0001708301-18-000039.txt : 20181114 0001708301-18-000039.hdr.sgml : 20181114 20181114080312 ACCESSION NUMBER: 0001708301-18-000039 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 59 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181114 DATE AS OF CHANGE: 20181114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BP Midstream Partners LP CENTRAL INDEX KEY: 0001708301 STANDARD INDUSTRIAL CLASSIFICATION: PIPE LINES (NO NATURAL GAS) [4610] IRS NUMBER: 821646447 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38260 FILM NUMBER: 181180484 BUSINESS ADDRESS: STREET 1: 501 WESTLAKE PARK BLVD CITY: HOUSTON STATE: TX ZIP: 77079 BUSINESS PHONE: (281) 366-2000 MAIL ADDRESS: STREET 1: 501 WESTLAKE PARK BLVD CITY: HOUSTON STATE: TX ZIP: 77079 10-Q 1 form10qq3-2018.htm 10-Q Document



 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     

Commission file number: 001-38260
bpmplogoa01.jpg
BP Midstream Partners LP
(Exact name of registrant as specified in its charter)
Delaware
 
82-1646447
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
501 Westlake Park Boulevard, Houston, Texas 77079
(Address of principal executive offices) (Zip Code)
(281) 366-2000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
  
Accelerated filer ¨
Non-accelerated filer ý
  
Smaller reporting company ¨
Emerging growth company ý
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  ý

As of November 13, 2018, the registrant had 52,375,535 common units and 52,375,535 subordinated units outstanding.
 





BP MIDSTREAM PARTNERS LP

TABLE OF CONTENTS






PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS (UNAUDITED)

BP MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
 
September 30, 2018
 
December 31, 2017
 
 
(in thousands of dollars)
ASSETS
Current assets
 
 

 
 

Cash and cash equivalents
 
$
49,354

 
$
32,694

Accounts receivable – third parties
 
126

 
188

Accounts receivable – related parties
 
9,861

 
9,481

Prepaid expenses
 
326

 
1,370

Other current assets
 
1,949

 
1,655

Total current assets
 
61,616

 
45,388

Equity method investments (Note 2)
 
464,839

 
487,999

Property, plant and equipment, net (Note 3)
 
68,990

 
69,488

Other assets
 
3,310

 
2,783

Total assets
 
$
598,755

 
$
605,658

 
 
 
 
 
LIABILITIES
Current liabilities
 
 

 
 

Short-term debt (Note 5)
 
$

 
$
15,000

Accounts payable – third parties
 
763

 
269

Accounts payable – related parties
 
2,597

 
2,270

Deferred revenue and credits
 
729

 

Accrued liabilities (Note 4)
 
4,563

 
4,481

Total current liabilities
 
8,652

 
22,020

Long-term portion of environmental remediation obligations
 
3,310

 
2,783

Total liabilities
 
11,962

 
24,803

Commitments and contingencies (Note 10)
 


 


 
 
 
 
 
EQUITY
Common unitholders – public (47,794,358 units issued and outstanding)
 
833,006

 
824,613

Common unitholders – BP Holdco (4,581,177 units issued and outstanding)
 
(46,350
)
 
(47,141
)
Subordinated unitholders – BP Holdco (52,375,535 units issued and outstanding)
 
(529,903
)
 
(538,947
)
Total partners' capital
 
256,753

 
238,525

Non-controlling interests
 
330,040

 
342,330

Total equity
 
586,793

 
580,855

Total liabilities and equity
 
$
598,755

 
$
605,658







The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

3




BP MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands of dollars, unless otherwise indicated)
 
 
 
 
Predecessor
 
 
 
Predecessor
Revenue
 
 
 
 
 
 

 
 
Third parties
 
$
508

 
$
238

 
$
2,072

 
$
1,712

Related parties
 
31,566

 
26,778

 
85,556

 
78,832

Total revenue
 
32,074

 
27,016

 
87,628

 
80,544

Costs and expenses
 
 
 
 
 
 

 
 

Operating expenses – third parties
 
2,892

 
3,062

 
8,558

 
6,380

Operating expenses – related parties
 
1,506

 
1,945

 
3,494

 
5,812

Maintenance expenses – third parties
 
640

 
1,362

 
1,523

 
2,651

Maintenance expenses – related parties
 
31

 
65

 
75

 
257

Gain from disposition of property, plant and equipment
 

 

 

 
(6
)
General and administrative – third parties
 
1,596

 
12

 
2,799

 
56

General and administrative – related parties
 
3,691

 
1,210

 
10,556

 
3,571

Depreciation
 
663

 
675

 
1,987

 
2,007

Property and other taxes
 
165

 
113

 
388

 
267

Total costs and expenses
 
11,184

 
8,444

 
29,380

 
20,995

Operating income
 
20,890

 
18,572

 
58,248

 
59,549

Income from equity method investments
 
22,581

 

 
66,262

 

Other income (loss)
 

 
380

 

 
(108
)
Interest (income) expense, net
 
(20
)
 

 
119

 

Income before income taxes
 
43,491

 
18,952

 
124,391

 
59,441

Income tax expense
 

 
7,403

 

 
23,219

Net income
 
43,491

 
$
11,549

 
124,391

 
$
36,222

Less: Net income attributable to non-controlling interests
 
8,272

 
 
 
28,163

 
 
Net income attributable to the Partnership
 
$
35,219

 
 
 
$
96,228

 
 
 
 
 
 
 
 
 
 
 
Net income attributable to the Partnership per limited partner unit  basic and diluted (in dollars):
 
 
 
 
 
 

 
 
Common units
 
$
0.34

 
 
 
$
0.92

 
 
Subordinated units
 
$
0.34

 
 
 
$
0.92

 
 
 
 
 
 
 
 
 
 
 
Distributions declared per limited partner unit (in dollars, Note 7):
 

 
 
 

 
 
Common units
 
$
0.2915

 
 
 
$
0.8315

 
 
Subordinated units
 
$
0.2915

 
 
 
$
0.8315

 
 
 
 
 
 
 
 
 
 
 
Weighted average number of limited partner units outstanding - basic and diluted (in millions):
 
 
 
 
 
 

 
 
Common units – public
 
47.8

 
 
 
47.8

 
 
Common units – BP Holdco
 
4.6

 
 
 
4.6

 
 
Subordinated units – BP Holdco
 
52.4

 
 
 
52.4

 
 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

4




BP MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)

 
 
 
Partnership
 
 
 
Predecessor
 
 
(in thousands of dollars)
 
Common Unitholders Public
 
Common Unitholders BP Holdco
 
Subordinated Unitholders BP Holdco
 
General Partner
 
Non-controlling Interests
 
Net Parent Investment
 
Total
Balance at December 31, 2016
 
$

 
$

 
$

 
$

 
$

 
$
73,942

 
$
73,942

 
Net income
 

 

 

 

 

 
36,222

 
36,222

 
Net transfers to Parent
 

 

 

 

 

 
(32,018
)
 
(32,018
)
Balance at September 30, 2017
 
$

 
$

 
$

 
$

 
$

 
$
78,146

 
$
78,146

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
 
$
824,613

 
$
(47,141
)
 
$
(538,947
)
 
$

 
$
342,330

 
$

 
$
580,855

 
Cumulative effect of accounting change (Note 2)
 
(1,253
)
 
(120
)
 
(1,373
)
 

 

 

 
(2,746
)
 
Net income
 
43,906

 
4,208

 
48,114

 

 
28,163

 

 
124,391

 
Distributions to unitholders
 
(34,400
)
 
(3,297
)
 
(37,697
)
 


 

 

 
(75,394
)
 
Unit-based compensation
 
140

 

 

 

 

 

 
140

 
Distributions to non-controlling interests
 

 

 

 

 
(40,453
)
 

 
(40,453
)
Balance at September 30, 2018
 
$
833,006

 
$
(46,350
)
 
$
(529,903
)
 
$

 
$
330,040

 
$

 
$
586,793




































The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

5


BP MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
(UNAUDITED)

 
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
 
(in thousands of dollars)
 
 
 
 
Predecessor
Cash flows from operating activities
 
 

 
 
Net income
 
$
124,391

 
$
36,222

Adjustments to reconcile net income to net cash provided by operating activities
 
 

 
 
Depreciation
 
1,987

 
2,007

Deferred income taxes
 

 
383

Share-based compensation
 
140

 
188

Loss due to changes in fair value of allowance oil receivable
 

 
108

Gain from disposition of property, plant and equipment
 

 
(6
)
Income from equity method investments
 
(66,262
)
 

Distributions of earnings received from equity method investments
 
71,314

 

Changes in operating assets and liabilities
 
 

 
 
Accounts receivable – third parties
 
62

 
241

Accounts receivable – related parties
 
(380
)
 
(4,362
)
Allowance oil receivable
 

 
(842
)
Prepaid expenses and other current assets
 
(23
)
 
(44
)
Accounts payable – third parties
 
494

 
152

Accounts payable – related parties
 
327

 
86

Deferred revenue and credits
 
729

 

Accrued liabilities
 
707

 
(66
)
Long-term portion of environmental remediation obligations
 

 
358

Other liabilities
 

 
(162
)
Net cash provided by operating activities
 
133,486

 
34,263

Cash flows from investing activities
 
 

 
 

Capital expenditures
 
(1,341
)
 
(2,063
)
Distributions in excess of earnings from equity method investments
 
15,362

 

Proceeds from disposition of property, plant and equipment
 

 
6

Net cash provided by (used in) investing activities
 
14,021

 
(2,057
)
Cash flows from financing activities
 
 

 
 

Net transfers to Parent – prior to the IPO
 

 
(32,206
)
Repayment of short-term debt
 
(15,000
)
 

Distributions to unitholders
 
(75,394
)
 

Distributions to non-controlling interests
 
(40,453
)
 

Net cash used in financing activities
 
(130,847
)
 
(32,206
)
Net change in cash and cash equivalents
 
16,660

 

Cash and cash equivalents at beginning of the period
 
32,694

 

Cash and cash equivalents at end of the period
 
$
49,354

 
$

Supplemental cash flow information
 
 

 
 
Non-cash investing transactions
 
 
 
 
Accrued capital expenditures
 
$
169

 
$
73



 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

6



BP MIDSTREAM PARTNERS LP  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)


1. Business and Basis of Presentation

BP Midstream Partners LP (either individually or together with its subsidiaries, as the context requires, the “Partnership”) is a Delaware limited partnership formed on May 22, 2017 by BP Pipelines (North America) Inc. (“BP Pipelines”), an indirect wholly owned subsidiary of BP p.l.c. (“BP”), a “foreign private issuer” within the meaning of the Securities Exchange Act of 1934, as amended.

