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Arc Logistics Partners LP (NYSE:ARCX)

Q4 2013 Results Earnings Conference Call

March 13, 2014 8:00 AM ET

Executives

Vince Cubbage - Chief Executive Officer

John Blanchard - President, Terminal

Bradley Oswald - Chief Financial Officer

Michael Hart - Executive Vice President, Corporate Development

Steven Schnitzer - General Counsel

Analysts

Theresa Chen - Barclays Capital

Michael Blum - Wells Fargo

Michael Klein - Robert W. Baird

Operator

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the Arc Logistics Partners LP Fourth Quarter and Full Year 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions)

As a reminder, today’s conference maybe recorded. Now, it’s my pleasure to turn the floor over to Steve Schnitzer. Sir, the floor is yours.

Steven Schnitzer

Good morning. I’m Steven Schnitzer, General Counsel of Arc Logistics Partners. Before I turn the call over to Vince, I would like to remind you of our few preliminary matters. During today’s call, we may make statements about our views, our expectations concerning future performance of Arc Logistics that constitute forward-looking statements within the meaning of federal securities laws, no assurances can be given, however, that these events will occur, many factors could cause results to differ from management’s expectations and actual results may differ materially from those projected in any forward-looking statements.

In addition, such results are subject to risk factors including without limited to, those described in our financial -- in our final prospectus filed with the SEC on November 7, 2013, and our quarterly reports quarter ended September 30, 2013 filed with the SEC on December 18, 2013. Please note that we undertake no obligation to update or revise any forward-looking statements made on this call.

In addition, during today’s call we will be discussing Arc Logistics’ adjusted EBITDA, which is a non-GAAP financial measure, a reconciliation of adjusted EBITDA to the most directly comparable GAAP measure is included in the press release that was issued yesterday, which has been filed with the SEC and posted on our website at www.arcxlp.com.

Most of you’d like to know we issued our press release announcing this call and our financial results after the market close yesterday, which is now available on our website at arcxlp.com. Webcast of today’s call will remain on our website for approximately one month.

Please also note that information we discuss on today’s call is non-recurring as of today March 13, 2014, and that any time sensitive information we discuss will not be correct or accurate as of the date or timing of any future replay.

I would like to now turn the call over to Vince Cubbage, CEO of Arc Logistics.

Vince Cubbage

Thank you, Steven. Good morning, everyone. Thank you for joining us today to discuss Arc Logistics Partners fourth quarter and full year 2013 results. I’m Vince Cubbage, CEO and joining me this morning are John Blanchard, who is President of our Terminal; Bradley Oswald, our Chief Financial Officer of Arc Logistics; Michael Hart, who is the Executive Vice President of Corporate Development; and Steven Schnitzer, whom we just heard from, our General Counsel.

We plan to review the Partnerships’ fourth quarter and full year results for 2013, speak freely about our expectations for 2014 and answer questions at the end of the call.

2013 was a transformational year for Arc Logistics marked by a number of significant accomplishments. The first accomplishment, we achieved record financial results. The Partnership increased our revenues in the fourth quarter by 116% and for the year by 109% in ’13 as compared to full year 2014 -- 2012.

On an adjusted EBITDA basis, the Partnership generated a quarter-over-quarter increase of approximately 158% and a year-over-year increase 2013 compared to 2012 of approximately 121%.

Financially, our 2013 results reflected a high level of contracted storage and throughput activity across our terminals. Some interesting new business development activity on the rail transloading side and discipline operating costs management delivered by our dedicated employees. The growth rate I just mentioned demonstrates the scalability of our platform to successful acquisition and new business development.

The second accomplishment is we significantly grew our business and asset base. During 2013, we increased our storage capacity by approximately 41%. We acquired a heavy products terminal and a methanol terminal in Mobile, Alabama. We also acquired a strategic light products terminal in Brooklyn, New York and added a rail transloading facility at Saraland, Alabama.

We also acquired interest in an LNG regasification facility, which is located at Pascagoula, Mississippi. The Mobile terminals we acquired included a main terminal and a methanol terminal located adjacent to the main terminal.

