BP Midstream Partners (BPMP) 10-Q2020 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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.

As of November 4, 2020, the registrant had 52,402,967 common units and 52,375,535 subordinated units outstanding.

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

Unless otherwise stated or the context otherwise indicates, all references to “we,” “our,” “us,” or similar expressions 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.

Business

BP Midstream Partners LP is a master limited partnership formed by BP Pipelines to own, operate, develop and acquire pipelines and other midstream assets. The Partnership's assets consist of interests in entities that own crude oil, natural gas, refined products and diluent pipelines and refined product terminals serving as key infrastructure for BP and other customers to transport onshore crude oil production to BP’s 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 assets deliver refined products and diluent from the Whiting Refinery and other U.S. supply hubs to major demand centers.

As of September 30, 2020, the Partnership's assets consisted of the following:

We generate a majority of revenue by charging fees for the transportation of crude oil, refined products and diluent through our pipelines under agreements with minimum volume commitments ("MVC"). We do not engage in the marketing and trading of any commodities. All operations are conducted in the United States, and all long-lived assets are located in the United States. Partnership operations consist of 1 reportable segment.

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

Basis of Presentation

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, 2020, and for the three and nine months ended September 30, 2020 and 2019, included herein, are unaudited. These financial statements include all known accruals and adjustments necessary, in the opinion of management, for a fair presentation of our condensed consolidated financial position, results of operations and cash flows. Unless otherwise specified, all such adjustments are of a normal and recurring nature. The unaudited results of operations for the interim periods reported are not necessarily indicative of results to be expected for the full year. These unaudited condensed consolidated financial statements 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, 2019 (the "Partnership's 2019 10-K").

Partnership financial position, results of operations and cash flows consist of consolidated BP Midstream Partners LP activities and balances. All intercompany accounts and transactions within the financial statements have been eliminated for all periods presented.

Summary of Significant Accounting Policies

We recognize revenue over time or at a point in time, depending on the nature of the performance obligations contained in the respective contract with customers. A performance obligation is our unit of account and it represents a promise in a contract to transfer goods or services to the customer. The contract transaction price, which is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, is allocated to each performance obligation and recognized as revenue when or as the performance obligation is satisfied. The following is an overview of our significant revenue stream, including a description of the respective performance obligations and related methods of revenue recognition.

Revenue from pipeline transportation is comprised of tariffs and fees associated with the transportation of liquid petroleum products, generally at published tariffs and in certain instances, revenue from MVC contracts at negotiated rates. Tariff revenue is recognized either at the point of delivery or at the point of receipt, pursuant to specifications outlined in the respective tariffs. We record revenue for crude oil, refined products and diluent transportation during the period in which they are earned (i.e., either physical delivery of product has taken place or the services designated in the contract have been performed). Partnership services are typically billed on a monthly basis, and we generally do not offer extended payment terms. We accrue revenue based on services rendered but not billed for that accounting month.

Billings to BP Products North America Inc. ("BP Products") for deficiency volumes under its MVCs, if any, are recorded as deferred revenue and credits, a contract liability, on the condensed consolidated balance sheets, as BP Products has the right to make up the deficiency volumes within the measurement period specified by the agreements. Deferred revenue under these arrangements is recognized into revenue once it is deemed remote that the customer will meet its required annual MVC. If the customer does satisfy its minimum volume commitment by shipping the deficiency volumes within the same calendar year, it may receive a refund of excess payments.

We recognized $5.1 million and $11.1 million of deficiency revenue under the throughput and deficiency agreements with BP Products for the three and nine months ended September 30, 2020, respectively. We recognized $2.4 million of deficiency revenue under the throughput and deficiency agreements with BP Products for the three and nine months ended September 30, 2019.

