BP Midstream Partners (BPMP) 10-Q2021 Q1 Quarterly report

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.

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 March 31, 2021, 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.

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 March 31, 2021, and for the three months ended March 31, 2021 and 2020, 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, 2020 (the "Partnership's 2020 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.

As a result of the completion of this conversion event, common units are now presented on a combined basis in the Condensed Consolidated Balance Sheets and the Condensed Consolidated Statements of Changes in Equity as of and for the period ended March 31, 2021. Prior periods have been reclassified in the comparative periods to conform to current period presentation in the Condensed Consolidated Balance Sheets and the Condensed Consolidated Statements of Changes in Equity.

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

We did not recognize deficiency revenue under the throughput and deficiency agreements with BP Products for the three months ended March 31, 2021 and 2020.

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 evaporation and other losses in transit. The amount of revenue recognized is a product of the quantity transported, the applicable FLA factor and the settlement price during the month the product is transported.

We recognized revenue of $2.6 million and $1.5 million in the three months ended March 31, 2021 and 2020, respectively, related to the FLA arrangements with our Parent.

The following table provides information about disaggregated revenue:

The values in the table below represent the fixed portion of the MVC arrangements with our existing customer contracts, summarized as future performance obligations as of March 31, 2021. The unfulfilled performance obligations included in the table below are expected to be recognized in revenue in the specified periods:

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 months ended March 31, 2021 and 2020.

The table below summarizes the balances and activities related for each equity method investment ("EMI") recorded as of and for the three months ended March 31, 2021 and 2020:

The following table presents aggregated selected income statement data for equity method investments on a 100% basis for the three months ended March 31, 2021 and 2020:

Property, plant and equipment consisted of the following:

As of March 31, 2021, the Partnership was in compliance with the covenants contained in the term loan facility and the credit facility. There were $468 million of outstanding borrowings under the term loan at March 31, 2021 and December 31, 2020. Interest charges and fees were $1.1 million and $3.6 million for the three months ended March 31, 2021 and 2020, respectively.

Indebtedness under the term loan bears interest at the 3-month LIBOR plus 0.73%. For the three months ended March 31, 2021 and 2020, the weighted average interest rates for our long-term debt was 0.95% and 2.88%, respectively.

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.

Revenue from related parties was $28.8 million and $29.7 million for the three months ended March 31, 2021 and 2020, respectively.

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 $14.0 million in 2020 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 $15.5 million per year, payable in equal monthly installments, beginning on January 1, 2021. We also reimburse our Parent for personnel and other costs related to the direct operation, management and maintenance of the assets and services and certain direct or allocated costs and expenses incurred by our Parent or its affiliates on our behalf pursuant to the terms in the omnibus agreement.

For the three months ended March 31, 2021 and 2020, we recorded the following amounts for related party expenses, which also included the expenses related to share-based compensation discussed below:

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 consist of the 35% ownership interest in Mardi Gras held by our Parent at March 31, 2021 and 2020. 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

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 per unit applicable to limited partners that is based on the weighted-average number of common units outstanding during the period.

Following the payment of the distribution on February 11, 2021, the financial tests required for the conversion of our subordinated units were satisfied under the terms of our partnership agreement. As a result, on February 12, 2021, all of the Partnership's subordinated units were converted into common units on a one-for-one basis and the subordination period was terminated. Following the conversion, we continue to use the two-class method when calculating the net income per unit applicable to limited partners. The remaining classes of participating securities are common units and incentive distribution rights.

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 months ended March 31, 2021 and 2020:

On April 15, 2021, the Partnership declared a cash distribution of $0.3475 per limited partner unit to unitholders of record on April 29, 2021, for the three months ended March 31, 2021. All of the subordinated units were converted into common units on February 12, 2021. As a result, on the date of record, there were no subordinated units outstanding, and therefore, no portion of the cash distribution has been allocated to the limited partners' subordinated units. However, pursuant to the requirements of the two-class method, and as stated above, the net income per unit amount applicable to the subordinated units has been calculated for the period of time the units were outstanding prior to their conversion.