On October 30, 2017, the Partnership completed its initial public offering (the "IPO") of common units representing limited partner interests. A total of 47,794,358 common units, including 5,294,358 common units pertaining to the exercise of the underwriters' over-allotment option, were issued to the public unitholders in connection with our IPO. Unless otherwise stated or the context otherwise indicates, all references to “we,” “our,” “us,” “Predecessor,” or similar expressions for time periods prior to the IPO refer to BP Midstream Partners LP Predecessor, which consisted of the historical assets and operations of the Predecessor Assets (as defined below). For time periods subsequent to the IPO, “we,” “our,” “us,” or similar expressions refer to the legal entity BP Midstream Partners LP.

The term “our Parent” refers to BP Pipelines, any entity that wholly owns BP Pipelines, indirectly or directly, including BP and BP America Inc. (“BPA”), an indirect wholly owned subsidiary of BP, and any entity that is wholly owned by the aforementioned entities, excluding BP Midstream Partners LP Predecessor and the Partnership.

Business

We are a fee-based, growth-oriented master limited partnership formed by BP Pipelines to own, operate, develop and acquire pipelines and other midstream assets. Our assets consist of interests in entities that own crude oil, natural gas, refined products and diluent pipelines serving as key infrastructure for BP and other customers to transport onshore crude oil production to BP’s refinery in Whiting, Indiana (the “Whiting Refinery”) and offshore crude oil and natural gas production to key refining markets and trading and distribution hubs. Certain of our assets deliver refined products and diluent from the Whiting Refinery and other U.S. supply hubs to major demand centers.

As of September 30, 2018, our assets consisted of the following:

BP Two Pipeline Company LLC, which owns the BP#2 crude oil pipeline system (“BP2”).
BP River Rouge Pipeline Company LLC, which owns the Whiting to River Rouge refined products pipeline system (“River Rouge”).
BP D-B Pipeline Company LLC, which owns the Diamondback diluent pipeline system (“Diamondback”). BP2, River Rouge, and Diamondback are located in the Midwest region of the United States, and together are referred to as the "Predecessor Assets" or the "Wholly Owned Assets".
A 28.5% ownership interest in Mars Oil Pipeline Company, LLC (“Mars”), which owns a major corridor crude oil pipeline system in the Gulf of Mexico. 
A 20% managing member interest in Mardi Gras Transportation System Company, LLC (“Mardi Gras”), which holds the following investments in joint ventures located in the Gulf of Mexico:
A 56% ownership interest in Caesar Oil Pipeline Company, LLC (“Caesar”),
A 53% ownership interest in Cleopatra Gas Gathering Company, LLC (“Cleopatra”),
A 65% ownership interest in Proteus Oil Pipeline Company, LLC (“Proteus”), and,
A 65% ownership interest in Endymion Oil Pipeline Company, LLC (“Endymion”).
Together Endymion, Caesar, Cleopatra and Proteus are referred to as the “Mardi Gras Joint Ventures.”

We generate the majority of our revenue by charging fees for the transportation of crude oil, refined products and diluent through our pipelines under long-term agreements with minimum volume commitments. We do not engage in the marketing and trading of any commodities. All of our operations are conducted in the United States, and all our long-lived assets are located in the United States. Our operations consist of one reportable segment.

Certain businesses of ours are subject to regulation by various authorities including, but not limited to the Federal Energy Regulatory Commission ("FERC"). Regulatory bodies exercise statutory authority over matters such as common carrier tariffs, construction, rates and ratemaking and agreements with customers.


7



BP MIDSTREAM PARTNERS LP  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)

Basis of Presentation

Our condensed consolidated financial statements have been prepared under the rules and regulations of the Securities and Exchange Commission (“SEC”). These rules and regulations conform to the accounting principles contained in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification, the single source of accounting principles generally accepted in the United States (“GAAP”).

Certain information and footnote disclosures normally included in the annual consolidated financial statements have been condensed or omitted from these condensed consolidated financial statements. The condensed consolidated financial statements as of September 30, 2018, and for the three and nine months ended September 30, 2018 and 2017, included herein, are unaudited. These financial statements include all known accruals and adjustments necessary, in the opinion of management, for a fair presentation of our consolidated financial position, results of operations and cash flows. Unless otherwise specified, all such adjustments are of a normal and recurring nature. The unaudited results of operations for the interim periods reported are not necessarily indicative of results to be expected for the full year. These unaudited condensed consolidated financial statements and other information included in this quarterly report on Form 10-Q should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017 (the "2017 Annual Report").

Prior to the IPO, our financial position, results of operations and cash flows consisted of the Predecessor's operations, which represented a combined reporting entity. Subsequent to the IPO, our financial position, results of operations and cash flows consist of consolidated BP Midstream Partners LP activities and balances. All intercompany accounts and transactions within the financial statements have been eliminated for all periods presented.

Prior to the IPO, our condensed consolidated statements of operations include expense allocations to the Predecessor for certain functions performed by our Parent on our behalf, including allocations of general corporate expenses related to finance, accounting, treasury, legal, information technology, human resources, shared services, government affairs, insurance, health, safety, security, employee benefits, incentives, severance and environmental functional support. The portion of expenses that are specifically identifiable to the Predecessor Assets are directly recorded to the Predecessor, with the remainder allocated on the basis of headcount, throughput volumes, miles of pipe and other measures. Our management believes the assumptions underlying the financial statements, including the assumptions regarding the allocation of general corporate expenses from our Parent, are reasonable. Nevertheless, the financial statements may not include all of the expenses that would have been incurred, had we been a stand-alone entity during the periods prior to the IPO and may not reflect our financial position, results of operations and cash flows, had we been a stand-alone entity during such periods. See Note 6 - Related Party Transactions.

Prior to the IPO, the Predecessor Assets did not own or maintain separate bank accounts. Our Parent used a centralized approach to cash management and historically funded our operating and investing activities as needed within the boundaries of a documented funding agreement. Accordingly, cash held by our Parent at the corporate level was not allocated to us for any of the periods prior to the IPO. During such periods, we reflected the cash generated by our operations and expenses paid by our Parent on our behalf as a component of Net parent investment on our condensed consolidated balance sheets, and as a net distribution to our Parent on our condensed consolidated statements of cash flows. We also did not include any interest income on the net cash transfers to our Parent. In connection with the IPO, we established our own cash accounts for the funding of our operating and investing activities.

All financial information presented for the periods after the IPO represents the condensed consolidated results of operations, financial position and cash flows of the Partnership. Accordingly:

Our condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and condensed consolidated statement cash flows for the nine months ended September 30, 2018 consist of the consolidated results of the Partnership. Our condensed consolidated statements of operations for the three and nine months ended September 30, 2017 and condensed consolidated statement cash flows for the nine months ended September 30, 2017 consist of the combined results of the Predecessor.
Our condensed consolidated balance sheets at September 30, 2018 and December 31, 2017 consist of the consolidated balances of the Partnership.
Our condensed consolidated statement of changes in equity for the nine months ended September 30, 2018 consist of the consolidated results for the Partnership. Our condensed consolidated statement of changes in equity for the nine months ended September 30, 2017 consists of the combined results of the Predecessor.


8



BP MIDSTREAM PARTNERS LP  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)


Summary of Significant Accounting Policies

There have been no significant changes to our accounting policies as disclosed in Note 2 - Summary of Significant Accounting Policies in our 2017 Annual Report.

Recent Accounting Pronouncements Not Yet Adopted

Topic 606

In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic 606)". ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The core principle of the new standard is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

In August 2015, the FASB issued ASU 2015-14 to defer the adoption date for ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period for public business entities and to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019 for all other entities. This ASU is effective as of January 1, 2019 for an emerging growth company ("EGC"). We expect to transition from EGC status to large accelerated as of December 31, 2018, as such we will reflect the adoption in our Annual Report on Form 10-K for the year ending December 31, 2018.

In March 2016, ASU 2014-09 was further amended by the provisions of ASU 2016-08, "Principal versus Agent Considerations (Reporting Revenue Gross versus Net)," in April 2016 by the provisions of ASU 2016-10, "Identifying Performance Obligations and Licensing", in May 2016 by the provisions of ASU 2016-12, "Narrow-Scope Improvements and Practical Expedients", in December 2016 by the provisions of ASU 2016-20, "Technical Corrections to Topic 606, Revenue from Contracts with Customers" and in September 2017 by the provisions of ASU 2017-13, "Revenue Recognition (Topic 605) and Revenue from Contracts with Customers (Topic 606)."