The tariff for crude oil transportation at BP2 includes a fixed loss allowance (“FLA”). An FLA factor per barrel, a fixed percentage, is a separate fee that is considered a part of the transaction price under the applicable crude oil tariff to cover

We recognized revenue of $1.6 million and $3.9 million in the three and nine months ended September 30, 2020, respectively, related to the FLA arrangements with our Parent. In the three and nine months ended September 30, 2019, we recognized revenue of $2.7 million and $7.8 million, respectively, related to FLA arrangements with our Parent.

The following table provides information about disaggregated revenue:

Contract assets and contract liabilities are the result of timing differences between revenue recognition, billings and cash collections. Contract liabilities or deferred revenue and credits primarily relate to consideration received from customers for temporary deficiency quantities under minimum volume contracts that the customer has the right to make up in a future period, which we subsequently recognize as revenue or amounts we credit back to the customer in a future period.

The following table provides information about receivables from contracts with customers, contract assets and contract liabilities:

We account for ownership interests in Mars, the Mardi Gras Joint Ventures, Ursa, and KM Phoenix using the equity method for financial reporting purposes. Financial results include the Partnership's proportionate share of Mars, the Mardi Gras Joint Ventures, Ursa and KM Phoenix, which is reflected in Income from equity method investments on the condensed consolidated statements of operations. We did 0t record any impairment loss on equity method investments during the three and nine months ended September 30, 2020 and 2019.

The table below summarizes the balances and activities related for each equity method investment ("EMI") recorded as of and for the three and nine months ended September 30, 2020 and 2019:

The following table presents aggregated selected income statement data for equity method investments on a 100% basis for the three and nine months ended September 30, 2020 and 2019:

Property, plant and equipment consisted of the following:

Other current liabilities consisted of the following:

Indebtedness under the term loan bears interest at the 3-month LIBOR plus 0.73%. For the three and nine months ended September 30, 2020, the weighted average interest rate for the term loan and the credit facility was 1.18% and 1.91%, respectively.

Omnibus Agreement

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

BP Pipelines will indemnify us for all known and certain unknown environmental liabilities that are associated with the ownership or operation of Partnership assets and due to occurrences on or before October 30, 2017, subject to certain limitations. Specifically, under our omnibus agreement, indemnification for any unknown environmental liabilities was limited to liabilities due to occurrences on or before October 30, 2017, which were identified prior to October 30, 2020. We continue to maintain indemnification by our general partner for matters previously discovered. To the extent that unknown environmental liabilities arise relating to prior ownership, the Partnership will be liable.

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.

Related Party Revenue

Revenue from related parties was $33.1 million and $93.5 million for the three and nine months ended September 30, 2020, respectively, and $33.9 million and $91.2 million for the three and nine months ended September 30, 2019, respectively.

Related Party Expenses

All employees performing services on behalf of Partnership operations are employees of our Parent. Our Parent also procures 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.

We paid our Parent an annual fee of $13.6 million in 2019 in the form of monthly installments under the omnibus agreement for general and administrative services provided by our Parent and its affiliates. The annual fee was adjusted to $15.2 million per year, payable in equal monthly installments, beginning on January 1, 2020. During the second quarter of 2020, our Parent agreed to adjust the fee payable under the Omnibus Agreement back to the 2019 annual fee, beginning in the second quarter, prorated for the remainder of 2020 due to the ongoing economic effects of the global COVID-19 pandemic. A new fee will be in place for 2021. We also reimburse our Parent for personnel and other costs related to the direct operation, management and

For the three and nine months ended September 30, 2020 and 2019, we recorded the following amounts for related party expenses, which also included the expenses related to share-based compensation discussed below:

Share-based Compensation

Our Parent operates share option plans and equity-settled employee share plans. These plans typically have a three-year performance or restricted period during which the units accrue net notional dividends, which are treated as having been reinvested. Leaving employment will normally preclude the conversion of units into shares, but special arrangements apply for participants that leave for qualifying reasons.

Non-controlling Interests

Non-controlling interests consist of the 35% ownership interest in Mardi Gras held by our Parent at September 30, 2020 and 2019. 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 the condensed consolidated balance sheets and Net income attributable to non-controlling interests on the condensed consolidated statements of operations.

