Attached files

file filename
EX-32.2 - EX-32.2 - Shell Midstream Partners, L.P.shlx-ex322_7.htm
EX-32.1 - EX-32.1 - Shell Midstream Partners, L.P.shlx-ex321_8.htm
EX-31.1 - EX-31.1 - Shell Midstream Partners, L.P.shlx-ex311_6.htm
EX-31.2 - EX-31.2 - Shell Midstream Partners, L.P.shlx-ex312_9.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended September 30, 2015

or

¨

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

For the transition period from                      to                         

Commission file number: 001-36710

 

Shell Midstream Partners, L.P.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

46-5223743

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One Shell Plaza, 910 Louisiana Street, Houston, Texas 77002

(Address of principal executive offices) (Zip Code)

(713) 241-6161

(Registrant’s telephone number, including area code)

 

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

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

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

x

  

Smaller reporting company

 

¨

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

The registrant had 75,167,376 common units and 67,475,068 subordinated units outstanding as of November 12, 2015.

 

 

 

 

 


SHELL MIDSTREAM PARTNERS, L.P.

TABLE OF CONTENTS

 

 

 

 

 

Page

Part I. Financial Information  

 

 

3

 

 

 

 

Item 1. Financial Statements

 

3

 

Unaudited Condensed Consolidated Balance Sheets

 

3

Unaudited Condensed Consolidated Statements of Income

 

4

Unaudited Condensed Consolidated Statements of Cash Flows

 

5

Unaudited Condensed Consolidated Statement of Changes in Equity

 

6

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

20

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

36

 

Item 4. Controls and Procedures

 

36

 

Part II. Other Information

 

39

 

Item 1. Legal Proceedings

 

39

 

Item 1A. Risk Factors

 

39

 

Item 5. Other Information

 

39

 

Item 6. Exhibits

 

40

 

 

 

Signature

 

41

 

 

 

2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

SHELL MIDSTREAM PARTNERS, L.P.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

September 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

 

(in millions of dollars)

 

ASSETS

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

117.5

 

 

$

150.2

 

Accounts receivable - third parties, net

 

 

16.2

 

 

 

16.3

 

Accounts receivable - related parties

 

 

3.8

 

 

 

10.3

 

Allowance oil

 

 

4.6

 

 

 

3.4

 

Prepaid expenses

 

 

1.3

 

 

 

3.6

 

Total current assets

 

 

143.4

 

 

 

183.8

 

Equity method investments

 

 

186.7

 

 

 

160.7

 

Property, plant and equipment, net

 

 

271.8

 

 

 

275.0

 

Other assets

 

 

6.8

 

 

 

4.2

 

Total assets

 

$

608.7

 

 

$

623.7

 

LIABILITIES

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable - third parties

 

$

0.2

 

 

$

 

Accounts payable - related parties

 

 

5.9

 

 

 

10.6

 

Debt payable - related party

 

 

420.8

 

 

 

 

Distribution payable to SPLC

 

 

 

 

 

11.9

 

Deferred revenue - third parties

 

 

6.5

 

 

 

15.3

 

Deferred revenue - related parties

 

 

6.2

 

 

 

4.7

 

Accrued liabilities - third parties

 

 

11.1

 

 

 

0.9

 

Accrued liabilities - related parties

 

 

1.3

 

 

 

1.4

 

Total current liabilities

 

 

452.0

 

 

 

44.8

 

Total liabilities

 

 

452.0

 

 

 

44.8

 

Commitments and Contingencies (Note 11)

 

 

 

 

 

 

 

 

EQUITY

 

Common unitholders - public (53,692,308  and 46,000,000 units issued and

outstanding as of September 30, 2015 and December 31, 2014)

 

 

1,330.4

 

 

 

1,016.2

 

Common unitholder - SPLC (21,475,068 units issued and

outstanding as of September 30, 2015 and December 31, 2014)

 

 

(133.9

)

 

 

(140.3

)

Subordinated unitholder - SPLC (67,475,068 units issued and

outstanding as of September 30, 2015 and December 31, 2014)

 

 

(421.2

)

 

 

(440.9

)

General Partner - SPLC (2,911,070  and 2,754,084 units issued and

outstanding as of September 30, 2015 and December 31, 2014)

 

 

(722.7

)

 

 

(18.0

)

Total partners' capital

 

 

52.6

 

 

 

417.0

 

Noncontrolling interest

 

 

104.1

 

 

 

161.9

 

Total equity

 

 

156.7

 

 

 

578.9

 

Total liabilities and equity

 

$

608.7

 

 

$

623.7

 

 

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

 

 

 

3


SHELL MIDSTREAM PARTNERS, L.P.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(in millions of dollars, except per unit data)

 

 

 

 

 

 

 

Predecessor

 

 

 

 

 

 

Predecessor

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third parties

 

$

57.5

 

 

$

34.7

 

 

$

145.3

 

 

$

93.6

 

Related parties

 

 

14.9

 

 

 

12.2

 

 

 

36.4

 

 

 

33.2

 

Total revenue

 

 

72.4

 

 

 

46.9

 

 

 

181.7

 

 

 

126.8

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operations and maintenance - third parties

 

 

9.2

 

 

 

4.4

 

 

 

23.8

 

 

 

18.6

 

