BP MIDSTREAM PARTNERS LP Unless otherwise stated or the context otherwise indicates, all references to "we," "our," "us," refer to the legal entityBP Midstream Partners LP (the "Partnership"). The term "our Parent" refers toBP Pipelines (North America), Inc. ("BP Pipelines "), any entity that wholly ownsBP Pipelines , indirectly or directly, includingBP America Inc. and BP p.l.c. ("BP"), and any entity that is wholly owned by the aforementioned entities, excludingBP Midstream Partners LP . The following management discussion and analysis of financial conditions and results of operations should be read in conjunction with the unaudited financial statements and accompanying notes in this quarterly report and our Annual Report on Form 10-K for the year endedDecember 31, 2019 (the "Partnership's 2019 10-K"). All amounts are in millions of dollars, unless otherwise indicated.
Partnership Overview
We are a fee-based, growth-oriented master limited partnership formed byBP Pipelines , an indirect wholly owned subsidiary of BP, to own, operate, develop and acquire pipelines and other midstream assets. Partnership 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 Whiting Refinery and offshore crude oil and natural gas production to key refining markets and trading and distribution hubs.Certain Partnership assets deliver refined products and diluent from theWhiting Refinery and otherU.S. supply hubs to major demand centers. 20 --------------------------------------------------------------------------------
As of
•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".
•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 .
•65% ownership interest and 100% 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 :
•56% ownership interest in Caesar Oil Pipeline Company, LLC ("Caesar"),
•53% ownership interest in Cleopatra Gas Gathering Company, LLC ("Cleopatra"),
•65% ownership interest in Proteus Oil Pipeline Company, LLC ("Proteus"), and,
•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 ."
•22.7% ownership interest in Ursa Oil Pipeline Company, LLC ("Ursa").
•25% ownership interest in KM Phoenix Holdings, LLC ("KM Phoenix").
The Partnership generates a majority of revenue by charging fees for the
transportation of crude oil, refined products and diluent through 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 long-lived assets are located in the
United States . Partnership operations consist of one reportable segment.
Certain Partnership businesses 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.
Business Environment, Market Conditions and Outlook
The impact to the energy industry from both the recent swift and material decline in commodity prices and the global outbreak of COVID-19 have been unprecedented. Through the end of the first quarter, our assets remain operational. We did experience some adverse financial impact at the end of the first quarter which we expect to continue. Management continues to monitor the challenging macro environment. For risks associated with these and other factors, see "Item 1A. Risk Factors" in this Quarterly Report. Management continues to work closely withBP Pipelines , as operator of our assets under the Omnibus Agreement, to ensure appropriate practices are adopted for continued functioning of our assets as well as mitigation strategies for any office or worksite where COVID-19 may be detected.
COVID-19
In the first quarter of 2020, the COVID-19 outbreak spread across the globe. Federal, state and local governments mobilized to implement containment mechanisms and minimize impacts to their populations and economies. Various containment measures, which included the quarantining of cities, regions and countries, have resulted in a significant drop in general economic activity and a resulting decrease in demand for petroleum and petroleum-based products.
Decline in Demand and Potential Impact to Our Operations
The unprecedented supply and demand dynamics created by demand decreases resulting from COVID-19 and supply increases resulting from recent periods of increased production by members of theOrganization of Petroleum Exporting Countries ("OPEC") and other counties, includingRussia , beginning inMarch 2020 , have resulted in severe declines in commodity prices and created volatility, uncertainty, and turmoil in the oil and gas industry. While inApril 2020 , OPEC+ agreed to cut production, the production cuts have yet to offset the decrease in demand resulting from the COVID-19 pandemic and related economic repercussions. As a result, the price of oil has remained depressed to historic levels and available storage and transportation capacity for production is increasingly limited. With the storage and transportation constraints further adding to the pressure on commodities prices, refiners have started to curtail output and producers all over the world - including inthe United States - have significantly decreased their capital programs and even started to shut-in production. 21 -------------------------------------------------------------------------------- In the first quarter 2020, we have not experienced a material financial impact on our onshore pipelines as a result of reduced demand, as we have MVCs on all onshore pipelines throughDecember 31, 2020 (and for certain volumes on Diamondback, throughJune 30, 2021 ). However, we could experience a material financial impact if volumes shipped on our pipelines remain below such minimum commitments through the end of 2020 as a result of reduced consumer demand due to the response to the COVID-19 pandemic. If these conditions persist beyondDecember 31, 2020 and BP does not renew or extend our MVCs at all or at similar levels, it could have a material adverse effect on our financial results and condition. BP has no obligation to renew or extend our MVCs at any level. We also have not experienced any decline in demand for our services on our offshore pipelines in the first quarter. We expect demand to be resilient, as offshore projects are larger capital projects planned over many years and less impacted by temporary changes in capital investment. BP and our other customers, as well as us and other third-party operators of our pipelines, have implemented various protocols for both onshore and offshore personnel in efforts to limit the impact of COVID-19; however, those may not prove fully successful. There is risk of decreased volumes with respect to the offshore operations if operators take actions to reduce operations in response to demand declines or increasingly limited storage availability or are unable to control COVID-19 infections on platforms and are required to shut-in. Additionally, we expect the shippers on the offshore pipelines to continue to find buyers for their production, however they may not be successful. We have taken steps and continue to actively work to mitigate the evolving challenges and growing impact of both the COVID-19 pandemic and the industry downturn on our operations and our financial condition. We have also worked withBP Pipelines and the third-party operators of our assets to ensure that COVID-19 response and business continuity plans have been implemented across all of our assets and operations. BP employees, includingBP Pipelines personnel, have been working from home sinceMarch 16, 2020 , except those deemed critical to the functioning of owned and managed assets. For those that are critical and are required to be on-site, protocols have been implemented to protect those employees. Thus far, BP does not have a significant number of employees diagnosed with COVID-19 and working remotely has not significantly impacted our operations, including use of financial reporting systems, nor has it significantly impacted our internal control environment. We have not incurred, and in the future do not expect to incur, significant expenses related to business continuity. However, our continuing operations and the management of the immediate and contingent safety measures would likely become increasingly difficult if BP employees are infected by COVID-19 and the practical difficulties of social distancing impact productivity. We also continue to monitor our liquidity position. As ofMarch 31, 2020 , we had available capacity of$132 million under our unsecured revolving credit facility with an affiliate of BP and$105.5 million cash and our only outstanding indebtedness is$468 million outstanding under the term loan, with no principal payments due until 2025. We experienced a sharp decline in the price of our common units over the first quarter of 2020, a condition that is consistent across our sector and may impair our ability to access capital markets. We do not have any debt covenants or other lending arrangements that depend upon our unit price. We are in compliance with the covenants contained in both our revolving credit facility and term loan, both of which include the requirement to maintain a consolidated leverage ratio, which is calculated as total indebtedness to consolidated EBITDA, 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. Please see "Capital Resources and Liquidity" and Note 6 - Debt for additional information. We are unable to reasonably predict when, or to what extent, demand for petroleum and petroleum-based products and the overall markets and global economy will stabilize, and the pace of any subsequent recovery for the oil and gas industry. Further, to what extent these events do ultimately impact our business, liquidity, financial condition, and results of operations is highly uncertain and dependent on numerous evolving factors that cannot be predicted, including the duration of the pandemic. As noted above,BP Pipelines and the third-party operators of our assets have taken steps and continue to actively work to mitigate the evolving challenges and growing impact of both the COVID-19 pandemic and the industry downturn on our operations and financial condition. However, given the tremendous uncertainty and turmoil, there is no certainty that the measures we take will be ultimately sufficient.
How We Evaluate Our Operations
Partnership management uses a variety of financial and operating metrics to analyze performance. These metrics are significant factors in assessing operating results and profitability and include: (i) safety and environmental metrics, (ii) revenue (including FLA) from throughput and utilization; (iii) operating expenses and maintenance spend; (iv) Adjusted EBITDA (as defined below); and (v) cash available for distribution (as defined below).
Preventative Safety and Environmental Metrics
We are committed to maintaining and improving the safety, reliability and efficiency of Partnership operations. As noted above, we have worked withBP Pipelines and the third-party operators of our assets to ensure that COVID-19 response and 22 -------------------------------------------------------------------------------- business continuity plans have been implemented across all of our assets and operations. We have implemented reporting programs requiring all employees and contractors of our Parent who provide services to us to record environmental and safety related incidents. The Partnership's 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 Partnership operations to reduce and eliminate environmental and safety related incidents.