The following table details the distributions declared and/or paid for the periods presented:

Earnings in excess of distributions are allocated to the limited partners based on their respective percentage interests. Payments made to the Partnership’s unitholders are determined in relation to actual distributions declared and are not based on the net income allocations used in the calculation of net income per unit.

In addition to the common and subordinated units, the Partnership also identified the incentive distribution rights ("IDRs") currently held by the General Partner as a participating security and uses the two-class method when calculating the net income

When calculating basic earnings per unit under the two-class method for a master limited partnership, net income for the current reporting period is reduced by the amount of available cash that will be distributed to the General Partner and limited partners for that reporting period. The following tables show the allocation of net income to arrive at net income per limited partner unit for the three and nine months ended September 30, 2020 and 2019:

The carrying amounts of accounts receivable, other current assets, accounts payable, and other current liabilities approximate their fair values due to their short-term nature.

The carrying value of borrowings under the term loan as of September 30, 2020, and the credit facility as of December 31, 2019, approximate fair value as the interest rates are reflective of market rates.

Legal Proceedings

The Partnership is a party to ongoing legal proceedings in the ordinary course of business. For each outstanding legal matter, if any, we will evaluate the merits of the case, 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 the Partnership's business, financial condition, results of operations or liquidity.

Indemnification

Under an omnibus agreement, our Parent will indemnify us for certain environmental liabilities, litigation and other matters attributable to the ownership or operation of assets prior to Partnership ownership. For the purposes of determining the indemnified amount of any loss suffered or incurred by the Partnership, the Partnership’s ownership of 28.5% in Mars, and 65% in Mardi Gras, and Mardi Gras’ 56% ownership in Caesar, 53% ownership in Cleopatra, 65% ownership in Endymion and 65% ownership in Proteus will be considered. Indemnification for certain identified environmental liabilities is subject to a cap of $25 million without any deductible. Other matters covered by the omnibus agreement are subject to a cap of $15 million and an aggregate deductible of $0.5 million before we are entitled to indemnification. Indemnification for any unknown environmental

The Interest Purchase Agreement contains customary representations, warranties and covenants of our Parent and the Partnership. Our Parent, on the one hand, and the Partnership, on the other hand, have agreed to indemnify each other and their respective affiliates, officers, directors and other representatives against certain losses, including those resulting from any breach of their representations, warranties or covenants contained in the Interest Purchase Agreement, subject to certain limitations and survival periods. This agreement covers the Partnership’s ownership of 22.7% in Ursa and 25% in KM Phoenix.

Environmental Matters

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

Griffith Station Incident

Long-Term Incentive Plan

On October 26, 2017, the General Partner 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

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, 2020:

Mardi Gras is a Delaware limited liability company and a pass-through entity for U.S. federal and state income tax purposes. Mardi Gras holds equity interests in the Mardi Gras Joint Ventures and accounts for them as equity method investments. Mardi Gras does not have any other operations or activities. The remaining interests in each of the Mardi Gras Joint Ventures are owned by unaffiliated third-party investors. Each of the Mardi Gras Joint Ventures is managed by its respective management committee, and decisions made by these management committees require approval of two or more members that are not affiliates with equity interest holdings meeting certain thresholds.

We have 65% ownership interest and 100% managing member interest in Mardi Gras. The remainder of the economic interest in Mardi Gras was held 34% by BP Pipelines and 1% by an affiliate of BP. Through our managing member interest in Mardi Gras, we have the right to vote 100% of Mardi Gras’ interest in each of the Mardi Gras Joint Ventures. We determined that Mardi Gras is a variable interest entity because (i) we hold disproportional voting rights as compared to our economic interest in Mardi Gras, and (ii) substantially all of Mardi Gras’ activities involve or are conducted on behalf of our Parent, which holds disproportionately few voting rights.

The managing member interest in Mardi Gras provides us with the unilateral power to direct the activities of Mardi Gras that most significantly impact its economic performance including the right to exercise the voting rights of BP for each of the Mardi Gras Joint Ventures. In addition, our obligations to absorb the expected losses of and the right to receive the residual returns from Mardi Gras relative to our economic ownership is significant to Mardi Gras. As a result, we are the primary beneficiary of Mardi Gras and consolidate Mardi Gras.

We have the obligation to provide financial support to Mardi Gras if all members unanimously determine that additional capital contributions are necessary to fund Mardi Gras’ operations. The assets of Mardi Gras can only be used to satisfy its own obligations, which were 0 at September 30, 2020 and December 31, 2019. Under the current limited liability company agreement of Mardi Gras, creditors of Mardi Gras, if any, do not have any recourse to the general credit of the Partnership.

The financial position of Mardi Gras at September 30, 2020 and December 31, 2019, its financial performance for the three and nine months ended September 30, 2020 and 2019 and cash flows for the nine months ended September 30, 2020 and 2019, as reflected in the condensed consolidated financial statements, are as follows:

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.

Distribution

On October 15, 2020, we declared a cash distribution of $0.3475 per limited partner unit to unitholders of record on October 29, 2020, for the three months ended September 30, 2020. The distribution, combined with distributions to our General Partner, will be paid on November 12, 2020, and will total $37.6 million, with $16.6 million distributed to our non-affiliated common unitholders, and $21.0 million, including $1.2 million for IDRs distributed to our Parent in respect of its ownership of our common units, subordinated units and IDRs.

Throughput and Deficiency Agreements

On November 3, 2020, the Partnership entered into throughput and deficiency agreements with BP Products with respect to volumes transported on the following lines (i) BP2 crude oil pipeline system and related assets; (ii) River Rouge refined products pipeline system and related assets; and (iii) Diamondback diluent pipeline system and related assets. These new agreements have a term of three years beginning January 1, 2021 and expiring December 31, 2023. The Partnership has existing agreements on the same pipelines with BP Products that expire on December 31, 2020.

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 Partnership's strategy, future growth, future operations, future actions, the continued effects of the global COVID-19 pandemic on demand, the effects of the continued volatility of commodity prices and the related macroeconomic and political environment, volumes, capital requirements, conditions or events, future operating results or the ability to generate sales, our potential exposure to market risks, statements relating to the expected amount of cash available for distribution and level of distributions, 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 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 the Annual Report on Form 10-K for the year ended December 31, 2019, under Part II, Item 1A of our Quarterly Reports and other cautionary statements contained in this filing.

We based forward-looking statements on 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, actual outcomes and results may differ materially from what the Partnership has expressed or forecast in the forward-looking statements.

Forward-looking statements may include statements about:

Many of the foregoing risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any consequent worsening of the global business and economic environment. New factors emerge from time to time, and it is not possible for us to predict all such factors. Should one or more of the risks or uncertainties described in this Quarterly Report occur, or should underlying assumptions prove incorrect, actual results and plans could differ materially from those expressed in any forward-looking statements.

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

As of September 30, 2020, the Partnership's assets consisted of the following:    

    

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

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

The impact to the energy industry from both the recent swift and material decline in commodity prices and the global outbreak of COVID-19 have been unprecedented. Additionally, the operations of Mars, Ursa, Caesar, Proteus and Endymion, our offshore crude oil pipeline systems, and Cleopatra, our offshore natural gas pipeline (“Offshore Pipelines”), have been impacted by an elevated number of storms in the Gulf of Mexico during the third quarter. During 2020, there have been six named storms in the region, one in the second quarter and five in the third quarter. Although our assets have remained operational, the active storm season has negatively impacted our third quarter results, which we expect to continue into the fourth quarter. Management continues to monitor the challenging macro environment. For risks associated with these and other factors, see “Item 1A. Risk Factors” in this Quarterly Report.

Management continues to work closely with BP Pipelines, as operator of our assets under the Omnibus Agreement, to ensure appropriate practices are adopted for continued functioning of our assets as well as mitigation strategies for any office or worksite where COVID-19 may be detected.