Operations and maintenance - related parties

 

 

3.6

 

 

 

4.3

 

 

 

10.9

 

 

 

11.5

 

Loss from disposition of fixed assets

 

 

 

 

 

0.2

 

 

 

 

 

 

0.2

 

General and administrative - third parties

 

 

1.6

 

 

 

0.3

 

 

 

6.6

 

 

 

1.8

 

General and administrative - related parties

 

 

4.9

 

 

 

2.5

 

 

 

14.7

 

 

 

9.3

 

Depreciation

 

 

3.5

 

 

 

2.9

 

 

 

10.4

 

 

 

8.2

 

Property and other taxes

 

 

0.7

 

 

 

1.2

 

 

 

7.1

 

 

 

4.3

 

Total costs and expenses

 

 

23.5

 

 

 

15.8

 

 

 

73.5

 

 

 

53.9

 

Operating income

 

 

48.9

 

 

 

31.1

 

 

 

108.2

 

 

 

72.9

 

Income from equity investments

 

 

24.1

 

 

 

 

 

 

47.4

 

 

 

 

Dividend income from investment

 

 

2.7

 

 

 

 

 

 

6.6

 

 

 

 

Other income

 

 

0.1

 

 

 

 

 

 

1.1

 

 

 

 

Investment, dividend and other income

 

 

26.9

 

 

 

 

 

 

55.1

 

 

 

 

Interest expense, net

 

 

1.7

 

 

 

0.1

 

 

 

2.2

 

 

 

0.1

 

Income before income taxes

 

 

74.1

 

 

 

31.0

 

 

 

161.1

 

 

 

72.8

 

Income tax expense

 

 

(0.3

)

 

 

 

 

 

 

 

 

 

Net income

 

 

74.4

 

 

$

31.0

 

 

 

161.1

 

 

$

72.8

 

Less: Net income attributable to noncontrolling interests

 

 

20.1

 

 

 

 

 

 

 

51.0

 

 

 

 

 

Net income attributable to the Partnership

 

$

54.3

 

 

 

 

 

 

$

110.1

 

 

 

 

 

General Partner's interest in net income attributable to the Partnership

 

$

1.5

 

 

 

 

 

 

$

2.7

 

 

 

 

 

Limited Partners' interest in net income attributable to the Partnership

 

$

52.8

 

 

 

 

 

 

$

107.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per Limited Partner Unit - Basic and Diluted (in dollars):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

$

0.37

 

 

 

 

 

 

$

0.77

 

 

 

 

 

Subordinated

 

 

0.37

 

 

 

 

 

 

 

0.77

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average Limited Partner Units outstanding - Basic and Diluted (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common units - public

 

 

53.7

 

 

 

 

 

 

 

51.1

 

 

 

 

 

Common units - SPLC

 

 

21.5

 

 

 

 

 

 

 

21.5

 

 

 

 

 

Subordinated units - SPLC

 

 

67.5

 

 

 

 

 

 

 

67.5

 

 

 

 

 

 

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

 

 

 

4


SHELL MIDSTREAM PARTNERS, L.P.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

 

(in millions of dollars)

 

 

 

 

 

 

 

Predecessor

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

161.1

 

 

$

72.8

 

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

 

 

 

 

 

 

 

 

Depreciation

 

 

10.4

 

 

 

8.2

 

Loss from disposition of fixed assets

 

 

 

 

 

0.2

 

Allowance oil reduction to net realizable value

 

 

0.9

 

 

 

1.0

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

6.6

 

 

 

(5.6

)

Allowance oil

 

 

(2.1

)

 

 

1.7

 

Prepaid expenses

 

 

2.5

 

 

 

2.0

 

Accounts payable

 

 

(5.2

)

 

 

0.1

 

Deferred revenue

 

 

(7.3

)

 

 

9.8

 

Accrued liabilities

 

 

11.2

 

 

 

(15.0

)

Net cash provided by operating activities

 

 

178.1

 

 

 

75.2

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(7.6

)

 

 

(58.0

)

May 2015 Acquisition

 

 

(55.4

)

 

 

 

July 2015 Acquisition

 

 

(30.5

)

 

 

 

Return of investment

 

 

4.5

 

 

 

 

Payment of pre-Offering distributions from investments to SPLC

 

 

(11.9

)

 

 

 

Net cash used in investing activities

 

 

(100.9

)

 

 

(58.0

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Borrowings under credit facilities

 

 

420.8

 

 

 

 

Net proceeds from Private Placement

 

 

297.7

 

 

 

 

Contribution from General Partner

 

 

6.1

 

 

 

 

Capital distributions to General Partner

 

 

(712.1

)

 

 

 

Distributions to noncontrolling interest

 

 

(55.9

)

 

 

 

Distributions to unitholders and General Partner

 

 

(66.2

)

 

 

 

Credit facilities issuance costs

 

 

(0.3

)

 

 

 

Net contributions from Parent

 

 

 

 

 

7.6

 

Distribution of working capital to Parent

 

 

 

 

 

(2.9

)

Net cash (used in) provided by financing activities

 

 

(109.9

)

 

 

4.7

 

Net (decrease) increase in cash and cash equivalents

 

 

(32.7

)

 

 

21.9

 

Cash and cash equivalents at beginning of the period

 

 

150.2

 

