

 

(1)   The number of general partner units is determined by multiplying the total number of units deemed to be outstanding (i.e., the total number of common and subordinated units outstanding divided by 98.0%) by the general partner’s 2.0% general partner interest.

 

58


Table of Contents
(2)   Actual payments of distributions on the common units, subordinated units and general partner units are expected to be $         million for the period between the estimated closing date of this offering (                    , 2014) and the end of the fiscal quarter in which the closing date of this offering occurs.

 

If the underwriters exercise any part of their option to purchase additional common units, the number of common units owned by the selling unitholder will be reduced by the number of common units purchased in connection with any such exercise. Accordingly, the exercise of the underwriters’ option will not affect the total number of common units outstanding.

 

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

 

As of the closing date of this offering, our general partner will be entitled to 2.0% of all distributions that we make prior to our liquidation. Our general partner’s initial 2.0% interest in these distributions may be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us to maintain its initial 2.0% general partner interest. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us to maintain its current general partner interest.

 

Because we have not prepared a pro forma condensed statement of income to demonstrate what our pro forma cash available for distribution would have been for the four most recent fiscal quarters and for the fiscal year ended December 31, 2013, it is possible that such amounts may not have been sufficient to pay 100% of the aggregate minimum quarterly distribution on all of our common and subordinated units during those periods.

 

Forecasted Results of Operations for the Twelve Months Ending June 30, 2015

 

In this section, we present in detail the basis for our belief that we will be able to pay our minimum quarterly distribution on all of our outstanding units for the twelve months ending June 30, 2015. We present two tables, consisting of:

 

   

Forecasted Results of Operations for the twelve months ending June 30, 2015; and

 

   

Forecasted Cash Available for Distribution for the twelve months ending June 30, 2015,

 

as well as the significant assumptions upon which the forecasts are based.

 

Our forecast of our results of operations is a forward-looking statement and should be read together with the historical combined carve-out financial statements of our Predecessor and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. We do not as a matter of course make public projections as to future sales, earnings, or other results. However, management has prepared the prospective financial information set forth below to present forecasted results of operations and forecasted cash available for distribution. The accompanying prospective financial information was not prepared with a view toward public disclosure or with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of management, 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 expected course of action and our expected future financial performance. However, this information is not fact and should not be relied upon as being necessarily indicative of future results, and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information.

 

59


Table of Contents

Neither our independent auditors, nor any other independent accountants, have compiled, examined, or performed any procedures with respect to the prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the prospective financial information.

 

We present below a forecast of our expected results of operations for the twelve months ending June 30, 2015. Our forecast presents, to the best of our knowledge and belief, our expected results of operations for the forecast period.

 

Our financial forecast reflects our judgment, as of the date of this prospectus, of conditions we expect to exist and the course of action we expect to take during the twelve months ending June 30, 2015. Our financial forecast is based on assumptions that we believe to be reasonable with respect to the forecast period as a whole. The assumptions and estimates used in the financial forecast are inherently uncertain and represent those that we believe are significant to our financial forecast. We believe that we have a reasonable objective basis for those assumptions. To the extent that there is a shortfall during any quarter in the forecast period, we believe we would be able to make working capital borrowings to pay distributions in such quarter and would be able to repay such borrowings in a subsequent quarter, because we believe the total cash available for distribution for the forecast period will be more than sufficient to pay the aggregate minimum quarterly distribution to all unitholders. We believe our actual results of operations will approximate those reflected in our financial forecast, but we can give no assurance that our forecasted results will be achieved. There will likely be differences between our financial forecast and the actual results and those differences could be material. Our operations are subject to numerous risks that are beyond our control. If the financial forecast is not achieved, we may not be able to pay cash distributions on our units at the initial distribution rate stated in our cash distribution policy or at all.

 

When considering our financial forecast, you should keep in mind the risk factors and other cautionary statements included under the heading “Risk Factors” elsewhere in this prospectus. Any of the risks discussed in this prospectus or unanticipated events could cause our actual results of operations, cash flows and financial condition to vary significantly from the financial forecast and such variations may be material. Prospective investors are cautioned to not place undue reliance on the financial forecast and should make their own independent assessment of our future results of operations, cash flows and financial condition.

 

We are providing the financial forecast to supplement the historical combined carve-out financial statements of Predecessor in support of our belief that we will have sufficient cash available to allow us to pay cash distributions on all of our units for each quarter in the twelve-month period ending June 30, 2015 at our stated initial distribution rate. See “—Forecast Assumptions and Considerations—Summary of Significant Forecast Assumptions” for further information as to the assumptions we have made for the financial forecast.

 

We do not undertake any obligation to release publicly the results of any future revisions we may make to the financial forecast or to update the financial forecast to reflect events or circumstances after the date of this prospectus, even in the event that any or all of the underlying assumptions are shown to be in error. Therefore, we caution you not to place undue reliance on this information.

 

60


Table of Contents

VTTI ENERGY PARTNERS LP

FORECASTED RESULTS OF OPERATIONS

 

     Twelve Months Ending
June 30, 2015
 
     (in US$ millions)  

Statement of Operations Data:

  

Revenues

   $ 314.3   

Operating costs and expenses:

  

Operating costs

     88.4   

Depreciation and amortization

     75.4   

Selling, general and administrative

     28.7   
  

 

 

 

Total operating expenses

     192.5   
  

 

 

 

Total operating income

     121.8   
  

 

 

 

Other income (expense)

  

Interest expense, including affiliates

     (25.2)   

Other finance expenses

     (1.2)   
  

 

 

 

Total other expense, net

     (26.4)   
  

 

 

 

Income before income tax expense

     95.4   

Income tax expense

     (22.3)   
  

 

 

 

Net income

     73.1   
  

 

 

 

Non-controlling interest

     (50.8)   
  

 

 

 

Net income attributable to parents’ equity

   $                 22.3   
  

 

 

 

General partner’s interest in net income

   $     

Limited partners’ interest in net income

  

Net income per:

  

Common unit

   $     

Subordinated unit

   $     

General partner unit

   $     

 

See the accompanying summary of significant accounting policies and forecast assumptions.

 

61


Table of Contents

Forecast Assumptions and Considerations

 

Basis of Presentation

 

The accompanying financial forecast and related notes present our forecasted results of operations for the twelve months ending June 30, 2015, based on the assumption that:

 

   

we will issue to the selling unitholder              common units and              subordinated units, representing a     % limited partner interest in us;

 

   

we will issue to our general partner all of our incentive distribution rights, which will entitle our general partner to increasing percentages of the cash we distribute in excess of $         per unit per quarter;

 

   

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

 

   

the Holding Companies and the Operating Companies will be acquired at their historical carrying values from VTTI;

 

   

the margin on our debt will be the same as applied to the debt prior to this offering;

 

   

the cost of borrowing will be 4%;

 

   

the dollar/euro exchange rate is $1.36/euro;

 

   

VTTI Operating will repay $380.4 million in intercompany loans with VTTI using drawdowns from the new VTTI Operating Revolving Credit Facility;

 

   

VTTI will convert $233.5 million in intercompany loans with VTTI Operating to equity in VTTI Operating; and

 

   

we will pay $3.0 million to VTTI Holdings under the administrative services agreement.