Throughput
We have historically generated substantially all of our revenue under long-term agreements orFERC -regulated generally applicable tariffs by charging fees for the transportation of products through our pipelines. The amount of revenue we generate under these agreements depends in part on the volumes of crude oil, natural gas, refined products and diluent on our pipelines. Volumes on 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 partnership assets. Results of operations are impacted by our ability to: •utilize any remaining unused capacity on, or add additional capacity to, Partnership pipeline systems; •increase throughput volumes on Partnership 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; •identify and execute organic expansion projects; and •increase throughput volumes via acquisitions. In addition, substantially all of our aggregate revenue on BP2, Diamondback andRiver Rouge is supported by commercial agreements withBP Products . We are a party to two throughput and deficiency agreements withBP Products and one dedication agreement with a third-party for Diamondback. The dedication agreement and one throughput and deficiency agreement for Diamondback were renewed in 2020 and will now expire inJune 2021 . The other throughput and deficiency agreement for Diamondback will expire onDecember 31, 2020 by its term, if it is not renewed.BP Products has entered into minimum volume commitment agreements with respect to BP2 andRiver Rouge , and these two throughput and deficiency agreements will expire by their terms onDecember 31, 2020 , if they are not renewed.
Storage Utilization
Storage utilization is a metric that we use to evaluate the performance of our storage and terminalling assets. We define storage utilization as the percentage of the contracted capacity in barrels compared to the design capacity of the tank.
Operating Expenses and Total Maintenance Spend
Operating Expenses
Management seeks to maximize profitability by effectively managing 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. 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.
Total Maintenance Spend - Wholly Owned Assets
We calculate Total 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 total maintenance requirements. Total Maintenance Spend for the three months endedMarch 31, 2020 and 2019, respectively, is shown in the table below: 23 --------------------------------------------------------------------------------
Three Months Ended March 31,
2020 2019
(in millions of dollars)
Wholly Owned Assets
Maintenance expenses $ 0.3 $ 0.3
Maintenance capital expenditures 0.7 0.2
Maintenance capital recovery(1) (0.6) -
Total Maintenance Spend - Wholly Owned Assets $ 0.4 $ 0.5
(1) Relates to the portion of maintenance capital for the Griffith Station Incident reimbursable by insurance.
The Partnership seeks to maximize profitability by effectively managing maintenance expenses, which consist primarily of safety and environmental integrity programs. We seek to manage maintenance expenses on owned and operated pipelines by scheduling maintenance over time to avoid significant variability in maintenance expenses and minimize impact on cash flows, without compromising our commitment to safety and environmental stewardship. Maintenance expenses represent the costs we incur that do not significantly extend the useful life or increase the expected output of 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. Maintenance expenses may vary significantly from period to period because certain expenses are the result of scheduled safety and environmental integrity programs, which occur on a multi-year cycle and require substantial outlays. Maintenance capital expenditures represent expenditures to sustain operating capacity or operating income over the long term. Examples of maintenance capital expenditures include expenditures made to purchase new or replacement assets or extend the useful life of existing assets. These expenditures includes repairs and replacements of storage tanks, replacements of significant sections of pipelines and improvements to an asset's safety and environmental standards.
Adjusted EBITDA and Cash Available for Distribution
The Partnership defines Adjusted EBITDA as net income before net interest
expense, income taxes, gain or loss from disposition of property, plant and
equipment, and depreciation and amortization, plus cash distributed to the
Partnership from equity method investments for the applicable period, less
income from equity method investments. The Partnership defines Adjusted EBITDA
attributable to the Partnership as Adjusted EBITDA less Adjusted EBITDA
attributable to non-controlling interests. We present these financial measures
because we believe replacing our proportionate share of equity method
investments' net income with the cash received from such equity method
investments more accurately reflects the cash flow from our business, which is
meaningful to our investors.
We compute and present cash available for distribution and define it as Adjusted
EBITDA attributable to the Partnership less maintenance capital expenditures
attributable to the Partnership, net interest paid/received, cash reserves,
income taxes paid and net adjustments from volume deficiency payments
attributable to the Partnership. Cash available for distribution does not
reflect changes in working capital balances.
Adjusted EBITDA and cash available for distribution are non-GAAP ("GAAP" refers
to Unites States generally accepted accounting principles) supplemental
financial measures, which are metrics that management and external users of
Partnership condensed consolidated financial statements, such as industry
analysts, investors, lenders and rating agencies, may use to assess:
•operating performance as compared to other publicly traded Partnerships in the
midstream energy industry, without regard to historical cost basis or financing
methods;
•ability to generate sufficient cash to support decisions to make distributions
to our unitholders;
•ability to incur and service debt and fund capital expenditures; and
•viability of acquisitions and other capital expenditure projects and the
returns on investment of various investment opportunities.
We believe that the presentation of Adjusted EBITDA and cash available for
distribution provides useful information to investors in assessing our financial
condition and results of operations. The GAAP measures most directly comparable
to Adjusted EBITDA and cash available for distribution are net income and net
cash provided by operating activities, respectively.
24
--------------------------------------------------------------------------------Adjusted EBITDA and cash available for distribution should not be considered as an alternative to GAAP net income or net cash provided by operating activities.
Adjusted EBITDA and cash available for distribution have important limitations as analytical tools because they exclude some but not all items that affect net income and net cash provided by operating activities. You should not consider Adjusted EBITDA or cash available for distribution in isolation or as a substitute for analysis of our results as reported under GAAP. Additionally, because Adjusted EBITDA and cash available for distribution may be defined differently by other companies in our industry, our definition of Adjusted EBITDA and cash available for distribution may not be comparable to similarly titled measures of other companies, thereby diminishing its utility. Please read "Reconciliation of Non-GAAP Measures" section below for the reconciliation of net income and cash provided by operating activities to Adjusted EBITDA and cash available for distribution.
Factors Affecting Our Business
Partnership 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. For example, as discussed earlier, in March of 2020, the spot price
of West Texas Intermediate ("WTI") crude declined over 50% in response to
reductions in global demand due to the COVID-19 pandemic and announcements by
Saudi Arabia and Russia of plans to increase crude oil production. In addition
to the collapse in oil prices, demand for many refined petroleum products has
also declined sharply causing refineries to curtail output. The ultimate
magnitude and duration of the COVID-19 pandemic, resulting governmental
restrictions on the mobility of consumers and the related impact on crude oil
prices and the U.S. and global economy and capital markets is uncertain. The
uncertain future impacts of COVID-19 and swift shifts in the demand for oil may
negatively impact our financial position, particularly our cash flows and
liquidity. As of the date of this Quarterly Report, all of our assets remain
operational. We did experience some adverse financial impact at the end of the
first quarter which we expect to continue.
Customers
BP is our primary customer. Total revenue from BP represented 96.7% and 97.4% of our revenues for the three months endedMarch 31, 2020 and 2019, respectively. BP's volumes represented approximately 93.5% and 94.9% of the aggregate total volumes transported on the Wholly Owned Assets for the three months endedMarch 31, 2020 and 2019, respectively. In addition, we transport and store crude oil, natural gas and diluent for a mix of third-party customers, including crude oil producers, refiners, marketers and traders, and Partnership assets are connected to other crude oil, natural gas and diluent pipeline systems. In addition to serving directly connected MidwesternU.S. andGulf Coast markets, our pipelines have access to customers in various regions ofthe United States andCanada through interconnections with other major pipelines. Customers use our transportation and terminalling services for a variety of reasons. Producers of crude oil require the ability to deliver their product to market and frequently enter into firm transportation contracts to ensure that they will have sufficient capacity available to deliver their product to delivery points with greatest market liquidity. Marketers and traders generate income from buying and selling crude oil, natural gas, refined products and diluent to capitalize on price differentials over time or between markets. Our customer mix can vary over time and largely depends on the crude oil, natural gas, refined products and diluent supply and demand dynamics in our markets. Regulation Interstate common carrier pipelines are subject to regulation by various federal, state and local agencies including theFERC , theEnvironmental Protection Agency ("EPA ") and theDepartment of Transportation ("DOT"). For more information on federal, state and local regulations affecting our business, see Part I, Item 1 and 2. Business and Properties in the Partnership's 2019 10-K. 25 --------------------------------------------------------------------------------
Acquisition Opportunities
The Partnership plans to pursue acquisitions of complementary assets from BP as well as third parties subject to market conditions and our ability to obtain attractive financing. We also may pursue acquisitions jointly withBP Pipelines .BP Pipelines has granted us a right of first offer with respect to its retained ownership interest in Mardi Gras and all of its interests in midstream pipeline systems and assets related thereto in the contiguousUnited States and offshoreGulf of Mexico that were owned byBP Pipelines when we were established. 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 are well positioned to acquire midstream assets from BP, and particularlyBP Pipelines , as well as third parties, should such opportunities arise. Identifying and executing acquisitions will be a key part of our strategy. 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.
Financing
We expect to fund future capital expenditures primarily from external sources, including borrowings under our credit facility and potential future issuances of equity and debt securities. We intend to make cash distributions to unitholders at a minimum distribution rate of$0.2625 per unit per quarter ($1.05 per unit on an annualized basis). Based on the terms of our cash distribution policy, we expect that we will distribute to unitholders and the General Partner, as the holder of incentive distribution rights, most of the cash generated by operations.
Griffith Station Incident
On
We have incurred$0.1 million for response expense during the three months endedMarch 31, 2020 . Our assets are insured with a deductible of$1.0 million per incident. Total costs associated with the incident were offset with an insurance receivable of$5.1 million on our condensed consolidated balance sheet as ofMarch 31, 2020 . The insurance receivable is recorded as$4.3 million under "Other current assets" and$0.8 million under "Other assets" on our condensed consolidated balance sheet as ofMarch 31, 2020 . 26 --------------------------------------------------------------------------------
Results of Operations
The following tables and discussion contain a summary of condensed consolidated
results of operations for the three months ended
As mentioned above, in the first quarter 2020, our financial condition and
results of operations have not been significantly impacted by the current
pandemic or the swift and material decline in commodity prices. We do, however,
expect to experience a material financial impact if volumes shipped on our
onshore assets remain below the MVCs through the end of 2020. Additionally, if
the economic downturn extends into 2021 including limited demand for refined
products and a depressed oil price, we would be exposed to lower volumes flowing
through our onshore assets without the benefit of the current MVCs from BP.
Lower volumes flowing through the offshore assets, either due to depressed
demand or lack of storage capacity or both, could cause our income from equity
method investments to decline until such time as demand recovers.
Three Months Ended
March 31,
2020 2019
(in millions of dollars)
Revenue $ 30.7 $ 30.2
Costs and expenses
Operating expenses 5.2 4.8
Maintenance expenses 0.3 0.3
General and administrative 4.8 4.4
Depreciation 0.7 0.6
Property and other taxes 0.1 0.1
Total costs and expenses 11.1 10.2
Operating income 19.6 20.0
Income from equity method investments 31.3 24.4
Interest expense, net 3.4 3.7
Net income 47.5 40.7
Less: Net income attributable to non-controlling
interests 5.8 3.5
Net income attributable to the Partnership $ 41.7 $ 37.2
Adjusted EBITDA* $ 54.5 $ 49.1
Less: Adjusted EBITDA attributable to non-controlling interests
6.7 4.6
Adjusted EBITDA attributable to the Partnership $ 47.8 $ 44.5
* See Reconciliation of Non-GAAP Measures below.
27
--------------------------------------------------------------------------------Three Months Ended
March 31,
Pipeline throughput (thousands of barrels per day)(1) 2020 2019
BP2 286 306
Diamondback 82 79
River Rouge 73 69
Total Wholly Owned Assets 441 454
Mars 537 556
Caesar 185 214
Cleopatra(2) 21 27
Proteus 225 97
Endymion 225 97
Mardi Gras Joint Ventures 656 435
Ursa 95 112
Average revenue per barrel ($ per barrel)(3)
Total Wholly Owned Assets $ 0.76 $ 0.74
Mars 1.39 1.21
Mardi Gras Joint Ventures 0.60 0.74
Ursa 0.87 0.86
(1) Pipeline throughput is defined as the volume of delivered barrels.