 

 

 

Cash and cash equivalents at end of the period

 

$

117.5

 

 

$

21.9

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

Non-cash investing transactions

 

 

 

 

 

 

 

 

Contribution of fixed assets from SPLC to Zydeco

 

$

 

 

$

11.4

 

Change in accrued capital expenditures

 

 

(0.4

)

 

 

(15.2

)

 

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

 

 

 

5


SHELL MIDSTREAM PARTNERS, L.P.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

 

 

Partnership

 

 

 

 

 

 

 

 

 

(in millions of dollars)

 

Common Unitholders Public

 

 

Common Unitholder SPLC

 

 

Subordinated Unitholder SPLC

 

 

General Partner    SPLC

 

 

Noncontrolling Interest

 

 

Total

 

Balance at December 31, 2014

 

$

1,016.2

 

 

$

(140.3

)

 

$

(440.9

)

 

$

(18.0

)

 

$

161.9

 

 

$

578.9

 

Net income

 

 

39.5

 

 

 

16.5

 

 

 

51.4

 

 

 

2.7

 

 

 

51.0

 

 

 

161.1

 

Net proceeds from Private Placement

 

 

297.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

297.7

 

Contribution from General Partner

 

 

 

 

 

 

 

 

 

 

 

6.1

 

 

 

 

 

 

6.1

 

Distributions to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(55.9

)

 

 

(55.9

)

Distributions to unitholders and General Partner

 

 

(23.0

)

 

 

(10.1

)

 

 

(31.7

)

 

 

(1.4

)

 

 

 

 

 

(66.2

)

Acquisition of noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(52.9

)

 

 

(52.9

)

Capital distributions to General Partner

 

 

 

 

 

 

 

 

 

 

 

(712.1

)

 

 

 

 

 

(712.1

)

Balance at September 30, 2015

 

$

1,330.4

 

 

$

(133.9

)

 

$

(421.2

)

 

$

(722.7

)

 

$

104.1

 

 

$

156.7

 

 

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

 

 

 

6


SHELL MIDSTREAM PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Except as noted within the context of each note disclosure, the dollar amounts presented in the tabular data within these note disclosures are stated in millions of dollars.

1. Description of the Business and Basis of Presentation

Summary

Shell Midstream Partners, L.P. (“we,” “us,” “our” or “the Partnership”) is a Delaware limited partnership formed on March 19, 2014, to own and operate assets, including certain assets received from Shell Pipeline Company LP (“SPLC”). We conduct our operations through our wholly owned subsidiary Shell Midstream Operating, LLC (“Operating Company”). Our General Partner is Shell Midstream Partners GP LLC (“General Partner”). References to “Shell” refer collectively to Royal Dutch Shell plc (“RDS”) and its controlled affiliates, other than us, our subsidiaries and our General Partner.

 

Description of the Business

We are a fee-based, growth-oriented master limited partnership formed by Shell to own, operate, develop and acquire pipelines and other midstream assets. Our 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. As of September 30, 2015, we own interests in three crude oil pipeline systems and two refined products systems. The crude oil pipeline systems, which are held by Zydeco Pipeline Company LLC (“Zydeco”), Mars Oil Pipeline Company (“Mars”) and Poseidon Oil Pipeline Company, LLC (“Poseidon”), are strategically located along the Texas and Louisiana Gulf Coast and in the Gulf of Mexico. These systems link major onshore and offshore production areas with key refining markets. The refined products pipeline systems, which are held by Bengal Pipeline Company LLC (“Bengal”) and Colonial Pipeline Company (“Colonial”), connect Gulf Coast and southeastern U.S. refineries to major demand centers from Alabama to New York. On July 1, 2014, SPLC formed Zydeco as a wholly owned subsidiary. In anticipation of our initial public offering of common units by the Partnership, SPLC contributed the fixed assets and certain agreements of the crude oil pipeline system from Houston, Texas to Houma, Louisiana (“Ho-Ho”) and other related fixed assets of SPLC to Zydeco.

As of September 30, 2015, we own a 62.5% interest in Zydeco, a 28.6% interest in Mars, a 36.0% interest in Poseidon, a 49.0% interest in Bengal and a 3.0% interest in Colonial. Zydeco is consolidated within our condensed consolidated financial statements as a subsidiary. We obtained control of this affiliate via a voting agreement with SPLC through which we have voting power over the ownership interests retained by SPLC in Zydeco. The 37.5% ownership interest in Zydeco retained by SPLC is reflected as noncontrolling interest in our condensed consolidated financial statements. We account for each of our investments in Mars, Bengal and Poseidon using the equity method of accounting, and we account for our investment in Colonial using the cost method of accounting.

On November 11, 2015, the Partnership entered into a Contribution Agreement with SPLC and the Operating Company to acquire a 100% interest in Pecten Midstream LLC (“Pecten”) (the “November 2015 Acquisition”). The November 2015 Acquisition is expected to close on or about November 17, 2015, with an effective date of October 1, 2015, subject to customary closing conditions.  Because of the October 1, 2015 effective date, net income attributable to the Partnership will include 100% of the fourth quarter 2015 results of Pecten. Pecten’s fourth quarter cash available for distribution will likewise be included in the Partnership’s fourth quarter 2015 cash available for distribution. Pecten comprises a crude pipeline system located in the Gulf of Mexico (Auger) and a crude storage terminal located southwest of Chicago (Lockport). See Note 12 — Subsequent Events for additional details.

We generate the majority 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. Our operations consist of one reportable segment.

Basis of Presentation

Our condensed consolidated financial statements include all majority owned and non-majority owned subsidiaries required to be consolidated under generally accepted accounting principles in the United States of America (“GAAP”). Our reporting currency is U.S. dollars, and all references to dollars are U.S. dollars. The accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete annual financial statements. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. During interim periods, we follow the accounting policies disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the United States Securities and Exchange Commission (“SEC”). The unaudited condensed consolidated financial statements for the three and nine months ended September 30,

7


2015 and 2014 include all adjustments we believe are necessary for a fair statement of the results for the interim periods. These adjustments are of a normal recurring nature unless otherwise disclosed. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2015. These unaudited condensed consolidated financial statements and other information included in this Quarterly Report should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

The September 30, 2014 condensed consolidated financial statements were derived from the financial statements and accounting records of SPLC and Shell. References to the Partnership or other expressions defined above for time periods prior to November 3, 2014 refer to our predecessor for accounting purposes (“Predecessor”). These statements reflect the condensed combined historical results of operations and cash flows of our Predecessor as if such business had been a separate entity for the three and nine months ended September 30, 2014. The condensed consolidated statements of income also include expense allocations to our Predecessor prior to July 1, 2014 for certain functions historically performed by SPLC and Shell, including allocations of general corporate expenses related to finance, legal, information technology, human resources, communications, ethics and compliance, shared services, employee benefits and incentives, insurance, and share-based compensation. Personnel and operating costs incurred by SPLC and Shell on our Predecessor’s behalf were charged to our Predecessor and are included in either general and administrative expenses or operations and maintenance expenses in the accompanying condensed consolidated statements of income, depending on the nature of the employee’s role in our operations. These allocated corporate costs relate primarily to the wages and benefits of SPLC’s and Shell’s employees supporting our Predecessor’s operations and have been allocated to our Predecessor on the basis of direct usage when identifiable, with the remainder allocated on the basis of fixed assets, headcount, labor or other measure. The expense allocations have been determined on a basis that we, SPLC and Shell consider to be a reasonable reflection of the utilization of services provided or the benefit received by our Predecessor during the periods presented. Nevertheless, the condensed consolidated financial statements may not include all of the expenses that would have been incurred as a separate, publicly-traded company during the three and nine months ended September 30, 2014 and may not reflect our condensed consolidated statements of income and cash flows as a separate, publicly-traded company during the three and nine months ended September 30, 2014. All employees performing services on behalf of our Predecessor’s operations are employees of SPLC or Shell. Beginning from July 1, 2014, Zydeco, our Predecessor, entered into an operating and management agreement with SPLC (the “Management Agreement”) under which SPLC provides general management and administrative services to us. Therefore, we no longer receive allocated corporate expenses from SPLC. We will continue to receive direct and allocated field and regional expenses from SPLC including payroll expenses not covered under the Management Agreement. See details of related party transactions in Note 3 — Related Party Transactions and Agreements.

Prior to the contribution of fixed assets and certain agreements on July 1, 2014, the cash generated and used by our operations was deposited to SPLC’s centralized account which was comingled with the cash of other pipeline entities controlled by SPLC. SPLC funded our operating and investing activities as needed. Accordingly, we did not record any cash and cash equivalents held by SPLC on our behalf for any period prior to July 1, 2014. We reflected the cash generated by our operations and expenses paid by SPLC on behalf of our operations as “Net contributions from Parent” in the accompanying condensed consolidated statements of cash flows. On July 1, 2014, we established our own cash accounts for the funding of our operating and investing activities, with the exception of the capital expenditures incurred by SPLC on our behalf and then contributed to us.

All financial information presented represents the condensed consolidated statements of income, financial position and cash flows accordingly:

 

·

Our condensed consolidated statements of income for the three and nine months ended September 30, 2015 and condensed consolidated statement of cash flows for the nine months ended September 30, 2015 consist of the consolidated results of the Partnership. Our condensed consolidated statements of income for the three and nine months ended September 30, 2014 and condensed consolidated statement of cash flows for the nine months ended September 30, 2014 consist entirely of the condensed combined results of our Predecessor.

 

·

Our condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014 consist of the consolidated balances of the Partnership.

 

·

Our condensed consolidated statement of changes in equity for the nine months ended September 30, 2015 consists of the consolidated results of the Partnership.

Partners’ Capital and Accounting Periods

Post-Offering Periods

 

On November 3, 2014, we completed our initial public offering (the “Offering”) of 46,000,000 common units (including 6,000,000 common units issued pursuant to the exercise of the underwriters’ over-allotment option). At the completion of the Offering, SPLC owned 21,475,068 common units and 67,475,068 subordinated units, representing an aggregate 65.9% limited partner interest.  SPLC

8


also owned a 100% interest in our General Partner, which in turn owned 2,754,084 general partner units, representing a 2.0% general partner interest.

References to the Partnership or other expressions defined above for time periods beginning November 3, 2014 refer to the post-Offering accounting periods of Shell Midstream Partners, L.P.

On May 18, 2015 (the “Issuance Date”), the Partnership completed the sale of 7,692,308 common units representing limited partner interests (the “Common Units”) to unaffiliated third parties in a private placement (the “Private Placement”) for approximately $297.7 million net proceeds ($300.0 million of gross proceeds less $2.3 million of placement agent fees) and issued 156,986 general partner units (the “General Partner Units”) to our General Partner for $6.1 million in order for our General Partner to maintain its 2.0% general partner interest. See Note 8 — Equity — Private Placement for additional detail.

Pre-Offering Periods

 

The Predecessor’s financial results included in our condensed consolidated statements of income and condensed consolidated statements of cash flows contain the financial results of the following Predecessor entities for the time periods indicated.

For the accounting periods prior to June 30, 2014, the Predecessor’s financial results are those of Ho-Ho, wholly owned by SPLC. For the accounting period from July 1, 2014 to September 30, 2014, the Predecessor’s financial results are those of Zydeco.

Summary of Significant Accounting Policies

The accounting policies are set forth in Note 2 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2014. There have been no significant changes to these policies during the nine months ended September 30, 2015.

We account for equity and cost method investments acquired under common control prospectively from the date of acquisition consistent with our treatment of these investments in our Annual Report on Form 10-K for the year ended December 31, 2014.

Recent Accounting Pronouncements

For accounting pronouncements issued prior to April 2015, refer to Note 2 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

In April 2015, the FASB issued accounting standards update to Subtopic 835-30, “Interest – Imputation of Interest” to simplify the presentation of debt issuance costs. The amendments require that debt issuance costs related to a recognized debt liability be presented as a direct deduction from the carrying amount of that debt liability. These provisions are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The adoption of this guidance will not have a material effect on our financial position or results of operations.

 

In April 2015, the FASB issued an accounting standards update to topic 260, “Earnings Per Share” to clarify the presentation of historical earnings per unit for periods prior to the effective date of a transfer of a business to a master limited partnership from the general partner accounted for as an transaction between entities under common control. The amendments in this update specify that for purposes of calculating historical earnings per unit under the two-class method, the earnings (losses) of a transferred business before the effective date of the transaction should be allocated entirely to the general partner. In that circumstance, the previously reported earnings per unit of the limited partners (which is typically the earnings per unit measure presented in the financial statements) would not change as a result of the transaction. Qualitative disclosures about how the rights to the earnings (losses) differ before and after the transaction occurs for purposes of computing earnings per unit under the two-class method are also required. These provisions are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. We have elected early adoption for the fiscal year and interim periods within 2015. As a result, earnings of acquired businesses prior to the effective date of each acquisition are not allocated to our unitholders in our earnings per unit calculations.

 

In July 2015, the FASB issued accounting standards update to topic 330, “Inventory” to simplify the measurement of inventory. This amendment requires that inventory should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This standard update becomes effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. We are currently evaluating the effect that adopting this new standard will have on our consolidated financial statements and related disclosures.

In August 2015, the FASB affirmed its earlier proposal to defer the effective date of the new revenue standard topic 606, “Revenue from Contracts with Customers,” for all entities by one year, to annual reporting periods beginning after December 15, 2017. The

9


FASB also decided to permit early adoption, but not before the original public entity effective date of December 15, 2016. We are currently evaluating the effect that adopting this new standard will have on our consolidated financial statements and related disclosures.

 

In August 2015, the FASB issued an accounting standards update to Subtopic 835-30, “Interest – Imputation of Interest” to allow for reporting entities to treat debt issuance costs related to line-of-credit arrangements as an asset and subsequently amortize ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. This accounting standard amends the standard issued in April 2015 in order to specify how to treat line-of-credit arrangements. This provision is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The adoption of this guidance will not have a material effect on our financial position or results of operations.

 

In September 2015, the FASB issued accounting standards update to topic 805, “Business Combinations” to require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This provision is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The adoption of this guidance will not have a material effect on our financial position or results of operations

 

2. Acquisitions

On May 18, 2015, we acquired an additional 19.5% interest in Zydeco and an additional 1.388% interest in Colonial for $448.0 million in cash (the “May 2015 Acquisition”). The May 2015 Acquisition closed pursuant to a Purchase and Sale Agreement dated May 12, 2015 (“Purchase and Sale Agreement”) among the Operating Company, the Partnership and SPLC, and became effective on April 1, 2015, and is accounted for as a transaction between entities under common control. The Partnership funded the May 2015 Acquisition with net proceeds from the Private Placement, $80.0 million of cash on hand and $70.8 million in borrowings under our five year revolving credit facility (“Five Year Revolver”) with Shell Treasury Center (West) Inc. (“STCW”), an affiliate of Shell. Total transaction costs of $0.5 million were incurred in association with the May 2015 Acquisition. The terms of the May 2015 Acquisition were approved by the Board of Directors of our General Partner (the “Board”) and by the conflicts committee of the Board, which consists entirely of independent directors. The conflicts committee engaged an independent financial advisor and legal counsel. In accordance with the Purchase and Sale Agreement, SPLC has agreed to reimburse us for our proportionate share of certain costs and expenses incurred by Zydeco after April 1, 2015 with respect to a directional drill project to address soil erosion over a two-mile section of our 22-inch diameter pipeline under the Atchafalaya River and Bayou Shaffer in Louisiana. Such reimbursements will be treated as an additional capital contribution from the General Partner at the time of payment.

In connection with the May 2015 Acquisition we acquired book value of net assets under common control, which is included in our condensed consolidated balance sheet, as follows:

 

 

 

 

 

 

Other assets (1)

 

$

2.5

 

Partners' capital (2)

 

 

52.9

 

May 2015 Acquisition

 

$

55.4

 

 

(1)

Book value of 1.388% additional interest in Colonial contributed by SPLC.

 

(2)

Book value of 19.5% additional interest in Zydeco from SPLC’s noncontrolling interest.

We recognized $392.6 million of consideration in excess of the book value of net assets acquired as a capital distribution to our General Partner in accordance with our policy for common control transactions.

Effective July 1, 2015, Shell Oil Products US (“SOPUS”) conveyed to us its 36.0% interest in Poseidon (the “July 2015 Acquisition”) for $350.0 million in cash. The July 2015 Acquisition closed pursuant to a contribution agreement dated July 1, 2015 (the “Poseidon Contribution Agreement”) among the Operating Company, the Partnership and SOPUS and is accounted for as a transaction between entities under common control. We have recorded this asset acquisition prospectively from the effective date. Poseidon is a Delaware Limited Liability Company formed in February 1996 to design, construct, own and operate a non-Federal Energy Regulatory Commission (“FERC”) regulated crude oil pipeline system located offshore Louisiana in the central region of the Gulf of Mexico. The July 2015 Acquisition was funded with borrowings of $100.0 million under our 364 day revolving credit facility agreement (“364 Day Revolver”) with STCW and $250.0 million under our Five Year Revolver. For additional information regarding these credit facilities, see Note 7 — Related Party Debt. We account for our interest in Poseidon using the equity method of accounting.

 

10


In connection with the July 2015 Acquisition we acquired book value of net assets under common control of $30.5 million which is included in Equity method investments in our consolidated balance sheet. We recognized $319.5 million of consideration in excess of the book value of net assets acquired as a capital distribution to our General Partner in accordance with our policy for common control transactions.  

3. Related Party Transactions and Agreements

     Related party transactions and agreements include those with SPLC and Shell, including those entities in which Shell has an ownership interest but does not have control.

Acquisition Agreements

See the description of the Purchase and Sale Agreement relating to the May 2015 Acquisition and the Poseidon Contribution Agreement relating to the July 2015 Acquisition as further described in Note 2 — Acquisitions.  

 Formation of Zydeco  

In connection with the formation of Zydeco and the Offering, the Partnership and our Predecessor have entered into various agreements with SPLC and Shell.

On July 1, 2014, in conjunction with its formation, Zydeco entered into a contribution agreement (the “Contribution Agreement”) and the Management Agreement with SPLC. Pursuant to the Contribution Agreement, Zydeco reimburses SPLC for capital expenditures incurred by SPLC on behalf of Zydeco subsequent to November 3, 2014. The Management Agreement requires Zydeco to pay SPLC an annual management fee for general and administrative services.

Concurrent with the Offering, Zydeco also entered into a tax sharing agreement with an affiliate of Shell whereby Zydeco has agreed to reimburse Shell for state, local and franchise taxes attributable to Zydeco’s portion of the activity included in Shell’s combined returns for the respective taxing jurisdictions.

Formation of the Partnership

In conjunction with the Offering, on November 3, 2014, we entered into an omnibus agreement (“Omnibus Agreement”) with SPLC and our General Partner providing for our payment of an annual general and administrative services fee to SPLC as well as our reimbursement of certain costs incurred by SPLC on our behalf. Under the Omnibus Agreement certain costs are indemnified by SPLC. SPLC owns the noncontrolling interest in Zydeco. As of September 30, 2015 we have filed two claims for indemnification.

Mars has incurred maintenance expense for an underground cavern integrity project including inspections, plug and abandonment, installations and integrity tests to return the Mars cavern 4 to service. During the nine months ended September 30, 2015 we recognized $1.1 million in Other income and as a related party receivable related to the indemnification for the Partnership’s share of these expenses.  

Zydeco has incurred general and administrative expenses including expert fees related to a legal matter regarding the FERC, tariff rates and has also recognized an estimated settlement provision.  Refer to Note 11 – Commitments and Contingencies – Legal Proceedings for additional information. During the nine months ended September 30, 2015 we recognized $1.1 million in general and administrative expense reimbursements and as a related party receivable related to the indemnification by SPLC for the Partnership’s share of these expenses.

11


Other Related Party Balances

Other related party balances consist of the following:

 

 

 

September 30,

2015

 

 

December 31,

2014

 

Accounts receivable

 

$

3.8

 

 

$

10.3

 

Prepaid expenses

 

 

0.8

 

 

 

1.8

 

Other assets

 

 

0.6

 

 

 

0.5

 

Total assets

 

$

5.2

 

 

$

12.6

 

Accounts payable (1)

 

$

5.9

 

 

$

10.6

 

Debt payable

 

 

420.8

 

 

 

 

Distribution payable to SPLC

 

 

 

 

 

11.9

 

Deferred revenue

 

 

6.2

 

 

 

4.7

 

Accrued liabilities

 

 

1.3

 

 

 

1.4

 

Total liabilities

 

$

434.2

 

 

$

28.6

 

 

(1)

Accounts payable reflects amounts owed to SPLC for reimbursement of third-party expenses incurred by SPLC for our benefit.

 

 

Related Party Revolving Credit Facilities

We have entered into two revolving credit facilities with STCW: The Five Year Revolver and the 364 Day Revolver. Zydeco has entered into a senior unsecured revolving credit facility (the “Zydeco Revolver”) with STCW. For additional information regarding these credit facilities, see Note 7 — Related Party Debt.         

Related Party Revenues and Expenses

We provide crude oil transportation and storage services to related parties under long-term contracts. We entered into these contracts in the normal course of our business and the services are based on the same terms as those provided to third parties. Our transportation services revenue from related parties was $14.3 million and $34.6 million for the three and nine months ended September 30, 2015, respectively, and $11.4 million and $30.5 million for the three and nine months ended September 30, 2014, respectively. Revenues related to storage services from related parties were $0.6 million and $1.8 million for the three and nine months ended September 30, 2015, respectively, and $0.8 million and $2.7 million for the three and nine months ended September 30, 2014, respectively.

During the three months ended September 30, 2015, Zydeco, Mars, Bengal, Poseidon and Colonial paid cash distributions to the Partnership of $50.9 million, of which $25.0 million related to Zydeco. During the nine months ended September 30, 2015, Zydeco, Mars, Bengal, Poseidon and Colonial paid cash distributions to the Partnership of $128.7 million, of which $70.2 million related to Zydeco.

For a discussion of services performed by SPLC and Shell on our behalf, see Note 1 – Description of the Business and Basis of Presentation – Basis of Presentation. During the six months ended June 30, 2014, we were allocated $6.8 million of indirect general corporate expenses incurred by SPLC and Shell which are included within general and administrative expenses in the accompanying condensed consolidated statements of income.  

Beginning July 1, 2014, Zydeco entered into the Management Agreement with SPLC under which SPLC provides general management and administrative services to us. We no longer receive allocated corporate expenses from SPLC or Shell. We will continue to receive direct and allocated field and regional expenses, including payroll expenses not covered under the Management Agreement. These expenses are primarily allocated to us on the basis of headcount, labor or other measure. These expense allocations have been determined on a basis that both SPLC and we consider to be a reasonable reflection of the utilization of services provided or the benefit received by us during the periods presented.

Prior to the Offering, we were covered by the insurance policies of SPLC. Subsequent to the Offering, the majority of our coverage is provided by Shell with the remaining coverage by third-party insurers. The related party portion of insurance expense for the three and nine months ended September 30, 2015 was $0.7 million and $1.7 million, respectively.

12


The following table shows related party expenses, including personnel costs described above, incurred by Shell and SPLC on our behalf that are reflected in the accompanying condensed consolidated statements of income for the indicated periods:

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

 

 

 

 

Predecessor

 

 

 

 

 

 

Predecessor

 

Operations and maintenance - related parties

 

$

3.6

 

 

$

4.3

 

 

$

10.9

 

 

$

11.5

 

General and administrative - related parties (1)

 

 

4.9

 

 

 

2.5

 

 

 

14.7

 

 

 

9.3

 

 

(1)

For the three and nine months ended September 30, 2015, we incurred $1.8 million and $5.4 million, respectively, under the Management Agreement and $2.1 million and $6.4 million, respectively, under the Omnibus Agreement for general and administrative services.

Pension and Retirement Savings Plans

Employees who directly or indirectly support our operations participate in the pension, postretirement health and life insurance, and defined contribution benefit plans sponsored by Shell, which include other Shell subsidiaries. Our share of pension and postretirement health and life insurance costs for the three and nine months ended September 30, 2015 was $1.3 million and $3.1 million, respectively, and for the three and nine months ended September 30, 2014 was $0.1 million and $2.2 million, respectively. Our share of defined contribution benefit plan costs for the three and nine months ended September 30, 2015 was $0.1 million and $0.4 million, respectively, and for the three and nine months ended September 30, 2014 was $0.1 million and $0.5 million, respectively. Pension and defined contribution benefit plan expenses are included in either general and administrative expenses or operations and maintenance expenses in the accompanying condensed consolidated statements of income, depending on the nature of the employee’s role in our operations.

Share-based Compensation

Shell’s incentive compensation programs primarily consist of share awards, restricted share awards or cash awards (any of which may be a performance award). The Performance Share Plan (“PSP”) was introduced in 2005 by Shell. Conditional awards of RDS shares are made under the terms of the PSP to certain employees each year. The extent to which the awards vest is determined over a three-year performance period. Half of the award is linked to the key performance indicators, averaged over the period. For the PSP awards made prior to 2010, the other half of the award was linked to the relative total shareholder return over the period compared with four main competitors of RDS. For awards made in 2010 and onwards, the other half of the award is linked to a comparison with four main competitors of RDS over the period on the basis of four relative performance measures. All shares that vest are increased by an amount equal to the notional dividends accrued on those shares during the period from the award date to the vesting date. None of the awards result in beneficial ownership until the shares are delivered.

Under the PSP, awards are made on a highly selective basis to senior personnel. Shares are awarded subject to a three-year vesting period.

Certain SPLC and Shell employees supporting our operations as well as other Shell operations were historically granted these types of awards. These share-based compensation costs have been allocated to us as part of the cost allocations from Shell prior to June 30, 2014 and have been immaterial. Beginning July 1, 2014, we did not receive any allocated share-based compensation. Share-based compensation expense is included in general and administrative expenses in the accompanying condensed consolidated statements of income. These costs totaled $0.1 million for the six months ended June 30, 2014.

Equity and Cost Method Investments

We have equity and cost method investments in entities that own certain of our assets, including Mars, Bengal, Poseidon and Colonial. SPLC also owns interests in some of these entities. In some cases we may be required to make capital contributions or other payments to these entities. See Note 4 – Equity Method Investments for additional details.

4. Equity Method Investments

 

Equity investments in affiliates comprise the following as of the dates indicated:

 

 

13


 

 

September 30, 2015

 

 

December 31, 2014

 

Mars

 

$

84.5

 

 

$

75.0

 

Bengal

 

 

74.1

 

 

 

85.7

 

Poseidon (1)

 

 

28.1

 

 

 

-

 

 

 

$

186.7

 

 

$

160.7

 

 

 

(1)

We acquired an equity interest in Poseidon on July 1, 2015. For additional information regarding this transaction, see Note 2 — Acquisitions.

 

 

 

Our equity investments in affiliates balance was affected by the following during the periods indicated:

 

 

 

Three Months Ended September 30, 2015

 

 

 

Mars

 

 

Bengal

 

 

Poseidon

 

 

Total

 

Distributions received

 

$

7.7

 

 

$

5.1

 

 

$

10.4

 

 

$

23.2

 

Income from equity investments

 

 

10.5

 

 

 

5.6

 

 

 

8.0

 

 

 

24.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2015

 

 

 

Mars

 

 

Bengal

 

 

Poseidon

 

 

Total

 

Distributions received

 

$

24.9

 

 

$

16.6

 

 

$

10.4

 

 

$

51.9

 

Income from equity investments

 

 

23.6

 

 

 

15.8

 

 

 

8.0

 

 

 

47.4

 

Return of investment(1)

 

 

1.3

 

 

 

0.8

 

 

 

2.4

 

 

 

4.5

 

 

(1)

Distributions received in excess of our income from equity investments is shown as a return of investment in our condensed consolidated statements of cash flows.

 

 

Summarized Financial Information

The following tables present aggregated selected unaudited income statement data for our equity method investments in Mars, Bengal and Poseidon (on a 100% basis):

 

Mars

 

Three Months Ended

September 30, 2015

 

 

Nine Months Ended

September 30, 2015

 

Total revenues

 

$

56.8

 

 

$

148.7

 

Total operating expenses

 

 

19.2

 

 

 

63.0

 

Operating income

 

$

37.6

 

 

$

85.7

 

Net income

 

$

37.6

 

 

$

85.8

 

 

 

 

 

 

 

 

 

 

Bengal

 

Three Months Ended

September 30, 2015

 

 

Nine Months Ended

September 30, 2015

 

Total revenues

 

$

18.6

 

 

$

52.2

 

Total operating expenses

 

 

7.2

 

 

 

20.3

 

Operating income

 

$

11.4

 

 

$

31.9

 

Net income

 

$

11.3

 

 

$

31.8

 

 

 

 

 

 

 

 

 

 

Poseidon

 

Three Months Ended

September 30, 2015

 

 

Nine Months Ended

September 30, 2015 (1)

 

Total revenues

 

$

30.8

 

 

$

92.7

 

Total operating expenses

 

 

7.0

 

 

 

21.6

 

Operating income

 

$

23.8

 

 

$

71.1

 

Net income

 

$

22.9

 

 

$

67.8

 

 

14


 

(1)

We acquired an equity interest in Poseidon on July 1, 2015. For comparative purposes we have disclosed summarized financial information for the nine months ended September 30, 2015. For additional information regarding this transaction, see Note 2 – Acquisitions.

5. Property, Plant and Equipment

Property, plant and equipment consist of the following as of September 30, 2015 and December 31, 2014:

 

 

 

Depreciable

Life

 

 

September 30,

2015

 

 

December 31,

2014

 

Land

 

 

 

 

$

1.4

 

 

$

1.1

 

Building and improvements

 

10 - 40 years

 

 

 

10.5

 

 

 

10.5

 

Pipeline and equipment

 

10 - 30 years

 

 

 

328.3

 

 

 

313.6

 

Other

 

5 - 25 years

 

 

 

5.5

 

 

 

5.5

 

 

 

 

 

 

 

 

345.7

 

 

 

330.7

 

Accumulated depreciation

 

 

 

 

 

 

(77.0

)

 

 

(66.5

)

 

 

 

 

 

 

 

268.7

 

 

 

264.2

 

Construction in progress

 

 

 

 

 

 

3.1

 

 

 

10.8

 

Property, plant and equipment, net

 

 

 

 

 

$

271.8

 

 

$

275.0

 

 

 

6. Accrued Liabilities

Third-party accrued liabilities consist of the following as of September 30, 2015 and December 31, 2014:

 

 

 

September 30,

2015

 

 

December 31,

2014

 

Transportation, project engineering

 

$

1.1

 

 

$