 

Summary of Significant Accounting Policies and Sources of Estimation Uncertainty

 

A summary of significant accounting policies is set out in Note 2 to the annual combined carve-out financial statements and Note 2 to our interim unaudited condensed combined carve-out financial statements included elsewhere in this prospectus.

 

Summary of Significant Forecast Assumptions

 

The forecast has been prepared by and is the responsibility of our management. The forecast reflects our judgment as of the date of this prospectus of conditions we expect to exist and the course of action we expect to take during the twelve months ending June 30, 2015. While the assumptions disclosed in this prospectus are not all-inclusive, the assumptions listed below are those that we believe are significant to our forecasted results of operations and any items not included below were not deemed significant. We believe we have a reasonable objective basis for these assumptions. We believe our actual results of operations will approximate those reflected in our forecast, but we can give no assurance that our forecasted results will be achieved. There will likely be differences between our forecast and the actual results and those differences could be material. If the forecast is not achieved, we may not be able to pay cash distributions on our common units at the minimum quarterly distribution rate or at all.

 

Revenues. We estimate that our total revenues for the twelve months ending June 30, 2015 will be approximately $314.3 million, as compared to approximately $299.2 million for the year ended December 31, 2013. Our forecast is based on the assumption that storage and throughput fees will increase by $20.0 million due to increased storage capacity availability, inflation escalators and favorable foreign exchange variance, partially offset by a $4.9 million reduction in excess throughput and ancillary fees due to a forecasted return to typical throughput levels from the elevated levels experienced in 2013.

 

Operating Costs and Expenses. We estimate that our operating costs and expenses will be approximately $88.4 million for the twelve months ending June 30, 2015, as compared to approximately $88.9 million for the

 

62


Table of Contents

year ended December 31, 2013. The forecasted decrease in operating costs and expenses is primarily due to events in the year ended December 31, 2013 that are not anticipated to occur in the forecast period, such as an environmental spill at the Amsterdam terminal and associated insurance, maintenance and repair and other costs.

 

Depreciation and Amortization. We estimate that depreciation and amortization expense will be approximately $75.4 million for the twelve months ending June 30, 2015, as compared to approximately $67.4 million for the year ended December 31, 2013. Depreciation expense is expected to increase for the twelve months ending June 30, 2015 compared to the year ended December 31, 2013 due to incremental depreciation related to completion and commissioning of capital expenditure projects at our Amsterdam, Antwerp and other terminals.

 

Selling, General and Administrative. We estimate that selling, general and administrative expenses will be approximately $28.7 million for the twelve months ending June 30, 2015, as compared to approximately $22.9 million for the year ended December 31, 2013. The additional $5.8 million in total estimated selling, general and administrative expenses as compared to the year ended December 31, 2013 consists of approximately $3.0 million in external expenses we will incur as a result of becoming a publicly traded partnership, including costs associated with annual reports to unitholders, tax return preparation, investor relations, audit fees, legal fees, incremental director and officer liability insurance costs and directors’ compensation. The remaining $2.8 million in increased estimated selling, general and administrative expenses consists of increased costs of information technology and corporate networking to the terminals, market adjustments of salaries and other expenses.

 

Financing. We estimate that interest expense will be approximately $25.2 million for the twelve months ending June 30, 2015, as compared to approximately $30.0 million for the year ended December 31, 2013. The reduction in interest expense is driven by repayment and conversion of affiliate debt and repayment of project finance loan at our Johore terminal, partially offset by borrowings under the VTTI Operating Revolving Credit Facility.

 

Capital Expenditures. We estimate that total capital expenditures for the twelve months ending June 30,

2015 will be $60.5 million as compared to capital expenditures of $84.7 million for the year ended December 31, 2013. This forecast is based on the following assumptions:

 

   

Our estimated maintenance capital expenditures will be $27.6 million for the twelve months ending June 30, 2015 as compared to actual maintenance capital expenditures of approximately $28.4 million for the year ended December 31, 2013.

 

   

Our expansion capital expenditures will be approximately $32.9 million for the twelve months ending June 30, 2015 as compared to actual expansion capital expenditures of approximately $56.3 million for the year ended December 31, 2013. The $32.9 million expansion capital expenditures anticipated to be spent during the forecast period is related to capacity expansion at our Antwerp and Amsterdam terminals, while the $56.3 million for the year ended December 31, 2013 was primarily related to several expansion and revamping projects at our Antwerp and Amsterdam terminals. We intend to fund our anticipated expansion capital expenditures with borrowings from the VTTI Operating Revolving Credit Facility.

 

Regulatory, Industry and Economic Factors. Our forecast of our results of operations for the twelve months ending June 30, 2015 is based on the following assumptions related to regulatory, industry and economic factors:

 

   

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

 

   

There will not be any new governmental regulation of the portions of the industry in which we operate or any interpretation of existing regulation that in either case will be materially adverse to our business.

 

   

There will not be any change in tax law that will materially increase our tax expense.

 

 

63


Table of Contents
   

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 terminaling services agreements.

 

   

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

 

   

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

 

Forecasted Cash Available for Distribution

 

The table below sets forth our calculation of forecasted cash available for distribution to our unitholders and general partner based on the Forecasted Results of Operations set forth above. Based on the financial forecast and related assumptions, we forecast that our cash available for distribution generated during the twelve months ending June 30, 2015 will be approximately $         million. This amount would be sufficient to pay 100% of the minimum quarterly distribution of $         per unit on all of our common units and subordinated units for the four quarters ending June 30, 2015.

 

Actual payments of distributions on the common units, subordinated units and the general partner units are expected to be $         million for the period between the estimated closing date of this offering (                     , 2014) and the end of the fiscal quarter in which the closing date of this offering occurs.

 

You should read “—Forecast Assumptions and Considerations—Summary of Significant Forecast Assumptions” included as part of the financial forecast for a discussion of the material assumptions underlying our forecast of Adjusted EBITDA that is included in the table below. Our forecast is based on those material assumptions and reflects our judgment of conditions we expect to exist and the course of action we expect to take. The assumptions disclosed in our financial forecast are those that we believe are significant to generate the forecasted Adjusted EBITDA. If our estimate is not achieved, we may not be able to pay distributions on the common units at the initial distribution rate of $         per unit per quarter ($         per unit on an annualized basis). Our financial forecast and the forecast of cash available for distribution set forth below have been prepared by our management. This calculation represents available cash from operating surplus generated during the period and excludes any cash from working capital borrowings, capital expenditures and cash on hand on the closing date.

 

Adjusted EBITDA should not be considered an alternative to net income, operating income, cash flow from operating activities or any other measure of financial performance calculated in accordance with U.S. GAAP.

 

64


Table of Contents

When considering our forecast of cash available for distribution for the twelve months ending June 30, 2015, you should keep in mind the risk factors and other cautionary statements under the headings “Forward-Looking Statements” and “Risk Factors” elsewhere in this prospectus. Any of these factors or the other risks discussed in this prospectus could cause our results of operations to vary significantly from those set forth in the financial forecast and the forecast of cash available for distribution set forth below.

 

VTTI ENERGY PARTNERS LP

FORECASTED CASH AVAILABLE FOR DISTRIBUTION(1)

 

     Quarter Ending(2)     Twelve  Months
Ending

June 30, 2015
 
     September 30,
2014
    December 31,
2014
    March 31,
2015
    June 30,
2015
   
     (in US$ millions, except per unit amounts)  

Adjusted EBITDA(3)

   $ 46.7      $ 53.3      $ 47.8      $ 57.0      $ 204.8   

Adjustments for cash items and maintenance capital expenditures:

          

Less:

          

Cash interest expense

     (6.2     (6.3     (6.4     (6.4     (25.3

Cash interest income

                                   

Cash income tax expense

                                   

Maintenance capital expenditures

     (6.8     (6.8     (7.0     (7.0     (27.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash available for distribution

   $ 33.7      $ 40.2      $ 34.4      $ 43.6      $ 151.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Cash flow attributable to non-controlling interest

   $ (22.8   $ (27.1   $ (23.3   $ (29.5   $ (102.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Minimum quarterly distribution per unit (annualized)

          

Expected distributions:

          

Distributions to public common unitholders

          

Distributions to the selling unitholder—common units

          

Distributions to the selling unitholder—subordinated units

          

Distributions to general partner units

          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total distributions(4)

   $        $        $        $        $     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess cash

          

Annualized minimum quarterly distribution per unit

          

Aggregate distributions based on annualized minimum quarterly distribution

          

Percent of minimum quarterly distributions payable to common unitholders

          

Percent of minimum quarterly distributions payable to subordinated unitholder

          

 

(1)   The forecast is based on the assumptions set forth in “—Forecast Assumptions and Considerations—Summary of Significant Forecast Assumptions”.
(2)   The sum of forecast amounts for the four quarters may not equal the twelve month totals due to the effects of rounding.

 

65


Table of Contents
(3)   For a definition of Adjusted EBITDA, see “Selected Historical Financial and Operating Data”. The following table reconciles Adjusted EBITDA to net income, its most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, for the twelve months ending June 30, 2015:

 

     Quarter Ending(2)      Twelve  Months
Ending

June 30, 2015
 
     September 30,
2014
     December 31,
2014
     March 31,
2015
     June 30,
2015
    
    

(unaudited)

 
    

(in US$ millions)

 

Net income

   $ 16.8       $ 22.5       $ 16.4       $ 17.3       $ 73.0   

Interest expense, including affiliates

     6.2         6.3         6.4         6.4         25.3   

Other items(a)

     0.2         (1.0      0.8         8.8         8.8   

Depreciation and amortization

     18.5         18.5         19.2         19.2         75.4   

Income tax expense

     5.0         7.0         5.0         5.3         22.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 46.7       $ 53.3       $ 47.8       $ 57.0       $ 204.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (a)   Other items consist of non-cash items in operating expenses and anticipated timing differences between the recognition and receipt of revenues.

 

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

 

Forecast of Compliance with Debt Covenants

 

Our ability to make distributions could be affected if we do not remain in compliance with the restrictions and covenants of our financing agreements. Our terminals are subject to several financing agreements, which we anticipate will be amended in connection with this offering. We have assumed that we will be in compliance with all of the covenants in such financing agreements during the forecast period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for a further description of our financing agreements, including these financial covenants.

 

66


Table of Contents

HOW WE MAKE CASH DISTRIBUTIONS

 

Distributions of Available Cash

 

General

 

Within 45 days after the end of each quarter, beginning with the quarter ending September 30, 2014, we will distribute all of our available cash (defined below) to unitholders of record on the applicable record date. We will adjust the minimum quarterly distribution for the period from the closing of this offering through                     , 2014, based on the actual length of the period.

 

Definition of Available Cash

 

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

 

   

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

 

   

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

 

   

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

 

   

provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters (except to the extent establishing such reserves would cause us to not be able to distribute the minimum quarterly distribution (plus any arrearage) for such quarter);

 

   

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

 

Intent to Distribute the Minimum Quarterly Distribution

 

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

 

There is no guarantee that we will pay the minimum quarterly distribution on the common units and subordinated units in any quarter. Even if our cash distribution policy is not modified or revoked, the amount of distributions paid under our policy and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement. We will be effectively prohibited from making any distributions to unitholders if it would cause an event of default, or an event of default is then existing, under our financing agreements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for a discussion of the restrictions contained in our financing agreements that may restrict our ability to make distributions.

 

67


Table of Contents

Operating Surplus and Capital Surplus

 

General

 

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

 

Operating Surplus

 

Operating surplus for any period generally means:

 

   

$         million; plus

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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

 

68


Table of Contents

As described above, operating surplus includes a provision that will enable us, if we choose, to distribute as operating surplus up to $         million of cash we receive in the future from non-operating sources, such as asset sales, issuances of securities and long-term borrowings, that would otherwise be distributed as capital surplus. In addition, the effect of including, as described above, certain cash distributions on equity securities or interest payments on debt in operating surplus would be to increase operating surplus by the amount of any such cash distributions or interest payments. As a result, we may also distribute as operating surplus up to the amount of any such cash distributions or interest payments we receive from non-operating sources.

 

Operating expenditures generally means all of our cash expenditures, including but not limited to taxes, employee and director compensation, reimbursement of expenses to our general partner, repayment of working capital borrowings, debt service payments, payments made under any interest rate, currency or commodity hedge contracts (provided that payments made in connection with the termination of any hedge contract prior to the expiration of its specified termination date be included in operating expenditures in equal quarterly installments over the remaining scheduled life of such hedge contract) and maintenance and replacement capital expenditures (which are discussed in further detail under “—Capital Expenditures” below), provided that operating expenditures will not include:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

distributions to partners; or

 

   

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

 

Capital Expenditures

 

For purposes of determining operating surplus, capital expenditures are classified as either maintenance and replacement capital expenditures, expansion capital expenditures or investment capital expenditures. Maintenance and replacement capital expenditures are those capital expenditures required to maintain, over the long-term, the operating capacity of or the revenue generated by our capital assets.

 

Expansion capital expenditures are those capital expenditures that increase the operating capacity of or the revenue generated by our capital assets. To the extent, however, that capital expenditures associated with acquiring a new terminal or improving an existing terminal increase the revenues or the operating capacity of our terminals, those capital expenditures would be classified as expansion capital expenditures.

 

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

 

Examples of maintenance and replacement capital expenditures include capital expenditures associated with modifying an existing terminal or acquiring a new terminal, to the extent such expenditures are incurred to maintain the operating capacity of or the revenue generated by our terminals. Maintenance and replacement capital expenditures will also include interest (and related fees) on debt incurred and distributions on equity issued (including the amount of any incremental distributions made to the holders of our incentive distribution rights) to finance the acquisition or construction of a replacement terminal and paid in respect of the construction period. We define construction period as the period beginning on the date that we enter into a binding acquisition

 

69


Table of Contents

or construction contract and ending on the earlier of the date that the replacement terminal commences commercial service or the date that the replacement terminal is abandoned or disposed of. Debt incurred to pay or equity issued to fund construction period interest payments, and distributions on such equity (including the amount of any incremental distributions made to the holders of our incentive distribution rights) will also be considered maintenance and replacement capital expenditures.

 

Definition of Capital Surplus

 

Capital surplus generally will be generated only by:

 

   

borrowings other than working capital borrowings;

 

   

sales of debt and equity securities; and

 

   

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

 

Characterization of Cash Distributions

 

We will treat all available cash distributed as coming from operating surplus until the sum of all available cash distributed since we began operations equals the operating surplus as of the most recent date of determination of available cash. We will treat any amount distributed in excess of operating surplus, regardless of its source, as capital surplus. As described above, operating surplus does not reflect actual cash on hand that is available for distribution to our unitholders. For example, it includes a provision that will enable us, if we choose, to distribute as operating surplus up to $         million of cash we receive in the future from non-operating sources, such as asset sales, issuances of securities and long-term borrowings, that would otherwise be distributed as capital surplus. We do not anticipate that we will make any distributions from capital surplus.

