The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A – ORGANIZATION
Central Energy Partners LP,
formerly known as Rio Vista Energy Partners L.P. (
Partnership
), a Delaware limited partnership, was formed by Penn Octane
Corporation (
Penn Octane
) on July 10, 2003 and was a wholly-owned subsidiary of Penn Octane until September 30, 2004, the
date that Penn Octane completed a series of transactions that (i) transferred substantially all of its owned pipeline and terminal
assets in Brownsville, Texas and Matamoros, Mexico and certain immaterial liabilities to Rio Vista Operating Partnership L.P. (
RVOP
)
(ii) transferred Penn Octane’s 99.9% interest in RVOP to the Partnership and (iii) distributed all of its limited partnership
interests (Common Units) in the Partnership to its common stockholders (
Spin-Off
), resulting in the Partnership becoming
a separate public company. The Common Units represent 98% of the Partnership’s outstanding capital and 100% of the Partnership’s
limited partnership interests. The remaining 2% represented the General Partner interest. The General Partner is Central Energy
GP LLC, formerly known as Rio Vista GP, LLC (
General Partner
) (see Note B — Partners’ Capital) which was 75%
owned by Penn Octane. Penn Octane had 100% voting control over the General Partner pursuant to a voting agreement with the other
owner of the General Partner. The General Partner is entitled to receive distributions from the Partnership on its General Partner
interest and additional incentive distributions (see Note B – Partners Capital — Distributions of Available Cash) as
provided in the Partnership’s partnership agreement. The General Partner has sole responsibility for conducting the Partnership’s
business and for managing the Partnership’s operations in accordance with the partnership agreement. Common Unitholders do
not participate in the management of the Partnership. The General Partner does not receive a management fee in connection with
its management of the Partnership’s business, but is entitled to be reimbursed for all direct and indirect expenses incurred
on the Partnership’s behalf.
On November 17, 2010, the
Partnership, Penn Octane and Central Energy, LP, as successor in interest to Central Energy LLC, completed the transactions contemplated
by the terms of a Securities Purchase and Sale Agreement, as amended. At closing, the Partnership sold 12,724,019 Common Units
to Central Energy, LP for $3,950,000 and Penn Octane sold 100% of the limited liability company interests in the General Partner
(
GP Interests
) to Central Energy, LP for $150,000 (
Sale
). As a result, Penn Octane no longer had any interest in
the General Partner or any control over the operations of the Partnership. On May 26, 2011, Central Energy, LP transferred the
Newly Issued Common Units to its limited partners. In September 2011, Central Energy, LP transferred all of the GP Interests to
its limited partners and the sole members of the general partner of Central Energy, LP. As a result, Central Energy, LP no longer
holds any interest in the Partnership or the General Partner.
In July 2007, the Partnership
acquired the business of Regional Enterprises, Inc. (
Regional
). The principal business of Regional is storage, transportation
and railcar trans-loading of bulk liquids, including hazardous chemicals and petroleum products owned by its customers. Regional’s
principal facilities are located on the James River in Hopewell, Virginia, where it receives bulk chemicals and petroleum products
from ships and barges into approximately 10,400,000 gallons of available storage. Regional also receives product in rail tank cars
at its rail spur from which it trans-loads hazardous chemicals and petroleum liquids to its fleet of tanker trailers for delivery
throughout the mid-Atlantic region.
The accompanying consolidated
financial statements include the Partnership and its only operating subsidiary, Regional. The Partnership has two other subsidiaries
that have no operations – RVOP (see Note H – Commitments and Contingencies – TransMontaigne Dispute) and Rio
Vista Operating GP LLC. All significant intercompany accounts and transactions are eliminated. The Partnership and its consolidated
subsidiaries are hereinafter referred to as “Central”.
Central’s strategy is
to acquire midstream assets with a focus on gas transportation and services assets, including gas gathering, dehydration and compression
systems, pipelines, fractionation and condensate stabilization facilities and related assets.
CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A – ORGANIZATION – Continued
The unaudited consolidated
balance sheet as of September 30, 2012, the unaudited consolidated statements of operations for the three months and nine
months ended September 30, 2011 and 2012, the unaudited consolidated statements of cash flows for the nine months ended
September 30, 2011 and 2012 and the unaudited consolidated statement of partners’ capital (deficit) for the nine months
ended September 30, 2012, have been prepared by Central without audit. In the opinion of management, the unaudited
consolidated financial statements include all adjustments (which include only normal recurring adjustments) necessary to
present fairly the unaudited consolidated financial position as of September 30, 2012, the unaudited consolidated results of
operations for the three months and nine months ended September 30, 2011 and 2012, the unaudited consolidated statements of
cash flows for the nine months ended September 30, 2011 and 2012 and the unaudited consolidated statement of partners’
capital (deficit) for the nine months ended September 30, 2012.
Certain information and footnote
disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted pursuant to the rules and regulations of the Securities Exchange Commission,
although Central believes that the disclosures made are adequate to make the information not misleading. These unaudited consolidated
financial statements should be read in conjunction with Central’s Annual Report on Form 10-K for the year ended December
31, 2011 filed with the Securities and Exchange Commission.
Basis of Presentation
Certain reclassifications have
been made to prior period balances to conform in the current presentation. All reclassifications have been consistently applied
to the periods presented.
NOTE B – PARTNERS’ CAPITAL
Common
Units
The Common Units represent limited
partner interests in the Partnership. The holders of Common Units are entitled to participate in the Partnership’s distributions
and exercise the rights or privileges available to limited partners under the Second Amended and Restated Agreement of Limited
Partnership of the Partnership, as amended (
Partnership Agreement
). The holders of Common Units have only limited voting
rights on matters affecting the Partnership. Holders of Common Units have no right to elect the General Partner or its directors
on an annual or other continuing basis. Certain members of the General Partner have the right to appoint the directors of the General
Partner under the terms of the Second Amended and Restated Limited Liability Company Agreement of the General Partner (
GP Operating
Agreement
). Although the General Partner has a fiduciary duty to manage the Partnership in a manner beneficial to the Partnership
and its Unitholders, the directors of the General Partner also have a fiduciary duty to manage the General Partner in a manner
beneficial to its members. The General Partner generally may not be removed except upon the vote of the holders of at least 80%
of the outstanding Common Units; provided, however, if at any time any person or group, other than the General Partner and its
affiliates, or a direct or subsequently approved transferee of the General Partner or its affiliates, acquires, in the aggregate,
beneficial ownership of 20% or more of any class of units then outstanding, that person or group will lose voting rights on all
of its units and the units may not be voted on any matter and will not be considered to be outstanding when sending notices of
a meeting of Unitholders, calculating required votes, determining the presence of a quorum or for other similar purposes, unless
such restriction is waived in writing by the General Partner (which right can be exercised in its sole discretion). In addition,
the Partnership Agreement contains provisions limiting the ability of holders of Common Units to call meetings or to acquire information
about the Partnership’s operations, as well as other provisions limiting the holders of Common Units ability to influence
the manner or direction of management.
CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE B – PARTNERS’ CAPITAL
– Continued
Common
Units - Continued
On November 17, 2010, the Partnership
sold 12,724,019 newly-issued Common Units to Central Energy, LP for $3,950,000 in the Sale. On May 26, 2011, pursuant to the
terms of its limited partnership agreement, Central Energy, LP distributed the Newly Issued Common Units of the Partnership to
its limited partners. As a result, the Cushing MLP Opportunity Fund I L.P., a Delaware limited partnership (
Cushing Fund
),
holds 7,413,013 Common Units of the Partnership (46.7%) and Sanctuary Capital LLC holds 1,017,922 Common Units of the Partnership
(6.4%). Messrs. Anbouba and Montgomery, the sole members of the general partner of Central Energy, LP were not distributed any
Newly Issued Common Units. In March 2011, the General Partner waived the voting restriction referred to in the preceding paragraph
with respect to the 46.7% interest held by the Cushing Fund in the Partnership.
General Partner Interests
The General Partner owns a 2%
general partner interest in the Partnership. On November 17, 2010, in connection with the Sale, Penn Octane sold 100% of the
GP Interests to Central Energy, LP for $150,000. As a result, Penn Octane no longer has any interest in the General Partner or
any control over the operations of the Partnership.
In accordance with the terms
of the limited partnership agreement of Central Energy, LP, it distributed all of the GP Interests in the General Partner to its
limited partners in September 2011. As a result of this distribution, Messrs. Imad K. Anbouba and Carter R. Montgomery, the sole
members of Central Energy, LP’s general partner, each beneficially own 30.17% of the GP Interests. The Cushing Fund holds
25% of the GP Interests and the remaining interests are held by others, none representing more than 5% individually.
In addition to its 2% GP Interest,
the General Partner is the holder of incentive distribution rights which entitle it to an increasing portion of cash distributions
as described in the Partnership Agreement. As a result, cash distributions from the Partnership are shared by the Unitholders and
the General Partner based on a formula whereby the General Partner receives disproportionately more distributions per percentage
interest than the Unitholders as annual cash distributions exceed certain milestones.
The General Partner generally
has unlimited liability for the obligations of the Partnership, such as its debts and environmental liabilities, except for those
contractual obligations of the Partnership that are expressly made without recourse to the General Partner.
Distributions
of Available Cash
Until December 2010, all of
the Partnership’s Unitholders had the right to receive distributions from the Partnership of “available cash”
as defined in the Partnership Agreement in an amount equal to at least the minimum distribution of $0.25 per quarter per unit,
plus any arrearages in the payment of the minimum quarterly distribution on the units from prior quarters subject to any reserves
determined by the General Partner. The General Partner has a right to receive a distribution corresponding to its 2% General Partner
interest and the incentive distribution rights described above under “General Partner Interests”. The distributions
were to be paid within 45 days after the end of each calendar quarter.
In 2008, the Partnership made
distributions of $1,308,000 to Unitholders and $27,000 to the General Partner for the quarters ended March 31 and June 30,
2008. The Partnership did not make any distributions since August 18, 2008 for the quarter ended June 30, 2008. The amount of the
distributions paid through the June 2008 quarterly distribution represented the minimum quarterly distributions required to be
made by the Partnership pursuant to the Partnership Agreement through that date.
CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE B – PARTNERS’ CAPITAL
– Continued
Distributions
of Available Cash - Continued
In December 2010, the General
Partner and more than a majority in interest of the limited partners holding Common Units of the Partnership approved an amendment
to the Partnership Agreement to provide that the Partnership was no longer obligated to make distributions of “Common Unit
Arrearage” or “Cumulative Common Unit Arrearages” pursuant to the terms of the Partnership Agreement in respect
of any quarter prior to the quarter beginning October 1, 2011. The impact of this amendment is that the Partnership is not obligated
to Unitholders for unpaid minimum quarterly distributions prior to the quarter beginning October 1, 2011 and Unitholders would
only be entitled to minimum quarterly distributions arising from the quarter beginning October 1, 2011 and thereafter. This amendment
was incorporated into the Partnership Agreement in April 2011.
Based on Central’s current
cash flow constraints and the likelihood of a restriction on distributions by the Partnership as a result of anticipated acquisitions,
on March 28, 2012, the General Partner and Unitholders holding more than a majority in interest of the Common Units of the Partnership
voted to amend the Partnership Agreement to change the commencement of the payment of “Common Unit Arrearages” or “Cumulative
Common Unit Arrearages” from the quarter beginning October 1, 2011 until an undetermined future quarter established by the
Board of Directors of the General Partner. The impact of this amendment is that the Partnership is not obligated to Unitholders
for unpaid minimum quarterly distributions until such time as the Board of Directors of the General Partner reinstates the obligation
to make minimum quarterly distributions, and Unitholders would only be entitled to minimum quarterly distributions arising from
that time which is established and thereafter.
At the present time, the limited
partners of Central Energy, LP, the entity that acquired the Newly-Issued Common Units in the Sale, hold 80% of the total issued
and outstanding Common Units of the Partnership and, therefore, control any Limited Partner vote on Partnership matters. The ability
of the Partnership to make distributions can be further impacted by many factors including the ability to successfully complete
an acquisition, the financing terms of debt and/or equity proceeds received to fund the acquisition and the overall success of
the Partnership and its operating subsidiaries. In addition to eliminating the obligation to make payments of minimum quarterly
distributions until a quarter established by the Board of Directors of the General Partner, the General Partner expects that the
minimum quarterly distribution amount and/or the target distribution levels will be adjusted to a level which reflects the existing
economics of the Partnership and provides for the desired financial targets, including Common Unit trading price, targeted cash
distribution yields and the participation by the General Partner in incentive distribution rights. The distribution of the 12,724,019
Newly-Issued Common Units in the Sale (which did not result in the acquisition of any proportional increase in distributable cash
flow) and any additional issuance of Common Units or other Partnership securities in connection with the next acquisition will
not support the current minimum quarterly distribution of $0.25 per Common Unit. Management anticipates making this adjustment
in connection with an acquisition by the Partnership since the financing of an acquisition is likely to involve the issuance of
additional Common Units or other securities by the Partnership. In connection with an acquisition, the General Partner will be
able to better determine the future capital structure of the Partnership and the amounts of “distributable cash” that
the Partnership may generate in the future. The establishment of a revised target distribution rate may be accomplished by a reverse
split of the number of Partnership Common Units issued and outstanding and/or a reduction in the actual amount of the target distribution
rate per Common Unit.
NOTE C – INCOME (
Loss)
Per Common UNIT
Net (loss) per Common Unit is
computed on the weighted average number of Common Units outstanding in accordance with ASC 260. During periods in which Central
incurs losses, giving effect to common unit equivalents is not included in the computation as it would be antidilutive. The following
tables present reconciliations from net (loss) per Common Unit to net (loss) per Common Unit assuming dilution (see Note G –
Unit Options):
CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C – INCOME (
Loss)
Per Common UNIT
- Continued
|
|
For the three months ended September 30, 2011
|
|
|
|
(Loss)
(Numerator)
|
|
|
Units
(Denominator)
|
|
|
Per-Unit
Amount
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) available to the Common Units
|
|
$
|
(241,000
|
)
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) available to the Common Units
|
|
|
(241,000
|
)
|
|
|
15,866,482
|
|
|
$
|
(0.02
|
)
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) available to the Common Units
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
For the three months ended September 30, 2012
|
|
|
|
(Loss)
(Numerator)
|
|
|
Units
(Denominator)
|
|
|
Per-Unit
Amount
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) available to the Common Units
|
|
$
|
(362,000
|
)
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) available to the Common Units
|
|
|
(362,000
|
)
|
|
|
15,866,482
|
|
|
$
|
(0.02
|
)
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) available to the Common Units
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
For the nine months ended September 30, 2011
|
|
|
|
(Loss)
(Numerator)
|
|
|
Units
(Denominator)
|
|
|
Per-Unit
Amount
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) available to the Common Units
|
|
$
|
(1,060,000
|
)
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) available to the Common Units
|
|
|
(1,060,000
|
)
|
|
|
15,866,482
|
|
|
$
|
(0.07
|
)
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) available to the Common Units
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
For the nine months ended September 30, 2012
|
|
|
|
(Loss)
(Numerator)
|
|
|
Units
(Denominator)
|
|
|
Per-Unit
Amount
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) available to the Common Units
|
|
$
|
(1,069,000
|
)
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) available to the Common Units
|
|
|
(1,069,000
|
)
|
|
|
15,866,482
|
|
|
$
|
(0.07
|
)
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) available to the Common Units
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - PROPERTY, PLANT AND EQUIPMENT
|
|
December 31,
2011
|
|
|
September 30,
2012
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
512,000
|
|
|
$
|
512,000
|
|
Terminal and improvements
|
|
|
4,356,000
|
|
|
|
4,589,000
|
|
Automotive equipment
|
|
|
2,697,000
|
|
|
|
1,341,000
|
|
|
|
|
7,565,000
|
|
|
|
6,442,000
|
|
Less: accumulated depreciation and amortization
|
|
|
(3,645,000
|
)
|
|
|
(2,975,000
|
)
|
|
|
$
|
3,920,000
|
|
|
$
|
3,467,000
|
|
Depreciation expense of property,
plant and equipment totaled $161,000 and $134,000 for the three months ended September 30 2011 and 2012 and $490,000 and $431,000
for the nine months ended September 30, 2011 and 2012, respectively.
Sale of Regional’s
Owned Tractor Fleet
|
|
On February 17, 2012, in connection with Regional’s Vehicle Lease Service Agreement (see
Note H), Regional sold six of its owned tractors for proceeds of $97,000 of which $90,000 was used to fund the deposit required
pursuant to the aforementioned agreement and the remainder was used for working capital.
|
|
|
During May 2012 and June 2012, in connection with Regional’s Vehicle Lease Service Agreement
(see Note H), Regional sold twenty-one of its owned tractors for total proceeds of $410,000. As of September 30, 2012, $408,000
of the proceeds were used to meet ongoing debt service obligations (see Note E). The remaining balance of the proceeds at September
30, 2012 totaling approximately $2,000 was held in a restricted cash account with RZB (see below).
|
|
|
In connection with the sale of the tractor fleet, a gain of $256,000 was recorded during the nine
months ended September 30, 2012.
|
|
|
As a result of the aforementioned sale of Regional’s owned tractors, Regional’s truck
fleet currently consists of twenty leased tractors and five owned tractors.
|
NOTE E — DEBT OBLIGATIONS
|
|
December 31,
2011
|
|
|
September 30,
2012
|
|
Long-term debt obligations were as follows:
|
|
|
|
|
|
|
|
|
RZB Note
|
|
$
|
2,610,000
|
|
|
$
|
1,970,000
|
|
|
|
|
2,610,000
|
|
|
|
1,970,000
|
|
Less current portion
|
|
|
1,000,000
|
|
|
|
1,970,000
|
|
|
|
$
|
1,610,000
|
|
|
$
|
-
|
|
RZB Note
On July 26, 2007, the Partnership
borrowed $5,000,000 (
RZB Loan
) from RB International Finance (USA) LLC, formerly known as RZB Finance LLC (
RZB
),
the proceeds of which were used in connection with the acquisition of Regional. Through several amendments to the RZB Loan, Regional
became the borrower under the RZB Loan and the associated promissory note (
RZB Note
), and all of Regional’s assets,
as well as the outstanding capital stock of Regional, are pledged as collateral for the RZB Loan. RZB has the right to foreclose
on the assets of Regional in order to recover amounts owing under the RZB Loan. The interest rate is variable and approximated
5.8% for the quarter ended September 30, 2012.
On May 25, 2010, Regional and
RZB, entered into a Seventh Amendment (
Seventh Amendment
) in connection with the RZB Loan. Under the terms of the Seventh
Amendment, the maturity date of the RZB Note was extended until May 31, 2014 and monthly principal amortization requirements were
adjusted as follows:
CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E — DEBT OBLIGATIONS – Continued
RZB Note – Continued
May 2010 through April 2011
|
$ 50,000 Monthly amortization
|
May 2011 through April 2012
|
$ 70,000 Monthly amortization
|
May 2012 through April 2013
|
$ 90,000 Monthly amortization
|
May 2013 through April 2014
|
$100,000 Monthly amortization
|
May 2014
|
$ 50,000
|
Under the terms of the Seventh
Amendment, Regional was required to provide audited financial statements of Regional for the year ended December 31, 2009 by September
30, 2010 and subsequent annual audited financial statements of Regional within 90 days after the end of each subsequent annual
year end. In addition, the Seventh Amendment included additional restrictive covenants related to change in control, change in
management and distributions of cash. Per the loan agreement with RZB, Regional is also required to provide certified monthly financial
statements to RZB.
On November 9, 2010, Regional
and RZB entered into an Eighth Amendment (
Eighth Amendment
) in connection with the RZB Note. Under the terms of the Eighth
Amendment, the RZB Note was amended to provide for the ability of Central Energy, LP to replace Penn Octane as the owner of the
General Partner of Central upon consummation of the Securities Purchase and Sale Agreement and makes it an event of default under
the RZB Note if (i) Central Energy, LP or Central Energy, LLC, the sole general partner of Central Energy, LP, ceases to own or
control, directly or indirectly, at least 51% of the limited liability company interests of the General Partner, (ii) Messrs. Anbouba
and Montgomery cease to own and control 100% of the membership interests of Central Energy, LLC or (iii) Central Energy, LLC ceases
to be the sole general partner of Central Energy, LP and it also removed the provision that the RZB Note was required to be repaid
in full upon any change in control of the general partner of Central.
Upon an event of default, including
failure to make required payments under the RZB Note or Regional’s failure to provide the required financial statements as
prescribed, RZB at its sole discretion may, by written notice to Regional, declare the RZB Note immediately due and payable and
take all actions prescribed under the RZB Loan and the related security documents, as amended, including a foreclosure on the assets
and common stock of Regional which are held as collateral for the Loan. As a result of an Event of Default, interest accrues at
the Default Rate (as defined in the RZB Loan), and is payable on demand.
RZB Events of Default
Regional did not provide the
audited financial statements for the years ended December 31, 2009 and 2010 to RZB until April 22, 2011. At December 31, 2011 and
through August 31, 2012, Regional was in compliance with its obligations under the RZB Note.
On September 14, 2012, Regional
received a “Response and Notice of Default and Reservation of Rights” (
September 14 Default Notice
) from RZB
in connection with the RZB Loan. The September 14 Default Notice was the result of Regional’s failure to pay the August 2012
interest of $10,619.65 due and payable on September 4, 2012.
On October 4, 2012, Regional
received a “Notice of Default, Demand for Payment and Reservation of Rights” (
October 4 Demand Notice
) from
RZB in connection with the RZB Loan. The October 4 Demand Notice was delivered as the result of Regional’s failure to pay
the monthly principal payment in the amount of $90,000 due and payable on October 1, 2012 and the continued default with respect
to the non-payment of the interest payment as set forth in the September 14 Default Notice. The October 4 Demand Notice declares
all Obligations (as defined in the RZB Loan) immediately due and payable and demands immediate payment in full of all Obligations,
including fees, expenses and other costs of RZB. The October 4 Demand Notice also (1) contemplates the initiation of foreclosure
proceedings in respect of the property owned by Regional and covered by that certain Mortgage, Deed of Trust and Security Agreement
dated as of July 26, 2007, and (2) demands immediate payment of all rents due upon the property pursuant to the terms of the Assignment
of Leases and Rents dated July 26, 2007.
CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E — DEBT OBLIGATIONS – Continued
RZB Events of Default – Continued
On October 19, 2012, Regional
paid the outstanding interest due for August 2012 and September 2012 of $19,102.22. At September 30, 2012, the amount of principal
owing under the RZB Note is $1,970,000. As a result of the September 14 Default Notice and the October 4 Demand Notice, as of September
30, 2012, the RZB Note is immediately due and payable and therefore all amounts owing under the RZB Note have been classified as
current obligations. The parties are currently in discussions regarding steps to be taken to cure the default under the RZB Note.
Restricted Cash
In connection with Regional’s
Vehicle Lease Service Agreement (see Note H), Regional sold twenty-seven of its owned tractors
(Sold Tractors)
for total
proceeds of $507,000. RZB held a priority lien on the Sold Tractors. Under the terms of the RZB Loan, the net proceeds from the
Sold Tractors were deposited into a restricted account controlled by RZB and are to be used to prepay the RZB Loan unless RZB at
its sole discretion permitted such proceeds to be re-invested into Regional’s business. As of September 30, 2012, RZB has
allowed Regional to utilize $505,000 of the proceeds for working capital requirements, including shortfalls from operations to
meet ongoing debt service obligations.
NOTE F – UNIT-BASED PAYMENT
Central utilizes unit-based
awards as a form of compensation for employees, officers, managers and consultants of the General Partner. During the quarter ended
September 30, 2006, Central adopted the provisions of ASC 718 for unit-based payments to employees using the modified prospective
application transition method. Under this method, previously reported amounts should not be restated to reflect the provisions
of ASC 718. ASC 718 requires measurement of all employee unit-based payment awards using a fair-value method and recording of such
expense in the consolidated financial statements over the requisite service period. The fair value concepts have not changed significantly
in ASC 718; however, in adopting this standard, companies must choose among alternative valuation models and amortization assumptions.
After assessing alternative valuation models and amortization assumptions, Central will continue using both the Black-Scholes valuation
model and straight-line amortization of compensation expense over the requisite service period for each separately vesting portion
of the grant. Central will reconsider use of this model if additional information becomes available in the future that indicates
another model would be more appropriate, or if grants issued in future periods have characteristics that cannot be reasonably estimated
using this model. Central did not record unit-based payment expense for employees and non-employees for the three months and nine
months ended September 30, 2011 and 2012, under the fair-value provisions of ASC 718.
NOTE G – UNIT OPTIONS
Options
The Partnership has no employees
and is managed by its General Partner. Central applies ASC 718 for options granted to employees and managers of the General Partner
and ASC 505 for options issued to acquire goods and services from non-employees.
CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G – UNIT OPTIONS –
Continued
Equity
Incentive Plan
On March 9, 2005, the Board
of Directors of the General Partner approved the 2005 Equity Incentive Plan (
2005 Plan
). The 2005 Plan permits the grant
of common unit options, common unit appreciation rights, restricted Common Units and phantom Common Units to any person who is
an employee (including to any executive officer) or consultant of the Partnership or the General Partner or any affiliate of Central
or the General Partner. The 2005 Plan provides that each outside director of the General Partner shall be granted a common unit
option once each fiscal year for not more than 5,000 Common Units, in an equal amount as determined by the Board of Directors.
The aggregate number of Common Units authorized for issuance as awards under the 2005 Plan is 750,000. The 2005 Plan remains available
for the grant of awards until March 9, 2015, or such earlier date as the Board of Directors of the General Partner may determine.
The 2005 Plan is administered by the Compensation Committee of the Board of Directors of the General Partner. In addition, the
Board of Directors may exercise any authority of the Compensation Committee under the 2005 Plan. Under the terms of the Partnership
Agreement and applicable rules of the NASDAQ National Market, no approval of the 2005 Plan by the Unitholders of the Partnership
was required. At September 30, 2012, there were not any outstanding options to acquire Common Units. As of September
30, 2012, approximately 623,000 Common Units remain available for issuance under the 2005 Plan.
NOTE H - COMMITMENTS AND CONTINGENCIES
Legal Proceedings
VOSH Actions
On July 25, 2005, an equipment
failure during the loading of nitric acid from a railcar to a tanker truck resulted in a release of nitric acid and injury to an
employee of Regional. Cleanup costs totaled approximately $380,000 in 2005 and were covered entirely by reimbursement from Regional’s
insurance carrier. Several lawsuits against Regional were filed by property owners in the area. All of these suits were settled
for an aggregate amount of $115,000, which was within insurance coverage limits. The Virginia Department of Labor and Industry,
Occupational Safety and Health Compliance issued a citation against Regional on October 7, 2005 seeking a fine of $4,500. Regional
requested withdrawal of the citation and disputed the basis for the citation and the fine. On June 18, 2007, the Commissioner of
Labor and Industry filed suit against Regional in the Circuit Court for the City of Hopewell for collection of the unpaid fine.
The citation arose from allegations that Regional had failed to evaluate properly the provision and use of employer-supplied equipment.
During September 2012, the Court dismissed the citations after a bench trial.
On November 27, 2005, an employee
of Regional died following inhalation of turpentine vapors. Under Virginia law, recovery by the deceased employee’s estate
was limited to a workers compensation claim, which was closed on April 20, 2007 for the amount of $11,000. The Virginia Department
of Labor and Industry, Occupational Safety and Health Compliance issued a citation against Regional on May 24, 2006 seeking a fine
of $28,000. Regional requested withdrawal of the citation and disputed the basis for the citation and the fine. The amount of the
fine is not covered by insurance. On June 18, 2007, the Commissioner of Labor and Industry for the Commonwealth of Virginia filed
suit against Regional in the Circuit Court for the City of Hopewell for collection of the unpaid fine. There were four citations
involved in the case referenced above. One of the citations arose from the Commissioner's allegations that Regional had exposed
this employee to levels of hydrogen sulfide gas in excess of the levels permitted by applicable regulations. Another citation
arose from the Commissioner's allegations that Regional had not provided respiratory protection equipment needed to protect this
employee from hazards in the workplace. The other two citations arose from the Commissioner's allegations that Regional had
not evaluated the need for respiratory equipment in this work environment and had not evaluated the need to create a confined-space
permit entry system for the employee's work in taking a sample of turpentine from the top of the railcar. During September 2012,
the Court dismissed the first two citations after a bench trial. The Court has called for briefing on the other two citations.
Regional is cautiously optimistic that, after briefing, the Court will dismiss the other two citations as well.
CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - COMMITMENTS AND CONTINGENCIES
- Continued
Legal Proceedings - continued
Other Contingencies
Central is involved with other
proceedings, lawsuits and claims in the ordinary course of its business. Central believes that the liabilities, if any, ultimately
resulting from such proceedings, lawsuits and claims should not materially affect its consolidated financial results.
TransMontaigne Dispute
RVOP is a subsidiary of the
Partnership which held liquid petroleum gas assets located in southern Texas and northern Mexico (
LPG Assets
) contributed
to it by Penn Octane Corporation upon formation of the Partnership. It sold all of the LPG Assets to TransMontaigne in two separate
transactions. The first transaction included the sale of substantially all of its U.S. assets, including a terminal facility and
refined products tank farm located in Brownsville, Texas and associated improvements, leases, easements, licenses and permits,
an LPG sales agreement and its LPG inventory in August 2006. In a separate transaction, RVOP sold its remaining LPG Assets to affiliates
of TransMontaigne, including TMOC Corp., in December 2007. These assets included the U.S. portion of two pipelines from the Brownsville
terminal to the U.S. border with Mexico, along with all associated rights-of-way and easements and all of the rights for indirect
control of an entity owning a terminal site in Matamoros, Mexico. The Purchase and Sale Agreement dated December 26, 2007 (Purchase
and Sale Agreement) between TransMontaigne and RVOP provided for working capital adjustments and indemnification under certain
circumstances.
RVOP has received demands for
indemnification dated December 17, 2008, December 31, 2008, March 17, 2009, May 12, 2009, May 18, 2009, March 18, 2010, September
22, 2010 and January 24, 2011 (
Indemnification Notices
) seeking reimbursement from RVOP for $775,000 in claims relating
to working capital adjustments and indemnification obligations as prescribed under the Purchase and Sale Agreement. In addition
to the aforementioned claims, the January 24, 2011 Indemnification Notice included a demand for indemnification based on a lawsuit
filed by MCAR Development against Razorback, LLC, a subsidiary of TransMontaigne, on January 4, 2011, which lawsuit demands payment
of damages resulting from a pipeline meandering outside the recorded pipeline easement. Razorback had requested that RVOP assume
the defense of the litigation and provide indemnification to Razorback. RVOP did not agree to assume the defense of the litigation
but is cooperating with TransMontaigne in its defense of the litigation. RVOP intends to work with TransMontaigne to define the
scope of the adjustments contained in the Indemnification Notices to an amount which RVOP considers to be more realistic and which
also considers RVOP offsets to the amounts already presented by TransMontaigne. Any amount which may subsequently be agreed to
by TransMontaigne and RVOP shall first be charged to the $500,000 Holdback provided for in the Purchase and Sale Agreement, and
also is subject to the $1,000,000 indemnification limitation. RVOP has accrued a reserve of approximately $283,000 for potential
future obligations in addition to the Holdback. RVOP’s management believes that the amount of the TransMontaigne claim will
be resolved within the amounts provided.
CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - COMMITMENTS AND CONTINGENCIES
- Continued
Terminal Operator Status of Regional Facility
In May 2011, Regional was contacted
by the IRS regarding whether its Hopewell, Virginia facility would qualify as a “terminal operator” which handles “taxable
fuels” and accordingly is required to register through a submission of Form 637 to the IRS. Code Section 4101 provides that
a “fuel terminal operator” is a person that (a) operates a terminal or refinery within a foreign trade zone or within
a customs bonded storage facility or, (b) holds an inventory position with respect to a taxable fuel in such a terminal. In June
2011, an agent of the IRS toured the Hopewell, Virginia facility and notified the plant manager verbally that he thought the facility
did qualify as a “terminal operator.” As a result, even though Regional disagrees with the IRS agent’s analysis,
it elected to submit, under protest, to the IRS a Form 637 registration application in July 2011 to provide information about the
Hopewell facility. Regional believes that its Form 637 should be rejected by the IRS because (a) the regulations do not apply to
Regional’s facility, (b) the items stored do not meet the definition of a “taxable fuel” and (c) there were no
taxable fuels being stored or expected to be stored in the foreseeable future that would trigger the registration requirement.
To date, Regional has not received a response with respect to its Form 637 submission or arguments that it is not subject to the
Requirements. Should the IRS find Regional to be a fuel terminal operator as defined in the Code, Regional would be subject to
additional administrative and filing requirements, although the associated costs associated with compliance are not expected to
be material. Also in such case, the management of Regional does not expect that there will be any retroactive penalties assessed
as a result of previously not applying and filing as a terminal operator, though management does expect that Regional would be
subject to penalties for the failure to file timely with the IRS any future required reports or forms.
Agreements
Penske Truck Lease
Effective January 18, 2012,
Regional entered into a Vehicle Maintenance Agreement (
Maintenance Agreement
) with Penske Truck Leasing Co., L. P. (
Penske
)
for the maintenance of its owned tractor and trailer fleet. The Maintenance Agreement provides for (i) fixed servicing as described
in the agreement, which is basically scheduled maintenance, at the fixed monthly rate for tractors and for trailers and (ii) additional
requested services, such as tire replacement, mechanical repairs, physical damage repairs, tire replacement, towing and roadside
service and the provision of substitute vehicles, at hourly rates and discounts set forth in the agreement. Pricing for the fixed
services is subject to upward adjustment for each rise of at least one percent (1%) for the Consumer Price Index for All Urban
Consumers for the United States published by the United States Department of Labor. The term of the agreement is 36 months. Regional
is obligated to maintain liability insurance coverage on all vehicles naming Penske as a co-insured and indemnify Penske for any
loss it or its representatives may incur in excess of the insurance coverage. Penske has the right to terminate the Maintenance
Agreement for any breach by Regional upon 60 days written notice, including failure to pay timely all fees owing Penske, maintenance
of Regional’s insurance obligation or any other breach of the terms of the agreement.
On February 17, 2012, Regional
entered into a Vehicle Lease Service Agreement with Penske for the outsourcing of 20 new Volvo tractors (
New Tractors
) to
be acquired by Penske and leased to Regional, and the outsourcing of the maintenance of the New Tractors to Penske (
Lease Agreement
).
Under the terms of the Lease Agreement, Regional made a $90,000 deposit, the proceeds for which were obtained from the sale of
six of Regional’s owned tractors, and will pay a monthly lease fee per tractor and monthly maintenance charge (
Maintenance
Charge
) which is based on the actual miles driven by each New Tractor during each month. The Maintenance Charge covers all
scheduled maintenance, including tires, to keep the New Tractors in good repair and operating condition. Any replacement parts
and labor for repairs which are not ordinary wear and tear shall be in accordance with Penske fleet pricing, and such costs are
subject to upward adjustment on the same terms as set forth in the Maintenance Agreement. Penske is also obligated to provide roadside
service resulting from mechanical or tire failure. Penske will obtain all operating permits and licenses with respect to the use
of the New Tractors by Regional.
CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - COMMITMENTS AND CONTINGENCIES
- Continued
Agreements - Continued
Penske Truck Lease – Continued
The term of the Lease Agreement
is for 7 years. The New Tractors were delivered by Penske during May 2012 and June 2012. Under the terms of the Lease Agreement,
Regional (i) may acquire any or all of the New Tractors after the first anniversary date of the Lease Agreement based on the non-depreciated
value of the tractor and (ii) has the option after the first anniversary date of the Lease Agreement to terminate the lease arrangement
with respect to as many as five of the New Tractors leased based on a documented downturn in business. Regional is obligated to
maintain liability insurance coverage on all vehicles covered by the Lease Agreement on the same basis as in the Lease Agreement.
The Lease Agreement can be terminated
by Penske upon an “event of default” by Regional. An event of default includes (i) failure by Regional to pay timely
any lease charges when due or maintain insurance coverage as required by the Lease Agreement, (ii) any representation or warranty
of Regional is incorrect in any material respect, (iii) Regional fails to remedy any non-performance under the agreement within
five (5) days of written notice from Penske, (iv) Regional or any guarantor of its obligations becomes insolvent, makes a bulk
transfer or other transfer of all or substantially all of its assets or makes an assignment for the benefit of creditors or (v)
Regional files for bankruptcy protection or any other proceeding providing for the relief of debtors. Penske may institute legal
action to enforce the Lease Agreement or, with or without terminating the Lease Agreement, take immediate possession of the New
Trucks wherever located or, upon five (5) days written notice to Regional, either require Regional to purchase any or all of the
New Tractors or make the “alternative payment” described below. In addition, Regional is obligated to pay all lease
charges for all such New Tractors accrued and owing through the date of the notice from Penske as described above. Penske’s
ability to require Regional to purchase the New Truck fleet or make the “alternative payment” would place a substantial
financial burden on Regional.
The Lease Agreement can also
be terminated by either party upon 120 days written notice to the other party as to any New Truck subject to the agreement on any
annual anniversary of such tractor’s in-service date. Upon termination of the Lease Agreement by either party, Regional shall,
at Penske’s option, either acquire the New Tractor that is the subject of the notice at the non-depreciated value of such
tractor, or pay Penske the “alternative payment.” The “alternative payment” is defined in the Lease Agreement
as the difference, if any, between the fair market value of the New Tractor and such tractor’s “depreciated Schedule
A value” ($738 per month commencing on the in-service date of such tractor). If the Lease Agreement is terminated by Penske
and Regional is not then in default under any term of the Lease Agreement, Regional is not obligated to either acquire the New
Tractor that is the subject of the termination or pay Penske the “alternative payment” as described above.
In connection with the delivery
of the New Tractors, Regional sold its remaining owned tractor fleet, except for several owned tractor units which were retained
to be used for terminal site logistics.
As a result of entering into
the Lease Agreement and the Vehicle Maintenance Agreement, Regional no longer provides maintenance for either the New Tractors
or its owned tractor and tanker fleet. Regional expects that the annual costs related to the future operation of the transportation
fleet, including savings from fuel efficiencies and reduced maintenance costs, will be reduced from historical amounts.
Asphalt Agreement
On November 30, 2000, Regional
renewed a Storage and Product Handling Agreement with a customer with an effective date of December 1, 2000 (
Asphalt Agreement
).
The Asphalt Agreement provides for the pricing, terms and conditions under which the customer will purchase terminal services and
facility usage from Regional for the storage and handling of the customer’s asphalt products. The Asphalt Agreement was amended
on October 15, 2002 with an effective date of December 1, 2002 (
Amended Asphalt Agreement
).
CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - COMMITMENTS AND CONTINGENCIES
- Continued
Agreements – Continued
Asphalt Agreement - Continued
The term of the Amended Asphalt
Agreement is five years with an option by the customer for an additional five-year renewal term, which the customer exercised in
July 2007. After the additional five-year term, the Amended Asphalt Agreement renews automatically for successive one-year terms
unless terminated upon 120 days advance written notice by either party. The annual fee payable to Regional for the initial five-year
term of the Amended Asphalt Agreement is approximately $500,000, payable in equal monthly installments, subject to adjustments
for inflation and certain facility improvements. In exchange for the annual fee, Regional agrees to provide minimum annual throughput
of 610,000 net barrels of asphalt per contract year, with additional volume to be paid on a per barrel basis. During the term of
the Amended Asphalt Agreement, Regional agreed to provide three storage tanks and certain related equipment to the customer on
an exclusive basis as well as access to Regional’s barge docking facility.
On March 19, 2012, one of the
storage tanks (
Storage Tank
) leased under the Amended Asphalt Agreement was discovered to have a leak. Regional immediately
notified the customer and a course of action to accommodate the expected temporary reduction in the customer’s available
storage was implemented. During April 2012, after removal of the existing product from the Storage Tank, the customer of the Storage
Tank was notified by Regional that the Storage Tank was no longer available for use until necessary repairs were completed. Regional
has notified its insurance providers of the incident. Regional has recently completed the clean out and examination of the Storage
Tank. Regional believes that a portion and/or all of the costs to clean and repair the Storage Tank (
Asphalt Loss
) are covered
through Regional’s insurance policies, for which Regional is responsible for deductible amounts of up to $100,000. During
October 2012, one of the insurance providers which Regional submitted a claim notified Regional that the incident did not fall
within insurance coverage limits. Regional is still awaiting a determination from the other insurance carrier for which a claim
was submitted. At September 30, 2012, Regional has recorded a loss of $238,000 in connection with the Asphalt Loss, including the
estimated amounts to repair the Storage Tank. Due to limitations of operating cash flow, Regional estimates that the earliest that
the Storage Tank will be back in service is December 1, 2012.
Fuel Oil Agreement
On November 16, 1998, Regional
renewed a Terminal Agreement with a customer with an effective date of November 1, 1998, as amended on April 5, 2001, October 11,
2001 and August 1, 2003 (
Fuel Oil Agreement
). The Fuel Oil Agreement provides for the pricing, terms and conditions under
which Regional will provide terminal facilities and services to the customers for the delivery of fuel oil. The agreement renews
automatically for successive one-year terms unless terminated upon 365 days advance written notice by either party. Pursuant to
the agreement, as amended, Regional agreed to provide three storage tanks, certain related pipelines and equipment, and at least
two tractor tankers to the customer on an exclusive basis, as well as access to Regional’s barge docking facility. In exchange
for use of Regional’s facilities and services, the customer pays an annual tank rental amount of approximately $300,000 plus
a product transportation fee calculated on a per 100 gallon basis, each subject to annual adjustment for inflation. Regional agreed
to deliver a minimum daily quantity of fuel oil on behalf of the customer. During December 2008, the Terminal Agreement was again
amended whereby Regional was only required to provide one storage tank through May 2009 and one storage tank through November 30,
2011. The use of the storage tank can be renewed by the customer for an additional two years by providing nine months prior notice
to Regional. The customer has renewed the contract, which extends its term through November 30, 2013. In addition, under the newly
amended Terminal Agreement, the customer pays an annual tank rental amount of approximately $308,000 plus a product transportation
fee calculated on a per gallon basis, each subject to annual adjustment for inflation.
CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - COMMITMENTS AND CONTINGENCIES
- Continued
Agreements - Continued
No. 4 Oil Agreement
On January 7, 2009, Regional
entered into a No. 4 Oil Terminal Agreement with a customer with an effective date of January 7, 2009 and an expiration date of
January 6, 2012. The No. 4 Oil Terminal Agreement provided for the pricing, terms, and conditions under which Regional would provide
terminal facilities and services to the customer for the receipt, storage and distribution of No. 4 Oil or vacuum gas oil. Pursuant
to the agreement, Regional agreed to provide one storage tank (
Tank 120
), certain related pipelines and equipment, necessary
tractor tankers, as well as access to Regional’s barge docking facility. In exchange for use of Regional’s facilities
and services, the customer paid an annual tank rental amount of approximately $330,000, plus a product transportation fee calculated
on a per run basis, each subject to annual adjustment for inflation. The customer did not renew the contract. Tank 120 has not
yet been leased to a new customer.
VGO Agreement
On May 1, 2009, Regional entered
into a Vacume Gas Oil Terminal Agreement (
VGO Terminal Agreement
) with a customer with an effective date of May 1, 2009,
as amended June 2, 2009, and June 10, 2009. The VGO Terminal Agreement expired January 6, 2012. The VGO Terminal Agreement provided
for the customer to pay an annual tank rental amount of approximately $288,000, plus a product transportation fee calculated on
a per run basis, each subject to annual adjustment for inflation. The customer did not renew this contract. This tank was leased
to a new customer beginning March 1, 2012 (see below).
Sodium Hydroxide Agreement
On September 27, 2007, Regional
entered into a Terminal Agreement with a customer with an effective date of June 1, 2008 and an expiration date of May 30, 2013.
This Terminal Agreement provides for the pricing, terms, and conditions under which Regional will provide terminal facilities and
services to the customer for the receipt, storage and distribution of sodium hydroxide. Pursuant to the agreement, Regional agrees
to provide two storage tanks, certain related pipelines and equipment, necessary tractor tankers, as well as access to Regional’s
barge docking and rail facilities. In exchange for use of Regional’s facilities and services, the customer pays an annual
tank rental amount of approximately $314,172, plus a product transportation fee calculated on a per run basis, each subject to
annual adjustment for inflation.
No. 6 Oil Agreements
On March 1, 2012, Regional entered
into a Services Agreement with a customer with an effective date of March 1, 2012 and a termination date of February 28, 2015,
subject to being automatically renewed in one-year increments. This Services Agreement provides for the pricing, terms, and conditions
under which Regional will provide terminal facilities and services to the customer for the receipt, storage and distribution of
No. 6 oil. Pursuant to the agreement, Regional agrees to provide one storage tank (capacity of approximately 1.2 million gallons),
certain related pipelines and equipment, necessary tractor tankers, as well as access to Regional’s barge docking and rail
facilities. In exchange for use of Regional’s facilities and services, the customer pays an annual tank rental amount of
approximately $360,000, plus loading and unloading fees. As part of the lease, Regional insulated the tank and made other modifications
to the tank and barge line.
CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H — COMMITMENTS AND CONTINGENCIES – Continued
Unpaid Compensation and Reimbursements
Effective November 1, 2011,
Messrs. Anbouba and Montgomery, executive officers of the General Partner, agreed to forego any further compensation until such
time as the General Partner completed its plan for recapitalizing its operations to obtain the funds needed by Central to conduct
its operations. During the period January 1, 2012 through May 31, 2012, the Chief Financial Officer of the General Partner also
ceased receiving compensation. During June 2012, the Chief Financial Officer of the General Partner began receiving a portion of
his ongoing monthly salary. The Partnership has also failed to reimburse expenses to Messrs. Anbouba and Montgomery since September
2011 and the Chief Financial Officer since June 2011 through May 2012. During June 2012, the Chief Financial Officer began receiving
a portion of his ongoing monthly expenses. In addition, the General Partner has not reimbursed AirNow Compression Systems, LTD.
since January 2012 or Rover Technologies LLC since June 2011 through May 2012 for the overhead costs associated with offices maintained
on the premises of each affiliated organization. During June 2012, Rover Technologies LLC began receiving a portion of its overhead
costs which are to be reimbursed.
Partnership Tax Treatment
The Partnership is not a taxable
entity for U.S. tax purposes (see below) and incurs no U.S. federal income tax liability. The Partnership’s tax return takes
into account all of the Partnership’s subsidiaries except Regional.
Each Unitholder of the Partnership is required
to take into account that Unitholder’s share of items of income, gain, loss and deduction of the Partnership in computing
that Unitholder’s federal income tax liability, even if no cash distributions are made to the Unitholder by the Partnership.
Distributions by the Partnership to a Unitholder are generally not taxable unless the amount of cash distributed is in excess of
the Unitholder’s adjusted basis in the Partnership.
Regional is a corporation and
as such is subject to U.S. federal and state corporate income tax. Most of its income is not “qualifying income” as
discussed below. Central believes that a portion of Regional’s income could be considered as “qualifying income”.
Central believes that income derived from the storage of Asphalt, No. 2 Oil and/or No. 6 Oil could constitute “qualifying
income.” Central may explore options regarding the reorganization of some or all of its Regional assets into a more efficient
tax structure to take advantage of the tax savings that could result from the “qualified income” being generated at
the Partnership level rather than at the Regional level. Central expects that there would be a tax expense associated with the
transfer of income from Regional to the Partnership.
Section 7704 of the Internal
Revenue Code (
Code
) provides that publicly-traded partnerships shall, as a general rule, be taxed as corporations despite
the fact that they are not classified as corporations under Section 7701 of the Code. Section 7704 of the Code provides an exception
to this general rule for a publicly traded partnership if 90% or more of its gross income for every taxable year consists of “qualifying
income” (
Qualifying Income Exception
). For purposes of this exception, “qualifying income” includes income
and gains derived from the exploration, development, mining or production, processing, refining, transportation (including pipelines)
or marketing of any mineral or natural resource. Other types of “qualifying income” include interest (other than from
a financial business or interest based on profits of the borrower), dividends, real property rents, gains from the sale of real
property, including real property held by one considered to be a “dealer” in such property, and gains from the sale
or other disposition of capital assets held for the production of income that otherwise constitutes “qualifying income”.
Non-qualifying income which is held and taxed through a taxable entity (such as Regional), is excluded from the calculation in
determining whether the publicly traded partnership meets the qualifying income test. The Partnership estimates that more than
90% of its gross income (excluding Regional) was “qualifying income.” No ruling has been or will be sought from the
IRS and the IRS has made no determination as to the Partnership’s classification as a partnership for federal income tax
purposes or whether the Partnership’s operations generate a minimum of 90% of “qualifying income” under Section
7704 of the Code.
CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H — COMMITMENTS AND CONTINGENCIES – Continued
Partnership Tax Treatment
- continued
If the Partnership was classified
as a corporation in any taxable year, either as a result of a failure to meet the Qualifying Income Exception or otherwise, the
Partnership’s items of income, gain, loss and deduction would be reflected only on the Partnership’s tax return rather
than being passed through to the Partnership’s Unitholders, and the Partnership’s net income would be taxed at corporate
rates.
If the Partnership was treated
as a corporation for U.S. federal income tax purposes, the Partnership would pay tax on income at corporate rates, which is currently
a maximum of 35%. Distributions to Unitholders would generally be taxed again as corporate distributions, and no income, gains,
losses or deductions would flow through to the Unitholders. Because a tax would be imposed upon the Partnership as a corporation,
the cash available for distribution to Unitholders would be substantially reduced and the Partnership’s ability to make minimum
quarterly distributions would be impaired. Consequently, treatment of the Partnership as a corporation would result in a material
reduction in the anticipated cash flow and after-tax return to Unitholders and therefore would likely result in a substantial reduction
in the value of the Partnership’s Common Units.
Current law may change so as
to cause the Partnership to be taxable as a corporation for U.S. federal income tax purposes or otherwise subject the Partnership
to entity-level taxation. The Partnership Agreement provides that, if a law is enacted or existing law is modified or interpreted
in a manner that subject the Partnership to taxation as a corporation or otherwise subjects the Partnership to entity-level taxation
for federal, state or local income tax purposes, then the minimum quarterly distribution amount and the target distribution amount
will be adjusted to reflect the impact of that law on the Partnership.
NOTE I – MAJOR CUSTOMERS AND CONCENTRATIONS
OF CREDIT RISK
Major Customers
For the fiscal quarter ended
September 30, 2012, General Chemical Corporation, SGR Energy LLC and Suffolk Sales accounted for approximately 21%, 17% and 14%
of Regional’s revenues, respectively, and approximately 26%, 6% and 19% of Regional’s accounts receivable, respectively.
No other individual customer accounted for more than 10% of Regional's revenues and accounts receivables. Norfalco, Inc. accounted
for 7% of Regional's revenues and 6% of Regional's accounts receivables. MeadWestvaco Specialty Chemicals, Inc., accounted for
5% of Regional's revenues and 10% of Regional's accounts receivables. PVS Chloralkali accounted for 6% of Regional's revenues and
14% of Regional's accounts receivables.
Concentrations of Credit Risk
The balance sheet items that
potentially subject Central to concentrations of credit risk are primarily cash and cash equivalents and accounts receivable. Central
maintains cash balances in different financial institutions. Balances in accounts other than “Noninterest-Bearing Transaction
Accounts” are insured up to Federal Deposit Insurance Corporation (
FDIC
) limits of $250,000 per institution. Noninterest-Bearing
Transaction Accounts have unlimited FDIC insurance coverage through December 31, 2012. At September 30, 2012, Central did not have
any cash balances in financial institutions in excess of FDIC insurance coverage. Concentrations of credit risk with Regional’s
accounts receivable are mitigated by Regional’s ongoing credit evaluations of its customers.
CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J — INCOME TAXES
Tax Liabilities
IRS Installment Agreement
On November 17, 2010, Regional
entered into an installment agreement (
IRS Installment Agreement
) with the Internal Revenue Service (
IRS
) for the
payment of $384,000 owing in income taxes, penalties and interest in connection with the income tax return filed for the period
November 2006 to July 27, 2007. Under the terms of the IRS Installment Agreement, Regional paid $60,000 upon entering into the
IRS Installment Agreement and is required to pay $20,000 per month beginning December 2010 (except the January 2011 monthly installment
whereby the monthly payment amount was $40,000) until all amounts owing under the IRS Installment Agreement, including continuing
interest and penalties on outstanding balances, were paid in full. In addition to the $384,000, the IRS Installment Agreement provided
for the $198,000 of income taxes, penalties and interest due in connection with the December 31, 2008 income tax return that was
filed in 2010 to be included as part of the overall balance of the IRS Installment Agreement at such time that those balances outstanding
were formally assigned for collection within the IRS. Regional paid all taxes due and owing to the IRS for the tax period July
28, 2007 to December 31, 2007 prior to entering into the IRS Installment Agreement.
During 2009, the Partnership
and RVOP allocated expenses to Regional for the period years 2008 and 2009. The amount of the allocated expenses for those periods
totaled approximately $1,100,000. During the three months ended March 31, 2011, the Partnership and RVOP allocated additional expenses
to Regional of $419,000 for the period from July 28, 2007 to December 31, 2007. Regional has amended its previously filed income
tax returns for the period from July 28, 2007 to December 31, 2007 and for the year ended December 31, 2008 to reflect the allocated
expenses and other income tax adjustments which eliminated the $198,000 amount referred to above. The effect on income tax payable
and income tax expense for those changes was reflected in the 2009 consolidated financial statements of Central.
During March 2012, the IRS Installment
Agreement was fully paid. Subsequently, Regional received written notification from the IRS that the lien filed in connection with
the IRS Installment Agreement was released.
Estimated Taxes
At December 31, 2011 and September
30, 2012, Regional had accrued estimated income taxes in the amount of $157,000 and $189,000, respectively, in connection with
estimated federal and state income taxes owing for the period January 1, 2011 through December 31, 2011 (
2011 Tax Year
).
To date, Regional has not made any tax payments in connection with the 2011 Tax Year. As a result, Regional is subject to penalties
for such period. At the present time, Regional does not have the cash necessary to make such tax payments and it intends to obtain
installment agreements with the IRS and the state taxing authority to provide for the payment of such taxes.
Late Filings and Delivery
of Schedules K-1 to Unitholders
The Partnership failed to file
timely its federal and state partnership tax returns for the periods from January 1, 2008 through December 31, 2008 (
2008 Tax
Year
) and January 1, 2009 through December 31, 2009 (
2009 Tax Year
). It filed the federal tax returns for the 2008 Tax
Year and the 2009 Tax Year on June 14, 2011. The Partnership’s federal tax return for the period January 1, 2010 to December
31, 2010 (
2010 Tax Year
) was filed timely on August 3, 2011. The IRS has notified the Partnership that it intends to audit
the federal tax returns for 2008 Taxable Year and the 2009 Taxable Year.
CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J — INCOME TAXES - Continued
Tax Liabilities - Continued
Late Filings and Delivery
of Schedules K-1 to Unitholders - continued
The Partnership also failed
to deliver timely the appropriate Schedules K-1 to Unitholders associated with the 2008 Tax Year and the 2009 Tax Year. The Partnership
delivered the delinquent Schedules K-1 for such tax periods to Unitholders on June 23, 2011. On August 4, 2011, it also distributed
Schedules K-1 for the 2010 Tax Year. The Partnership timely filed automatic extensions for the filing of its federal and state
tax returns for the 2011 Tax Year and filed timely the federal tax return and delivered the Schedules K-1 for the 2011 Tax Year
to its Unitholders by the required due date of September 17, 2012. The Partnership has also timely filed all state tax returns
that were required to be filed through the date of this report.
The Code provides for penalties
to be assessed against pass-through entities, such as the Partnership, in connection with the late filing of federal partnership
tax returns and the failure to furnish timely the required Schedules K-1 to investors. Similar penalties are also assessed by certain
states for late filing of state partnership tax returns. The Code and state statutes also provide taxpayer relief in the form of
reduction and/or abatement of penalties assessed for late filing of the returns where “reasonable cause” resulted in
such late filings. In August, 2011, the IRS notified the Partnership that its calculation of penalties for the 2008 Tax Year and
the 2009 Tax Year total approximately $2.5 million. The Partnership estimates that the maximum tax penalty exposure is $940,000
for all state penalties. The State of California notified the Partnership in February 2012 that its calculation of penalties owing
to California for the 2008 Tax Year and the 2009 Tax Year total approximately $137,000. During August 2012, the State of California
agreed to waive the $137,000 of penalties previously assessed. The Partnership has accrued a total of $1,122,000 through September
30, 2012 as its estimate of the penalty exposure related to its failure to file timely its federal and state tax returns for the
tax years 2008 and 2009.
During September 2011, the Partnership
submitted to the IRS its request for a waiver of the penalties for failure to timely file the Partnership’s federal tax returns
and associated K-1’s for tax years 2008 and 2009. The waiver request was made pursuant to Code Section 6698(a)(2) which provides
that the penalty will not apply if the taxpayer establishes that its failure to file was due to reasonable cause. The Partnership
also requested a waiver based on the IRS’s past administrative policies towards first offenders. During September 2011, the
Partnership received notice from the IRS that is was opening an administrative procedure to audit the 2008 and 2009 tax returns
of the Partnership and Central Energy GP LLC. To date, the Partnership has yet to receive a response from the IRS regarding its
waiver request. In the event the Partnership does not receive a favorable response, it intends to seek additional remedies including
exhaustion of all taxpayer appeal rights. The Partnership would also be entitled to pursue other avenues of relief. The IRS has
taken a much stronger position against the taxpayer relief provisions of the Code during 2011.
There can be no assurance that
the Partnership’s request for relief from the federal tax penalties will be approved by the IRS or that the Partnership’s
estimate of its penalty exposure is accurate. Central does not currently have the financial resources to pay the penalties that
may be assessed by the IRS.
Since filing the delinquent
2008 and 2009 state partnership tax returns, the Partnership has also (i) submitted a request for abatement of penalties based
on reasonable cause and/or (ii) applied for participation into first offender programs which provide relief of the penalties to
those states which impose significant penalties for late filing of state returns. There can be no assurance that the Partnership
will receive abatement of all penalties or be accepted for participation in first offender programs and, if accepted, can continue
to comply with the requirements of such programs. At the present time, Central does not have the financial resources to pay the
penalties that may be assessed by any state tax authority.
CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE K — ENVIRONMENTAL MATTERS
Regional is subject to various
federal, state and local laws and regulations relating to the protection of the environment. Regional has established procedures
for the ongoing evaluation of its operations, to identify potential environmental exposures and to comply with regulatory policies
and procedures.
Regional accounts for environmental
contingencies in accordance with ASC 450. Environmental expenditures that relate to current operations are expensed or capitalized
as appropriate. Expenditures that relate to an existing condition caused by past operations, and do not contribute to current or
future revenue generation, are expensed. Liabilities for environmental contingencies are recorded when environmental assessments
and/or clean-ups are probable and the costs can be reasonably estimated. Central maintains insurance which may cover in whole or
in part certain types of environmental contingencies. For the quarters ended September 30, 2011 and 2012, Regional had no environmental
contingencies requiring specific disclosure or the recording of a liability.
NOTE L — RELATED PARTY TRANSACTIONS
The General Partner has a legal
duty to manage the Partnership in a manner beneficial to the Partnership’s Unitholders.
However, the General Partner
also has a legal duty to manage its affairs in a manner that benefit its members. This can create a conflict of interest between
the Unitholders of the Partnership and the members of the General Partner. The Partnership Agreement provides certain requirements
for the resolution of conflicts, but also limits the liability and reduces the fiduciary duties of the General Partner to the Unitholders.
The Partnership Agreement also restricts the remedies available to Unitholders for actions that might otherwise constitute breaches
of the General Partner’s fiduciary duty.
Advances from General Partner
During the three months ended
September 30, 2012, the General Partner made cash advances to the Partnership of $2,000 for the purpose of funding working capital
pursuant to the terms of an intercompany demand promissory note entered into between the Partnership and the General Partner effective
March 1, 2012. The intercompany demand note provides for advances from time to time by the General Partner to the Partnership of
up to $2,000,000. Repayment of such advances, together with accrued and unpaid interest, is to be made in 12 substantially equal
quarterly installments starting with the quarter ended March 31, 2016. The note bears interest at the imputed rate of the IRS for
medium term notes. The rate at March 1, 2012 is 1.2% per annum and such rate is adjusted monthly by the IRS under IRB 625. At September
30, 2012, the balance of advances made by the General Partner to the Partnership, including accrued and unpaid interest was $1,066,000.
On September
14, 2012, a Super-Majority of the Members, as defined in the Second Amended and Restated Limited Liability Company Agreement of
the General Partner, dated April 12, 2011, as amended (
Agreement
), approved the issuance and sale by the General Partner
of 12,000 additional Membership Interests of the General Partner (
Additional Interests
) at a purchase price of $50.00 per
unit, pursuant to Sections 3.2(a) and 6.13(a) of the Agreement (
GP Sale
). The Additional Interests were purchased by all
the existing members of the General Partner, except 144 units offered to one existing member (
Unsubscribed Units
), in accordance
with their pro rata ownership of the General Partner. In accordance with the Agreement, the General Partner will offer the Unsubscribed
Units to those members whom participated in the GP Sale.
The proceeds
from the GP Sale, totaling $600,000 are intended to be primarily used by the General Partner to fund working capital requirements
of the Partnership, including the payment of certain outstanding obligations and to fund minimal future general and administrative
expenses of the Partnership for the upcoming 3 to 6 months. All funds advanced to the Partnership by the General Partner since
November 17, 2010 have been treated as a loan. Any advances made by the General Partner to the Partnership from proceeds of the
GP Sale will also be advanced pursuant to the terms of the intercompany demand promissory note described above.
CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE L — RELATED PARTY TRANSACTIONS – Continued
Intercompany Loans and Receivables
- Regional
Regional Acquisition Funding
In connection with the Regional
acquisition, on July 26, 2007, Regional issued to the Partnership a promissory note in the amount of $2,500,000 (
Central Promissory
Note
) in connection with the remaining funding needed to complete the acquisition of Regional. Interest on the Central Promissory
Note is 10% annually and such interest is payable quarterly. The Central Promissory Note is due on demand. Regional has not made
an interest payment on the Central Promissory Note since its inception. Interest is accruing but unpaid. The balance on the note
at September 30, 2012 is $3,796,000. The payment of this amount is subordinated to the payment of the RZB Note by Regional.
Other Advances
In addition to the Central Promissory
Note, there have been other intercompany net advances made from time to time from the Partnership and/or RVOP to Regional, including
the $1.0 million advanced by the Partnership to Regional in connection with the third amendment to the RZB Loan Agreement and allocations
of corporate expenses, offset by actual cash payments made by Regional to the Partnership and/or RVOP. These intercompany amounts
were historically evidenced by book entries. Effective March 1, 2012, Regional and the Partnership entered into an intercompany
demand promissory note incorporating all advances made as of December 31, 2010 and since that date. At September 30, 2012, the
cash advances made by the Partnership to Regional under the intercompany demand note totaled $1,245,000. The note bears interest
at the rate of 10% annually from January 1, 2011. At September 30, 2012, the intercompany balance owed by Regional to the Partnership
and/or RVOP is approximately $1,441,000, which includes interest at the rate of 10% per annum assessed since January 1, 2011. This
amount is due to the Partnership and RVOP on demand; however, as is the case with the Central Promissory Note, payment of these
amounts is also subordinated to payment of the RZB Note.
Reimbursement Agreements
Effective November 17, 2010,
the Partnership moved its principal executive offices to Dallas, Texas. As a result, it has entered into a Reimbursement Agreement
with AirNow Compression Systems, LTD, an affiliate of Imad K. Anbouba, the General Partner’s Chief Executive Officer and
President. The agreement provides for the monthly payment of allocable “overhead costs,” which include rent, utilities,
telephones, office equipment and furnishings attributable to the space utilized by employees of the General Partner. The term of
the agreement is month-to-month and can be terminated by either party on 30 day’s advance written notice. Effective January
1, 2011, the Partnership entered into an identical agreement with Rover Technologies LLC, a limited liability company affiliated
with Ian Bothwell, the General Partner’s Executive Vice President, Chief Financial Officer and Secretary, located in El Segundo,
California. Mr. Bothwell is a resident of California and lives near El Segundo.
Regional is charged for direct
expenses paid by the Partnership on its behalf, as well as its share of allocable overhead for expenses incurred by the Partnership
which are indirectly attributable for Regional related activities. For the three months ended September 30, 2011 and 2012, Regional
recorded allocable expenses of $174,000 and $36,000, respectively. For the nine months ended September 30, 2011 and 2012, Regional
recorded allocable expenses of $531,000 and $224,000, respectively.
CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE M — REALIZATION OF ASSETS
The unaudited consolidated balance
sheet of Central has been prepared in conformity with accounting principles generally accepted in the United States of America,
which contemplate continuation of Central as a going concern. Central had a loss from operations for the year ended December 31,
2011 and the nine months ended September 30, 2012, and has a deficit in working capital of $5,252,000 at September 30, 2012. Pursuant
to the October 4 Demand Notice, RZB has declared the RZB Note immediately due and payable and demands immediate payment in full.
RZB is also contemplating the initiation of foreclosure proceedings in respect of the property owned by Regional and demanding
immediate payment of all rents due upon the property. Currently, the amounts owing under the RZB Note total approximately $1,970,000.
Regional’s unpaid income taxes for the 2011 Tax Year totaled approximately $189,000 at September 30, 2012. The RZB Note is
collateralized by all Regional assets and a pledge of the common stock of Regional to RZB by the Partnership. In addition, the
Partnership is liable for the federal and state late filing penalties related to the Partnership’s failure to deliver timely
Schedules K-1 for the 2008 Tax Year and the 2009 Tax Year to its Unitholders of up to $3,464,000. Central is also responsible for
contingencies associated with the TransMontaigne dispute (see Note H – Commitments and Contingencies – TransMontaigne
Dispute).
Substantially all of Central’s
assets are pledged or committed to be pledged as collateral on the RZB Note, and therefore, Central is unable to obtain additional
financing collateralized by those assets. Until such time as the Storage Tank is placed back into service and Tank 120 is leased,
Regional does not expect to have sufficient working capital from operations to cover the ongoing monthly debt service obligations
on the RZB Note, and therefore, the amount which can be provided to Central, if any, to fund general overhead is not expected to
be available. In addition, if there is a successful restructuring of the RZB Note resulting from the October 4 Demand Notice, the
terms are likely to restrict any future advances to the Partnership until the RZB Note is paid. Regional is seeking to refinance
the RZB Note but there is no assurance that it will be successful. Although the General Partner has recently secured funds which
are intended to be advanced to the Partnership, the General Partner is not obligated to advance funds to the Partnership and the
amount of these funds are only sufficient to cover minimal overhead for the limited period of time. Should Central need additional
capital in excess of the cash generated from operations to make the RZB Note payments, for payment of taxes, for payment of the
contingent liabilities, for expansion, repair of the Storage Tank, capital improvements to existing assets, for working capital
or otherwise, its ability to raise capital would be hindered by the existing pledge. In addition, the Partnership has obligations
under existing registrations rights agreements. These rights may be a deterrent to any future equity financings. If additional
amounts cannot be raised and cash flow is inadequate, Central and/or Regional would be required to seek other alternatives which
could include the sale of assets, closure of operations and/or protection under the U.S. bankruptcy laws.
In view of the matters described
in the preceding paragraphs, recoverability of the recorded asset amounts shown in the accompanying unaudited consolidated balance
sheet is dependent upon the ability of Central to (1) continue to defer any potential foreclosure of assets in connection
with the October 4 Demand Notice and successfully negotiate a restructuring of the RZB Note to reflect payment terms consistent
with Regional’s current operating cash flow, (2) pay the income tax liabilities owed by Regional for the 2011 Tax Year or
enter into installment payment agreements, (3) resolve favorably the exposure for late tax filing penalties for the tax years
ended December 31, 2008 and 2009 and non-delivery of Schedules K-1, (4) satisfactorily resolve the TransMontaigne
dispute, (5) satisfactorily complete the repairs associated with the Asphalt Loss, (6) continue to receive waiver of salaries
and expenses by the Partnership’s executive officers until sufficient working capital is received, (7) receive additional
advances from the General Partner from proceeds recently received by the General Partner in connection with the GP Sale as well
as future additional advances, if necessary, and (8) receive additional distributions from Regional as a result of a refinancing
of the RZB Note on terms that provide a more favorable repayment schedule.
The unaudited consolidated financial
statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or amounts
and classification of liabilities that might be necessary should Central be unable to restructure such debt, obtain adequate funding
to maintain operations and to continue in existence.
CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE N - 401K
Regional sponsors a defined
contribution retirement plan (
401(k) Plan
) covering all eligible employees effective November 1, 1988. The 401(k) Plan allows
eligible employees to contribute, subject to Internal Revenue Service limitations on total annual contributions, up to 60% of their
compensation as defined in the 401(k) Plan, to various investment funds. Regional matches, on a discretionary basis, 50% of the
first 6% of employee contributions. Furthermore, Regional may make additional contributions on a discretionary basis at the end
of the Plan year for all eligible employees.
NOTE O – INVESTMENT ADVISOR AGREEMENT
Central’s strategy is
to acquire midstream assets with a focus on gas transportation and services assets, including gas gathering, dehydration and compression
systems, pipelines, fractionation and condensate stabilization facilities and related assets. To advance this strategy, during
May 2011, the Partnership retained the services of an investment banking firm (
Financial Advisor
) to assist it in evaluating
strategic growth and financing alternatives pursuant to an agreement which expired on April 30, 2012. During May 2012, the Partnership
and Financial Advisor entered into a new agreement which expires on April 30, 2013 (
2012 Advisor Agreement
), and can be
extended by mutual consent. The 2012 Advisor Agreement provides that the Partnership will retain the Financial Advisor for any
M&A Transaction and Private Financing Transaction, as those terms are defined in the 2012 Advisor Agreement, provided that
the Financial Advisor may elect not to accept such engagement at its sole option. The advisory fees to be paid for such engagements
are customary with industry practices and are payable only in the event a transaction is successfully completed by Central.
NOTE P - SEGMENT INFORMATION
Central reports segment information
in accordance with ASC 280. Under ASC 280, all publicly traded companies are required to report certain information about the operating
segments, products, services and geographical areas in which they operate and their major customers. Operating segments are components
of a company for which separate financial information is available that is evaluated regularly by management in deciding how to
allocate resources and assess performance. This information is reported on the basis that it is used internally for evaluating
segment performance. Central had only one operating segment (transportation and terminaling business of Regional) during the three
months ended September 30, 2011 and 2012. The following are amounts related to the transportation and terminaling business included
in the accompanying consolidated financial statements for the three months ended September 30, 2011 and 2012 and at December 31,
2011 and September 30, 2012:
|
|
Three Months
Ended
September 30,
2011
|
|
|
Three Months
Ended
September 30,
2012
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
1,810,000
|
|
|
$
|
1,466,000
|
|
Interest expense
|
|
$
|
119,000
|
|
|
$
|
143,000
|
|
Depreciation and amortization
|
|
$
|
161,000
|
|
|
$
|
134,000
|
|
Income tax (expense)
|
|
$
|
(10,000
|
)
|
|
$
|
(32,000
|
)
|
Net income (loss)
|
|
$
|
30,000
|
|
|
$
|
(271,000
|
)
|
|
|
December 31,
2011
|
|
|
September 30,
2012
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,825,000
|
|
|
$
|
8,253,000
|
|
CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE Q – REGISTRATION RIGHTS AGREEMENTS
TCW Affiliate
In November 2007, an affiliate
of Central entered into a $30 million senior secured credit facility with TCW Asset Management Company (
TCW
), as agent,
and TCW Energy Fund X Investors, as holders (
TCW Credit Facility
), in connection with the purchase of certain oil and gas
properties located in Haskell, McIntosh and Pittsburg Counties, Oklahoma. The TCW Credit Facility was amended on several occasions
and finally settled in May 2009 after TCW issued a “notice of event of default – demand for cure.” As a part
of the settlement, the Partnership entered into a registration rights agreement with an affiliate of TCW to provide piggyback registration
rights with respect to 400,000 Common Units held by the affiliate of TCW. See Note F – Debt Obligations – TCW Credit
Facility to the Audited Financial Statements of Central Energy for the year ended December 31, 2010 contained in the Annual Report
on Form 10-K for the year ended December 31, 2010 for additional information regarding the TCW Credit Facility and the settlement
arrangements.
Penn Octane Corporation
In November 2010, the Partnership
granted piggy-back registration rights to Penn Octane Corporation with respect to 197,628 Common Units held by Penn Octane in connection
with the transaction whereby Penn Octane and an affiliate sold 100% of the limited liability company interests in the General Partner
to Central Energy, LP and the Partnership sold 12,724,019 Common Units to Central Energy, LP in connection with the Sale (see Note
A – Organization).
Limited Partners of Central
Energy, LP
Effective as of August 1, 2011,
the Partnership and the limited partners of Central Energy, LP executed a Registration Rights Agreement. The Registration Rights
Agreement was prepared and signed by the parties as a part of the terms of the Sale. On May 26, 2011, Central Energy, LP distributed
the 17,724,019 Common Units issued in connection with the Sale to its limited partners pursuant to the terms of the Central Energy,
LP limited partnership agreement. As a result, Central Energy, LP no longer holds any Common Units of the Partnership. The limited
partners of Central Energy, LP are referred to herein as the “
Purchasers
.”
The Registration Rights Agreement
provides the Purchasers with shelf registration rights and piggyback registration rights, with certain restrictions, with respect
to the Common Units held by them (
Registrable Securities
). The Partnership is required to file a shelf registration statement
with the SEC on behalf of the Purchasers as soon as practicable after April 15, 2012 and maintain an effective shelf registration
statement with respect to the Registrable Securities until the earlier to occur of (1) all securities registered under the shelf
registration statement have been distributed as contemplated in the shelf registration statement, (2) there are no Registrable
Securities outstanding or (3) two years from the dated on which the shelf registration statement was first filed. The piggyback
registration rights permit a Purchaser to elect to participate in an underwritten offering of the Partnership’s securities
other than a registration statement filed in connection with the registration of the Partnership’s securities relating solely
to (1) employee benefit plans or (2) a Rule 145 transaction. The amount of Registrable Securities that the Purchasers can offer
for sale in a piggyback registration is subject to certain restrictions as set forth in the Registration Rights Agreement.
The Partnership is required
to pay all costs associated with the shelf registration, any piggyback registration or an underwritten offer except for the underwriting
fees, discounts and selling commission, transfer taxes (if any) applicable to the sale of the Registrable Securities, and fees
and disbursements of legal counsel for any Purchaser. The Partnership is also indemnifying the Purchasers and their respective
directors, officers, employees, agents, managers and underwriters, pursuant to an applicable underwriting agreement with such underwriter,
from any losses, claims, damages, expenses or liabilities (1) arising from any untrue statement or alleged untrue statement of
a material fact contained in the shelf registration statement or any other registration statement relating to the Registrable Securities
or (2) the omission or alleged omission to state in such registration statement a material fact required to be stated therein or
necessary to make the statements therein not misleading.
CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE Q – REGISTRATION RIGHTS AGREEMENTS - Continued
Limited Partners of Central
Energy, LP – Continued
The Registration Rights Agreement
also prohibits the Partnership from entering into a similar agreement which would be inconsistent with the rights granted in the
Registration Statement or provide any other holder of the Partnership’s securities rights that are more favorable than those
granted to Purchasers without the prior written approval of Purchasers holding a majority of the Registrable Securities.
Given the current financial
condition of Central, as well as the current bid/ask price of the Common Units, the Partnership does not anticipate filing the
shelf registration statement for the foreseeable future. The Partnership will seek to amend the Registration Rights Agreement to
extend such filing requirement to a later date.
NOTE R – SUBSEQUENT EVENT
There were no other significant
or material subsequent events as of the date this report was available for release.