PetroLogistics LP

On July 16, 2014, PetroLogistics LP, a Delaware limited partnership (“PetroLogistics”), completed its merger (the “Merger”) with FHR Propylene, LLC, a Delaware limited liability company (“FHR Propylene”) and subsidiary of Flint Hills Resources, LLC, a Delaware limited liability company (“New Parent”).  PetroLogistics was the surviving entity in the Merger and as a result of the Merger became an indirect subsidiary of New Parent.  In connection with the Merger, Propylene Holdings LLC transferred to an indirect subsidiary of New Parent 100% of the issued and outstanding membership interests of the General Partner (the “GP Equity Transfer”).  Further, as a result of the Merger, PetroLogistics' outstanding common units ceased trading on the New York Stock Exchange.  PetroLogistics filed a Form 15 with the Securities and Exchange Commission (the “SEC”) to terminate the registration of its $365.0 million in principal amount of 6.25% Senior Notes due 2020 (the “Notes”).  Under the Indenture governing the Notes, PetroLogistics has a contractual obligation to file reports with the SEC.

In April 2014, the FASB issued Accounting Standard Update (or “ASU”) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). Under this amendment, requirements for reporting discontinued operations have changed. Discontinued operations may include disposals of a business, nonprofit activity and component of an entity upon meeting certain other criteria. Disposals representing components of an entity must reflect a strategic shift that has a major effect on the entity's operations and financial results. Previous conditions prohibiting the entity from having significant continuing involvement in the disposal group and requiring the elimination of operations and cash flows from ongoing operations of the entity have been removed. The update is effective on a prospective basis for disposals that occur within annual periods beginning on or after December 15, 2014, and interim periods in those years. We are evaluating the provisions of this statement and have not determined what impact the adoption of ASU 2014-08 will have on our financial position or results of operations.

On June 2, 2014, a putative class action complaint by unitholders of PetroLogistics, captioned Klemesrud v. PetroLogistics LP, et al., C.A. No. 9723-VCP, which we refer to as the "Klemesrud Action," was filed in the Court of Chancery of the State of Delaware.  Between June 4 and June 25, 2014, two additional putative class action complaints by unitholders of PetroLogistics, captioned Swanson v. PetroLogistics LP, et al., C.A. No. 9737-VCP, which we refer to as the "Swanson Action," and Henry v. PetroLogistics LP, et al., C.A. No. 9759-VCP, which we refer to as the "Henry Action," were filed in the Delaware Court, and three additional putative class action complaints by unitholders of PetroLogistics, captioned Basaraba v. PetroLogistics LP, et al., No. 4:14-cv-1558, which we refer to as the "Basaraba Action," Wolfson v. PetroLogistics LP, et al., No. 4:14-cv-1723, which we refer to as the "Wolfson Action," and Maggi v. Petrologistics, LP, et al., No. 4:14-cv-1786, which we refer to as the “Maggi Action,” were filed in the United States District Court for the Southern District of Texas, Houston Division.  Each of the complaints names PetroLogistics and the General Partner, the members of the board of directors of the General Partner, Propylene Holdings LLC, New Parent and Merger Sub as defendants, and the complaints in the Klemesrud Action and the Henry Action also name Koch Industries, Inc. or Koch Industries, LLC as defendants.  In each of the complaints, the plaintiffs generally allege that the members of the board of directors of the General Partner breached their duties to the unitholders of PetroLogistics by entering into the Merger Agreement and further allege that the other defendants aided and abetted the alleged breaches of duty by the members of the board of directors of the General Partner.  The Henry Action also alleges that the defendants breached the terms of our partnership agreement, and the Wolfson Action and the Maggi Action allege that the defendants violated Sections 14(a) and 20(a) of the Securities and Exchange Act of 1934 by issuing an information statement that omits and/or misrepresents material information concerning the Merger.  In each of the complaints, the plaintiffs seek, among other things, to enjoin the Merger and/or money damages.

Upon the closing of Merger and GP Equity Transfer, by virtue of the Merger and without any action on the part of PetroLogistics or the General Partner, (a) each common unit issued and outstanding and owned by holders, other than the Sponsors and the Founding Unitholders (each as defined below) (such holders, the “Public Unitholders”) was cancelled and converted automatically into the right to receive an amount in cash equal to $14.00, without interest and subject to any required withholding taxes (the “Public Merger Consideration”), and (b) each common unit issued and outstanding and beneficially owned by (1) our Sponsors and (2) David Lumpkins, Nathan Ticatch and a related family partnership and family trust (collectively, the “Founding Unitholders”) was cancelled and converted automatically into the right to receive an amount in cash equal to $12.00, without interest and subject to any required withholding taxes, in each case, upon the terms and subject to the conditions set forth in the Merger Agreement.  No additional consideration was delivered in exchange for the GP Equity Transfer.

As a result of the Merger, PetroLogistics outstanding common units ceased trading on the New York Stock Exchange.  Further, PetroLogistics terminated the registration of its Notes.  Under the Indenture governing the Notes, PetroLogistics has a contractual obligation to file reports with the SEC.

Cost of Sales.  Cost of sales was $306.1 million or 71% of sales for the six months ended June 30, 2014, compared to $225.2 million, or approximately 61% of sales, for the six months ended June 30, 2013.  Total propylene production volume in the six months ended June 30, 2014 and 2013 was 611.5 and 553.7 million pounds of propylene, respectively.  This increase in production volume was driven by unplanned downtime at the facility during the six months ended June 30, 2013.  The primary component of cost of sales was the propane feedstock, which represented 73% and 69% of total production costs for the six months ended June 30, 2014 and 2013, respectively.  The increase in propane expense in 2014 from the first six months of 2013 is partially due to the 10% increase in propylene production volumes in 2014.  Also contributing to the increase in propane expense was a higher average propane price of $1.18 per gallon in 2014 compared to $0.88 per gallon in 2013, an increase of 34%.  In addition, fuel and utilities expense increased $5.6 million or 28% due to the increase in propylene production.  Depreciation, amortization and accretion expense was $23.8 million for the six months ended June 30, 2014, compared to $20.4 million for the six months ended June 30, 2013, an increase of $3.5 million.  The increase in cost of sales was partially offset by a decrease in propylene purchased from third parties from $27.4 million in the first half of 2013 to $6.1 million in the first half of 2014.  In 2013, we purchased significantly more volumes of propylene from third parties in preparation for the planned triennial turnaround in the third quarter of 2013.  The change in inventory represents the change in the production value of the product inventory between the beginning and end of the period based on the weighted average cost of production, including the cost of propane.  This amount fluctuates with our average cost of production and the amount of product inventory we carry.