In the first quarter of 2020, the COVID-19 outbreak spread across the globe. Federal, state and local governments mobilized to implement containment mechanisms and minimize impacts to their populations and economies. Various containment measures, which included the quarantining of cities, regions and countries, have resulted in a significant drop in general economic activity and a resulting decrease in demand for petroleum and petroleum-based products.

In the second and third quarters of 2020, as COVID-19 appeared to decrease or stabilize in certain areas, certain local, regional and national authorities began to loosen such containment measures and restrictions in various locations in an effort to begin economic recovery, among other purposes. While this relaxation of containment measures initially led to an increased demand for petroleum and petroleum-based products through improved general economic conditions, there has also been a resurgence of COVID-19 cases in the third quarter and continuing into October 2020 that resulted in the reinstatement of containment measures and restrictions, which could lower demand for petroleum and petroleum-based products.

The unprecedented supply and demand dynamics created by demand decreases resulting from COVID-19 and supply increases resulting from recent periods of increased production by members of the Organization of Petroleum Exporting Countries and other countries, including Russia ("OPEC+"), beginning in March 2020, have resulted in severe declines in commodity prices and created volatility, uncertainty, and turmoil in the oil and gas industry. Despite OPEC+ agreeing to cut production in April 2020, such production cuts have yet to offset the decrease in demand resulting from the COVID-19 pandemic and related economic repercussions. As a result, the price of oil has remained depressed, and available storage and transportation capacity for production have been limited. It is uncertain whether capital and production cuts will continue and, if so, whether they will be sufficient to offset the continued low demand resulting from the COVID-19 pandemic. Demand and prices may again decline due to the resurgence of the outbreak across the U.S. and other locations across the world and the related social distancing guidelines, travel restrictions, and stay-at-home orders, although the extent of the additional impact on our industry and our business cannot be reasonably predicted at this time.

In the nine months ended September 30, 2020, we experienced a negative financial impact on our onshore pipelines as a result of reduced demand. The impacts of this as well as other operational drivers are offset by $11.1 million of deficiency revenue recorded under our MVCs on all onshore pipelines, which extend through December 31, 2020 (and for certain volumes on Diamondback through June 30, 2021). We could continue to experience a negative financial impact if volumes shipped on our pipelines remain below such minimum commitments beyond 2020 as a result of reduced consumer demand due to the response to the COVID-19 pandemic. As discussed in greater detail below under “Item 5—Throughput and Deficiency Agreements,” BP Products has executed new MVC agreements for an additional three years which continue to provide downside protection to the Partnership.

For our offshore joint ventures, we expect demand to be resilient, as offshore projects are larger capital projects planned over many years and less impacted by temporary changes in capital investment. We experienced a decline in volumes on our offshore pipelines during the second and third quarters; and such decline was primarily due to the short term weather impacts in the Gulf of Mexico and planned maintenance activities. To limit the impact of COVID-19, BP and our other customers, as well as third-party operators of our pipelines, have implemented various protocols for both onshore and offshore personnel; however, these may not prove to be successful. There is risk of decreased volumes with respect to our offshore operations if operators take actions to reduce operations in response to demand declines or increasingly limited storage availability or are unable to control COVID-19 infections on platforms and are required to shut-in. Additionally, we expect the shippers on our offshore pipelines to continue to find buyers for their production; however, they may not be successful.

We have taken steps and continue to actively work to mitigate the evolving challenges and continuing impact of both the COVID-19 pandemic and the industry downturn on our operations and our financial condition. We have also worked with BP Pipelines and the third-party operators of our assets to ensure that COVID-19 response and business continuity plans have been implemented across all of our assets and operations. BP employees, including BP Pipelines personnel, have been working from home since March 16, 2020, except those deemed critical to the functioning of owned and managed assets. For those that are critical and are required to be on-site, protocols have been implemented to protect those employees. Thus far, the need for BP employees to work remotely has not significantly impacted our operations, including use of financial reporting systems, nor has it significantly impacted our internal control environment. We have not incurred, and in the future do not expect to incur, significant expenses related to business continuity. However, our continuing operations and the management of the immediate and contingent safety measures would likely become increasingly difficult if a significant number of BP employees are infected by COVID-19 and the practical difficulties of social distancing impact productivity.

We are unable to reasonably predict when, or to what extent, demand for petroleum and petroleum-based products and the overall markets and global economy will stabilize, and the pace of any subsequent recovery for the oil and gas industry. Further, to what extent these events do ultimately impact our business, liquidity, financial condition, and results of operations is highly uncertain and dependent on numerous evolving factors that cannot be predicted, including the duration of the pandemic.

Partnership management uses a variety of financial and operating metrics to analyze performance. These metrics are significant factors in assessing operating results and profitability and include: (i) safety and environmental metrics, (ii) revenue (including FLA) from throughput and utilization; (iii) operating expenses and maintenance spend; (iv) Adjusted EBITDA (as defined below); and (v) cash available for distribution (as defined below).

We are committed to maintaining and improving the safety, reliability and efficiency of Partnership operations. As noted above, we have worked with BP Pipelines and the third-party operators of our assets to ensure that COVID-19 response and business continuity plans have been implemented across all of our assets and operations. We have implemented reporting programs requiring all employees and contractors of our Parent who provide services to us to record environmental and safety related incidents. The Partnership's management team uses these existing programs and data to evaluate trends and potential interventions to deliver on performance targets. We integrate health, occupational safety, process safety and environmental principles throughout Partnership operations to reduce and eliminate environmental and safety related incidents.

We have historically generated substantially all of our revenue under long-term agreements or FERC-regulated generally applicable tariffs by charging fees for the transportation of products through our pipelines. The amount of revenue we generate under these agreements depends in part on the volumes of crude oil, natural gas, refined products and diluent on our pipelines.

Volumes on pipelines are primarily affected by the supply of, and demand for, crude oil, natural gas, refined products and diluent in the markets served directly or indirectly by Partnership assets. Results of operations are impacted by our ability to:

In addition, substantially all of our aggregate revenue on BP2, River Rouge and Diamondback is supported by commercial agreements with BP Products. As described in further detail in “Item 5—Throughput and Deficiency Agreements,” on November 3, 2020, the Partnership entered into throughput and deficiency agreements with BP Products with respect to volumes transported on the following lines (i) BP2 crude oil pipeline system and related assets; (ii) River Rouge refined products pipeline system and related assets; and (iii) Diamondback diluent pipeline system and related assets. These new agreements have a term of three years beginning January 1, 2021 and expiring December 31, 2023. The Partnership has existing agreements on the same pipelines with BP Products that expire on December 31, 2020.

Storage utilization is a metric that we use to evaluate the performance of our storage and terminalling assets. We define storage utilization as the percentage of the contracted capacity in barrels compared to the design capacity of the tank.

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

We calculate Total Maintenance Spend as the sum of maintenance expenses and maintenance capital expenditures, excluding any reimbursable maintenance capital expenditures. We track these expenses on a combined basis because it is useful to understanding total maintenance requirements. Total Maintenance Spend for the nine months ended September 30, 2020 and 2019, respectively, is shown in the table below:

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

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

Maintenance capital expenditures represent expenditures to sustain operating capacity or operating income over the long term. Examples of maintenance capital expenditures include expenditures made to purchase new or replacement assets or extend the useful life of existing assets. These expenditures includes repairs and replacements of storage tanks, replacements of significant sections of pipelines and improvements to an asset’s safety and environmental standards.

The Partnership defines Adjusted EBITDA as net income before net interest expense, income taxes, gain or loss from disposition of property, plant and equipment, and depreciation and amortization, plus cash distributed to the Partnership from equity method investments for the applicable period, less income from equity method investments. The Partnership defines Adjusted EBITDA attributable to the Partnership as Adjusted EBITDA less Adjusted EBITDA attributable to non-controlling interests. We present these financial measures because we believe replacing our proportionate share of equity method investments’ net income with the cash received from such equity method investments more accurately reflects the cash flow from our business, which is meaningful to our investors.

We compute and present cash available for distribution and define it as Adjusted EBITDA attributable to the Partnership less maintenance capital expenditures attributable to the Partnership, net interest paid/received, cash reserves, income taxes paid and net adjustments from volume deficiency payments attributable to the Partnership. Cash available for distribution does not reflect changes in working capital balances.

Adjusted EBITDA and cash available for distribution are non-GAAP supplemental financial measures, which are metrics that management and external users of Partnership condensed consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess:

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.

Partnership business can be negatively affected by sustained downturns or slow growth in the economy in general and is impacted by shifts in supply and demand dynamics, the mix of services requested by the customers of our pipelines, competition and changes in regulatory requirements affecting our customers’ operations. For example, as discussed earlier, in March of 2020, the spot price of West Texas Intermediate (“WTI”) crude declined over 50% in response to reductions in global demand due to the COVID-19 pandemic and announcements by Saudi Arabia and Russia of plans to increase crude oil production. In addition to the collapse and current volatility in oil prices, demand for many refined petroleum products has also declined sharply causing refineries to curtail output. The ultimate magnitude and duration of the COVID-19 pandemic, resulting governmental restrictions on the mobility of consumers and the related impact on crude oil prices and the U.S. and global economy and capital markets is uncertain. The uncertain future impacts of COVID-19 and swift shifts in the demand for oil may negatively impact our financial position, particularly our cash flows and liquidity. As of the date of this Quarterly Report, all of our assets remain operational. We did experience some negative financial impact through the third quarter which we expect to continue.

BP is our primary customer. Total revenue from BP represented 98.2% and 97.5% of our revenues for the three and nine months ended September 30, 2020, respectively. Total revenue from BP represented 98.0% and 97.6% of our revenues for the

In addition, we transport and store crude oil, natural gas and diluent for a mix of third-party customers, including crude oil producers, refiners, marketers and traders, and Partnership assets are connected to other crude oil, natural gas and diluent pipeline systems. In addition to serving directly connected 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. Customers use our transportation and terminalling services for a variety of reasons. Producers of crude oil require the ability to deliver their product to market and frequently enter into firm transportation contracts to ensure that they will have sufficient capacity available to deliver their product to delivery points with greatest market liquidity. Marketers and traders generate income from buying and selling crude oil, natural gas, refined products and diluent to capitalize on price differentials over time or between markets. Our customer mix can vary over time and largely depends on the crude oil, natural gas, refined products and diluent supply and demand dynamics in our markets.

The Partnership plans to pursue acquisitions of complementary assets from BP as well as third parties subject to market conditions (including the ongoing effects of COVID-19) and our ability to obtain attractive financing. We may also pursue acquisitions jointly with BP Pipelines. BP Pipelines has granted us a right of first offer with respect to its retained ownership interest in Mardi Gras and all of its interests in midstream pipeline systems and assets related thereto in the contiguous United States and offshore Gulf of Mexico that were owned by BP Pipelines when we were established. Neither BP nor any of its affiliates are under any obligation, however, to sell or offer to sell us additional assets or to pursue acquisitions jointly with us, and we are under no obligation to buy any additional assets from them or to pursue any joint acquisitions with them. We will focus our acquisition strategy on transportation and midstream assets within the crude oil, natural gas and refined products sectors. We believe that we are well positioned to acquire midstream assets from BP, and 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.

We expect to fund future capital expenditures primarily from external sources, including borrowings under our credit facility and potential future issuances of equity and debt securities.

We intend to make cash distributions to unitholders at a minimum distribution rate of $0.2625 per unit per quarter ($1.05 per unit on an annualized basis). Based on the terms of our cash distribution policy, we expect that we will distribute to unitholders and the General Partner, as the holder of IDRs, most of the cash generated by operations.