We acquired these terminals from a private owner in February 2013 and they handle various grades of asphalts, crude oil, methanol, for customers under long-term contracts and both have access to the main terminals deepwater Aframax capable dock.

The Brooklyn Terminal is a light products terminal we acquired in 2013. It has a total storage capacity of 63,000 barrels, the smallest terminal we have by capacity. It is a key strategic asset in a strategic market and its one of our leading terminals when measured by throughput.

And the new Saraland facility is the rail transloading side located in Saraland, Alabama. We acquired that in the first quarter of last year as well and expanded it up to 26 railcars a long loaded capacity if not. All of those sites are currently capable of servicing heated and non-heated railcars.

In November 2013, we used the portion of our IPO proceeds to acquire a 10.3% interest in the Gulf LNG regasification facility that’s located in the Pascagoula, Mississippi, that terminal is also owned by Kinder Morgan, GE Energy Financial Services and our sponsor Lightfoot Capital. Kinder Morgan operates facilities in all of its capacities contracted into a long-term takeaway contract. We received a quarterly distribution from our investment in that facility.

With these acquisitions at the end of the year, we had 14 terminals operating in United States, approximately 5 million barrels of storage capacity and two rail transloading facilities near Mobile, Alabama. Those adds to a capable throughput in 23,000 barrels per day on the transloading side. And we also owned our interest in the LNG terminal.

Another key improvement in 2013 was that we continue to diversify exposure to markets, products, individual customers. Our operating model is focused on providing safe, efficient and reliable service to our customers under primarily long-term contract and as we’ve grown the business, we’ve also focused on diversifying that business and our individual exposure to specific products, regions, supply points for customers.

Importantly, our acquisitions in 2013 combines with a focus on successful business and customer development initiative resulting in a favorable impact on contracts, tender and customer profile as well as business mix and geographic diversification. At year end 2013, our terminals are spread across East Coast, Gulf Coast and Midwest regions of the United States and our largest customer now represents only 60% of revenues compared to 42% of revenues in 2012.

Another critically important accomplishment in 2013 is the success of our management terminal personnel had again in this year in providing safe, efficient, reliable service to our customers. We conduct continual training in having incentive compensation structures for the realignment of these standards and their commitment to safety has resulted in statistics in health, safety and environmental metrics that are industry leading. Quite frankly, we are very proud of this record.

In 2013, we also accomplished the long-term goal we set several years ago. We completed our IPO. We successfully completed that IPO in November issuing 6.8 million common units pursuant to listed on New York Stock Exchange under the symbol ARCX. With the proceeds of the IPO to redeem a class of equity shares that we issued in connection with an earlier acquisition as well as purchase of 10.3% interest in Gulf LNG Holdings.

Being public enables us to more effective use our equity of future acquisition as well as excess capital to fund our growth and acquisition initiative. Finally we paid our first distribution to unitholders in February of this year as we continue to grow our business, we are focused on increasing revenue and EBITDA and therefore distributable cash flow with a specific objective of increase in 2014 cash available for distribution by approximately 10% over the projections we provided in our IPO prospectus.

With that, I’d like to turn the call over to Bradley Oswald, our CFO.

Bradley Oswald

Thanks Vince. Good morning. Before we discuss the quarterly and year end financial performance, I would like to remind participants today that we are disclosing our unaudited results and that the new public partnership had operated between section of its predecessors on terminals.

Therefore the financial results discussed herein reflects both the periods prior to and as for the completion of the IPO on November 12, 2013. As such, total results are not necessarily indicative of future performance and all participants are encouraged to read our Form 10-K for 2015 to understand the transition that occurred throughout 2013.

Because of this combination, a pre-imposed IPO financial results and related accounting treatment, certain standard performance metrics like earnings per unit and cash available for distribution are not meaningful for this 2013 transitional reporting period and are not presented.

For the fourth quarter of 2013, our net income was $0.4 million which represents a 72% decline from the fourth quarter of 2012 of $1.3 million. The year-over-year reduction in net income was primarily result of a one-time non-cash write-off of deferred financing fees of $2.6 million related to amending our credit facility which is partially offset by equity earnings from our new investment in Gulf LNG Holdings of $1.3 million.

