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 second quarter, our assets remain operational. We did experience some adverse financial impact through the second 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. In the second quarter of 2020, as COVID-19 appeared to decrease or stabilize in certain areas, certain local, regional and national authorities began to loosen such containment measures and restrictions in various locations in an effort to begin economic recovery, among other purposes. While this relaxation of containment measures has initially led to an increased demand for petroleum and petroleum-based products through improved general economic conditions, there was also a resurgence of COVID-19 cases inJune 2020 and continuing intoJuly 2020 that resulted in the reinstatement of containment measures and restrictions, which could lower 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 countries, includingRussia ("OPEC+"), beginning inMarch 2020 , have resulted in severe 21 -------------------------------------------------------------------------------- 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 limited. However it is uncertain whether capital and production cuts will continue and, if so, whether they will be sufficient to offset the continued low demand resulting from the COVID-19 pandemic. Demand, and pricing, may again decline due to the resurgence of the outbreak across theU.S. and other locations across the world and the related social distancing guidelines, travel restrictions, and stay-at-home orders, although the extent of the additional impact on our industry and our business cannot be reasonably predicted at this time. In the six months endedJune 30, 2020 , we have experienced an adverse financial impact on our onshore pipelines as a result of reduced demand partially offset by$6.0 million of deficiency revenue recorded under our MVCs on all onshore pipelines, which extend throughDecember 31, 2020 (and for certain volumes on Diamondback, throughJune 30, 2021 ). Throughput on our onshore pipelines was approximately 13.9% lower as compared to the first quarter of 2020, primarily due to reduced volumes on BP2 reflective of lower refinery utilization as a result of reduced demand related to COVID-19 and lower throughput onRiver Rouge and Diamondback, which was driven by lower demand for refined products, and lower demand for diluent in connection with reduced Canadian heavy crude production, respectively. We could experience a material financial impact if volumes shipped on our pipelines remain below such minimum commitments beyond 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 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. Although we experienced a decline in volumes on our offshore pipelines during the second quarter, that decrease was primarily due to the short term impact of tropical storm Cristobal and planned maintenance activities, and to a lesser degree, lower demand due to COVID related impacts. 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 employees working remotely have 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 a significant number of 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 ofJune 30, 2020 , we had available capacity of$132 million under our unsecured revolving credit facility with an affiliate of BP and$114.9 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 decline in the price of our common units over the first six months of 2020, a condition that is consistent across our sector and may impact 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 22 -------------------------------------------------------------------------------- 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 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
23
--------------------------------------------------------------------------------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 six months endedJune 30, 2020 and 2019, respectively, is shown in the table below: Six Months Ended June 30, 2020 2019 (in millions of dollars) Wholly Owned Assets Maintenance expenses $ 1.8 $ 0.9 Maintenance capital expenditures 1.2 0.3 Maintenance capital recovery(1) (0.6) - Total Maintenance Spend - Wholly Owned Assets $ 2.4 $ 1.2
(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 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;
24
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•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. 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 and current volatility 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
through the second quarter which we expect to continue.
Customers
BP is our primary customer. Total revenue from BP represented 97.5% and 97.1% of our revenues for the three and six months endedJune 30, 2020 , respectively. Total revenue from BP represented 97.5% and 97.4% of our revenues for the three and six months endedJune 30, 2019 , respectively. BP's volumes represented approximately 94.2% and 93.8% of the aggregate total volumes transported on the Wholly Owned Assets for the three and six months endedJune 30, 2020 , respectively. BP's volumes represented approximately 94.9% and 95.0% of the aggregate total volumes transported on the Wholly Owned Assets for the three and six months endedJune 30, 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 the
25
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a Notice of Inquiry requesting comments on a proposed oil pipeline index using
the Producer Price Index for Finished Goods (PPI-FG) plus 0.09% as the index
level, and requested comments on whether and how the index should reflect
changes to FERC's policies regarding income tax costs and return on equity. The
Notice of Inquiry is subject to a comment period, after which FERC will issue a
final oil pipeline index for the five-year period commencing July 1, 2021 .
FERC's final application of its indexing rate methodology for the next five-year
term of index rates may impact our revenues associated with any transportation
services we may provide pursuant to rates adjusted by the FERC oil pipeline
index. 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.