We have evaluated the impact that the adoption of the provisions under Topic 606 will have on our revenue contracts, consolidated financial statements and the accompanying notes. Based upon our assessment, we have not identified any material differences in the amount of revenue recognized; but Topic 606 may have an immaterial impact on the timing of revenue recognition for some reporting periods. Topic 606 will require the disclosure of further detail regarding our performance obligations, changes in assets and liabilities balances and transaction price allocated to performance obligations that are unsatisfied as of the end of the reporting period. We will adopt the new standard under the modified retrospective transition method.

Topic 842

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)", which improves transparency and comparability among organizations by requiring lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. It also requires additional disclosures about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities and for annual reporting periods beginning after December 15, 2019 and interim reporting periods beginning after December 15, 2020 for all other entities. This ASU is effective as of January 1, 2019 for us, as we expect to transition from EGC status to large accelerated as of December 31, 2018.

In January 2018, the FASB issued ASU 2018-01, "Leases (Topic 842), Land Easement Practical Expedient for Transition to Topic 842". This ASU permits an entity to continue to apply its current accounting policy for land easements that existed before the effective date of Topic 842. Once an entity adopts Topic 842, it would apply prospectively to all new (or modified) land easements to determine whether the arrangement contains a lease. Topic 842 requires adoption by application of a modified retrospective transition approach and is effective for us on the same effective date as ASU 2016-02.

In July 2018, the FASB issued ASU 2018-11, "Leases (Topic 842): Targeted Improvements." This ASU permits an entity to elect an additional transition method to existing modified retrospective transition requirements. An entity can recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for the periods prior to adoption.

9



BP MIDSTREAM PARTNERS LP  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)


We are in the process of finalizing our review of our lease agreements and evaluating internal controls to support management in the accounting and disclosure of leasing activities. While we are still evaluating the impact the adoption of these standards will have on our consolidated financial statements and the accompanying notes, we currently believe the most significant changes to our financial statements will be the recognition of a lease liability and offsetting right-of-use asset in our consolidated balance sheet for operating leases under the modified retrospective transition method. We will have our assessment completed prior to December 31, 2018 and ASU 2016-02 will be effective for us as of January 1, 2019.

For additional information on accounting pronouncements issued prior to December 2017, see Note 2 - Summary of Significant Accounting Policies in our 2017 Annual Report.

2. Equity Method Investments

We account for our ownership interests in Mars and the Mardi Gras Joint Ventures using the equity method for financial reporting purposes. Our financial results include our proportionate share of the Mars’ and Mardi Gras Joint Ventures’ net income, which is reflected in Income from equity method investments on the condensed consolidated statements of operations.

Summarized financial information for each of our equity method investments on a 100% basis is as follows:
 
Three Months Ended September 30, 2018
 
 
 
Mardi Gras Joint Ventures
 
 
 
Mars
 
Caesar
 
Cleopatra
 
Proteus
 
Endymion
 
Total Mardi Gras Joint Ventures
 
Total
Statement of operations data
Revenues
$
69,404

 
$
12,366

 
$
6,195

 
$
7,262

 
$
7,871

 
$
33,694

 
$
103,098

Operating expenses
26,456

 
4,296

 
3,732

 
3,978

 
4,317

 
16,323

 
42,779

Net income
42,949

 
8,070

 
2,463

 
3,284

 
3,664

 
17,481

 
60,430

 
Nine Months Ended September 30, 2018
 
 
 
Mardi Gras Joint Ventures
 
 
 
Mars
 
Caesar
 
Cleopatra
 
Proteus
 
Endymion
 
Total Mardi Gras Joint Ventures
 
Total
Statement of operations data
Revenues
$
178,446

 
$
33,801

 
$
17,178

 
$
24,167

 
$
26,299

 
$
101,445

 
$
279,891

Operating expenses
69,485

 
11,723

 
8,423

 
10,249

 
12,545

 
42,940

 
112,425

Net income
108,972

 
22,078

 
8,755

 
13,918

 
14,084

 
58,835

 
167,807



10



BP MIDSTREAM PARTNERS LP  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)

The table below summarizes the balances and activities related to each of our equity method investments that we recorded for the three and nine months ended September 30, 2018:

Three Months Ended September 30, 2018


 
Mardi Gras Joint Ventures
 


Mars
 
Caesar
 
Cleopatra
 
Proteus
 
Endymion
 
Total Mardi Gras Joint Ventures
 
Total
Beginning Balance
$
58,688

 
$
120,834

 
$
121,547

 
$
83,981

 
$
85,024

 
$
411,386

 
$
470,074

Distributions
(13,167
)
 
(4,760
)
 
(2,544
)
 
(3,510
)
 
(3,835
)
 
(14,649
)
 
(27,816
)
Income from equity method investments
12,241

 
4,519

 
1,306

 
2,135

 
2,380

 
10,340

 
22,581

Ending Balance
$
57,762

 
$
120,593

 
$
120,309

 
$
82,606

 
$
83,569

 
$
407,077

 
$
464,839

 
Nine Months Ended September 30, 2018
 

 
Mardi Gras Joint Ventures
 

 
Mars
 
Caesar
 
Cleopatra
 
Proteus
 
Endymion
 
Total Mardi Gras Joint Ventures
 
Total
Beginning Balance
$
65,561

 
$
123,586

 
$
123,512

 
$
87,144

 
$
88,196

 
$
422,438

 
$
487,999

Cumulative effect of accounting change*
(2,746
)
 

 

 

 

 

 
(2,746
)
Distributions
(36,110
)
 
(15,357
)
 
(7,844
)
 
(13,585
)
 
(13,780
)
 
(50,566
)
 
(86,676
)
Income from equity method investments
31,057

 
12,364

 
4,641

 
9,047

 
9,153

 
35,205

 
66,262

Ending Balance
$
57,762

 
$
120,593

 
$
120,309

 
$
82,606

 
$
83,569

 
$
407,077

 
$
464,839

 
 
 
 
 
 
 
 
 
 
 
 
 
 
* The financial results of Mars reflect the adoption of ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" on January 1, 2018 under the modified retrospective transition method through a cumulative adjustment to equity. Our impact from this accounting change to our Mars investment was $(2,746), offset to partners' capital. The Mardi Gras Joint Ventures will adopt this ASU on January 1, 2019.

3. Property, Plant and Equipment

Property, plant and equipment consisted of the following:
 
 
September 30,
 
December 31,
 
 
2018
 
2017
Land
 
$
155

 
$
155

Right-of-way assets
 
1,380

 
1,380

Buildings and improvements
 
12,032

 
12,032

Pipelines and equipment
 
92,208

 
92,083

Other
 
509

 
509

Construction in progress
 
1,426

 
67

     Property, plant and equipment, gross
 
107,710

 
106,226

Less: Accumulated depreciation
 
(38,720
)
 
(36,738
)
     Property, plant and equipment, net
 
$
68,990

 
$
69,488



11



BP MIDSTREAM PARTNERS LP  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)

4. Accrued Liabilities

Accrued liabilities consisted of the following:
 
 
September 30,
 
December 31,
 
 
2018
 
2017
Current portion of environmental remediation obligations
 
$
882

 
$
1,655

Other accrued liabilities
 
3,681

 
2,826

Accrued liabilities
 
$
4,563

 
$
4,481


Accrued interest and fees related to our credit facility were $155 and $159 as of September 30, 2018 and December 31, 2017, respectively, included in Other accrued liabilities. See Note 5 - Debt for further discussion of accrued interest and fees on debt with our related party.

5. Debt

On October 30, 2017, the Partnership entered into a $600.0 million unsecured revolving credit facility agreement (the “Credit Facility”) with an affiliate of BP. A summary of certain key terms of the Credit Facility is included in Note 7 - Debt in our 2017 Annual Report.

On May 4, 2018, the Partnership repaid outstanding borrowings under the Credit Facility. This short-term debt had a principal balance of $15.0 million at the time of repayment and the repayment was made using cash on hand.

There were $0 of outstanding borrowings under the Credit Facility at September 30, 2018 and $15 million outstanding at December 31, 2017. Interest charges and fees related to the Credit Facility were $0.2 million and $0.6 million for the three and nine months ended September 30, 2018 respectively, and $0 for the three and nine months ended September 30, 2017.

This facility includes customary fees, including a commitment fee of 0.10% and a utilization fee of 0.20% per annum.

6. Related Party Transactions

Related party transactions include transactions with our Parent and our Parent’s affiliates, including those entities in which our Parent has an ownership interest but does not have control. In addition to the fixed loss allowance (“FLA”) arrangements discussed in Note 2- Summary of Significant Accounting Policies in our 2017 Annual Report and the Credit Facility discussed above, we have entered into the following transactions with our related parties:

Omnibus Agreement

In connection with the IPO, the Partnership entered into an omnibus agreement with BP Pipelines and certain of its affiliates, including BP Midstream Partners GP LLC (our "general partner"). This agreement addresses, among other things, (i) the Partnership's obligation to pay an annual fee for general and administrative services provided by BP Pipelines and its affiliates, (ii) the Partnership's obligation to reimburse BP Pipelines for personnel and other costs related to the direct operation, management and maintenance of the assets and (iii) the Partnership's obligation to reimburse BP Pipelines for services and certain direct or allocated costs and expenses incurred by BP Pipelines or its affiliates on behalf of the Partnership.