 

Subordination Period

 

General

 

During the subordination period, which we define below, the common units will have the right to receive distributions of available cash from operating surplus in an amount equal to the minimum quarterly distribution of $         per unit, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. Distribution arrearages do not accrue on the subordinated units. The purpose of the subordinated units is to increase the likelihood that during the subordination period there will be available cash from operating surplus to be distributed on the common units.

 

Definition of Subordination Period

 

The subordination period will extend until the second business day following the distribution of available cash from operating surplus in respect of any quarter, ending on or after                     , 2017, that each of the following tests are met:

 

   

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

 

   

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

 

   

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

 

70


Table of Contents

If the unitholders remove our general partner without cause, the subordination period may end before                             , 2017.

 

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

 

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

 

Early Termination of Subordination Period

 

Notwithstanding the foregoing, the subordination period will automatically terminate on the first business day following the distribution of available cash in respect of any quarter, beginning with the quarter ending                     , 2015, that each of the following tests is met:

 

   

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

 

   

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

 

   

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

 

Definition of Adjusted Operating Surplus

 

Adjusted operating surplus for any period generally means:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

71


Table of Contents

Distributions of Available Cash From Operating Surplus During the Subordination Period

 

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

 

   

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

 

   

second, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period;

 

   

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

 

   

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

 

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

 

Distributions of Available Cash From Operating Surplus After the Subordination Period

 

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

 

   

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

 

   

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

 

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

 

General Partner Interest

 

Our partnership agreement provides that our general partner initially will be entitled to 2.0% of all distributions that we make prior to our liquidation. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us to maintain its 2.0% general partner interest if we issue additional units. Our general partner’s 2.0% interest, and the percentage of our cash distributions to which it is entitled, will be proportionately reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us in order to maintain its 2.0% general partner interest. Our general partner will be entitled to make a capital contribution in order to maintain its 2.0% general partner interest in the form of the contribution to us of common units based on the current market value of the contributed common units.

 

Incentive Distribution Rights

 

Incentive distribution rights represent the right to receive an increasing percentage of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. Our general partner will hold the incentive distribution rights following completion of this offering. The incentive distribution rights may be transferred separately from any other interests without a vote of our unitholders. Any transfer by our general partner of the incentive distribution rights would not change the percentage allocations of quarterly distributions with respect to such rights.

 

72


Table of Contents

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

 

Effect of Removal of Our General Partner on the Subordination Period

 

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

 

   

the subordination period will end and each subordinated unit will immediately convert into one common unit and will then participate pro rata with the other common units in distributions of available cash;

 

   

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

 

   

our general partner will have the right to convert its general partner interest into common units or to receive cash in exchange for that interest.

 

If for any quarter:

 

   

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

 

   

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

 

then, we will distribute any additional available cash from operating surplus for that quarter among the unitholders and our general partner in the following manner:

 

   

first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unitholder receives a total of $         per unit for that quarter (the “first target distribution”);

 

   

second, 85.0% to all unitholders, pro rata, 2.0% to our general partner and 13.0% to the holders of the incentive distribution rights, pro rata, until each unitholder receives a total of $         per unit for that quarter (the “second target distribution”);

 

   

third, 75.0% to all unitholders, pro rata, 2.0% to our general partner and 23.0% to the holders of the incentive distribution rights, pro rata, until each unitholder receives a total of $         per unit for that quarter (the “third target distribution”); and

 

   

thereafter, 50.0% to all unitholders, pro rata, 2.0% to our general partner and 48.0% to the holders of the incentive distribution rights, pro rata.

 

In each case, the amount of the target distribution set forth above is exclusive of any distributions to common unitholders to eliminate any cumulative arrearages in payment of the minimum quarterly distribution. The percentage interests set forth above assume that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of equity securities.

 

Percentage Allocations of Available Cash From Operating Surplus

 

The following table illustrates the percentage allocations of the additional available cash from operating surplus among the unitholders, our general partner and the holders of the incentive distribution rights up to the various target distribution levels. The amounts set forth under “Marginal Percentage Interest in Distributions” are the percentage interests of the unitholders, our general partner and the holders of the incentive distribution rights in any available cash from operating surplus we distribute up to and including the corresponding amount in the column “Total Quarterly Distribution Target Amount”, until available cash from operating surplus we distribute reaches the next target distribution level, if any. The percentage interests shown for the unitholders, our general

 

73


Table of Contents

partner and the holders of the incentive distribution rights for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests shown for our general partner include its 2.0% general partner interest only and assume that our general partner has contributed any capital necessary to maintain its 2.0% general partner interest.

 

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

Minimum Quarterly Distribution

   $      98.0     2.0     0

First Target Distribution

   up to $      98.0     2.0     0

Second Target Distribution

   above $

up to $

     85.0     2.0     13.0

Third Target Distribution

   above $

up to $

     75.0     2.0     23.0

Thereafter

   above $      50.0     2.0     48.0

 

Our General Partner’s Right to Reset Incentive Distribution Levels

 

Our general partner, as the initial holder of our incentive distribution rights, has the right under our partnership agreement to elect to relinquish the right of the holders of our incentive distribution rights to receive incentive distribution payments based on the initial cash target distribution levels and to reset, at higher levels, the minimum quarterly distribution amount and cash target distribution levels upon which the incentive distribution payments to our general partner would be set. Our general partner’s right to reset the minimum quarterly distribution amount and the cash target distribution levels upon which the incentive distributions payable to our general partner are based may be exercised, without approval of our unitholders or the conflicts committee of our general partner’s board of directors, at any time when there are no subordinated units outstanding and we have made cash distributions to the holders of the incentive distribution rights at the highest level of incentive distribution for each of the prior four consecutive fiscal quarters. If at the time of any election to reset the minimum quarterly distribution amount and the cash target distribution levels our general partner and its affiliates are not the holders of a majority of the incentive distribution rights, then any such election to reset shall be subject to the prior written concurrence of our general partner that the conditions described in the immediately preceding sentence have been satisfied. The reset minimum quarterly distribution amount and cash target distribution levels will be higher than the minimum quarterly distribution amount and the cash target distribution levels prior to the reset such that there will be no incentive distributions paid under the reset cash target distribution levels until cash distributions per unit following this event increase as described below. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would otherwise not be sufficiently accretive to cash distributions per common unit, taking into account the existing levels of incentive distribution payments being made to our general partner.

 

In connection with the resetting of the minimum quarterly distribution amount and the cash target distribution levels and the corresponding relinquishment by our general partner of incentive distribution payments based on the cash target distribution levels prior to the reset, our general partner will be entitled to receive a number of newly issued common units based on a predetermined formula described below that takes into account the “cash parity” value of the average cash distributions related to the incentive distribution rights received by our general partner for the two quarters prior to the reset event as compared to the average cash distributions per common unit during this period. We will also issue an additional amount of general partner units in order to maintain the general partner’s ownership interest in us relative to the issuance of the additional common units.

 

The number of common units that our general partner would be entitled to receive from us in connection with a resetting of the minimum quarterly distribution amount and the cash target distribution levels then in effect would be equal to (x) the average amount of cash distributions received by our general partner in respect of

 

74


Table of Contents

its incentive distribution rights during the two consecutive fiscal quarters ended immediately prior to the date of such reset election divided by (y) the average of the amount of cash distributed per common unit during each of these two quarters. The issuance of the additional common units will be conditioned upon approval of the listing or admission for trading of such common units by the national securities exchange on which the common units are then listed or admitted for trading.

 

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

 

   

first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unitholder receives an amount equal to 115.0% of the reset minimum quarterly distribution for that quarter;

 

   

second, 85.0% to all unitholders, pro rata, 2.0% to our general partner and 13.0% to the holders of the incentive distribution rights, pro rata, until each unitholder receives an amount per unit equal to 125.0% of the reset minimum quarterly distribution for that quarter;

 

   

third, 75.0% to all unitholders, pro rata, 2.0% to our general partner and 23.0% to the holders of the incentive distribution rights, pro rata, until each unitholder receives an amount per unit equal to 150.0% of the reset minimum quarterly distribution for that quarter; and

 

   

thereafter, 50.0% to all unitholders, pro rata, 2.0% to our general partner and 48.0% to the holders of the incentive distribution rights, pro rata.

 

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

 

     Quarterly
Distribution
per Unit

Prior to Reset
   Marginal Percentage
Interest in Distribution
    Holders of
IDRs
    Quarterly
Distribution per
Unit following
Hypothetical Reset
        Unitholders     General
Partner
     

Minimum Quarterly Distribution

   $      98.0     2.0     0   $

First Target Distribution

   up to $      98.0     2.0     0   up to $(1)

Second Target Distribution

   above $

up to $

     85.0     2.0     13.0   above $

up to $(2)

Third Target Distribution

   above $

up to $

     75.0     2.0     23.0   above $

up to $(3)

Thereafter

   above $      50.0     2.0     48.0   above $

 

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

 

75


Table of Contents

The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders, the general partner and the holders of the incentive distribution rights based on an average of the amounts distributed per quarter for the two quarters immediately prior to the reset. The table assumes that there are              common units and              general partner units outstanding, representing a 2.0% general partner interest, and that the average distribution to each common unit is $         for the two quarters prior to the reset. The assumed number of outstanding units assumes the conversion of all subordinated units into common units and no additional unit issuances.

 

    Quarterly
Distribution
per Unit
Prior to
Reset
    Common
Unitholders
Cash
Distributions
Prior to
Reset
    Additional
Common
Units
  General Partner and
IDR Holders Cash
Distribution Prior to
Reset
    Total
Distributions
 
        2.0%
General
Partner
Interest
    IDRs     Total    

Minimum Quarterly Distribution

  $                   $                     $                   $                   $                   $                

First Target Distribution

  $                 

Second Target Distribution

  $                 

Third Target Distribution

  $                 

Thereafter

  $                 
    $          $        $        $        $     
   

 

 

   

 

 

 

 

   

 

 

   

 

 

   

 

 

 

 

The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders, the general partner and the holders of the incentive distribution rights with respect to the quarter in which the reset occurs. The table reflects that as a result of the reset there are              common units and              general partner units outstanding, and that the average distribution to each common unit is $        . The number of additional common units was calculated by dividing (x) $         as the average of the amounts received by VTTI in respect of its incentive distribution rights for the two quarters prior to the reset as shown in the table above by (y) the $         of available cash from operating surplus distributed to each common unit as the average distributed per common unit for the two quarters prior to the reset.

 

    Quarterly
Distribution
per Unit

After Reset
    Common
Unitholders
Cash
Distributions
After Reset
    Additional
Common
Units
  General Partner and IDR
Holders Cash Distributions

After Reset
    Total
Distributions
 
          2.0%
General
Partner
Interest
    IDRs     Total    

Minimum Quarterly Distribution

  $                   $                     $                   $                   $                   $                

First Target Distribution

  $                 

Second Target Distribution

  $                 

Third Target Distribution

  $                 

Thereafter

  $                 
    $          $        $        $        $     
   

 

 

   

 

 

 

 

   

 

 

   

 

 

   

 

 

 

 

Assuming that it continues to hold a majority of our incentive distribution rights, VTTI will be entitled to cause the minimum quarterly distribution amount and the cash target distribution levels to be reset on more than one occasion, provided that it may not make a reset election except at a time when the holders of the incentive distribution rights have received incentive distributions for the prior four consecutive fiscal quarters based on the highest level of incentive distributions that the holders of incentive distribution rights are entitled to receive under our partnership agreement.

 

76


Table of Contents

Distributions From Capital Surplus

 

How Distributions From Capital Surplus Will Be Made

 

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

 

   

first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until the minimum quarterly distribution is reduced to zero, as described below;

 

   

second, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each common unit an amount of available cash from capital surplus equal to any unpaid arrearages in payment of the minimum quarterly distribution on the common units; and

 

   

thereafter, we will make all distributions of available cash from capital surplus as if they were from operating surplus.

 

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

 

Effect of a Distribution from Capital Surplus

 

The partnership agreement treats a distribution of capital surplus as the repayment of the consideration for the issuance of the units, which is a return of capital. Each time a distribution of capital surplus is made, the minimum quarterly distribution and the cash target distribution levels will be reduced in the same proportion as the distribution had to the fair market value of the common units prior to the announcement of the distribution. Because distributions of capital surplus will reduce the minimum quarterly distribution, after any of these distributions are made, it may be easier for our general partner to receive incentive distributions and for the subordinated units to convert into common units. However, any distribution of capital surplus before the minimum quarterly distribution is reduced to zero cannot be applied to the payment of the minimum quarterly distribution or any arrearages.

 

Once we reduce the minimum quarterly distribution and the cash target distribution levels to zero, we will then make all future distributions 50.0% to the holders of units, 2.0% to our general partner and 48.0% to the holders of the incentive distribution rights (initially, our general partner). The 2.0% interests shown for our general partner assumes that our general partner maintains its 2.0% general partner interest.

 

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

 

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

 

   

the minimum quarterly distribution;

 

   

the cash target distribution levels; and

 

   

the initial unit price.

 

For example, if a two-for-one split of the common and subordinated units should occur, the minimum quarterly distribution, the cash target distribution levels and the initial unit price would each be reduced to 50.0% of its initial level. If we combine our common units into a lesser number of units or subdivide our common units into a greater number of units, we will combine our subordinated units or subdivide our subordinated units, using the same ratio applied to the common units. We will not make any adjustment by reason of the issuance of additional units for cash or property.

 

77


Table of Contents

Distributions of Cash Upon Liquidation

 

If we dissolve in accordance with the partnership agreement, we will sell or otherwise dispose of our assets in a process called liquidation. We will apply the proceeds of liquidation in the manner set forth below.

 

If, as of the date three trading days prior to the announcement of the proposed liquidation, the average closing price for our common units for the preceding 20 trading days (or the current market price) is greater than the sum of:

 

   

any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period; plus

 

   

the initial unit price (less any prior capital surplus distributions and any prior cash distributions made in connection with a partial liquidation);

 

then the proceeds of the liquidation will be applied as follows:

 

   

first, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding common unit an amount equal to the current market price of our common units;

 

   

second, 98.0% to the subordinated unitholders, pro rata, and 2.0% to our general partner, until we distribute for each subordinated unit an amount equal to the current market price of our common units; and

 

   

thereafter, 50.0% to all unitholders, pro rata, 48.0% to holders of incentive distribution rights and 2.0% to our general partner.