(2) Natural gas is converted to oil equivalent at 5.8 million cubic feet per one thousand barrels.
(3) Based on reported revenues from transportation and allowance oil divided by delivered barrels over
the same time period.
Three Months Ended
Total revenue from wholly owned assets increased by approximately$0.5 million or 1.7% for the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 , due to the following factors: •Increase of$1.3 million or 15.9% increase in throughput revenue attributable to a 7.8% increase in throughput volume and a 7.6% increase in weighted average tariff rate fromRiver Rouge . •Increase of$0.3 million or 9.2% increase in throughput revenue attributable to a 4.0% increase in throughput volume and a 5.0% increase in the weighted average tariff rate from Diamondback. •The above increases were partially offset by BP2 which had a$0.2 million or 1.5% decrease in throughput revenue attributable to a 5.5% decrease in throughput volume, and •Revenue from allowance oil was lower by$0.9 million or 39.8% primarily due to lower volume on BP2 and a lower realized price per barrel. Operating expenses increased by$0.4 million or 8.3% for the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 , primarily attributable to a$0.2 million increase in insurance expense due to higher insurance rates and$0.2 million increase in energy cost.
General and administrative expense increased by
Income from equity method investments increased by$6.9 million or 28.3% in the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 , primarily due to an increase of$3.5 million and$4.8 million of incremental earnings in the current period from Proteus and Endymion, respectively. These two assets had reduced activity due to maintenance in the three months endedMarch 31, 2019 , compared to the three months endedMarch 31, 2020 . The three months endedMarch 31, 2020 , included production from Appomattox whereas the three months endedMarch 31, 2019 , did not. This increase was offset by a net decrease of$1.4 million in income from all other equity method investments. 28 -------------------------------------------------------------------------------- Interest expense decreased by$0.3 million or 8.1% in the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 , due to lower interest rates in the quarter. Net income attributable to non-controlling interests increased by$2.3 million or 65.7% in the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 , due to higher earnings from Mardi Gras in the quarter.
Reconciliation of Non-GAAP Measures
The following tables present a reconciliation of Adjusted EBITDA to net income
and to net cash provided by operating activities, the most directly comparable
GAAP financial measures, for each of the periods indicated.
Three Months Ended
March 31,
2020 2019
(in millions of dollars)
Reconciliation of Adjusted EBITDA and Cash Available for Distribution to Net Income Net income $ 47.5 $ 40.7 Add: Depreciation 0.7 0.6 Interest expense, net 3.4 3.7
Cash distributions received from equity method investments -
19.2 13.0
Cash distributions received from equity method investments - Mars
13.0 12.2
Cash distributions received from equity method investments - Others
2.0 3.3
Less:
Income from equity method investments -
16.6 9.8 Income from equity method investments - Mars 12.5 11.9 Income from equity method investments - Others 2.2 2.7 Adjusted EBITDA 54.5 49.1
Less:
Adjusted EBITDA attributable to non-controlling interests 6.7 4.6 Adjusted EBITDA attributable to the Partnership 47.8 44.5
Add:
Net adjustments from volume deficiency agreements 0.1 (0.7) Maintenance capital recovery(1) 0.6 -
Less:
Net interest paid/(received) 7.2 7.7 Maintenance capital expenditures 0.7 0.2 Cash reserves(2) (3.5) (3.8)
Cash available for distribution attributable to the Partnership $
44.1 $ 39.7
(1) Relates to the portion of maintenance capital for the Griffith Station Incident reimbursable by insurance. (2) Reflects cash reserved due to timing of interest payment(s).