Pursuant to the omnibus agreement, BP Pipelines will indemnify the Partnership and fund the costs of required remedial action for its known historical and legacy spills and releases and other environmental and litigation claims identified in the omnibus agreement. BP Pipelines will also indemnify the Partnership with respect to subsidiaries for which it is the operator for certain title defects and for failures to obtain certain consents and permits necessary to conduct its business for one year following the closing of our IPO.

Further, the omnibus agreement addresses the granting of a license from BPA to the Partnership with respect to use of certain BP trademarks and trade name.


12



BP MIDSTREAM PARTNERS LP  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)

Cash Management Program

Prior to the IPO, we did not have our standalone cash accounts but participated in our Parent’s centralized cash management and funding system. See Note 1 - Business and Basis of Presentation for further discussion.

In connection with the IPO, we established our own cash accounts for the funding of our operating and investing activities but continued to participate in our Parent’s centralized cash management and funding system.

Related Party Revenue     

We provide crude oil, refined products and diluent transportation services to related parties and generate revenue through published tariffs. We have commercial arrangements with BP Products North America, Inc. ("BP Products") that include minimum volume commitments. Under these fee-based agreements, we provide transportation services to BP Products and BP Products has committed to pay us for minimum volumes of crude oil, refined products and diluent, regardless of whether such volumes are physically shipped by BP Products through our pipelines during the term of the agreements. See Note 8 - Related Party Transactions in our 2017 Annual Report for further discussion regarding these agreements. We also have a FLA arrangement with BP Products, which provides us with additional income. See Note 8 - Fair Value Measurements for further information.

Our revenue from related parties was $31,566 and $85,556 for the three and nine months ended September 30, 2018 respectively, and $26,778 and $78,832 for the three and nine months ended September 30, 2017, respectively.

We recognized $3,857 in deficiency revenue under the throughput and deficiency agreements with BP Products for the three and nine months ended September 30, 2018, and $0 for the three and nine months ended September 30, 2017. We recorded $729 and $0 in Deferred revenue and credits on our condensed consolidated balance sheets at September 30, 2018 and December 31, 2017, respectively.

Related Party Expenses

All employees performing services on behalf of our operations are employees of our Parent. Our Parent also procures our insurance policies on our behalf and performs certain general corporate functions for us related to finance, accounting, treasury, legal, information technology, human resources, shared services, government affairs, insurance, health, safety, security, employee benefits, incentives, severance and environmental functional support. Personnel and operating costs incurred by our Parent on our behalf are included in either Operating expenses – related parties or General and administrative – related parties in the condensed consolidated statements of operations, depending on the nature of the service provided.

Prior to our IPO, we were allocated operating and indirect general corporate expenses incurred by our Parent. See Note 1 - Business and Basis of Presentation for a summary of the allocation methodology.

Subsequent to the IPO, we pay BP Pipelines an annual fee of $13,300 in the form of monthly installments under the omnibus agreement for general and administrative services provided by BP Pipelines and its affiliates. We also reimburse BP Pipelines for personnel and other costs related to the direct operation, management and maintenance of the assets and services and certain direct or allocated costs and expenses incurred by BP Pipelines or its affiliates on our behalf pursuant to the terms in the omnibus agreement.

For the three and nine months ended September 30, 2018 and 2017, we recorded the following amounts for related party expenses, which also included the expenses related to share-based compensation discussed below:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
 
2017
 
2018
 
 
2017
 
 
 
 
 
Predecessor
 
 
 
 
Predecessor
Operating expenses—related parties
 
$
1,506

 
 
$
1,945

 
$
3,494

 
 
$
5,812

Maintenance expenses—related parties
 
31

 
 
65

 
75

 
 
257

General and administrative—related parties
 
3,691

 
 
1,210

 
10,556

 
 
3,571

Total costs and expenses—related parties
 
$
5,228

 
 
$
3,220

 
$
14,125

 
 
$
9,640


13



BP MIDSTREAM PARTNERS LP  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)


Share-based Compensation

Certain employees of our Parent supporting our operations were historically granted awards under share option plans and equity-settled employee share plans. Prior to the IPO, these share-based compensation costs were allocated to us as part of the cost allocations from our Parent. These costs were $84 and $188 for the three and nine months ended September 30, 2017, respectively, recorded in General and administrative – related parties on the condensed consolidated statements of operations.

Subsequent to the IPO, the share-based compensation related to the employees of our Parent who provide services to us is charged to the Partnership pursuant to the terms of the omnibus agreement. The Partnership also issued its own unit-based compensation under our long term incentive plan. See Note 11 - Unit-Based Compensation.

Non-controlling Interests

We control and consolidate Mardi Gras via an agreement between us and our Parent, under which we have the right to vote 100% of Mardi Gras’ ownership interests in each of the Mardi Gras Joint Ventures. Non-controlling interests consist of the 80% ownership interest in Mardi Gras retained by our Parent upon the completion of the IPO and held at September 30, 2018. Net income attributable to non-controlling interests is the product of the non-controlling interests ownership percentage and the net income of Mardi Gras. We report Non-controlling interests as a separate component of equity on our condensed consolidated balance sheets and Net income attributable to non-controlling interests on our condensed consolidated statements of operations.

7. Net Income Per Limited Partner Unit

On February 15, 2018, we paid a prorated quarterly cash distribution of $0.1798 per limited partner unit to unitholders of record on February 1, 2018, for the period from October 30 through December 31, 2017.

On May 15, 2018, we paid a quarterly cash distribution of $0.2675 per limited partner unit to unitholders of record on May 1, 2018, for the period from January 1 through March 31, 2018.

On August 15, 2018, we paid a quarterly cash distribution of $0.2725 per limited partner unit to unitholders of record on August 1, 2018, for the period from April 1 through June 30, 2018.

On October 12, 2018, the board of directors of our general partner declared a quarterly cash distribution of $0.2915 per limited partner unit to unitholders of record on November 1, 2018, for the period from July 1 through September 30, 2018. This distribution will be paid on November 15, 2018.

Net income per limited partner unit is only calculated for the three and nine months ended September 30, 2018 as no units were outstanding in the same periods of 2017. The following tables show the allocation of net income to arrive at net income per limited partner unit for the three and nine months ended September 30, 2018:

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2018
Net income attributable to the Partnership
 
$
35,219

 
$
96,228

Less:
 

 

Incentive distribution rights currently held by the General Partner
 

 

Limited partners' distribution declared on common units
 
15,268

 
43,550

Limited partners' distribution declared on subordinated units
 
15,268

 
43,550

Net income attributable to the Partnership in excess of distributions
 
$
4,683

 
$
9,128



14



BP MIDSTREAM PARTNERS LP  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)

 
 
 
Three Months Ended September 30, 2018
 
 
 
General Partner
 
Limited Partners' Common Units
 
Limited Partners' Subordinated Units
 
Total
Distributions declared
 
$

 
$
15,268

 
$
15,268

 
$
30,536

Net income attributable to the Partnership in excess of distributions

 
2,341

 
2,342

 
4,683

Net income attributable to the Partnership
$

 
$
17,609

 
$
17,610

 
$
35,219

Weighted average units outstanding:
 
 
 
 
 
 
 
Basic
 
 
 
 
52,376

 
52,376

 
104,752

Diluted
 
 
 
 
52,383

 
52,376

 
104,759

Net income per limited partner unit (in dollars):
 
 
 
 
 
 
 
Basic
 
 
 
 
$
0.34

 
$
0.34

 
 
Diluted
 
 
 
 
$
0.34

 
$
0.34

 
 
 
 
 
Nine Months Ended September 30, 2018
 
 
 
General Partner
 
Limited Partners' Common Units
 
Limited Partners' Subordinated Units
 
Total
Distributions declared
$

 
$
43,550

 
$
43,550

 
$
87,100

Net income attributable to the Partnership in excess of distributions
$

 
$
4,564

 
$
4,564

 
9,128

Net income attributable to the Partnership
$

 
$
48,114

 
$
48,114

 
$
96,228

Weighted average units:


 


 


 


Basic
 
 


 
52,376

 
52,376

 
104,752

Diluted
 
 

 
52,383

 
52,376

 
104,759

Net income per limited partner unit (in dollars):


 


 


 


Basic
 
 


 
$
0.92

 
$
0.92

 


Diluted


 
$
0.92

 
$
0.92

 



8. Fair Value Measurements

We measure assets and liabilities requiring fair value presentation and disclose such amounts according to the quality of valuation inputs under the fair value hierarchy. The carrying amounts of our financial instruments included in current assets and current liabilities approximate fair value due to their short-term nature and maturity.

Our tariff for crude oil transportation on BP2 includes a fixed percentage FLA per barrel, which is a separate fee under the applicable crude oil tariff to cover evaporation and other loss in transit. In the periods presented, all our revenue on BP2 was generated from services to our Parent. We recognize FLA income in Revenue - related parties in the condensed consolidated statements of operations during the periods when commodities are transported.

Allowance oil receivable incurred prior to October 1, 2017 contained an embedded derivative, which we recorded at fair value on the condensed consolidated balance sheets together with its host arrangement. We recorded the changes in fair value in Other income (loss) on the condensed consolidated statements of operations. Allowance oil receivable balance incurred prior to October 1, 2017, including the embedded derivative, was classified as Level 2 in the fair value hierarchy. Such balances were entirely settled upon the IPO.

Allowance oil receivable incurred subsequent to October 1, 2017 no longer contains an embedded derivative or results in gain or loss related to the change in its fair value pursuant to the revised settlement price determination in a related party agreement

15



BP MIDSTREAM PARTNERS LP  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)

between us and our Parent. We now settle the allowance oil at the end of each period; therefore, the balances are entirely recorded in Accounts receivable - related parties after October 1, 2017.

In the three and nine months ended September 30, 2018, we recognized FLA income of $2,691 and $7,691, respectively. In the three and nine months ended September 30, 2017, we recognized FLA income of $2,243 and $6,240, respectively, and a gain/(loss) due to the changes in fair value of $380 and $(108), respectively, related to the FLA arrangement with our Parent.

9. Income Taxes

Prior to our IPO, the Predecessor was a part of BPA and was included in the income tax returns of BPA. Our tax provision prior to the IPO was prepared on a separate return basis, as if the Predecessor was a separate group of companies under common ownership. The Predecessor recorded income tax expense of $7,403 and $23,219 for the three and nine months ended September 30, 2017, respectively.

BP Midstream Partners LP is not a taxable entity for U.S. federal and state income tax purposes. Taxes on our net income are generally borne by our partners through the allocation of taxable income. The condensed consolidated financial statements, therefore, do not include a provision for income tax after the IPO.

10. Commitments and Contingencies

Legal Proceedings

From time to time, we are party to ongoing legal proceedings in the ordinary course of business. For each of our outstanding legal matters, if any, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies and the likelihood of an unfavorable outcome. While the outcome of these proceedings cannot be predicted with certainty, we do not believe the results of these proceedings, individually or in the aggregate, will have a material adverse effect on our business, financial condition, results of operations or liquidity.

Indemnification

Under our omnibus agreement, our Parent will indemnify us for certain environmental liabilities, litigation and other matters attributable to the ownership or operation of our assets prior to the closing of the IPO. For the purposes of determining the indemnified amount of any loss suffered or incurred by the Partnership, the Partnership’s ownership of 28.5% in Mars, and 20% in Mardi Gras, and Mardi Gras’ 56% ownership in Caesar, 53% ownership in Cleopatra, 65% ownership in Endymion and 65% ownership in Proteus will be taken into account. Indemnification for certain identified environmental liabilities is subject to a cap of $25.0 million without any deductible. Other matters covered by the omnibus agreement are subject to a cap of $15.0 million and an aggregate deductible of $0.5 million before we are entitled to indemnification. Indemnification for any unknown environmental liabilities is limited to liabilities due to occurrences prior to the closing of the IPO and that are identified before the third anniversary of the closing of the IPO.

Environmental Matters

We are subject to federal, state, and local environmental laws and regulations. We record provisions for environmental liabilities based on management’s best estimates, using all information that is available at the time. In making environmental liability estimations, we consider the material effect of environmental compliance, pending legal actions against us and potential third-party liability claims. Often, as the remediation evaluation and effort progresses, additional information is obtained, requiring revisions to estimated costs. We are indemnified by our Parent under the omnibus agreement against environmental cleanup costs for incidents that occurred prior to the IPO. Subsequent to the IPO, revisions to the estimated environmental liability for conditions that are not indemnified under the omnibus agreement with our Parent are reflected in our condensed consolidated statements of operations in the year in which they are probable and reasonably estimable.

We accrued $4,192 and $4,438 for environmental liabilities at September 30, 2018 and December 31, 2017, respectively. The balances are related to incidents that occurred prior to the IPO and are entirely indemnified by our Parent. As a result, we recorded corresponding indemnification assets of $4,192 and $4,438 on the condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017.
 

16



BP MIDSTREAM PARTNERS LP  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)

11. Unit-Based Compensation

Long-Term Incentive Plan

Our general partner has adopted the BP Midstream Partners LP 2017 Long Term Incentive Plan (the “LTIP”). Awards under the LTIP are available for eligible officers, directors, employees and consultants of the general partner and its affiliates, who perform services for the Partnership. The LTIP allows the Partnership to grant unit options, unit appreciation rights, restricted units, phantom units, unit awards, cash awards, performance awards, distribution equivalent rights, substitute awards and other unit-based awards. The maximum aggregate number of common units that may be issued pursuant to the awards granted under the LTIP shall not exceed 5,502,271, subject to proportionate adjustment in the event of unit splits and similar events.

Unit-Based Awards under the LTIP

The following is a summary of phantom unit award activities of the Partnership’s common units for the nine months ended September 30, 2018:
 
Phantom Units
 
Number of Units (in units)
 
Weighted Average Grant Date Fair Value per Unit (in dollars)
Outstanding at December 31, 2017
8,468

   
$
17.48

Granted
3,737

   
20.07

Outstanding at September 30, 2018
12,205

   
$
18.27

Vested at September 30, 2018

 


For the three and nine months ended September 30, 2018, total compensation expense recognized for phantom unit awards was $56 and $140, respectively. The unrecognized compensation cost related to phantom unit awards was $63 at September 30, 2018, which is expected to be recognized over a weighted average period of 0.3 years. There were no forfeitures for the nine months ended September 30, 2018.

12. Variable Interest Entity

We control and consolidate our variable interest entity in Mardi Gras because we are the primary beneficiary. Mardi Gras holds equity interests in the Mardi Gras Joint Ventures and accounts for them as equity method investments. Mardi Gras does not have any other operations or activities. See Note 15 - Variable Interest Entity in our 2017 Annual Report for further discussion.

The financial position of Mardi Gras at September 30, 2018 and December 31, 2017, its financial performance for the three and nine months ended September 30, 2018 and 2017 and cash flows for the nine months ended September 30, 2018 and 2017, as reflected in our condensed consolidated financial statements, are as follows:

 
September 30, 2018
 
December 31, 2017
Balance sheet
 
 
 
Equity method investments
$
407,077

 
$
422,438

Non-controlling interests
330,040

 
342,330



17



BP MIDSTREAM PARTNERS LP  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars, unless otherwise indicated)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,

2018
 
2017
 
2018
 
2017
Statement of operations
 
 
 
 
 
 
 
Income from equity method investments
$
10,340

 
*
 
$
35,205

 
*
Less: Net income attributable to non-controlling interests
8,272

 
*
 
28,163

 
*
Net impact on Net income attributable to the Partnership
$
2,068

 
*
 
$
7,042

 
*
* Information is not applicable as the interest in Mardi Gras was contributed to the Partnership on October 30, 2017.
 
Nine Months Ended September 30,

2018
 
2017
Statement of cash flows
 
 
 
Cash flows from operating activities


 
 
Distributions of earnings received from equity method investments
$
35,205

 
*
Cash flows from investing activities

 
 
Distribution in excess of earnings from equity method investments
15,362

 
*
Cash flows from financing activities

 
 
Distributions to non-controlling interests
(40,453
)
 
*
Net change on BPMP's cash and cash equivalents
$
10,114

 
*
* Information is not applicable as the interest in Mardi Gras was contributed to the Partnership on October 30, 2017.

13. Subsequent Events

We have evaluated subsequent events through the issuance of these condensed consolidated financial statements. Based on this evaluation, it was determined that no subsequent events occurred, other than the items noted below, that require recognition or disclosure in the condensed consolidated financial statements.

Cash Distribution

On October 12, 2018, we declared a cash distribution of $0.2915 per limited partner unit to unitholders of record on November 1, 2018, for the three months ended September 30, 2018. The distribution will be paid on November 15, 2018 and will total $30.5 million, with $13.9 million being distributed to our non-affiliated common unitholders and $16.6 million being distributed to BP Midstream Partners Holdings LLC ("BP Holdco") in respect of its ownership of our common and subordinated units.

Acquisition of Equity Interests

On October 1, 2018, pursuant to an Interest Purchase Agreement (the “Interest Purchase Agreement”) with BP Products North America Inc. (“BP Products”), BP Offshore Pipelines Company LLC (“BP Offshore”), and BP Pipelines we completed the acquisition of (i) an additional 45.0% interest in Mardi Gras, from BP Pipelines, (ii) a 25.0% interest in KM Phoenix Holdings LLC, a Delaware limited liability company, from BP Products, and (iii) a 22.6916% interest in URSA Oil Pipeline Company LLC, a Delaware limited liability company, from BP Offshore, in exchange for aggregate consideration of $468 million funded with borrowings under our revolving credit facility. The purchase will be accounted for as a transaction between entities under common control; as a result, we will recognize the acquired assets at their historical carrying value.

18




CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q (the “Quarterly Report”) includes various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). All statements other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected cost, prospects, plans and objectives of management, are forward-looking statements.

When used in this Quarterly Report, you can identify our forward-looking statements by words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “plan,” “predict,” “project,” “seek,” “target,” “could,” “may,” “should,” “would” or other similar expressions that convey the uncertainty of future events or outcomes, although not all forward-looking statements contain such identifying words. When considering forward-looking statements, you should carefully consider the risk factors and other cautionary statements described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 and other cautionary statements contained in this filing.

We based forward-looking statements on our current expectations and assumptions about future events and currently available information as to the outcome and timing of future events. We caution you that these statements are not guarantees of future performance as they involved assumptions that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecast in the forward-looking statements.