Acquisition Opportunities
The Partnership plans to pursue acquisitions of complementary assets from BP as well as third parties subject to market conditions (including the ongoing effects of COVID-19) and our ability to obtain attractive financing. We may also 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 IDRs, most of the cash generated by operations.
Griffith Station Incident
OnJune 13, 2019 , a building fire occurred at theGriffith Station on BP2. Management performed an evaluation of the assets and recorded an impairment in 2019. A charge of$2.3 million for the impairment and$0.8 million for response expenses were recorded under "Impairment and other, net" on our condensed consolidated statements of operations for the three and six months endedJune 30, 2019 . Our assets are insured with a deductible of$1.0 million per incident. We accrued an offsetting insurance receivable of$2.1 million under "Other current assets" on our condensed consolidated balance sheet as ofJune 30, 2019 . We have incurred$0.1 million and$0.2 million for response expense during the three and six months endedJune 30, 2020 , respectively. Total costs associated with the incident were offset with an insurance receivable of$5.2 million under "Other current assets" on our condensed consolidated balance sheet as ofJune 30, 2020 . The insurance receivable is recorded as$4.3 million under "Other current assets" and$0.7 million under "Other assets" on our consolidated balance sheet as ofDecember 31, 2019 . 26 --------------------------------------------------------------------------------
Results of Operations
The following tables and discussion contain a summary of condensed consolidated
results of operations for the three and six months ended
As mentioned above in Item 2 - COVID-19, through the second quarter of 2020, our
financial condition and results of operations have been adversely impacted by
the COVID-19 pandemic and the current volatility and decline in commodity
prices. We could experience a material financial impact if volumes shipped on
our onshore assets remain below the MVCs beyond the end of 2020 and the MVCs are
not renewed. 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 Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(in millions of dollars)
Revenue $ 31.5 $ 28.6 $ 62.2 $ 58.8
Costs and expenses
Operating expenses 4.4 4.8 9.6 9.6
Maintenance expenses 1.5 0.7 1.8 1.0
General and administrative 4.3 4.1 9.1 8.5
Depreciation 0.6 0.7 1.3 1.3
Impairment and other, net - 1.0 - 1.0
Property and other taxes 0.2 0.2 0.3 0.3
Total costs and expenses 11.0 11.5 22.1 21.7
Operating income 20.5 17.1 40.1 37.1
Income from equity method
investments 26.8 28.8 58.1 53.2
Interest expense, net 1.9 3.8 5.3 7.5
Net income 45.4 42.1 92.9 82.8
Less: Net income attributable to
non-controlling interests 4.8 4.8 10.6 8.3
Net income attributable to the
Partnership $ 40.6 $ 37.3 $ 82.3 $ 74.5
Adjusted EBITDA* $ 52.9 $ 51.6 $ 107.4 $ 100.7
Less: Adjusted EBITDA attributable
to non-controlling interests 5.5 6.0 12.2 10.6
Adjusted EBITDA attributable to the
Partnership $ 47.4 $ 45.6 $ 95.2 $ 90.1
* See Reconciliation of Non-GAAP
Measures below.
27
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Three Months Ended Six Months Ended
June 30, June 30,
Pipeline throughput (thousands of barrels per day)(1) 2020 2019 2020 2019
BP2 260 275 273 291
Diamondback 61 55 71 67
River Rouge 59 73 66 71
Total Wholly Owned Assets 380 403 410 429
Mars 501 569 519 562
Caesar 159 204 172 209
Cleopatra(2) 17 26 19 26
Proteus 209 184 217 141
Endymion 209 184 217 141
Mardi Gras Joint Ventures 594 598 625 517
Ursa 87 119 91 116
Average revenue per barrel ($ per barrel)(3)
Total Wholly Owned Assets $ 0.74 $ 0.78 $ 0.75 $ 0.76
Mars 1.36 1.16 1.38 1.19
Mardi Gras Joint Ventures 0.62 0.66 0.61 0.69
Ursa 0.92 0.88 0.89 0.87
(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$2.9 million or 10.1% for the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 , due to the following factors: •Increase of$6.0 million from the recognition of deficiency revenue in current period. •Increase of$0.3 million or 12.3% in throughput revenue attributable to a 10.4% increase in throughput volume and a 1.7% increase in the weighted average tariff rate from Diamondback. •Decrease of$1.8 million or 69.1% in revenues from allowance oil primarily due to lower volume on BP2 and a lower realized price per barrel. •Decrease of$1.4 million or 15.4% in throughput revenue attributable to a 19.5% decrease in throughput volume and partially offset by a 5.2% increase in weighted average tariff rate fromRiver Rouge . •Decrease of$0.2 million or 1.1% in throughput revenue attributable to a 5.4% decrease in throughput volume partially offset by a 4.6% increase in weighted average tariff rate from BP2. Operating expenses decreased by$0.4 million or 8.3% for the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 , primarily attributable to a$0.5 million decrease in energy and drag reducing agent costs due to lower volumes. Maintenance expenses increased by$0.8 million or 114.3% for the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 due to pipeline repairs completed in 2020. Impairment expense decreased by$1.0 million in the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 , as no impairment expenses were recognized in the current period. Income from equity method investments decreased by$2.0 million or 6.9% for the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 , primarily due to a decrease in throughput volume and revenue on Mars, 28 -------------------------------------------------------------------------------- Caesar, Cleopatra, and Ursa. In addition, due to lower customer demand, income from KM Phoenix was lower for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . Interest expense decreased by$1.9 million or 50.0% in the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 , due to lower interest rates in the quarter from the term loan arrangement compared to the credit facility we had outstanding for the three months endedJune 30, 2019 .