29
--------------------------------------------------------------------------------
Three Months Ended March 31,
2020 2019
(in millions of dollars)
Reconciliation of Adjusted EBITDA and Cash Available for Distribution
to Net Cash Provided by Operating Activities
Net cash provided by operating activities $ 48.9 $ 37.0
Add:
Interest expense, net 3.4 3.7Distribution in excess of earnings from equity method investments
2.8 3.2
Less:
Changes in other assets and liabilities 0.5 (5.3) Non-cash adjustments 0.1 0.1 Adjusted EBITDA 54.5 49.1 Less: Adjusted EBITDA attributable to non-controlling interests 6.7 4.6 Adjusted EBITDA attributable to the Partnership 47.8 44.5
Add:
Net adjustments from volume deficiency agreements 0.1 (0.7) Maintenance capital recovery(1) 0.6 -
Less:
Net interest paid/(received) 7.2 7.7 Maintenance capital expenditures 0.7 0.2 Cash reserves(2) (3.5) (3.8)
Cash available for distribution attributable to the Partnership $
44.1 $ 39.7 (1) Relates to the portion of maintenance capital for the Griffith Station Incident reimbursable by insurance. (2) Reflects cash reserved due to timing of interest payment(s).
Capital Resources and Liquidity
Currently, we expect our primary ongoing sources of liquidity to be cash generated from operations (including distribution from equity method investments), and, as needed, borrowings under our existing credit facility. The entities in which we own an interest may also incur debt. We believe that cash generated from these sources will be sufficient to meet our short-term working capital requirements and long-term capital expenditure requirements and to make quarterly cash distributions. As ofMarch 31, 2020 , our liquidity was$237.5 million , consisting of$105.5 million of cash and$132 million available under our existing credit facility with BP. As noted in "Decline in Demand and Potential Impact to Our Operations," our assets remain operational and we have not experienced significant financial impacts in the first quarter of 2020 due to the COVID-19 pandemic and related declines in commodity prices as a result of our MVCs with respect to our onshore operations and the nature of our offshore operations. However, we do expect to experience a material financial impact if volumes shipped on our onshore assets remain below the MVCs through the end of 2020. Additionally, there is risk of decreased volumes with respect to the offshore operations if operators take actions to reduce operations in response to demand declines or increasingly limited storage availability or are unable to control COVID-19 infections on platforms and are required to shut-in. Our only debt outstanding is our$468 million borrowed under our term loan with an affiliate of BP, and there are no principal payments required with respect to that facility until 2025. However, in the longer term, if reduced demand were to persist through 2021 and longer, we may not be able to continue to generate similar levels of operating cash flow and our liquidity and capital resources may not be sufficient to make our current levels of cash distributions to unitholders or even our minimum quarterly distribution. In particular, if these conditions persist beyondDecember 31, 2020 , and result in a significant decline in demand for our services with respect to our onshore pipelines, and BP does not renew or extend our MVCs at all or at similar levels, it could have a material adverse effect on our cash flows and financial condition, including limiting our ability to access capacity under our credit facility with BP if we are unable to meet the financial covenants or otherwise receive a waiver of the same. BP has no obligation to renew or extend our MVCs at 30 -------------------------------------------------------------------------------- any level. Although we continue to actively work to mitigate the evolving challenges and growing impact of both the COVID-19 pandemic and the industry downturn on our operations and our financial condition, there is no certainty that the measures we take will be ultimately sufficient. We are unable to reasonably predict when, or to what extent, demand for petroleum products and the overall markets and global economy will stabilize, and the pace of any subsequent recovery for the oil and gas industry. Further, to what extent these events do ultimately impact our business, liquidity, financial condition, and results of operations over the longer term is highly uncertain and dependent on numerous evolving factors that cannot be predicted, including the duration of the pandemic. Cash Distributions The board of directors of ourGeneral Partner has adopted a cash distribution policy pursuant to which we intend to pay a minimum quarterly distribution of$0.2625 per unit per quarter, which equates to approximately$27.5 million per quarter, or approximately$110 million per year in the aggregate, based on the number of common and subordinated units outstanding as ofMarch 31, 2020 . We intend to pay such distributions to the extent we have sufficient cash after the establishment of cash reserves and the payment of expenses, including payments to ourGeneral Partner and its affiliates. OnApril 15, 2020 , we declared a cash distribution of$0.3475 per limited partner unit to unitholders of record onApril 30, 2020 , for the three months endedMarch 31, 2020 . The distribution, combined with distributions to ourGeneral Partner , will be paid onMay 14, 2020 , and will total$37.6 million , with$16.6 million being distributed to non-affiliated common unitholders and$21.0 million , including$1.2 million for IDRs, being distributed to our Parent in respect of its ownership of Partnership common units, subordinated units and IDRs. Revolving Credit Facility OnOctober 30, 2017 , the Partnership entered into the$600 million unsecured Credit Facility with an affiliate of BP. The Credit Facility terminates onOctober 30, 2022 , and 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 ourGeneral Partner requires the approval ofBP Holdco prior to the incurrence of any indebtedness that would cause our 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, 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 million ) and (vi) insolvency. Additionally, the Credit Facility limits our 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 London Interbank Offered Rate ("LIBOR") plus 0.85%. This facility includes customary fees, including a commitment fee of 0.10% and a utilization fee of 0.20%. In connection with our acquisition in the fourth quarter of 2018, we borrowed$468 million from the Credit Facility. This amount was outstanding atDecember 31, 2019 , and repaid as ofMarch 31, 2020 .