Distributions declared to BP Holdco for the three months ended March 31, 2021 totaled $21.0 million, including $1.2 million for IDRs distributed to our Parent in respect of its ownership of our common units and IDRs. Distributions declared to BP Holdco for the three months ended March 31, 2020 totaled $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.

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 March 31, 2021 and December 31, 2020 approximate fair value as the interest rates are reflective of market rates.

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.

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

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.

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.

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 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.

The following is a summary of phantom unit award activities of the Partnership’s common units for the three months ended March 31, 2021:

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 March 31, 2021 and December 31, 2020. 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 March 31, 2021 and December 31, 2020, its financial performance for the three months ended March 31, 2021 and 2020 and cash flows for the three months ended March 31, 2021 and 2020, 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 item noted below, that require recognition or disclosure in the condensed consolidated financial statements.

On April 15, 2021, we declared a cash distribution of $0.3475 per limited partner unit to unitholders of record on April 29, 2021, for the three months ended March 31, 2021. The distribution, combined with distributions to our General Partner, will be paid on May 13, 2021, 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 and IDRs.

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 the Partnership's strategy, future growth, future operations, future actions, the continued effects of the global coronavirus disease (“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 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 the Annual Report on Form 10-K for the year ended December 31, 2020, under Part II, Item 1A of our Quarterly Reports 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:

Many of the foregoing risks and uncertainties may continue to 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.

The impact to the energy industry from the decline in demand for petroleum and petroleum-based products resulting from the response to the global outbreak of COVID-19 have been unprecedented. Management continues to monitor the challenging macro environment. For risks associated with these and other factors, refer to “Risk Factors” in the Partnership's 2020 10-K.

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 third quarter of 2020, the relaxation of containment measures led to a resurgence of COVID-19 cases. This resurgence continued into the fourth quarter and resulted in the reinstatement of containment measures and restrictions, which has lowered demand for petroleum and petroleum-based products.

In the first quarter of 2021, vaccine rollouts ramped up nationwide. This has led to the energy market seeing demand recovery driven by increases in road and air transportation. The vaccination effort has continued into the second quarter and we believe this will result in a further reduction of containment measures and restrictions thereby increasing demand recovery to a new normal, particularly as the summer season approaches.

In addition to the increase in vaccinations, certain regions across the United States have lifted, and continue to lift, certain restrictions previously imposed to contain the spread of COVID-19. While overall demand has improved from fourth quarter lows, moderate improvements in market conditions and energy demand have occurred during the first quarter of 2021. Uncertainties related to COVID-19 continue to affect the oil and gas industry, including the risk of new virus strains and renewed restrictions and the uncertainty of successful administration of effective treatments and vaccines.

In the first quarter of 2021, we experienced a slight reduction in volumes on our onshore pipelines compared to the fourth quarter of 2020 as a result of apportionment on the Enbridge mainline impacting BP2 and COVID-19 related demand impacts on River Rouge, partially offset by increased seasonal demand for diluent on Diamondback.

Demand remained steady on our offshore pipelines in the first quarter of 2021. 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. 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 protocols 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.

As noted above, BP Pipelines and the third-party operators of our assets have taken steps and continue to actively work to mitigate the evolving challenges and continuing impact of the COVID-19 pandemic on our operations, financial condition, cash flows and liquidity. However, there is no certainty that the measures we take will be ultimately sufficient.

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.

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:

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 three months ended March 31, 2021 and 2020, 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 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 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 our 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. 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. We did experience some reduction in volumes on River Rouge in the first quarter of 2021. As of the date of this Quarterly Report, all of our assets remain operational.

BP is our primary customer. Total revenue from BP represented 97.3% and 96.7% of our revenues for the three months ended March 31, 2021 and 2020, respectively. BP’s volumes represented approximately 94.7% and 93.5% of the aggregate total volumes transported on the Wholly Owned Assets for the three months ended March 31, 2021 and 2020, respectively.

In addition, we transport and store crude oil, natural gas and diluent for a mix of third-party customers, including crude oil producers, refiners, marketers and traders, and Partnership assets are connected to other crude oil, natural gas and diluent pipeline systems. In addition to serving directly connected 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.

Total revenue from wholly owned assets decreased by approximately $1.1 million or 3.6% for the three months ended March 31, 2021, compared to the three months ended March 31, 2020, due to the following factors:

Total costs and expenses was flat in the three months ended March 31, 2021, compared to the three months ended March 31, 2020.

Income from equity method investments decreased by $1.0 million or 3.2% for the three months ended March 31, 2021, compared to the three months ended March 31, 2020, primarily due to lower throughput on Mars and Caesar, slightly offset by higher production from Appomattox, which transports volume through Proteus and Endymion.

Interest expense decreased by $2.3 million or 67.6% in the three months ended March 31, 2021, compared to the three months ended March 31, 2020, due to lower interest rates tied to LIBOR.

Based upon current expectations for the fiscal year 2021, we believe that our cash on hand, cash flow from operations and borrowings available under our credit facility will be sufficient to fund our operations for 2021. As of March 31, 2021, our liquidity was $261.4 million, consisting of $129.4 million of cash and cash equivalents and $132.0 million available under our existing credit facility with BP. Our only outstanding indebtedness is $468.0 million borrowed under our term loan with an affiliate of BP, and there are no principal payments due until 2025.

Additionally, there is risk of decreased volumes with respect to the offshore operations if operators take actions to reduce operations in response to demand declines or increasingly limited storage availability or are unable to control COVID-19 infections on platforms and are required to shut-in. In the longer term, if there was a decrease in demand and such decrease persisted throughout 2021 or longer, we may not be able to continue to generate similar levels of operating cash flow and our liquidity and capital resources may not be sufficient to make our current levels of cash distributions to unitholders or even meet our minimum quarterly distribution. We continue to actively work to mitigate the evolving challenges and growing impact of COVID-19 on our operations, financial condition, cash flows and liquidity. However, there is no certainty that the measures we take will be ultimately sufficient.

In the fourth quarter of 2018, we borrowed $468.0 million from the credit facility. This amount was outstanding at December 31, 2019, and repaid on March 13, 2020 using funds from the Term Loan Facility Agreement.

Capital expenditures reported on the condensed consolidated statement of cash flows for the three months ended March 31, 2021 were $3.4 million. We incurred $2.6 million expansion capital expenditures for an onshore capacity increase project and $0.8 maintenance capital expenditures primarily associated with flow computer upgrades and the Griffith Station Electrical and Controls project.

Capital expenditures for the three months ended March 31, 2020 were $0.7 million, primarily associated with the Griffith Station Electrical and Controls project.

There were no material changes to contractual obligations as disclosed in the Partnership's 2020 10-K.

The Partnership has not entered into any transactions, agreements or other contractual arrangements that would result in off-balance sheet liabilities.

There have been no material changes to critical accounting policies as disclosed in the Partnership's 2020 10-K.

Information about market risks for the three months ended March 31, 2021, does not differ materially from that discussed under Item 7A of the Partnership's 2020 10-K.

The Partnership's management, with the participation of the principal executive officer and principal financial officer, evaluated the effectiveness of disclosure controls and procedures as of the end of the period covered by this report. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in the reports that are filed or submitted under the Exchange Act is accumulated and communicated to management, including our

There were no changes in the Partnership's system of internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarterly period ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting.

The Partnership is subject to various risks and uncertainties in the course of business. Security holders and potential investors in the Partnership's securities should carefully consider the risk factors set forth under “Risk Factors” in the Partnership's 2020 10-K. As of the date of this Quarterly Report, there have been no material changes in our risk factors from those described in the Partnership’s 2020 10-K.

None.