Adjusted EBITDA increased 158% to $7.1 million for the fourth quarter 2013 compared to $2.8 million in the fourth quarter of 2012. The partnership’s strong results for the fourth quarter primarily driven by this year’s acquisition equity, the execution of new customer agreement, increased throughput and transloading activity and management’s completion of expansion projects which resulted in the increased revenues of $6.7 million, offset by increased operating expenses of $3.1 million and selling and general administrative expenses of $0.5 million.

For the full year 2013, our net income was $12.8 million compared to $5.4 million in 2012. Adjusted EBITDA for the year 2013 increased 121% to $24 million compared to $10.9 million for 2012. The Partnership’s year-over-year performance were then driven by 2013 acquisition activity, the execution of new customer agreement, the completion of expansion projects and increased customer activity which resulted in increased revenue of $25 million, offset by increased operating expenses.

During 2013, we spend over $160 million on expansion capital expenditures which resulted in the acquisition of three terminals and one transloading facility, investment in Gulf LNG Holdings and a completion of multiple expansion projects to deploy our continued commitment to our customers. The partnership estimate will expand approximately $3 million on maintenance capital expenditures in 2014, that’s evaluating a number of expansion projects, increased revenue and adjusted EBITDA.

Partnership ended the year with approximately $106 million in estimated indebtedness and approximately $5 million in cash, providing adequate liquidity to finished operations and solid capital expenditures.

On January 13th, we declared our -- on January 31, 2013, we declared our first quarterly cash distribution of $0.2064 per unit or $1.55 on an annualized basis. This distribution represent the program of distribution for the fourth quarter from the period November 13, 2013 through December 31, 2013. The program of distribution is a result of the partnership’s completing its initial public offering in November.

I will now turn the call over to John Blanchard for business and market update.

John Blanchard

Thanks, Brad. Good morning, everyone. 2013 was a tremendous year of growth for Arc Logistics. On the acquisition side, we have implemented the transition of Mobile Brooklyn Terminal as well as the Saraland transloading facility.

Overall, we’ve added approximately 9.5 barrels of storage and increased throughput activity by over 70% as compared to 2012. This transition included streamlining operations, training staff, improving asset capabilities and at the same time, reinforcing by highly focused on environmental health and safety. These acquisitions have expanded our relationships to new and existing customers and we feel will provide an opportunity for new growth moving forward.

In 2013, we also expanded the marine capabilities at our Blakeley terminal to offer Panamax vessels to receive and deliver product to the terminal and particular in the fourth quarter, we were able to extend our relationships with major oil companies under light products and by executing several new customer contracts.

We diversified our customer base in the mobile market to include international and regional distributors and marketers that are servicing many customers in the Gulf Coast. We also increased our rail capability in the mobile market from 6,500 barrels a day capacity to over 23,000 barrels a day of capacity.

We also completed an expansion project in mobile by adding 150,000 barrels of new storage that is fully contracted. We will continue down this growth path in 2014, as we fully integrate recent acquisitions and organic growth projects in light and heavy products markets.

As part of this growth, we will look to expand our light products presence through branded and unbranded customers. In our heavy product assets, we are looking to increase our tank utilization through several opportunities in the asphalt, chemical and crude markets.

Our largest project targeted for 2014 will be our mobile crude-by-rail facility,which offers Canadian National Railway direct services from Canada to the Gulf Coast refineries through our assets.

We expect this project to become operational in second half of 2014 and we’ve already acquired land abiding our Blakeley terminal to allow for new tankage once we are able to reach full capacity of this Gulf Coast unit train unloading facility.

We will continue to remain focused on projects related to contracts that have been executed or are at near completion. In addition, we are working with major oil companies to connect to our assets -- connect our assets to proprietary and common carrier pipelines.

In 2014, Arc Logistics will continue to pursue the execution of its business strategy and will remain focused on growth opportunities through organic projects, as well as throughout acquisitions. As an independent terminal operator, we will continue to partner and build relationships with our customers and expand our business around their respective growth opportunities.

I will now turn the call over to Vince for closing remarks.

Vince Cubbage

Thank you, John. In closing, Arc Logistics is well-positioned for continued success in 2014. 2013 marked another year of successfully identifying and completing both internal projects and making attractive acquisitions.

Importantly, we’ve also been successfully integrating these new assets into our business. We remain focused on executing a long-term business strategy to providing the highest level of safe, efficient and responsive service to our customers, investing in our existing operations and identifying and completing strategic opportunities.

We continue to work on a number of those projects and believe we are very well-positioned for both the strategic and the financial position to capitalize on those opportunities.

With that, we would be very happy to take any of your questions.

Question-and-Answer Session

Operator

Yes, sir. (Operator Instructions) And it looks like our first phone question will come from Theresa Chen with Barclays Capital. Please go ahead. Your line is open.

Theresa Chen - Barclays Capital

Good morning. My first question in regards to the higher cash available for distribution guidance, you mentioned that you are evaluating a number of opportunities that have led you to upward guidance and I just wanted to see if you could give us any color on what those opportunities look like. I just want general, what’s changed between when the IPO prospectus came out and now if you are confident with higher guidance?

John Blanchard

Sure. So there is several different opportunities that we have executed upon and we are going to continue to do on moving forward. As I stated -- this is John Blanchard. As I stated, we have executed several new contracts with some light product customers in the fourth quarter of 2014.

We want to continue to expand our relationships with those customers through 2014 and we are also going to pursue some growth within our -- again, in our crude-by-rail down in the Gulf Coast assets that should enhance our cash flow as well.

Theresa Chen - Barclays Capital

Okay. And just to clarify, are you planning to use the additional cash available for distribution to build coverage, or are you intended to pay around distribution?

Vince Cubbage

I think we will -- for the first few quarters, we’re planning to evaluate each project at the partnership, it’s currently evaluating in terms of its cash need, and we will make that determination each quarter going forward.

Theresa Chen - Barclays Capital

Understood. And then on the timing of the dropdown of the other 9.7% interest in both LNG, could you give us an update on that, is that still likely a 2015 event?

Vince Cubbage

I would tell you that that really is a decision of the parent’s board, the N number of discussions around it, and it’s certainly available to Arc Logistics at some point in the future, but the exact timing of that hasn’t been determined.

Theresa Chen - Barclays Capital

Okay. And then lastly, just on the M&A market, can you give us an update as what the acquisition environment looks like currently and where you see to expand either geographically or product-wise?

Vince Cubbage

Sure. I think that’s the question that all of us have a view on. When we look out the -- really the larger package of assets on the acquisition side, have a couple of characteristics, the pending my opinion it makes sense to a specific group of buyers, and those buyers have historically just based on some valuation metrics what we booked out over the last few years been willing to pay up for those assets.

Where we have been successful in our acquisition profile is finding things that makes sense to us or are supported by customer contracts, such as our Brooklyn acquisition where we really would a very logical strategic buyer for the asset, because we don’t have competing business strategy of marketing the commodity in the market where we’re purchasing them. So I guess big picture, the larger packages are expensive and it makes sense to do a few group of very strategic buyers that are willing to pay up and the smaller asset packages are a little niche with sound good success in evaluating and pursuing those.

Theresa Chen - Barclays Capital

Thank you very much.

Operator

Thank you, ma’am. Our next phone question will come from [James Sibly with HighTech Asset Management] (ph). Please go ahead. Your line is open.

Unidentified Analyst

Yes. I believe you’ve indicated at the IPO road show that a double-digit growth in distributions would be a reasonable thing to assume over the first few years of the -- I guess the partnership. I am wondering if your increased guidance 10% over the 22.5 million that was in your prospectus would change your view on what’s the reasonable distribution growth to expect?

Vince Cubbage

I think that’s been our first call, first IPO and really just completing a year with the IPO was November event, we’re not talking about the December result looking forward. I think we’re comfortable to guides we’ve been providing people. We see opportunities increased that based on a number of projects we’re working on, but right now we’re not increasing our guidance. I would look at as we’re confirming the guidance revisions for.

Unidentified Analyst

So we should be still comfortable expecting a 10% distribution growth year-over-year?