Six Months Ended
Total revenue from wholly owned assets increased by approximately$3.4 million or 5.8% for the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , due to the following factors: •Increase of$6.0 million from the recognition of deficiency revenue in current period. •Increase of$0.7 million or 10.4% in throughput revenue attributable to a 7.2% increase in throughput volume and a 3.0% increase in the weighted average tariff rate from Diamondback. •Decrease of$2.8 million or 54.9% in revenue from allowance oil primarily due to lower volume on BP2 and a lower realized price per barrel. •Decrease of$0.4 million or 1.3% in throughput revenue attributable to a 5.5% decrease in throughput volume that was partially offset by 4.4% increase in the weighted average tariff rate from BP2, and •Decrease of$0.1 million or 0.5% in throughput revenue attributable to a 6.4% decrease in throughput volume that was partially offset by 6.3% increase in weighted average tariff rate fromRiver Rouge . Maintenance expenses increased by$0.8 million or 80.0% for the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 due to pipeline repairs completed in 2020 General and administrative expenses increased by$0.6 million or 7.1% for the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 . For the six months endedJune 30, 2020 , the increase was primarily from the increase in omnibus fee in first quarter. Impairment expense decreased by$1.0 million in the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 , as no impairment expenses were recognized in the current period. Income from equity method investments increased by$4.9 million or 9.2% for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 due to incremental throughput volume from Appomattox, which transports volume through Proteus and Endymion, in the first quarter of 2020 and the negative impact of maintenance activities on Proteus and Endymion in the first quarter of 2019. Interest expense, net decreased by$2.2 million or 29.3% in the six months endedJune 30, 2020 primarily due to lower interest rates in the second quarter of 2020 from the term loan arrangement compared to the credit facility we had outstanding for the six months endedJune 30, 2019 .
Net income attributable to non-controlling interests increased by
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.
29
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Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(in millions of dollars)
Reconciliation of Adjusted EBITDA and Cash
Available for Distribution to Net Income
Net income $ 45.4 $ 42.1 $ 92.9 $ 82.8
Add:
Depreciation 0.6 0.7 1.3 1.3
Interest expense, net 1.9 3.8 5.3 7.5
Cash distributions received from equity method
investments - Mardi Gras Joint Ventures 15.8 17.2 35.0 30.3
Cash distributions received from equity method
investments - Mars 13.7 13.7 26.7 25.8
Cash distributions received from equity method
investments - Others 2.3 2.9 4.3 6.2
Less:
Income from equity method investments -
13.7 13.9 30.3 23.8
Income from equity method investments - Mars 11.6 11.9 24.1 23.7
Income from equity method investments - Others 1.5 3.0 3.7 5.7
Adjusted EBITDA 52.9 51.6 107.4 100.7
Less:
Adjusted EBITDA attributable to non-controlling interests 5.5 6.0 12.2 10.6 Adjusted EBITDA attributable to the Partnership 47.4 45.6 95.2 90.1
Add:
Net adjustments from volume deficiency agreements (1.7) 1.0 (1.6) 0.3 Maintenance capital recovery(1) - - 0.6 -
Less:
Net interest paid/(received) 0.8 3.7 8.0 11.4 Maintenance capital expenditures 0.5 0.1 1.2 0.3 Cash reserves(2) 1.2 (0.1) (2.3) (3.9) Cash available for distribution attributable to the Partnership$ 43.2 $ 42.9 $ 87.3 $ 82.6
(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).
30
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Six Months Ended June 30,
2020 2019
(inmillions of dollars) Reconciliation of Adjusted EBITDA and Cash Available for Distribution to Net Cash Provided by Operating Activities Net cash provided by operating activities
$ 99.5 $ 87.3 Add: Interest expense, net 5.3 7.5
Distribution in excess of earnings from equity method investments 5.3
6.6
Less:
Changes in other assets and liabilities 2.6 (0.4) Non-cash adjustments 0.1 0.1 Impairment and other, net* - 1.0 Adjusted EBITDA 107.4 100.7 Less: Adjusted EBITDA attributable to non-controlling interests 12.2 10.6 Adjusted EBITDA attributable to the Partnership 95.2 90.1
Add:
Net adjustments from volume deficiency agreements (1.6) 0.3 Maintenance capital recovery(1) 0.6 -
Less:
Net interest paid/(received) 8.0 11.4 Maintenance capital expenditures 1.2 0.3 Cash reserves(2) (2.3) (3.9)
Cash available for distribution attributable to the Partnership
$ 82.6 (1) Relates to the portion of maintenance capital for theGriffith Station Incident reimbursable by insurance. (2) Reflects cash reserved due to timing of interest payment(s). * Includes$3.1 million of costs related to the Griffith Incident (impairment charge of$2.3 million and$0.8 million for the response expense), net of$(2.1) million in offsetting insurance receivable. The net charge of$1.0 million reflects our insurance deductible.
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 ofJune 30, 2020 , our liquidity was$246.9 million , consisting of$114.9 million of cash and$132 million available under our existing credit facility with BP. 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. Through the second quarter of 2020, our financial condition and results of operations have been adversely impacted by the COVID-19 pandemic and the current volatility and decline in commodity prices. We could experience a material financial impact if volumes shipped on our onshore assets remain below the MVCs beyond the end of 2020 and the MVCs are not renewed. 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. In the longer term, if reduced demand were to persist through 2021 or 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 meet our minimum quarterly distribution. 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. 31 --------------------------------------------------------------------------------
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 ofJune 30, 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. OnJuly 15, 2020 , we declared a cash distribution of$0.3475 per limited partner unit to unitholders of record onJuly 30, 2020 , for the three months endedJune 30, 2020 . The distribution, combined with distributions to ourGeneral Partner , will be paid onAugust 13, 2020 , and will total$37.6 million , with$16.6 million distributed to our non-affiliated common unitholders, and$21.0 million , including$1.2 million for IDRs distributed to our Parent in respect of its ownership of our 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 ofJune 30, 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$99.5 million and$87.3 million in cash flow from operating activities in the six months endedJune 30, 2020 and 2019, respectively. The$12.2 million increase in cash flows from operating activities resulted from a$5.0 million increase in distribution from equity method investments,$3.0 million increase in working capital, and a net$4.2 million increase due to an increase in operating income and a reduction in interest expense. Investing Activities. Cash flow generated by investing activities was$4.0 million and$6.3 million in the six months endedJune 30, 2020 and 2019, respectively. The$2.3 million decrease in cash flow generated by investing activities was primarily due to a$1.0 million increase in capital expenditures, and a$1.3 reduction in distribution in excess of earnings from equity method investments during the six months endedJune 30, 2020 . 32 -------------------------------------------------------------------------------- Financing Activities. Cash flow used in financing activities was$87.4 million and$75.2 million in the six months endedJune 30, 2020 and 2019, respectively. The$12.2 million increase in the usage of cash for financing activities was due to increases related to distributions to unitholders and ourGeneral Partner of$10.6 million and to non-controlling interest of$1.6 million .
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 associated with ongoing projects related to the Wholly Owned Assets, for the six months endedJune 30, 2020 and 2019, is shown in the table below: Six Months Ended June 30, 2020 2019 (in millions of dollars) Cash spent on expansion capital expenditures $ 0.1 $ - Cash spent on maintenance capital expenditures 1.2 0.3 Increase in accrued capital expenditures 0.3 - Total capital expenditures incurred $ 1.6 $ 0.3 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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