Forward-looking statements may include statements about:
The continued ability of BP and any non-affiliate customers to satisfy their obligations under our commercial and other agreements and the impact of lower market prices for crude oil, natural gas, refined products and diluent.
The volume of crude oil, natural gas, refined products and diluent we transport or store and the prices that we can charge our customers.
The tariff rates with respect to volumes that we transport through our regulated assets, which rates are subject to review and possible adjustment imposed by federal and state regulators.
Changes in revenue we realize under the fixed loss allowance provisions of our fees and tariffs resulting from changes in underlying commodity prices.
Fluctuations in the prices for crude oil, natural gas, refined products and diluent.
The level of onshore and offshore production and demand for crude oil, natural gas, refined products and diluent.
Our ability to successfully integrate recently acquired assets with our own and realize the anticipated benefits of such acquisitions.
Changes in global economic conditions and the effects of a global economic downturn on the business of BP and the business of its suppliers, customers, business partners and credit lenders.
Liabilities associated with the risks and operational hazards inherent in transporting and/or storing crude oil, natural gas, refined products and diluent.
Curtailment of operations or expansion projects due to unexpected leaks or spills; severe weather disruption; riots, strikes, lockouts or other industrial disturbances; or failure of information technology systems due to various causes, including unauthorized access or attack.
Costs or liabilities associated with federal, state and local laws and regulations relating to environmental protection and safety, including spills, releases and pipeline integrity.
Costs associated with compliance with evolving environmental laws and regulations on climate change.
Costs associated with compliance with safety regulations and system maintenance programs, including pipeline integrity management program testing and related repairs.
Changes in tax status.
Changes in the cost or availability of third-party vessels, pipelines, rail cars and other means of delivering and transporting crude oil, natural gas, refined products and diluent.
Direct or indirect effects on our business resulting from actual or threatened terrorist incidents or acts of war.
Changes in, and availability to us, of the equity and debt capital markets.

Should one or more of the risks or uncertainties described in this Quarterly Report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.

All forward-looking statements, expressed or implied, included in this Quarterly Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.


19




Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Quarterly Report.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

Unless otherwise stated or the context otherwise indicates, all references to “we,” “our,” “us,” “Predecessor Assets,” “Predecessor,” or similar expressions for time periods prior to the initial public offering (the "IPO") date of October 30, 2017 refer to BP Midstream Partners LP Predecessor, our predecessor for accounting purposes. For time periods subsequent to the IPO, “we,” “our,” “us,” or similar expressions refer to the legal entity BP Midstream Partners LP (the "Partnership"). The term “our Parent” refers to BP Pipelines (North America), Inc. (“BP Pipelines”), any entity that wholly owns BP Pipelines, indirectly or directly, including BP America Inc. and BP p.l.c. (“BP”), and any entity that is wholly owned by the aforementioned entities, excluding BP Midstream Partners LP Predecessor and the Partnership.

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 ended December 31, 2017 (our "2017 Annual Report").

Partnership Overview

We are a fee-based, growth-oriented master limited partnership formed by BP Pipelines on May 22, 2017 to own, operate, develop and acquire pipelines and other midstream assets. On October 30, 2017, the Partnership completed its IPO of common units representing limited partner interests. A total of 47,794,358 common units, including 5,294,358 common units pertaining to the exercise of the underwriters' over-allotment option, were issued to the public unitholders in connection with our IPO. On October 26, 2017, the Partnership's common units began trading on the New York Stock Exchange ("NYSE") under the symbol "BPMP".

Our assets consist of interests in entities that own crude oil, natural gas, refined products and diluent pipelines serving as key infrastructure for BP and other customers to transport onshore crude oil production to BP's crude oil refinery in Whiting, Indiana (the "Whiting Refinery") and offshore crude oil and natural gas production to key refining markets and trading and distribution hubs. Certain of our assets deliver refined products and diluent from the Whiting Refinery and other U.S. supply hubs to major demand centers.

As of September 30, 2018, our assets consisted of the following:    
    
BP Two Pipeline Company LLC, which owns the BP#2 crude oil pipeline system (“BP2”).
BP River Rouge Pipeline Company LLC, which owns the Whiting to River Rouge refined products pipeline system (“River Rouge”).
BP D-B Pipeline Company LLC, which owns the Diamondback diluent pipeline system (“Diamondback”). BP2, River Rouge, and Diamondback are located in the Midwest region of the United States, and together are referred to as the "Predecessor Assets" or the "Wholly Owned Assets".
A 28.5% ownership interest in Mars Oil Pipeline Company, LLC (“Mars”), which owns a major corridor crude oil pipeline system in the Gulf of Mexico. 
A 20% managing member interest in Mardi Gras Transportation System Company, LLC (“Mardi Gras”), which holds the following investments in joint ventures located in the Gulf of Mexico:
A 56% ownership interest in Caesar Oil Pipeline Company, LLC (“Caesar”),
A 53% ownership interest in Cleopatra Gas Gathering Company, LLC (“Cleopatra”),
A 65% ownership interest in Proteus Oil Pipeline Company, LLC (“Proteus”), and,
A 65% ownership interest in Endymion Oil Pipeline Company, LLC (“Endymion”). Together Endymion, Caesar, Cleopatra and Proteus are referred to as the “Mardi Gras Joint Ventures.”

Acquisition of Equity Interests

On October 1, 2018, pursuant to an Interest Purchase Agreement (the “Interest Purchase Agreement”) with BP Products North America Inc. (“BP Products”), BP Offshore Pipelines Company LLC (“BP Offshore”), and BP Pipelines we completed the acquisition of (i) an additional 45.0% interest in Mardi Gras, from BP Pipelines, (ii) a 25.0% interest in KM Phoenix Holdings LLC, a Delaware limited liability company, from BP Products, and (iii) a 22.6916% interest in URSA Oil Pipeline Company LLC, a Delaware limited liability company, from BP Offshore, in exchange for aggregate consideration of $468 million funded with

20


borrowings under our revolving credit facility. The purchase will be accounted for as a transaction between entities under common control; as a result, we will recognize the acquired assets at their historical carrying value.

How We Evaluate Our Operations

Our management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include: (i) safety and environmental metrics, (ii) revenue (including FLA) from throughput and utilization; (iii) 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 our operations. We have implemented
reporting programs requiring all employees and contractors of our Parent who provide services to us to record environmental and safety related incidents. Our management team uses these existing programs and data to evaluate trends and potential interventions to deliver on performance targets. We integrate health, occupational safety, process safety and environmental principles throughout our operations in order to reduce and eliminate environmental and safety related incidents.

Throughput

The amount of revenue our business generates primarily depends on our fee-based transportation agreements with shippers, our tariffs and the volumes of crude oil, natural gas, refined products and diluent that we handle on our pipelines. We generate the majority of our revenue by charging fees under long-term agreements with minimum volume commitments.

The volumes that we handle on our pipelines are primarily affected by the supply of, and demand for, crude oil, natural gas, refined products and diluent in the markets served directly or indirectly by our assets. Our results of operations are impacted by our ability to:

utilize any remaining unused capacity on, or add additional capacity to, our pipeline systems;
increase throughput volumes on our pipeline systems by making connections to existing or new third-party pipelines or other facilities, primarily driven by the anticipated supply of and demand for crude oil, natural gas, refined products and diluent;
identify and execute organic expansion projects; and
increase throughput volumes via acquisitions.

Operating Expenses and Total Maintenance Spend

Operating Expenses

Our management seeks to maximize our profitability by effectively managing our operating expenses. These expenses are comprised primarily of labor expenses (including contractor services), general materials, supplies, minor maintenance, utility costs (including electricity and fuel) and insurance premiums. Utility costs fluctuate based on throughput volumes and the grades of crude oil and types of refined products we handle. Our other operating expenses generally remain relatively stable across broad ranges of throughput volumes, but can fluctuate from period to period depending on the mix of activities performed during that period.

Total Maintenance Spend

We calculate Total Maintenance Spend as the sum of maintenance expenses and maintenance capital expenditures, excluding any reimbursable maintenance capital expenditures. We track these expenditures on a combined basis because it is useful to understanding our total maintenance requirements. Total Maintenance Spend for the nine months ended September 30, 2018 and 2017, respectively, is shown in the table below:

21


 
Nine Months Ended September 30,
 
2018
 
2017
 
(in thousands of dollars)
 
 
 
Predecessor
Wholly Owned Assets
 
 
 
Maintenance expenses
$
1,598

 
$
2,908

Maintenance capital expenditures
1,341

 
2,063

Total Maintenance Spend - Wholly Owned Assets
$
2,939

 
$
4,971


We seek to maximize our profitability by effectively managing our maintenance expenses, which consist primarily of safety and environmental integrity programs. We seek to manage our maintenance expenses on the pipelines we operate by scheduling maintenance over time to avoid significant variability in our maintenance expenses and minimize their impact on our cash flows, without compromising our commitment to safety and environmental stewardship.

Our maintenance expenses represent the costs we incur that do not significantly extend the useful life or increase the expected output of our property, plant and equipment. These expenses include pipeline repairs, replacements of immaterial sections of pipelines, inspections, equipment rentals and costs incurred to maintain compliance with existing safety and environmental standards, irrespective of the magnitude of such compliance expenses. Our maintenance expenses vary significantly from period to period because certain of our expenses are the result of scheduled safety and environmental integrity programs, which occur on a multi-year cycle and require substantial outlays.

Adjusted EBITDA and Cash Available for Distribution

We define 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. We define 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 our 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 plus net adjustments from volume deficiency agreements, less maintenance capital expenditures, net interest paid/received, cash reserves, and income taxes paid. 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 our condensed consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess:

our operating performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or financing methods;
the ability of our business to generate sufficient cash to support our decision to make distributions to our unitholders;
our ability to incur and service debt and fund capital expenditures; and
the 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

22


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 the Comparability of Our Financial Results

Our results of operations subsequent to the IPO are not comparable to our Predecessor’s historical results of operations for the reasons described below:

Revenues

Prior to July 1, 2017, our Predecessor did not have agreements that contained minimum volume commitments. As of July 1, 2017, we entered into a throughput and deficiency agreement with BP Products for transporting diluent on Diamondback under a joint tariff agreement with a third-party carrier that contains minimum volume requirements.  In connection with the IPO, we entered into additional throughput and deficiency agreements that contain minimum volume requirements with BP Products for each of our three Wholly Owned Assets. See Note 8 - Related Party Transactions in the Notes to Consolidated Financial Statements in our 2017 Annual Report.

Contribution of Interests in Investments

Immediately prior to the consummation of the IPO, BP Pipelines contributed to us 28.5% ownership interest in Mars and 20% managing member interest in Mardi Gras. We control and consolidate Mardi Gras via an agreement between us and our Parent, under which we have the right to vote 100% of Mardi Gras’ ownership interests in each of the Mardi Gras Joint Ventures. Historical Predecessor results of operations consist of only the Predecessor Assets.

Expenses

Our Predecessor’s operating and general and administrative expenses included charges for the management and operations of our assets and certain general corporate overhead, shared services and operating services allocated to us by BP Pipelines through October 29, 2017. These allocated expenses included but were not limited to finance, accounting, treasury, legal, information technology, human resources, shared services, government affairs, insurance, health, safety, security, employee benefits, incentives, severance and environmental functional support. These expenses were charged or allocated to our Predecessor Assets based on the nature of the expenses.

Subsequent to the IPO, BP Pipelines charges us a combination of fixed and reimbursable charges for administrative and operating services under our omnibus agreement. We pay an annual fee, initially $13.3 million, to BP Pipelines for general and administrative services. The omnibus fee is structured to support all of our onshore and offshore assets, while the expenses allocated to the Predecessor only covered the Wholly Owned Assets.

Income Taxes

Federal income taxes were reflected on the historical financial statements of our Predecessor. The Partnership is a pass-through entity for federal and state income tax purposes and is not subject to federal and state income tax expense in its financial results.

Financing

There are differences in the way we finance our operations as compared to the way our Predecessor historically financed its operations. Historically, our Predecessor’s operations were financed as part of BP Pipelines’ integrated operations, and our Predecessor did not record any separate costs associated with financing its operations. Our Predecessor largely relied on internally-generated cash flows and capital contributions from BP Pipelines to satisfy its capital expenditure requirements. Subsequent to the IPO, funding for future capital expenditures is primarily from external sources, including affiliate borrowings under our $600.0 million Credit Facility and potential future issuances of equity and debt securities.

We intend to make cash distributions to our 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 our unitholders and our general partner, as the holder of our incentive distribution rights, most of the cash generated by our operations.


23


Factors Affecting Our Business

Our business can be negatively affected by sustained downturns or slow growth in the economy in general, and is impacted by the mix of services requested by the customers of our pipelines, competition and changes in regulatory requirements affecting our customers’ operations.

Major Expansion Projects

One of our investees, Proteus, has an expansion project under construction in 2018. An affiliate of Royal Dutch Shell plc ("Shell") is currently building the Mattox pipeline, which will connect to Proteus for the mutual benefit of all parties involved. Through this upstream connection, Proteus will transport all of the volumes from Shell's recently sanctioned Appomattox platform. Proteus is also constructing a new connecting platform adjacent to South Pass 89E platform that will accommodate volumes from the Mattox pipeline. In addition, the new Proteus platform will provide space for future pumping equipment and the ability to increase the capacity of the Proteus system to over 700 kbpd.

The total project cost is expected to be approximately $386.0 million from 2015 to 2019, which are prepaid to Proteus from third-party investors that are not affiliated with the Partnership. During the three months ended September 30, 2018, Proteus incurred $48.8 million of capitalized costs. We expect the Appomattox expansion capital expenditures to be approximately $170.3 million for the twelve months of 2018, which includes $57.9 million for the remaining three months of 2018.

Customers

BP is our primary customer. Transportation revenue from BP represented 98.4% and 97.6% of our revenues for the three and nine months ended September 30, 2018, respectively, and 99.1% and 97.9% for the three and nine months ended September 30, 2017, respectively. BP’s volumes represented approximately 49.4% and 52.5% of the aggregate total volumes transported on the Wholly Owned Assets, Mars and the Mardi Gras Joint Ventures combined for the three and nine months ended September 30, 2018, respectively. BP’s volumes represented approximately 98.3% and 97.4% of the aggregate total volumes transported on the Wholly Owned Assets for the three and nine months ended September 30, 2017, respectively.

In addition, we transport crude oil, natural gas and diluent for a mix of third-party customers, including crude oil producers, refiners, marketers and traders, and our assets are connected to other crude oil, natural gas and diluent pipeline systems. In addition to serving directly connected Midwestern U.S. and Gulf Coast markets, our pipelines have access to customers in various regions of the United States and Canada through interconnections with other major pipelines. Our customers use our transportation 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.

Competition

Our pipelines face competition from a variety of alternative transportation methods including rail, water borne movements including barging and shipping, trucking and other pipelines that service the same markets as our pipelines. Competition for BP2 and River Rouge common carrier pipelines is based primarily on connectivity to sources of supply and demand, while Diamondback faces competition for Gulf Coast sourced diluent from third-party pipelines, which have made direct connections at Manhattan, Illinois. Our offshore pipelines compete for new production on the basis of geographic proximity to the production, cost of connection, available capacity, transportation rates and access to onshore markets.

Regulation

Our interstate common carrier pipelines are subject to regulation by various federal, state and local agencies including the FERC, the U.S. Environmental Protection Agency ("EPA") and the U.S. Department 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 our 2017 Annual Report.

Acquisition Opportunities

We plan to pursue acquisitions of complementary assets from BP as well as third parties. We also may pursue acquisitions jointly with BP Pipelines. Neither BP nor any of its affiliates are under any obligation, however, to sell or offer to sell us additional assets

24


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 particularly BP 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.

Seasonality

The volumes of crude oil, refined products and diluent transported in our pipelines are directly affected by the level of supply and demand for such commodities in the markets served directly or indirectly by our assets. However, many effects of seasonality on our revenue will be substantially mitigated through the use of our fee-based long-term agreements with BP Products that include minimum volume commitments.

Results of Operations

The following tables and discussion contain a summary of our consolidated results of operations for the three and nine months ended September 30, 2018 and 2017.
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands of dollars)
 
 
 
Predecessor
 
 
 
Predecessor
Revenue
$
32,074

 
$
27,016

 
$
87,628

 
$
80,544

Costs and expenses
 
 
 
 
 
 
 
Operating expenses
4,398

 
5,007

 
12,052

 
12,192

Maintenance expenses
671

 
1,427

 
1,598

 
2,908

Gain from disposition of property, plant and equipment






(6
)
General and administrative
5,287

 
1,222

 
13,355

 
3,627

Depreciation
663


675


1,987


2,007

Property and other taxes
165

 
113

 
388

 
267

Total costs and expenses
11,184

 
8,444

 
29,380

 
20,995

Operating income
20,890

 
18,572

 
58,248

 
59,549

Income from equity method investments
22,581

 

 
66,262

 

Other income (loss)

 
380

 

 
(108
)
Interest (income) expense, net
(20
)



119



Income before income taxes
43,491

 
18,952

 
124,391

 
59,441

Income tax expense


7,403




23,219

Net income
43,491

 
$
11,549

 
124,391

 
$
36,222

Less: Net income attributable to non-controlling interests
8,272

 
 
 
28,163

 
 
Net income attributable to the Partnership
$
35,219

 
 
 
$
96,228

 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA**
$
49,369

 
$
19,627

 
$
146,911

 
$
61,442

Less: Adjusted EBITDA attributable to non-controlling interests
11,719

 
*

 
40,453

 
*

Adjusted EBITDA attributable to the Partnership
$
37,650

 
*

 
$
106,458

 
*

* Information is not applicable for the periods prior to the IPO.
 
 
 
 
 
 
** See Reconciliation of Non-GAAP Measures below.
 
 
 
 
 
 
 

25




 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Pipeline throughput (thousands of barrels per day)(1)(2)
2018
 
2017
 
2018
 
2017
BP2
276

 
312

 
286

 
288

Diamondback
52

 
44

 
69

 
56

River Rouge
70

 
61

 
65

 
60

Total Wholly Owned Assets
398

 
417

 
420

 
404

 
 
 
 
 
 
 
 
Mars
580

 
480

 
499

 
476

 
 
 
 
 
 
 
 
Caesar
214

 
208

 
198

 
216

Cleopatra(3)
24

 
23

 
23

 
25

Proteus
150

 
157

 
169

 
159

Endymion
150

 
157

 
169

 
159

Mardi Gras Joint Ventures
538

 
545

 
559

 
559

 
 
 
 
 
 
 
 
Average revenue per barrel ($ per barrel)(2)(4)
 
 
 
 
 
 
 
Total Wholly Owned Assets
$
0.77

 
$
0.71

 
$
0.73

 
$
0.73

Mars
1.22

 
1.43

 
1.21

 
1.41

Mardi Gras Joint Ventures
0.68

 
0.66

 
0.66

 
0.67

(1) Pipeline throughput is defined as the volume of delivered barrels.
 
 
 
 
(2) Interests in Mars and Mardi Gras were contributed to the Partnership on October 30, 2017. Throughput and average revenue per barrel for Mars and the Mardi Gras Joint Ventures are presented on a 100% basis for the three and nine months ended September 30, 2018, and 2017. Data presented for Mars and Mardi Gras Joint Ventures for the three and nine months ended September 30, 2017 are for informational purposes only and are not included in our Predecessor financial results.
(3) Natural gas is converted to oil equivalent at 5.8 million cubic feet per one thousand barrels.
(4) Based on reported revenues from transportation and allowance oil divided by delivered barrels over the same time period.

Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017

Total revenue increased by $5.1 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. Revenue from BP2 decreased by $1.2 million attributable to a 11.5% decrease in throughput volume partially offset by 4.4% increase in weighted average tariff rate. Revenue from FLA on BP2 increased by $0.4 million. Revenue from River Rouge increased by $1.5 million due to a 14.8% increase in throughput volume and a 4.6% increase in the weighted average tariff rate. Revenue from Diamondback increased by $0.5 million due to a 19.6% increase in throughput volume and a 4.6% increase in weighted average tariff rate. We also recognized $2.6 million and $1.3 million in revenue from minimum volume deficiency on BP2 and Diamondback, respectively.

Operating expenses decreased by $0.6 million for the three months ended September 30, 2018, compared to the three months ended September 30, 2017 primarily due to a $0.9 decrease in insurance expense for Wholly Owned Assets and partially offset by an $0.3 million increase in right-of-way clearing.

Maintenance expense decreased by $0.8 million for the three months ended September 30, 2018, compared to the three months ended September 30, 2017 primarily due to a decrease in repairs and corrosion work on River Rouge.

General and administrative expense increased by $4.1 million, or 333%, in the three months ended September 30, 2018, compared to the three months ended September 30, 2017. For the three months ended September 30, 2018, general and administrative expenses primarily consist of $3.3 million under our omnibus agreement with our Parent. In addition, the three months ended September 30, 2018 included $1.0 million for transaction costs related to our acquisition in the fourth quarter. Subsequent to the IPO, general and administrative expenses previously allocated to the Predecessor are now covered in the omnibus agreement with our Parent.


26




Property and other tax expense remained flat at approximately $0.2 million and $0.1 million in the three months ended September 30, 2018 and 2017, respectively.

Income from equity method investments was $22.6 million in the three months ended September 30, 2018 due to earnings from Mars and Mardi Gras Joint Ventures subsequent to IPO compared to no income from equity method investments in 2017.

Other loss for the three months ended September 30, 2017 represents the changes in fair value of the embedded derivative associated with the allowance oil receivable incurred by our Predecessor prior to October 1, 2017. Pursuant to a related party agreement, allowance oil receivable incurred on and after October 1, 2017 is settled at the commodity prices of the movement month and no longer contains an embedded derivative that would result in gain and losses due to changes in fair value.

Net interest earned was less than $0.1 million for the three months ended September 30, 2018. We repaid $15 million in borrowings under our $600.0 million Credit Facility in May 2018 and earned interest on our cash deposits held by the Partnership in the period. The Predecessor entity in comparison had no related debt or credit facility to drive interest expense or any held cash deposits to earn interest income.

Income tax expense for the Predecessor entity in the three months ended September 30, 2017 was $7.4 million. Prior to the IPO, the Predecessor was included in the consolidated income tax returns of our Parent which is subject to federal and state income taxes. The effective tax rate during the three months ended September 30, 2017 was at 39.1%. Subsequent to the IPO, the Partnership is treated as a pass-through entity for federal and state income tax purposes. There is no federal and state income taxes for the period subsequent the IPO.

Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

Total revenue increased by $7.1 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. Revenue from BP2 increased by $0.2 million primarily attributable to a 1.3% increase in weighted average tariff rate that was offset by a 0.8% decrease in throughput volume. Revenue from FLA on BP2 increased by $1.5 million. Revenue from River Rouge increased by $2.1 million due to 8.4% increase in throughput volume and a 1.1% increase in the weighted average tariff rate. Revenue from Diamondback decreased by $0.3 million due to a 23.8% increase in throughput volume and a 21.4% decrease in weighted average tariff rate caused by a 94.7% increase in throughput volume from third parties at a lower tariff rate. We also recognized $2.6 million and $1.3 million in revenue from minimum volume deficiency on BP2 and Diamondback, respectively in the 2018 period. Other revenue decreased by $0.4 million compared to the prior year to date period.

Operating expenses decreased by $0.1 million for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017 primarily due to an $2.2 million increase in third party expenses and a decrease of $2.4 million in related party expenses. This change is due to the Partnership having its own insurance, so the expense is now reported as third party and not related party.

Maintenance expenses decreased by $1.3 million, or 45%, in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, primarily as a result of a decrease in spend on River Rouge related to repairs and corrosion work.

General and administrative expenses increased by $9.7 million, or 268%, in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017. For the nine months ended September 30, 2018, general and administrative expenses primarily consist of $10.0 million under our omnibus agreement with our Parent compared to $3.6 million allocated in the nine months ended September 30, 2017. There was also an increase of $1.7 million for professional services and other costs required as a publicly traded partnership, an increase of $1.0 million for transaction costs related to our acquisition in the fourth quarter and $0.3 million for unit based compensation fees.

Depreciation expense remained relatively flat at $2.0 million in both of the nine months ended September 30, 2018 and 2017.

Property and other tax expense increased slightly to $0.4 million from $0.3 million in nine months ended September 30, 2018 and 2017, respectively.

Income from equity method investments was $66.3 million in the nine months ended September 30, 2018 due to earnings from Mars and the Mardi Gras Joint Ventures subsequent to IPO compared to no income from equity method investments in 2017.

Other loss was $0.1 million in the nine months ended September 30, 2017. Other loss represents the changes in fair value of the embedded derivative associated with the allowance oil receivable incurred prior to October 1, 2017. Pursuant to a related party

27




agreement, allowance oil receivable incurred on and after October 1, 2017 is settled at the commodity prices of the movement month and no longer contains an embedded derivative that would result in gain and losses due to changes in fair value.

Interest expense, net was $0.1 million in the nine months ended September 30, 2018. In connection with the IPO, we entered into the $600.0 million Credit Facility. The $0.1 million of net interest consisted of interest expense and commitment and utilization fees, which were partially offset by interest income on cash deposits held by the Partnership.

Income tax expense in the nine months ended September 30, 2017 was $23.2 million for the Predecessor. Prior to the IPO, the Predecessor was included in the consolidated income tax returns of our Parent which is subject to federal and state income taxes. The effective tax rate during the nine months ended September 30, 2017 was at 39.1%. Subsequent to the IPO, the Partnership is treated as a pass-through entity for federal and state income tax purposes. There is no federal and state income taxes for the period subsequent to the IPO.

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
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands of dollars)
 
 
 
Predecessor
 
 
 
Predecessor
Reconciliation of Adjusted EBITDA and Cash Available for Distribution to Net Income
 
 
 
 
 
 
 
Net income
$
43,491

 
$
11,549

 
124,391

 
$
36,222

Add:
 
 
 
 
 
 
 
Depreciation
663

 
675

 
1,987

 
2,007

Gain from disposition of property, plant and equipment

 

 

 
(6
)
Income tax expense


7,403




23,219

Interest (income) expense, net
(20
)



119



Cash distributions received from equity method investments — Mars
13,167

 

 
36,110

 

Cash distributions received from equity method investments — Mardi Gras Joint Ventures
14,649

 

 
50,566

 

Less:
 
 
 
 
 
 
 
Income from equity method investments — Mars
12,241

 

 
31,057

 

Income from equity method investments — Mardi Gras Joint Ventures
10,340

 

 
35,205

 

Adjusted EBITDA
49,369

 
$
19,627

 
146,911

 
$
61,442

Less:
 
 
 
 
 
 
 
Adjusted EBITDA attributable to non-controlling interests
11,719

 
 
 
40,453

 
 
Adjusted EBITDA attributable to the Partnership
37,650

 
 
 
106,458

 
 
Add:
 
 
 
 
 
 
 
Net adjustments from volume deficiency agreements
(2,676
)
 
 
 
(1,853
)
 
 
Less:
 
 
 
 

 
 
Net interest paid/(received)
(20
)
 
 
 
126

 
 
Maintenance capital expenditures
869

 
 
 
1,341

 
 
Cash available for distribution attributable to the Partnership
$
34,125

 
 
 
$
103,138

 
 


28




 
Nine Months Ended September 30,
 
2018
 
2017
 
(in thousands of dollars)
 
 
 
Predecessor
Reconciliation of Adjusted EBITDA and Cash Available for Distribution to Net Cash Provided by Operating Activities
 
 
 
Net cash provided by operating activities
$
133,486

 
$
34,263

Add:
 
 
 
Income tax expense

 
23,219

Interest (income) expense, net
119

 

Distribution in excess of earnings from equity method investments
15,362

 

Changes in other assets and liabilities
(1,916
)
 
4,639

Less:
 
 
 
Non-cash adjustments
140

 
679

Adjusted EBITDA
$
146,911