Vince Cubbage

Yes.

Unidentified Analyst

Okay. Thank you.

Operator

Thank you, sir. Our next phone question will come from the line of Michael Blum with Wells Fargo. Please go ahead. Your line is open.

Michael Blum - Wells Fargo

Thanks. Good morning, everybody. I guess first question, do you have a budget you can share for growth capital or organic capital for 2014?

Vince Cubbage

No, we don’t forecast acquisitions. In terms of internal projects…?

Michael Blum - Wells Fargo

Yes.

Vince Cubbage

I think what we would tell you is that those internal projects are what’s behind the forward guidance that we’re comfortable sharing, but that we -- as we look through where we provide guidance and where we draw the line between what we disclosed and update the actual project by project capital is not something that we’re disclosing.

Michael Blum - Wells Fargo

Okay. And then I realize it’s kind of a messy quarter because of all the moving pieces, but just on a company basis for the fourth quarter, do you have a maintenance capital number for the fourth quarter?

Bradley Oswald

Yes. For the fourth quarter, our maintenance capital expenditures line is approximately $1 million, fourth quarter.

Michael Blum - Wells Fargo

Okay, great. Thanks very much for the call I had.

Operator

(Operator Instructions) And it looks like our next phone question will come from Michael Klein with Robert W. Baird. Please go ahead. Your line is open.

Michael Klein - Robert W. Baird

Good morning, gentlemen. Thanks for taking my call. If I can follow up on Michael’s previous question in regards to the fourth quarter. Thanks for that maintenance CapEx number. What about cash interest expense number? Could you at all relate that so we could help determine distributable cash flow?

Bradley Oswald

The cash interest expense for the fourth quarter was a drop, it was just under $100 million a quarter.

Michael Klein - Robert W. Baird

Great. Thanks, Brad. And could you talk about the diversions in the LNG segment performance versus your expectations at IPO. That segment looks to have underperformed S1 guidance by roughly a $1 million for the quarter. Could you talk about the drivers there, and if you expect those operations to normalize going forward into 2014 and better match your S1 disclosure there?

Bradley Oswald

Michael, the disclosure that included in our fourth quarter numbers is only for the ownership having the LNG interest for 42 days. So we’re actually not representing for the fourth quarter. So when you normalize that for that time period, it should be in line with what the expectations were in the IPO.

Michael Klein - Robert W. Baird

Okay. Very good, Brad. Thank you. Can I ask more broadly thinking about the business from a very macro perspective, what would happen if we did in fact realize the major backwardation in the crude oil over incur full year business? Is there something that could be a headwind or a tailwind going forward? You gentlemen concern yourselves with that at all. Your input there would be appreciated.

John Blanchard

Yeah. This is John. So the way that we structure our contracts with customers that bring crude oil to our systems is under a minimum volume contract. So what we would really see really under that situation would be customers hitting their minimums and not taking risk on excess barrel as moving through our facility. So we generally are very conservative when we put our projections together and based them on what we feel is a very conservative volume through our facility.

So as moving forward if there are -- there is a backwardation or there are upset spreads, we anticipate that we would still have the minimum volumes under our contract and just be as we had suggested for our projections moving forward.

Michael Klein - Robert W. Baird

Great. So John, would that in fact be a headwind for your business?

John Blanchard

Backwardation?

Michael Klein - Robert W. Baird

That’s it.

John Blanchard

No, I mean, it would maintain relatively flat versus what we projected.

Michael Klein - Robert W. Baird

Great. Thanks, gentlemen. That’s it for me.

Operator

(Operator Instructions) Presenters, at this time I’m currently showing no additional questioners in the current queue. With that, this will conclude the Arc Logistics Partners fourth quarter and full year 2013 earnings conference call. Thank you for your participation and have a wonderful day.

Vince Cubbage

Well, thank you, everybody. On behalf of the company, we appreciate your time this morning and your support and we are happy you’ve done on our behalf. Everyone have a great day.

Operator

Thank you, sir. And again ladies and gentlemen, this does conclude today’s call. Thank you for your participation and have a wonderful day. You may disconnect at this time.

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