UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from   to

Commission file number 001-36647

JP ENERGY PARTNERS LP

(Exact name of registrant as specified in its charter)

600 East Las Colinas Blvd
Suite 2000

Irving, Texas 75039
(Address of principal executive offices) (Zip Code)

(Registrant’s telephone number, including area code):  (972) 444-0300

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES ☒   NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐   NO ☒

At October 31, 2016, there were 18,532,298 common units and 18,124,560 subordinated units outstanding.

TABLE OF CONTENTS

PART I     FINANCIAL INFORMATION

Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q (this “report” or this “Form 10-Q”) to “JP Energy Partners,” “the Partnership,” “we,” “our,” “us,” or like terms refer to JP Energy Partners LP and its subsidiaries, and references to “our general partner” refer to JP Energy GP II LLC, our general partner.  References to “our sponsor” or “Lonestar” refer to Lonestar Midstream Holdings, LLC, which owns and controls our general partner. References to “ArcLight Capital” refer to ArcLight Capital Partners, LLC and references to “ArcLight Fund V” refer to ArcLight Energy Partners Fund V, L.P. References to “ArcLight” refer collectively to ArcLight Capital and ArcLight Fund V. ArcLight Capital manages ArcLight Fund V, which controls our general partner through its ownership and control of Lonestar.

Forward-Looking Statements

Certain statements and information in this Form 10-Q may constitute “forward-looking statements.”  The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature.  These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us.  While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate.  All comments concerning our expectations for future operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions.  Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections.  Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:

the price of, demand for and production of, crude oil, refined products and natural gas liquids (“NGLs”) in the markets we serve;

the volumes of crude oil that we gather, transport and store, the throughput volumes at our refined products terminals and our NGL sales volumes;

the fees we receive for the crude oil, refined products and NGL volumes we handle;

pressures from our competitors, some of which may have significantly greater resources than us;

the cost of propane that we buy for resale, including due to disruptions in its supply, and whether we are able to pass along cost increases to our customers;

competitive pressures from other energy sources such as natural gas, which could reduce existing demand for propane;

the risk of contract cancellation, non-renewal or failure to perform by our customers, and our inability to replace such contracts and/or customers;

leaks or releases of hydrocarbons into the environment that result in significant costs and liabilities;

the level of our operating, maintenance and general and administrative expenses;

regulatory action affecting our existing contracts, our permits, our operating costs or our operating flexibility;

failure to secure or maintain contracts with our largest customers, or non-performance of any of those customers under the applicable contract;

competitive conditions in our industry;

changes in the long-term supply or production of and demand for oil, natural gas liquids, refined products and natural gas;

the availability and cost of capital and our ability to access certain capital sources;

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a deterioration of the credit and capital markets;

volatility of fuel prices;

actions taken by our customers, competitors and third-party operators;

our ability to complete growth projects on time and on budget;

inclement or hazardous weather conditions, including flooding, and the physical impacts of climate change;

environmental hazards;

industrial accidents;

changes in laws and regulations (or the interpretation thereof) related to the transportation, storage or terminaling of crude oil and refined products or the distribution and sales of NGLs;

fires, explosions or other accidents;

the effects of future litigation;

satisfaction of the conditions to the completion of the proposed AMID Merger (defined in Note 1), including receipt of the approval of our unitholders;

the timing and likelihood of completion of the proposed AMID Merger, including the timing, receipt and terms and conditions of any required governmental and regulatory approvals for the proposed merger that could reduce anticipated benefits or cause the parties to abandon the proposed transaction;

the possibility that the expected synergies and value creation from the proposed AMID Merger will not be realized or will not be realized within the expected time period;

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the risk that the businesses of JPEP and AMID will not be integrated successfully; 

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disruption from the proposed AMID Merger making it more difficult to maintain business and operational relationships;

the risk that unexpected costs will be incurred in connection with the proposed AMID Merger;

the possibility that the proposed AMID Merger does not close, including due to the failure to satisfy the closing conditions;

the amount of corporate overhead support provided by our general partner, if any; and

other factors discussed elsewhere in this Form 10-Q and in our other current and periodic reports filed with the Securities and Exchange Commission (the “SEC”).

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof.  We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.

Item 1.     Financial Statements

JP ENERGY PARTNERS LP

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

JP ENERGY PARTNERS LP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

JP ENERGY PARTNERS LP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

JP ENERGY PARTNERS LP

CONDENSED CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

JP ENERGY PARTNERS LP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Business and Basis of Presentation

Business.  The unaudited condensed consolidated financial statements presented herein contain the results of JP Energy Partners LP, a Delaware limited partnership, and its subsidiaries. All expressions of the “Partnership,” “JPE,” “us,” “we,” “our,” and all similar expressions are references to JP Energy Partners LP and our consolidated, wholly-owned subsidiaries, unless otherwise expressly stated or the context requires otherwise. We were formed in May 2010 by members of management and were further capitalized in June 2011 by ArcLight Capital Partners, LLC (“ArcLight”) to own, operate, develop and acquire a diversified portfolio of midstream energy assets. We completed our initial public offering in October 2014. Our operations currently consist of three business segments: (i) crude oil pipelines and storage, (ii) refined products terminals and storage and (iii) NGL distribution and sales, which together provide midstream infrastructure solutions for the growing supply of crude oil, refined products and NGLs, in the United States. JP Energy GP II LLC (“GP II”) is our general partner.

Basis of Presentation.  Our unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information. All intercompany accounts and transactions have been eliminated in the preparation of the accompanying unaudited condensed consolidated financial statements.

The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of results expected for the full year ending December 31, 2016. In our opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments consisting of normal recurring accruals necessary for fair statement of the financial position and results of operations for such interim periods in accordance with GAAP. Although we believe the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to the rules and regulations of the SEC. These unaudited condensed consolidated interim financial statements and the notes thereto should be read in conjunction with our audited consolidated financial statements and the related notes for the year ended December 31, 2015 included in our Annual Report on Form 10-K filed with the SEC on February 29, 2016.

Use of Estimates.  The unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, which includes the use of estimates and assumptions made by management that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities that exist at the date of the condensed consolidated financial statements. Although these estimates are based on management’s available knowledge of current and expected future events, actual results could be different from those estimates.

AMID Merger Agreement. On October 23, 2016, we and our general partner entered into an Agreement and Plan of Merger (“LP Merger Agreement”) with American Midstream Partners, L.P. (“AMID”), American Midstream GP, LLC, the general partner of AMID (“AMID GP”), and an indirect and wholly owned subsidiary of AMID (“Merger Sub”). The LP Merger Agreement provides that we will be merged with and into Merger Sub (“AMID Merger”), with the Partnership surviving the merger as a wholly owned subsidiary of AMID.

At the effective time of the AMID Merger, (i) each common unit and each subordinated unit of the Partnership issued and outstanding or deemed issued and outstanding as of immediately prior to the effective time, other than common unit and subordinated units of the Partnership held by Lonestar, JP Energy Development LP, a Delaware limited partnership, or their respective affiliates (together, the “Affiliated Holders”) will be converted into the right to receive 0.5775 of a common unit representing limited partner interests in AMID (“AMID Common Unit”) and (ii) each common unit and subordinated unit of the Partnership issued and outstanding or deemed issued and outstanding as of immediately prior to the effective time held by the Affiliated Holders will be converted into the right to receive 0.5225 of an AMID Common Unit.

In connection with the LP Merger Agreement, on October 23, 2016, AMID GP entered into an Agreement and Plan of Merger (the “GP Merger Agreement” and, together with the LP Merger Agreement, the “Merger Agreements”) with our general partner and a wholly owned subsidiary of AMID GP (“GP Merger Sub”). Upon the terms and subject to the conditions set forth in the GP Merger Agreement, GP Merger Sub will merge with and into JPE GP (the “GP Merger” together with the LP Merger, the “Mergers”), with JPE GP surviving the merger as a wholly owned subsidiary of AMID GP.  In connection with the consummation of the GP Merger, a wholly-owned subsidiary of AMID will be admitted as the sole general partner of the Partnership and our general partner will simultaneously cease to be the general partner of the Partnership.

The receipt of the merger consideration is expected to be tax-free to our unitholders.

Completion of the merger is subject to the satisfaction or waiver of a number of customary closing conditions as set forth in the Merger Agreement, including approval of the AMID Merger by (i) holders of at least a majority of the outstanding common units of the Partnership that are not held by our general partner or its affiliates and the holders of at least a majority of the outstanding subordinated units of the Partnership voting for the adoption of the LP Merger Agreement and the transactions contemplated thereby, receipt of required regulatory approvals in connection with the merger, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and effectiveness of a registration statement on Form S-4 registering the AMID common units to be issued in connection with the merger.

The LP Merger Agreement contains certain termination rights for both AMID and the Partnership. The LP Merger Agreement further provides that, upon termination of the LP Merger Agreement, under certain circumstances, the Partnership may be required to reimburse AMID’s expenses, subject to certain limitations, or pay AMID a termination fee equal to $10.0 million less any previous AMID expenses reimbursed by JPE.

In connection with the Merger Agreements, Lonestar, the Partnership and our general partner entered into an Expense Reimbursement Agreement  providing that Lonestar will reimburse, or will pay directly on behalf of, the Partnership or our general partner the third party reasonable costs and expenses incurred the Partnership or our general partner in connection with the Mergers (as defined below), including  (i) the termination fee and (ii) all reasonable out-of-pocket legal and financial advisory fees, costs and expenses paid or payable to third parties and incurred in connection with the negotiation, execution and performance of the LP Merger Agreement and consummation of the Mergers.

2. Summary of Significant Accounting Policies

Fair value measurement.  We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. We determine fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

Level 1 Inputs—Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

Level 2 Inputs—Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 Inputs—Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

The fair value of our derivatives (see Note 7) was estimated using industry standard valuation models using market-based observable inputs, including commodity pricing and interest rate curves (Level 2). The fair value of our contingent liabilities was determined using the discounted future estimated cash payments based on inputs that are not

observable in the market (Level 3). We do not have any other assets or liabilities measured at fair value on a recurring basis.

Our other financial instruments consist primarily of cash and cash equivalents and long-term debt. The fair value of long-term debt approximates the carrying value as the underlying instruments are at rates similar to current rates offered to us for debt with the same remaining maturities.

Accounts Receivable.  Accounts receivable are reported net of the allowance for doubtful accounts. The allowance for doubtful accounts is based on specific identification and expectation of collecting considering historical collection results. Account balances considered to be uncollectible are recorded to the allowance for doubtful accounts and charged to bad debt expense, which is included in general and administrative expenses in the condensed consolidated statements of operations. The allowance for doubtful accounts was $987,000 and $1,217,000 as of September 30, 2016 and December 31, 2015, respectively.

Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred and/or services have been rendered, the seller’s price to the buyer is fixed and determinable, and collectability is reasonably assured. 

Revenue-related taxes collected from customers and remitted to taxing authorities, principally sales taxes, are presented on a net basis within the consolidated statements of operations.

Crude Oil Pipelines and Storage. The crude oil pipelines and storage segment mainly generates revenues through crude oil sales and pipeline transportation and storage fees. We enter into outright purchase and sale contracts as well as buy/sell contracts with counterparties, under which contracts we gather and transport different types of crude oil and eventually sell the crude oil to either the same counterparty or different counterparties. We account for such revenue arrangements on a gross basis. Occasionally, we enter into crude oil inventory exchange arrangements with the same counterparty for which the purchase and sale of inventory are considered in contemplation of each other. Revenues from such inventory exchange arrangements are recorded on a net basis. Revenues for crude oil pipeline transportation services are recognized upon delivery of the product and when payment has either been received or collection is reasonably assured. For certain crude oil pipeline transportation arrangements, we enter into purchase and sale contracts with counterparties instead of pipeline transportation agreements. In such cases, we assess the indicators associated with agent and principal considerations for each arrangement to determine whether revenue should be recorded on a gross basis versus net basis. In addition, we also provide crude oil trucking transportation services to third party customers.

Refined Products Terminals and Storage. We generate fee-based revenues for terminal and storage services with longstanding customers under contracts that, consistent with industry practice, typically contain an initial term of one to two years with annual evergreen renewals. Such fee-based revenues are recognized when services are provided upon delivery of the products to customers. Revenues are also generated by selling excess refined products that result from blending, additization and inventory control processes.

NGL Distribution and Sales. Revenues from the NGL distribution and sales segment are mainly generated from NGL and refined product sales, sales of the related parts and equipment and through gathering and transportation fees.

Comprehensive Loss. For the three and nine months ended September 30, 2016 and 2015, comprehensive loss was equal to net loss.

Recent Accounting Pronouncements.

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses specific cash flow issues with the objective of reducing the diversity that exists in practice in how certain transactions are classified in the statement of cash flows. The standard is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption of this ASU is permitted. We adopted ASU 2016-

15 in the third quarter of 2016 and the adoption did not have a material impact on our consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.  This standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842). Lessees will need to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. It will be critical to identify leases embedded in a contract to avoid misstating the lessee’s balance sheet. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. ASU 2016-02 is effective for public companies for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years. We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. This standard does not allow for early adoption except related to credit risk adjustment in other comprehensive income. The adoption of ASU 2016-01 is not expected to have a material impact on our consolidated financial statements and related disclosures.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU 2015-11 changes the measurement principle for inventory measured using any method other than LIFO or the retail inventory method from the lower of cost or market to lower of cost and net realizable value.  Net realizable value is defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.  ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016.  Early adoption of this ASU is permitted.  We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes the existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2016 using either of the following transition methods: (i) a full retrospective approach reflecting the

application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). In August 2015, the FASB issued ASU No. 2015-14, Update Revenue from Contracts with Customers (Topic 606), which defers the effective date of ASU 2014-09 for public and non-public entities reporting under U.S. GAAP for one year. The FASB also decided to permit entities to early adopt the standard but adoption is not permitted earlier than the original effective date for public entities. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations (Reporting Gross versus Net), which is intended to provide clarity to principal versus agent considerations when it comes to revenue recognition related to ASU 2014-09. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing, which provides clarity to a few items for identifying performance obligations and licensing where the board had received feedback on the issuance of ASU 2014-09. Neither ASU 2016-08 nor 2016-10 is effective until ASU 2014-09 becomes effective. We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.

3. Discontinued Operations

On February 1, 2016, we sold certain trucking and marketing assets in the Mid-Continent area (the “Mid-Continent Business”) to JP Development, simultaneous with JP Development’s sale of its GSPP pipeline assets to a third party buyer. The sales price related to the Mid-Continent Business was $9,685,000, in cash, which included certain adjustments related to inventory and other working capital items. As of December 31, 2015, the Mid-Continent Business met all the criteria to be classified as assets held for sale in accordance with ASC 360; therefore, we classified all the related assets and liabilities as held for sale in the condensed consolidated balance sheet at that date. The operating results of the Mid-Continent Business have been classified as discontinued operations for all periods presented in the condensed consolidated statements of operations. We combined the cash flows from the Mid-Continent Business with the cash flows from continuing operations for all periods presented in the condensed consolidated statements of cash flows. The Mid-Continent Business will not generate any continuing cash flows subsequent to the date of disposition. Prior to the classification as discontinued operations, we reported the Mid-Continent Business in our crude oil pipelines and storage segment. The following table summarizes selected financial information related to the Mid-Continent Business’ operations for the three and nine months ended September 30, 2016 and 2015.

Condensed Consolidated Statements of Operations

The discontinued operations of the Mid-Continent Business are summarized below:

Condensed Consolidated Balance Sheets

The current and non-current assets and liabilities of the Mid-Continent Business are as follows:

The following table summarizes other selected financial information related to the Mid-Continent Business: