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Table of Contents

As filed with the Securities and Exchange Commission on October 20, 2014

Registration No. 333-196850

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 4

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Shell Midstream Partners, L.P.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   4610   46-5223743
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (IRS Employer
Identification Number)

One Shell Plaza

910 Louisiana Street

Houston, Texas 77002

(713) 241-6161

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Lori M. Muratta

Vice President, General Counsel and Secretary

Shell Midstream Partners GP LLC

One Shell Plaza

910 Louisiana Street

Houston, Texas 77002

(713) 241-6161

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Kelly B. Rose

Hillary H. Holmes

Andrew J. Ericksen

Baker Botts L.L.P.

910 Louisiana Street

Houston, Texas 77002

(713) 229-1234

 

Douglas E. McWilliams

Gillian A. Hobson

Vinson & Elkins L.L.P.

1001 Fannin Street

Suite 2500

Houston, Texas 77002

(713) 758-2222

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed Maximum
Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee

Common units representing limited partner interests

  $905,625,000   $114,684(3)

 

 

(1) 

Includes common units issuable upon exercise of the underwriters’ option to purchase additional common units.

(2) 

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o).

(3) 

$96,660 previously paid.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities, in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated October 20, 2014

PROSPECTUS

 

 

  LOGO    LOGO   

37,500,000 Common Units

Representing Limited Partner Interests

 

 

This is the initial public offering of common units representing limited partner interests of Shell Midstream Partners, L.P. We were recently formed by Shell Pipeline Company LP, or SPLC, an affiliate of Royal Dutch Shell plc, or Shell, and no public market currently exists for our common units. We are offering 37,500,000 common units in this offering. We expect that the initial public offering price will be between $19.00 and $21.00 per common unit. We have been approved to list our common units on the New York Stock Exchange under the symbol “SHLX,” subject to official notice of issuance. We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act.

As a result of certain laws and regulations to which we are or may in the future become subject, we may require that an owner of our common units provide a certification or information necessary for our general partner to determine that a limited partner is not an ineligible holder.

Investing in our common units involves a high degree of risk. Before buying any common units, you should carefully read the discussion of material risks of investing in our common units in “Risk Factors” beginning on page 25. These risks include the following:

 

 

We may not have sufficient cash available for distribution following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay minimum quarterly distributions to our unitholders. We would not have had sufficient cash available for distribution to pay the full minimum quarterly distributions on our common units and subordinated units and the corresponding distribution on our general partner units for the year ended December 31, 2013 and the twelve months ended June 30, 2014.

 

 

Our general partner and its affiliates, including Shell, have conflicts of interest with us and limited duties to us and our unitholders, and they may favor their own interests to the detriment of us and our unitholders. Additionally, we have no control over the business decisions and operations of Shell, and it is under no obligation to adopt a business strategy that favors us.

 

 

Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors.

 

 

Even if holders of our common units are dissatisfied, they cannot initially remove our general partner without its consent.

 

 

There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. Following this offering, the price of our common units may fluctuate significantly, and you could lose all or part of your investment.

 

 

Our tax treatment depends on our status as a partnership for U.S. federal income tax purposes. If the Internal Revenue Service were to treat us as a corporation for U.S. federal income tax purposes, which would subject us to entity-level taxation, or if we were otherwise subjected to a material amount of additional entity-level taxation, then our cash available for distribution would be substantially reduced.

 

 

Our unitholders’ share of our income will be taxable to them for U.S. federal income tax purposes even if they do not receive any cash distributions from us.

 

     Per Common
Unit
     Total  

Price to the public

   $                                $                

Underwriting discount and commissions(1)

   $         $     

Proceeds to us (before expenses)

   $         $     

 

(1) Excludes an aggregate structuring fee payable to Barclays Capital Inc. and Citigroup Global Markets Inc. that is equal to 0.25% of the gross proceeds of this offering, or approximately $        .

We have granted the underwriters a 30-day option to purchase up to an additional 5,625,000 common units on the same terms and conditions as set forth above if the underwriters sell more than 37,500,000 common units in this offering.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the common units on or about             , 2014, through the book-entry facilities of The Depository Trust Company.

 

 

Book-Running Managers

 

Barclays   Citigroup

 

Morgan Stanley     UBS Investment Bank

 

 

Co-Managers

 

Credit Suisse

 

Goldman, Sachs & Co.

 

J.P. Morgan

  Wells Fargo Securities
RBC Capital Markets       Credit Agricole CIB

Prospectus dated             , 2014


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1   

Overview

     1   

Our Relationship with Shell

     1   

Our Assets and Operations

     2   

Organic Growth Projects

     4   

Business Strategies

     4   

Competitive Strengths

     5   

Implications of Being an Emerging Growth Company

     6   

Risk Factors

     6   

Formation Transactions

     7   

Organizational Structure After the Formation Transactions

     9   

Management

     10   

Principal Executive Offices

     10   

Summary of Conflicts of Interest and Duties

     10   

The Offering

     12   

Summary Historical and Unaudited Pro Forma Financial Data

     17   

Non-GAAP Financial Measures

     20   

RISK FACTORS

     25   

Risks Related to Our Business

     25   

Risks Inherent in an Investment in Us

     36   

Tax Risks to Common Unitholders

     46   

USE OF PROCEEDS

     51   

CAPITALIZATION

     52   

DILUTION

     53   

CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     54   

General

     54   

Our Minimum Quarterly Distribution

     57   

Unaudited Pro Forma Cash Available for Distribution for the Twelve Months Ended June 30, 2014 and the Year Ended December 31, 2013

     58   

Estimated Cash Available for Distribution for the Twelve Months Ending September 30, 2015

     66   

Significant Forecast Assumptions

     71   

PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

     77   

Distributions of Available Cash

     77   

Operating Surplus and Capital Surplus

     78   

Capital Expenditures

     80   

Subordination Period

     81   

Distributions of Available Cash from Operating Surplus During the Subordination Period

     83   

Distributions of Available Cash from Operating Surplus After the Subordination Period

     83   

General Partner Interest and Incentive Distribution Rights

     83   

Percentage Allocations of Available Cash from Operating Surplus

     84   

General Partner’s Right to Reset Incentive Distribution Levels

     85   

Distributions from Capital Surplus

     87   

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     88   

Distributions of Cash Upon Liquidation

     88   

SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA

     91   

Non-GAAP Financial Measures

     94   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     99   

Overview

     99   

How We Generate Revenue

     100   

 

i


Table of Contents

How We Evaluate Our Operations

     101   

Factors Affecting Our Business

     103   

Factors Affecting the Comparability of Our Financial Results

     105   

Results of Operations of Our Predecessor

     106   

Capital Resources and Liquidity

     107   

Off-Balance Sheet Arrangements

     109   

Regulatory Matters

     110   

Critical Accounting Policies

     110   

Quantitative and Qualitative Disclosures About Market Risk

     112   

INDUSTRY

     113   

General

     113   

North American Crude Oil Production Overview

     113   

Gulf Coast Refinery Overview

     115   

North American Midstream Infrastructure

     117   

BUSINESS

     120   

Overview

     120   

Organic Growth Projects

     120   

Business Strategies

     121   

Competitive Strengths

     121   

Our Assets and Operations

     122   

Our Relationship with Shell

     129   

Competition

     129   

Seasonality

     130   

Pipeline Control Operations

     130   

FERC and Common Carrier Regulations

     130   

Pipeline Safety

     132   

Product Quality Standards

     134   

Security

     134   

Environmental Matters

     134   

Title to Properties and Permits

     137   

Insurance

     138   

Employees

     138   

Legal Proceedings

     138   

MANAGEMENT

     140   

Management of Shell Midstream Partners, L.P.

     140   

Director Independence

     140   

Committees of the Board of Directors

     140   

Directors and Executive Officers of Shell Midstream Partners GP LLC

     141   

Board Leadership Structure

     145   

Board Role in Risk Oversight

     145   

Executive Compensation

     145   

Director Compensation

     146   

Long-Term Incentive Plan

     146   

Management of Subsidiaries and Investments

     149   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     150   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     151   

Distributions and Payments to Our General Partner and Its Affiliates

     151   

Agreements Governing the Formation Transactions

     152   

Contracts with Affiliates

     154   

Procedures for Review, Approval or Ratification of Transactions with Related Parties

     162   

 

ii


Table of Contents

CONFLICTS OF INTEREST AND DUTIES

     163   

Conflicts of Interest

     163   

Duties of Our General Partner

     169   

DESCRIPTION OF THE COMMON UNITS

     173   

The Units

     173   

Transfer Agent and Registrar

     173   

Transfer of Common Units

     173   

OUR PARTNERSHIP AGREEMENT

     175   

Organization and Duration

     175   

Purpose

     175   

Capital Contributions

     175   

Voting Rights

     176   

Applicable Law; Forum, Venue and Jurisdiction

     177   

Limited Liability

     177   

Issuance of Additional Partnership Interests

     178   

Amendment of Our Partnership Agreement

     179   

Merger, Consolidation, Conversion, Sale or Other Disposition of Assets

     181   

Termination and Dissolution

     181   

Liquidation and Distribution of Proceeds

     182   

Withdrawal or Removal of Our General Partner

     182   

Transfer of General Partner Units

     183   

Transfer of Ownership Interests in Our General Partner

     183   

Transfer of Incentive Distribution Rights

     184   

Change of Management Provisions

     184   

Limited Call Right

     184   

Meetings; Voting

     185   

Status as Limited Partner

     185   

Ineligible Holders; Redemption

     185   

Indemnification

     186   

Reimbursement of Expenses

     186   

Books and Reports

     187   

Right to Inspect Our Books and Records

     187   

Registration Rights

     187   

UNITS ELIGIBLE FOR FUTURE SALE

     188   

Rule 144

     188   

Our Partnership Agreement and Registration Rights

     188   

Lock-Up Agreements

     189   

Registration Statement on Form S-8

     189   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     190   

Partnership Status

     191   

Tax Treatment of Income Earned Through C Corporation Subsidiary

     192   

Limited Partner Status

     192   

Tax Consequences of Unit Ownership

     192   

Tax Treatment of Operations

     198   

Disposition of Common Units

     199   

Uniformity of Units

     201   

Tax-Exempt Organizations and Other Investors

     202   

Administrative Matters

     203   

State, Local, Foreign and Other Tax Considerations

     206   

INVESTMENT IN SHELL MIDSTREAM PARTNERS, L.P. BY EMPLOYEE BENEFIT PLANS

     207   

Prohibited Transaction Issues

     207   

Plan Asset Issues

     207   

 

iii


Table of Contents

UNDERWRITING

     209   

Commissions and Expenses

     209   

Option to Purchase Additional Common Units

     210   

Lock-Up Agreements

     210   

Offering Price Determination

     211   

Indemnification

     211   

Stabilization, Short Positions and Penalty Bids

     211   

Electronic Distribution

     212   

Listing on the NYSE

     212   

Stamp Taxes

     212   

Other Relationships

     212   

Direct Participation Program Requirements

     213   

Selling Restrictions

     213   

LEGAL MATTERS

     216   

EXPERTS

     216   

WHERE YOU CAN FIND MORE INFORMATION

     216   

FORWARD-LOOKING STATEMENTS

     217   

INDEX TO FINANCIAL STATEMENTS

     F-1   

APPENDIX A—Form of First Amended and Restated Agreement of Limited Partnership of Shell Midstream Partners, L.P.

  

APPENDIX B—Eligible Holder Status

  

APPENDIX C—Glossary of Terms

  

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. We have not, and the underwriters have not, authorized any other person to provide you with information different from that contained in this prospectus and any free writing prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted.

This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. Please read “Risk Factors” and “Forward-Looking Statements.”

 

 

INDUSTRY AND MARKET DATA

The market and statistical data included in this prospectus regarding the midstream crude oil and refined products industry, including descriptions of trends in the market and our position and the position of our competitors within the industry, is based on a variety of sources, including independent industry publications, government publications and other published independent sources, information obtained from customers, distributors, suppliers and trade and business organizations, commissioned reports and publicly available information, as well as our good faith estimates, which have been derived from management’s knowledge and experience in the industry in which we operate. Although we have not independently verified the accuracy or completeness of the third-party information included in this prospectus, based on management’s knowledge and experience, we believe that these third-party sources are reliable and that the third-party information included in this prospectus or in our estimates is accurate and complete. While we are not aware of any misstatements regarding the market, industry or similar data presented herein, such data involve risks and uncertainties and are subject to change based on various factors, including those discussed under the headings “Forward-Looking Statements” and “Risk Factors” in this prospectus.

 

iv


Table of Contents

PROSPECTUS SUMMARY

This summary provides a brief overview of selected information contained elsewhere in this prospectus. You should carefully read the entire prospectus, including “Risk Factors,” the historical audited and unaudited financial statements and accompanying notes and the unaudited pro forma financial statements and accompanying notes included elsewhere in this prospectus, before making an investment decision. Unless otherwise indicated, the information in this prospectus assumes (i) an initial public offering price of $20.00 per common unit (the mid-point of the price range set forth on the cover of this prospectus) and (ii) that the underwriters do not exercise their option to purchase additional common units.

Unless the context otherwise requires, references in this prospectus to “Shell Midstream Partners, L.P.,” “Shell Midstream Partners,” “our partnership,” “we,” “our,” “us,” or similar terms, when used in a historical context, refer to the assets that we will own immediately following this offering and their related operations. These assets include (i) a 43.0% ownership interest in Zydeco Pipeline Company LLC, (ii) a 28.6% ownership interest in Mars Oil Pipeline Company, (iii) a 49.0% ownership interest in Bengal Pipeline Company LLC and (iv) a 1.612% ownership interest in Colonial Pipeline Company. For accounting purposes or when used in the past tense, “we,” “our,” “us” and similar terms refer to our predecessor, the Houston-to-Houma pipeline system. When used in the present tense or future tense, these terms refer to Shell Midstream Partners, L.P. and its subsidiaries after giving effect to this offering and the related formation transactions. References to our “general partner” refer to Shell Midstream Partners GP LLC. References to “Shell” refer collectively to Royal Dutch Shell plc and its controlled affiliates, other than us, our subsidiaries and our general partner. References to “SPLC” refer to Shell Pipeline Company LP, a wholly owned subsidiary of Royal Dutch Shell plc, and its controlled affiliates, other than us, our subsidiaries and our general partner. References to “Zydeco,” “Mars,” “Bengal” and “Colonial” refer to Zydeco Pipeline Company LLC, Mars Oil Pipeline Company, Bengal Pipeline Company LLC and Colonial Pipeline Company, respectively, and the pipeline systems owned by those entities. References to the subsidiaries of Shell Midstream Partners, L.P. include Shell Midstream Operating LLC, Zydeco, Mars and Bengal. We have provided definitions for some of the terms we use to describe our business and industry and other terms used in this prospectus in the “Glossary of Terms” beginning on page C-1 of this prospectus.

Shell Midstream Partners, L.P.

Overview

We are a fee-based, growth-oriented master limited partnership recently formed by Shell to own, operate, develop and acquire pipelines and other midstream assets. Our initial assets consist of interests in entities that own crude oil and refined products pipelines serving as key infrastructure to transport growing onshore and offshore crude oil production to Gulf Coast refining markets and to deliver refined products from those markets to major demand centers. We generate substantially all of our revenue under long-term agreements by charging fees for the transportation of crude oil and refined products through our pipelines. We do not engage in the marketing and trading of any commodities.

We will initially own interests in two crude oil pipeline systems and two refined products systems. The crude oil pipeline systems, which are held by Zydeco and Mars, are strategically located along the Texas and Louisiana Gulf Coast and offshore Louisiana. These systems link major onshore and offshore production areas with key refining markets. The refined products pipeline systems, which are held by Bengal and Colonial, connect Gulf Coast and southeastern U.S. refineries to major demand centers from Alabama to New York.

Our Relationship with Shell

Shell is one of the world’s largest independent energy companies in terms of market capitalization and operating cash flow, and Shell and its joint ventures are a leading producer and transporter of onshore and offshore

 

 

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Table of Contents

hydrocarbons as well as a major refiner in the United States. As one of the largest producers in the Gulf of Mexico, Shell is currently developing several deepwater prospects and associated infrastructure. In addition to its offshore production, Shell has significant onshore exploration and production interests and produces crude oil and natural gas throughout North America. Shell’s downstream portfolio includes interests in refineries throughout the United States with a combined refining capacity over 1.8 million barrels per day.

Shell’s portfolio of midstream assets provides key infrastructure required to transport and store crude oil and refined products for Shell and third parties. Shell’s ownership interests in transportation and midstream assets include crude oil and refined products pipelines; crude oil and refined products terminals; chemicals pipelines; natural gas processing plants; and LNG infrastructure assets.

SPLC is Shell’s principal midstream subsidiary in the United States. Following this offering, SPLC will own our general partner, a significant limited partner interest in us and all of our incentive distribution rights. As a result, we believe Shell is motivated to promote and support the successful execution of our business strategies, including using our partnership as a growth vehicle for its midstream assets. Shell has an expansive portfolio of midstream infrastructure, including additional interests in our assets, which could contribute to our future growth if acquired by us. We may also pursue acquisitions jointly with Shell or its affiliates. Neither Shell nor any of its affiliates is 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.

Our Assets and Operations

We believe that our assets are core components of the North American crude oil and refined products infrastructure. Our initial assets consist of the following:

 

   

A 43.0% ownership interest in Zydeco Pipeline Company LLC, or Zydeco, which is currently wholly owned by SPLC. Zydeco will wholly own the Houston-to-Houma crude oil pipeline system, or Ho-Ho, which is regulated by the Federal Energy Regulatory Commission, or FERC. Ho-Ho is situated within the largest refining market in the United States. Following the flow reversal project completed in December 2013, Ho-Ho provides a critical outlet to alleviate current transportation bottlenecks for crude oil produced in multiple basins throughout North America, a large portion of which is transported to and stored in the Houston area, to access major refining centers along the Gulf Coast. Upon the completion of the Ho-Ho expansion projects described below, approximately 87% of the fully expanded capacity of Ho-Ho will be subject to FERC-approved transportation services agreements with a weighted average remaining term of over eight years. SPLC’s employees operate Ho-Ho for Zydeco. SPLC will own the remaining 57.0% interest in Zydeco. For more information about the reversal and expansion of Ho-Ho, please read “—Organic Growth Projects” and “Business—Our Assets and Operations—Zydeco.”

 

   

A 28.6% ownership interest in Mars Oil Pipeline Company, or Mars. Mars is a major corridor crude oil pipeline in a high-growth area of the offshore Gulf of Mexico, originating approximately 130 miles offshore in the deepwater Mississippi Canyon and terminating in salt dome caverns in Clovelly, Louisiana. Mars transports offshore crude oil production received from the Mississippi Canyon area, including the Olympus platform and the Medusa and Ursa pipelines, and from the Green Canyon and Walker Ridge areas via the Amberjack pipeline connection. We believe that Mars is the primary outlet for connected producers. Mars reaches attractive trading hubs in Louisiana. Mars’ transportation volumes are subject to life-of-lease agreements, some of which have a guaranteed return, and posted tariffs, in each case with established producers with whom Mars has long-standing relationships. SPLC operates Mars’ pipeline system. SPLC will own a 42.9% interest in Mars and an affiliate of BP p.l.c., or BP, will own the remaining 28.5% interest in Mars.

 

   

A 49.0% ownership interest in Bengal Pipeline Company LLC, or Bengal. Bengal’s refined products pipeline connects four refineries in the St. Charles, Norco, Garyville and Convent areas of Louisiana

 

 

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with refined products storage tankage in Baton Rouge, Louisiana. Bengal also connects with the Plantation and Colonial pipelines, providing major market outlets to the East Coast from the Gulf Coast. Colonial is the system operator for regulatory reporting purposes and operates Bengal’s tankage. As of June 30, 2014, approximately 67% of Bengal’s capacity was subject to minimum volume commitments under ship-or-pay contracts with a weighted average remaining term of approximately 2.5 years. SPLC operates Bengal’s pipelines. SPLC will own a 1.0% interest in Bengal and Colonial will own the remaining 50.0% interest.

 

   

A 1.612% ownership interest in Colonial Pipeline Company, or Colonial. Colonial is the largest refined products pipeline in the United States, transporting more than 40 different refined products, consisting primarily of gasoline, diesel fuel and jet fuel. Colonial transports more than 100 million gallons per day of refined products, or approximately 50% of refined petroleum products consumed in the East Coast of the United States, through its 5,500 mile system. Colonial operates its pipeline system. SPLC will own a 14.508% interest in Colonial and third parties will own the remaining interests.

For more information about our assets, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—How We Generate Revenue” and “Business—Our Assets and Operations.”

The table below sets forth certain information regarding our initial assets as of June 30, 2014:

 

Entity

   Our
Ownership
Interest
    SPLC Retained
Ownership
Interest(1)
    Pipeline
Length
(Miles)
     Mainline
Capacity
(Kbpd)(2)
    Estimated Contribution to Our
Forecasted Cash Available for
Distribution for the Twelve Months
Ending September 30, 2015(3)
 

Zydeco (Ho-Ho)

     43.0     57.0     350         375 (4)      62.0

Mars

     28.6     42.9     163         400 (5)      21.7

Bengal

     49.0     1.0     158         515 (6)      11.6

Colonial

     1.612     14.508     5,500         2,500        4.7

 

(1) We will have the right to vote SPLC’s retained ownership interest in Zydeco, Mars and Bengal.
(2) Pipeline capacities vary depending on the specific products being transported, among other factors.
(3) Total cash available for distribution used in calculating percentages shown does not give effect to incremental general and administrative expense related to being a publicly traded partnership and other expenses to be incurred at the partnership level. Please read “Cash Distribution Policy and Restrictions on Distributions” for important information as to the assumptions we have made for our financial forecast and for a reconciliation of cash available for distribution to net income for each of Zydeco, Mars and Bengal. Our forecast is a forward-looking statement and should be read together with our historical financial statements and accompanying notes included elsewhere in this prospectus, our unaudited pro forma condensed combined financial statements and accompanying notes included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(4) The capacity of Ho-Ho ranges from 250 kbpd to 400 kbpd depending on the segment of pipeline and the type of crude oil transported. The mainline capacity, which represents the capacity of the 213-mile segment from Nederland to Houma, following completion of the flow reversal in December 2013, is 360 kbpd. We expect to complete several expansion projects on Ho-Ho, including the installation of new pump stations and the addition of a new connection at Nederland before the end of 2014, and the addition of a new third-party connection and new tankage at Port Neches before the end of 2015. Following completion of these expansion projects, the mainline capacity of Ho-Ho is expected to increase from 360 kbpd to 375 kbpd.
(5) The capacity of the Mars pipeline system ranges from 100 kbpd to 600 kbpd depending on the segment of pipeline and the type of crude oil transported. The mainline capacity, which represents the capacity of the 54-mile segment from the connections to Ursa and Medusa at the West Delta 143 platform complex to the connection with the Amberjack pipeline at Fourchon, Louisiana, is 400 kbpd.
(6) The Bengal pipeline system consists of two pipelines that have capacities of 210 kbpd and 305 kbpd.

 

 

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Organic Growth Projects

We have a history of making capital investments in response to customer demand. We have recently completed two significant capital projects that are supported by long-term transportation agreements and will increase throughput on our pipelines. We believe that our recently completed growth projects and our current expansion projects provide near-term growth with attractive returns for us.

Reversal and Expansion of Ho-Ho. In response to strong shipper demand, we completed a reversal of Ho-Ho in December 2013. Ho-Ho now flows from the Houston, Texas area to market hubs in St. James and Clovelly, Louisiana and transports growing light crude oil volumes arriving in the Houston market from the Eagle Ford shale, the Permian Basin and the Bakken shale to Gulf Coast refining centers. We also expect that Ho-Ho will eventually carry crude oil volumes arriving in the Houston market from the Canadian oil sands. We expect to complete several expansion projects on Ho-Ho, including the installation of new pump stations and the addition of a new connection at Nederland before the end of 2014, and the addition of a new third-party connection and new tankage at Port Neches before the end of 2015. The open seasons related to the reversal and expansion projects resulted in FERC-approved transportation services agreements for approximately 87% of the fully expanded capacity of Ho-Ho with a weighted average remaining term of over eight years.

Mars Expansion. Mars recently completed an expansion project that became operational in February 2014. The expansion added approximately 41 miles of 16- to 18-inch diameter pipeline that connects the new Olympus platform to Mars’ existing pipeline at the West Delta 143 platform. The Olympus platform, which is the largest tension-leg platform in the Gulf of Mexico, accesses the deepwater South Deimos, West Boreas and Mars fields. In connection with this expansion, Mars entered into life-of-lease agreements with certain producers that include a guaranteed return to Mars. The annual transportation rate under these agreements is adjusted over a fixed period of time to achieve a pre-determined rate of return. At the end of the fixed period, the last calculated rate will be locked in and thereafter subject to adjustments based on the FERC index. As a corridor pipeline, Mars is positioned to allow additional connections from new supply pipelines without significant capital expenditures by Mars. Due to Mars’ existing connections to the Medusa, Ursa and Amberjack pipelines, we expect that Mars will be an increasingly important conduit for crude oil produced in the deepwater Gulf of Mexico to access salt dome caverns in Clovelly, Louisiana which are major trading hubs.

Business Strategies

Our primary business objectives are to generate stable and predictable cash flows and increase our quarterly cash distribution per unit over time through safe and reliable operation of our assets.

 

   

Maintain Safe and Reliable Operations. We are committed to maintaining and improving the safety, reliability and efficiency of our operations, which we believe to be key components in generating stable cash flows. We strive for operational excellence by using SPLC’s existing programs to integrate health, occupational safety, process safety and environmental principles throughout our business with a commitment to continuous improvement. In addition, many of our assets are relatively new or have recently undergone significant upgrades. SPLC’s employees operate Ho-Ho for Zydeco and also operate Mars. Colonial operates its pipeline system. Colonial is the system operator of Bengal for regulatory reporting purposes and operates Bengal’s tankage. SPLC operates Bengal’s pipelines. Both SPLC and Colonial are industry-leading pipeline operators that have been recognized for safety and reliability and continually invest in the maintenance and integrity of our assets. We will continue to employ SPLC’s rigorous training, integrity and audit programs to drive ongoing improvements in safety as we strive for zero incidents.

 

   

Focus on Fee-Based Businesses. We are focused on generating stable and predictable cash flows by providing fee-based transportation services, most of which are underpinned by ship-or-pay contracts or

 

 

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life-of-lease agreements, some of which provide us with a guaranteed return. We intend to continue to focus on assets that generate revenue from multiple long-term, fee-based agreements with inflation escalators.

 

   

Grow Our Business Through Strategic Acquisitions. We plan to pursue strategic acquisitions of assets from Shell and third parties. We believe Shell will offer us opportunities to acquire additional interests in our assets, as well as additional midstream assets that it currently owns or may acquire or develop in the future. We also may have opportunities to pursue the acquisition or development of additional assets jointly with Shell or its affiliates. However, Shell and its affiliates are under no obligation to offer any assets or opportunities to us.

 

   

Optimize Existing Assets and Pursue Organic Growth Opportunities. We will seek to enhance the profitability of our businesses by pursuing opportunities to increase throughput volumes, manage costs and improve operating efficiencies. We also will consider opportunities to increase revenue on our pipeline systems by evaluating and capitalizing on organic expansion projects, including, for example, connecting additional production or refineries, or increasing pipeline capacity by adding pumps. Our recent reversal of Ho-Ho and the expansion of Mars demonstrate our ability to respond to growing demand for transportation services in the areas in which we operate.

Competitive Strengths

We believe that we are well positioned to execute our business strategies based on the following competitive strengths:

 

   

Our Relationship with Shell. We believe that our relationship with Shell provides us with a strategic advantage to operate and compete for additional midstream assets. SPLC will own our general partner, a significant limited partner interest in us and all of our incentive distribution rights. In addition, Shell owns a substantial amount of other midstream assets, including additional interests in our assets. We believe that our relationship with Shell and its affiliates will provide us with significant growth opportunities. We also expect that we will benefit from SPLC’s long history of operating safe and reliable pipelines.

 

   

Strategically Located Assets. Our assets serve as key infrastructure to transport growing onshore and offshore production to Gulf Coast refining markets and to deliver refined products from those markets to major demand centers. Our crude oil pipeline systems are strategically located along the Texas and Louisiana Gulf Coast and offshore Louisiana and link major onshore and offshore areas of current and future production with key refining markets. Our refined products pipelines connect Gulf Coast and southeastern U.S. refining areas to major demand centers from Alabama to New York.

 

   

Stable and Predictable Cash Flows. Our assets primarily consist of interests in common carrier pipeline systems that generate stable revenue under FERC-based tariffs and long-term transportation agreements. Our ship-or-pay contracts will substantially mitigate volatility in our cash flows by limiting our exposure to changing market dynamics that can reduce production and affect shipper demand. Our life-of-lease agreements, some of which have a guaranteed return, reduce our cash flow exposure to volume reductions. We also believe that our strong position as the outlet for major offshore production with consistent production activity will provide consistent revenue.

 

   

Financial Flexibility. At the closing of this offering, we will enter into a revolving credit facility with an affiliate of Shell with $300 million in available capacity. We believe that we will have the financial flexibility to execute our growth strategy through borrowing capacity under our revolving credit facility and access to capital markets.

 

   

Experienced Management Team. Our management team has substantial experience in the management and operation of pipelines, storage facilities and other midstream assets. Our management team also has

 

 

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expertise in executing growth strategies in the midstream sector. Our management team includes many of SPLC’s and Shell’s senior management, who average over 20 years of experience in the energy industry.

Implications of Being an Emerging Growth Company

As our predecessor had less than $1 billion in revenues during its last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may, for up to five years, take advantage of specified exemptions from reporting and other regulatory requirements that are otherwise applicable generally to public companies. These exemptions include:

 

   

the initial presentation of two years of audited financial statements and two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in the registration statement of an initial public offering of common equity securities;

 

   

exemption from the auditor attestation requirement on the effectiveness of our system of internal controls over financial reporting;

 

   

delayed adoption of new or revised financial accounting standards; and

 

   

reduced disclosure about our executive compensation arrangements.

We may take advantage of these provisions until we are no longer an emerging growth company, which will occur on the earliest of (i) the last day of the fiscal year following the fifth anniversary of this offering, (ii) the last day of the fiscal year in which we have more than $1 billion in annual revenues, (iii) the last day of the fiscal year in which we have more than $700 million in market value of our common units held by non-affiliates as of the end of our fiscal second quarter or (iv) the date on which we have issued more than $1 billion of non-convertible debt over a three-year period.

We have elected to take advantage of all of the applicable JOBS Act provisions, except that we have elected to opt out of the exemption that allows emerging growth companies to extend the transition period for complying with new or revised financial accounting standards, which election is irrevocable. Accordingly, the information that we provide you may be different than what you may receive from other public companies in which you hold equity interests.

Risk Factors

An investment in our common units involves risks associated with our business, our partnership structure and the tax characteristics of our common units. You should carefully consider the risks described in “Risk Factors” and the other information in this prospectus before investing in our common units.

Risks Related to Our Business

 

   

We may not have sufficient cash available for distribution following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay minimum quarterly distributions to our unitholders.

 

   

The assumptions underlying the forecast of cash available for distribution that we include in “Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause our actual cash available for distribution to differ materially from our forecast.

 

   

We do not control certain of the entities that own our assets.

 

 

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Risks Inherent in an Investment in Us

 

   

Our general partner and its affiliates, including Shell, have conflicts of interest with us and limited duties to us and our unitholders, and they may favor their own interests to the detriment of us and our unitholders. Additionally, we have no control over the business decisions and operations of Shell, and it is under no obligation to adopt a business strategy that favors us.

 

   

Our partnership agreement requires that we distribute all of our available cash, which could limit our ability to grow and make acquisitions.

 

   

The fees and reimbursements due to our general partner and its affiliates, including SPLC, for services provided to us or on our behalf will reduce our cash available for distribution. In certain cases, the amount and timing of such reimbursements will be determined by our general partner and its affiliates, including SPLC.

 

   

Our partnership agreement replaces fiduciary duties applicable to a corporation with contractual duties and restricts the remedies available to holders of our common units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

 

   

If you are an ineligible holder (as defined in our partnership agreement), your common units may be subject to redemption.

 

   

Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.

 

   

Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors.

 

   

Even if holders of our common units are dissatisfied, they cannot initially remove our general partner without its consent.

 

   

There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. Following this offering, the price of our common units may fluctuate significantly, and you could lose all or part of your investment.

Tax Risks to Common Unitholders

 

   

Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service, or IRS, were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, or if we were otherwise subjected to a material amount of additional entity-level taxation, then our cash available for distribution would be substantially reduced.

 

   

Our unitholders’ share of our income will be taxable to them for federal income tax purposes even if they do not receive any cash distributions from us.

 

   

If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the cost of any IRS contest will reduce our cash available for distribution.

Formation Transactions

At or prior to the closing of this offering, the following transactions, which we refer to as the formation transactions, will occur:

 

   

SPLC will contribute and Zydeco will issue to us interests in Zydeco collectively representing an aggregate 43.0% ownership interest in Zydeco, and we will enter into a voting agreement with SPLC giving us the right to vote SPLC’s retained 57.0% ownership interest in Zydeco;

 

 

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SPLC will contribute a 28.6% ownership interest in Mars to us and will enter into a voting agreement with us giving us the right to vote its retained 42.9% ownership interest in Mars;

 

   

SPLC will contribute a 49.0% ownership interest in Bengal to us and will enter into a voting agreement with us giving us the right to vote its retained 1.0% ownership interest in Bengal;

 

   

SPLC will contribute a 1.612% ownership interest in Colonial to us;

 

   

we will issue 29,975,068 common units and 67,475,068 subordinated units, representing an aggregate 70.8% limited partner interest in us, to SPLC;

 

   

we will issue 2,754,084 general partner units, representing a 2% general partner interest in us, and all of our incentive distribution rights to our general partner;

 

   

we will issue 37,500,000 common units to the public in this offering, representing a 27.2% limited partner interest in us, and will apply the net proceeds as described in “Use of Proceeds”;

 

   

we will enter into a revolving credit facility with an affiliate of Shell with $300 million in available capacity, under which no amounts will be drawn at the closing of this offering; and

 

   

we and our general partner will enter into an omnibus agreement with SPLC pursuant to which we will agree, among other things, to pay our general partner an annual fee for general and administrative services to be provided to us.

The number of common units to be issued to SPLC includes 5,625,000 common units that will be issued at the expiration of the underwriters’ option to purchase additional common units, assuming that the underwriters do not exercise the option. Any exercise of the underwriters’ option to purchase additional common units would reduce the common units shown as issued to SPLC by the number to be purchased by the underwriters in connection with such exercise. If and to the extent the underwriters exercise their option to purchase additional common units, the number of common units purchased by the underwriters pursuant to any exercise will be sold to the public, and any remaining common units not purchased by the underwriters pursuant to any exercise of the option will be issued to SPLC at the expiration of the option period for no additional consideration. We will use any net proceeds from the exercise of the underwriters’ option to purchase additional common units from us to make an additional cash distribution to SPLC.

 

 

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Organizational Structure After the Formation Transactions

After giving effect to the formation transactions described above, assuming the underwriters’ option to purchase additional common units from us is not exercised, our units will be held as follows:

 

Public common units

     27.2

Interests of Shell and affiliates:

  

Shell common units

     21.8

Shell subordinated units

     49.0

General partner units

     2.0
  

 

 

 

Total

     100.0
  

 

 

 

The following simplified diagram depicts our organizational structure after giving effect to the formation transactions described above.

 

LOGO

 

 

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Management

We are managed by the board of directors and executive officers of Shell Midstream Partners GP LLC, our general partner. SPLC is the sole owner of our general partner and has the right to appoint the entire board of directors of our general partner, including the independent directors appointed in accordance with the listing standards of the New York Stock Exchange, or NYSE. Unlike shareholders in a publicly traded corporation, our common unitholders are not entitled to elect our general partner or the board of directors of our general partner. Many of the executive officers and directors of our general partner also currently serve as officers of Shell. For more information about the directors and executive officers of our general partner, please read “Management—Directors and Executive Officers of Shell Midstream Partners GP LLC.” Our operations will be conducted through, and our operating assets will be owned by, various operating subsidiaries. However, neither we nor our subsidiaries will have any employees. Our general partner has the sole responsibility for providing the employees and other personnel necessary to conduct our operations, whether through directly hiring employees or by obtaining services of personnel employed by Shell, SPLC or third parties, but we sometimes refer to these individuals in this prospectus as our employees because they provide services directly to us.

Principal Executive Offices

Our principal executive offices are located at One Shell Plaza, 910 Louisiana Street, Houston, Texas 77002, and our telephone number is (713) 241-6161. Following the completion of this offering, our website will be located at www.shellmidstreampartners.com. We expect to make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission, or SEC, available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.

Summary of Conflicts of Interest and Duties

Under our partnership agreement, our general partner has a duty to manage us in a manner it believes is not adverse to our best interests. However, because our general partner is a wholly owned subsidiary of SPLC, the officers and directors of our general partner also have a duty to manage the business of our general partner in a manner that is not adverse to the best interests of SPLC. As a result of this relationship, conflicts of interest may arise in the future between us and our unitholders, on the one hand, and our general partner and its affiliates, including SPLC, on the other hand. For example, our general partner will be entitled to make determinations that affect the amount of cash distributions we make to the holders of common units, which in turn has an effect on whether our general partner receives incentive cash distributions. For a more detailed description of the conflicts of interest and duties of our general partner, please read “Risk Factors—Risks Inherent in an Investment in Us” and “Conflicts of Interest and Duties.”

Delaware law provides that Delaware limited partnerships may, in their partnership agreements, expand, restrict or eliminate the fiduciary duties owed by the general partner to limited partners and the partnership. Our partnership agreement contains various provisions replacing the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing the duties of our general partner and contractual methods of resolving conflicts of interest. The effect of these provisions is to restrict the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of its fiduciary duties. Our partnership agreement also provides that affiliates of our general partner, including SPLC and its affiliates, are not restricted from competing with us, and neither our general partner nor its affiliates have any obligation to present business opportunities to us. By purchasing a common unit, the purchaser agrees to be bound by the terms of our partnership agreement, and pursuant to the terms of our partnership agreement, each holder of common units consents to various actions and potential conflicts of interest contemplated in our

 

 

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partnership agreement that might otherwise be considered a breach of fiduciary or other duties under Delaware law. Please read “Conflicts of Interest and Duties—Duties of Our General Partner” for a description of the fiduciary duties imposed on our general partner by Delaware law, the replacement of those duties with contractual standards under our partnership agreement and certain legal rights and remedies available to holders of our common units and subordinated units. For a description of our other relationships with our affiliates, please read “Certain Relationships and Related Party Transactions.”

 

 

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The Offering

 

Common units offered to the public

37,500,000 common units.

 

  43,125,000 common units if the underwriters exercise in full their option to purchase additional common units from us.

 

Option to purchase additional units

We have granted the underwriters a 30-day option to purchase up to an additional 5,625,000 common units if the underwriters sell more than 37,500,000 common units in this offering.

 

Units outstanding after this offering

67,475,068 common units and 67,475,068 subordinated units, each representing an aggregate 49% limited partner interest in us, and 2,754,084 general partner units, representing a 2% general partner interest in us.

 

  If and to the extent the underwriters do not exercise their option to purchase additional common units, in whole or in part, we will issue up to an additional 5,625,000 common units to SPLC at the expiration of the option for no additional consideration. If and to the extent the underwriters exercise their option to purchase additional common units, the number of common units purchased by the underwriters pursuant to any exercise will be sold to the public, and any remaining common units not purchased by the underwriters pursuant to any exercise of the option will be issued to SPLC at the expiration of the option period for no additional consideration. Accordingly, the exercise of the underwriters’ option will not affect the total number of common units outstanding or the amount of cash needed to pay the minimum quarterly distribution on all units.

 

Use of proceeds

We expect to receive net proceeds of approximately $711.3 million from the sale of common units offered by this prospectus based on the assumed initial public offering price of $20.00 per common unit (the mid-point of the price range set forth on the cover of this prospectus), after deducting underwriting discounts, structuring fees and estimated offering expenses. We intend to use (i) approximately $423.3 million of the net proceeds of this offering to make a cash distribution to SPLC, (ii) approximately $188.0 million of the net proceeds of this offering to make a cash distribution to SPLC and a contribution to Zydeco, which will then make a cash distribution to SPLC, both to reimburse SPLC for capital expenditures incurred prior to this offering related to Zydeco, and (iii) approximately $100.0 million for general partnership purposes, including to fund potential expansion capital expenditures and acquisitions. Please read “Use of Proceeds.”

 

 

If the underwriters exercise their option to purchase additional common units in full, the additional net proceeds to us would be

 

 

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approximately $107.3 million, after deducting underwriting discounts. We will use any net proceeds from the exercise of the underwriters’ option to purchase additional common units from us to make an additional cash distribution to SPLC.

 

Cash distributions

We intend to pay a minimum quarterly distribution of $0.1625 per unit ($0.6500 per unit on an annualized basis) to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates. We refer to this cash as “available cash,” and we define its meaning in our partnership agreement. Our ability to pay minimum quarterly distributions is subject to various restrictions and other factors described in more detail under the caption “Cash Distribution Policy and Restrictions on Distributions.”

 

  For the quarter in which this offering closes, we intend to pay a prorated distribution on our units covering the period from the completion of this offering through December 31, 2014, based on the actual length of that period.

 

  Our partnership agreement requires us to distribute all of our available cash each quarter in the following manner:

 

   

first, 98% to the holders of common units and 2% to our general partner, until each common unit has received a minimum quarterly distribution of $0.1625 plus any arrearages from prior quarters;

 

   

second, 98% to the holders of subordinated units and 2% to our general partner, until each subordinated unit has received a minimum quarterly distribution of $0.1625; and

 

   

third, 98% to all unitholders, pro rata, and 2% to our general partner, until each unit has received a distribution of $0.186875.

 

  If cash distributions to our unitholders exceed $0.186875 per unit in any quarter, our general partner will receive, in addition to distributions on its 2% general partner interest, increasing percentages, up to 48%, of the cash we distribute in excess of that amount. We refer to these distributions as “incentive distributions” because they incentivize our general partner to increase distributions to our unitholders. In certain circumstances, our general partner, as the initial holder of our incentive distribution rights, has the right to reset the target distribution levels described above to higher levels based on our cash distributions at the time of the exercise of this reset election. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions.”

 

 

If we do not have sufficient available cash at the end of each quarter, we may, but are under no obligation to, borrow funds to pay

 

 

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distributions to our unitholders. We do not have a legal obligation to pay distributions at our minimum quarterly distribution rate or at any other rate except as provided in our partnership agreement.

 

  Pursuant to our partnership agreement, we will reimburse our general partner and its affiliates, including SPLC, for costs and expenses they incur and payments they make on our behalf. Pursuant to the omnibus agreement, we will pay an annual fee, initially $8.5 million, to SPLC for general and administrative services. In addition, we expect to incur $3.6 million of incremental general and administrative expense annually as a result of being a publicly traded partnership. Each of these payments will be made prior to making any distributions on our common units. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Formation Transactions.”

 

  The amount of cash available for distribution we must generate to support the payment of minimum quarterly distributions on our common and subordinated units and the corresponding distributions on our general partner units, in each case to be outstanding immediately after this offering, for four quarters is approximately $89.5 million (or an average of approximately $22.4 million per quarter).

On a pro forma basis, assuming we had completed this offering and the related formation transactions on January 1, 2013, our cash available for distribution for the twelve months ended June 30, 2014 and the year ended December 31, 2013 was approximately $59.8 million and $37.3 million, respectively. As a result, we would have had sufficient cash available for distribution to pay the full minimum quarterly distributions on our common units and the corresponding distributions on our general partner units but only approximately 33.6% of the minimum quarterly distributions on our subordinated units and the corresponding distributions on our general partner units for the twelve months ended June 30, 2014. For the year ended December 31, 2013, we would have had sufficient cash available for distribution to pay only approximately 83.3% of the full minimum quarterly distributions on our common units and the corresponding distributions on our general partner units, and we would not have had sufficient cash available for distribution to pay any of the minimum quarterly distributions on our subordinated units and the corresponding distributions on our general partner units for that period. Please read “Cash Distribution Policy and Restrictions on Distributions—Unaudited Pro Forma Cash Available for Distribution for the Twelve Months Ended June 30, 2014 and the Year Ended December 31, 2013.”

 

 

We believe, based on our financial forecast and related assumptions included in “Cash Distribution Policy and Restrictions on Distributions—Estimated Cash Available for Distribution for the Twelve Months Ending September 30, 2015,” we will have sufficient cash available for distribution to make cash distributions for the twelve months ending September 30, 2015, at the minimum quarterly

 

 

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distribution rate of $0.1625 per unit (or $0.6500 per unit on an annualized basis) on all of our common and subordinated units and to make the corresponding distributions on our general partner units, in each case to be outstanding immediately after this offering. Our actual results of operations, cash flows and financial condition during the forecast period may vary from the forecast, and there is no guarantee that we will make quarterly cash distributions to our unitholders. Please read “Cash Distribution Policy and Restrictions on Distributions.”

 

Subordinated units

SPLC will initially own all of our subordinated units. The principal difference between our common and subordinated units is that for any quarter during the subordination period, the subordinated units will not be entitled to receive any distribution of available cash until the common units have received the minimum quarterly distribution for such quarter plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units will not accrue arrearages.

 

Conversion of subordinated units

The subordination period will end on the first business day after the date that we have earned and paid distributions of at least (i) $0.6500 (the annualized minimum quarterly distribution) on each of the outstanding common units, subordinated units and general partner units for each of three consecutive, non-overlapping four-quarter periods ending on or after December 31, 2017, or (ii) $0.9750 (150% of the annualized minimum quarterly distribution) on each of the outstanding common units, subordinated units and general partner units and the related distributions on the incentive distribution rights for any four-quarter period ending on or after December 31, 2015, in each case provided there are no arrearages in payment of the minimum quarterly distributions on our common units at that time.

 

  The subordination period also will end upon the removal of our general partner other than for cause if no subordinated units or common units held by the holders of subordinated units or their affiliates are voted in favor of that removal.

 

  When the subordination period ends, each outstanding subordinated unit will convert into one common unit, and common units will no longer be entitled to arrearages. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordination Period.”

 

Issuance of additional units

Our partnership agreement authorizes us to issue an unlimited number of additional units without the approval of our unitholders. Our unitholders will not have preemptive or participation rights to purchase their pro rata share of any additional units issued. Please read “Units Eligible for Future Sale” and “Our Partnership Agreement—Issuance of Additional Partnership Interests.”

 

 

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Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our business. Our unitholders will have no right to elect our general partner or its directors on an annual or other continuing basis. Our general partner may not be removed except by a vote of the holders of at least 66 2/3% of the outstanding units, including any units owned by our general partner and its affiliates, voting together as a single class. Upon the closing of this offering, SPLC will own an aggregate of 72.2% of our common and subordinated units. This will give SPLC the ability to prevent the involuntary removal of our general partner. Please read “Our Partnership Agreement—Voting Rights.”

 

Limited call right

If at any time our general partner and its affiliates own more than 75% of the outstanding common units, our general partner will have the right, but not the obligation, to purchase all, but not less than all, of the remaining common units at a price not less than the then-current market price of the common units, as calculated in accordance with our partnership agreement.

 

Estimated ratio of taxable income to distributions

We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ending December 31, 2017, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be 20% or less of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $0.6500 per unit, we estimate that your average allocable federal taxable income per year will be no more than approximately $0.1300 per unit. Thereafter, the ratio of allocable taxable income to cash distributions to you could substantially increase. Please read “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Ratio of Taxable Income to Distributions” for the basis of this estimate.

 

Material U.S. federal income tax consequences

For a discussion of the material federal income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States, please read “Material U.S. Federal Income Tax Consequences.”

 

Exchange listing

We have been approved to list our common units on the NYSE under the symbol “SHLX,” subject to official notice of issuance.

 

 

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Summary Historical and Unaudited Pro Forma Financial Data

Shell Midstream Partners, L.P. was formed on March 19, 2014. Therefore, no historical financial information of Shell Midstream Partners, L.P. is included in the following tables. Upon completion of this offering, we will own a 43.0% interest in Zydeco, which will acquire ownership of Ho-Ho before the closing of this offering, a 28.6% interest in Mars, a 49.0% interest in Bengal and a 1.612% interest in Colonial. We will account for these interests as follows:

 

   

Zydeco. Through our 43.0% ownership interest in Zydeco and the right to vote SPLC’s 57.0% retained ownership interest, we will control Zydeco for accounting purposes and will consolidate the results of Zydeco. The 57.0% ownership interest in Zydeco retained by SPLC will be reflected as a noncontrolling interest in our consolidated financial statements going forward.

 

   

Mars. We will account for our ownership interest in Mars using the equity method of accounting, and the percentage of Mars’ net income attributable to our 28.6% ownership interest will be shown as income from equity investment in our consolidated statements of income going forward. Through our 28.6% ownership interest in Mars and the right to vote SPLC’s 42.9% retained ownership interest, we will have the right to vote 71.5% of the ownership interests in Mars. However, for accounting purposes, we will not control Mars.

 

   

Bengal. We will account for our ownership interest in Bengal using the equity method of accounting, and the percentage of Bengal’s net income attributable to our 49.0% ownership interest will be shown as income from equity investment in our consolidated statements of income going forward. Through our 49.0% ownership interest in Bengal and the right to vote SPLC’s 1.0% retained ownership interest, we will have the right to vote 50% of the ownership interests in Bengal. However, for accounting purposes, we will not control Bengal.

 

   

Colonial. We will account for our ownership interest in Colonial using the cost method of accounting, and cash distributions received from Colonial will be shown as dividend income in our consolidated statements of income going forward.

The following table shows summary historical combined financial data of Ho-Ho, our predecessor, and summary unaudited pro forma condensed combined financial data of Shell Midstream Partners, L.P. for the periods ended and as of the dates indicated. The summary historical combined financial data of our predecessor as of, and for the years ended, December 31, 2013 and 2012, are derived from audited combined financial statements of our predecessor, which are included elsewhere in this prospectus. The summary historical unaudited condensed combined financial data of our predecessor as of June 30, 2014 and for the six months ended June 30, 2014 and 2013 are derived from the unaudited condensed combined financial statements of our predecessor included elsewhere in this prospectus. The summary pro forma financial data of Shell Midstream Partners, L.P. as of and for the six months ended June 30, 2014 and for the year ended December 31, 2013 are derived from the unaudited pro forma condensed combined financial statements of Shell Midstream Partners, L.P. included elsewhere in this prospectus. The following table should be read in conjunction with, and is qualified in its entirety by reference to, the audited historical and unaudited pro forma condensed combined financial statements and accompanying notes included elsewhere in this prospectus. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The pro forma adjustments in the unaudited pro forma condensed combined balance sheet have been prepared as if certain formation transactions to be effected at the closing of this offering had taken place as of June 30, 2014. The pro forma adjustments in the unaudited pro forma condensed combined statement of income have been prepared as if certain formation transactions to be effected at the closing of this offering had taken place on January 1, 2013. These formation transactions include, and the unaudited pro forma condensed combined financial statements give effect to, the following:

 

   

the impact of the contribution by SPLC to Zydeco of Ho-Ho and related assets;

 

 

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the contribution by SPLC and the issuance by Zydeco to us of interests in Zydeco collectively representing an aggregate 43.0% ownership interest in Zydeco, and execution of an agreement with SPLC giving us the right to vote its 57.0% ownership interest;

 

   

the contribution by SPLC to us of a 28.6% ownership interest in Mars and execution of an agreement with SPLC giving us the right to vote its 42.9% ownership interest;

 

   

the contribution by SPLC to us of a 49.0% ownership interest in Bengal and execution of an agreement with SPLC giving us the right to vote its 1.0% ownership interest;

 

   

the contribution by SPLC to us of a 1.612% ownership interest in Colonial; and

 

   

our entry into an omnibus agreement with SPLC and certain of its affiliates, including our general partner, pursuant to which, among other things, we will pay an annual fee, initially $8.5 million, to SPLC for general and administrative services.

The unaudited pro forma condensed combined financial statements also reflect the following significant assumptions and formation transactions related to this offering:

 

   

the issuance of 37,500,000 common units to the public, 2,754,084 general partner units and the incentive distribution rights to our general partner and 29,975,068 common units and 67,475,068 subordinated units to SPLC; and

 

   

the application of the net proceeds of this offering as described in “Use of Proceeds.”

The unaudited pro forma condensed combined financial statements do not give effect to an estimated $3.6 million per year in incremental general and administrative expenses as a result of being a publicly traded partnership, including costs associated with annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, investor relations activities, registrar and transfer agent fees, incremental director and officer liability insurance costs and director compensation. Additionally, the unaudited pro forma condensed combined financial statements do not give effect to changes in insurance expense for Zydeco and Mars.

The summary unaudited pro forma financial data of Mars, Bengal and Colonial are derived from the unaudited pro forma financial statements of Shell Midstream Partners, L.P. included elsewhere in this prospectus. The unaudited pro forma statement of income adjustments for Mars and Bengal were prepared as if the formation transactions related to Mars and Bengal had taken place on January 1, 2013. Dividend income received from our investment in Colonial is presented as a separate line item in the unaudited pro forma condensed combined statements of income.

 

 

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The following table presents the non-GAAP financial measures of Adjusted EBITDA and cash available for distribution. For definitions of Adjusted EBITDA and cash available for distribution and a reconciliation to our most directly comparable financial measures calculated and presented in accordance with GAAP, please read “—Non-GAAP Financial Measures.”

 

    Ho-Ho Historical (Predecessor)     Shell Midstream
Partners,

L.P. Pro Forma
 
    Six Months Ended
June  30,
    Year Ended
December 31,
    Six
Months
Ended
June 30,
2014
    Year Ended
December 31,
2013
 
(unaudited)       2014             2013         2013     2012      
(in millions)                                 (As Revised)  

Statements of Operations Data:

           

Total Revenue

  $ 79.5      $ 53.9      $ 91.6      $ 113.0      $ 79.5      $ 91.6   

Costs and Expenses:

           

Operations and maintenance

    21.4        30.9        52.2        44.2        21.4        52.2   

Loss (gain) from disposition of fixed assets

    —          —          (20.8     1.2        —          (20.8

General and administrative

    8.3        6.0        12.2        10.4        12.0        19.5   

Depreciation and amortization

    5.3        3.3        6.9        5.8        5.3        6.9   

Property and other taxes

    3.1        2.5        4.6        4.4        3.1        4.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    38.1        42.7        55.1        66.0        41.8        62.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

  $ 41.4      $ 11.2      $ 36.5      $ 47.0      $ 37.7      $ 29.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from equity investment—Mars

    —          —          —          —          12.0        21.6   

Income from equity investment—Bengal

    —          —          —          —          9.2        17.8   

Dividend income—Colonial

    —          —          —          —          2.7        5.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 41.4      $ 11.2      $ 36.5      $ 47.0      $ 61.6      $ 73.6   

Less:

           

Net income attributable to noncontrolling interests—Zydeco(1)

    —          —          —          —          23.9        21.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Shell Midstream Partners

  $ 41.4      $ 11.2      $ 36.5      $ 47.0      $ 37.7      $ 52.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per limited partner unit (basic and diluted):

           

Common units

          $ 0.33      $ 0.65   

Subordinated units

          $ 0.22      $ 0.11   

Balance Sheet Data (at period end):

           

Property, plant and equipment, net

  $ 249.3      $ 129.1      $ 223.5      $ 107.4      $ 260.7     

Equity method investments—Mars and Bengal

    —          —          —          —          158.4     

Total assets

    290.4        151.7        250.3        135.2       

Total debt

    —          —          —          —          —       

Statements of Cash Flow Data:

           

Net cash provided by (used in):

           

Operating activities

  $ 49.2      $ 31.0      $ 25.1      $ 51.8       

Investing activities

    (46.3     (21.0     (82.6     (4.8    

Financing activities

    (2.9     (10.0     57.5        (47.0    

Other Data:

           

Adjusted EBITDA(2)

  $ 46.7      $ 14.5      $ 22.6      $ 54.0      $ 65.9      $ 42.2   

Adjusted EBITDA attributable to Shell Midstream Partners(2)

          $ 39.0      $ 28.6   

Capital expenditures—Ho-Ho:

           

Maintenance

    3.7        1.0        2.2        3.5       

Expansion

    42.6        20.0        102.9        1.3       

Cash available for distribution(2)

  $ 58.1      $ 13.5      $ 20.4      $ 50.5      $ 42.2      $ 37.3   

 

(1) Represents net income attributable to SPLC’s ownership interest in Zydeco.
(2) For a discussion of the non-GAAP financial measures Adjusted EBITDA and cash available for distribution, please read “Selected Historical and Unaudited Pro Forma Financial Data—Non-GAAP Financial Measures.”

 

 

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Non-GAAP Financial Measures

We define Adjusted EBITDA as net income before income taxes, net interest expense, gain or loss from dispositions of fixed assets, and depreciation and amortization, plus cash distributed to the partnership from equity investments for the applicable period, less income from equity investments. We define Adjusted EBITDA attributable to Shell Midstream Partners as Adjusted EBITDA less Adjusted EBITDA attributable to noncontrolling interests. We present these financial measures because we believe replacing our proportionate share of our equity investments’ net income with the cash received from such equity 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 Shell Midstream Partners less maintenance capital expenditures attributable to Shell Midstream Partners, net interest paid, cash reserves and income taxes paid, plus net adjustments from volume deficiency payments attributable to Shell Midstream Partners. Cash available for distribution will not reflect changes in working capital balances.

For Mars and Bengal, we define Adjusted EBITDA as net income before net interest expense, income taxes, gain or loss from pipeline operations and depreciation and amortization, and cash available for distribution as Adjusted EBITDA less maintenance capital expenditures and cash interest expense.

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

 

   

our operating performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or, in the case of Adjusted EBITDA, financing methods;

 

   

the ability of our business to generate sufficient cash to support our decision to make distributions to our unitholders;

 

   

our ability to incur and service debt and fund capital expenditures; and

 

   

the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.

We believe that the presentation of Adjusted EBITDA and cash available for distribution in this prospectus 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 attributable to Shell Midstream Partners and net cash provided by operating activities. Adjusted EBITDA and cash available for distribution should not be considered as an alternative to GAAP net income or net cash provided by operating activities. Adjusted EBITDA and cash available for distribution have important limitations as analytical tools because they exclude some but not all items that affect net income and net cash provided by operating activities. You should not consider Adjusted EBITDA or cash available for distribution in isolation or as a substitute for analysis of our results as reported under GAAP. Additionally, because Adjusted EBITDA and cash available for distribution may be defined differently by other companies in our industry, our definition of Adjusted EBITDA and cash available for distribution may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.

 

 

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The following table presents a reconciliation of Adjusted EBITDA and cash available for distribution to net income and net cash provided by (used in) operating activities, respectively, the most directly comparable GAAP financial measures, on a historical basis and pro forma basis, as applicable, for each of the periods indicated.

 

    Ho-Ho Historical (Predecessor)     Shell Midstream Partners,
L.P. Pro Forma
 
(unaudited)   Six Months Ended
June 30,
    Year Ended
December 31,
    Six  Months
Ended
June 30,
2014
    Year Ended
December 31,
2013
 
(in millions)       2014             2013         2013     2012      
Reconciliation of Adjusted EBITDA to Net Income:                           (As Revised)  

Net income

  $ 41.4      $ 11.2      $ 36.5      $ 47.0      $ 61.6      $ 73.6   

Add:

           

Loss (gain) from disposition of fixed assets

    —          —          (20.8     1.2        —          (20.8

Depreciation and amortization

    5.3        3.3        6.9        5.8        5.3        6.9   

Cash distribution received from equity investments—Mars(1)

    —          —          —          —          11.4        3.4   

Cash distribution received from equity investments—Bengal

    —          —          —          —          8.8        18.5   

Less:

           

Income from equity investment—Mars

    —          —          —          —          12.0        21.6   

Income from equity investment—Bengal

    —          —          —          —          9.2        17.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 46.7      $ 14.5      $ 22.6      $ 54.0      $ 65.9      $ 42.2   

Less:

           

Adjusted EBITDA attributable to noncontrolling interests—Zydeco

    —          —          —          —          26.9        13.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA Attributable to Shell Midstream Partners

  $ 46.7      $ 14.5      $ 22.6      $ 54.0      $ 39.0      $ 28.6   

Less:

           

Cash interest

    —          —          —          —          0.4        0.6   

Maintenance capital expenditures(2)

    3.7        1.0        2.2        3.5        1.6        0.9   

Adjustment for insurance expense

    —          —          —          —          1.3        2.9   

Incremental general and administrative expense of being a public partnership

    —          —          —          —          1.8        3.6   

Add:

           

Net adjustments from volume deficiency payments attributable to Shell Midstream Partners(3)

    15.1        —          —          —          6.5        —     

Assumed capital contribution from SPLC to fund Mars expansion capital expenditures attributable to Shell Midstream Partners(4)

    —          —          —          —          1.8        16.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Available for Distribution attributable to Shell Midstream Partners

  $ 58.1      $ 13.5      $ 20.4      $ 50.5      $ 42.2      $ 37.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation of Adjusted EBITDA to Net Cash Provided by Operating Activities:

           

Net cash provided by operating activities

  $ 49.2      $ 31.0      $ 25.1      $ 51.8       

Less:

           

Change in assets and liabilities

    2.5        16.5        2.5        (2.2    
 

 

 

   

 

 

   

 

 

   

 

 

     

Adjusted EBITDA

  $ 46.7      $ 14.5      $ 22.6      $ 54.0       
 

 

 

   

 

 

   

 

 

   

 

 

     

 

(1) Represents cash received from Mars for the period shown. For the six months ended June 30, 2014 and the year ended December 31, 2013, the distribution from Mars was net of cash reserved for significant expansion capital expenditures. Following this offering, we expect that Mars will distribute substantially all of its cash from operations.
(2) Pro forma maintenance capital expenditures represent our proportionate ownership share of Zydeco’s maintenance capital expenditures for the periods shown.
(3) Represents a net adjustment to reflect (a) the receipt of cash payments with respect to committed volume deficiencies under Zydeco’s FERC-approved transportation services agreements that are recognized as deferred revenue and (b) the absence of such cash payments when deferred revenue is recognized upon the satisfaction or expiration of certain conditions under Zydeco’s FERC-approved transportation services agreements. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—How We Generate Revenue.” Pro forma net adjustments from volume deficiency payments represent our proportionate ownership share of Zydeco’s net adjustments from volume deficiency payments for the periods shown.

 

 

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(4) Reflects assumed payment by SPLC for our proportionate share of expansion capital expenditures incurred by Mars attributable to our pro forma ownership interest in Mars. During the period shown, Mars funded expansion capital expenditures with cash from operations. Following this offering, we expect that Mars will distribute substantially all of its cash from operations.

The following table presents for Zydeco a reconciliation of Adjusted EBITDA and cash available for distribution to net income, the most directly comparable GAAP financial measure, on a historical basis and pro forma basis, as applicable, for the period indicated.

 

(unaudited)

(in millions)

   Six Months Ended
June 30, 2014
     Year Ended
December 31, 2013
 

Zydeco(1)

     

Reconciliation of Adjusted EBITDA and Cash Available for Distribution to Net Income

     

Net income

   $ 41.4       $ 36.5   

Pro forma adjustments(2)

     0.5         1.2   
  

 

 

    

 

 

 

Pro Forma Net Income

   $ 41.9       $ 37.7   

Add:

     

Loss (gain) from disposition of fixed assets

     —           (20.8

Depreciation and amortization

     5.3         6.9   

Interest expense, net

     —           —     
  

 

 

    

 

 

 

Adjusted EBITDA

   $ 47.2       $ 23.8   

Less:

     

Maintenance capital expenditures

     3.7         2.2   

Cash interest expense

     —           —     

Add:

     

Net adjustments from volume deficiency payments(3)

     15.1         —     

Adjustment for Zydeco insurance

     0.7         0.8   
  

 

 

    

 

 

 

Cash Available for Distribution

   $ 59.3       $ 22.4   
  

 

 

    

 

 

 

Cash Distribution by Zydeco to its members—100%

   $ 59.3       $ 22.4   

Cash Distribution by Zydeco to Shell Midstream Partners—43.0%

   $ 25.5       $ 9.6   

 

(1) Derived from the historical combined financial statements of Ho-Ho, our predecessor, which pipeline system will be owned by Zydeco.
(2) Represents adjustments to general and administrative expense. Please read the accompanying notes to the unaudited pro forma condensed combined financial statements.
(3) Represents a net adjustment to reflect (a) the receipt of cash payments with respect to committed volume deficiencies under Zydeco’s FERC-approved transportation services agreements that are recognized as deferred revenue and (b) the absence of such cash payments when deferred revenue is recognized upon the satisfaction or expiration of certain conditions under Zydeco’s FERC-approved transportation services agreements. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—How We Generate Revenue.”

 

 

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The following table presents for Mars a reconciliation of Adjusted EBITDA and cash available for distribution to net income, the most directly comparable GAAP financial measure, on a historical basis for the period indicated.

 

(unaudited)

(in millions)

   Six Months Ended
June 30, 2014
    Year Ended
December 31, 2013
 
           (As Revised)  

Mars

    

Reconciliation of Adjusted EBITDA and Cash Available for Distribution to Net Income

    

Net income

   $ 41.8      $ 75.5   

Add:

    

Net loss (gain) from pipeline operations

     (0.6     (9.0

Depreciation and amortization

     5.2        5.4   

Interest expense, net

     —          —     
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 46.4      $ 71.9   

Less:

    

Maintenance capital expenditures

     —          1.6   

Cash interest expense

     —          —     
  

 

 

   

 

 

 

Cash Available for Distribution

   $ 46.4      $ 70.3   

Less:

    

Cash reserves(1)

     6.4        58.3   
  

 

 

   

 

 

 

Cash Distribution by Mars to its partners—100%(2)

   $ 40.0      $ 12.0   
  

 

 

   

 

 

 

Cash Distribution by Mars to Shell Midstream Partners—28.6%

   $ 11.4      $ 3.4   

 

(1) Represents cash reserved for significant expansion capital expenditures net of changes in working capital. Following this offering, we expect that Mars will distribute substantially all of its cash from operations.
(2) The distribution for the six months ended June 30, 2014 reflects a $32.9 million distribution to SPLC and an affiliate of BP through June 30, 2014 and a $7.1 million distribution to an affiliate of BP on July 1, 2014.

 

 

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The following table presents for Bengal a reconciliation of Adjusted EBITDA and cash available for distribution to net income, the most directly comparable GAAP financial measure, on a historical basis for the period indicated.

 

(unaudited)

(in millions)

   Six Months Ended
June 30, 2014
     Year Ended
December 31, 2013
 

Bengal

     

Reconciliation of Adjusted EBITDA and Cash Available for Distribution to Net Income

     

Net income

   $ 18.7       $ 36.3   

Add:

     

Net loss (gain) from pipeline operations

     —           —     

Depreciation and amortization

     2.6         5.2   

Interest expense, net

     0.1         0.2   
  

 

 

    

 

 

 

Adjusted EBITDA

   $ 21.4       $ 41.7   

Less:

     

Maintenance capital expenditures

     0.5         2.5   

Cash interest expense

     0.1         0.2   
  

 

 

    

 

 

 

Cash Available for Distribution

   $ 20.8       $ 39.0   

Less:

     

Cash reserves(1)

     2.9         1.3   
  

 

 

    

 

 

 

Cash Distribution by Bengal to its members—100%

   $ 17.9       $ 37.7   
  

 

 

    

 

 

 

Cash Distribution by Bengal to Shell Midstream Partners—49.0%

   $ 8.8       $ 18.5   

 

(1) Represents a discretionary cash reserve to be used for reinvestment and other general purposes.

 

 

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RISK FACTORS

Investing in our common units involves a high degree of risk. You should carefully consider the risks described below with all of the other information included in this prospectus before deciding to invest in our common units. Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. If any of the following risks actually occur, they may materially harm our business and our financial condition and results of operations. In this event, we might not be able to pay distributions on our common units, the trading price of our common units could decline, and you could lose part or all of your investment.

Risks Related to Our Business

We may not have sufficient cash available for distribution following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay minimum quarterly distributions to our unitholders.

The amount of cash available for distribution we must generate to support the payment for four quarters of minimum quarterly distributions on our common and subordinated units and the corresponding distributions on our general partner units, in each case to be outstanding immediately after this offering, is approximately $89.5 million (or an average of approximately $22.4 million per quarter). On a pro forma basis, assuming we had completed this offering on January 1, 2013, our cash available for distribution for the twelve months ended June 30, 2014 and the year ended December 31, 2013 would have been approximately $59.8 million and $37.3 million, respectively. As a result, we would have had sufficient cash available for distribution to pay the full minimum quarterly distributions on our common units and the corresponding distributions on our general partner units but only approximately 33.6% of the minimum quarterly distributions on our subordinated units and the corresponding distributions on our general partner units for the twelve months ended June 30, 2014. For the year ended December 31, 2013, we would have had sufficient cash available for distribution to pay only approximately 83.3% of the full minimum quarterly distributions on our common units and the corresponding distributions on our general partner units, and we would not have had sufficient cash available for distribution to pay any of the minimum quarterly distributions on our subordinated units and the corresponding distributions on our general partner units for that period.

We may not generate sufficient cash flows each quarter to enable us to pay minimum quarterly distributions. The amount of cash we can distribute on our units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things, our throughput volumes, tariff rates and fees and prevailing economic conditions. In addition, the actual amount of cash flows we generate will also depend on other factors, some of which are beyond our control, including:

 

   

the amount of our operating expenses and general and administrative expenses, including reimbursements to SPLC with respect to those expenses;

 

   

the amount and timing of capital expenditures and acquisitions we make;

 

   

our debt service requirements and other liabilities, and restrictions contained in our debt agreements;

 

   

fluctuations in our working capital needs;

 

   

the amount of cash distributed to us by the entities in which we own a noncontrolling interest; and

 

   

the amount of cash reserves established by our general partner.

For a description of additional restrictions and factors that may affect our ability to make cash distributions, please read “Cash Distribution Policy and Restrictions on Distributions.”

 

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The assumptions underlying the forecast of cash available for distribution that we include in “Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause our actual cash available for distribution to differ materially from our forecast.

The forecast of cash available for distribution set forth in “Cash Distribution Policy and Restrictions on Distributions” includes our forecast of our results of operations and cash available for distribution for the twelve months ending September 30, 2015. Our ability to pay full minimum quarterly distributions in the forecast period is based on a number of assumptions that may not prove to be correct and that are discussed in “Cash Distribution Policy and Restrictions on Distributions.” Our financial forecast has been prepared by management, and we have neither received nor requested an opinion or report on it from our or any other independent auditor. Our actual results may differ materially from those shown in or underlying the forecast of cash available for distribution, and, even if our results are consistent with the forecast, we may not pay cash distributions to our unitholders in the amounts shown or at all.

We do not control certain of the entities that own our assets.

We have no significant assets other than our ownership interest in Zydeco, Mars, Bengal and Colonial. As a result, our ability to make distributions to our unitholders depends on the performance of these entities and their ability to distribute funds to us. More specifically:

 

   

Each of Mars, Bengal and Colonial is managed by its governing board. Our ability to influence decisions with respect to the operation of each of Mars, Bengal and Colonial varies depending on the amount of control we exercise under the applicable governing agreement.

 

   

We do not control the amount of cash distributed by Colonial.

 

   

We do not directly control the amount of cash distributed by Bengal. We only influence the amount of cash distributed through our veto rights over the cash reserves made by Bengal.

 

   

We will not have the ability to unilaterally require Mars, Bengal or Colonial to make capital expenditures.

 

   

Mars, Bengal and Colonial may require us to make additional capital contributions to fund operating and maintenance expenditures, as well as to fund expansion capital expenditures, which would reduce the amount of cash otherwise available for distribution by us or require us to incur additional indebtedness.

 

   

Colonial, which had $1.6 billion of long-term debt as of June 30, 2014, may incur additional indebtedness without our consent, which debt payments would reduce the amount of cash that might otherwise available for distribution.

 

   

Our assets are operated by SPLC or Colonial, neither of which we control.

For a more complete description of the agreements governing the management and operation of the entities in which we own an interest, please read “Certain Relationships and Related Party Transactions—Contracts with Affiliates” and “Business—Our Assets and Operations.”

If we are unable to obtain needed capital or financing on satisfactory terms to fund expansions of our asset base, our ability to make quarterly cash distributions may be diminished or our financial leverage could increase. Other than our revolving credit facility, we do not have any commitment with any of our affiliates to provide any direct or indirect financial assistance to us following the closing of this offering.

If we do not make sufficient or effective expansion capital expenditures, we will be unable to expand our business operations and may be unable to maintain or raise the level of our quarterly cash distributions. We will

 

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be required to use cash from our operations, incur borrowings or access the capital markets in order to fund our expansion capital expenditures. The entities in which we own an interest may also incur borrowings or access the capital markets to fund capital expenditures. Our and their ability to obtain financing or access the capital markets may be limited by our financial condition at such time as well as the covenants in our debt agreements, general economic conditions and contingencies, or other uncertainties that are beyond our control. The terms of any such financing could also limit our ability to pay distributions to our common unitholders. Incurring additional debt may significantly increase our interest expense and financial leverage, and issuing additional limited partner interests may result in significant common unitholder dilution and increase the aggregate amount of cash required to maintain the then-current distribution rate, which could materially decrease our ability to pay distributions at the then-current distribution rate.

If we are unable to make acquisitions on economically acceptable terms from Shell or third parties, our future growth would be limited, and any acquisitions we may make may reduce, rather than increase, our cash flows and ability to make distributions to unitholders.

Our strategy to grow our business and increase distributions to unitholders is dependent in part on our ability to make acquisitions that result in an increase in cash available for distribution per unit. The consummation and timing of any future acquisitions will depend upon, among other things, whether we are able to:

 

   

identify attractive acquisition candidates;

 

   

negotiate acceptable purchase agreements;

 

   

obtain financing for these acquisitions on economically acceptable terms; and

 

   

outbid any competing bidders.

We can offer no assurance that we will be able to successfully consummate any future acquisitions, whether from Shell or any third parties. If we are unable to make future acquisitions, our future growth and ability to increase distributions will be limited. Furthermore, even if we do consummate acquisitions that we believe will be accretive, they may in fact result in a decrease in cash available for distribution per unit as a result of incorrect assumptions in our evaluation of such acquisitions or unforeseen consequences or other external events beyond our control. Acquisitions involve numerous risks, including difficulties in integrating acquired businesses, inefficiencies and unexpected costs and liabilities.

Our operations are subject to many risks and operational hazards. If a significant accident or event occurs that results in a business interruption or shutdown for which we are not adequately insured, our operations and financial results could be materially and adversely affected.

Our operations are subject to all of the risks and operational hazards inherent in transporting and storing crude oil and refined products, including:

 

   

damages to pipelines, facilities, offshore pipeline equipment and surrounding properties caused by third parties, severe weather, natural disasters, including hurricanes, and acts of terrorism;

 

   

maintenance, repairs, mechanical or structural failures at our or SPLC’s facilities or at third-party facilities on which our customers’ or our operations are dependent, including electrical shortages, power disruptions and power grid failures;

 

   

damages to, loss of availability of and delays in gaining access to interconnecting third-party pipelines, terminals and other means of delivering crude oil and refined products;

 

   

disruption or failure of information technology systems and network infrastructure due to various causes, including unauthorized access or attack or our proposed relocation of the central control room from which the pipelines of Zydeco, Mars and Bengal are remotely controlled;

 

   

leaks of crude oil or refined products as a result of the malfunction of equipment or facilities;

 

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unexpected business interruptions;

 

   

curtailments of operations due to severe seasonal weather; and

 

   

riots, strikes, lockouts or other industrial disturbances.

These risks could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of property and equipment and pollution or other environmental damage, as well as business interruptions or shutdowns of our facilities. Any such event or unplanned shutdown could have a material adverse effect on our business, financial condition and results of operations.

If third-party pipelines, production platforms, refineries, caverns and other facilities interconnected to our pipelines become unavailable to transport, produce, refine or store crude oil or refined products, our revenue and available cash could be adversely affected.

We depend upon third-party pipelines, production platforms, refineries, caverns and other facilities that provide delivery options to and from our pipelines. For example, Mars depends on a natural gas supply pipeline connecting to the West Delta 143 platform to power its equipment and delivers the volumes it transports to salt dome caverns in Clovelly, Louisiana. Because we do not own these third-party pipelines, production platforms, refineries, caverns or facilities, their continuing operation is not within our control. For example, production platforms in the offshore Gulf of Mexico may be required to be shut in by the Bureau of Safety and Environmental Enforcement (“BSEE”) or the Bureau of Ocean Energy Management (“BOEM”) of the U.S. Department of the Interior (“DOI”) following incidents such as loss of well control. If these or any other pipeline or terminal connection were to become unavailable for current or future volumes of crude oil or refined products due to repairs, damage to the facility, lack of capacity, shut in by regulators or any other reason, or if caverns to which we connect have cracks, leaks or leaching or require shut-in due to changes in law, our ability to operate efficiently and continue shipping crude oil and refined products to major demand centers could be restricted, thereby reducing revenue. Any temporary or permanent interruption at any key pipeline or terminal interconnect, at any key production platform or refinery or at caverns to which we deliver could have a material adverse effect on our business, results of operations, financial condition or cash flows, including our ability to make distributions.

Any significant decrease in production of crude oil in our areas of operation could reduce the volumes of crude oil we transport, which could adversely affect our revenue and available cash.

Our crude oil pipelines depend on the continued availability of crude oil production and reserves, particularly in the Gulf of Mexico. Low prices for crude oil or regulatory limitations could adversely affect development of additional reserves and production that are accessible by our assets. In addition, production from existing areas with access to those pipeline systems will naturally decline over time. The amount of crude oil reserves underlying wells in these areas may also be less than anticipated, and the rate at which production from these reserves declines may be greater than anticipated. Accordingly, to maintain or increase the volume of crude oil transported, or throughput, on our pipelines and cash flows associated with the transportation of crude oil, our customers must continually obtain new supplies of crude oil. In addition, we will not generate revenue under our life-of-lease agreements that do not include a guaranteed return to the extent that production in the area we serve declines or is shut in.

If new supplies of crude oil are not obtained, including supplies to replace any decline in volumes from our existing areas of operations, the overall volume of crude oil transported on our systems would decline, which could have a material adverse effect on our business, results of operations, financial condition or cash flows, including our ability to make distributions.

 

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Any significant decrease in the demand for crude oil and refined products could reduce the volumes of crude oil and refined products that we transport, which could adversely affect our revenue and available cash.

The volumes of crude oil and refined products that we transport depend on the supply and demand for crude oil, gasoline, jet fuel and other refined products in our geographic areas and other factors driving the demand for crude oil and refined products, including competition from alternative energy sources and the impact of new and more stringent regulations and standards affecting the exploration, production and refining industries.

If the demand for refined products decreases significantly, or if there were a material increase in the price of crude oil supplied to our customers’ refineries without an increase in the value of the products produced by those refineries, either temporary or permanent, which caused our customers to reduce production of refined products at their refineries, there would likely be a reduction in the volumes of crude oil and refined products that we transport. Any such reduction could have a material adverse effect on our business, results of operations, financial condition or cash flows, including our ability to make distributions.

Our insurance policies do not cover all losses, costs or liabilities that we may experience, and insurance companies that currently insure companies in the energy industry may cease to do so or substantially increase premiums.

Our initial assets other than Mars are insured at the entity level for certain property damage, business interruption and third-party liabilities, which includes pollution liabilities. Mars is self-insured by its current owners. We will carry commercial insurance for our pro rata portion of Mars’ potential liabilities, which will increase our general and administrative expenses. We will not carry named windstorm insurance for Mars, most of which is located in the Gulf of Mexico.

All of the insurance policies relating to our assets and operations are subject to policy limits. In addition, the waiting period under the business interruption insurance policies of the entities in which we own an interest ranges from 21 days to 60 days. We and the entities in which we own an interest do not maintain insurance coverage against all potential losses and could suffer losses for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. Changes in the insurance markets subsequent to the September 11, 2001 terrorist attacks and Hurricanes Katrina, Rita, Gustav and Ike have made it more difficult and more expensive to obtain certain types of coverage, and we may elect to self-insure portions of our asset portfolio. Moreover, the offshore entities in which we own an interest do not maintain insurance coverage for named windstorms. The occurrence of an event that is not fully covered by insurance, or failure by one or more insurers to honor its coverage commitments for an insured event, could have a material adverse effect on our business, financial condition and results of operations. Insurance companies may reduce the insurance capacity they are willing to offer or may demand significantly higher premiums or deductibles to cover our assets. If significant changes in the number or financial solvency of insurance underwriters for the energy industry occur, we may be unable to obtain and maintain adequate insurance at a reasonable cost. We cannot assure you that the insurers of the entities in which we own an interest will renew their insurance coverage on acceptable terms, if at all, or that the entities in which we own an interest will be able to arrange for adequate alternative coverage in the event of non-renewal. The unavailability of full insurance coverage to cover events in which the entities in which we own an interest suffer significant losses could have a material adverse effect on our business, financial condition and results of operation.

We are exposed to the credit risks, and certain other risks, of our customers, and any material nonpayment or nonperformance by our customers could reduce our ability to make distributions to our unitholders.

We are subject to the risks of loss resulting from nonpayment or nonperformance by our customers. If any of our most significant customers default on their obligations to us, our financial results could be adversely affected. Our customers may be highly leveraged and subject to their own operating and regulatory risks. For

 

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certain of our pipelines, we also may have a limited pool of potential customers and may be unable to replace any customers who default on their obligations to us. Therefore, any material nonpayment or nonperformance by our customers could reduce our ability to make distributions to our unitholders.

Our expansion of existing assets and construction of new assets may not result in revenue increases and will be subject to regulatory, environmental, political, legal and economic risks, which could adversely affect our operations and financial condition.

In order to optimize our existing asset base, we intend to evaluate and capitalize on organic opportunities for expansion projects in order to increase revenue on our assets. If we undertake these projects, they may not be completed on schedule or at all or at the budgeted cost.

We also intend to expand our existing pipelines, such as by adding horsepower, pump stations or new connections. For example, we expect to complete several expansion projects on Ho-Ho, including the installation of new pump stations and the addition of a new connection at Nederland before the end of 2014, and the addition of a new third-party connection and new tankage at Port Neches before the end of 2015. These expansion projects involve numerous regulatory, environmental, political and legal uncertainties, most of which are beyond our control. If the Ho-Ho expansion projects are not completed on schedule, certain agreements that we have entered into in anticipation of these expansion projects being completed may be cancelled or may not be effective for their full volume.

Moreover, we may not receive sufficient long-term contractual commitments or spot shipments from customers to provide the revenue needed to support projects, and we may be unable to negotiate acceptable interconnection agreements with third-party pipelines to provide destinations for increased throughput. Even if we receive such commitments or spot shipments or make such interconnections, we may not realize an increase in revenue for an extended period of time. For example, we expect to transport increased volumes on Mars as a result of our Mars expansion project and, among other things, additional volumes from the Amberjack pipeline at the interconnection of Mars with the Amberjack pipeline. However, anticipated volume increases may not materialize, and we may not realize an increase in revenue as a result of the Mars expansion project or realize the full benefit from this interconnection. As a result, new or expanded facilities may not be able to attract enough throughput to achieve our expected investment return, which could materially and adversely affect our results of operations and financial condition and our ability in the future to make distributions to our unitholders.

We do not own all of the land on which our pipelines are located, which could result in disruptions to our operations.

We do not own all of the land on which our pipelines are located, and we are, therefore, subject to the possibility of more onerous terms and increased costs to retain necessary land use if we do not have valid leases or rights-of-way or if such rights-of-way lapse or terminate. We obtain the rights to construct and operate our pipelines on land owned by third parties and governmental agencies, and some of our agreements may grant us those rights for only a specific period of time. Our loss of these rights, through our inability to renew leases, right-of-way contracts or otherwise, or inability to obtain easements at reasonable costs could have a material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to our unitholders.

We are subject to pipeline safety laws and regulations, compliance with which may require significant capital expenditures, increase our cost of operations and affect or limit our business plans.

Our interstate and offshore pipeline operations are subject to pipeline safety regulations administered by the Pipeline and Hazardous Materials Safety Administration (“PHMSA”) of the U.S. Department of Transportation (“DOT”). These laws and regulations require us to comply with a significant set of requirements for the design, construction, operation, maintenance, inspection and management of our crude oil and refined products pipelines.

 

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Certain aspects of our offshore pipeline operations, such as new construction and modification, are also regulated by BSEE and the U.S. Coast Guard.

On January 3, 2012, the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011 (“2011 Pipeline Safety Act”) was signed into law. The 2011 Pipeline Safety Act, among other things:

 

   

Increases the maximum penalty for violation of pipeline safety regulations from $100,000 to $200,000 per violation per day of violation and also from $1 million to $2 million for a related series of violations;

 

   

Requires PHMSA to adopt appropriate regulations within two years which mandate the use of automatic or remote-controlled shutoff valves on new or rebuilt pipeline facilities and to perform a study on the application of such technology to existing pipeline facilities in High Consequence Areas (“HCAs”), defined as those areas that are unusually sensitive to environmental damage, that cross a navigable waterway, or that have a high population density;

 

   

Requires PHMSA to study and report on the adequacy of soil cover requirements in HCAs; and

 

   

Requires PHMSA to evaluate in detail whether integrity management requirements should be expanded to pipeline segments outside of HCAs (where the requirements currently apply).

PHMSA has begun to undertake the various requirements imposed on it by the legislation, which will impose additional costs on new pipeline projects as well as on existing operations. In addition, PHMSA is considering new regulations to require more frequent inspections of tanks, new operator qualification requirements for pipeline construction and changes to operator qualification rules, including enhanced enforcement. Compliance with these requirements will increase costs if adopted.

In this climate of increasingly stringent regulation, pipeline failures or failures to comply with applicable regulations could result in shut-downs, capacity constraints or operational limitations to our pipelines. Should any of these risks materialize, it could have a material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to our unitholders.

PHMSA is also reviewing the risks and requirements that affect a pipeline reversal, such as the Ho-Ho flow reversal. Should additional requirements be imposed, we could incur additional costs related to Zydeco and Zydeco’s cash distributions may be adversely affected.

Compliance with and changes in environmental laws and regulations, including proposed climate change laws and regulations, could adversely affect our performance. Our customers are also subject to environmental laws and regulations, and any changes in these laws and regulations, including laws and regulations related to hydraulic fracturing, could result in significant added costs to comply with such requirements and delays or curtailment in pursuing production activities, which could reduce demand for our services.

The principal environmental risks associated with our operations are emissions into the air and releases into the soil, surface water or groundwater. Our operations are subject to extensive environmental laws and regulations, including those relating to the discharge and remediation of materials in the environment, greenhouse gas (“GHG”) emissions, waste management, species and habitat preservation, pollution prevention, pipeline integrity and other safety-related regulations and characteristics and composition of fuels. Certain of these laws and regulations could impose obligations to conduct assessment or remediation efforts at our facilities or third-party sites where we take wastes for disposal or where our wastes migrated, or could impose strict liability on us for the conduct of third parties or for actions that complied with applicable requirements when taken, regardless of negligence or fault. Our offshore operations are also subject to laws and regulations protecting the marine environment administered by the U.S. Coast Guard and BOEM. Failure to comply with these laws and regulations could lead to administrative, civil or criminal penalties or liability and imposition of injunctions, operating restrictions or the loss of permits.

 

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Because environmental laws and regulations are becoming more stringent and new environmental laws and regulations are continuously being enacted or proposed, the level of expenditures required for environmental matters could increase in the future. Current and future legislative action and regulatory initiatives could result in changes to operating permits, material changes in operations, increased capital expenditures and operating costs, increased costs of the goods we transport, and decreased demand for products we handle that cannot be assessed with certainty at this time. We may be required to make expenditures to modify operations or install pollution control equipment or release prevention and containment systems that could materially and adversely affect our business, financial condition, results of operations and liquidity if these expenditures, as with all costs, are not ultimately reflected in the tariffs and other fees we receive for our services. For example, the U.S. Environmental Protection Agency (“EPA”) has, in recent years, adopted final rules making more stringent the National Ambient Air Quality Standards (“NAAQS”) for ozone, sulfur dioxide and nitrogen dioxide, and the EPA is considering further revisions to the NAAQS. Emerging rules implementing these revised air quality standards may require us to obtain more stringent air permits and install more stringent controls at our operations, which may result in increased capital expenditures.

Climate change legislation and regulations to address GHG emissions are in various phases of discussion or implementation in the United States. The outcome of federal, state and regional actions to address climate change could result in a variety of regulatory programs including potential new regulations to control or restrict emissions, taxes or other charges to deter emissions of GHGs, energy efficiency requirements to reduce demand, or other regulatory actions. These actions could result in increased compliance and operating costs or could adversely affect demand for the crude oil and refined products that we transport. Additionally, adoption of federal, state or regional requirements mandating a reduction in GHG emissions could have far-reaching impacts on the energy industry and the U.S. economy. We cannot predict the potential impact of such laws or regulations on our future consolidated financial condition, results of operations or cash flows.

Our customers are also subject to environmental laws and regulations that affect their businesses, and changes in these laws or regulations could materially adversely affect their businesses or prospects. Our crude oil pipelines serve customers who depend on production techniques, such as hydraulic fracturing, that are currently being scrutinized by federal, state and local authorities and that could be subjected to increased regulatory costs, delays or liabilities. Any changes in laws or regulations that impose significant costs or liabilities on our customers, or that result in delays, curtailments or cancellations of their projects, could reduce their demand for our services and materially adversely affect our results of operations, financial position or cash flows.

Subsidence and coastal erosion could damage our pipelines along the Gulf Coast and offshore and the facilities of our customers, which could adversely affect our operations and financial condition.

Our pipeline operations along the Gulf Coast and offshore could be impacted by subsidence and coastal erosion. Such processes could cause serious damage to our pipelines, which could affect our ability to provide transportation services. Additionally, such processes could impact our customers who operate along the Gulf Coast, and they may be unable to utilize our services. Subsidence and coastal erosion could also expose our operations to increased risks associated with severe weather conditions, such as hurricanes, flooding and rising sea levels. As a result, we may incur significant costs to repair and preserve our pipeline infrastructure. For example, we expect that we will need to complete a directional drill at Morgan City, Louisiana to replace a Ho-Ho pipe undercut by erosion. Such costs could adversely affect our business, financial condition, results of operation or cash flows.

We may incur significant costs and liabilities as a result of pipeline integrity management program testing and any necessary pipeline repair or preventative or remedial measures.

PHMSA has adopted regulations requiring pipeline operators to develop integrity management programs for transportation pipelines, with enhanced measures required for pipelines located where a leak or rupture could harm an HCA. The regulations require operators to:

 

   

perform ongoing assessments of pipeline integrity;

 

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identify and characterize applicable threats to pipeline segments that could affect an HCA;

 

   

improve data collection, integration and analysis;

 

   

repair and remediate the pipeline as necessary; and

 

   

implement preventive and mitigating actions.

In addition, states have adopted regulations similar to existing PHMSA regulations for intrastate pipelines. For example, our intrastate pipelines in Louisiana are subject to pipeline integrity management regulations administered by the Office of Conservation of the Louisiana Department of Natural Resources.

At this time, we cannot predict the ultimate cost of compliance with applicable pipeline integrity management regulations, as the cost will vary significantly depending on the number and extent of any repairs found to be necessary as a result of the pipeline integrity testing. We will continue our pipeline integrity testing programs to assess and maintain the integrity of our pipelines. The results of these tests could cause us to incur significant and unanticipated capital and operating expenditures for repairs or upgrades deemed necessary to ensure the continued safe and reliable operation of our pipelines.

Our actual implementation costs may be affected by industry-wide demand for the associated contractors and service providers. Additionally, should any of our assets fail to comply with PHMSA regulations, they could be subject to shut-down, pressure reductions, penalties and fines.

We may be unable to obtain or renew permits necessary for our operations or for growth and expansion projects, which could inhibit our ability to do business.

Our facilities operate under a number of federal and state permits, licenses and approvals with terms and conditions containing a significant number of prescriptive limits and performance standards in order to operate. In addition, we implement maintenance, growth and expansion projects as necessary to pursue business opportunities, and these projects often require similar permits, licenses and approvals. These permits, licenses, approval limits and standards require a significant amount of monitoring, record keeping and reporting in order to demonstrate compliance with the underlying permit, license, approval limit or standard. Noncompliance or incomplete documentation of our compliance status may result in the imposition of fines, penalties and injunctive relief. A decision by a government agency to deny or delay issuing a new or renewed permit or approval, or to revoke or substantially modify an existing permit or approval, could have a material adverse effect on our ability to continue operations and on our financial condition, results of operations and cash flows.

Our assets were constructed over many decades which may cause our inspection, maintenance or repair costs to increase in the future. In addition, there could be service interruptions due to unknown events or conditions or increased downtime associated with our pipelines that could have a material adverse effect on our business and results of operations.

Our pipelines were constructed over many decades. Pipelines are generally long-lived assets, and pipeline construction and coating techniques have varied over time. Depending on the era of construction, some assets will require more frequent inspections, which could result in increased maintenance or repair expenditures in the future. Any significant increase in these expenditures could adversely affect our results of operations, financial position or cash flows, as well as our ability to make cash distributions to our unitholders.

The tariff rates of our regulated assets are subject to review and possible adjustment by federal and state regulators, which could adversely affect our revenue and our ability to make distributions to our unitholders.

We provide both interstate and intrastate transportation services for refined products and crude oil. Our pipelines are common carriers and are required to provide service to any shipper similarly situated to an existing shipper that requests transportation services on our pipelines.

 

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Zydeco, Bengal, Colonial and portions of Mars provide interstate transportation services that are subject to regulation by FERC under the ICA. FERC uses prescribed rate methodologies for developing and changing regulated rates for interstate pipelines. Shippers may protest (and FERC may investigate) the lawfulness of existing, new or changed tariff rates. FERC can suspend new or changed tariff rates for up to seven months and can allow new rates to be implemented subject to refund of amounts collected in excess of the rate ultimately found to be just and reasonable. Shippers may also file complaints that existing rates are unjust and unreasonable. If FERC finds a rate to be unjust and unreasonable, it may order payment of reparations for up to two years prior to the filing of a complaint or investigation, and FERC may prescribe new rates prospectively. We may at any time also be required to respond to governmental requests for information, including compliance audits conducted by FERC, such as the pending audit of Colonial.

State agencies may regulate the rates, terms and conditions of service for our pipelines offering intrastate transportation services, and such agencies could limit our ability to increase our rates or order us to reduce our rates and pay refunds to shippers. State agencies can also regulate whether a service may be provided or cancelled. The FERC and most state agencies support light-handed regulation of common carrier pipelines and have generally not investigated the rates, terms and conditions of service of pipelines in the absence of shipper complaints, and generally resolve complaints informally. Louisiana’s Public Service Commission has a more stringent review of rate increases and may prohibit or limit future rate increases for intrastate movements regulated by Louisiana.

Under our agreements with certain of our customers, we and the customer have agreed to base tariff rates for some of our pipelines, and our customers have agreed not to challenge the base tariff rates or changes to those rates during the term of the agreements, subject to certain exceptions. Some of these agreements and the underlying rates have been approved by FERC under a declaratory order. These agreements do not, however, prevent any other new or prospective shipper, FERC or a state agency from challenging our tariff rates or our terms and conditions of service on rates or services not covered by these agreements. For example, following the reversal of Ho-Ho, on December 10, 2013, SPLC filed three related tariffs with FERC to establish rates for uncommitted service on Ho-Ho. The filed rates became effective on December 12, 2013 and were protested. They are collected subject to refund pending the outcome of a hearing at FERC to determine whether the initial uncommitted (or non-contract) rates are just and reasonable.

A successful challenge of any of our rates, or any changes to FERC’s approved rate or index methodologies, could adversely affect our revenue and our ability to make distributions to our unitholders. Similarly, if state agencies in the states in which we offer intrastate transportation services change their policies or aggressively regulate our rates or terms and conditions of service, it could also adversely affect our revenue and our ability to make distributions to our unitholders.

If we lose any of our key personnel, our ability to manage our business and continue our growth could be negatively impacted.

We depend on our senior management team and key technical personnel. If their services are unavailable to us for any reason, we may be required to hire other personnel to manage and operate our company and to develop our products and technology. We cannot assure you that we would be able to locate or employ such qualified personnel on acceptable terms or at all.

Terrorist or cyber-attacks and threats, or escalation of military activity in response to these attacks, could have a material adverse effect on our business, financial condition or results of operations.

Terrorist attacks and threats, cyber-attacks, or escalation of military activity in response to these attacks, may have significant effects on general economic conditions, fluctuations in consumer confidence and spending and market liquidity, each of which could materially and adversely affect our business. Strategic targets, such as energy-related assets and transportation assets, may be at greater risk of future terrorist or cyber-attacks than

 

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other targets in the United States. We do not maintain specialized insurance for possible liability or loss resulting from a cyber-attack on our assets that may shut down all or part of our business. Instability in the financial markets as a result of terrorism or war could also affect our ability to raise capital including our ability to repay or refinance debt. It is possible that any of these occurrences, or a combination of them, could have a material adverse effect on our business, financial condition and results of operations.

Restrictions in our revolving credit facility could adversely affect our business, financial condition, results of operations, ability to make cash distributions to our unitholders and the value of our units.

We will be dependent upon the earnings and cash flows generated by our operations in order to meet any debt service obligations and to allow us to make cash distributions to our unitholders. At the closing of this offering, we expect to enter into a revolving credit facility with an affiliate of Shell with $300 million in available capacity, under which no amounts will be drawn at the closing of this offering. Restrictions in our revolving credit facility and any future financing agreements could restrict our ability to finance our future operations or capital needs or to expand or pursue our business activities, which may, in turn, limit our ability to make cash distributions to our unitholders.

The restrictions in our revolving credit facility could affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the provisions of our revolving credit facility could result in an event of default which would enable our lenders to declare the outstanding principal of that debt, together with accrued interest, to be immediately due and payable. If the payment of our debt is accelerated, defaults under our other debt instruments, if any, may be triggered, and our assets may be insufficient to repay such debt in full, and the holders of our units could experience a partial or total loss of their investment. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity” for additional information about our revolving credit facility.

Increases in interest rates could adversely impact the price of our common units, our ability to issue equity or incur debt for acquisitions or other purposes and our ability to make cash distributions at our intended levels.

Interest rates on future credit facilities and debt offerings could be higher than current levels, causing our financing costs to increase accordingly. As with other yield-oriented securities, our unit price is impacted by our level of our cash distributions and implied distribution yield. The distribution yield is often used by investors to compare and rank yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our units, and a rising interest rate environment could have an adverse impact on the price of our common units, our ability to issue equity or incur debt for acquisitions or other purposes and our ability to make cash distributions at our intended levels.

Our product loss allowance exposes us to commodity risk.

Our long-term transportation agreements and tariffs for crude oil shipments include a product loss allowance. We collect product loss allowance to reduce our exposure to differences in crude oil measurement between origin and destination meters, which can fluctuate widely. This arrangement exposes us to risk of financial loss in some circumstances, including when the crude oil is received from a ship or connecting carrier using different measurement techniques, or resulting from solids and water produced from the crude oil. It is not always possible for us to completely mitigate the measurement differential. If the measurement differential exceeds the loss allowance, the pipeline must make the customer whole for the difference in measured crude oil. Additionally, we take title to any excess product that we transport when product losses are within the allowed levels, and we sell that product several times per year at prevailing market prices. This allowance oil revenue is subject to more volatility than transportation revenue, as it is directly dependent on our measurement capability and commodity prices.

 

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The lack of diversification of our assets and geographic locations could adversely affect our ability to make distributions to our common unitholders.

We rely on revenue generated from our pipelines, which are primarily located along the Texas and Louisiana Gulf Coast and offshore Louisiana. Due to our lack of diversification in assets and geographic location, an adverse development in our businesses or areas of operations, including adverse developments due to catastrophic events, weather, regulatory action and decreases in demand for crude oil and refined products, could have a significantly greater impact on our results of operations and cash available for distribution to our common unitholders than if we maintained more diverse assets and locations.

If we are deemed an “investment company” under the Investment Company Act of 1940, it could have a material adverse effect on our business and the price of our common units.

Our initial assets will consist of partial ownership interests in Zydeco, Mars, Bengal and Colonial. If a sufficient amount of our initial assets, or other assets acquired in the future, are deemed to be “investment securities” within the meaning of the Investment Company Act of 1940, we may have to register as an investment company under the Investment Company Act, claim an exemption, obtain exemptive relief from the SEC or modify our organizational structure or our contract rights. Registering as an investment company could, among other things, materially limit our ability to engage in transactions with affiliates, including the purchase and sale of certain securities or other property to or from our affiliates, restrict our ability to borrow funds or engage in other transactions involving leverage, and require us to add additional directors who are independent of us or our affiliates. The occurrence of some or all of these events would adversely affect the price of our common units and could have a material adverse effect on our business.

Risks Inherent in an Investment in Us

Our general partner and its affiliates, including Shell, have conflicts of interest with us and limited duties to us and our unitholders, and they may favor their own interests to the detriment of us and our unitholders. Additionally, we have no control over the business decisions and operations of Shell, and it is under no obligation to adopt a business strategy that favors us.

Following the offering, SPLC will own a 70.8% limited partner interest in us (or 66.7% if the underwriters’ option to purchase additional common units is exercised in full) and will own and control our general partner. Although our general partner has a duty to manage us in a manner that is not adverse to the best interests of us and our unitholders, the directors and officers of our general partner also have a duty to manage our general partner in a manner that is not adverse to the best interests of its owner, SPLC. Conflicts of interest may arise between SPLC and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts, the general partner may favor its own interests and the interests of its affiliates, including SPLC, over the interests of our common unitholders. These conflicts include, among others, the following situations:

 

   

neither our partnership agreement nor any other agreement requires SPLC to pursue a business strategy that favors us or utilizes our assets, which could involve decisions by SPLC to undertake acquisition opportunities for itself;

 

   

SPLC’s directors and officers have a fiduciary duty to make these decisions in the best interests of the owners of SPLC, which may be contrary to our interests; in addition, many of the officers and directors of our general partner are also officers and/or directors of SPLC and will owe fiduciary duties to SPLC and its owners;

 

   

SPLC may be constrained by the terms of its debt instruments from taking actions, or refraining from taking actions, that may be in our best interests;

 

   

our partnership agreement replaces the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing its duties, limiting our general partner’s liabilities and

 

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restricting the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty;

 

   

except in limited circumstances, our general partner has the power and authority to conduct our business without unitholder approval;

 

   

disputes may arise under agreements pursuant to which SPLC and its affiliates are our customers;

 

   

our general partner will determine the amount and timing of asset purchases and sales, borrowings, issuance of additional partnership securities and the creation, reduction or increase of cash reserves, each of which can affect the amount of cash that is distributed to our unitholders;

 

   

our general partner will determine the amount and timing of many of our capital expenditures and whether a capital expenditure is classified as an expansion capital expenditure, which would not reduce operating surplus, or a maintenance capital expenditure, which would reduce our operating surplus. This determination can affect the amount of cash that is distributed to our unitholders and the ability of the subordinated units to convert into common units;

 

   

our general partner will determine which costs incurred by it are reimbursable by us;

 

   

our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units, to make incentive distributions or to accelerate expiration of the subordination period;

 

   

our partnership agreement permits us to classify up to $90 million as operating surplus, even if it is generated from asset sales, non-working capital borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions on our subordinated units or to our general partner in respect of the general partner units or the incentive distribution rights;

 

   

our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf;

 

   

our general partner intends to limit its liability regarding our contractual and other obligations;

 

   

our general partner may exercise its right to call and purchase all of the common units not owned by it and its affiliates if it and its affiliates own more than 75% of the common units;

 

   

our general partner controls the enforcement of obligations owed to us by our general partner and its affiliates, including under the omnibus agreement and our other agreements with SPLC;

 

   

our general partner decides whether to retain separate counsel, accountants or others to perform services for us; and

 

   

our general partner may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to our general partner’s incentive distribution rights without the approval of the conflicts committee of the board of directors of our general partner, which we refer to as our conflicts committee, or our unitholders. This election may result in lower distributions to our common unitholders in certain situations.

Under the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our general partner or any of its affiliates, including its executive officers, directors and owners. Any such person or entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Any such person or entity will not be liable to us or to any limited partner for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not communicate such opportunity or information to us. This may create actual and potential conflicts of interest between us and affiliates of our general partner and

 

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result in less than favorable treatment of us and our unitholders. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Formation Transactions—Omnibus Agreement” and “Conflicts of Interest and Duties.”

Our partnership agreement requires that we distribute all of our available cash, which could limit our ability to grow and make acquisitions.

We expect that we will distribute all of our available cash to our unitholders and will rely primarily upon our cash reserves (including the net proceeds that we will retain from this offering) and external financing sources, including borrowings under our revolving credit facility and the issuance of debt and equity securities, to fund future acquisitions and other expansion capital expenditures. To the extent we are unable to finance growth with external sources of capital, the requirement in our partnership agreement to distribute all of our available cash and our current cash distribution policy will significantly impair our ability to grow. In addition, because we will distribute all of our available cash, our growth may not be as fast as businesses that reinvest all of their available cash to expand ongoing operations.

Our revolving credit facility will restrict our ability to incur additional debt, including through the issuance of debt securities. To the extent we issue additional units, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our cash distributions per unit. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to our common units, and our unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such additional units. If we incur additional debt (under our revolving credit facility or otherwise) to finance our growth strategy, we will have increased interest expense, which in turn will reduce the available cash that we have to distribute to our unitholders.

The fees and reimbursements due to our general partner and its affiliates, including SPLC, for services provided to us or on our behalf will reduce our cash available for distribution. In certain cases, the amount and timing of such reimbursements will be determined by our general partner and its affiliates, including SPLC.

Pursuant to our partnership agreement, we will reimburse our general partner and its affiliates, including SPLC, for costs and expenses they incur and payments they make on our behalf. Pursuant to the omnibus agreement, we will pay an annual fee, initially $8.5 million, to SPLC for general and administrative services. In addition, pursuant to the omnibus agreement, we will reimburse our general partner for payments to SPLC for other expenses incurred by SPLC on our behalf to the extent the fees relating to such services are not included in the general and administrative services fee. Each of these payments will be made prior to making any distributions on our common units. The reimbursement of expenses and payment of fees to our general partner and its affiliates will reduce our cash available for distribution. There is no limit on the fee and expense reimbursements that we may be required to pay to our general partner and its affiliates. Please read “Cash Distribution Policy and Restrictions on Distributions” and “Certain Relationships and Related Party Transactions—Agreements Governing the Formation Transactions—Omnibus Agreement.”

Our partnership agreement replaces fiduciary duties applicable to a corporation with contractual duties and restricts the remedies available to holders of our common units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

Our partnership agreement contains provisions that replace fiduciary duties applicable to a corporation with contractual duties and restrict the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. For example, our partnership agreement provides that:

 

   

whenever our general partner (acting in its capacity as our general partner), the board of directors of our general partner or any committee thereof (including the conflicts committee) makes a determination or

 

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takes, or declines to take, any other action in their respective capacities, our general partner, the board of directors of our general partner and any committee thereof (including the conflicts committee), as applicable, is required to make such determination, or take or decline to take such other action, in good faith, meaning that it subjectively believed that the decision was not adverse to our best interests, and, except as specifically provided by our partnership agreement, will not be subject to any other or different standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation, or at equity;

 

   

our general partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as such decisions are made in good faith;

 

   

our general partner and its officers and directors will not be liable for monetary damages to us or our limited partners resulting from any act or omission unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or its officers and directors, as the case may be, acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that the conduct was criminal; and

 

   

our general partner will not be in breach of its obligations under the partnership agreement (including any duties to us or our unitholders) if a transaction with an affiliate or the resolution of a conflict of interest is:

 

   

approved by the conflicts committee of the board of directors of our general partner, although our general partner is not obligated to seek such approval;

 

   

approved by the vote of a majority of the outstanding common units, excluding any common units owned by our general partner and its affiliates;

 

   

determined by the board of directors of our general partner to be on terms no less favorable to us than those generally being provided to or available from unrelated third parties; or

 

   

determined by the board of directors of our general partner to be fair and reasonable to us, taking into account the totality of the relationships among the parties involved, including other transactions that may be particularly favorable or advantageous to us.

In connection with a situation involving a transaction with an affiliate or a conflict of interest, any determination by our general partner or the conflicts committee must be made in good faith. If an affiliate transaction or the resolution of a conflict of interest is not approved by our common unitholders or the conflicts committee and the board of directors of our general partner determines that the resolution or course of action taken with respect to the affiliate transaction or conflict of interest satisfies either of the standards set forth in the third and fourth subbullet points above, then it will be presumed that, in making its decision, the board of directors of our general partner acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership challenging such determination, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Please read “Conflicts of Interest and Duties.”

If you are an ineligible holder, your common units may be subject to redemption.

We have adopted certain requirements regarding those investors who may own our common and subordinated units. Eligible taxable holders are limited partners whose, or whose owners’, federal income tax status does not have or is not reasonably likely to have a material adverse effect on the rates that can be charged by us on assets that are subject to regulation by FERC or a similar regulatory body, as determined by our general partner with the advice of counsel. Ineligible holders are limited partners (a) who are not an eligible taxable holder or (b) whose nationality, citizenship or other related status would create a substantial risk of cancellation or forfeiture of any property in which we have an interest, as determined by our general partner with the advice of counsel. If you are an ineligible holder, in certain circumstances as set forth in our partnership agreement, your units may be redeemed by us at the then-current market price. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner. Please read “Our Partnership Agreement—Ineligible Holders; Redemption.”

 

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Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.

Unitholders’ voting rights are further restricted by a provision of our partnership agreement providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot be used to vote on any matter.

Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors.

Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. For example, unlike holders of stock in a public corporation, unitholders will not have “say-on-pay” advisory voting rights. Unitholders did not elect our general partner or the board of directors of our general partner and will have no right to elect our general partner or the board of directors of our general partner on an annual or other continuing basis. The board of directors of our general partner is chosen by the member of our general partner, which is a wholly owned subsidiary of SPLC. Furthermore, if the unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. As a result of these limitations, the price at which our common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.

Even if holders of our common units are dissatisfied, they cannot initially remove our general partner without its consent.

Unitholders will be unable initially to remove our general partner without its consent because our general partner and its affiliates will own sufficient units upon completion of the offering to be able to prevent its removal. The vote of the holders of at least 66 2/3% of all outstanding common and subordinated units voting together as a single class is required to remove our general partner. At the closing of this offering, our general partner and its affiliates will own 44.4% of our common units (or 36.1% of our common units, if the underwriters exercise their option to purchase additional common units) and all of our subordinated units, representing an aggregate 72.2% of our outstanding common and subordinated units. If our general partner is removed without cause during the subordination period and units held by our general partner and its affiliates are not voted in favor of that removal, all remaining subordinated units will automatically convert into common units and any existing arrearages on our common units will be extinguished, thereby eliminating the distribution and liquidation preference of common units. “Cause” is narrowly defined to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding our general partner liable to us or any limited partner for actual fraud or willful misconduct in its capacity as our general partner. “Cause” does not include most cases of charges of poor management of the business, so the removal of our general partner because of unitholder dissatisfaction with the performance of our general partner in managing our partnership will most likely result in the termination of the subordination period and conversion of all subordinated units to common units.

Furthermore, unitholders’ voting rights are further restricted by the partnership agreement provision providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot vote on any matter.

Our partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.

 

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Our general partner interest or the control of our general partner may be transferred to a third party without unitholder consent.

Our partnership agreement does not restrict the ability of SPLC to transfer all or a portion of its general partner interest or its ownership interest in our general partner to a third party. Our general partner, or the new owner of our general partner would then be in a position to replace the board of directors and officers of our general partner with its own designees and thereby exert significant control over the decisions made by the board of directors and officers.

The incentive distribution rights of our general partner may be transferred to a third party without unitholder consent.

Our general partner may transfer its incentive distribution rights to a third party at any time without the consent of our unitholders. If our general partner transfers its incentive distribution rights to a third party, it will have less incentive to grow our partnership and increase distributions. A transfer of incentive distribution rights by our general partner could reduce the likelihood of Shell or SPLC selling or contributing additional assets to us, which in turn would impact our ability to grow our asset base.

We may issue additional units without unitholder approval, which would dilute unitholder interests.

At any time, we may issue an unlimited number of limited partner interests of any type without the approval of our unitholders, and our unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such limited partner interests. Further, there are no limitations in our partnership agreement on our ability to issue equity securities that rank equal or senior to our common units as to distributions or in liquidation or that have special voting rights and other rights. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:

 

   

our existing unitholders’ proportionate ownership interest in us will decrease;

 

   

the amount of cash we have available to distribute on each unit may decrease;

 

   

because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of minimum quarterly distributions will be borne by our common unitholders will increase;

 

   

because the amount payable to holders of incentive distribution rights is based on a percentage of total available cash, the distributions to holders of incentive distribution rights will increase even if the per unit distribution on common units remains the same;

 

   

the ratio of taxable income to distributions may increase;

 

   

the relative voting strength of each previously outstanding unit may be diminished; and

 

   

the market price of our common units may decline.

SPLC may sell units in the public or private markets, and such sales could have an adverse impact on the trading price of the common units.

After the completion of this offering, SPLC will hold 29,975,068 common units and 67,475,068 subordinated units. All of the subordinated units will convert into common units at the end of the subordination period and may convert earlier under certain circumstances. Additionally, we have agreed to provide SPLC with certain registration rights under applicable securities laws. Please read “Units Eligible for Future Sale.” The sale of these units in the public or private markets could have an adverse impact on the price of the common units or on any trading market that may develop.

 

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Our general partner’s discretion in establishing cash reserves may reduce the amount of cash we have available to distribute to unitholders.

Our partnership agreement requires our general partner to deduct from operating surplus the cash reserves that it determines are necessary to fund our future operating expenditures. In addition, the partnership agreement permits the general partner to reduce available cash by establishing cash reserves for the proper conduct of our business, to comply with applicable law or agreements to which we are a party, or to provide funds for future distributions to partners. These cash reserves will affect the amount of cash we have available to distribute to unitholders.

Our general partner has a limited call right that may require you to sell your common units at an undesirable time or price.

If at any time our general partner and its affiliates own more than 75% of our then-outstanding common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than their then-current market price, as calculated pursuant to the terms of our partnership agreement. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. At the completion of this offering, our general partner and its affiliates will own approximately 44.4% of our common units. At the end of the subordination period (which could occur as early as December 31, 2015), assuming no additional issuances of common units by us (other than upon the conversion of the subordinated units), our general partner and its affiliates will own approximately 72.2% of our outstanding common units and therefore would not be able to exercise the call right at that time. For additional information about our general partner’s call right, please read “Our Partnership Agreement—Limited Call Right.”

There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. Following this offering, the price of our common units may fluctuate significantly, and you could lose all or part of your investment.

Prior to this offering, there has been no public market for our common units. After this offering, there will be only 37,500,000 publicly traded common units, assuming the underwriters’ option to purchase additional common units from us is not exercised. In addition, SPLC will own 29,975,068 common units and 67,475,068 subordinated units, representing an aggregate 70.8% limited partner interest in us (or 66.7% if the underwriters’ option to purchase additional common units is exercised in full). We do not know the extent to which investor interest will lead to the development of an active trading market or how liquid that market might be. You may not be able to resell your common units at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.

The initial public offering price for the common units offered hereby will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of the common units that will prevail in the trading market. The market price of our common units may decline below the initial public offering price. The market price of our common units may also be influenced by many factors, some of which are beyond our control, including:

 

   

the level of our quarterly distributions;

 

   

our quarterly or annual earnings or those of other companies in our industry;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

the failure of securities analysts to cover our common units after this offering or changes in financial estimates by analysts;

 

   

future sales of our common units; and

 

   

other factors described in these “Risk Factors.”

 

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Our general partner, or any transferee holding a majority of the incentive distribution rights, may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to the incentive distribution rights, without the approval of the conflicts committee of our general partner or our unitholders. This election may result in lower distributions to our common unitholders in certain situations.

The holder or holders of a majority of the incentive distribution rights, which is initially our general partner, have the right, at any time when there are no subordinated units outstanding and the holders have received incentive distributions at the highest level to which they are entitled (48%, in addition to distributions paid on its 2% general partner interest) for each of the prior four consecutive fiscal quarters (and the aggregate amounts distributed in respect of such four-quarter period did not exceed adjusted operating surplus for such four-quarter period), to reset the minimum quarterly distribution and the initial target distribution levels at higher levels based on our cash distribution at the time of the exercise of the reset election. Following a reset election, the minimum quarterly distribution will be reset to an amount equal to the average cash distribution per unit for the two fiscal quarters immediately preceding the reset election (such amount is referred to as the “reset minimum quarterly distribution”), and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution. Our general partner has the right to transfer the incentive distribution rights at any time, in whole or in part, and any transferee holding a majority of the incentive distribution rights shall have the same rights as our general partner with respect to resetting target distributions.

In the event of a reset of the minimum quarterly distribution and the target distribution levels, the holders of the incentive distribution rights will be entitled to receive, in the aggregate, the number of common units equal to that number of common units which would have entitled the holders to an average aggregate quarterly cash distribution in the prior two quarters equal to the average of the distributions on the incentive distribution rights in the prior two quarters. Our general partner will also be issued the number of general partner units necessary to maintain the same percentage general partner interest in us that existed immediately prior to the reset election. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal expansion projects that would not otherwise be sufficiently accretive to cash distributions per common unit. It is possible, however, that our general partner or a transferee could exercise this reset election at a time when it is experiencing, or expects to experience, declines in the cash distributions it receives related to its incentive distribution rights and may therefore desire to be issued common units rather than retain the right to receive incentive distribution payments based on target distribution levels that are less certain to be achieved in the then-current business environment. This risk could be elevated if our incentive distribution rights have been transferred to a third party. As a result, a reset election may cause our common unitholders to experience dilution in the amount of cash distributions that they would have otherwise received had we not issued common units to our general partner in connection with resetting the target distribution levels. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—General Partner’s Right to Reset Incentive Distribution Levels.”

Our general partner intends to limit its liability regarding our obligations.

Our general partner intends to limit its liability under contractual arrangements so that the counterparties to such arrangements have recourse only against our assets, and not against our general partner or its assets. Our general partner may therefore cause us to incur indebtedness or other obligations that are nonrecourse to our general partner. Our partnership agreement permits our general partner to limit its liability, even if we could have obtained more favorable terms without the limitation on liability. In addition, we are obligated to reimburse or indemnify our general partner to the extent that it incurs obligations on our behalf. Any such reimbursement or indemnification payments would reduce the amount of cash otherwise available for distribution to our unitholders.

Our partnership agreement replaces our general partner’s fiduciary duties to holders of our common units with contractual standards governing its duties.

Our partnership agreement contains provisions that eliminate the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law and replace those duties with several different

 

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contractual standards. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, free of any duties to us and our unitholders other than the implied contractual covenant of good faith and fair dealing, which means that a court will enforce the reasonable expectations of the partners where the language in the partnership agreement does not provide for a clear course of action. This provision entitles our general partner to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. Examples of decisions that our general partner may make in its individual capacity include:

 

   

how to allocate corporate opportunities among us and its other affiliates;

 

   

whether to exercise its limited call right;

 

   

whether to seek approval of the resolution of a conflict of interest by the conflicts committee of the board of directors of our general partner;

 

   

how to exercise its voting rights with respect to the units it owns;

 

   

whether to exercise its registration rights;

 

   

whether to elect to reset target distribution levels;

 

   

whether to transfer the incentive distribution rights to a third party; and

 

   

whether or not to consent to any merger or consolidation of the partnership or amendment to the partnership agreement.

By purchasing a common unit, a common unitholder agrees to become bound by the provisions in the partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Duties—Duties of Our General Partner.”

We identified a material weakness in our internal control over financial reporting with respect to our predecessor’s unaudited financial statements for the three months ended March 31, 2013. If one or more material weaknesses persist or if we fail to develop or maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud, which would likely have a negative impact on the market price of our common units. Pursuant to the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we are an emerging growth company and we may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards.

We will be required to disclose material changes made in our internal control over financial reporting on a quarterly basis and we will be required to assess the effectiveness of our controls annually. However, for as long as we are an “emerging growth company” under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. We could be an emerging growth company for up to five years. Please read “Prospectus Summary—Implications of Being an Emerging Growth Company.” An effective system of internal controls is necessary for us to provide reliable and timely financial reports, prevent fraud and to operate successfully as a publicly traded partnership. We prepare our consolidated financial statements in accordance with GAAP, but our internal accounting controls may not meet all standards applicable to companies with publicly traded securities. Our efforts to develop and maintain our system of internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future or to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002. For example, Section 404 will require us, among other things, to annually review and report on the effectiveness of our system of internal controls over financial reporting. We must comply with Section 404 (except for the requirement for an auditor’s attestation report) beginning with our fiscal year ending December 31, 2015. Any

 

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failure to develop, implement or maintain our effective internal controls, or the failure by the entities that are our equity investees to do so, or the failure by us or them to improve our or their system of internal controls could harm our operating results or cause us to fail to meet our reporting obligations.

We revised our predecessor’s unaudited condensed combined statements of operations, the unaudited condensed combined statements of changes in net parent investment, and the unaudited condensed combined statements of cash flows for the three months ended March 31, 2013. The revision was due to errors in the recording of the accrual of revenues and recording of loss/gain from pipeline operations during the three months ended March 31, 2013. Accordingly, we identified a material weakness in our internal controls over the preparation of these interim financial statements, specifically, determining the completeness and accuracy of the journal entries required to properly accrue revenues and record loss/gain from pipeline operations.

A “material weakness” is a deficiency, or combination of deficiencies, in internal controls such that there is a reasonable possibility that a material misstatement in financial statements will not be prevented or detected on a timely basis. The material weakness described above resulted in adjustments to our predecessor’s unaudited financial statements for the three months ended March 31, 2013. As a result, we are standardizing processes, segregating financial data within the accounting system, and implementing further controls to validate our financial data. However, there can be no assurances that these remediation steps will continue to be successful.

Given the difficulties inherent in the design and operation of our system of internal controls over financial reporting, in addition to our limited accounting personnel and management resources, we can provide no assurance as to our, or our independent registered public accounting firm’s, future conclusions about the effectiveness of our system of internal controls, and we may incur significant costs in our efforts to comply with Section 404. Any failure to implement and maintain an effective system of internal controls over financial reporting will subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business and would likely have a negative effect on the trading price of our common units.

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

As an emerging growth company, we have the option to take advantage of these reporting exemptions until we are no longer an “emerging growth company.” We cannot predict if investors will find our units less attractive because we will rely on these exemptions. If some investors find our units less attractive as a result, there may be a less active trading market for our units and our trading price may be more volatile.

Unitholders’ liability may not be limited if a court finds that unitholder action constitutes control of our business.

A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to the general partner. Our partnership is organized under Delaware law, and we conduct business in a number of other states. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some of the other states in which we do business. A unitholder could be liable for any and all of our obligations as if a unitholder were a general partner if a court or government agency were to determine that (i) we were conducting business in a state but had not complied with that particular state’s partnership statute; or (ii) a unitholder’s right to act with other unitholders to remove or replace our general partner, to approve some amendments to our partnership agreement or to take other actions under our partnership agreement constitute “control” of our business. For a discussion of the implications of the limitations of liability on a unitholder, please read “Our Partnership Agreement—Limited Liability.”

 

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Unitholders may have to repay distributions that were wrongfully distributed to them.

Under certain circumstances, unitholders may have to repay amounts wrongfully distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Transferees of common units are liable both for the obligations of the transferor to make contributions to the partnership that are known to the transferee at the time of the transfer and for unknown obligations if the liabilities could be determined from our partnership agreement. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

The NYSE does not require a publicly traded partnership like us to comply with certain of its corporate governance requirements.

We have been approved to list our common units on the NYSE, subject to official notice of issuance. Because we will be a publicly traded partnership, the NYSE does not require us to have, and we do not intend to have, a majority of independent directors on our general partner’s board of directors or to establish a compensation committee or a nominating and corporate governance committee. Additionally, any future issuance of additional common units or other securities, including to affiliates, will not be subject to the NYSE’s shareholder approval rules that apply to a corporation. Accordingly, unitholders will not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements. Please read “Management—Management of Shell Midstream Partners, L.P.”

We will incur increased costs as a result of being a publicly traded partnership.

We have no history operating as a publicly traded partnership. As a publicly traded partnership, we will incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002 and related rules subsequently implemented by the SEC and the NYSE have required changes in the corporate governance practices of publicly traded companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make activities more time-consuming and costly. For example, as a result of becoming a publicly traded partnership, we are required to have at least three independent directors, create an audit committee and adopt policies regarding internal controls and disclosure controls and procedures, including the preparation of reports on our system of internal controls over financial reporting.

Tax Risks to Common Unitholders

In addition to reading the following risk factors, please read “Material U.S. Federal Income Tax Consequences.”

Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service, or IRS, were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, or if we were otherwise subjected to a material amount of additional entity-level taxation, then our cash available for distribution would be substantially reduced.

The anticipated after-tax economic benefit of an investment in the common units depends largely on our being treated as a partnership for federal income tax purposes.

Despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. A change in our business or a change in current law could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.

 

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If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%, and would likely pay state and local income tax at varying rates. Distributions would generally be taxed again as corporate dividends (to the extent of our current and accumulated earnings and profits), and no income, gains, losses, deductions or credits would flow through to you. Because a tax would be imposed upon us as a corporation, our cash available for distribution would be substantially reduced. In addition, several states are evaluating changes to current law which could subject us to additional entity-level taxation and further reduce the cash available for distribution to unitholders.

Our partnership agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state or local income tax purposes, the minimum quarterly distribution amount and the target distribution levels may be adjusted to reflect the impact of that law on us.

The present federal income tax treatment of publicly traded limited partnerships, including us, or an investment in our common units may be modified by administrative or judicial interpretation, or legislative change, at any time, and potentially retroactively. We are unable to predict whether any such modifications will ultimately occur.

Our unitholders’ share of our income will be taxable to them for federal income tax purposes even if they do not receive any cash distributions from us.

Because a unitholder will be treated as a partner to whom we will allocate taxable income that could be different in amount than the cash we distribute, a unitholder’s allocable share of our taxable income will be taxable to it, which may require the payment of federal income taxes and, in some cases, state and local income taxes, on the unitholder’s share of our taxable income even if it receives no cash distributions from us. Our unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from that income.

If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the cost of any IRS contest will reduce our cash available for distribution.

The IRS or a court may reach conclusions that differ from the conclusions of our counsel expressed in this prospectus. Any contest with the IRS, and the outcome of any IRS contest, may have a materially adverse impact on the market for our common units and the price at which our common units trade. In addition, our costs of any contest with the IRS will be borne indirectly by our unitholders and our general partner because the costs will reduce our cash available for distribution.

Tax gain or loss on the disposition of our common units could be more or less than expected.

If our unitholders sell common units, the unitholders will recognize a gain or loss for federal income tax purposes equal to the difference between the amount realized and their tax basis in those common units. Because distributions in excess of a unitholder’s allocable share of our net taxable income decrease the unitholder’s tax basis in its common units, the amount, if any, of such prior excess distributions with respect to the common units a unitholder sells will, in effect, become taxable income to the unitholder if it sells such common units at a price greater than its tax basis in those common units, even if the price received is less than its original cost. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, a unitholder that sells common units may incur a tax liability in excess of the amount of cash received from the sale. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Common Units—Recognition of Gain or Loss” for a further discussion of the foregoing.

 

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Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.

Investment in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (known as IRAs), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file federal income tax returns and applicable state tax returns and pay tax on their share of our taxable income. Please read “Material U.S. Federal Income Tax Consequences—Tax-Exempt Organizations and Other Investors” for a further discussion of the foregoing. Any tax-exempt entity or non-U.S. person should consult a tax advisor before investing in our common units.

We will treat each purchaser of common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.

Because we cannot match transferors and transferees of common units and because of other reasons, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to our unitholders. Baker Botts L.L.P. is unable to opine as to the validity of such filing positions. It also could affect the timing of these tax benefits or the amount of gain from your sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns. Please read “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Section 754 Election” for a further discussion of the effect of the depreciation and amortization positions we will adopt.

We will prorate our items of income, gain, loss and deduction for federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.

We will prorate our items of income, gain, loss and deduction for federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The use of this proration method may not be permitted under existing or proposed Treasury Regulations, and, accordingly, our counsel is unable to opine as to the validity of this method. If the IRS were to challenge this method or new Treasury regulations were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders. Baker Botts L.L.P. has not rendered an opinion with respect to whether our monthly convention for allocating taxable income and losses is permitted by existing Treasury Regulations. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Common Units—Allocations Between Transferors and Transferees.”

A unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of those common units. If so, the unitholder would no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan and may recognize gain or loss from the disposition.

Because a unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of the loaned common units, the unitholder may no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those common units may

 

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not be reportable by the unitholder and any cash distributions received by the unitholder as to those common units could be fully taxable as ordinary income. Baker Botts L.L.P. has not rendered an opinion regarding the treatment of a unitholder where common units are loaned to a short seller to effect a short sale of common units. Please read “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Treatment of Short Sales.”

We will adopt certain valuation methodologies and monthly conventions for federal income tax purposes that may result in a shift of income, gain, loss and deduction between our general partner and our unitholders. The IRS may challenge this treatment, which could adversely affect the value of the common units.

When we issue additional units or engage in certain other transactions, we will determine the fair market value of our assets and allocate any unrealized gain or loss attributable to our assets to the capital accounts of our unitholders and our general partner. Our methodology may be viewed as understating the value of our assets. In that case, there may be a shift of income, gain, loss and deduction between certain unitholders and our general partner, which may be unfavorable to such unitholders. The IRS may challenge our valuation methods and allocations of taxable income, gain, loss and deduction between our general partner and certain of our unitholders.

A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount of taxable gain from our unitholders’ sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.

The sale or exchange of 50% or more of our capital and profits interests during any twelve month period will result in the termination of our partnership for federal income tax purposes. The sale or exchange of 50% or more of the capital and profits interests in any entity in which we own an interest that is treated as a partnership for federal income tax purposes during any twelve month period will result in the termination of such partnership for federal income tax purposes.

We will be considered to have technically terminated our existing partnership and having formed a new partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve month period. Our technical termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns (and our unitholders could receive two Schedules K-1 if certain relief were unavailable) for one fiscal year and could result in a deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in the unitholder’s taxable income for the year of termination. If treated as a new partnership, we must make new tax elections and could be subject to penalties if we are unable to determine that a termination occurred. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Common Units—Constructive Termination” for a discussion of the consequences of our termination for federal income tax purposes.

We own material interests in entities treated as partnerships for federal income tax purposes. Any of these entities will be considered to have technically terminated and to have formed a new partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in such entity’s capital and profits within a twelve month period. Such a termination could result in a deferral of depreciation deductions allowable in computing our taxable income.

 

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If our assets were subjected to a material amount of additional entity-level taxation by individual states, it would reduce our cash available for distribution to you.

If our assets are subjected to a material amount of additional entity-level taxation by individual states, our cash available for a distribution to you would be reduced. Currently, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise and other forms of taxation. We will initially own assets and conduct business in Louisiana and Texas. Texas imposes a franchise tax on all business entities at a maximum effective rate of 0.7% of the business’ gross income apportioned to Texas. In the future, we may expand our operations. Imposition of a similar tax on us in other jurisdictions that we may expand to could substantially reduce our cash available for distribution to you.

As a result of investing in our common units, a unitholder may become subject to state and local taxes and return filing requirements in jurisdictions where we operate or own or acquire properties.

In addition to federal income taxes, our unitholders will likely be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or control property now or in the future, even if the unitholders do not live in any of those jurisdictions. Our unitholders will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. We initially expect to conduct business and/or control assets in Louisiana and Texas. Louisiana currently imposes a personal income tax on individuals. As we make acquisitions or expand our business, we may control assets or conduct business in additional states that impose a personal income tax. It is each unitholder’s responsibility to file all federal, state and local tax returns. Our counsel has not rendered an opinion on the state or local tax consequences of an investment in our common units. Prospective unitholders should consult their own tax advisors regarding such matters.

Entity level taxes on income from C corporation subsidiaries will reduce cash available for distribution, and an individual unitholder’s share of dividend and interest income from such subsidiaries would constitute portfolio income that could not be offset by the unitholder’s share of our other losses or deductions.

A portion of our taxable income is earned through Colonial, a C corporation. Such C corporations are subject to federal income tax on their taxable income at the corporate tax rate, which is currently a maximum of 35%, and will likely pay state (and possibly local) income tax at varying rates, on their taxable income. Any such entity level taxes will reduce the cash available for distribution to our unitholders. Distributions from any such C corporation will generally be taxed again to unitholders as dividend income to the extent of current and accumulated earnings and profits of such C corporation. As of January 1, 2014, the maximum federal income tax rate applicable to such dividend income which is allocable to individuals is generally 20%. An individual unitholder’s share of dividend and interest income from Colonial or other C corporation subsidiaries would constitute portfolio income that could not be offset by the unitholder’s share of our other losses or deductions.

 

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USE OF PROCEEDS

We expect to receive net proceeds of approximately $711.3 million from the sale of common units offered by this prospectus based on the assumed initial public offering price of $20.00 per common unit (the mid-point of the price range set forth on the cover of this prospectus), after deducting underwriting discounts, structuring fees and estimated offering expenses. Our estimate assumes the underwriters’ option to purchase additional common units from us is not exercised. We intend to use (i) approximately $423.3 million of the net proceeds of this offering to make a cash distribution to SPLC, (ii) approximately $188.0 million of the net proceeds of this offering to make a cash distribution to SPLC and a contribution to Zydeco, which will then make a cash distribution to SPLC, both to reimburse SPLC for capital expenditures incurred prior to this offering related to Zydeco, and (iii) approximately $100.0 million for general partnership purposes, including to fund potential expansion capital expenditures and acquisitions.

If and to the extent the underwriters exercise their option to purchase additional common units, the number of common units purchased by the underwriters pursuant to any exercise will be sold to the public, and any remaining common units not purchased by the underwriters pursuant to any exercise of the option will be issued to SPLC at the expiration of the option period for no additional consideration. If the underwriters exercise their option to purchase additional common units in full, the additional net proceeds to us would be approximately $107.3 million, after deducting underwriting discounts. We will use any net proceeds from the exercise of the underwriters’ option to purchase additional common units from us to make an additional cash distribution to SPLC.

An increase or decrease in the initial public offering price of $1.00 per common unit would cause the net proceeds from the offering, after deducting underwriting discounts and offering expenses, to increase or decrease by approximately $35.8 million.

 

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CAPITALIZATION

The following table shows:

 

   

the historical cash and cash equivalents and capitalization of our predecessor as of June 30, 2014; and

 

   

our pro forma cash and cash equivalents and capitalization as of June 30, 2014, reflecting:

 

   

the contribution by SPLC and the issuance by Zydeco to us of interests in Zydeco collectively representing an aggregate 43.0% ownership interest in Zydeco, and the contribution by SPLC to the Partnership of a 28.6%, 49.0%, and 1.612% ownership interest in Mars, Bengal and Colonial, respectively; and

 

   

this offering and the application of the net proceeds of this offering as described under “Use of Proceeds.”

This table is derived from, and should be read together with, the unaudited pro forma financial statements and the accompanying notes included elsewhere in this prospectus. You should also read this table in conjunction with “Prospectus Summary—Formation Transactions,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the unaudited historical interim financial statements and unaudited pro forma financial statements included in this prospectus.

 

     As of June 30, 2014  
(in millions)    Ho-Ho
Predecessor
Historical
     Pro
Forma(1)(2)
 
        

Cash and cash equivalents

   $ —         $ 100.0   
  

 

 

    

 

 

 

Long-term debt:

     

Revolving credit facility(3)

   $ —         $   —     

Zydeco revolving credit facility(3)

     —           —     

Net parent investment/partners’ capital

     

Net parent investment

     251.1           —     

Held by public:

     

Common units

     —           711.3   

Held by Shell:

     

Common units

     —           (101.2

Subordinated units

     —           (227.9

General partner units

     —           (9.3
  

 

 

    

 

 

 

Total net parent investment/Shell Midstream Partners, L.P. partners’ capital

     251.1         372.9   
  

 

 

    

 

 

 

Noncontrolling interest in consolidated subsidiary(4)

     —           148.6   
  

 

 

    

 

 

 

Total net parent investment/partners’ capital

   $ 251.1       $ 521.5   
  

 

 

    

 

 

 

 

(1) Assumes the mid-point of the price range set forth on the cover of this prospectus.
(2) The total distribution to SPLC of $611.3 million, including the reimbursement for capital expenditures, was allocated to all units held by Shell.
(3) We will enter into a $300 million revolving credit facility at the closing of this offering, under which no amounts will be drawn at the closing of this offering. Zydeco has entered into a $30 million revolving credit facility, under which no amounts will be drawn at the closing of this offering.
(4) Represents the 57.0% ownership interest in Zydeco retained by SPLC following this offering.

 

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DILUTION

Dilution is the amount by which the offering price per common unit in this offering will exceed the pro forma net tangible book value per unit after the offering. On a pro forma basis as of June 30, 2014, after giving effect to the offering of common units and the related formation transactions, our net tangible book value was approximately $372.9 million, or $2.71 per unit. Purchasers of common units in this offering will experience substantial and immediate dilution in pro forma net tangible book value per common unit for financial accounting purposes, as illustrated in the following table.

 

Assumed initial public offering price per common unit(1)

     $ 20.00   

Pro forma net tangible book value per unit before the offering(2)

   $ 2.72     

Decrease in net tangible book value per unit attributable to purchasers in the offering

     (0.01  
  

 

 

   

Less: Pro forma net tangible book value per unit after the offering(3)

       2.71   
    

 

 

 

Immediate dilution in net tangible book value per common unit to purchasers in the offering(4)(5)

     $ 17.29   
    

 

 

 

 

(1) The mid-point of the price range set forth on the cover of this prospectus.
(2) Determined by dividing the number of units (29,975,068 common units, 67,475,068 subordinated units and 2,754,084 general partner units) to be issued to the general partner and its affiliates for their contribution of assets and liabilities to us into the pro forma net tangible book value of the contributed assets and liabilities.
(3) Determined by dividing the number of units to be outstanding after this offering (67,475,068 common units, 67,475,068 subordinated units and 2,754,084 general partner units) and the application of the related net proceeds into our pro forma net tangible book value, after giving effect to the application of the net proceeds of this offering.
(4) If the initial public offering price were to increase or decrease by $1.00 per common unit, then dilution in net tangible book value per common unit would equal $18.29 and $16.29, respectively.
(5) Assumes the underwriters’ option to purchase additional common units from us is not exercised. If the underwriters’ option to purchase additional common units from us is exercised in full, the immediate dilution in net tangible book value per common unit to purchasers in this offering will remain $17.29.

The following table sets forth the number of units that we will issue and the total consideration contributed to us by the general partner and its affiliates in respect of their units and by the purchasers of common units in this offering upon consummation of the formation transactions contemplated by this prospectus.

 

     Units Acquired     Total Consideration  
($ in millions)    Number          %         Amount             %      

General partner and its affiliates(1)(2)(3)

     100.2         73   $ (338.4     —  

Purchasers in this offering(2)

     37.5         27     711.3        100
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

     137.7         100   $ 372.9        100
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) Upon the consummation of the formation transactions contemplated by this prospectus, our general partner and its affiliates will own 29,975,068 common units, 67,475,068 subordinated units and 2,754,084 general partner units.
(2) Assumes the underwriters’ option to purchase additional common units from us is not exercised.
(3) The assets contributed by the general partner and its affiliates were recorded at historical cost in accordance with GAAP. Book value of the consideration provided by our general partner and its affiliates, as of June 30, 2014, after giving effect to the application of the net proceeds of the offering, is $(338.4) million.

 

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CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

The following discussion of our cash distribution policy should be read in conjunction with the specific assumptions included in this section. In addition, please read “Risk Factors” and “Forward-Looking Statements” for information regarding certain risks inherent in our business and regarding statements that do not relate strictly to historical or current facts.

For additional information regarding our historical and pro forma results of operations, please refer to our historical financial statements and the accompanying notes and our unaudited pro forma financial statements and the accompanying notes included elsewhere in this prospectus.

General

Rationale for Our Cash Distribution Policy

Our partnership agreement requires that we distribute all of our available cash quarterly. This requirement forms the basis of our cash distribution policy and reflects a basic judgment that our unitholders will be better served by our distributing available cash rather than retaining it, because, among other reasons, we believe we will generally finance any expansion capital expenditures from external financing sources. Under our current cash distribution policy, we intend to make minimum quarterly distributions on our common and subordinated units of $0.1625 per unit, or $0.6500 per unit on an annualized basis, to the extent we have sufficient available cash after the establishment of cash reserves and the payment of costs and expenses, including the payment of expenses to our general partner. However, other than the requirement in our partnership agreement to distribute all of our available cash each quarter, we have no legal obligation to make quarterly cash distributions in this or any other amount, and our general partner has considerable discretion to determine the amount of cash available for distribution each quarter. Generally, we define available cash as our (i) cash on hand at the end of a quarter after the payment of our expenses and the establishment of cash reserves, (ii) cash on hand on the date on which our general partner determines the amount of cash available for distribution, which we refer to as the date of determination, resulting from dividends or distributions received after the end of the quarter from equity interests in any person other than a subsidiary in respect of operations conducted by such person during the quarter, and (iii) if our general partner so determines, cash on hand at the date of determination resulting from working capital borrowings after the end of the quarter. Because we are not subject to an entity-level federal income tax, we expect to have more cash to distribute than would be the case if we were subject to federal income tax. If we do not generate sufficient available cash from our operations, we may, but are under no obligation to, borrow funds to pay minimum quarterly distributions to our unitholders.

Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy

Although our partnership agreement requires that we distribute all of our available cash quarterly, there is no guarantee that we will make quarterly cash distributions to our unitholders at our minimum quarterly distribution rate or at any other rate, and we have no legal obligation to do so. Our current cash distribution policy is subject to certain restrictions, as well as the considerable discretion of our general partner in determining the amount of our available cash each quarter. The following factors will affect our ability to make cash distributions, as well as the amount of any cash distributions we make:

 

   

Our cash distribution policy may be subject to restrictions on cash distributions under our new revolving credit facility and any future debt agreements. Such restrictions may prohibit us from making cash distributions while an event of default has occurred and is continuing under our new revolving credit facility, notwithstanding our cash distribution policy. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity—Revolving Credit Facility.”

 

   

The amount of cash that we distribute and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement. Specifically, our general partner will have the authority to establish cash reserves for the prudent conduct of our business

 

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and for future cash distributions to our unitholders, and the establishment of or increase in those reserves could result in a reduction in cash distributions from levels we currently anticipate pursuant to our stated cash distribution policy. Any decision to establish cash reserves made by our general partner in good faith will be binding on our unitholders.

 

   

While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including the provisions requiring us to make cash distributions, may be amended. During the subordination period, our partnership agreement may not be amended without the approval of our public common unitholders, except in a limited number of circumstances when our general partner can amend our partnership agreement without any unitholder approval. For a description of these limited circumstances, please read “Our Partnership Agreement—Amendment of Our Partnership Agreement—No Limited Partner Approval.” However, after the subordination period has ended, our partnership agreement may be amended with the consent of our general partner and the approval of a majority of the outstanding common units, including common units owned by our general partner and its affiliates. At the closing of this offering, SPLC will own our general partner and will indirectly own an aggregate of approximately 72.2% of our outstanding common and subordinated units (or 68.0% if the underwriters’ option to purchase additional common units is exercised in full).

 

   

Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, or the Delaware Act, we may not make a distribution if the distribution would cause our liabilities to exceed the fair value of our assets.

 

   

We may lack sufficient cash to pay distributions to our unitholders due to cash flow shortfalls attributable to a number of operational, commercial or other factors as well as increases in our operating expenses or general and administrative expenses, principal and interest payments on our debt, tax expenses, working capital requirements and anticipated cash needs. Our available cash is directly impacted by our cash expenses necessary to run our business and will be reduced dollar-for-dollar to the extent such uses of cash increase. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Distributions of Available Cash.”

 

   

Upon the closing of this offering, we will own a 43.0% interest in Zydeco and SPLC will own the remaining 57.0% interest in Zydeco. Pursuant to a voting agreement with SPLC, we will control cash distributions by Zydeco. Please read “Certain Relationships and Related Party Transactions—Contracts with Affiliates —Zydeco Limited Liability Company Agreement.”

 

   

Upon the closing of this offering, we will own a 28.6% interest in Mars, SPLC will own a 42.9% interest in Mars and an affiliate of BP will own the remaining 28.5% interest. Pursuant to a voting agreement with SPLC, we will have voting power sufficient such that any cash reserves by Mars that reduce the amount of distributable cash will require our approval; however, the amount of reserves will also be influenced by the capital budget, which must be approved by us and the other partner. Mars is required by the terms of its partnership agreement to distribute its “distributable cash” (as defined in the Mars partnership agreement) from time to time to its partners in accordance with their ownership interests. “Distributable cash” is defined as the gross cash proceeds from operations less the portion thereof used to establish reserves as determined by the partnership committee of Mars. Determinations of reserves by the partnership committee require approval of committee members representing at least a majority of the ownership interests. The amount of reserves is influenced by the capital budget which is approved by 100% of the ownership interests. Please read “Certain Relationships and Related Party Transactions—Contracts with Affiliates—Mars Partnership Agreement.”

 

   

Upon the closing of this offering, we will own a 49.0% interest in Bengal, SPLC will own a 1.0% interest in Bengal and Colonial will own the remaining 50% interest. Pursuant to a voting agreement with SPLC, we will have voting power sufficient such that any cash reserves by Bengal that reduce the amount of cash distributed will require our approval. Bengal is required by the terms of its limited liability company agreement to make quarterly cash distributions to its members of its “available cash,” which is defined to include the unrestricted cash and cash equivalents of Bengal, less reasonable cash

 

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reserves as the board of managers of Bengal determines is proper or in the best interests of Bengal. Cash reserves include those reserves necessary for working capital and obligations or other contingencies of Bengal. Determinations by the board of managers requires approval of managers representing at least a majority of the ownership interests. Please read “Certain Relationships and Related Party Transactions—Contracts with Affiliates—Bengal Limited Liability Company Agreement.”

 

   

We will not control cash distributions by Colonial. Upon the closing of this offering, we will own a 1.612% interest in Colonial and SPLC will own a 14.508% interest in Colonial. Colonial’s organizational documents do not require it to pay dividends. However, Colonial has historically paid aggregate dividends to its shareholders approximately equal to Colonial’s net income. Please read “Certain Relationships and Related Party Transactions—Contracts with Affiliates—Colonial Organizational Documents.”

 

   

If and to the extent our available cash materially declines from quarter to quarter, we may elect to change our current cash distribution policy and reduce the amount of our quarterly distributions in order to service or repay our debt or fund expansion capital expenditures.

To the extent that our general partner determines not to distribute the full minimum quarterly distribution on our common units with respect to any quarter during the subordination period, the common units will accrue an arrearage equal to the difference between the minimum quarterly distribution and the amount of the distribution actually paid on the common units with respect to that quarter. The aggregate amount of any such arrearages must be paid on the common units before any distributions of available cash from operating surplus may be made on the subordinated units and before any subordinated units may convert into common units. The subordinated units will not accrue any arrearages. Any shortfall in the payment of the minimum quarterly distribution on the common units with respect to any quarter during the subordination period may decrease the likelihood that our quarterly distribution rate would increase in subsequent quarters. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordination Period.”

Our Ability to Grow is Dependent on Our Ability to Access External Expansion Capital

Our partnership agreement requires us to distribute all of our available cash to our unitholders on a quarterly basis. As a result, we expect that we will rely primarily upon our cash reserves (including the net proceeds that we will retain from this offering) and external financing sources, including borrowings under our revolving credit facility (under which no amounts will be outstanding at the closing of this offering) and the issuance of debt and equity securities, to fund future acquisitions and other expansion capital expenditures. To the extent we are unable to finance growth with external sources of capital, the requirement in our partnership agreement to distribute all of our available cash and our current cash distribution policy will significantly impair our ability to grow. In addition, because we will distribute all of our available cash, our growth may not be as fast as businesses that reinvest all of their available cash to expand ongoing operations. Our new revolving credit facility will limit, and any future debt agreements may limit, our ability to incur additional debt, including through the issuance of debt securities. Please read “Risk Factors—Risks Related to Our Business—Restrictions in our revolving credit facility could adversely affect our business, financial condition, results of operations, ability to make cash distributions to our unitholders and the value of our units.” To the extent we issue additional units, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our cash distributions per unit. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to our common units, and our unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such additional units. If we incur additional debt to finance our growth strategy, we will have increased interest expense, which in turn will reduce the available cash that we have to distribute to our unitholders. Please read “Risk Factors—Risks Related to Our Business—Increases in interest rates could adversely impact the price of our common units, our ability to issue equity or incur debt for acquisitions or other purposes and our ability to make cash distributions at our intended levels.”

 

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Our Minimum Quarterly Distribution

Upon the consummation of this offering, our partnership agreement will provide for a minimum quarterly distribution of $0.1625 per unit for each whole quarter, or $0.6500 per unit on an annualized basis. Our ability to make cash distributions at the minimum quarterly distribution rate will be subject to the factors described above under “—General—Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy.” Quarterly distributions, if any, will be made within 60 days after the end of each calendar quarter to holders of record on or about the first day of each such month in which such distributions are made. We will not make distributions for the period that begins on October 1, 2014 and ends on the day prior to the closing of this offering. We will adjust the amount of our distribution for the period from the completion of this offering through December 31, 2014 based on the actual length of the period.

The amount of available cash needed to pay the minimum quarterly distribution on all of our common and subordinated units and the corresponding distributions on our general partner units, in each case to be outstanding immediately after this offering, for one quarter and on an annualized basis (assuming no exercise and full exercise of the underwriters’ option to purchase additional common units) is summarized in the table below:

 

     No Exercise  of
Underwriters’ Option to Purchase
Additional Common Units
     Full Exercise  of
Underwriters’ Option to Purchase
Additional Common Units
 
     Aggregate Minimum
Quarterly Distributions
     Aggregate Minimum
Quarterly Distributions
 
(in thousands)    Number
of Units
     One
Quarter
     Annualized
(Four
Quarters)
     Number
of Units
     One
Quarter
     Annualized
(Four
Quarters)
 

Common units held by public

     37,500       $ 6,093       $ 24,375         43,125       $ 7,007       $ 28,031   

Common units held by SPLC

     29,975         4,871         19,484         24,350         3,957         15,828   

Subordinated units held by SPLC

     67,475         10,965         43,859         67,475         10,965         43,859   

General partner units

     2,754         448         1,790         2,754         448         1,790   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     137,704       $ 22,377       $ 89,508         137,704       $ 22,377       $ 89,508   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of the date of this offering, our general partner will be entitled to 2% of all distributions that we make prior to our liquidation. Our general partner’s initial 2% interest in these distributions may be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us in order to maintain its initial 2% general partner interest. Our general partner will also initially hold all of the incentive distribution rights, which entitle the holder to increasing percentages, up to a maximum of 48%, of the cash we distribute in excess of $0.186875 per unit per quarter.

During the subordination period, before we make any quarterly distributions to our subordinated unitholders, our common unitholders are entitled to receive payment of the full minimum quarterly distribution for such quarter plus any arrearages in distributions of the minimum quarterly distribution from prior quarters, and our general partner will receive corresponding distributions on its general partner units. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordination Period.” We cannot guarantee, however, that we will pay distributions on our common units at our minimum quarterly distribution rate or at any other rate in any quarter.

Although holders of our common units may pursue judicial action to enforce provisions of our partnership agreement, including those related to requirements to make cash distributions as described above, our partnership agreement provides that any determination made by our general partner in its capacity as our general partner must be made in good faith and that any such determination will not be subject to any other standard imposed by the Delaware Act or any other law, rule or regulation or at equity. Our partnership agreement provides that, in order for a determination by our general partner to be made in “good faith,” our general partner must subjectively believe that the determination is not adverse to our best interests.

 

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The provision in our partnership agreement requiring us to distribute all of our available cash quarterly may not be modified without amending our partnership agreement; however, as described above, the actual amount of our cash distributions for any quarter is subject to fluctuations based on the amount of cash we generate from our business, the amount of reserves our general partner establishes in accordance with our partnership agreement, the amount of available cash from working capital borrowings and the dividends or distributions received from our equity interests.

Additionally, our general partner may reduce the minimum quarterly distribution and the target distribution levels if legislation is enacted or modified that results in our becoming taxable as a corporation or otherwise subject to taxation as an entity for federal, state or local income tax purposes. In such an event, the minimum quarterly distribution and the target distribution levels may be reduced proportionately by the percentage decrease in our available cash resulting from the estimated tax liability we would incur in the quarter in which such legislation is effective. The minimum quarterly distribution will also be proportionately adjusted in the event of any distribution, combination or subdivision of common units in accordance with the partnership agreement, or in the event of a distribution of available cash from capital surplus. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels.” The minimum quarterly distribution is also subject to adjustment if the holders of the incentive distribution rights (initially only our general partner) elect to reset the target distribution levels related to the incentive distribution rights. In connection with any such reset, the minimum quarterly distribution will be reset to an amount equal to the average cash distribution amount per common unit for the two quarters immediately preceding the reset. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—General Partner’s Right to Reset Incentive Distribution Levels.”

In the sections that follow, we present in detail the basis for our belief that we will be able to fully fund our annualized minimum quarterly distribution of $0.6500 per unit for the twelve months ending September 30, 2015. In those sections, we present two tables, consisting of:

 

   

“Unaudited Pro Forma Cash Available for Distribution,” in which we present the amount of cash available for distribution we would have generated on a pro forma basis for the twelve months ended June 30, 2014 and the year ended December 31, 2013, derived from our unaudited pro forma financial statements that are included in this prospectus, as adjusted to give pro forma effect to this offering and the related formation transactions; and

 

   

“Estimated Cash Available for Distribution for the Twelve Months Ending September 30, 2015,” in which we provide our estimated forecast of our ability to generate sufficient cash available for distribution to support the full payment of minimum quarterly distributions on our common and subordinated units and the corresponding distributions on our general partner units for the twelve months ending September 30, 2015.

Unaudited Pro Forma Cash Available for Distribution for the Twelve Months Ended June 30, 2014 and the Year Ended December 31, 2013

On a pro forma basis, assuming we had completed this offering and the related formation transactions on January 1, 2013, our cash available for distribution for the twelve months ended June 30, 2014 and the year ended December 31, 2013 would have been approximately $59.8 million and $37.3 million, respectively. The amount of cash available for distribution we must generate to support the payment of minimum quarterly distributions for four quarters on our common units and subordinated units and the corresponding distributions on our general partner units, in each case to be outstanding immediately after this offering, is approximately $89.5 million (or an average of approximately $22.4 million per quarter). As a result, we would have had sufficient cash available for distribution to pay the full minimum quarterly distributions on our common units and the corresponding distributions on our general partner units but only approximately 33.6% of the minimum quarterly distributions on our subordinated units and the corresponding distributions on our general partner units for the twelve months ended June 30, 2014. For the year ended December 31, 2013, we would have had

 

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sufficient cash available for distribution to pay only approximately 83.3% of the full minimum quarterly distributions on our common units and the corresponding distributions on our general partner units, and we would not have had sufficient cash available for distribution to pay any of the minimum quarterly distributions on our subordinated units and the corresponding distributions on our general partner units for that period.

We based the pro forma adjustments upon currently available information and specific estimates and assumptions. The pro forma amounts on the following page do not purport to present our results of operations had the formation transactions contemplated in this prospectus actually been completed as of the dates indicated. In addition, cash available for distribution is primarily a cash accounting concept, while our unaudited pro forma financial statements have been prepared on an accrual basis. As a result, you should view the amount of pro forma cash available for distribution only as a general indication of the amount of cash available for distribution that we might have generated had we been formed on January 1, 2013.

The following table illustrates, on a pro forma basis, for the twelve months ended June 30, 2014 and the year ended December 31, 2013, the amount of cash available for distribution that would have been available for distribution on our common and subordinated units and the corresponding distributions on our general partner units, assuming in each case that this offering and the other formation transactions contemplated in this prospectus had been consummated on January 1, 2013.

 

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Shell Midstream Partners, L.P.

Unaudited Pro Forma Cash Available for Distribution

 

(in millions, except per unit data)   Twelve Months Ended
June 30, 2014
    Year Ended
December 31, 2013
 
          (As Revised)  

Statement of Operations Data:

   

Revenue

  $ 117.2      $ 91.6   

Pro Forma Costs and Expenses:

   

Operations and maintenance(1)

    42.7        52.2   

Gain from disposition of fixed assets

    (20.8     (20.8

General and administrative

    21.7        19.5   

Depreciation and amortization

    8.9        6.9   

Property and other taxes

    5.2        4.6   
 

 

 

   

 

 

 

Total costs and expenses

    57.7        62.4   
 

 

 

   

 

 

 

Pro Forma Operating Income

    59.5        29.2   

Income from equity investment—Mars(2)

    25.0        21.6   

Income from equity investment—Bengal(2)

    18.8        17.8   

Dividend income from investment—Colonial(3)

    4.9        5.0   

Interest expense, net

    —          —     
 

 

 

   

 

 

 

Pro Forma Net Income

    108.2        73.6   

Less:

   

Net income attributable to noncontrolling interests—Zydeco(4)

    38.8        21.5   
 

 

 

   

 

 

 

Pro Forma Net Income attributable to Shell Midstream Partners(5)

  $ 69.4      $ 52.1   

Add:

   

Net income attributable to noncontrolling interests—Zydeco(4)

    38.8        21.5   

Loss (gain) from disposition of fixed assets

    (20.8     (20.8

Depreciation and amortization

    8.9        6.9   

Interest expense, net

    —         —    

Cash distribution received from equity investment—Mars(6)

    14.9        3.4   

Cash distribution received from equity investment—Bengal(6)

    17.3        18.5   

Less:

   

Income from equity investment—Mars(2)

    25.0        21.6   

Income from equity investment—Bengal(2)

    18.8        17.8   
 

 

 

   

 

 

 

Pro Forma Adjusted EBITDA

  $ 84.7      $ 42.2   

Less:

   

Pro Forma Adjusted EBITDA attributable to noncontrolling interests—Zydeco

    32.0        13.6   
 

 

 

   

 

 

 

Pro Forma Adjusted EBITDA Attributable to Shell Midstream Partners.

  $ 52.7      $ 28.6   

Less:

   

Cash interest paid by Shell Midstream Partners(7)

    0.6        0.6   

Maintenance capital expenditures attributable to Shell Midstream Partners—Zydeco(8)

    2.1        0.9   

Expansion capital expenditures attributable to Shell Midstream Partners—Zydeco(9)

    54.0        44.2   

Adjustment to insurance expense(10)

    2.6        2.9   

Incremental general and administrative expense of being a publicly traded partnership(11)

    3.6        3.6   

Add:

   

Net adjustments from volume deficiency payments attributable to Shell Midstream Partners(12)

    6.5        —     

Assumed capital contribution from SPLC for Zydeco expansion capital expenditures attributable to Shell Midstream Partners(13)

    54.0        44.2   

Assumed capital contribution from SPLC to fund Mars expansion capital expenditures attributable to Shell Midstream Partners(14)

    9.5        16.7   
 

 

 

   

 

 

 

Pro Forma Cash Available for Distribution attributable to Shell Midstream Partners

  $ 59.8      $ 37.3   
 

 

 

   

 

 

 

Cash Distributions

   

Minimum annual distribution per unit

  $ 0.6500      $ 0.6500   
 

 

 

   

 

 

 

Annual distribution to:

   

Public common unitholders

  $ 24.4      $ 24.4   

Shell:

   

Common units

    19.5        19.5   

Subordinated units

    43.8        43.8   

General partner units

    1.8        1.8   
 

 

 

   

 

 

 

Total annual distributions at the minimum quarterly distribution rate

  $ 89.5      $ 89.5   
 

 

 

   

 

 

 

Excess (shortfall) of Pro Forma Cash Available for Distribution Attributable to Shell Midstream Partners over Aggregate Minimum Quarterly Distributions

  $ (29.7   $ (52.2

 

(1) Includes fixed and variable costs related to the Ho-Ho operations. Ho-Ho was not fully operational from August to December 2013 due to a flow reversal project.

 

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(2) Each of Mars and Bengal is an unconsolidated entity in which we own a 28.6% and 49.0% interest, respectively, and our earnings from those unconsolidated affiliates are included on our unaudited pro forma condensed combined statement of income included elsewhere in this prospectus. Because our earnings from unconsolidated affiliates from each of Mars and Bengal are not necessarily reflective of the amount of cash we would expect to receive from those entities, it is included in our pro forma net income but subtracted in connection with our calculation of Adjusted EBITDA. To give effect to the actual cash contribution to us from Mars and Bengal during the twelve months ended June 30, 2014 and the year ended December 31, 2013, our actual cash distribution received from those entities is included in our Adjusted EBITDA. Please read “—Pro Forma Cash Distributed to Us.”
(3) Represents cash dividends in respect of our 1.612% ownership interest in Colonial.
(4) Represents net income attributable to SPLC’s ownership interest in Zydeco giving pro forma effect to the formation transactions and this offering.
(5) Reflects pro forma net income of Shell Midstream Partners, L.P. giving pro forma effect to the offering, the contribution by SPLC and the issuance by Zydeco to us of interests in Zydeco collectively representing an aggregate 43.0% ownership interest in Zydeco, a 28.6% ownership interest in Mars, 49.0% ownership interest in Bengal and a 1.612% ownership interest in Colonial, and related transactions as further discussed in the unaudited pro forma condensed combined financial statements of Shell Midstream Partners, L.P. included elsewhere in this prospectus.
(6) For the twelve months ended June 30, 2014 and for the year ended December 31, 2013, we have assumed that we would have received 28.6% of the pro forma cash distributed by Mars to its partners and 49.0% of the cash distributed by Bengal to its members. For information regarding the provisions of the governing agreements of Mars and Bengal that govern cash distributions by Mars and Bengal, respectively, please read “Certain Relationships and Related Party Transactions—Contracts with Affiliates—Mars Partnership Agreement” and “Certain Relationships and Related Party Transactions—Contracts with Affiliates—Bengal Limited Liability Company Agreement.” Please read “—Pro Forma Cash Distributed to Us.”
(7) The amount shown represents a 0.19% commitment fee for the undrawn portion of our credit facility to be entered into at the closing of this offering and a 0.23% commitment fee for the undrawn portion of the $30 million Zydeco credit facility.
(8) Maintenance capital expenditures are capital expenditures made to replace partially or fully depreciated assets, to maintain the existing operating capacity of our assets and to extend their useful lives, or other capital expenditures that are incurred in maintaining existing system volumes and related cash flows. Represents our proportionate ownership share of maintenance capital expenditures for Zydeco.
(9) In addition to maintenance capital expenditures, our predecessor made expansion capital expenditures relating to the reversal of Ho-Ho and related assets. The amount shown represents our proportionate ownership share of Zydeco expansion capital expenditures.
(10) Reflects increased insurance expense for our ownership interest in Mars offset by a decrease in Zydeco’s insurance expense.
(11) Reflects estimated incremental cash expenses associated with being a publicly traded partnership, including costs associated with annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, independent auditor fees, investor relations activities, registrar and transfer agent fees, incremental director and officer liability insurance costs and director compensation.
(12)

Represents a net adjustment to reflect, in respect of our ownership interest in Zydeco, (a) the receipt of cash payments with respect to committed volume deficiencies under Zydeco’s FERC-approved transportation services agreements that are recognized as deferred revenue and (b) the absence of such cash payments when deferred revenue is recognized upon the satisfaction or expiration of certain conditions under Zydeco’s FERC-approved transportation services agreements. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—How We Generate Revenue.”

 

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(13) During the periods shown, SPLC funded expansion capital expenditures for Ho-Ho with cash from operations; however, following this offering, we expect that Zydeco will distribute substantially all of its cash from operations.
(14) Historically, Mars has funded expansion capital expenditures from cash generated by operations. Going forward, we expect Mars to distribute substantially all of its cash from operations to its members and fund any capital expenditures with capital contributions. As a result, we have included an adjustment to expansion capital expenditures attributable to Shell Midstream Partners for the periods shown.

 

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Pro Forma Cash Distributed to Us

The following table presents for Zydeco a reconciliation of pro forma Adjusted EBITDA and pro forma cash available for distribution to pro forma net income for the twelve months ended June 30, 2014 and the year ended December 31, 2013.

 

(in millions)    Twelve Months Ended
June 30, 2014
    Year Ended
December 31, 2013
 

Zydeco(1)

    

Reconciliation of Adjusted EBITDA and Cash Available for Distribution to Net Income

    

Net income

   $ 66.7      $ 36.5   

Zydeco adjustments(2)

     1.3        1.2   
  

 

 

   

 

 

 

Pro Forma Net Income

   $ 68.0      $ 37.7   
  

 

 

   

 

 

 

Add:

    

Gain from disposition of fixed assets

     (20.8     (20.8

Depreciation and amortization

     8.9        6.9   

Interest expense, net

     —          —     
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 56.1      $ 23.8   
  

 

 

   

 

 

 

Less:

    

Maintenance capital expenditures

     4.9        2.2   

Cash interest expense

     —          —     

Add:

    

Net adjustments from volume deficiency payments(3)

     15.1        —     

Adjustment for Zydeco insurance

     1.3        0.8   
  

 

 

   

 

 

 

Cash Available for Distribution

   $ 67.6      $ 22.4   
  

 

 

   

 

 

 

Cash Distribution by Zydeco to its members—100%

   $ 67.6      $ 22.4   

Cash Distribution by Zydeco to Shell Midstream Partners—43.0%

   $ 29.1      $ 9.6   

 

(1) Derived from the historical combined financial statements of Ho-Ho, our predecessor, which pipeline system will be owned by Zydeco.
(2) Represents adjustments to general and administrative expense. Please read accompanying notes to the unaudited pro forma condensed combined financial statements.
(3) Represents a net adjustment to reflect (a) the receipt of cash payments with respect to committed volume deficiencies under Zydeco’s FERC-approved transportation services agreements that are recognized as deferred revenue and (b) the absence of such cash payments when deferred revenue is recognized upon the satisfaction or expiration of certain conditions under Zydeco’s FERC-approved transportation services agreements. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—How We Generate Revenue.”

 

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The following table presents for Mars a reconciliation of pro forma Adjusted EBITDA and pro forma cash available for distribution to pro forma net income for the twelve months ended June 30, 2014 and the year ended December 31, 2013.

 

(in millions)    Twelve Months Ended
June 30, 2014
    Year Ended
December 31, 2013
 
           (As Revised)  

Mars

    

Reconciliation of Adjusted EBITDA and Cash Available for Distribution to Net Income

    

Net income

   $ 87.3      $ 75.5   

Add:

    

Net gain from pipeline operations

     (9.5     (9.0

Depreciation and amortization

     7.9        5.4   

Interest expense, net

     —          —     
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 85.7      $ 71.9   

Less:

    

Maintenance capital expenditures

     0.6        1.6   

Cash interest expense

              
  

 

 

   

 

 

 

Cash Available for Distribution

   $ 85.1      $ 70.3   

Less:

    

Cash reserves(1)

     33.1        58.3   
  

 

 

   

 

 

 

Cash Distribution by Mars to its partners—100%(2)

   $ 52.0      $ 12.0   
  

 

 

   

 

 

 

Cash Distribution by Mars to Shell Midstream Partners—28.6%(3)

   $ 14.9      $ 3.4   

 

(1) Represents growth capital expenditures net of cash contribution from partners.
(2) The distribution for the twelve months ended June 30, 2014 reflects a $44.9 million distribution to SPLC and an affiliate of BP through June 30, 2014 and a $7.1 million distribution to an affiliate of BP on July 1, 2014.
(3) During the periods shown, Mars funded expansion capital expenditures with cash from operations; however, following this offering, we expect that Mars will distribute substantially all of its cash from operations. After giving effect to the assumed capital contribution from SPLC for Mars expansion capital expenditures attributable to our pro forma ownership interest in Mars, the cash distribution by Mars to us for the twelve months ended June 30, 2014 and the year ended December 31, 2013 would have been $24.4 million and $20.1 million, respectively.

 

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The following table presents for Bengal a reconciliation of pro forma Adjusted EBITDA and pro forma cash available for distribution to pro forma net income for the twelve months ended June 30, 2014 and the year ended December 31, 2013.

 

(in millions)    Twelve Months Ended
June 30, 2014
     Year Ended
December 31, 2013
 

Bengal

     

Reconciliation of Adjusted EBITDA and Cash Available for Distribution to Net Income

     

Net income

   $ 38.3       $ 36.3   

Add:

     

Net loss (gain) from pipeline operations

     —           —     

Depreciation and amortization

     5.2         5.2   

Interest expense, net

     0.2         0.2   
  

 

 

    

 

 

 

Adjusted EBITDA

   $ 43.7       $ 41.7   

Less:

     

Maintenance capital expenditures

     2.4         2.5   

Cash interest expense

     0.2         0.2   
  

 

 

    

 

 

 

Cash Available for Distribution

   $ 41.1       $ 39.0   

Less:

     

Cash reserves(1)

     5.7         1.3   
  

 

 

    

 

 

 

Cash Distribution by Bengal to its members—100%

   $ 35.4       $ 37.7   
  

 

 

    

 

 

 

Cash Distribution by Bengal to Shell Midstream Partners—49.0%

   $ 17.3       $ 18.5   

 

(1) Represents a discretionary reserve to be used for reinvestment and other general purposes.

 

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Estimated Cash Available for Distribution for the Twelve Months Ending September 30, 2015

We forecast that our estimated cash available for distribution for the twelve months ending September 30, 2015 will be approximately $98.5 million. This amount would exceed by $9.0 million the amount of cash available for distribution we must generate to support the payment of the minimum quarterly distributions for four quarters on our common units and subordinated units and the corresponding distributions on our general partner units, in each case to be outstanding immediately after this offering, for the twelve months ending September 30, 2015. The number of outstanding units on which we have based our estimate does not include any common units that may be issued under the long-term incentive plan that our general partner will adopt prior to the closing of this offering.

We have not historically made public projections as to future operations, earnings or other results. However, management has prepared the forecast of estimated cash available for distribution for the twelve months ending September 30, 2015, and related assumptions set forth below to substantiate our belief that we will have sufficient cash available for distribution to pay the full minimum quarterly distributions on our common and subordinated units and the corresponding distributions on our general partner units for the twelve months ending September 30, 2015. Please read below under “—Significant Forecast Assumptions” for further information as to the assumptions we have made for the financial forecast. This forecast is a forward-looking statement and should be read together with our historical financial statements and accompanying notes included elsewhere in this prospectus, our unaudited pro forma financial statements and accompanying notes included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This forecast was not prepared with a view toward complying with the published guidelines of the SEC or guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information, but, in the view of our management, this forecast was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of management’s knowledge and belief, the assumptions on which we base our belief that we can generate sufficient cash available for distribution to pay the full minimum quarterly distributions on our common and subordinated units and the corresponding distributions on our general partner units for the twelve months ending September 30, 2015. However, this information is not fact and should not be relied upon as being necessarily indicative of our future results, and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information.

The prospective financial information included in this registration statement has been prepared by, and is the responsibility of, our management. PricewaterhouseCoopers LLP has neither examined, compiled nor performed any procedures with respect to the accompanying prospective financial information and, accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto. The PricewaterhouseCoopers LLP report included in this prospectus relates to our historical financial information. It does not extend to the prospective financial information and should not be read to do so.

When considering our financial forecast, you should keep in mind the risk factors and other cautionary statements under “Risk Factors.” Any of the risks discussed in this prospectus, to the extent they are realized, could cause our actual results of operations to vary significantly from those that would enable us to generate our estimated cash available for distribution.

We do not undertake any obligation to release publicly the results of any future revisions we may make to the forecast or to update this forecast to reflect events or circumstances after the date of this prospectus. Therefore, you are cautioned not to place undue reliance on this prospective financial information.

 

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Shell Midstream Partners, L.P.

Estimated Cash Available for Distribution

 

     Twelve
Months
Ending

September 30,
2015
                         
       Three Months Ending  
(in millions, except per unit data)      December 31,
2014
    March 31,
2015
    June 30,
2015
    September 30,
2015
 

Statements of Operations Data:

          

Estimated Revenue

   $ 243.4      $ 52.0      $ 52.0      $ 60.9      $ 78.5   

Estimated Costs and Expenses:

          

Operations and maintenance(1)

     52.4        13.4        11.8        13.2        14.0   

General and administrative(2)

     22.5        5.5        5.6        5.7        5.7   

Depreciation

     10.8        2.7        2.7        2.7        2.7   

Property and other taxes(3)

     11.4        1.5        3.3        3.3        3.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     97.1        23.1        23.4        24.9        25.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated Operating Income

     146.3        28.9        28.6        36.0        52.8   

Income from equity investment—Mars(4)

     22.1        4.6        6.6        4.6        6.3   

Income from equity investment—Bengal(4)

     14.9        4.4        3.0        3.7        3.8   

Dividend income from investment—Colonial(5)

     5.3        1.2        1.3        1.4        1.4   

Interest expense, net(6)

     (0.6     (0.1     (0.1     (0.2     (0.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated Net Income

     188.0        39.0        39.4        45.5        64.1   

Less:

          

Net income attributable to noncontrolling interests—Zydeco(7)

     92.1        18.6        18.5        22.7        32.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated Net Income Attributable to Shell Midstream Partners

   $ 95.9      $ 20.4      $ 20.9      $ 22.8      $ 31.8   

Add:

          

Net income attributable to noncontrolling interests—Zydeco(7)

     92.1        18.6        18.5        22.7        32.3   

Depreciation

     10.8        2.7        2.7        2.7        2.7   

Interest expense, net

     0.6        0.1        0.1        0.2        0.2   

Estimated cash distribution from equity investment—Mars(4)(8)

     24.8        5.3        7.3        5.3        6.9   

Estimated cash distribution from equity investment—Bengal(4)(8)

     13.3        3.1        3.1        3.5        3.6   

Less:

          

Income from equity investment—Mars(4)

     22.1        4.6        6.6        4.6        6.3   

Income from equity investment—Bengal(4)

     14.9        4.4        3.0        3.7        3.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated Adjusted EBITDA

   $ 200.5      $ 41.2      $ 43.0      $ 48.9      $ 67.4   

Less:

          

Estimated Adjusted EBITDA attributable to noncontrolling interests—Zydeco

     98.2        20.2        20.0        24.2        33.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Twelve
Months
Ending

September 30,
2015
                             
        Three Months Ending  
(in millions, except per unit data)       December 31,
2014
     March 31,
2015
     June 30,
2015
     September 30,
2015
 

Estimated Adjusted EBITDA Attributable to Shell Midstream Partners

   $ 102.3       $ 21.0       $ 23.0       $ 24.7       $ 33.6   

Less:

              

Cash interest paid by Shell Midstream Partners

     0.6         0.1         0.1         0.2         0.2   

Maintenance capital expenditures attributable to Shell Midstream Partners—Zydeco

     4.0         0.7         0.6         1.3         1.4   

Expansion capital expenditures attributable to Shell Midstream Partners—Zydeco(9)

     1.8         0.6         0.5         0.5         0.2   

Add:

              

Net adjustments from volume deficiency payments attributable to Shell Midstream Partners(10)

     0.8         4.0         3.6                 (6.8

Cash on hand and borrowings under our revolving credit facility to fund expansion capital expenditures(11)

     1.8         0.6         0.5         0.5         0.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Estimated Cash Available for Distribution Attributable to Shell Midstream Partners

   $ 98.5       $ 24.2       $ 25.9       $ 23.2       $ 25.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Estimated Cash Distributions from Shell Midstream Partners

              

Minimum annual distribution per unit

   $ 0.6500       $ 0.1625       $ 0.1625       $ 0.1625       $ 0.1625   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Annual distribution to:

              

Public common unitholders

   $ 24.4       $ 6.1       $ 6.1       $ 6.1       $ 6.1   

Shell:

              

Common units

     19.5         4.8         4.9         4.9         4.9   

Subordinated units

     43.8         10.9         10.9         11.0         11.0   

General partner units

   $ 1.8       $ 0.4       $ 0.4       $ 0.5       $ 0.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total annual distributions at the minimum quarterly distribution rate

   $ 89.5       $ 22.2       $ 22.3       $ 22.5       $ 22.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Excess (Shortfall) of Estimated Cash Available for Distribution Attributable to Shell Midstream Partners over Aggregate Minimum Quarterly Distributions

   $ 9.0       $ 2.0       $ 3.6       $ 0.7       $ 2.7   

 

(1) Includes all fixed and variable costs related to the operations of Zydeco. Includes commercial insurance expense payable by us and attributable to our proportionate ownership share of Mars.
(2) Consists of (i) all general and administrative expenses attributable to 100% of Zydeco of $10.4 million, (ii) an $8.5 million fee to be paid by us to SPLC for administrative services and (iii) $3.6 million of incremental general and administrative expenses payable by us as a result of being a publicly traded partnership.
(3) Represents property tax, Texas margin tax and other taxes.
(4)

Each of Mars and Bengal is an unconsolidated entity in which we own a 28.6% and 49.0% interest, respectively, and our earnings from those unconsolidated affiliates are included on our unaudited pro forma consolidated statement of income included elsewhere in this prospectus. Because our earnings from unconsolidated affiliates from each of Mars and

 

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  Bengal are not necessarily reflective of the amount of cash we would expect to receive from those entities, it is included in our net income but subtracted in connection with our calculation of Adjusted EBITDA. To give effect to expected cash contribution to us from Mars and Bengal during the twelve months ending September 30, 2015, our estimate of the cash that we expect to receive from those entities is included in our Adjusted EBITDA.
(5) Represents cash dividends in respect of our 1.612% ownership interest in Colonial.
(6) We estimate that at the closing of this offering and for the twelve months ending September 30, 2015 we will not have any borrowings under our new $300 million credit facility to be entered into at the closing of this offering. The amount shown represents a 0.19% commitment fee for the undrawn portion of our credit facility and a 0.23% commitment fee for the undrawn portion of the $30 million Zydeco credit facility.
(7) Represents net income attributable to SPLC’s ownership interest in Zydeco.
(8) We have assumed that we will receive 28.6% of the available cash of Mars and 49.0% of the available cash of Bengal, for the twelve months ending September 30, 2015.
(9) Reflects our proportionate share of Zydeco’s assumed expansion capital expenditures, which we expect to fund with proceeds retained from this offering.
(10) Represents a net adjustment to reflect (a) the receipt of cash payments with respect to committed volume deficiencies under Zydeco’s FERC-approved transportation services agreements that are recognized as deferred revenue and (b) the absence of such cash payments when deferred revenue is recognized upon the satisfaction or expiration of certain conditions under Zydeco’s FERC-approved transportation services agreements.
(11) Does not include net proceeds of this offering that are retained by us.

Estimated Cash Distributed to Us

The following table presents for Zydeco a reconciliation of estimated Adjusted EBITDA and estimated cash available for distribution to estimated net income.

 

     Twelve Months Ending
September 30, 2015
 
(in millions)   

Zydeco

  

Reconciliation of Adjusted EBITDA and Cash Available for Distribution to Net Income

  

Estimated Net income

   $ 161.6   

Add:

  

Depreciation and amortization

     10.8   

Interest expense, net

     0.1