Term Loan Facility Agreement
OnFebruary 24, 2020 , the Partnership entered into a$468 million term loan with an affiliate of BP. OnMarch 13, 2020 , proceeds were used to repay outstanding borrowings under our existing Credit Facility. Please refer to Note 9 - Debt in the Partnership's 2019 10-K for further details. The term loan has a final repayment date ofFebruary 24, 2025 and provides for certain covenants, including the requirement to maintain a consolidated leverage ratio, which is calculated as total indebtedness to consolidated EBITDA, 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. Simultaneous with this transaction, we entered into a First Amendment to Short Term Credit Facility Agreement ("First Amendment") whereby the lender added a provision that indebtedness under both the term loan and credit facility shall not exceed$600 million . All other terms of the credit facility remain the same. As ofMarch 31, 2020 , the Partnership was in compliance with the covenants contained in the term loan facility and the credit facility. Cash Flows from Operations Operating Activities. We generated$48.9 million and$37.0 million in cash flow from operating activities in the three months endedMarch 31, 2020 and 2019, respectively. The$11.9 million increase in cash flows from operating activities primarily resulted from a$6.1 million increase from operations due largely to an increase in distribution of earnings from equity method 31 -------------------------------------------------------------------------------- investments and a$5.8 million increase from changes in working capital, which primarily resulted from increases in cash inflows of$2.7 million from accounts receivable,$1.4 million from accounts payable, and$1.0 million from deferred revenue and credits. Investing Activities. Cash flow generated by investing activities was$2.1 million and$3.0 million in the three months endedMarch 31, 2020 and 2019, respectively. The$0.9 million decrease in cash flow generated by investing activities was due to a$0.5 million increase in capital expenditures and a$0.4 million reduction in excess distributions from equity method investments during the three months endedMarch 31, 2020 .
Financing Activities. Cash flow used in financing activities was
Capital Expenditures
Our operations can be capital intensive, requiring investment to expand, upgrade or enhance existing operations and to meet environmental and operational regulations. Capital requirements consist of maintenance capital expenditures and expansion capital expenditures, both as defined in our Partnership agreement. We are required to distinguish between maintenance capital expenditures and expansion capital expenditures in accordance with our Partnership agreement.
A summary of capital expenditures related to the Wholly Owned Assets, for the
three months ended
Three Months Ended March 31,
2020 2019
(in millions of dollars)
Cash spent on maintenance capital expenditures $ 0.7 $ 0.2
Total capital expenditures incurred $ 0.7
$ 0.2
Capital expenditures reported on the condensed consolidated statement of cash flows for the three months endedMarch 31, 2020 were$0.7 million , primarily associated with the Griffith Station Electrical and Controls project. Capital expenditures for the three months endedMarch 31, 2019 were$0.2 million , primarily associated with piping from boosters to mainline pumps forRiver Rouge . All capital expenditures in the three months endedMarch 31, 2020 and 2019 were maintenance expenditures. We did not incur any expansion capital expenditures during such periods. Contractual Obligations
There were no material changes to contractual obligations as disclosed in the Partnership's 2019 10-K.
Off-Balance Sheet Arrangements
The Partnership has not entered into any transactions, agreements or other contractual arrangements that would result in off-balance sheet liabilities.
Critical Accounting Policies and Estimates
There have been no material changes to critical accounting policies as disclosed in the Partnership's 2019 10-K.
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