 

If, as of the date three trading days prior to the announcement of the proposed liquidation, the current market price of our common units is equal to or less than the sum of:

 

   

any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period; plus

 

   

the initial unit price (less any prior capital surplus distributions and any prior cash distributions made in connection with a partial liquidation);

 

then the proceeds of the liquidation will be applied as follows:

 

   

first, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding common unit an amount equal to the initial unit price (less any prior capital surplus distributions and any prior cash distributions made in connection with a partial liquidation);

 

   

second, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period;

 

   

third, 98.0% to the subordinated unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding subordinated unit an amount equal to the initial unit price (less any prior capital surplus distributions and any prior cash distributions made in connection with a partial liquidation); and

 

   

thereafter, 50.0% to all unitholders, pro rata, 48.0% to holders of incentive distribution rights and 2.0% to our general partner.

 

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

 

78


Table of Contents

SELECTED HISTORICAL FINANCIAL

AND OPERATING DATA

 

We were formed in April 2014 and do not have historical financial statements. Therefore, in this prospectus we present the historical financial and operating data of VTTI Energy Partners LP Predecessor, consisting of the combined financial statements of the Holding Companies and the Operating Companies. We refer to our predecessor for accounting purposes as our “Predecessor”.

 

Upon completion of the formation transactions described under “Prospectus Summary—Formation Transactions”, the Holding Companies and the Operating Companies will become subsidiaries of VTTI Operating and we will own 36% of the profit shares and 51% of the voting shares of VTTI Operating. Since we will control VTTI Operating’s assets and operations through our majority voting interest, our future consolidated financial statements will include VTTI Operating, the Holding Companies and the Operating Companies as consolidated subsidiaries, and the selling unitholder’s 64% interest will be reflected as a non-controlling interest.

 

The selected historical financial data of our Predecessor as of and for the years ended December 31, 2012 and 2013 and the three months ended March 31, 2013 and 2014 has been derived from the audited historical combined carve-out financial statements of our Predecessor and the unaudited condensed combined interim financial statements of our Predecessor, respectively, prepared in accordance with U.S. GAAP, which are included elsewhere in this prospectus.

 

The following financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the historical combined carve-out financial statements of VTTI Energy Partners LP Predecessor and the notes thereto included elsewhere in this prospectus.

 

79


Table of Contents

Our results of operations, cash flows and financial conditions could differ from those that would have resulted if we operated autonomously or as an entity independent of VTTI in the periods for which historical financial data is presented below, and such data may not be indicative of our future operating results or financial performance.

 

     VTTI Energy Partners LP Predecessor  
     December 31,
2012
    December 31,
2013
    Three
Months
Ended
March 31,
2013
    Three
Months
Ended
March 31,
2014
 
                 (Unaudited)     (Unaudited)  
     (in US$ millions, except operating data)  

Statement of Operations Data:

        

Revenues

   $ 257.6      $ 299.2      $ 71.0      $ 73.5   

Operating costs and expenses:

        

Operating costs

     80.9        88.9        21.7        23.6   

Depreciation and amortization

     55.5        67.4        16.5        17.5   

Selling, general and administrative

     20.7        22.9        5.4        6.0   

Other operating expenses

     0.6        0.9        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     157.7        180.1        43.6        47.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income

     99.9        119.1        27.4        26.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

        

Interest expense, including affiliates

     (18.9     (30.0     (7.4     (7.5

Other expenses

     (0.7     (1.4     (0.4     (0.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (19.6     (31.4     (7.8     (7.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     80.3        87.7        19.6        18.6   

Income tax expense

     (14.2     (17.7     (3.6     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     66.1      $ 70.0      $ 16.0      $ 18.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-controlling interest

     (5.2     (5.5     (1.3     (1.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to parents’ equity

   $ 60.9      $ 64.5      $ 14.7      $ 17.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Statement of Cash Flow Data:

        

Net cash provided by operating activities

   $ 121.1      $ 149.9      $ 30.6      $ 27.7   

Net cash used in investing activities

     (146.1     (84.7     (19.0     (11.9

Net cash provided by financing activities

     54.5        (51.0     3.5        (13.4

Other Financial Data:

        

Adjusted EBITDA(1)

   $ 155.4      $ 186.5      $ 43.9      $ 43.9   

Balance Sheet Data (at period end):

        

Cash and cash equivalents

   $ 38.7      $ 54.5        $ 56.8   

Total assets

     1,584.4        1,658.5          1,660.0   

Total liabilities

     880.8        1,012.8          1,007.2   

Total owner’s equity

     703.6        645.7          652.8   

Operating Data:

        

Gross storage capacity, end of period (MMBbls)

     35.3        35.5          35.5   

 

(1)   We define Adjusted EBITDA as net income (loss) before interest expense, income tax expense, depreciation and amortization expense, as further adjusted to reflect certain other non-cash and non-recurring items.

 

80


Table of Contents

Adjusted EBITDA is a non-GAAP supplemental financial measure that management and external users of our combined financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess our operating performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or financing methods, and the viability of acquisitions and other capital expenditure projects and the returns on investment in various opportunities.

 

We believe that the presentation of Adjusted EBITDA in this prospectus provides useful information to management in assessing our financial condition and results of operations. The U.S. 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 U.S. 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 U.S. GAAP. Because Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of Adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing its utility. The following table reconciles Adjusted EBITDA to net income for each of the periods indicated.

 

     Year Ended
December 31,
2012
     Year Ended
December 31,
2013
     Three Months
Ended

March 31,
2013
     Three Months
Ended

March 31,
2014
 
                   (unaudited)      (unaudited)  
     (in US$ millions)  

Net income

   $ 66.1       $ 70.0       $ 16.0       $ 18.6   

Interest expense, including affiliates

     18.9         30.0           7.4           7.5   

Other items(a)

     0.7         1.4           0.4           0.3   

Depreciation and amortization

     55.5         67.4           16.5           17.5   

Income tax expense

     14.2         17.7           3.6           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $     155.4       $     186.5       $ 43.9       $ 43.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (a)   Other items consist of non-cash items in operating expenses and anticipated timing differences between the recognition and receipt of revenues.

 

81


Table of Contents

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

OPERATIONS

 

The historical financial statements included in this prospectus reflect the assets, liabilities and operations of VTTI Energy Partners LP Predecessor, consisting of the combined financial statements of the Holding Companies and the Operating Companies. We refer to our predecessor for accounting purposes as our “Predecessor”.

 

Upon completion of the formation transactions described under “Prospectus Summary—Formation Transactions”, the Holding Companies and the Operating Companies will become subsidiaries of VTTI Operating and we will own 36% of the profit shares and 51% of the voting shares of VTTI Operating. Since we will control VTTI Operating’s assets and operations through our majority voting interest, our future consolidated financial statements will include VTTI Operating, the Holding Companies and the Operating Companies as consolidated subsidiaries, and the selling unitholder’s 64% interest will be reflected as a non-controlling interest.

 

The following discussion analyzes the results of operations and financial condition of the Predecessor. You should read this discussion in conjunction with the historical and pro forma financial statements and accompanying notes included in this prospectus. All references in this section to “we”, “our”, “us” or similar terms refer to VTTI Energy Partners LP (including VTTI Operating, the Holding Companies and the Operating Companies) when used in the present or future tense and refer to our Predecessor when used in historical context.

 

This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors” included elsewhere in this prospectus.

 

Overview

 

We are a fee-based, growth-oriented limited partnership formed in April 2014 by VTTI, one of the world’s largest independent energy terminaling businesses, to own, operate, develop and acquire refined petroleum product and crude oil terminaling and related energy infrastructure assets on a global scale. Our initial assets consist of a 36% interest in VTTI Operating, which owns a portfolio of 6 terminals with 396 tanks and 35.5 million barrels of refined petroleum product and crude oil storage capacity located in Europe, the Middle East, Asia, and North America. Our network of terminal facilities represents one of the largest independent portfolios of refined petroleum product and crude oil terminaling assets in the world when measured by total storage capacity. Since inception in 2006, our parent VTTI has increased its operating storage capacity by 47.6 million barrels through a balance of organic development projects, greenfield construction and third party acquisitions. Capitalizing on our relationship with VTTI and its owners, Vitol and MISC, we intend to continue our growth through acquisitions from VTTI or third parties, organic development opportunities, greenfield construction and optimization of our existing assets, and we have a management team dedicated to executing this growth strategy.

 

Our primary business objective is to generate stable and predictable cash flows that will enable us to pay quarterly cash distributions to our unitholders and to increase those distributions over time. We generate substantially all of our revenue from long-term, fee-based, take-or-pay contracts for the terminal storage and throughput of refined petroleum products and crude oil. Our contracts have a weighted average remaining tenor of more than four years as of June 30, 2014, including the guarantee period described below under “Business—Our Assets—Our Initial Assets”. The counterparties to our terminal contracts are primarily major energy industry participants with strong credit profiles. We do not have direct commodity price exposure because we do not own the underlying commodities being stored at our terminals and do not engage in the trading of any commodities.

 

82


Table of Contents

How We Generate Revenues

 

We operate in a single segment consisting of fee-based terminaling services. We generate 100% of our revenue through the provision of these services to our customers under long-term agreements. The types of fees we charge are (1) storage and throughput fees and (2) excess throughput and ancillary fees. For the years ended December 31, 2012 and 2013 and the three months ended March 31, 2013 and 2014, we generated approximately 90%, 88%, 93% and 93%, respectively, of our revenue from storage and throughput fees. Our customers are required to pay these storage and throughput fees to us regardless of the actual storage capacity they use or the volume of products that we receive. The remainder of our revenues, consisting of 10%, 12%, 7% and 7% for the years ended December 31, 2012 and 2013 and the three months ended March 31, 2013 and 2014, respectively, were generated from excess throughput and ancillary fees for services such as mixing, blending, heating and transferring products between our tanks or to rail or truck.

 

The substantial majority of our customers require access to large, strategically located storage capacity in close proximity to demand markets, export markets, transportation infrastructure and/or refineries. Our combination of geographic location, efficient and well-maintained storage assets and access to multiple modes of transportation gives us the flexibility to meet the evolving demands of our existing customers, as well as the demands of prospective customers seeking terminaling services throughout our areas of operation.

 

As of March 31, 2014, substantially all of our available storage capacity was under contract. We have long-standing relationships with our customers and have a successful track record of renewing customer contracts upon expiration. While we believe that each of our terminals will be contracted for the foreseeable future at a rate not less than the respective rate in effect as of the date of this prospectus, we will enter into an omnibus agreement with VTTI in connection with this offering under which VTTI will guarantee the rates of certain capacity currently contracted by Vitol for a specified period of time after the Vitol terminaling services agreements expire. This will result in an overall weighted average contract tenor as of June 30, 2014, of more than four years. Although we will make every effort to renew existing contracts or seek new customers upon the expiration of existing terminaling services agreements, if we are unable to do so, we believe that this guarantee arrangement will provide us with stable and predictable cash flows for an extended period of time. For more on this guarantee arrangement, see “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement—Guarantees”.

 

Factors That Impact Our Business

 

The revenues generated by our business are generally driven by storage capacity and throughput volumes that we have under contract, the commercial utilization of our terminal facilities in relation to their capacity and the prices we receive for our services, which in turn are driven by the demand for the products being shipped through or stored in our facilities. Though all of our terminal service agreements require a customer to pay for tank capacity regardless of use, our revenues can be affected by (1) the length of the underlying service contracts, pricing changes and shifts in the products handled when the underlying storage capacity is recontracted, (2) fluctuations in product volumes to the extent revenues under the contracts are a function of the amount of product stored or transported, and (3) changes in the demand for ancillary services such as mixing, blending, heating and transferring products between our tanks or to rail or truck.

 

We believe key factors that influence our business are (1) the long-term demand for and supply of refined petroleum products and crude oil, (2) the demand for terminaling services, (3) the needs of our customers together with the competitiveness of our service offerings with respect to terminal location, flexibility of infrastructure, quality of service, price and safety and (4) our ability and the ability of our competitors to capitalize on changing market dynamics and opportunities for acquisitions, organic development, greenfield construction and optimization of existing assets.

 

83


Table of Contents

Supply and Demand for Refined Petroleum Products and Crude Oil

 

Our results of operations are dependent upon the volumes of refined petroleum products and crude oil we have contracted to handle and store and, to a lesser extent, on the actual volumes of refined petroleum products and crude oil we handle and store for our customers. An important factor in such contracting is the amount of production and demand for refined petroleum products and crude oil. The production of and demand for refined petroleum products and crude oil are driven by many factors, including the price for crude oil and general economic conditions. To the extent practicable and economically feasible, we generally attempt to mitigate the risk of reduced volumes and pricing by negotiating contracts with minimum payments based on available capacity and with multi-year terms. However, an increase or decrease in the demand for refined petroleum products and crude oil in the areas served by our terminals will have a corresponding effect on (1) the volumes we contract to terminal and store if we are not able to extend or replace our existing customer contracts and (2) the volumes we actually terminal and store.

 

Demand for Terminaling Services

 

Because we do not take ownership of the refined petroleum products or crude oil that we store or handle on behalf of our customers and do not engage in the trading of any commodities, we do not have any direct commodity exposure. However, certain commodity pricing dynamics have an effect on demand for our terminaling services.

 

If the prices of refined products and crude oil become relatively stable, the market remains in a prolonged backwardated (future prices lower than current prices) or contango (future prices higher than current prices) state, changes in product specifications occur or if governmental regulations are passed that alter our customers’ need to store those commodities, demand for our terminaling services could change. We seek to mitigate the impact of near-term commodity market price dynamics by generally entering into long-term agreements with our customers that have significant terminaling services fee components.

 

Customers and Competition

 

We provide terminaling services for a number of major energy industry participants, including marketing companies, major integrated oil companies, national oil companies, distributors and chemical and petrochemical companies. In general, the mix of services we provide to our customers varies depending on market conditions, expectations for future market conditions and the overall competitiveness of our service offerings.

 

The terminaling markets in which we operate are very competitive, and we compete with other terminal operators on the basis of terminal location, flexibility of infrastructure, quality of service, price and safety. The competitiveness of our service offerings could be significantly impacted by the entry of new competitors into the markets in which we operate. We believe, however, that significant barriers to entry exist, including significant costs and execution risk, a lengthy permitting and development cycle, financing challenges, shortage of personnel with the requisite expertise, a finite number of sites with connectivity suitable for development and the costs of industry regulations and development of internal controls to ensure compliance therewith.

 

We continuously monitor the competitive environment, the evolving needs of our customers, current and forecasted market conditions and the competitiveness of our service offerings in order to maintain the proper balance between optimizing near-term earnings and cash flow and positioning the business for sustainable long-term growth. Because of our significant investments in maintaining high quality assets and because terminaling is our core business, we believe that we can be more flexible and responsive to the needs of our customers than many of our competitors.

 

84


Table of Contents

Third Party Acquisitions, Organic Development Opportunities, Greenfield Construction and Optimization of Existing Assets

 

Regional refined petroleum products and crude oil supply and demand dynamics shift over time, which can lead to significant changes in demand for terminaling services. At such times, we believe that terminaling companies that have positioned themselves for third party acquisitions, organic development opportunities, greenfield construction and the optimization of existing assets will be at a competitive advantage in capitalizing on the shifting market dynamics.

 

At the closing of this offering, VTTI will agree to offer us the right to acquire its existing and future energy infrastructure assets before offering to sell any such assets to any third party. We plan to pursue accretive acquisitions of these assets. We also will seek to identify and acquire third party assets both independently and jointly with VTTI or third parties. Where feasible, we have designed the infrastructure at our terminals to facilitate future expansion, which we expect to both reduce our overall capital and operating costs per additional barrel of storage capacity and shorten the duration and enhance the predictability of development timelines. Our terminals have available land that should allow us to increase our storage capacity if warranted by market conditions. We also will pursue development of new terminals independently of, or in partnership with, VTTI in order to meet increasing demand for our services. We will further strive to maximize the utilization of our terminals by providing access to multiple modes of transportation, advanced blending and loading technology and high capacity throughput and storage equipment such as tanks, pumps and berths in order to provide our customers with maximum flexibility and optionality. Accordingly, we believe that we are well positioned to grow organically in response to changing market conditions.

 

Factors Impacting the Comparability of Our Financial Results

 

You should consider the following facts when evaluating our historical results of operations and assessing our future prospects:

 

   

We consolidate VTTI Operating’s financial results.    Upon completion of this offering, we will own 36% of the profit shares and 51% of the voting shares of VTTI Operating. Since we will control VTTI Operating’s assets and operations through our majority voting interest, our pro forma financial statements consolidate, and our financial statements after the closing of this offering will consolidate, all of VTTI Operating’s financial results with ours in accordance with U.S. GAAP. Consequently, our future consolidated financial statements will include VTTI Operating as a consolidated subsidiary, and the selling unitholder’s 64% interest will be reflected as a non-controlling interest.

 

   

The assets of VTTI Operating will change over time.    Our combined carve-out financial statements reflect changes in the size and composition of VTTI Operating’s terminals. We expect VTTI Operating’s terminaling assets to continue to change over time.

 

   

Our ownership interest in VTTI Operating may change.    Pursuant to the omnibus agreement with VTTI, we will have the right of first offer to purchase VTTI’s remaining interest in VTTI Operating.

 

   

Our historical results of operations are affected by fluctuations in currency exchange rates.    A portion of our revenue is received in currencies other than the U.S. dollar. The revenues we receive from our operations in The Netherlands and in Belgium are denominated in Euros. See Note 18 to our combined consolidated carve-out financial statements for further information.

 

   

We will incur additional general and administrative expenses as a result of being a publicly traded limited partnership.    We expect we will incur approximately $3.0 million annually in general and administrative expenses related to being a publicly traded limited partnership that we have not previously incurred, including costs associated with annual reports to unitholders, tax return preparation, investor relations, audit fees, legal fees, incremental director and officer liability insurance costs and directors’ compensation.

 

   

We may enter into different financing agreements.    Our Credit Facilities that we expect to enter into at or prior to the closing of this offering may not be representative of the financing agreements that will be in place in the future.

 

85


Table of Contents

Overview of Our Results of Operations

 

Our management uses a variety of financial measurements to analyze our performance, including the following key measures:

 

   

revenues derived from (1) storage and throughput fees and (2) excess throughput and ancillary fees;

 

   

our operating and selling, general and administrative expenses; and

 

   

our Adjusted EBITDA.

 

In our period to period comparisons of our revenues and expenses set forth below, we analyze the following revenue and expense components:

 

Revenues

 

We characterize our revenues into two different types, as follows:

 

   

Storage and Throughput Fees.    Our customers pay us fixed monthly fees for storage and associated liquid throughput handling, even if the actual capacity they use or the amount of product that we receive is less than the amount reserved. Storage and throughput fees generated approximately 88% and 93% of our revenues for the year ended December 31, 2013 and the three months ended March 31, 2014, respectively.

 

   

Excess Throughput and Ancillary Fees.    Our customers pay excess throughput fees if the actual product handled is more than the amount agreed in the contract and pay us additional fees for ancillary services such as mixing, blending, heating and transferring products between our tanks or to rail or truck. For the year ended December 31, 2013 and the three months ended March 31, 2014, we generated approximately 12% and 7% of our revenues, respectively, from excess throughput and ancillary service fees.

 

Operating Costs

 

Our operating expenses are comprised primarily of labor expenses, utility costs, repairs and maintenance expenses, leases and other costs. These expenses generally remain relatively stable across broad ranges of activity levels at our terminal facilities, but can fluctuate from period to period depending on the mix of activities performed during that period and the timing of these expenses. We seek to manage our maintenance expenses by scheduling maintenance over time to avoid significant variability in our maintenance expenses and minimize their impact on our cash flow.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses include costs not directly attributable to the operations of our facilities and include costs associated with annual reports to unitholders, tax return preparation, investor relations, audit fees, legal fees, incremental director and officer liability insurance costs and directors’ compensation. We expect to incur additional personnel and related costs and incremental external general and administrative expenses of approximately $3.0 million annually as a result of being a publicly traded partnership. These additional costs and expenses are not reflected in our historical financial statements.

 

Adjusted EBITDA

 

We define Adjusted EBITDA as net income (loss) before interest expense, income tax expense, depreciation and amortization expense, as further adjusted to reflect certain other non-cash and non-recurring items.

 

86


Table of Contents

Adjusted EBITDA is a non-GAAP supplemental financial measure that management and external users of our combined financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess our operating performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or financing methods, and the viability of acquisitions and other capital expenditure projects and the returns on investment in various opportunities.

 

We believe that the presentation of Adjusted EBITDA in this prospectus provides useful information to management in assessing our financial condition and results of operations. The U.S. 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 U.S. 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 U.S. GAAP. Because Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of Adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing its utility. For a reconciliation of this measure to its most directly comparable financial measures calculated and presented in accordance with U.S. GAAP, see “Selected Historical Financial and Operating Data”.

 

Results of Operations

 

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

 

The following table and discussion is a summary of the results of operations of our Predecessor for the three months ended March 31, 2013 and 2014.

 

     Three Months Ended
March 31,
 
             2013                     2014          
     (unaudited)  
     (in US$ millions)  

Revenues: