PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (UNAUDITED)
BP MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) |
| | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | (in thousands of dollars) |
ASSETS |
Current assets | | |
| | |
|
Cash and cash equivalents | | $ | 75,402 |
| | $ | 56,970 |
|
Accounts receivable – third parties | | 298 |
| | 325 |
|
Accounts receivable – related parties | | 10,423 |
| | 9,769 |
|
Prepaid expenses | | 2,056 |
| | 4,667 |
|
Other current assets | | 2,861 |
| | 629 |
|
Total current assets | | 91,040 |
| | 72,360 |
|
Equity method investments (Note 4) | | 539,933 |
| | 549,039 |
|
Property, plant and equipment, net (Note 5) | | 65,273 |
| | 68,580 |
|
Other assets | | 3,477 |
| | 3,224 |
|
Total assets | | $ | 699,723 |
| | $ | 693,203 |
|
| | | | |
LIABILITIES |
Current liabilities | | |
| | |
|
Accounts payable – third parties | | $ | 473 |
| | $ | 607 |
|
Accounts payable – related parties | | 1,725 |
| | 2,553 |
|
Deferred revenue and credits | | 3,630 |
| | 1,067 |
|
Other current liabilities (Note 6) | | 3,829 |
| | 6,900 |
|
Total current liabilities | | 9,657 |
| | 11,127 |
|
Long-term debt (Note 7) | | 468,000 |
| | 468,000 |
|
Other liabilities | | 3,422 |
| | 3,224 |
|
Total liabilities | | 481,079 |
| | 482,351 |
|
| | | | |
Commitments and contingencies (Note 12) | |
|
| |
|
|
| | | | |
EQUITY |
Common unitholders – public (2019 – 47,806,563 issued and outstanding; 2018 – 47,802,826 units issued and outstanding) | | 841,257 |
| | 836,789 |
|
Common unitholders – BP Holdco (2019 and 2018 – 4,581,177 units issued and outstanding) | | (61,266 | ) | | (61,684 | ) |
Subordinated unitholders – BP Holdco (2019 and 2018 – 52,375,535 units issued and outstanding) | | (700,453 | ) | | (705,227 | ) |
General partner | | 403 |
| | — |
|
Total partners' capital | | 79,941 |
| | 69,878 |
|
Non-controlling interests | | 138,703 |
| | 140,974 |
|
Total equity | | 218,644 |
| | 210,852 |
|
Total liabilities and equity | | $ | 699,723 |
| | $ | 693,203 |
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
BP MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (in thousands of dollars, unless otherwise indicated) |
Revenue | | | | | | |
| | |
Third parties | | $ | 715 |
| | $ | 766 |
| | $ | 1,513 |
| | $ | 1,564 |
|
Related parties | | 27,885 |
| | 28,169 |
| | 57,328 |
| | 53,990 |
|
Total revenue | | 28,600 |
| | 28,935 |
| | 58,841 |
| | 55,554 |
|
Costs and expenses | | | | | | |
| | |
Operating expenses – third parties | | 3,380 |
| | 3,017 |
| | 6,708 |
| | 5,636 |
|
Operating expenses – related parties | | 1,459 |
| | 1,026 |
| | 2,894 |
| | 1,988 |
|
Maintenance expenses – third parties | | 598 |
| | 847 |
| | 883 |
| | 883 |
|
Maintenance expenses – related parties | | 54 |
| | 24 |
| | 73 |
| | 44 |
|
General and administrative – third parties | | 470 |
| | 415 |
| | 1,430 |
| | 1,203 |
|
General and administrative – related parties | | 3,683 |
| | 3,442 |
| | 7,121 |
| | 6,865 |
|
Lease expense | | 18 |
| | 15 |
| | 36 |
| | 30 |
|
Depreciation | | 658 |
| | 662 |
| | 1,314 |
| | 1,324 |
|
Impairment and other, net | | 1,000 |
| | — |
| | 1,000 |
| | — |
|
Property and other taxes | | 141 |
| | 112 |
| | 250 |
| | 223 |
|
Total costs and expenses | | 11,461 |
| | 9,560 |
| | 21,709 |
| | 18,196 |
|
Operating income | | 17,139 |
| | 19,375 |
| | 37,132 |
| | 37,358 |
|
Income from equity method investments | | 28,838 |
| | 20,842 |
| | 53,208 |
| | 43,681 |
|
Interest expense, net | | 3,782 |
| | 25 |
| | 7,526 |
| | 139 |
|
Income before income taxes | | 42,195 |
| | 40,192 |
| | 82,814 |
| | 80,900 |
|
Income tax expense | | — |
| | — |
| | — |
| | — |
|
Net income | | 42,195 |
| | 40,192 |
| | 82,814 |
| | 80,900 |
|
Less: Net income attributable to non-controlling interests | | 4,864 |
| | 9,722 |
| | 8,330 |
| | 19,891 |
|
Net income attributable to the Partnership | | $ | 37,331 |
| | $ | 30,470 |
| | $ | 74,484 |
| | $ | 61,009 |
|
| | | | | | | | |
Net income attributable to the Partnership per limited partner unit – basic and diluted (in dollars): | | | | | | |
| | |
Common units | | $ | 0.35 |
| | $ | 0.29 |
| | $ | 0.70 |
| | $ | 0.58 |
|
Subordinated units | | $ | 0.35 |
| | $ | 0.29 |
| | $ | 0.70 |
| | $ | 0.58 |
|
| | | | | | | | |
Weighted average number of limited partner units outstanding - basic and diluted (in millions): | | | | | | |
| | |
Common units – public | | 47.8 |
| | 47.8 |
| | 47.8 |
| | 47.8 |
|
Common units – BP Holdco | | 4.6 |
| | 4.6 |
| | 4.6 |
| | 4.6 |
|
Subordinated units – BP Holdco | | 52.4 |
| | 52.4 |
| | 52.4 |
| | 52.4 |
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
BP MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Month Period Ended June 30, 2018 |
| | Partners' Capital | | | | |
(in thousands of dollars) | Common Unitholders – Public | | Common Unitholders – BP Holdco | | Subordinated Unitholders – BP Holdco | | General Partner | | Non-controlling Interests | | Total |
Balance at December 31, 2017 | $ | 824,613 |
| | $ | (47,141 | ) | | $ | (538,947 | ) | | $ | — |
| | $ | 342,330 |
| | $ | 580,855 |
|
| Cumulative effect of accounting change (Note 4) | (1,253 | ) | | (120 | ) | | (1,373 | ) | | — |
| | — |
| | (2,746 | ) |
| Net income | 13,934 |
| | 1,336 |
| | 15,269 |
| | — |
| | 10,169 |
| | 40,708 |
|
| Distributions to unitholders ($0.1798 per unit) and general partner | (8,592 | ) | | (823 | ) | | (9,415 | ) | | — |
| | — |
| | (18,830 | ) |
| Unit-based compensation | 39 |
| | — |
| | — |
| | — |
| | — |
| | 39 |
|
| Distributions to non-controlling interests | — |
| | — |
| | — |
| | — |
| | (15,026 | ) | | (15,026 | ) |
Balance at March 31, 2018 | 828,741 |
| | (46,748 | ) | | (534,466 | ) | | — |
| | 337,473 |
| | 585,000 |
|
| Net income | 13,902 |
| | 1,333 |
| | 15,235 |
| | — |
| | 9,722 |
| | 40,192 |
|
| Distributions to unitholders ($0.2675 per unit) and general partner | (12,785 | ) | | (1,225 | ) | | (14,011 | ) | | — |
| | — |
| | (28,021 | ) |
| Unit-based compensation | 45 |
| | — |
| | — |
| | — |
| | — |
| | 45 |
|
| Distributions to non-controlling interests | — |
| | — |
| | — |
| | — |
| | (13,708 | ) | | (13,708 | ) |
Balance at June 30, 2018 | $ | 829,903 |
| | $ | (46,640 | ) | | $ | (533,242 | ) | | $ | — |
| | $ | 333,487 |
| | $ | 583,508 |
|
| | | | | | | | | | | |
| | Six Month Period Ended June 30, 2019 |
| | Partners' Capital | | | | |
(in thousands of dollars) | Common Unitholders – Public | | Common Unitholders – BP Holdco | | Subordinated Unitholders – BP Holdco | | General Partner | | Non-controlling Interests | | Total |
Balance at December 31, 2018 | $ | 836,789 |
| | $ | (61,684 | ) | | $ | (705,227 | ) | | $ | — |
| | $ | 140,974 |
| | $ | 210,852 |
|
| Net income | 16,863 |
| | 1,616 |
| | 18,476 |
| | 198 |
| | 3,466 |
| | 40,619 |
|
| Distributions to unitholders ($0.3015 per unit) and general partner | (14,413 | ) | | (1,382 | ) | | (15,791 | ) | | — |
| | — |
| | (31,586 | ) |
| Unit-based compensation | 40 |
| | — |
| | — |
| | — |
| | — |
| | 40 |
|
| Distributions to non-controlling interests | — |
| | — |
| | — |
| | — |
| | (4,569 | ) | | (4,569 | ) |
Balance at March 31, 2019 | 839,279 |
| | (61,450 | ) | | (702,542 | ) | | 198 |
| | 139,871 |
| | 215,356 |
|
| Net income | 16,851 |
| | 1,615 |
| | 18,462 |
| | 403 |
| | 4,864 |
| | 42,195 |
|
| Distributions to unitholders ($0.3126 per unit) and general partner | (14,944 | ) | | (1,431 | ) | | (16,373 | ) | | (198 | ) | | — |
| | (32,946 | ) |
| Unit-based compensation | 71 |
| | — |
| | — |
| | — |
| | — |
| | 71 |
|
| Distributions to non-controlling interests | — |
| | — |
| | — |
| | — |
| | (6,032 | ) | | (6,032 | ) |
Balance at June 30, 2019 | $ | 841,257 |
| | $ | (61,266 | ) | | $ | (700,453 | ) | | $ | 403 |
| | $ | 138,703 |
| | $ | 218,644 |
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
BP MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
| | | | | | | | |
| | Six Months Ended June 30, |
| | 2019 | | 2018 |
| | (in thousands of dollars) |
Cash flows from operating activities | | |
| | |
Net income | | $ | 82,814 |
| | $ | 80,900 |
|
Adjustments to reconcile net income to net cash provided by operating activities | | |
| | |
Depreciation | | 1,314 |
| | 1,324 |
|
Impairment and other, net | | 1,000 |
| | — |
|
Non-cash expenses | | 136 |
| | 84 |
|
Income from equity method investments | | (53,208 | ) | | (43,681 | ) |
Distributions of earnings received from equity method investments | | 55,692 |
| | 47,807 |
|
Changes in operating assets and liabilities | | |
| | |
Accounts receivable – third parties | | 27 |
| | (29 | ) |
Accounts receivable – related parties | | (654 | ) | | 223 |
|
Prepaid expenses and other current assets | | 2,590 |
| | (136 | ) |
Accounts payable – third parties | | (134 | ) | | 493 |
|
Accounts payable – related parties | | (828 | ) | | (629 | ) |
Deferred revenue and credits | | 2,563 |
| | 2,186 |
|
Other current liabilities | | (4,103 | ) | | (705 | ) |
Net cash provided by operating activities | | 87,209 |
| | 87,837 |
|
Cash flows from investing activities | | |
| | |
|
Capital expenditures | | (266 | ) | | (472 | ) |
Distributions in excess of earnings from equity method investments | | 6,622 |
| | 11,053 |
|
Net cash provided by investing activities | | 6,356 |
| | 10,581 |
|
Cash flows from financing activities | | |
| | |
|
Repayment of debt | | — |
| | (15,000 | ) |
Distributions to unitholders and general partner | | (64,532 | ) | | (46,851 | ) |
Distributions to non-controlling interests | | (10,601 | ) | | (28,734 | ) |
Net cash used in financing activities | | (75,133 | ) | | (90,585 | ) |
Net change in cash and cash equivalents | | 18,432 |
| | 7,833 |
|
Cash and cash equivalents at beginning of the period | | 56,970 |
| | 32,694 |
|
Cash and cash equivalents at end of the period | | $ | 75,402 |
| | $ | 40,527 |
|
Supplemental cash flow information | | |
| | |
Cash paid for interest | | $ | 12,061 |
| | $ | 428 |
|
Cash paid for lease liabilities | | 31 |
| | — |
|
Non-cash investing transactions | | | | |
Accrued capital expenditures | | 205 |
| | 198 |
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
BP MIDSTREAM PARTNERS LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)
1. Business and Basis of Presentation
BP Midstream Partners LP (either individually or together with its subsidiaries, as the context requires, the “Partnership”) is a Delaware limited partnership formed on May 22, 2017 by BP Pipelines (North America) Inc. (“BP Pipelines”), an indirect wholly owned subsidiary of BP p.l.c. (“BP”), a “foreign private issuer” within the meaning of the Securities Exchange Act of 1934, as amended.
Unless otherwise stated or the context otherwise indicates, all references to “we,” “our,” “us,” or similar expressions for time periods refer to BP Midstream Partners LP. The term “our Parent” refers to BP Pipelines; any entity that wholly owns BP Pipelines, indirectly or directly, including BP and BP America Inc. (“BPA”), an indirect wholly owned subsidiary of BP; and any entity that is wholly owned by the aforementioned entities, excluding BP Midstream Partners LP.
Business
We are a fee-based, growth-oriented master limited partnership formed by BP Pipelines to own, operate, develop and acquire pipelines and other midstream assets. Our assets consist of interests in entities that own crude oil, natural gas, refined products and diluent pipelines serving as key infrastructure for BP and other customers to transport onshore crude oil production to BP’s refinery in Whiting, Indiana (the “Whiting Refinery”) and offshore crude oil and natural gas production to key refining markets and trading and distribution hubs. Certain of our assets deliver refined products and diluent from the Whiting Refinery and other U.S. supply hubs to major demand centers.
Acquisition of Equity Interests
On October 1, 2018, pursuant to the Interest Purchase Agreement (the “Interest Purchase Agreement”) that we entered into with BP Products North America Inc. (“BP Products”), BP Offshore Pipelines Company LLC (“BP Offshore”), and BP Pipelines, we completed the acquisition of (i) an additional 45% interest in Mardi Gras, from BP Pipelines, (ii) a 25% interest in KM Phoenix Holdings LLC, ("KM Phoenix") a Delaware limited liability company, from BP Products, and (iii) a 22.7% interest in URSA Oil Pipeline Company LLC, ("Ursa") a Delaware limited liability company, from BP Offshore, in exchange for aggregate consideration of $468 million funded with borrowings under our Credit Facility (as defined below). The purchase was accounted for as a transaction between entities under common control; as a result, we recognized the acquired assets at their historical carrying value.
As of June 30, 2019, our assets consisted of the following:
BP Two Pipeline Company LLC, which owns the BP#2 crude oil pipeline system (“BP2”).
BP River Rouge Pipeline Company LLC, which owns the Whiting to River Rouge refined products pipeline system (“River Rouge”).
BP D-B Pipeline Company LLC, which owns the Diamondback diluent pipeline system (“Diamondback”). BP2, River Rouge, and Diamondback, together, are referred to as the "Wholly Owned Assets".
| |
• | A 28.5% ownership interest in Mars Oil Pipeline Company, LLC (“Mars”), which owns a major corridor crude oil pipeline system in the Gulf of Mexico. |
A 65% managing member interest in Mardi Gras Transportation System Company, LLC (“Mardi Gras”), which holds the following investments in joint ventures located in the Gulf of Mexico:
A 56% ownership interest in Caesar Oil Pipeline Company, LLC (“Caesar”),
A 53% ownership interest in Cleopatra Gas Gathering Company, LLC (“Cleopatra”),
A 65% ownership interest in Proteus Oil Pipeline Company, LLC (“Proteus”), and,
A 65% ownership interest in Endymion Oil Pipeline Company, LLC (“Endymion”).
Together Endymion, Caesar, Cleopatra and Proteus are referred to as the “Mardi Gras Joint Ventures.”
A 22.7% ownership interest in Ursa.
A 25% ownership interest in KM Phoenix.
We generate the majority of our revenue by charging fees for the transportation of crude oil, refined products and diluent through our pipelines under long-term agreements with minimum volume commitments ("MVC"). We do not engage in the marketing and trading of any commodities. All operations are conducted in the United States, and all our long-lived assets are in the United States. Our operations consist of one reportable segment.
BP MIDSTREAM PARTNERS LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)
Certain businesses of ours are subject to regulation by various authorities including, but not limited to the Federal Energy Regulatory Commission ("FERC"). Regulatory bodies exercise statutory authority over matters such as common carrier tariffs, construction, rates and ratemaking and agreements with customers.
Basis of Presentation
Our condensed consolidated financial statements have been prepared under the rules and regulations of the Securities and Exchange Commission (“SEC”). These rules and regulations conform to the accounting principles contained in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification, the single source of accounting principles generally accepted in the United States (“GAAP”).
Certain information and footnote disclosures normally included in the annual consolidated financial statements have been condensed or omitted from these condensed consolidated financial statements. The condensed consolidated financial statements as of June 30, 2019, and for the three and six months ended June 30, 2019 and 2018, included herein, are unaudited. These financial statements include all known accruals and adjustments necessary, in the opinion of management, for a fair presentation of our condensed consolidated financial position, results of operations and cash flows. Unless otherwise specified, all such adjustments are of a normal and recurring nature. The unaudited results of operations for the interim periods reported are not necessarily indicative of results to be expected for the full year. These unaudited condensed consolidated financial statements and other information included in this quarterly report on Form 10-Q should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018 (the "2018 Annual Report").
Our financial position, results of operations and cash flows consist of consolidated BP Midstream Partners LP activities and balances. All intercompany accounts and transactions within the financial statements have been eliminated for all periods presented.
Summary of Significant Accounting Policies
Other than the adoption of ASU 2016-02 described below, there have been no significant changes to our accounting policies as disclosed in Note 2 - Summary of Significant Accounting Policies in our 2018 Annual Report.
Standards Adopted
Topic 842
On February 25, 2016, the FASB issued ASU 2016-02, “Leases” followed by a series of related accounting standard updates (collectively referred to as “Topic 842”). We adopted the new standard on January 1, 2019, utilizing the modified retrospective method. The new lease standard improves transparency and comparability among organizations by requiring lessees to recognize a lease liability and a corresponding right-of-use asset for virtually all lease contracts. We elected the optional transition relief under ASU 2018-11 "Leases: Targeted Improvement" which allows us to apply the transition provision at the adoption date instead of the earliest comparative period presented in our financial statements. Therefore, we recognized and measured leases existing at the adoption date but without retrospective application. See Note 3 - Leases. No cumulative effect impact was recorded to the statement of operations or beginning balance in our statement of changes in equity.
2. Revenue Recognition
In 2018, we adopted ASU 2014-09, "Revenue from Contracts with Customers" and all related ASU’s (collectively referred to as “Topic 606”) by applying the modified retrospective method to all contracts that were not completed on January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented in accordance with the new revenue standard. Topic 606 requires entities to recognize revenue through the application of a five-step model, which includes: (1) identification of the contract; (2) identification of the performance obligations; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations; and (5) recognition of revenue as the entity satisfies the performance obligations.
BP MIDSTREAM PARTNERS LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)
Pipeline Transportation
Revenue from pipeline transportation is comprised of tariffs and fees associated with the transportation of liquid petroleum products, generally at published tariffs and in certain instances, revenue from MVC contracts at negotiated rates. Tariff revenue is recognized either at the point of delivery or at the point of receipt, pursuant to specifications outlined in the respective tariffs.
Billings to BP Products for deficiency volumes under its MVCs, if any, are recorded as deferred revenue and credits, a contract liability, on our condensed consolidated balance sheets, as BP Products has the right to make up the deficiency volumes within the measurement period specified by the agreements. Deferred revenue under these arrangements is recognized into revenue once it is deemed remote that the customer will meet its required annual MVC.
Allowance Oil
Our tariff for crude oil transportation at BP2 includes a fixed loss allowance (“FLA”). An FLA factor per barrel, a fixed percentage, is a separate fee that is considered a part of the transaction price under the applicable crude oil tariff to cover evaporation and other losses in transit.
In the three and six months ended June 30, 2019 we recognized revenue of $2,612 and $5,097, respectively, related to the FLA arrangements with our Parent. In the three and six months ended June 30, 2018, we recognized revenue of $2,860 and $5,000, respectively, related to the FLA arrangements with our Parent.
Disaggregation of Revenue
The following table provides information about disaggregated revenue:
|
| | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | 2018 | | 2019 | 2018 |
Transportation services revenue - third parties | $ | 715 |
| $ | 766 |
| | $ | 1,513 |
| $ | 1,564 |
|
Transportation services revenue - related parties | 27,885 |
| 28,169 |
| | 57,328 |
| 53,990 |
|
Total ASC 606 revenue | $ | 28,600 |
| $ | 28,935 |
| | $ | 58,841 |
| $ | 55,554 |
|
Future Performance Obligations
The fixed portion of our existing customer contracts are summarized in the future performance obligations as of June 30, 2019. The unfulfilled performance obligations included in the table below are expected to be recognized in revenue in the specified periods:
|
| | | |
| As of June 30, 2019 |
Remainder of 2019 | $ | 57,134 |
|
2020 | 109,590 |
|
Total | $ | 166,724 |
|
Contract Balances
Contract assets and contract liabilities are the result of timing differences between revenue recognition, billings and cash collections. Contract liabilities or deferred revenue and credits primarily relate to consideration received from customers for temporary deficiency quantities under minimum volume contracts that the customer has the right to make up in a future period, which we subsequently recognize as revenue or amounts we credit back to the customer in a future period.
BP MIDSTREAM PARTNERS LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)
The following table provides information about receivables from contracts with customers, contract assets and contract liabilities:
|
| | | | | | |
| June 30, 2019 | December 31, 2018 |
Receivables from contracts with customers - third parties | $ | 298 |
| $ | 325 |
|
Receivables from contracts with customers - related parties | 9,859 |
| 9,611 |
|
Deferred revenue and credits - related parties | 3,630 |
| 1,067 |
|
3. Leases
We have elected the optional practical expedients permitted under the transition guidance within the new lease standard, which among other things, allows us to carry forward the historical accounting treatment relating to classification for existing leases upon adoption, allows us to not be required to reassess whether an expired or existing contract is or contains a lease, and allows us not to have to reassess initial direct costs for an existing lease.
In addition, we elected the optional transition guidance related to land easements that allows us to carry forward our historical accounting treatment on existing agreements upon adoption. This allowed us to not be required to assess existing land easements that were not historically accounted for as leases under Topic 840, therefore they are excluded from this disclosure.
We also elected the practical expedient to not separate lease and non-lease components for all asset classes. However, we did not elect to apply the hindsight practical expedient; therefore the non-exercised renewals were not included in the lease terms.
Beginning January 1, 2019, operating right-of-use ("ROU") assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because our leases do not provide an explicit rate of return, we use our incremental borrowing rate based on lease term information available at the commencement date in determining the present value of lease payments.
The impact of Topic 842 on our condensed consolidated balance sheet beginning January 1, 2019 was through the recognition of ROU assets and lease liabilities for operating leases. Amounts recognized at January 1, 2019 for operating leases were as follows:
|
| | | |
| January 1, 2019 |
ROU Assets | $ | 518 |
|
Current lease liability | 60 |
|
Long-term lease liability | 458 |
|
We have a total of four operating leases related to office space of which the term of two expires in 2036 and the other two in 2020. We have the option to terminate our leases 30 days after providing written notice of the election to terminate to the landlord. Two of our leases include a right of renewal and an annual 3% escalation on the anniversary date of lease inception. We have the option to renew our leases by giving notice to landlord not less than 60 days prior to the expiration of the lease term. We have not included the option to renew the leases in our determination of lease term because at the time of lease inception it was not certain we would exercise the renewal. We have included the variable lease payments based on the escalation percentage from above in the determination of our lease liabilities and our ROU assets. The other two leases include a non-lease component for maintenance expense. No leases include a residual value guarantee or provide us an option to acquire the real property at the end of the lease. We have no material subleasing arrangements.
Amounts recognized in the accompanying condensed consolidated balance sheet are as follows:
|
| | | | |
Lease activity | Balance sheet location | June 30, 2019 |
ROU assets | Other assets | $ | 493 |
|
Current lease liability | Other current liabilities | 60 |
|
Long-term lease liability | Other liabilities | 438 |
|
As of June 30, 2019, the weighted average discount rate of our leases was 4.35% and the weighted average remaining lease term was 15.5 years.
BP MIDSTREAM PARTNERS LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)
The undiscounted future minimum lease payments as of June 30, 2019 and December 31, 2018 are presented in the table below:
|
| | | | | | |
| Post-adoption ASC 842 | Pre-adoption ASC 842 |
| June 30, 2019 | December 31, 2018 |
2019 | $ | 31 |
| $ | 62 |
|
2020 | 63 |
| 63 |
|
2021 | 32 |
| 32 |
|
2022 | 33 |
| 33 |
|
2023 | 34 |
| 34 |
|
Thereafter | 514 |
| 514 |
|
Total | $ | 707 |
| $ | 738 |
|
4. Equity Method Investments
We account for our ownership interests in Mars, Ursa, KM Phoenix and the Mardi Gras Joint Ventures using the equity method for financial reporting purposes. Our financial results include our proportionate share of the Mars, Ursa, KM Phoenix and the Mardi Gras Joint Ventures, which is reflected in Income from equity method investments on the condensed consolidated statements of operations. We did not record any impairment loss on our equity method investments during the six months ended June 30, 2019 and 2018.
The table below summarizes the balances and activities related to each of our equity method investments ("EMI") that we recorded for the three and six months ended June 30, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2018 |
| Percentage Ownership | Distributions Received | Income from EMI | Carrying Value | | Percentage Ownership | Distributions Received | Income from EMI | Carrying Value |
Mars | 28.5% | $ | (13,680 | ) | $ | 11,891 |
| $ | 57,020 |
| | 28.5% | $ | (10,118 | ) | $ | 8,689 |
| $ | 58,688 |
|
Caesar(1) | 56.0% | (4,368 | ) | 4,494 |
| 119,523 |
| | 56.0% | (4,480 | ) | 3,519 |
| 120,834 |
|
Cleopatra(1) | 53.0% | (3,180 | ) | 2,556 |
| 118,301 |
| | 53.0% | (2,385 | ) | 1,486 |
| 121,547 |
|
Proteus(1) | 65.0% | (5,200 | ) | 3,310 |
| 77,724 |
| | 65.0% | (5,070 | ) | 3,498 |
| 83,981 |
|
Endymion(1) | 65.0% | (4,485 | ) | 3,537 |
| 80,747 |
| | 65.0% | (5,200 | ) | 3,650 |
| 85,024 |
|
Others(2) | Various | (2,927 | ) | 3,050 |
| 86,618 |
| | 0% | — |
| — |
| — |
|
Total Equity Investments | | $ | (33,840 | ) | $ | 28,838 |
| $ | 539,933 |
| | | $ | (27,253 | ) | $ | 20,842 |
| $ | 470,074 |
|
BP MIDSTREAM PARTNERS LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 | | Six Months Ended June 30, 2018 |
| Percentage Ownership | Distributions Received | Income from EMI | Carrying Value | | Percentage Ownership | Cumulative Effect of Accounting Change(3) | Distributions Received | Income from EMI | Carrying Value |
Mars | 28.5% | $ | (25,838 | ) | $ | 23,715 |
| $ | 57,020 |
| | 28.5% | $ | (2,746 | ) | $ | (22,943 | ) | $ | 18,816 |
| $ | 58,688 |
|
Caesar(1) | 56.0% | (9,688 | ) | 9,821 |
| 119,523 |
| | 56.0% | — |
| (10,597 | ) | 7,845 |
| 120,834 |
|
Cleopatra(1) | 53.0% | (6,625 | ) | 5,376 |
| 118,301 |
| | 53.0% | — |
| (5,300 | ) | 3,335 |
| 121,547 |
|
Proteus(1) | 65.0% | (7,540 | ) | 3,932 |
| 77,724 |
| | 65.0% | — |
| (10,075 | ) | 6,912 |
| 83,981 |
|
Endymion(1) | 65.0% | (6,435 | ) | 4,671 |
| 80,747 |
| | 65.0% | — |
| (9,945 | ) | 6,773 |
| 85,024 |
|
Others(2) | Various | (6,188 | ) | 5,693 |
| 86,618 |
| | 0% | — |
| — |
| — |
| — |
|
Total Equity Investments | | $ | (62,314 | ) | $ | 53,208 |
| $ | 539,933 |
| | | $ | (2,746 | ) | $ | (58,860 | ) | $ | 43,681 |
| $ | 470,074 |
|
| |
1. | These investments are held by our investment in Mardi Gras which increased to 65% from 20% on October 1, 2018. |
| |
2. | Includes ownership in Ursa (22.7%) and KM Phoenix (25%) acquired on October 1, 2018. |
| |
3. | The financial results of Mars reflected the adoption of Topic 606 on January 1, 2018 under the modified retrospective transition method through a cumulative adjustment to equity. Our cumulative effect impact from this accounting change to our Mars investment was $(2,746), offset to equity. The Mardi Gras Joint Ventures and Ursa adopted this ASU on January 1, 2019 and there was no cumulative effect impact from the adoption. KM Phoenix adopted Topic 606 on January 1, 2018 and there was no cumulative effect impact from the adoption. |
The following table presents aggregated selected income statement data for our equity method investments on a 100% basis for the three and six months ended June 30, 2019 and 2018:
|
| | | | | | | | |
| | Three Months Ended June 30, |
| | 2019 | | 2018(1) |
Statement of operations | | | | |
Revenue | | $ | 148,139 |
| | $ | 103,211 |
|
Operating expenses | | 71,151 |
| | 45,549 |
|
Net income | | 78,071 |
| | 57,775 |
|
|
| | | | | | | | |
| | Six Months Ended June 30, |
| | 2019 | | 2018(1) |
Statement of operations | | | | |
Revenue | | $ | 264,142 |
| | $ | 215,287 |
|
Operating expenses | | 116,964 |
| | 93,030 |
|
Net income | | 148,374 |
| | 122,487 |
|
| |
1. | Balances include KM Phoenix and Ursa results. |
BP MIDSTREAM PARTNERS LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)
5. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
|
| | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
Land | | $ | 155 |
| | $ | 155 |
|
Right-of-way assets | | 1,380 |
| | 1,380 |
|
Buildings and improvements | | 9,332 |
| | 12,032 |
|
Pipelines and equipment | | 93,908 |
| | 93,617 |
|
Other | | 546 |
| | 509 |
|
Construction in progress | | 256 |
| | 277 |
|
Property, plant and equipment | | 105,577 |
| | 107,970 |
|
Less: Accumulated depreciation | | (40,304 | ) | | (39,390 | ) |
Property, plant and equipment, net | | $ | 65,273 |
| | $ | 68,580 |
|
During the three and six months ended June 30, 2019, an impairment charge of $2.3 million was recorded under "Impairment and other, net" on our condensed consolidated statements of operations. See Note 12 - Commitments and Contingencies. There were no impairments during the period ended December 31, 2018.
6. Other Current Liabilities
Other current liabilities consisted of the following:
|
| | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
Current portion of environmental remediation obligations | | $ | 750 |
| | $ | 629 |
|
Current portion of lease liabilities | | 60 |
| | — |
|
Accrued interest payable - related parties | | 270 |
| | 4,155 |
|
Accrued liabilities | | 2,749 |
| | 2,116 |
|
Other current liabilities | | $ | 3,829 |
| | $ | 6,900 |
|
7. Debt
On October 30, 2017, the Partnership entered into a $600 million unsecured revolving credit facility agreement (the “Credit Facility”) with an affiliate of BP. A summary of certain key terms and covenants of the Credit Facility is included in our financial statements included in our 2018 Annual Report in Note 8 - Debt. As of June 30, 2019, the Partnership was in compliance with the covenants contained in the Credit Facility.
On October 1, 2018, the Partnership borrowed $468 million under the Credit Facility to fund our acquisition. See Note 1 - Business and Basis of Presentation.
On February 20, 2019, we entered into a Credit Facility Waiver Agreement (“First Waiver Agreement”) whereby the lender waived certain terms on our outstanding $468 million borrowings. The original loan repayment date of March 29, 2019 was waived and amended and modified to April 1, 2020.
On May 3, 2019, we entered into a Second Credit Facility Waiver Agreement (“Second Waiver Agreement”) whereby the lender waived certain terms on our outstanding $468 million borrowings. The amended loan repayment date of April 1, 2020 was waived and amended and modified to November 30, 2020. Accrued interest will be paid on the 25th day of April, July, October and January of each year. Any remaining interest will be paid on November 30, 2020. All other terms of the Credit Facility remain the same.
Pursuant to the First Waiver Agreement and Second Waiver Agreement, we classified the $468 million outstanding as long-term debt on our condensed consolidated balance sheet at June 30, 2019 and December 31, 2018.
BP MIDSTREAM PARTNERS LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)
There were $468 million of outstanding borrowings under the Credit Facility at June 30, 2019 and December 31, 2018. Interest charges and fees related to the Credit Facility were $4.1 million and $8.2 million for the three and six months ended June 30, 2019, respectively, and $0.2 million and $0.4 million for the three and six months ended June 30, 2018, respectively.
For the three and six months ended June 30, 2019, the weighted average interest rate for the Credit Facility was 3.25%. For the three and six months ended June 30, 2018, the weighted average interest rate for the Credit Facility was 2.24%. This facility includes customary fees, including a commitment fee of 0.10% and a utilization fee of 0.20% per annum.
8. Related Party Transactions
Related party transactions include transactions with our Parent and our Parent’s affiliates, including those entities in which our Parent has an ownership interest but does not have control. In addition to the FLA arrangements discussed in Note 2- Revenue Recognition and the Credit Facility discussed above, we have entered into the following transactions with our related parties:
Omnibus Agreement
The Partnership has entered into an omnibus agreement with BP Pipelines and certain of its affiliates, including BP Midstream Partners GP LLC (our "General Partner"). This agreement addresses, among other things, (i) the Partnership's obligation to pay an annual fee for general and administrative services provided by BP Pipelines and its affiliates, (ii) the Partnership's obligation to reimburse BP Pipelines for personnel and other costs related to the direct operation, management and maintenance of the assets and (iii) the Partnership's obligation to reimburse BP Pipelines for services and certain direct or allocated costs and expenses incurred by BP Pipelines or its affiliates on behalf of the Partnership.
BP Pipelines will indemnify us for all known and certain unknown environmental liabilities that are associated with the ownership or operation of our assets and due to occurrences on or before October 30, 2017, subject to certain limitations. Indemnification for any unknown environmental liabilities will be limited to liabilities due to occurrences on or before October 30, 2017, which are identified prior to October 30, 2020.
Further, the omnibus agreement addresses the granting of a license from BPA to the Partnership with respect to use of certain BP trademarks and trade name.
Cash Management Program
We have established our own cash accounts for the funding of our operating and investing activities but continue to participate in our Parent’s centralized cash management and funding system.
Related Party Revenue
We provide crude oil, refined products and diluent transportation services to related parties and generate revenue through published tariffs. We have commercial arrangements with BP Products that include MVC. See Note 9 - Related Party Transactions in our financial statements included in our 2018 Annual Report for further discussion regarding these agreements.
Our revenue from related parties was $27,885and $57,328 for the three and six months ended June 30, 2019, respectively, and $28,169 and $53,990 for the three and six months ended June 30, 2018, respectively.
We recognized no deficiency revenue under the throughput and deficiency agreements with BP Products for the three and six months ended June 30, 2019 and 2018. We recorded $3,630 and $1,067 inDeferred revenue and credits on our condensed consolidated balance sheets at June 30, 2019 and December 31, 2018, respectively.
Related Party Expenses
All employees performing services on behalf of our operations are employees of our Parent. Our Parent also procures our insurance policies on our behalf and performs certain general corporate functions for us related to finance, accounting, treasury, legal, information technology, human resources, shared services, government affairs, insurance, health, safety, security, employee benefits, incentives, severance and environmental functional support. Personnel and operating costs incurred by our Parent on our
BP MIDSTREAM PARTNERS LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)
behalf are included in either Operating expenses – related parties or General and administrative – related parties in the condensed consolidated statements of operations, depending on the nature of the service provided.
We paid our Parent an annual fee of $13.3 million in 2018 in the form of monthly installments under the omnibus agreement for general and administrative services provided by our Parent and its affiliates. The annual fee was adjusted to $13.6 million per year, payable in equal monthly installments, beginning on January 1, 2019. We also reimburse our Parent for personnel and other costs related to the direct operation, management and maintenance of the assets and services and certain direct or allocated costs and expenses incurred by our Parent or its affiliates on our behalf pursuant to the terms in the omnibus agreement.
For the three and six months ended June 30, 2019 and 2018, we recorded the following amounts for related party expenses, which also included the expenses related to share-based compensation discussed below:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Operating expenses—related parties | | $ | 1,459 |
| | $ | 1,026 |
| | $ | 2,894 |
| | $ | 1,988 |
|
Maintenance expenses—related parties | | 54 |
| | 24 |
| | 73 |
| | 44 |
|
General and administrative—related parties | | 3,683 |
| | 3,442 |
| | 7,121 |
| | 6,865 |
|
Total costs and expenses—related parties | | $ | 5,196 |
| | $ | 4,492 |
| | $ | 10,088 |
| | $ | 8,897 |
|
Share-based Compensation
Our Parent operates share option plans and equity-settled employee share plans. These plans typically have a three-year performance or restricted period during which the units accrue net notional dividends, which are treated as having been reinvested. Leaving employment will normally preclude the conversion of units into shares, but special arrangements apply for participants that leave for qualifying reasons.
Share-based compensation related to the employees of our Parent who provide services to us is charged to the Partnership pursuant to the terms of the omnibus agreement. The Partnership also issued its own unit-based compensation under our long-term incentive plan. See Note 13 - Unit-Based Compensation.
Non-controlling Interests
Non-controlling interests consist of the 80% ownership interest in Mardi Gras held by our Parent at June 30, 2018 compared to the 35% ownership interest held at June 30, 2019 after completion of the acquisition on October 1, 2018. Net income attributable to non-controlling interests is the product of the non-controlling interests ownership percentage and the net income of Mardi Gras. We report Non-controlling interests as a separate component of equity on our condensed consolidated balance sheets and Net income attributable to non-controlling interests on our condensed consolidated statements of operations.
9. Net Income Per Limited Partner Unit
The following table details the distributions declared and/or paid for the periods presented:
|
| | | | | | | | | | | | | | | | |
Date Paid or to be Paid | Three Months Ended | General Partner | Limited Partners' Common Units | Limited Partners' Subordinated Units | Total | Distributions per Limited Partner Unit |
May 15, 2018 | March 31, 2018 | $ | — |
| $ | 14,010 |
| $ | 14,010 |
| $ | 28,020 |
| $ | 0.2675 |
|
August 15, 2018 | June 30, 2018 | — |
| 14,272 |
| 14,272 |
| 28,544 |
| 0.2725 |
|
May 15, 2019 | March 31, 2019 | 198 |
| 16,375 |
| 16,373 |
| 32,946 |
| 0.3126 |
|
August 14, 2019 | June 30, 2019 | 403 |
| 16,958 |
| 16,954 |
| 34,315 |
| 0.3237 |
|
Earnings in excess of distributions are allocated to the limited partners based on their respective percentage interests. Payments made to the Partnership’s unitholders are determined in relation to actual distributions declared and are not based on the net income allocations used in the calculation of net income per unit.
BP MIDSTREAM PARTNERS LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)
In addition to the common and subordinated units, the Partnership also identified the incentive distribution rights ("IDRs") currently held by the General Partner as a participating security and uses the two-class method when calculating the net income per unit applicable to limited partners that is based on the weighted-average number of common units outstanding during the period.
When calculating basic earnings per unit under the two-class method for a master limited partnership, net income for the current reporting period is reduced by the amount of available cash that will be distributed to the General Partner and limited partners for that reporting period. The following tables show the allocation of net income to arrive at net income per limited partner unit for the three and six months ended June 30, 2019 and 2018:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net income attributable to the Partnership | $ | 37,331 |
| | $ | 30,470 |
| | $ | 74,484 |
| | $ | 61,009 |
|
Less: |
| |
| | | | |
Incentive distribution rights currently held by the General Partner | 403 |
| | — |
| | 601 |
| | — |
|
Limited partners' distribution declared on common units | 16,958 |
| | 14,272 |
| | 33,333 |
| | 28,282 |
|
Limited partners' distribution declared on subordinated units | 16,954 |
| | 14,272 |
| | 33,327 |
| | 28,282 |
|
Net income attributable to the Partnership in excess of distributions | $ | 3,016 |
| | $ | 1,926 |
| | $ | 7,223 |
| | $ | 4,445 |
|
|
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, 2019 |
| | | General Partner | | Limited Partners' Common Units | | Limited Partners' Subordinated Units | | Total |
Distributions declared | | $ | 403 |
| | $ | 16,958 |
| | $ | 16,954 |
| | $ | 34,315 |
|
Net income attributable to the Partnership in excess of distributions | — |
| | 1,508 |
| | 1,508 |
| | 3,016 |
|
Net income attributable to the Partnership | $ | 403 |
| | $ | 18,466 |
| | $ | 18,462 |
| | $ | 37,331 |
|
Weighted average units outstanding (in millions): | | | | | | | |
Basic and Diluted | | | | 52.4 |
| | 52.4 |
| | 104.8 |
|
Net income per limited partner unit (in dollars): | | | | | | | |
Basic and Diluted | | | | $ | 0.35 |
| | $ | 0.35 |
| | |
|
| | | | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, 2019 |
| | | General Partner | | Limited Partners' Common Units | | Limited Partners' Subordinated Units | | Total |
Distributions declared | $ | 601 |
| | $ | 33,333 |
| | $ | 33,327 |
| | $ | 67,261 |
|
Net income attributable to the Partnership in excess of distributions | — |
| | 3,612 |
| | 3,611 |
| | 7,223 |
|
Net income attributable to the Partnership | $ | 601 |
| | $ | 36,945 |
| | $ | 36,938 |
| | $ | 74,484 |
|
Weighted average units outstanding (in millions): | | | | | | | |
Basic and Diluted | |
|
| | 52.4 |
| | 52.4 |
| | 104.8 |
|
Net income per limited partner unit (in dollars): | | | | | | | |
Basic and Diluted | |
|
| | $ | 0.70 |
| | $ | 0.70 |
| | |
BP MIDSTREAM PARTNERS LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)
|
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, 2018 |
| | | General Partner | | Limited Partners' Common Units | | Limited Partners' Subordinated Units | | Total |
Distributions declared | | $ | — |
| | $ | 14,272 |
| | $ | 14,272 |
| | $ | 28,544 |
|
Net income attributable to the Partnership in excess of distributions | — |
| | 963 |
| | 963 |
| | 1,926 |
|
Net income attributable to the Partnership | $ | — |
| | $ | 15,235 |
| | $ | 15,235 |
| | $ | 30,470 |
|
Weighted average units outstanding (in millions): | | | | | | | |
Basic and Diluted | | | | 52.4 |
| | 52.4 |
| | 104.8 |
|
Net income per limited partner unit (in dollars): | | | | | | | |
Basic and Diluted | | | | $ | 0.29 |
| | $ | 0.29 |
| | |
|
| | | | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, 2018 |
| | | General Partner | | Limited Partners' Common Units | | Limited Partners' Subordinated Units | | Total |
Distributions declared | | $ | — |
| | $ | 28,282 |
| | $ | 28,282 |
| | $ | 56,564 |
|
Net income attributable to the Partnership in excess of distributions | — |
| | 2,223 |
| | 2,222 |
| | 4,445 |
|
Net income attributable to the Partnership | $ | — |
| | $ | 30,505 |
| | $ | 30,504 |
| | $ | 61,009 |
|
Weighted average units outstanding (in millions): | | | | | | | |
Basic and Diluted | | | | 52.4 |
| | 52.4 |
| | 104.8 |
|
Net income per limited partner unit (in dollars): | | | | | | | |
Basic and Diluted | | | | $ | 0.58 |
| | $ | 0.58 |
| | |
10. Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. We classify the fair value of an asset or liability based on the lowest level of input significant to its measurement. A fair value initially reported as Level 3 will be subsequently reported as Level 2 if the unobservable inputs become inconsequential to its measurement, or corroborating market data becomes available. Asset and liability fair values initially reported as Level 2 will be subsequently reported as Level 3 if corroborating market data becomes unavailable.
The carrying amounts of our accounts receivable, other current assets, accounts payable, deferred revenue and credits, and other current liabilities approximate their fair values due to their short-term nature.
The carrying value of borrowings under our Credit Facility as of June 30, 2019 and December 31, 2018 approximate fair value as the interest rates are reflective of market rates.
11. Income Taxes
BP Midstream Partners LP is not a taxable entity for U.S. federal and state income tax purposes. Taxes on our net income are generally borne by our partners through the allocation of taxable income. The condensed consolidated financial statements, therefore, do not include a provision for income tax.
BP MIDSTREAM PARTNERS LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)
12. Commitments and Contingencies
Legal Proceedings
From time to time, we are party to ongoing legal proceedings in the ordinary course of business. For each of our outstanding legal matters, if any, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies and the likelihood of an unfavorable outcome. While the outcome of these proceedings cannot be predicted with certainty, we do not believe the results of these proceedings, individually or in the aggregate, will have a material adverse effect on our business, financial condition, results of operations or liquidity.
Indemnification
Under our omnibus agreement, our Parent will indemnify us for certain environmental liabilities, litigation and other matters attributable to the ownership or operation of our assets prior to our ownership. For the purposes of determining the indemnified amount of any loss suffered or incurred by the Partnership, the Partnership’s ownership of 28.5% in Mars, and 65% in Mardi Gras, and Mardi Gras’ 56% ownership in Caesar, 53% ownership in Cleopatra, 65% ownership in Endymion and 65% ownership in Proteus will be considered. Indemnification for certain identified environmental liabilities is subject to a cap of $25.0 million without any deductible. Other matters covered by the omnibus agreement are subject to a cap of $15.0 million and an aggregate deductible of $0.5 million before we are entitled to indemnification. Indemnification for any unknown environmental liabilities is limited to liabilities due to occurrences prior to the closing of the IPO and that are identified before the third anniversary of the closing of the IPO.
The Interest Purchase Agreement contains customary representations, warranties and covenants of our Parent and the Partnership. Our Parent, on the one hand, and the Partnership, on the other hand, have agreed to indemnify each other and their respective affiliates, officers, directors and other representatives against certain losses, including those resulting from any breach of their representations, warranties or covenants contained in the Interest Purchase Agreement, subject to certain limitations and survival periods. This agreement covers the Partnership’s ownership of 22.7% in Ursa and 25% in KM Phoenix.
Environmental Matters
We are subject to federal, state, and local environmental laws and regulations. We record provisions for environmental liabilities based on management’s best estimates, using all information that is available at the time. In making environmental liability estimations, we consider the material effect of environmental compliance, pending legal actions against us and potential third-party liability claims. Often, as the remediation evaluation and effort progress, additional information is obtained, requiring revisions to estimated costs. We are indemnified by our Parent under the omnibus agreement against environmental cleanup costs for incidents that occurred prior to our ownership. Revisions to the estimated environmental liability for conditions that are not indemnified under the omnibus agreement with our Parent are reflected in our condensed consolidated statements of operations in the year in which they are probable and reasonably estimable.
We accrued $3,734 and $3,853 for environmental liabilities at June 30, 2019 and December 31, 2018, respectively. These balances are broken down on the condensed consolidated balance sheets as follows:
|
| | | | | | | |
| Balance sheet location | June 30, 2019 | December 31, 2018 |
Current portion of environmental remediation obligations | Other current liabilities | $ | 750 |
| $ | 629 |
|
Long-term portion of environmental remediation obligations | Other liabilities | 2,984 |
| 3,224 |
|
Total | | $ | 3,734 |
| $ | 3,853 |
|
The balances are related to incidents that occurred prior to our ownership and are entirely indemnified by our Parent. As a result, we recorded $3,734 and $3,853 for corresponding indemnification assets at June 30, 2019 and December 31, 2018, respectively. These balances are broken down on the condensed consolidated balance sheets as follows:
BP MIDSTREAM PARTNERS LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)
|
| | | | | | | |
| Balance sheet location | June 30, 2019 | December 31, 2018 |
Current portion of indemnification assets | Other current assets | $ | 750 |
| $ | 629 |
|
Non-current portion of indemnification assets | Other assets | 2,984 |
| 3,224 |
|
Total | | $ | 3,734 |
| $ | 3,853 |
|
Griffith Station Incident
On June 13, 2019, a building fire occurred at the Griffith Station on BP2. Management has performed an initial evaluation of the assets and determined that an impairment is required. A charge of $2.3 million for the impairment and $0.8 million for response expense were recorded under "Impairment and other, net" on our condensed consolidated statements of operations for the three and six months ended June 30, 2019. Our assets are insured with a deductible of $1.0 million per incident. We have accrued an offsetting insurance receivable of $2.1 million under "Other current assets" on our condensed consolidated balance sheet as of June 30, 2019.
13. Unit-Based Compensation
Long-Term Incentive Plan
Our General Partner has adopted the BP Midstream Partners LP 2017 Long Term Incentive Plan (the “LTIP”). Awards under the LTIP are available for eligible officers, directors, employees and consultants of the General Partner and its affiliates, who perform services for the Partnership. The LTIP allows the Partnership to grant unit options, unit appreciation rights, restricted units, phantom units, unit awards, cash awards, performance awards, distribution equivalent rights, substitute awards and other unit-based awards. The maximum aggregate number of common units that may be issued pursuant to the awards granted under the LTIP shall not exceed 5,502,271, subject to proportionate adjustment in the event of unit splits and similar events.
Unit-Based Awards under the LTIP
The following is a summary of phantom unit award activities of the Partnership’s common units for the six months ended June 30, 2019:
|
| | | | | | |
| Phantom Units |
| Number of Units (in units) | | Weighted Average Grant Date Fair Value per Unit (in dollars) |
Outstanding at December 31, 2018 | 3,737 |
| | $ | 20.07 |
|
Granted | 15,227 |
| | 16.64 |
|
Vested | (3,737 | ) | | 20.07 |
|
Outstanding at June 30, 2019 | 15,227 |
| | $ | 16.64 |
|
For the three and six months ended June 30, 2019, total compensation expense recognized for phantom unit awards was approximately $71 and $111, respectively. For the three and six months ended June 30, 2018, total compensation expense recognized for phantom unit awards was approximately $45 and $84, respectively. The unrecognized compensation cost related to phantom unit awards was approximately $169 at June 30, 2019, which is expected to be recognized over a weighted average period of 0.7 years.
14. Variable Interest Entity
Mardi Gras is a Delaware corporation and a pass-through entity for federal and state income tax purposes. Mardi Gras holds equity interests in the Mardi Gras Joint Ventures and accounts for them as equity method investments. Mardi Gras does not have any other operations or activities. The remaining interests in each of the Mardi Gras Joint Ventures are owned by unaffiliated third-party investors. Each of the Mardi Gras Joint Ventures is managed by their respective management committee, and decisions made by these management committees require approval of two or more members that are not affiliates with equity interest holdings meeting certain thresholds.
BP MIDSTREAM PARTNERS LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)
On October 30, 2017, our Parent contributed to us 20% of its economic interest and 100% of its managing member interest in Mardi Gras. The remainder of the economic interest in Mardi Gras was held 79% by BP Pipelines and 1% by an affiliate of BP. Through our managing member interest in Mardi Gras, we have the right to vote 100% of Mardi Gras’ interest in each of the Mardi Gras Joint Ventures. We determined that Mardi Gras is a variable interest entity because (i) we hold disproportional voting rights as compared to our economic interest in Mardi Gras, and (ii) substantially all of Mardi Gras’ activities involve or are conducted on behalf of our Parent, which holds disproportionately few voting rights.
On October 1, 2018, pursuant to the Interest Purchase Agreement we completed the acquisition of an additional 45% interest in Mardi Gras from BP Pipelines. This reduced the non-controlling interest on Mardi Gras from 80% to 35%.
The managing member interest in Mardi Gras provides us with the unilateral power to direct the activities of Mardi Gras that most significantly impacts its economic performance including the right to exercise the voting rights of BP for each of the Mardi Gras Joint Ventures. In addition, our obligations to absorb the expected losses of and the right to receive the residual returns from Mardi Gras relative to our economic ownership is significant to Mardi Gras. As a result, we are the primary beneficiary of Mardi Gras and consolidate Mardi Gras.
We have the obligation to provide financial support to Mardi Gras if all members unanimously determine that additional capital contributions are necessary to fund Mardi Gras’ operations. The assets of Mardi Gras can only be used to satisfy its own obligations, which were zero at June 30, 2019 and December 31, 2018. Under the current limited liability company agreement of Mardi Gras, creditors of Mardi Gras, if any, do not have any recourse to the general credit of the Partnership.
The financial position of Mardi Gras at June 30, 2019 and December 31, 2018, its financial performance for the three and six months ended June 30, 2019 and 2018 and cash flows for the six months ended June 30, 2019 and 2018, as reflected in our condensed consolidated financial statements, are as follows:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Balance sheet | | | |
Equity method investments | $ | 396,295 |
| | $ | 402,783 |
|
Non-controlling interests | 138,703 |
| | 140,974 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Statement of operations | | | | | | | |
Income from equity method investments | $ | 13,897 |
| | $ | 12,153 |
| | $ | 23,800 |
| | $ | 24,865 |
|
Less: Net income attributable to non-controlling interests | 4,864 |
| | 9,722 |
| | 8,330 |
| | 19,891 |
|
Net impact on Net income attributable to the Partnership | $ | 9,033 |
| | $ | 2,431 |
| | $ | 15,470 |
| | $ | 4,974 |
|
|
| | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
Statement of cash flows | | | |
Cash flows from operating activities | | | |
Distributions of earnings received from equity method investments | $ | 23,666 |
| | $ | 24,865 |
|
Cash flows from investing activities | | | |
Distribution in excess of earnings from equity method investments | 6,622 |
| | 11,053 |
|
Cash flows from financing activities | | | |
Distributions to non-controlling interests | (10,601 | ) | | (28,734 | ) |
Net change on the Partnership's cash and cash equivalents | $ | 19,687 |
| | $ | 7,184 |
|
BP MIDSTREAM PARTNERS LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)
15. Subsequent Events
We have evaluated subsequent events through the issuance of these condensed consolidated financial statements. Based on this evaluation, it was determined that no subsequent events occurred, other than the distribution noted below, that require recognition or disclosure in the condensed consolidated financial statements.
Distribution
On July 17, 2019 we declared a cash distribution of $0.3237 per limited partner unit to unitholders of record on July 31, 2019, for the three months ended June 30, 2019. The distribution, combined with distributions to our General Partner, will be paid on August 14, 2019 and will total $34.3 million, with $15.5 million being distributed to our non-affiliated common unitholders and $18.8 million, including $0.4 million for IDRs, being distributed to our Parent in respect of its ownership of our common units, subordinated units and IDRs.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q (the “Quarterly Report”) includes various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended.amended ("Exchange Act"). All statements other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected cost, prospects, plans and objectives of management, are forward-looking statements.
When used in this Quarterly Report, you can identify our forward-looking statements by words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “plan,” “predict,” “project,” “seek,” “target,” “could,” “may,” “should” or“should,” “would” or other similar expressions that convey the uncertainty of future events or outcomes,
although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should carefully consider the risk factors and other cautionary statements described under the heading “Risk Factors” in our Annual Report on Form 10-K for the prospectusyear ended December 31, 2018, under Part II, Item 1A of BP Midstream Partners LP dated October 25, 2017, as filed with the Securities and Exchange Commission (“the SEC”) on October 27, 2017 (the “Prospectus”), filed pursuant to rule 424(b) of the Securities Act and the risk factorsthis Quarterly Report and other cautionary statements contained in our other filings with the SEC. Thesethis filing.
We based forward-looking statements are based on management’sour current beliefs, based onexpectations and assumptions about future events and currently available information as to the outcome and timing of future events. We caution you that these statements are not guarantees of future performance as they involved assumptions that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecast in the forward-looking statements.
Forward-looking statements may include statements about:
The continued ability of BP and any non-affiliate customers to satisfy their obligations under our commercial and other agreements and the impact of lower market prices for crude oil, natural gas, diluentrefined products and refined products.diluent.
The volume of crude oil, natural gas, refined products and diluent we transport or store and the prices that we can charge our customers.
The tariff rates with respect to volumes that we transport through our regulated assets, which rates are subject to review and possible adjustment imposed by federal and state regulators.
Changes in revenue we realize under the fixed loss allowance provisions of our fees and tariffs resulting from changes in underlying commodity prices.
Fluctuations in the prices for crude oil, natural gas, refined products and refined petroleum products.diluent.
The level of onshore and offshore production and demand for crude oil, natural gas, refined products and diluent.
Our ability to successfully integrate recently acquired assets with our own and realize the anticipated benefits of such acquisitions.
Changes in global economic conditions and the effects of a global economic downturn on the business of BP and the business of its suppliers, customers, business partners and credit lenders.
Liabilities associated with the risks and operational hazards inherent in transporting and/or storing crude oil, natural gas, refined products and diluent.
Curtailment of operations or expansion projects due to unexpected leaks or spills; severe weather disruption; riots, strikes, lockouts or other industrial disturbances; or failure of information technology systems due to various causes, including unauthorized access or attack.
Costs or liabilities associated with federal, state and local laws and regulations relating to environmental protection and safety, including spills, releases and pipeline integrity.
Costs associated with compliance with evolving environmental laws and regulations on climate change.
Costs associated with compliance with safety regulations and system maintenance programs, including pipeline integrity management program testing and related repairs.
Changes in tax status.
Changes in the cost or availability of third-party vessels, pipelines, rail cars and other means of delivering and transporting crude oil, natural gas, diluentrefined products and refined petroleum products.diluent.
Direct or indirect effects on our business resulting from actual or threatened terrorist incidents or acts of war.
Changes in, and availability to us, of the equity and debt capital markets.
PART I. Financial Information
Explanatory Note
BP Midstream Partners LP (the “Partnership”) is a Delaware limited partnership formed on May 22, 2017 to acquire certain assets of BP Pipelines (North America) Inc. (“BPPLNA”), an indirect wholly owned subsidiary of BP America Inc. (“BPA”), a wholly owned subsidiary of BP p.l.c. (“BP”).
On October 30, 2017 (the “Completion Date”), the Partnership completed its initial public offering (the “IPO”) as discussed in Note 2 - Initial Public Offering Should one or more of the accompanying footnotes of the BP Midstream Partners LP Predecessor unaudited condensed combined financial statements. Immediately prior to the closing of the IPO, BPPLNA contributed to its wholly owned subsidiary, BP Midstream Partners Holdings LLC (“BP Holdco”), a 100.0% interest in each of BP Two Pipeline Company LLC, BP River Rouge Pipeline Company LLC and BP D-B Pipeline Company LLC (together, the “Predecessor Assets”), a 28.5% ownership interest in Mars Oil Pipeline Company LLC (“Mars”) and a 20.0% managing member interest in Mardi Gras Transportation System Company LLC (“Mardi Gras” and together with the Predecessor Assets and Mars, the “Contributed Assets”), and BP Holdco contributed the Contributed Assets to the Partnership. In exchange for BPPLNA's contribution of the Contributed Assets to the Partnership, BPPLNA, through BP Holdco and its wholly owned subsidiary, BP Midstream Partners GP LLC, received a 54.4% limited partner interest in the Partnership, the non-economic general partner interest in the Partnership, the Partnership's incentive distribution rights, and a cash distribution of $814.7 million.
The historical financial information containedrisks or uncertainties described in this report relates to periods that ended prior to the Completion Date. Unless context otherwise requires, references to “we,” “our,” “us,” “Predecessor Assets,” “Predecessor,”Quarterly Report occur, or similar expressions for time periods prior to the IPO refer to BP Midstream Partners LP Predecessor. For time periods subsequent to the IPO, “we,” “our,” “us,”should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.
All forward-looking statements, expressed or similar expressions refer to the legal entity BP Midstream Partners LP. Consequently, the unaudited condensed combined financial statements of BP Midstream Partners LP Predecessor and related discussion of the financial condition and results of operations containedimplied, included in this report pertain to our Predecessor.
While management believes that the financial statements contained hereinQuarterly Report are preparedexpressly qualified in accordance with accounting principles generally accepted in the United States and in compliance with the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), the financial statements of our Predecessor may nottheir entirety by this cautionary statement. This cautionary statement should also be indicative of the financial results that will be reported by us for periods subsequent to the Completion Date. The information contained in this report should be read in conjunction with the information contained in (i) the Partnership's prospectus dated October 25, 2017 filed with the SEC on October 27, 2017considered in connection with the IPO and (ii) our Current Reports on Form 8-K filed with the SEC on October 31, 2017 and November 1, 2017.
Item 1. Financial Statements (Unaudited)
BP MIDSTREAM PARTNERS LP
UNAUDITED BALANCE SHEETS
|
| | | | | | | | |
| | September 30, 2017 | | May 31, 2017 |
| | (in whole dollars) |
Assets | | | | |
Total assets | | $ | — |
| | $ | — |
|
| | | | |
Partner's capital | | | | |
Limited partner's capital | | $ | 100 |
| | $ | 100 |
|
Less: Note receivable from limited partner | | (100 | ) | | (100 | ) |
Total partner's capital | | $ | — |
| | $ | — |
|
The accompanying notes are an integral part of the unaudited balance sheets.
BP MIDSTREAM PARTNERS LP
NOTES TO UNAUDITED BALANCE SHEETS
1. Description of the Business
Organization
BP Midstream Partners LP (either individuallyany subsequent written or together with its subsidiaries, as context requires, the “Partnership”) is a Delaware limited partnership formed on May 22, 2017 by BP Pipelines (North America) Inc. (“BPPLNA”), an indirect wholly owned subsidiary of BP p.l.c. (“BP”), to own, operate, develop and acquire pipelines and other midstream assets.
BP Midstream Partners Holdings LLC (“BP Holdco”), a wholly owned subsidiary of BPPLNA, contributed $100 in the form of a note receivable to the Partnership on May 22, 2017. There have been no other transactions involving the Partnership as of September 30, 2017.
2. Subsequent Events
On October 30, 2017, the Partnership completed its initial public offering (the “IPO”) of 42,500,000 common units representing limited partner interests at a price to the public of $18.00 per unit. Subsequent to the closing of the IPO, the underwriters partially exercised their over-allotment option and purchased 5,294,358 additional common units at $18.00 per unit. A total of 47,794,358 common units were issued to the public unitholders in connection with the IPO. A registration statement on Form S-1, as amended through the time of its effectiveness, was filed by the Partnership with the Securities and Exchange Commission (the “SEC”) and was declared effective on October 25, 2017. On October 26, 2017, the Partnership's common units began trading on the New York Stock Exchange under the symbol “BPMP”.
In connection with the closing of the IPO, BPPLNA contributed to the Partnership a 100.0% ownership interest in the Predecessor Assets, 28.5% ownership interest in Mars Oil Pipeline Company LLC; and a 20.0% managing member interest in Mardi Gras Transportation System Company LLC. See Note 1, “Business and Basis of Presentation” to the condensed combined financialoral forward-looking statements of BP Midstream Partners LP Predecessor.
On October 30, 2017, the Partnership entered into a $600.0 million revolving credit facility agreement (the “credit facility”) with an affiliate of BP. The credit facility provides for certain covenants, including the requirement to maintain a consolidated leverage ratio, which is calculated as total indebtedness to consolidated EBITDA (as defined in the credit facility), not to exceed 5.0 to 1.0, subject to a temporary increase in such ratio to 5.5 to 1.0 in connection with certain material acquisitions. In addition, the limited liability company agreement of BP Midstream Partners GP LLC (the “General Partner”) requires the approval of BP Holdco prior to the incurrence of any indebtedness that would cause the Partnership's leverage ratio to exceed 4.5 to 1.0.
The credit facility also contains customary events of default, such as (i) nonpayment of principal when due, (ii) nonpayment of interest, feeswe or other amounts, (iii) breach of covenants, (iv) misrepresentation, (v) cross-payment default and cross-acceleration (in each case, to indebtedness in excess of $75.0 million) and (vi) insolvency. Additionally, the Partnership's revolving credit facility limits its ability to, among other things: (i) incur or guarantee additional debt, (ii) redeem or repurchase units or make distributions under certain circumstances; and (iii) incur certain liens or permit them to exist. Indebtedness under this facility bears interest at the 3-month LIBOR plus 0.85%. This facility includes customary fees, including a commitment fee of 0.10% and a utilization fee of 0.20%.
As of September 30, 2017, there were no borrowings outstanding under the credit facility. On November 6, 2017, the Partnership withdrew $15.0 million under the credit facility to fund working capital in the near term.
BP MIDSTREAM PARTNERS LP PREDECESSOR
UNAUDITED CONDENSED COMBINED BALANCE SHEETS
|
| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | (in thousands of dollars) |
ASSETS |
Current assets | | |
| | |
|
Accounts receivable - third parties | | $ | 101 |
| | $ | 342 |
|
Accounts receivable - related parties | | 17,839 |
| | 13,477 |
|
Allowance oil receivable (Note 3) | | 3,266 |
| | 2,532 |
|
Prepaid expenses and other current assets | | 44 |
| | — |
|
Total current assets | | 21,250 |
| | 16,351 |
|
Property, plant and equipment, net (Note 4) | | 70,013 |
| | 71,235 |
|
Total assets | | $ | 91,263 |
| | $ | 87,586 |
|
| | | | |
LIABILITIES |
Current liabilities | | |
| | |
|
Accounts payable - third parties | | $ | 1,200 |
| | $ | 1,048 |
|
Accounts payable - related parties | | 232 |
| | 146 |
|
Accrued liabilities (Note 5) | | 2,723 |
| | 4,067 |
|
Total current liabilities | | 4,155 |
| | 5,261 |
|
Long-term liabilities | | | | |
Long-term portion of environmental remediation obligation | | 2,720 |
| | 2,362 |
|
Deferred tax liabilities | | 6,242 |
| | 5,859 |
|
Other long-term liabilities | | — |
| | 162 |
|
Total noncurrent liabilities | | 8,962 |
| | 8,383 |
|
Total liabilities | | 13,117 |
| | 13,644 |
|
Commitments and contingencies (Note 9) | |
|
| |
|
|
| | | | |
NET PARENT INVESTMENT |
Net parent investment | | 78,146 |
| | 73,942 |
|
Total liabilities and net parent investment | | $ | 91,263 |
| | $ | 87,586 |
|
The accompanying notes are an integral part of the unaudited condensed combined financial statements.
BP MIDSTREAM PARTNERS LP PREDECESSOR
UNAUDITED CONDENSED COMBINED STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in thousands of dollars) |
Revenue | | |
| | | | | | |
Third parties | | $ | 238 |
| | $ | 1,249 |
| | $ | 1,712 |
| | $ | 3,512 |
|
Related parties | | 26,778 |
| | 22,092 |
| | 78,832 |
| | 78,025 |
|
Total revenue | | 27,016 |
| | 23,341 |
| | 80,544 |
| | 81,537 |
|
Costs and expenses | | |
| | |
| | |
| | |
|
Operating expenses – third parties | | 3,062 |
| | 1,902 |
| | 6,380 |
| | 5,569 |
|
Operating expenses – related parties | | 1,945 |
| | 1,480 |
| | 5,812 |
| | 4,550 |
|
Maintenance expenses – third parties | | 1,362 |
| | 991 |
| | 2,651 |
| | 1,709 |
|
Maintenance expenses – related parties | | 65 |
| | 103 |
| | 257 |
| | 330 |
|
Gain from disposition of property, plant and equipment, net | | — |
| | — |
| | (6 | ) | | — |
|
General and administrative – third parties | | 12 |
| | — |
| | 56 |
| | 7 |
|
General and administrative – related parties | | 1,210 |
| | 1,730 |
| | 3,571 |
| | 5,397 |
|
Depreciation | | 675 |
| | 649 |
| | 2,007 |
| | 1,917 |
|
Property and other taxes | | 113 |
| | 110 |
| | 267 |
| | 255 |
|
Total costs and expenses | | 8,444 |
| | 6,965 |
| | 20,995 |
| | 19,734 |
|
Operating income | | 18,572 |
| | 16,376 |
| | 59,549 |
| | 61,803 |
|
Other income (loss) | | 380 |
| | (246 | ) | | (108 | ) | | 285 |
|
Income tax expense | | 7,403 |
| | 6,309 |
| | 23,219 |
| | 24,284 |
|
Net income | | $ | 11,549 |
| | $ | 9,821 |
| | $ | 36,222 |
| | $ | 37,804 |
|
The accompanying notes are an integral part of the unaudited condensed combined financial statements.
BP MIDSTREAM PARTNERS LP PREDECESSOR
UNAUDITED CONDENSED COMBINED STATEMENTS OF CHANGES IN
NET PARENT INVESTMENT
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | (in thousands of dollars) |
Net parent investment | | | | |
Balance, beginning of the period | | $ | 73,942 |
| | $ | 74,258 |
|
Net income | | 36,222 |
| | 37,804 |
|
Net transfers to Parent | | (32,018 | ) | | (39,113 | ) |
Balance, end of the period | | $ | 78,146 |
| | $ | 72,949 |
|
The accompanying notes are an integral part of the unaudited condensed combined financial statements.
BP MIDSTREAM PARTNERS LP PREDECESSOR
UNAUDITED CONDENSED COMBINED STATEMENTS OF CASH FLOWS
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | (in thousands of dollars) |
Cash flows from operating activities | | |
| | |
|
Net income | | $ | 36,222 |
| | $ | 37,804 |
|
Adjustments to reconcile net income to net cash provided by operating activities | | |
| | |
|
Depreciation | | 2,007 |
| | 1,917 |
|
Deferred income taxes | | 383 |
| | 797 |
|
Stock-based compensation | | 188 |
| | 177 |
|
Loss (Gain) due to changes in fair value of allowance oil receivable | | 108 |
| | (285 | ) |
Gain from disposition of property, plant and equipment, net | | (6 | ) | | — |
|
Changes in operating assets and liabilities | | |
| | |
|
Accounts receivable - third parties | | 241 |
| | 62 |
|
Accounts receivable - related parties | | (4,362 | ) | | 1,307 |
|
Allowance oil receivable | | (842 | ) | | 204 |
|
Prepaid expenses and other current assets | | (44 | ) | | — |
|
Accounts payable - third parties | | 152 |
| | 99 |
|
Accounts payable - related parties | | 86 |
| | (36 | ) |
Accrued liabilities | | (66 | ) | | (77 | ) |
Long-term portion of environmental remediation obligation | | 358 |
| | (340 | ) |
Other long-term liabilities | | (162 | ) | | — |
|
Net cash provided by operating activities | | 34,263 |
| | 41,629 |
|
Cash flows from investing activities | | |
| | |
|
Capital expenditures | | (2,063 | ) | | (2,339 | ) |
Proceeds from disposition of property, plant and equipment, net | | 6 |
| | — |
|
Net cash used in investing activities | | (2,057 | ) | | (2,339 | ) |
Cash flows from financing activities | | |
| | |
|
Net transfers to Parent | | (32,206 | ) | | (39,290 | ) |
Net cash provided by financing activities | | (32,206 | ) | | (39,290 | ) |
Net change in cash and cash equivalents | | — |
| | — |
|
Cash and cash equivalents at beginning of the period | | — |
| | — |
|
Cash and cash equivalents at end of the period | | $ | — |
| | $ | — |
|
Supplemental cash flow information | | |
| | |
|
Non-cash investing transactions | | |
| | |
|
Change in accrued capital expenditures | | $ | (1,278 | ) | | $ | (494 | ) |
The accompanying notes are an integral part of the unaudited condensed combined financial statements.
BP MIDSTREAM PARTNERS LP PREDECESSOR
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
(in thousands of dollars unless otherwise indicated)
1. Business and Basis of Presentation
Business
BP Midstream Partners LP (either individually or together with its subsidiaries, as the context requires, the “Partnership”) is a Delaware limited partnership formed on May 22, 2017 by BP Pipelines (North America) Inc. (“BPPLNA”), an indirect wholly owned subsidiary of BP p.l.c. (“BP”), a “foreign private issuer” within the meaning of the Securities Exchange Act of 1934, as amended, to own, operate, develop and acquire pipelines and other midstream assets. On October 30, 2017 the Partnership completed its initial public offering (“IPO”) of common units representing limited partner interests. See Note 2 - Initial Public Offering for the discussion of the IPO.
BP Midstream Partners LP Predecessor consists of three pipeline businesses (as described in more detail below). Unless otherwise stated or the context otherwise indicates, all references to “we,” “our,” “us,” “Predecessor Assets,” “Predecessor,” or similar expressions for time periods prior to the IPO refer to BP Midstream Partners LP Predecessor. For time periods subsequent to the IPO, “we,” “our,” “us,” or similar expressions refer to the legal entity BP Midstream Partners LP.
The term “our Parent” refers to BPPLNA, any entity that wholly owns BPPLNA, indirectly or directly, including BP and BP America Inc. (“BPA”), an indirect wholly owned subsidiary of BP, and any entity that is wholly owned by the aforementioned entities, excluding BP Midstream Partners LP Predecessor. Our operations consist of one reportable segment. All of our operations are conducted in the United States, and all our long-lived assets are located in the United States.
The Predecessor Assets consist of the following three pipeline businesses:
BP Two Pipeline Company LLC, which owns the BP#2 crude oil pipeline system (“BP2”) comprising 12 miles of pipeline transporting crude oil from Griffith Station, Indiana, to BPA’s refinery in Whiting, Indiana (the “Whiting Refinery”). The BP2 pipeline has a capacity of approximately 475,000 barrels per day.
BP River Rouge Pipeline Company LLC, which owns the Whiting to River Rouge refined products pipeline system (“River Rouge”) comprising 244 miles of pipeline and related assets transporting refined petroleum products from the Whiting Refinery to the refined products terminal at River Rouge, Michigan. The River Rouge pipeline has a capacity of approximately 80,000 barrels per day.
BP D-B Pipeline Company LLC, which owns the Diamondback diluent pipeline system (“Diamondback”) comprising 42 miles of pipeline and related assets transporting diluent from Black Oak Junction, Indiana, to a third-party owned pipeline in Manhattan, Illinois. The Diamondback pipeline has a capacity of approximately 135,000 barrels per day.
Certain of BP Midstream Partners LP Predecessor’s businesses are subject to regulation by various authorities including, but not limited to the Federal Energy Regulatory Commission. Regulatory bodies exercise statutory authority over matters such as common carrier tariffs, construction, rates and ratemaking and agreements with customers.
Basis of Presentation
Our accompanying unaudited condensed combined financial statements have been prepared under the rules and regulations of the Securities and Exchange Commission (“SEC”). These rules and regulations conform to the accounting principles contained in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification, the single source of accounting principles generally accepted in the United States (“U.S. GAAP”). As permitted under the rules and regulations of the SEC, certain information and footnote disclosures normally included in the annual financial statements prepared in conformity with U.S. GAAP have been condensed or omitted from these condensed combined financial statements.
These financial statements were derived from the consolidated financial statements and accounting records of our Parent. These financial statements reflect the condensed combined historical results of operations, financial position and cash flows of the Predecessor as if such business had been a separate entity for all periods presented. For ease of reference, these financial statements are referred to as those of the Predecessor Assets. These condensed combined financial statements should be read in conjunction with the combined financial statements and related notes included in the prospectus of the Partnership dated October 25, 2017, as filed with the SEC on October 27, 2017 (the “Prospectus”).
BP MIDSTREAM PARTNERS LP PREDECESSOR
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
(in thousands of dollars unless otherwise indicated)
These financial statements are presented as if the operations of the Predecessor Assets had been combined for all periods presented. The assets and liabilities in these condensed combined financial statements have been reflected on the historical cost basis, as immediately prior to the closing of the IPO, all of the assets and liabilities presented were transferred to the Partnership within our Parent’s consolidated group in a transaction under common control. All intercompany accounts and transactions within the Predecessor have been eliminated.
The accompanying condensed combined statements of operations also include expense allocations for certain functions historically performed by our Parent and not allocated to the Predecessor Assets, including allocations of general corporate expenses related to finance, accounting, treasury, legal, information technology, human resources, shared services, government affairs, insurance, health, safety, security, employee benefits, incentives, severance and environmental functional support. The portion of expenses that are specifically identifiable to the Predecessor Assets are directly recorded to the Predecessor, with the remainder allocated on the basis of headcount, throughput volumes, miles of pipe and other measures. Our management believes the assumptions underlying the financial statements, including the assumptions regarding the allocation of general corporate expenses from our Parent, are reasonable. Nevertheless, the financial statements may not include all of the expenses that would have been incurred, had we been a stand-alone company during the periods presented and may not reflect our financial position, results of operations and cash flows, had we been a stand-alone company during the periods presented. See Note 6 - Related Party Transactions.
Prior to the IPO, we did not own or maintain separate bank accounts. Our Parent uses a centralized approach to cash management and historically funded our operating and investing activities as needed within the boundaries of a documented funding agreement. Accordingly, cash held by our Parent at the corporate level was not allocated to us for any of the periods presented. We reflected the cash generated by our operations and expenses paid by our Parentpersons acting on our behalf as a component of “Net parent investment” on our condensed combined balance sheets, and as a net distribution to our Parent in our condensed combined statements of cash flows. We have also not included any interest income on the net cash transfers to our Parent.may issue.
The financial
Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, asall of and forwhich are expressly qualified by the periods ended September 30, 2017 and 2016, included herein, are unaudited. These financial statements include all known accruals and adjustments necessary, in the opinion of management, for a fair presentation of the results of operations, the condensed combined financial position of the Predecessor Assets and cash flows. Unless otherwise specified, all such adjustments are of a normal and recurring nature. The unaudited results of operations for the interim periods reported are not necessarily indicative of results to be expected for the full year.
Summary of Significant Accounting Policies
There have been no updates to our accounting policies disclosed in the Prospectus. Please refer to the footnotes to the audited annual combined financial statements included in the Prospectus for a summary of our significant accounting policies.
Recent Accounting Pronouncements
For additional information on accounting pronouncements issued prior to December 2016, refer to Note 3 - Recent Accounting Pronouncements in the notes to the audited combined financial statements included in the Prospectus.
In September 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-13 “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842).” This ASU delays the mandatory adoption of Topic 606 and Topic 842 for public business entities that otherwise would not meet the definition of a public business entity except for a requirement to include or the inclusion of its financial statements or financial information in another entity’s filing with the SEC. This ASU also revises the guidance related to performance-based incentive fees in Topic 605 and revises the guidance related to leases in Topics 840 and 842. The revisions to the lease guidance eliminate language specific to certain sale-leaseback arrangements, guarantees of lease residual assets and loans made by lessees to owner-lessors. Also included is an amendment to Topic 842 to retain the guidance in Topic 840 covering the impact of changes in tax rates on investments in leveraged leases. This guidance is effective immediately. We do not expect ASU 2017-13 to impact our condensed combined financial statements. However, we together with our Parent are currently evaluating the impact that the adoption of the other provisions under Topic 606 and 842 will have on our condensed combined financial statements and notes to the condensed combined financial statements.
BP MIDSTREAM PARTNERS LP PREDECESSOR
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
(in thousands of dollars unless otherwise indicated)
In January 2017, the FASB issued ASU 2017-03, “Accounting Changes and Error Corrections (Topic 250).” The amendments to Topic 250 included in this update expand required qualitative disclosures when registrants cannot reasonably estimate the impact that adoption of the ASUs relatedsection, to revenue (ASU 2014-09), leases (ASU 2016-02) and credit losses (ASU 2016-13) will have on the financial statements. Such qualitative disclosures would include a comparison of the registrant’s new accounting policies, if determined, to current accounting policies, a description of the status of the registrant’s process to implement the new standard and a description of the significant implementation matters yet to be addressed by the registrant. Other than enhancements to the qualitative disclosures regarding future adoption of new ASUs, adoption of the provisions of this standard is not expected to have any impact on our condensed combined financial statements.
2. Initial Public Offering
Initial Public Offering
On October 30, 2017 (the “Completion Date”), the Partnership completed its initial public offering of 42,500,000 common units representing limited partner interests at a price to the public of $18.00 per unit. Subsequent to the closing of the IPO, the underwriters partially exercised their over-allotment option and purchased 5,294,358 additional common units at $18.00 per unit. A total of 47,794,358 common units were issued to the public unitholders in connection with the IPO. A registration statement on Form S-1, as amended through the time of its effectiveness, was filed by the Partnership with the SEC and was declared effective on October 25, 2017. On October 26, 2017, the Partnership's common units began trading on the New York Stock Exchange under the symbol “BPMP.”
Immediately prior to the consummation of the IPO on the Completion Date, BPPLNA contributed the following interests to the Partnership:
100.0% ownership interest in the Predecessor Assets;
28.5% ownership interest in Mars Oil Pipeline Company LLC; and
20.0% managing member interest in Mardi Gras Transportation System Company LLC (“Mardi Gras”), pursuant to which the Partnership has the right to vote BPPLNA's and its affiliates’ retained ownership interest in each of Caesar Oil Pipeline Company LLC, Cleopatra Gas Gathering Company LLC, Proteus Oil Pipeline Company LLC and Endymion Oil Pipeline Company LLC (together, the “Mardi Gras Joint Ventures”).
In exchange for BPPLNA's contribution of such interests to the Partnership, BPPLNA, through its wholly owned subsidiary, BP Midstream Partners Holdings LLC (“BP Holdco”), and through BP Holdco's wholly owned subsidiary, BP Midstream Partners GP LLC (the “General Partner”), received:
4,581,177 common units and 52,375,535 subordinated units, representing an aggregate 54.4% limited partner interest;
all of the non-economic general partner interest and our incentive distribution rights; and
a cash distribution of $814.7 million.
The Partnership received net proceeds of $814.7 million from the sale of 47,794,358 common units in the IPO,reflect events or circumstances after deducting underwriting discounts and commissions, structuring fees and other offering expenses. The Partnership made a cash distribution of $814.7 million to BPPLNA.
Revolving Credit Facility Agreement
On October 30, 2017, the Partnership entered into a $600.0 million revolving credit facility agreement (the “credit facility”) with an affiliate of BP. The credit facility provides for certain covenants, including the requirement to maintain a consolidated leverage ratio, which is calculated as total indebtedness to consolidated EBITDA (as defined in the credit facility), not to exceed 5.0 to 1.0, subject to a temporary increase in such ratio to 5.5 to 1.0 in connection with certain material acquisitions. In addition, the limited liability company agreement of the Partnership's General Partner requires the approval of BP Holdco prior to the incurrence of any indebtedness that would cause the Partnership's leverage ratio to exceed 4.5 to 1.0.
BP MIDSTREAM PARTNERS LP PREDECESSOR
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
(in thousands of dollars unless otherwise indicated)
The credit facility also contains customary events of default, such as (i) nonpayment of principal when due, (ii) nonpayment of interest, fees or other amounts, (iii) breach of covenants, (iv) misrepresentation, (v) cross-payment default and cross-acceleration (in each case, to indebtedness in excess of $75.0 million) and (vi) insolvency. Additionally, the Partnership's revolving credit facility limits its ability to, among other things: (i) incur or guarantee additional debt, (ii) redeem or repurchase units or make distributions under certain circumstances; and (iii) incur certain liens or permit them to exist. Indebtedness under this facility bears interest at the 3-month LIBOR plus 0.85%. This facility includes customary fees, including a commitment fee of 0.10% and a utilization fee of 0.20%. As of September 30, 2017, there were no borrowings outstanding under the credit facility.
Omnibus Agreement
In connection with the IPO, the Partnership entered into an omnibus agreement with BPPLNA and certain of its affiliates, including the General Partner. This agreement addresses, among other things, (i) the Partnership's obligation to pay an annual fee, initially $13.3 million, for general and administrative services provided by BPPLNA and its affiliates, (ii) the Partnership's obligation to reimburse BPPLNA for personnel and other costs related to the direct operation, management and maintenance of the assets and (iii) the Partnership's obligation to reimburse BPPLNA for services and certain direct or allocated costs and expenses incurred by BPPLNA or its affiliates on behalf of the Partnership.
Pursuant to the omnibus agreement, BPPLNA will indemnify the Partnership and fund all of the costs of required remedial action for its known historical and legacy spills and releases and other environmental and litigation claims identified in the omnibus agreement. BPPLNA will also indemnify the Partnership with respect to subsidiaries for which it is the operator for certain title defects and for failures to obtain certain consents and permits necessary to conduct its business for one year following the closing of the IPO.
The omnibus agreement also addresses the Partnership's right of first offer to acquire BPPLNA's retained ownership interest in Mardi Gras and all of BPPLNA's interests in midstream pipeline systems and assets related thereto in the contiguous United States and offshore Gulf of Mexico that are owned by BPPLNA at the closing of the IPO.
Further, the omnibus agreement addresses the granting of a license from BPA to the Partnership with respect to use of certain BP trademarks and tradename.
Throughput and Deficiency Agreements
In connection with the IPO, the Partnership entered into throughput and deficiency agreements with BP Products North America Inc. (“BP Products”), an indirect wholly owned subsidiary of BP. These agreements include minimum volume commitments that initially support substantially all of the Partnership's aggregate revenue on BP2, River Rouge and Diamondback. Under these fee-based agreements, we will provide transportation services to BP Products, and BP Products will commit to pay the Partnership for minimum monthly volumes of crude oil, refined products and diluent, regardless of whether such volumes are physically shipped by BP Products through the Partnership pipelines during the term of the agreements. These agreements became effective on October 30, 2017, with an initial term ending December 31, 2020.
Long-Term Incentive Plan
Prior to the closing of the IPO, we adopted BP Midstream Partners LP 2017 Long Term Incentive Plan (the “Plan”). Awards under the Plan are available for eligible officers, directors, employees and consultants of the General Partner and its affiliates, who perform services for the Partnership. The Plan provides the Partnership with the flexibility to grant unit options, unit appreciation rights, restricted units, phantom units, unit awards, cash awards, performance awards, distribution equivalent rights, substitute awards and other unit-based awards. The maximum aggregate number of common units that may be issued pursuant to any and all awards under the Plan shall not exceed 5% of our common and subordinated units outstanding upon the completion of the IPO, subject to adjustment due to (i) a subdivision or consolidation of the common units (by reclassification, split or reverse split or otherwise), (ii) a recapitalization, reclassification, or other change in our capital structure or (iii) any other reorganization, merger, combination, exchange, or other relevant change in capitalization of our equity, as provided under the Plan. Following the closing of the IPO, we granted a total number of 8,468 phantom units with an aggregate value on the date of grant of approximately $150 to our independent directors. These phantom units will vest on the first anniversary of the date of grant but will not be settled until the second anniversary of the vesting date.
this Quarterly Report.
BP MIDSTREAM PARTNERS LP PREDECESSOR
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
(in thousands of dollars unless otherwise indicated)
3. Allowance Oil
Our tariff for crude oil transportation at BP2 includes a fixed loss allowance (“FLA”). An FLA factor per barrel, a fixed percentage, is a separate fee under the applicable crude oil tariff to cover evaporation and other loss in transit. In the three and nine months ended September 30, 2017 and 2016, all of our revenue at BP2 was generated from services to our Parent.
As crude oil is transported, we earn additional income that equals the applicable FLA factor multiplied by the volume transported by our Parent measured at the receipt location. We do not take physical possession of the allowance oil as a result of our services, but record the value of the volumes accumulated as a receivable from our Parent. We recognize the FLA income in Revenue - related parties in the condensed combined statements of operations during the periods when commodities are transported. The amount of revenue recognized is a product of the quantity transported, the applicable FLA factor and the estimated settlement price during the month the product is transported.
We cash settle allowance oil receivable with our Parent in the subsequent periods after the transportation service has been performed. The settlement price is a product of the quantity settled and the summation of the calendar-month average price of West Texas Intermediate (“WTI”) on the New York Mercantile Exchange and a differential provided by a trading company wholly owned by our Parent. The differential represents the difference in market price between WTI and the type of allowance oil to be settled and the difference in market price between the current month and the prior month.
We measure the embedded derivative along with the allowance oil receivable in their entirety at fair value because the economic characteristics and risks of the embedded derivative are clearly and closely related to the economic characteristics and risks of the host arrangement. We recognize the changes in fair value in earnings in Other income (loss) in the condensed combined statements of operations. The embedded derivative is not designated as a hedging instrument. Refer to Note 7 - Fair Value Measurements for further discussion.
As of September 30, 2017 and December 31, 2016, allowance oil receivable, including the embedded derivative, was $3,266 and $2,532, respectively, on the condensed combined balance sheets. In the three and nine months ended September 30, 2017, we recognized income of $2,243 and $6,240, respectively, and a gain/(loss) due to changes in fair value of $380 and $(108), respectively, related to the FLA arrangement with our Parent. In the three and nine months ended September 30, 2016, we recognized income of $1,333 and $4,048, respectively, and a (loss)/gain due to changes in fair value of $(246) and $285, respectively, related to the FLA arrangement with our Parent.
4. Property, Plant and Equipment
Our property, plant and equipment is recorded at its historical cost of construction or, upon acquisition, at either the fair value of the assets acquired or the cost to the entity that placed the asset in service. Property, plant and equipment consisted of the following:
|
| | | | | | | | | | | |
| | Depreciable Lives | | September 30, 2017 | | December 31, 2016 |
Land | | — |
| | $ | 155 |
| | $ | 155 |
|
Rights-of-way | | — |
| | 1,380 |
| | 1,380 |
|
Building and improvements | | 16 - 40 years |
| | 12,032 |
| | 12,032 |
|
Pipeline and equipment | | 10 - 30 years |
| | 91,704 |
| | 89,135 |
|
Other | | 4 - 23 years |
| | 509 |
| | 509 |
|
Construction in progress | | — |
| | 308 |
| | 2,082 |
|
| | | | 106,088 |
| | 105,293 |
|
Less: Accumulated depreciation | | | | (36,075 | ) | | (34,058 | ) |
Property, plant and equipment, net | | | | $ | 70,013 |
| | $ | 71,235 |
|
BP MIDSTREAM PARTNERS LP PREDECESSOR
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
(in thousands of dollars unless otherwise indicated)
In the three months ended September 30, 2017, we did not dispose any property, plant and equipment. In the nine months ended September 30, 2017, we recognized a gain of $6 from disposition of property, plant and equipment. In the three and nine months ended September 30, 2016, we did not dispose of any property, plant and equipment. We determined that there were no impairments on our property, plant and equipment in the three and nine months ended September 30, 2017 or 2016.
5. Accrued Liabilities
Accrued liabilities consist of the following:
|
| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
Current portion of environmental remediation obligation | | $ | 1,645 |
| | $ | 1,310 |
|
Accrued non-capital project expenditures | | 607 |
| | 935 |
|
Accrued property taxes | | 165 |
| | 252 |
|
Accrued employee payroll and incentives | | 81 |
| | 109 |
|
Accrued capital project expenditures | | 73 |
| | 1,351 |
|
Other accrued liabilities | | 152 |
| | 110 |
|
Accrued liabilities | | $ | 2,723 |
| | $ | 4,067 |
|
6. Related Party Transactions
Related party transactions include transactions with our Parent and our Parent’s affiliates including those entities, in which our Parent has an ownership interest but does not have control. In addition to the fixed loss allowance arrangement discussed in Note 3 - Allowance Oil, we have entered into the following transactions with our related parties:
Cash Management Program
We participate in our Parent’s centralized cash management and funding system. Our working capital and capital expenditure requirements have historically been part of the corporate-wide cash management program for our Parent. As part of this program, our Parent maintained all cash generated by our operations, and cash required to meet our operating and investing needs was provided by our Parent as necessary within the boundaries of a documented funding agreement. Net cash generated from or used by our operations is reflected as a component of “Net parent investment” on the accompanying condensed combined balance sheets and as “Net transfers to Parent” on the accompanying condensed combined statements of cash flows. No interest income has been recognized on net cash kept by our Parent since, historically, we have not charged interest on intercompany balances.
Related Party Revenue and Expense
We provide crude oil, refined products and diluent transportation services to related parties and generate revenue through published tariffs. Our sales revenue from related parties was $26,778 and $78,832 for the three and nine months ended September 30, 2017, respectively, and $22,092 and $78,025 for the three and nine months ended September 30, 2016, respectively.
During the three and nine months ended September 30, 2017, we did not have long-term fee-based transportation agreements in place for volumes transported on any of our assets with related parties, other than a long-term transportation agreement at Diamondback which did not have a minimum volume commitment prior to July 1, 2017. During the three months ended September 30, 2017, we entered into a throughput and deficiency contract with BP Products for transporting diluent on the Diamondback pipeline under a joint tariff agreement with a third-party carrier. The throughput and deficiency contract contains a minimum volume requirement on BP Products for each of the twelve-month periods commencing on the effective date of July 1, 2017 and ending on June 30, 2020. In return, BP Products will receive a discounted incentive rate for each unit of diluent transported. During each of the twelve-month periods, BP Products will commit to pay us the discounted incentive rate for the minimum volumes, regardless of whether such volumes are physically shipped by BP Products through Diamondback.
BP MIDSTREAM PARTNERS LP PREDECESSOR
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
(in thousands of dollars unless otherwise indicated)
All employees performing services on behalf of our operations are employees of our Parent. Personnel and operating costs incurred by our Parent on our behalf were charged to us and included in either General and administrative expenses or Operating expenses in the accompanying condensed combined statements of operations, depending on the nature of the employee’s role in our operations. Our Parent also performs certain general corporate functions for us related to finance, accounting, treasury, legal, information technology, human resources, shared services, government affairs, insurance, health, safety, security, employee benefits, incentives, severance and environmental functional support. During the three and nine months ended September 30, 2017 and 2016, we were allocated operating and indirect general corporate expenses incurred by our Parent, which were included in Operating expenses - related parties and General and administrative - related parties in the accompanying condensed combined statements of operations.
We are covered by the insurance policies of our Parent. We were allocated insurance expense of $925 and $2,703 for the three and nine months ended September 30, 2017, respectively, and $704 and $2,111 for the three and nine months ended September 30, 2016, respectively. Insurance expense was included within Operating expenses - third parties in the accompanying condensed combined statements of operations.
During three and nine months ended September 30, 2017 and 2016, we were allocated the following amounts from our Parent, including the insurance expense discussed above, as well as the pension and retirement savings plans and share-based compensation discussed below:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Operating expenses - related parties | $ | 1,762 |
| | $ | 1,458 |
| | $ | 5,233 |
| | $ | 4,460 |
|
General and administrative - related parties | 1,210 |
| | 1,730 |
| | 3,571 |
| | 5,397 |
|
Total allocated operating and general corporate costs | $ | 2,972 |
| | $ | 3,188 |
| | $ | 8,804 |
| | $ | 9,857 |
|
These allocated operating and general corporate costs related primarily to the wages and benefits of our Parent’s employees that support our operations. Expenses incurred by our Parent on our behalf have been allocated to us on the basis of direct usage when identifiable. Where costs incurred by our Parent could not be determined to relate to us by specific identification, these costs were primarily allocated to us on the basis of headcount, throughput volumes, miles of pipe and other measures. The expense allocations have been determined on a basis that both we and our Parent consider to be a reasonable reflection of the utilization of services provided or the benefit received by us during the periods presented. The allocations may not, however, fully reflect the expenses we would have incurred as a separate, publicly traded company for the periods presented.
The following table shows related party expenses directly incurred by us that were included in the accompanying condensed combined statements of operations:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Operating expenses - related parties | $ | 183 |
| | $ | 22 |
| | $ | 579 |
| | $ | 90 |
|
Maintenance expenses - related parties | 65 |
| | 103 |
| | 257 |
| | 330 |
|
Total directly related party expenses | $ | 248 |
| | $ | 125 |
| | $ | 836 |
| | $ | 420 |
|
Pension and Retirement Savings Plans
Employees who directly or indirectly support our operations participate in the pension, post-retirement health insurance, and defined contribution benefit plans sponsored by our Parent and include other subsidiaries of our Parent. Pension and defined contribution benefit plan expenses allocated to us were included in General and administrative - related parties or Operating expenses - related parties in the accompanying condensed combined statements of operations, depending on the nature of the employee’s role in our operations.
BP MIDSTREAM PARTNERS LP PREDECESSOR
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
(in thousands of dollars unless otherwise indicated)
Our pension and post-retirement health insurance costs were $13 and $43 within Operating expenses for the three and nine months ended September 30, 2017, respectively, and $41 and $142 within General and administrative for the same periods, respectively. Such costs were $11 and $36 within Operating expenses for the three and nine months ended September 30, 2016, respectively, and $49 and $151 within General and administrative for the same periods, respectively.
Our defined contribution benefit plan costs were $19 and $34 within Operating expenses for the three and nine months ended September 30, 2017, respectively, and $59 and $112 within General and administrative for the same periods, respectively. Such costs were $8 and $26 within Operating expenses for the three and nine months ended September 30, 2016, respectively, and $35 and $107 within General and administrative for the same periods, respectively.
Share-based Compensation
Our Parent operates share option plans and equity-settled employee share plans. These plans typically have a three-year performance or restricted period during which the units accrue net notional dividends, which are treated as having been reinvested. Leaving employment will normally preclude the conversion of units into shares, but special arrangements apply for participants that leave for qualifying reasons.
Certain Parent employees supporting our operations were historically granted these types of awards. These share-based compensation costs have been allocated to us as part of the cost allocations from our Parent. These costs were $84 and $188 for the three and nine months ended September 30, 2017, respectively, and $60 and $177 for the three and nine months ended September 30, 2016, respectively. Share-based compensation expense is included in General and administrative - related parties in the accompanying condensed combined statements of operations.
7. Fair Value Measurements
As discussed in Note 3 - Allowance Oil, we record allowance oil receivable and the embedded derivative in their entirety at fair value in the condensed combined balance sheets. We record the changes in the fair value in Other income (loss) in the condensed combined statements of operations. The fair value is measured based on the settlement price at the end of the period, representing the amount that we would have received if all allowance oil receivables on hand were settled with our Parent at that time.
At September 30, 2017 and December 31, 2016, allowance oil receivable balances, including the embedded derivative, were classified as level 2 within the fair value hierarchy in the following table:
|
| | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | December 31, 2016 |
Recurring fair value measures | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total |
Allowance oil receivable | — |
| $ | 3,266 |
| — |
| $ | 3,266 |
| — |
| $ | 2,532 |
| — |
| $ | 2,532 |
|
There were no transfers into, or out of, the three levels of the fair value hierarchy for the three and nine months ended September 30, 2017 and 2016, respectively.
8. Income Taxes
BP Midstream Partners LP Predecessor was not a standalone entity for income tax purposes and was included as part of BPA consolidated federal income tax returns. Our provision for income taxes was prepared on a separate return basis with consideration to the tax laws and rates applicable in the jurisdictions in which we operated and earned income.
BPA and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states. These tax returns are subject to examination and possible challenge by the taxing authorities. Positions challenged by the taxing authorities may be settled or appealed by BPA. As a result, income tax uncertainties are recognized in BP Midstream Partners LP Predecessor’s combined financial statements in accordance with accounting for income taxes, when applicable. It is reasonably possible that changes to BP Midstream Partners LP Predecessor global unrecognized tax benefits could be significant; however, due to the uncertainty regarding the timing of completion of audits and possible outcomes, a current estimate of the range of such changes that may occur within the next twelve months cannot be made.
BP MIDSTREAM PARTNERS LP PREDECESSOR
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
(in thousands of dollars unless otherwise indicated)
BP Midstream Partners LP Predecessor recorded income tax expense of $7,403 and $23,219 for the three and nine months ended September 30, 2017, respectively, and $6,309 and $24,284 for the three and nine months ended September 30, 2016, respectively. There are no uncertain tax positions recorded on BP Midstream Partners LP Predecessor at the end of the periods presented.
BP Midstream Partners LP will be a pass-through entity for federal income tax purposes and will not be subject to federal income taxes on future period financial results.
9. Commitments and Contingencies
Legal Proceedings
Our Parent and certain affiliates are named defendants in lawsuits and governmental proceedings that arise in the ordinary course of our business. For each of our outstanding legal matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies and the likelihood of an unfavorable outcome. While there are still uncertainties related to the ultimate costs we may incur, based upon our evaluation and experience to date, we do not expect that the ultimate resolution of these matters will have a material adverse effect on our financial position, operating results, or cash flows.
Environmental Matters
We are subject to federal, state and local environmental laws and regulations. We record provisions for environmental liabilities based on management’s best estimates, using all information that is available at the time. In making environmental liability estimations, we consider the material effect of environmental compliance, pending legal actions against us and potential third-party liability claims. Often, as the remediation evaluation and effort progresses, additional information is obtained, requiring revisions to estimated costs. These revisions are reflected in our income in the year in which they are probable and reasonably estimable.
During the third quarter of 2017 and 2016, we increased our estimated provision for total remediation costs, which resulted in recognition of expenses of $1,006 for the three and nine months ended September 30, 2017, and $128 for the three and nine months ended September 30, 2016. We accrued $4,365 and $3,672 for environmental liabilities at September 30, 2017 and December 31, 2016, respectively.
In 1964, River Rouge experienced a release from a flange failure. Extensive soil and groundwater assessment and remediation activities have been conducted under oversight from Michigan Department of Environmental Quality (“MDEQ”). At September 30, 2017 and December 31, 2016, we accrued $2,515 and $1,700, respectively, for environmental liabilities associated with this incident. Remediation effort for this incident is likely to continue for up to 20 years. During the third quarter of 2017 and 2016, we increased our estimated provision for the remediation costs related to this incident, which resulted in recognition of expenses of $989 for the three and nine months ended September 30, 2017 and $28 for the three and nine months ended September 30, 2016.
In 2010, River Rouge experienced a release of approximately 90,000 gallons of gasoline. Extensive soil and groundwater assessment and remediation activities have been conducted under oversight from MDEQ. At September 30, 2017 and December 31, 2016, we accrued $1,630 and $1,620, respectively, for environmental liabilities associated with this incident. Remediation effort for this incident is likely to continue for up to 10 years. During the third quarter of 2017 and 2016, we increased our estimated provision for the remediation costs related to this incident, which resulted in recognition of expenses of $99 for the three and nine months ended September 30, 2017 and $186 for the three and nine months ended September 30, 2016.
There were several other environmental issues, for which we have accrued $220 and $352 in environmental liabilities at September 30, 2017 and December 31, 2016, respectively.
10. Subsequent Events
On the Completion Date, the Partnership completed its offering of 42,500,000 common units representing limited partner interests at a price to the public of $18.00 per unit. Subsequent to the closing of the IPO, the underwriters partially exercised their over-
BP MIDSTREAM PARTNERS LP PREDECESSOR
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
(in thousands of dollars unless otherwise indicated)
allotment option and purchased 5,294,358 additional common units at $18.00 per unit. A total of 47,794,358 common units were issued to the public unitholders in connection with the IPO.
On November 6, 2017, the Partnership withdrew $15.0 million under the credit facility to fund our working capital in the near term.
We have evaluated subsequent events through December 6, 2017, the date the condensed combined financial statements were issued. Based on this evaluation, it was determined that no subsequent events occurred, other than the items noted above, that require recognition or disclosure in the condensed combined financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with (i) the unaudited condensed combined financial statements and accompanying footnotes included under Item 1. Financial Statements (Unaudited), and (ii) the audited combined financial statements and accompanying footnotes in BP Midstream Partners LP's (the "Partnership") final prospectus dated October 25, 2017 and filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on October 27, 2017 (the “Prospectus”).
Unless otherwise stated or the context otherwise requires,indicates, all references to “we,” “our,” “us,”“Predecessor Assets,”“Predecessor,” or similar expressions , refer to the legal entity BP Midstream Partners LP Predecessor, the “Predecessor” for accounting purposes. For general descriptions of the Partnership, including information related to the Partnership's offshore joint ventures, please see the sections entitled “Initial Public Offering” and “Partnership Overview” below, as well as the Prospectus.(the "Partnership"). The term “our Parent” refers to BP Pipelines (North America), Inc. (“BPPLNA”BP Pipelines”), any entity that wholly owns BPPLNA,BP Pipelines, indirectly or directly, including BP America Inc. (“BPA”) and BP p.l.c. (“BP”), and any entity that is wholly owned by the aforementioned entities, excluding BP Midstream Partners LP Predecessor.LP.
The historicalfollowing management discussion and analysis of financial information containedconditions and results of operations should be read in conjunction with the unaudited financial statements and accompanying notes in this Management’s Discussionquarterly report and Analysis is that of the Predecessor for accounting purposes. Immediately prior to the consummation of the IPO on the Completion Date, we acquired a 28.5% ownership interest in Mars Oil Pipeline Company LLC (“Mars”) and a 20.0% managing member interest in Mardi Gras Transportation System Company LLC (“Mardi Gras”). For information relating to Mars and Mardi Gras, please refer to the Prospectus. Our ownership interests in Mars and Mardi Gras are not reflected in the historical discussion of the Predecessor results within this section.
Initial Public Offering
On October 30, 2017 (the “Completion Date”), the Partnership completed the IPO of 42,500,000 common units representing limited partner interests at a price to the public of $18.00 per unit. Subsequent to the closing of the IPO, the underwriters partially exercised their over-allotment option and purchased 5,294,358 additional common units at $18.00 per unit. A registration statementour Annual Report on Form S-1, as amended through10-K for the time of its effectiveness, was filed by the Partnership with the SEC and was declared effective on October 25, 2017. On October 26, 2017, the Partnership's common units began trading on the New York Stock Exchange under the symbol “BPMP.”
Immediately prior to the consummation of the IPO on the Completion Date, BPPLNA contributed the following interests to the Partnership:
100.0% ownership interest in the Predecessor Assets;
28.5% ownership interest in Mars; and
20.0% managing member interest in Mardi Gras Transportation System Company LLC (“Mardi Gras”), pursuant to which the Partnership has the right to vote BPPLNA's and its affiliates’ retained ownership interest in each of Caesar Oil Pipeline Company LLC (“Caesar”), Cleopatra Gas Gathering Company LLC (“Cleopatra”), Proteus Oil Pipeline Company LLC (“Proteus”) and Endymion Oil Pipeline Company LLC (“Endymion” and together with Caesar, Cleopatra and Proteus, the “Mardi Gras Joint Ventures”year ended December 31, 2018 (our "2018 Annual Report").
In exchange for BPPLNA's contribution of such ownership interests to the Partnership, BPPLNA, through its wholly owned subsidiary, BP Midstream Partners Holdings LLC (“BP Holdco”), and through BP Holdco’s wholly owned subsidiary, BP Midstream Partners GP LLC (the “General Partner”), received:
4,581,177 common units and 52,375,535 subordinated units, representing an aggregate 54.4% limited partner interest in us;
all of the non-economic general partner interest and our incentive distribution rights; and
a cash distribution of $814.7 million.
The Partnership received net proceeds of $814.7 million from the sale of 47,794,358 common units in the IPO, after deducting underwriting discounts and commissions, structuring fees and other offering expenses. The Partnership made a cash distribution of $814.7 million to BPPLNA.
In connection with the IPO, the Partnership entered into an omnibus agreement with BPPLNA and certain of its affiliates, including the General Partner, for the provision of certain general and administrative services by BPPLNA. See Note 2 - Initial Public Offering, in the notes to unaudited condensed combined financial statements, for a summary of this agreement.
Partnership Overview
We are a fee-based, growth-oriented master limited partnership recently formed by BPPLNABP Pipelines, an indirect wholly owned subsidiary of BP, to own, operate, develop and acquire pipelines and other midstream assets. Our initial assets consist of interests in entities that own crude oil, natural gas, refined products and diluent pipelines and refined product terminals serving as key infrastructure for BP and other customers to transport onshore crude oil production to BP’s crude oil refinery in Whiting Indiana (the “Whiting Refinery”)Refinery and offshore crude oil and natural gas production to key refining markets and trading and distribution hubs. Certain of our assets deliver refined products and diluent from the Whiting Refinery and other U.S. supply hubs to major demand centers.
As of the Completion Date,June 30, 2019, our initial assets consistconsisted of the following:
|
| | | | |
Entity/Asset | Our Ownership Interest | BPPLNA | Pipeline | Mainline |
Retained Ownership | Length | Capacity |
Interest | (Miles) | (Kbpd)(1) |
BP2(3) | 100.0% | — | 12 | 475 |
River Rouge(3) | 100.0% | — | 244 | 80 |
Diamondback | 100.0% | — | 42 | 135 |
Mars | 28.5% | — | 163 | 400(2) |
Mardi Gras(4): | 20.0%(5) | 80.0% | | |
Caesar | 11.2% | 44.8% | 115 | 450 |
Cleopatra | 10.6% | 42.4% | 115 | 500 |
Proteus | 13.0% | 52.0% | 70 | 425 |
Endymion | 13.0% | 52.0% | 90 | 425 |
BP Two Pipeline Company LLC, which owns the BP#2 crude oil pipeline system (“BP2”).BP River Rouge Pipeline Company LLC, which owns the Whiting to River Rouge refined products pipeline system (“River Rouge”).
BP D-B Pipeline Company LLC, which owns the Diamondback diluent pipeline system (“Diamondback”). BP2, River Rouge, and Diamondback are in the Midwest region of the United States, and together are referred to as the "Wholly Owned Assets".
| |
1)• | The approximate capacity information presented is in thousand barrels per day (“kbpd”) with the exception of the approximate capacity related to Cleopatra gas gathering system, which is presented in one million standard cubic feet per day (“MMscf/d”). Pipeline capacities are based on current operations and vary depending on the specific products being transported and delivery point, among other factors. |
| |
2) | Represents Mars mainline capacity of the approximately 54 mile segment from the connections to Ursa, Medusa and Olympus pipelines at the West Delta 143 platform complex to Fourchon, Louisiana where Mars has a connection with Amberjack pipeline for ultimate delivery to Clovelly, Louisiana. The capacity of the Mars pipeline system ranges from 100 kbpd to 600 kbpd depending on the pipeline segment and the type of crude oil transported. |
| |
3) | Historically, BP was the sole shipper on BP2 and River Rouge. Substantially all of our aggregate revenue on BP2, Diamondback and River Rouge is supported by commercial agreements with BP Products North America Inc. (“BP Products”). |
| |
4) | Our ownership interest and BPPLNA and its affiliates’ retainedA 28.5% ownership interest in each of Caesar, Cleopatra, Proteus and Endymion represents 20.0% and 80.0%Mars Oil Pipeline Company, LLC (“Mars”), respectively, of the 56.0%, 53.0%, 65.0% and 65.0% ownership interests of such investments. |
| |
5) | Our 20.0% interest in Mardi Gras iswhich owns a managing member interest that provides us with the right to vote BPPLNA's and its affiliates’ retained ownership interestmajor corridor crude oil pipeline system in the Mardi Gras Joint Ventures.Gulf of Mexico. |
A 65% managing member interest in Mardi Gras Transportation System Company, LLC (“Mardi Gras”), which holds the following investments in joint ventures located in the Gulf of Mexico:
How A 56% ownership interest in Caesar Oil Pipeline Company, LLC (“Caesar”),
A 53% ownership interest in Cleopatra Gas Gathering Company, LLC (“Cleopatra”),
A 65% ownership interest in Proteus Oil Pipeline Company, LLC (“Proteus”), and,
A 65% ownership interest in Endymion Oil Pipeline Company, LLC (“Endymion”). Together Endymion, Caesar, Cleopatra and Proteus are referred to as the “Mardi Gras Joint Ventures.”
A 22.7% ownership interest in Ursa Oil Pipeline Company, LLC ("Ursa"), which owns approximately 47 miles of pipeline that provides gathering and transportation services extending from Mississippi Canyon Block 809 to West Delta Block 143.
A 25% ownership interest in KM Phoenix Holdings, LLC ("KM Phoenix"), which owns 13 refined products terminals located across the United States with approximately 8.1 million barrels of storage and associated infrastructure).
We Generate Revenue
The Predecessor Assets generate revenue through published tariffs (regulated by the FERC) applied to volumes moved, with certain volumes on Diamondback transported at discounted rates per the contracts. Prior to the IPO, we did not have long-term fee-based transportation agreements in place for volumes transported on anymajority of our assets, other than two long-term transportation agreements at Diamondback, neither of which had minimum volume commitments prior to July 1, 2017. Effective July 1, 2017, we entered into a throughput and deficiency contract with our affiliate for transporting diluent on the Diamondback pipeline under a joint tariff agreement with a third-party carrier. This agreement contract contains a minimum volume requirement on our affiliate for each of the twelve-month periods commencing on the effective date of July 1, 2017 and ending on June 30, 2020. In return, our affiliate will receive a discounted incentive rate for each unit of diluent transported. During each of the twelve-month periods, our affiliate will commit to pay us the discounted incentive raterevenue by charging fees for the minimum volumes, regardless of whether such volumes are physically shipped through Diamondback.
The tariffs applicable to BP2 include a fixed loss allowance (“FLA”). An FLA factor per barrel, which is expressed as a fixed percentage, is a separate fee under the crude oil tariffs to cover evaporation and other loss in transit. As crude oil is transported,
we earn additional revenue that equals the applicable FLA factor multiplied by the volume transported by the customer and the applicable prices. Under the tariff applicable to BP2, allowance oil related revenue is recognized using the average market price for the relevant typetransportation of crude oil, duringrefined products and diluent through our pipelines under long-term agreements with MVC. We do not engage in the monthmarketing and trading of any commodities. All operations are conducted in the productUnited States, and all our long-lived assets are in the United States. Our operations consist of one reportable segment.
Certain businesses of ours are subject to regulation by various authorities including, but not limited to the Federal Energy Regulatory Commission ("FERC"). Regulatory bodies exercise statutory authority over matters such as common carrier tariffs, construction, rates and ratemaking and agreements with customers.
Acquisition of Equity Interests
On October 1, 2018, pursuant to an Interest Purchase Agreement (the “Interest Purchase Agreement”) with BP Products North America Inc. (“BP Products”), BP Offshore Pipelines Company LLC (“BP Offshore”), and BP Pipelines, we completed the acquisition of (i) an additional 45% interest in Mardi Gras, from BP Pipelines, (ii) a 25% interest in KM Phoenix Holdings LLC, a Delaware limited liability company, from BP Products, and (iii) a 22.7% interest in URSA Oil Pipeline Company LLC, a Delaware limited liability company, from BP Offshore, in exchange for aggregate consideration of $468 million funded with borrowings under our Credit Facility. The purchase was transported.accounted for as a transaction between entities under common control; as a result, we recognized the acquired assets at their historical carrying value.
How We Evaluate Our Operations
Our management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include: (i) safety and environmental metrics, (ii) revenue (including FLA) from throughput and utilization; (iii) operationsoperating expenses and maintenance expenses;spend; (iv) Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”)EBITDA (as defined below); and (v) cash available for distribution.distribution (as defined below).
Preventative Safety and Environmental Metrics
We are committed to maintaining and improving the safety, reliability and efficiency of our operations. We have implemented
reporting programs requiring all employees and contractors of our Parent who provide services to us to record environmental and safety-relatedsafety related incidents. Our management team uses these existing programs and data to evaluate trends and potential interventions to deliver on performance targets. We integrate health, occupational safety, process safety and environmental principles throughout our operations in order to reduce and eliminate environmental and safety-relatedsafety related incidents.
Throughput
The amount of revenue our business generates primarily depends on our fee-based transportation agreements with shippers, our tariffs and the volumes of crude oil, natural gas, refined products and diluent that we handle on our pipelines.
The volumes that we handle on our pipelines are primarily affected by the supply of, and demand for, crude oil, natural gas, refined products and diluent in the markets served directly or indirectly by our assets. Our results of operations will beare impacted by our ability to:
utilize any remaining unused capacity on, or add additional capacity to, our pipeline systems;
increase throughput volumes on our pipeline systems by making connections to existing or new third-party pipelines or other facilities, primarily driven by the anticipated supply of and demand for crude oil, natural gas, refined products and diluent; and
identify and execute organic expansion projects.projects; and
increase throughput volumes via acquisitions.
Operating Expenses and Total Maintenance Spend
Operating Expenses
Our management seeks to maximize our profitability by effectively managing our operating expenses. These expenses are comprised primarily of labor expenses (including contractor services), general materials, supplies, minor maintenance, utility costs (including electricity and fuel) and insurance premiums. Utility costs fluctuate based on throughput volumes and the grades of crude oil and types of refined products we handle. Our other operating expenses generally remain relatively stable across broad ranges of throughput volumes but can fluctuate from period to period depending on the mix of activities performed during that period.
Griffith Station Incident
On June 13, 2019, a building fire occurred at the Griffith Station on BP2. Management has performed an initial evaluation of the assets and determined that an impairment is required. A charge of $2.3 million for the impairment and $0.8 million for response expense were recorded under "Impairment and other, net" on our condensed consolidated statements of operations for the three and six months ended June 30, 2019. Our assets are insured with a deductible of $1.0 million per incident. We have accrued an offsetting insurance receivable of $2.1 million under "Other current assets" on our condensed consolidated balance sheet as of
June 30, 2019. The fire caused a temporary throughput restriction that was covered by our MVC. The throughput restriction was resolved within two weeks and volumes returned to normal operating levels.
Total Maintenance Spend - Wholly Owned Assets
We calculate total maintenance spendTotal Maintenance Spend as the sum of maintenance expenses and maintenance capital expenditures, excluding any reimbursable maintenance capital expenditures. We track these expenses on a combined basis because it is useful to understanding our total maintenance requirements. ForTotal Maintenance Spend for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016, total maintenance spend consisted of2018, respectively, is shown in the following:table below:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 |
| (in thousands of dollars) | (in thousands of dollars) |
Wholly Owned Assets | | | | |
Maintenance expenses | $ | 1,427 |
| | $ | 1,094 |
| | $ | 2,908 |
| | $ | 2,039 |
| $ | 956 |
| | $ | 927 |
|
Maintenance capital expenditures | 223 |
| | 708 |
| | 2,063 |
| | 2,339 |
| 266 |
| | 472 |
|
Total maintenance spend | $ | 1,650 |
| | $ | 1,802 |
| | $ | 4,971 |
| | $ | 4,378 |
| |
Total Maintenance Spend - Wholly Owned Assets | | $ | 1,222 |
| | $ | 1,399 |
|
Our maintenance expenses represent the costs we incur that do not significantly extend the useful life or increase the expected output of our property, plant and equipment. These expenses include pipeline repairs, replacements of immaterial sections of pipelines, inspections, equipment rentals and costs incurred to maintain compliance with existing safety and environmental standards, irrespective of the magnitude of such compliance expenses. Our maintenance expenses vary significantly from period to period because certain of our expenses are the result of scheduled safety and environmental integrity programs, which occur on a multiyearmulti-year cycle and require substantial outlays.
our operating performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or financing methods;
the ability of our business to generate sufficient cash to support our decision to make distributions to our unitholders;
Our business can be negatively affected by sustained downturns or slow growth in the economy in general and is impacted by shifts in supply and demand dynamics, the mix of services requested by the customers of our pipelines, competition and changes in regulatory requirements affecting our customers’ operations.
Our pipelines face competition from a variety of alternative transportation methods including rail, water borne movements including barging and shipping, trucking and other pipelines that service the same markets as our pipelines. Competition for BP2 and River Rouge common carrier pipelines is based primarily on connectivity to sources of supply and demand, while Diamondback faces competition for Gulf Coast sourced diluent from third-party pipelines, which have made direct connections at Manhattan, Illinois. Our offshore pipelines compete for new production based on geographic proximity to the production, cost of connection, available capacity, transportation rates and access to onshore markets.
We plan to pursue acquisitions of complementary assets from BP as well as third parties. We also may pursue acquisitions jointly with BPPLNA.BP Pipelines. Neither BP nor any of its affiliates are under any obligation, however, to sell or offer to sell us additional assets or to pursue acquisitions jointly with us, and we are under no obligation to buy any additional assets from them or to pursue any joint acquisitions with them. We will focus our acquisition strategy on transportation and midstream assets within the crude oil, natural gas and refined products sectors. We believe that we will beare well positioned to acquire midstream assets from BP, and particularly BPPLNA,BP Pipelines, as well as third parties, should such opportunities arise.arise and so long as such opportunities further the interests of the Partnership. Identifying and executing acquisitions will be a key part of our strategy.strategy so long as market conditions and other factors permit. However, if we do not make acquisitions on economically acceptable terms, our future growth will be limited, and the acquisitions we do make may reduce, rather than increase, our available cash.