ENGY Central Energy Partners LP (CE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE A –BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Business

Central Energy Partners LP, a publicly traded Delaware limited partnership, was formed in July 2003. As used in this report, the terms “Central Energy” and “the Partnership” refer to Central Energy Partners LP, and the terms “Central,” “the Company,” “we,” “our” and “us” are used in this report to refer to Central Energy, its sole general partner Central Energy GP LLC, and its consolidated subsidiaries as a whole.

We conduct our operations through our wholly-owned subsidiary, Regional Enterprises, Inc. (“ Regional ”). The principal business of Regional is the storage, transportation and railcar trans-loading of bulk liquids, including hazardous chemicals and petroleum products owned by its customers. Regional’s 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 million gallons of available storage tanks for delivery throughout the mid-Atlantic region of the United States. Regional also receives product from a rail spur which is capable of receiving 18 rail cars at any one time for trans-loading of chemical and petroleum liquids for delivery throughout the mid-Atlantic region of the United States. Regional operated a trans-loading facility in Johnson City, Tennessee, with 6 rail car slots until March 31, 2013. Regional also provides transportation services to customers for products which don’t originate at any of Regional’s terminal facilities.

The limited partnership interests in the Partnership (“ Common Units ”) represent 98% of the Partnership’s outstanding capital and 100% of the Partnership’s limited partnership interests. We are controlled by our general partner, Central Energy GP LLC (“ General Partner ”), which holds the remaining 2% interest in the Partnership. The General Partner is entitled to receive distributions from the Partnership on its General Partner interest and additional incentive distributions as provided in the partnership agreement. 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.

Effective November 26, 2013, CEGP Acquisition, LLC (“ CEGP ”) acquired 55% of the issued and outstanding membership interests in the General Partner and 3,000,000 Common Units, which represents 15% of the issued and outstanding Common Units of the Partnership (the “ CEGP Investment ”). CEGP appoints five (5) of the nine (9) members of the Board of Directors of the General Partner. As a result, CEGP controls the General Partner. CEGP is a newly-formed Texas limited liability company controlled by John L. Denman, Jr. and G. Thomas Graves III. Upon completion of the CEGP Investment, Mr. Denman replaced Mr. Imad K. Anbouba as CEO and President of the General Partner, and Mr. Graves was appointed as the Chairman of the Board of Directors replacing Mr. Jerry V. Swank, a principal of the controlling entity of The Cushing MLP Opportunity Fund I, L.P. which holds 39.1% of the Common Units of the Partnership (the “ Cushing Fund ”). JLD Services, Ltd., a company controlled by Mr. Denman, and Mr. Graves were each granted a Performance Warrant which, when exercised and combined with the Common Units acquired by CEGP in connection with the CEGP Investment, would represent 26.6% of the issued and outstanding Common Units of the Partnership.

Basis of Presentation

The accompanying consolidated financial statements include the Partnership and its only operating subsidiary, Regional. We have two other subsidiaries that have no operations – Rio Vista Operating Partnership, LP (“ RVOP ”) and Rio Vista Operating GP LLC. All significant intercompany accounts and transactions are eliminated.

The unaudited consolidated balance sheet as of June 30, 2014, the unaudited consolidated statements of operations for the three months and six months ended June 30, 2013 and 2014 and the unaudited consolidated statements of cash flows and of partners’ deficit for the six months ended June 30, 2014, have been prepared by us without audit. In our opinion, 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 June 30, 2014, the unaudited consolidated results of operations for the three months and six months ended June 30, 2013 and 2014 and the unaudited consolidated statements of cash flows and of partners’ deficit for the six months ended June 30, 2014.

CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 we believe that the disclosures made are adequate to make the information not misleading. These unaudited consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates, and such differences could be material.

Cash Equivalents

We consider all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.

Financial Instruments

The fair values of our financial instruments, which may include cash, accounts receivable, accounts payable and long-term debt, approximate their carrying amounts.

Distributions of Available Cash

In March 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 to be established by 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 General Partner reinstates the obligation to make minimum quarterly distributions. Unitholders will only be entitled to minimum quarterly distributions arising from and after the date established by the General Partner for making such distributions.

Environmental Obligations

We are subject to various federal, state and local laws and regulations relating to the protection of the environment. We have established procedures for the ongoing evaluation of our operations, to identify potential environmental exposures, and to comply with regulatory policies and procedures. We account 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. We maintain insurance which may cover in whole or in part certain types of environmental contingencies. For the quarters ended June 30, 2013 and 2014, we had no environmental contingencies requiring specific disclosure or the recording of a liability.

Unit Based Compensation

We may issue options, warrants, rights or appreciation rights with respect to Common Units for any Partnership purpose, including to non-employees for goods and services and to acquire or extend debt, without approval of the Limited Partners. We apply the provisions of ASC 505 to account for such transactions. ASC 505 requires that such transactions be accounted for at fair value. If the fair value of the goods and services or debt related transactions are not readily measurable, the fair value of the options, warrants, rights or appreciation rights is used to account for such transactions. We did not record any costs for unit-based payment costs for non-employees for the six months ended June 30, 2013 and 2014, respectively under the fair-value provisions of ASC 505.

CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The Partnership applies ASC 718 for options, Common Units or other equity-based grants to our employees and directors of the General Partner. 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, we 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. We recorded $16,000 and $51,000 for unit-based payment costs for employees and directors for the six months ended June 30, 2013 and 2014, respectively, under the fair-value provisions of ASC 718. See “Note F – Unit Options and Equity Incentive Plan – Incentive Plans” below for information regarding equity-based grants made during the six months ended June 30, 2014.

NOTE B – PARTNERS’ DEFICIT

The number of Common Units outstanding at June 30, 2014 was 19,591,482. The Common Units represent 98% of the Partnership’s outstanding capital and 100% of the Partnership’s limited partnership interests. We are controlled by our general partner, Central Energy GP LLC, which holds the remaining 2% interest in the Partnership.

NOTE C – 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 we incur 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 F – Unit Options and Equity Incentive Plan): 

Allocation of Net Income

Our net loss is allocated to partners’ capital accounts in accordance with the provisions of the partnership agreement.

Depreciation expense of property, plant and equipment totaled $135,000 and $137,000 for the three months ended June 30, 2013 and 2014 and $268,000 and $273,000 for the six months ended June 30, 2013 and 2014, respectively.

CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Hopewell Note

On March 20, 2013, we entered into a Term Loan and Security Agreement (“ Hopewell Loan Agreement ”) with Hopewell Investment Partners, LLC (“ Hopewell ”) pursuant to which Hopewell would loan Regional up to $2,500,000 (“ Hopewell Loan ”), all of which was advanced in 2013. William M. Comegys III, a member of the Board of Directors of the General Partner, is a member of Hopewell. As a result of this affiliation, the terms of the Hopewell Loan were reviewed by the Conflicts Committee of the Board of Directors of the General Partner. The committee determined that the Hopewell Loan was on terms better than could be obtained from a third-party lender.

In connection with the Hopewell Loan, we issued Hopewell a promissory note (“ Hopewell Note ”) along with a security interest in all of Regional’s assets, including a first lien mortgage on the real property owned by Regional and an assignment of rents and leases and fixtures on the remaining assets of Regional. In connection with the Hopewell Loan, we also delivered to Hopewell a pledge of the outstanding capital stock of Regional and the Partnership entered into an unlimited guaranty for the benefit of Hopewell. In addition, we entered into an Environmental Certificate with Hopewell representing as to the environmental condition of the property owned by Regional, agreeing to clean up or remediate any hazardous substances from the property, and agreeing, jointly and severally, to indemnify Hopewell from and against any claims whatsoever related to any hazardous substance on, in or impacting the property of Regional.

The principal purpose of the Hopewell Loan was to repay the entire amounts due by Regional to our previous lender in the amount of $1,970,000. The remaining amounts provided under the Hopewell Loan were used for working capital.

The Hopewell Loan matures in March 19, 2016 and carries a fixed annual rate of interest of 12%. Under the terms of the Hopewell Loan, as amended, we are required to make interest payments only through December 2014 and then 14 equal monthly payments of $56,000 (principal and interest) from January 2015 through February 2016 with a balloon payment of approximately $2 million due on March 19, 2016.

We are also required to provide annual audited and certified quarterly financial statements to Hopewell. The failure to provide those financial statements as prescribed is an event of default, and Hopewell may, by written notice to us, declare the Hopewell Note immediately due and payable.

NOTE F – UNIT OPTIONS AND EQUITY INCENTIVE PLAN

Performance Warrants

On November 26, 2013, we issued Performance Warrants to JLD Services, Ltd., a company controlled by Mr. Jack Denman, the Chief Executive Officer and President of the General Partner, and Mr. G. Thomas Graves III, the Chairman of the General Partner, for consideration of $500 each. Each Performance Warrant, grants the holder thereof the right, but not the obligation, to acquire up to 1,500,000 Common Units at a price of $0.093478, which was the average closing bid price for a Common Unit as reported by the “Pink Sheets” published by OTC Pink for the 30-day period ended November 22, 2013, in the event the Partnership successfully completes one or more asset acquisition transactions, approved by the General Partner, with an aggregate gross purchase price of at least $20 million within 12 months after the closing of the CEGP Investment. The Performance Warrants provide certain anti-dilution protections in the event of a distribution of additional Common Units or subdivision of outstanding Common Units, a capital reorganization of the Partnership, a reclassification of the units of the Partnership, the consolidation or merger of the Partnership with or into another entity, or other similar transaction. Each holder or its assigns is granted registration rights with respect to the Common Units issuable upon exercise of a Performance Warrant. We will record the value of the Performance Warrants at such time as the performance milestones are achieved.

CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Incentive Plans

On March 9, 2005, we established the 2005 Equity Incentive Plan of Rio Vista Energy Partners L.P. (“ 2005 Plan ”). The 2005 Plan permits the grant of options, appreciation rights, restricted common units and phantom units of Common Units of the Partnership to any person who is an employee or director of, or consultant to, the Partnership or the General Partner or any affiliate of the Partnership (the “ Partnership Entities ”). The plan provides anti-dilution protection as determined by the Compensation Committee for a combination, exchange or extra-ordinary distribution of Common Units, or reorganization, recapitalization or any similar event affecting the Common Units or other securities of the Partnership. There were 750,000 Common Units authorized for issuance as awards under the 2005 Plan. The 2005 Plan remains available for the grant of awards until March 9, 2015, or such earlier date as the Board of the General Partner may determine. As the result of the grant of Common Units to non-executive directors of the General Partner as described below, there are 47,310 Common Units remaining for issuance under the 2005 Plan as of June 30, 2014.

On March 26, 2014, the Board of Directors of the General Partner authorized and approved the 2014 Long-Term Incentive Plan of Central Energy Partners, LP (“ 2014 Plan ”). The 2014 Plan permits the grant of incentive and non-incentive Common Unit Options, Common Unit Appreciation Rights, Restricted Common Unit Grants, Common Units, Common Unit Value Equivalents and Substitute Awards to employees and directors of the Partnership Entities. The Compensation Committee may grant the recipient of an award, other than a Common Unit grant, the right to receive an amount equal to the minimum quarterly distributions associated with the Common Units which are the subject of an award. All awards, except an outright grant of Common Units, are subject to forfeiture upon termination of an executive officer, employee or director for any reason unless the Compensation Committee establishes other criteria in the award grant. The 2014 Plan provides anti-dilution protection for the recipient of an award in the case of a reorganization, combination, exchange or extra-ordinary distribution of Common Units, a merger, consolidation or combination of the Partnership with another entity, or a “change of control” of the Partnership or the General Partner. The 2014 Plan remains in effect until December 31, 2023, unless sooner terminated by the Board of Directors of the General Partner in accordance with its terms. The 2014 Plan authorizes the issuance of up to 3,300,000 Common Units, subject to amendment to increase the amount of authorized Common Units. As a result of the grant of Common Units to executive officers of the General Partner, Regional, and directors of the General Partner as summarized below, there are 1,950,000 Common Units remaining for issuance under the 2014 Plan as of June 30, 2014.

Grant of Restricted Common Unit Options to Executive Officers

On March 26, 2014, the Board of Directors of the General Partner approved the recommendation of the Board’s Compensation Committee to grant restricted Common Units (the “ Restricted Units ”) to the executive officers of the General Partner and Regional. The Compensation Committee finalized the terms of the Restricted Common Unit Restricted Unit Agreement, the form of which is attached to this Report (the “ Restricted Unit Agreement ”), and delivered such Restricted Unit Agreements to each of the executive officers on May 16, 2014, granting the number of Restricted Units as set forth in the following table:

The grant of the Restricted Units is made in consideration of the services to be rendered by an executive officer to the Partnership Entities. The Restricted Unit Agreement provides the award recipient the right to purchase the designated number of Common Units at an exercise price established by the final trade price of a Common Unit on the date of grant (May 16, 2014) or, if no trade occurred on the date of grant, the average bid and asked price on that date as quoted by OTC Pink. There was no trade in the Common Units on May 16, 2014, and the average bid and asked price on that date was $0.09. Each grant of Restricted Units expires on May 16, 2019.

CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The Restricted Units are awards of Common Units that are subject to restrictions on transferability and a substantial risk of forfeiture and are intended to retain and motivate members of management of the Partnership Entities. Award recipients have all the rights of a Unitholder in the Partnership with respect to the Restricted Units, including the right to receive distributions thereon if and when distributions are made by the Partnership to other Unitholders. The Restricted Units vest and the forfeiture restrictions lapse in substantially equal one-third (1/3) increments on each of May 16, 2015, May 16, 2016, and May 16, 2017.

If an award recipient’s service with the Partnership Entities is terminated prior to full vesting of the Restricted Units due to death or “disability” (as defined in the Restricted Unit Agreement) or if the award recipient’s employment with the Partnership Entities is terminated for “good reason” (as defined in the Restricted Unit Agreement) or by a Partnership Entity without “cause” (as defined in the Restricted Unit Agreement), then all Restricted Units will immediately vest in full as of the date of such termination. If an award recipient’s service with a Partnership Entity is terminated prior to full vesting of the Restricted Units for any other reason, then the award recipient will forfeit all unvested Restricted Units to the Partnership. In the event of an award recipient’s termination from service without “cause” or for “good reason” within two (2) years following the occurrence of a change of control, all unvested Restricted Units will become immediately vested in full. The Restricted Units are subject to anti-dilution protections as provided in the Restricted Unit Agreement. The Partnership is obligated to register the Restricted Units with the U.S. Securities and Exchange Commission (the “ Commission ”) pursuant to a Form S-8 registration statement.

Grant of Common Units to Directors under the 2005 Plan

As previously reported in the Partnership’s Annual Report on Form 10-K filed with the Commission on April 15, 2014, the Board of Directors of the General Partner approved the recommendation of its Compensation Committee to grant 375,000 Common Units to its non-executive directors under the 2005 Plan. The Compensation Committee finalized the terms of the Common Unit Grant Agreement, the form of which is attached to this Report (the “ Grant Agreement ”), and delivered such Grant Agreements to each of the non-executive directors on May 16, 2014, granting the number of Common Units as set forth in the following table:

The Common Units have been awarded to each of the directors for their service to the Partnership Entities in lieu of cash compensation. The Common Units awarded to each director have the value per Common Unit as established by the final trade price of a Common Unit on May 16, 2014 or, if no trade occurred on that date, the average bid and asked price on such date. The award recipient is the owner of the Common Units effective May 16, 2014 until such date as the Common Units are sold by such recipient and shall have all of the rights of a Unitholder of the Partnership. The Common Units are subject to anti-dilution protections as provided in the Restricted Unit Agreements. The Partnership is obligated to register the Common Units with the Commission pursuant to a Form S-8 registration statement.

CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Grant of Common Units to Directors under the 2014 Plan

On March 26, 2014, the Board of Directors of the General Partner approved the recommendation of its Compensation Committee to grant 75,000 Common Units to each of Imad K. Anbouba, a director of the General Partner and its former Chief Executive Officer, and Swank Investment Partners LP, an affiliate of The Cushing MLP Opportunity Fund I, L.P., which is the largest holder of Common Units and for which Daniel L. Spears, one of the directors of the General Partner, serves as portfolio manager. The Compensation Committee finalized the terms of the Common Unit Grant Agreements for such awards, the form of which is attached to this Report, and delivered such grant agreements to each of Mr. Anbouba and Swank Investment Partners on May 16, 2014. These grant agreements have the same terms and conditions as the Grant Agreements issued under the 2005 Plan.

Each of the 2005 Plan and the 2014 Plan are administered by the Compensation Committee of the Board. In addition, the Board may exercise any authority of the Compensation Committee under the 2005 Plan. The Compensation Committee has broad discretion in issuing awards under either plan and amending or terminating either plan. Under the terms of the Partnership Agreement, no approval of either the 2005 Plan or the 2014 Plan by the Limited Partners of the Partnership is required.

NOTE G - COMMITMENTS AND CONTINGENCIES

Legal Proceedings

We are involved with legal proceedings, lawsuits and claims in the ordinary course of our business. We believe that the liabilities, if any, ultimately resulting from such proceedings, lawsuits and claims should not materially affect its consolidated financial results.

Leases

Penske Truck Lease

Effective January 18, 2012, we entered into a Vehicle Maintenance Agreement (“ Maintenance Agreement ”) with Penske Truck Leasing Co., L. P. (“ Penske ”) for the maintenance of our 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, 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 to Penske, maintenance of Regional’s insurance obligation, or any other breach of the terms of the agreement.

On February 17, 2012, we entered into a seven-year Vehicle Lease Service Agreement with Penske for the outsourcing of 20 new Volvo tractors (“ Leased Tractors ”) to be acquired by Penske and leased to us for seven years, and the outsourcing of the maintenance of the Leased Tractors to Penske (“ Lease Agreement ”). Under the terms of the Lease Agreement, we 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 Leased Tractors in good repair and operating condition. Any replacement parts and labor for repairs which are not ordinary wear and tear are to be charged to Regional 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 has obtained all operating permits and licenses with respect to the use of the Leased Tractors by Regional. In connection with the delivery of the Leased Tractors, we sold our remaining owned tractor fleet, except for several owned tractor units which were retained to be used for terminal site logistics.

CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) 

Under the terms of the Lease Agreement, Regional (i) may acquire any or all of the Leased 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 Leased Tractors based on a documented downturn in business. On May 31, 2013, Regional notified Penske of its intent to terminate the lease arrangement effective June 15, 2013, for five Leased Tractors as provided in the Lease Agreement due to a decline in Regional’s transportation business. As a result of this partial termination, Regional now operates 15 Leased Tractors pursuant to the Lease Agreement. Regional is obligated to maintain liability insurance coverage on all Leased Tractors.

NOTE H – MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK

Major Customers

For the 3 months ended June 30, 2014, Associated Asphalt Hopewell LLC, Suffolk Sales, and MeadWestvaco Specialty Chemicals, Inc., accounted for approximately 27%, 20% and 15% of Regional’s revenues, respectively, and approximately 2%, 20% and 25% of its account receivables, respectively. Rubicon Energy, LLC accounted for approximately 11% of Regional’s revenues and 18% of the accounts receivable.

For the 6 months ended June 30, 2014, Associated Asphalt Hopewell LLC, Suffolk Sales, and MeadWestvaco Specialty Chemicals, Inc., accounted for approximately 24%, 22% and 17% of Regional’s revenues, respectively, and approximately 2%, 20% and 25% of Regional’s accounts receivable, respectively.

Concentrations of Credit Risk

The balance sheet items that potentially subject us to concentrations of credit risk are primarily cash and cash equivalents and accounts receivable. We maintain cash balances in different financial institutions. Balances in accounts are insured up to Federal Deposit Insurance Corporation (“ FDIC ”) limits of $250,000 per institution. At June 30, 2014, we did not have any cash balances in financial institutions in excess of FDIC insurance coverage. Concentrations of credit risk with our accounts receivable are mitigated by our ongoing credit evaluations of our customers.

NOTE I — INCOME TAXES

Federal Tax Liabilities

Failure to File Electronically and Delivery of Schedules K-1 to Unitholders

During November 2013, we received a notice from the IRS that we were liable for penalties (“2012 IRS Penalties”) of approximately $296,000 in connection with the late filing of the 2012 federal partnership tax return (“ 2012 Tax Return ”) and approximately $142,000 in connection with failing to file the 2012 Tax Return electronically. We timely filed the 2012 Tax Return manually. During January 2014, we submitted an appeal to the IRS to have the 2012 IRS Penalties removed. On February 25, 2014, we received written notice from the IRS that the appeal of the late filing penalty was approved and the appeal of the failure to file the 2012 Tax Return electronically was denied. We believe that there existed reasonable cause for the Partnership’s failure to file the 2012 Tax Return electronically and as a result we intend to appeal the decision to deny. As of June 30, 2014, we have accrued a reserve of $142,000 in connection with the remaining 2012 IRS Penalties.

There can be no assurance that our request for relief from the remaining outstanding 2012 IRS Penalties will be approved by the IRS or that we will have adequate financial resources to pay the remaining outstanding 2012 IRS Penalties.

CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE J — 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

All funds advanced to the Partnership by the General Partner since November 17, 2010 have been treated as a loan pursuant to the terms of an intercompany demand promissory note effective March 1, 2012, and amended during March 2014. The intercompany demand note provides for advances from time to time by the General Partner to the Partnership of up to $4,000,000. 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 June 30, 2014 is 1.89% per annum and such rate is adjusted monthly by the IRS under IRB 625. At June 30, 2014, the total amount owed to the General Partner by the Partnership, including accrued interest, was $3,845,000.

Intercompany Loans and Receivables

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 order to provide 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 June 30, 2014 is $4,234,000. The payment of this amount is subordinated to the payment of the Hopewell 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. 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. The note bears interest at the rate of 10% annually from January 1, 2011. At June 30, 2014, the intercompany balance owed by Regional to the Partnership and/or RVOP is approximately $2,803,000, which includes interest. 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 Hopewell Note by Regional.

Allocated Expenses Charged to Subsidiary

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 to Regional related activities. For the three months and six months ended June 30, 2013 and 2014, Regional recorded allocable expenses of $12,000, $55,000, $30,000 and $120,000, respectively.

Reimbursement Agreements

Effective December 31, 2013, in connection with the CEGP Investment and the resulting change in control of the General Partner, the Partnership moved its principal executive offices to another office location within Dallas, Texas that is leased from Katy Resources LLC (“ Katy ”), an entity controlled by G. Thomas Graves III, the Chairman of the Board of the General Partner. As a result, we entered into a new reimbursement agreement with Katy on a month-to-month basis for reimbursement of allocable “overhead costs” 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 Senior Vice President located in Manhattan Beach, California. Mr. Bothwell is a resident of California and lives in Manhattan Beach. Since June 2012, Regional has been directly charged for its allocated portion of Rover Technologies LLC’s expenses. In connection with the CEGP Investment, the Partnership reimbursed Rover Technologies LLC for the outstanding unpaid overhead costs as of the date of the CEGP Investment. For the three months and six months ended June 30, 2013 and 2014, expenses billed in connection with the reimbursement agreements were $12,000, $13,000, $30,000 and $35,000, respectively.

CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) 

NOTE K — REALIZATION OF ASSETS

Our unaudited consolidated balance sheets have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate our continuation as a going concern. We had a loss from operations for the year ended December 31, 2013 and the six months ended June 30, 2014 of $521,000 and $408,000, respectively.

During the period since December 31, 2012, we improved our overall liquidity. Our deficit in working capital, excluding current maturities of long-term debt, totaled $870,000 at June 30, 2014 compared with $3,163,000 at December 31, 2012, a reduction of $2,293,000. In addition, we were successful in reducing our obligations owing under the Penske Lease Agreement and extending the interest only payment period under the Hopewell Loan Agreement. During 2013, we also satisfactorily resolved the TransMontaigne Dispute, the contingencies associated with the late filing tax matters, and paid down and/or obtained payment arrangements with critical accounts payable vendors.

During November 2013, we completed the CEGP Investment, which provided working capital of $2.75 million to the General Partner and Central Energy. We also recently amended the note agreement with the General Partner which provides for an increase in the amount of advances from the General Partner from $2.0 million to $4.0 million and extends the commencement date for amortization of the note with the General Partner to the quarter ended March 2017.

Currently the General Partner’s cash reserves are limited and the remaining available amounts (approximately $0.2 million at July 17, 2014) are intended to be used to fund the Partnership’s ongoing working capital requirements. In connection with the Hopewell Note, Regional is currently required to make interest payments only of $25,000 per month until December 2014 and then equal monthly payments of $56,000 (principal and interest) each month thereafter until March 2016 at which time a balloon payment of approximately $2 million will be due. Regional also is required to make minimum monthly payments under the Penske Lease Agreement of approximately $30,000 until May 2019. Payments under the Hopewell Note and the Penske Lease Agreement could be accelerated in the event of a default. The amount of penalties related to the remaining 2012 Tax Return is $142,000 and will be required to be paid if our appeal is unsuccessful. Since the closing of the CEGP Investment, Messrs. Denman, Graves and Weir have agreed to forego receipt of any compensation as a result of concerns over available cash resources.

Substantially all of our assets are pledged as collateral for the Hopewell Loan, and therefore, we are unable to obtain additional financing collateralized by those assets without repayment of the Hopewell Loan. In addition, we have obligations under existing registrations rights agreements. These rights may be a deterrent to any future equity financings.

In view of the matters described in the preceding paragraphs, recoverability of the recorded asset amounts shown in the accompanying consolidated balance sheet assumes that: (1) the expected increase in revenues from recent contracts entered into by Regional materializes as predicted; (2) we do not experience any significant disruptions in storage revenues resulting from the timing of termination of storage tank lease agreements and identifying replacement customers and/or disruptions resulting from the performance of maintenance on our facilities; (3) our hauling revenues remain at current levels; (4) obligations to creditors are not accelerated; (5) there is adequate funding available for us to complete required maintenance and upgrades to our facilities; (6)our pending facility upgrades are completed timely and within estimated budgets; (7) our operating expenses remain at current levels; (8) we obtain additional working capital to meet our contractual commitments through future intercompany advances or a refinancing of the Hopewell Loan; and/or (9) the Partnership is able to receive future distributions from Regional or future advances from the General Partner in amounts necessary to fund working capital until an acquisition transaction is completed by the Partnership.

CENTRAL ENERGY PARTNERS LP AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

There is no assurance that we will have sufficient working capital to cover ongoing cash requirements for the period of time we believe is necessary to complete an acquisition that will provide additional working capital for us. If we do not have sufficient cash reserves, our ability to pursue additional acquisition transactions will be adversely impacted. Furthermore, despite significant effort, we have thus far been unsuccessful in completing an acquisition transaction. There can be no assurance that we will be able to complete an accretive acquisition or otherwise find additional sources of working capital. If an acquisition transaction cannot be completed or if additional funds cannot be raised and cash flow is inadequate, we 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.

It is our intention to acquire additional assets during 2014 on terms that will enable us to expand our assets and generate additional cash from operations. We are also seeking to obtain additional funding through a refinancing of the Hopewell Loan or from an alternative funding transaction. The accompanying 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 we be unable to obtain adequate funding to maintain operations and to continue in existence.

NOTE L - 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 M - SEGMENT INFORMATION

We report segment information in accordance with ASC 280, Segment Reporting. 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. We had only one operating segment (the transportation and terminaling business of Regional) during the three months and six months ended June, 2013 and 2014.

The following are amounts related to the Regional transportation and terminaling business included in the accompanying consolidated financial statements for the three months and six months ended June 30, 2013 and 2014 and at December 31, 2013 and June 30, 2014: