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EX-32.2 - EXHIBIT 32.2 - Shell Midstream Partners, L.P.q22018-ex322.htm
EX-32.1 - EXHIBIT 32.1 - Shell Midstream Partners, L.P.q22018-ex321.htm
EX-31.2 - EXHIBIT 31.2 - Shell Midstream Partners, L.P.q22018-ex312.htm
EX-31.1 - EXHIBIT 31.1 - Shell Midstream Partners, L.P.q22018-ex311.htm


    
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018
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.)
150 N. Dairy Ashford, Houston, Texas 77079
(Address of principal executive offices) (Zip Code)
(832) 337-2034
(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  ý    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  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
  
Accelerated filer ¨
Non-accelerated filer ¨
  
Smaller reporting company ¨
Emerging growth company o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

The registrant had 223,811,781 common units outstanding as of August 2, 2018.
 




SHELL MIDSTREAM PARTNERS, L.P.
TABLE OF CONTENTS
 





PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

SHELL MIDSTREAM PARTNERS, L.P.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
June 30, 2018
 
December 31, 2017
 
 
(in millions of dollars)
ASSETS
Current assets
 
 

 
 

Cash and cash equivalents
 
$
174.9

 
$
137.7

Accounts receivable – third parties, net
 
19.8

 
17.2

Accounts receivable – related parties
 
24.8

 
23.8

Allowance oil
 
18.9

 
12.4

Prepaid expenses
 
5.2

 
12.5

Total current assets
 
243.6

 
203.6

Equity method investments
 
820.9

 
362.6

Property, plant and equipment, net
 
741.2

 
736.5

Cost investments
 
62.1

 
62.1

Other assets – related parties
 
2.6

 
1.7

Total assets
 
$
1,870.4

 
$
1,366.5

LIABILITIES
Current liabilities
 
 

 
 

Accounts payable – third parties
 
$
4.4

 
$
4.0

Accounts payable – related parties
 
12.6

 
11.6

Deferred revenue – third parties
 
4.8

 
5.5

Deferred revenue – related party
 
6.7

 
13.9

Accrued liabilities – third parties
 
26.5

 
12.7

Accrued liabilities – related parties
 
11.5

 
7.2

Total current liabilities
 
66.5

 
54.9

Noncurrent liabilities
 
 
 
 
Debt payable – related party
 
2,091.5

 
1,844.0

Lease liability
 
23.9

 
24.3

Asset retirement obligations
 
6.7

 
6.6

Other unearned income
 
2.6

 
2.6

Total noncurrent liabilities
 
2,124.7

 
1,877.5

Total liabilities
 
2,191.2

 
1,932.4

Commitments and Contingencies (Note 12)
 


 


EQUITY (DEFICIT)
Common unitholders – public (123,832,233 and 98,832,233 units issued and outstanding as of June 30, 2018 and December 31, 2017)
 
3,433.9

 
2,773.5

Common unitholder – SPLC (99,979,548 and 88,950,136 units issued and
outstanding as of June 30, 2018 and December 31, 2017)
 
(219.0
)
 
(507.2
)
General partner – SPLC (4,567,588 and 3,832,293 units issued and outstanding as of June 30, 2018 and December 31, 2017)
 
(3,558.2
)
 
(2,855.5
)
Total partners’ capital
 
(343.3
)
 
(589.2
)
Noncontrolling interests
 
22.5

 
23.3

Total deficit
 
(320.8
)
 
(565.9
)
Total liabilities and deficit
 
$
1,870.4

 
$
1,366.5


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
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017 (1)
 
2018
 
2017 (1)
 
 
(in millions of dollars, except per unit data)
Revenue
 
 

 
 
 
 
 
 
Transportation, terminaling and storage services – third parties
 
$
57.0

 
$
59.7

 
$
91.6

 
$
118.9

Transportation, terminaling and storage services – related parties
 
55.1

 
39.5

 
98.4

 
83.9

Product revenue – third parties
 
1.4

 

 
1.4

 

Product revenue – related parties
 
1.7

 

 
9.6

 

Lease revenue – related parties
 
14.1

 
13.2

 
27.9

 
18.7

Total revenue
 
129.3

 
112.4

 
228.9

 
221.5

Costs and expenses
 
 

 
 

 
 

 
 

Operations and maintenance – third parties
 
24.9

 
26.5

 
68.0

 
45.5

Operations and maintenance – related parties
 
13.3

 
10.0

 
26.7

 
23.7

Cost of product sold – third parties
 
1.2

 

 
1.2

 

Cost of product sold – related parties
 
1.2

 

 
7.7

 

General and administrative – third parties
 
2.2

 
3.7

 
4.1

 
5.7

General and administrative – related parties
 
13.9

 
11.6

 
26.8

 
23.7

Depreciation, amortization and accretion
 
11.4

 
11.3

 
22.8

 
22.6

Property and other taxes
 
4.5

 
4.2

 
10.0

 
9.1

Total costs and expenses
 
72.6

 
67.3

 
167.3

 
130.3

Operating income
 
56.7

 
45.1

 
61.6

 
91.2

Income from equity method investments
 
48.4

 
44.7

 
88.6

 
91.4

Dividend income from cost investments
 
12.8

 
9.4

 
37.7

 
19.5

Other income
 
10.9

 

 
16.3

 

Investment, dividend and other income
 
72.1

 
54.1

 
142.6

 
110.9

Interest expense, net
 
13.3

 
7.5

 
23.9

 
12.3

Income before income taxes
 
115.5

 
91.7

 
180.3

 
189.8

Income tax expense
 
0.1

 

 
0.1

 

Net income
 
115.4

 
91.7

 
180.2

 
189.8

Less: Net income attributable to Parent
 

 
21.5

 

 
44.0

Less: Net income attributable to noncontrolling interests
 
4.7

 
4.7

 
5.5

 
9.5

Net income attributable to the Partnership
 
$
110.7

 
$
65.5

 
$
174.7

 
$
136.3

General partner's interest in net income attributable to the Partnership
 
$
31.6

 
$
14.3

 
$
58.6

 
$
26.4

Limited Partners' interest in net income attributable to the Partnership
 
$
79.1

 
$
51.2

 
$
116.1

 
$
109.9

 
 
 
 
 
 
 
 
 
Net income per Limited Partner Unit - Basic and Diluted:
 
 

 
 

 
 
 
 
Common
 
$
0.35

 
$
0.29

 
$
0.54

 
$
0.62

 
 
 
 
 
 
 
 
 
Distributions per Limited Partner Unit
 
$
0.3650

 
$
0.3041

 
$
0.7130

 
$
0.5951

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

 
 

 
 
 
 
Common units – public
 
123.8

 
88.4

 
118.9

 
88.4

Common units – SPLC
 
100.0

 
89.0

 
97.8

 
88.9

(1) The financial information presented has been retrospectively adjusted for acquisitions of businesses under common control.
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 
 
 
Six Months Ended June 30,
 
 
2018
 
2017 (1)
 
 
(in millions of dollars)
Cash flows from operating activities
 
 

 
 

Net income
 
$
180.2

 
$
189.8

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

 
 

Depreciation, amortization and accretion
 
22.8

 
22.6

Non-cash interest expense
 
0.4

 
0.1

Allowance oil reduction to net realizable value
 

 
0.3

Undistributed equity earnings
 
(2.2
)
 
(4.2
)
Changes in operating assets and liabilities
 
 

 
 

Accounts receivable
 
(3.5
)
 
(14.5
)
Allowance oil
 
(6.5
)
 
0.7

Prepaid expenses and other assets
 
6.4

 
1.9

Accounts payable
 
1.3

 
4.6

Deferred revenue and other unearned income
 
(3.3
)
 
10.4

Accrued liabilities
 
17.6

 
8.4

Net cash provided by operating activities
 
213.2

 
220.1

Cash flows from investing activities
 
 

 
 

Capital expenditures
 
(25.1
)
 
(25.8
)
Acquisitions from Parent
 
(481.6
)
 
(210.6
)
Contributions to investment
 
(14.0
)
 

Purchase price adjustment
 

 
0.4

Return of investment
 
32.6

 
10.5

April 2017 Divestiture
 

 
0.8

Net cash used in investing activities
 
(488.1
)
 
(224.7
)
Cash flows from financing activities
 
 

 
 

Net proceeds from equity offerings
 
973.3

 
2.9

Borrowings under credit facilities
 
1,220.0

 
580.0

Repayments of credit facilities
 
(972.9
)
 

Contributions from general partner
 
20.0

 
0.1

Proceeds from April 2017 Divestiture
 

 
20.2

Capital distributions to general partner
 
(738.4
)
 
(419.4
)
Distributions to noncontrolling interests
 
(6.6
)
 
(11.7
)
Distributions to unitholders and general partner
 
(188.8
)
 
(122.2
)
Net distributions to Parent
 

 
(43.2
)
Other contributions from Parent
 
5.9

 
12.4

Credit facility issuance costs
 

 
(0.7
)
Other
 
(0.4
)
 
(0.3
)
Net cash provided by financing activities
 
312.1

 
18.1

Net increase in cash and cash equivalents
 
37.2

 
13.5

Cash and cash equivalents at beginning of the period
 
137.7

 
122.1

Cash and cash equivalents at end of the period
 
$
174.9

 
$
135.6

Supplemental cash flow information
 
 

 
 

Non-cash investing and financing transactions
 
 

 
 

Distribution of working capital to Parent
 
$

 
$
(2.8
)
Change in accrued capital expenditures
 
0.5

 
1.8

Other non-cash contributions from Parent
 
1.9

 
1.1

(1) The financial information presented has been retrospectively adjusted for acquisitions of businesses under common control.
  
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 (DEFICIT)
 
 
Partnership
 
 
 
 
(in millions of dollars)
 
Common Unitholders Public
 
Common Unitholder SPLC
 
General Partner SPLC
 
Noncontrolling Interests
 
Total 
Balance as of December 31, 2017
 
$
2,773.5

 
$
(507.2
)
 
$
(2,855.5
)
 
$
23.3

 
$
(565.9
)
Impact of change in accounting policy (Note 2)
 
(1.4
)
 
1.0

 
(2.2
)
 
0.3

 
(2.3
)
Net income
 
64.5

 
51.6

 
58.6

 
5.5

 
180.2

Net proceeds from equity offerings
 
673.3

 
300.0

 

 

 
973.3

Contributions from general partner
 

 

 
20.0

 

 
20.0

Other contributions from Parent
 

 

 
7.7

 

 
7.7

Distributions to unitholders and general partner
 
(76.0
)
 
(64.4
)
 
(48.4
)
 

 
(188.8
)
Distributions to noncontrolling interests
 

 

 

 
(6.6
)
 
(6.6
)
May 2018 Acquisition
 

 

 
(738.4
)
 

 
(738.4
)
Balance as of June 30, 2018
 
$
3,433.9

 
$
(219.0
)
 
$
(3,558.2
)
 
$
22.5

 
$
(320.8
)


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. The financial information for the three and six months ended June 30, 2017 has been retrospectively adjusted for the acquisition of businesses under common control (see Note 3 - Acquisitions and Divestiture).

1. Description of Business and Basis of Presentation

Shell Midstream Partners, L.P. (“we,” “us,” “our” or “the Partnership”) is a Delaware limited partnership formed by Shell on March 19, 2014 to own and operate pipeline and other midstream assets, including certain assets acquired from Shell Pipeline Company LP (“SPLC”) and its affiliates. We conduct our operations either through our wholly owned subsidiary Shell Midstream Operating LLC (“Operating Company”) or through direct ownership by the Partnership. Our general partner is Shell Midstream Partners GP LLC (“general partner”). References to “RDS”, “Shell” or “Parent” refer collectively to Royal Dutch Shell plc and its controlled affiliates, other than us, our subsidiaries and our general partner. Our common units trade on the New York Stock Exchange under the symbol “SHLX”.

Description of Business

We are a fee-based, growth-oriented master limited partnership that owns, operates, develops and acquires pipelines and other midstream assets. As of June 30, 2018, our assets include interests in entities that own crude oil and refined products pipelines and terminals that serve as key infrastructure to (i) transport onshore and offshore crude oil production to Gulf Coast and Midwest refining markets and (ii) deliver refined products from those markets to major demand centers. Our assets also include interests in entities that own natural gas and refinery gas pipelines that transport offshore natural gas to market hubs and deliver refinery gas from refineries and plants to chemical sites along the Gulf Coast.

The following table reflects our ownership, and Shell’s retained ownership as of June 30, 2018:
 
SHLX Ownership
 
Shell’s Retained Ownership
 
 
 
 
Pecten Midstream LLC (“Pecten”)
100.0
%
 
%
Sand Dollar Pipeline LLC (“Sand Dollar”)
100.0
%
 
%
Triton West LLC (“Triton”)
100.0
%
 
%
Zydeco Pipeline Company LLC (“Zydeco”)
92.5
%
 
7.5
%
Amberjack Pipeline Company LLC (“Amberjack”) – Series A/Series B
75.0% / 50.0%

 
%
Mars Oil Pipeline Company LLC (“Mars”)
71.5
%
 
%
Odyssey Pipeline L.L.C. (“Odyssey”)
71.0
%
 
%
Bengal Pipeline Company LLC (“Bengal”)
50.0
%
 
%
Crestwood Permian Basin LLC (“Permian Basin”)
50.0
%
 
%
LOCAP LLC (“LOCAP”)
41.48
%
 
%
Poseidon Oil Pipeline Company LLC (“Poseidon”)
36.0
%
 
%
Explorer Pipeline Company (“Explorer”)
12.62
%
 
25.97
%
Proteus Oil Pipeline Company, LLC (“Proteus”)
10.0
%
 
%
Endymion Oil Pipeline Company, LLC (“Endymion”)
10.0
%
 
%
Colonial Pipeline Company (“Colonial”)
6.0
%
 
10.12
%
Cleopatra Gas Gathering Company, LLC (“Cleopatra”)
1.0
%
 
%

We generate a substantial portion of our revenue under long-term agreements by charging fees for the transportation, terminaling and storage of crude oil and refined products through our pipelines and storage tanks, and generate income from our equity and cost method investments. Our operations consist of one reportable segment. 


7




Basis of Presentation

Our unaudited condensed consolidated financial statements include all subsidiaries required to be consolidated under generally accepted accounting principles in the United States (“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. During interim periods, we follow the accounting policies disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017 (our “2017 Annual Report”), filed with the United States Securities and Exchange Commission (“SEC”). The unaudited condensed consolidated financial statements for the three and six months ended June 30, 2018 and 2017 include all adjustments we believe are necessary for a fair statement of the results of operations for the interim periods presented. These adjustments are of a normal recurring nature unless otherwise disclosed. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year. These unaudited condensed consolidated financial statements and other information included in this Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements and notes thereto included in our 2017 Annual Report.

Our consolidated subsidiaries include Pecten, Sand Dollar, Triton, Zydeco, Odyssey and the Operating Company. Asset acquisitions of additional interests in previously consolidated subsidiaries and interests in cost and equity method investments are included in the financial statements prospectively from the effective date of each acquisition. In cases where these types of acquisitions are considered acquisitions of businesses under common control, the financial statements are retrospectively adjusted. As such, all financial results of interests acquired in the May 2017 Acquisition and the December 2017 Acquisition (as defined in Note 3—Acquisitions and Divestiture) have been retrospectively adjusted. For additional common control interests acquired of cost and equity method investments previously owned, only the incremental ownership interest has been retrospectively adjusted. Our unaudited condensed consolidated financial statements were derived from the financial statements and accounting records of SPLC and Shell for the periods prior to acquisition. Specifically, such businesses are reflected for the following periods prior to the effective date of such acquisitions by us:

May 2017 Acquisition for periods prior to May 10, 2017; and

December 2017 Acquisition for periods prior to December 1, 2017, including the effect of fully consolidating Odyssey.

Our unaudited condensed consolidated statements of income and cash flow for the periods ended June 30, 2017 consist of the combined results of the May 2017 Acquisition and the December 2017 Acquisition prior to the respective acquisition dates, and the consolidated activity of the Partnership. Our unaudited condensed consolidated statement of income excludes the results of these businesses from net income attributable to the Partnership for the periods indicated above by allocating these results to our Parent. See Note 3 - Acquisitions and Divestiture for definitions and additional information.

Summary of Significant Accounting Policies

The accounting policies are set forth in Note 2—Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements of our 2017 Annual Report. There have been no significant changes to these policies during the six months ended June 30, 2018, other than those noted below.

Recent Accounting Pronouncements

Standards Adopted as of January 1, 2018

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09 to Topic 606, Revenue from Contracts with Customers, which superseded nearly all revenue recognition guidance in Topic 605, Revenue Recognition, under GAAP. We adopted the new standard utilizing the modified retrospective transition approach, effective January 1, 2018, by recognizing the cumulative effect of initially applying the standard for periods prior to January 1, 2018 to the opening balance of equity (deficit).

See Note 2—Revenue Recognition for additional information and disclosures required by the new standard.


8



In January 2017, the FASB issued ASU 2017-01 to Topic 805, Business Combinations, to clarify the definition of a business and to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This update was effective for us as of January 1, 2018. There was no impact on our financial statements as a result of this adoption in relation to our acquisition during the second quarter.

In August 2016, the FASB issued ASU 2016-15 to Topic 230, Statement of Cash Flows, making changes to the classification of certain cash receipts and cash payments in order to reduce diversity in presentation. The update addresses eight specific cash flow issues, of which only one is applicable to our financial statements. The applicable update relates to distributions received from equity method investees and prescribes two options for presenting these cash flows: cumulative earnings approach or nature of the distribution approach. We will continue to apply the cumulative earnings approach, where distributions received are considered either returns on investment and classified as operating cash flows or returns of investment and classified as investing cash flows. The adoption of this update on January 1, 2018 did not have a material impact on our financial statements.

In January 2016, the FASB issued ASU 2016-01 to Topic 825, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, requiring equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. Additionally, the update allows equity investments that do not have readily determinable fair values to be re-measured at fair value either upon the occurrence of an observable price change or upon identification of impairment, and requires additional disclosure around those investments. We have the following three equity investments which are accounted for under the cost method and which do not have readily determinable fair values:

 
 
June 30, 2018
 
December 31, 2017
 
 
Ownership
 
Amount
 
Ownership
 
Amount
Colonial
 
6.0
%
 
$
11.4

 
6.0
%
 
$
11.4

Explorer
 
12.62
%
 
48.6

 
12.62
%
 
48.6

Cleopatra
 
1.0
%
 
2.1

 
1.0
%
 
2.1

 
 
 
 
$
62.1

 
 
 
$
62.1


As of the adoption of this update on January 1, 2018, and as of June 30, 2018, we did not identify the occurrence of an observable price change or an identification of impairment for these three equity investments. Therefore, the adoption of this update on January 1, 2018 did not have a material impact on our financial statements.

Standards Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02 to Topic 842, Leases, which requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either a financing lease or operating lease with classification affecting the pattern of expense recognition in the condensed consolidated statements of income and presentation of cash flows in the condensed consolidated statements of cash flows. This update also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. For lessors, this update modifies the classification criteria and the accounting for sales-type and direct financing leases. This update is effective on a modified retrospective basis for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We will adopt the new standard on January 1, 2019 and continue to assess its impact to our consolidated financial statements and related disclosures. 

Currently, we plan to elect the practical expedients upon transition that will retain the lease classification and initial direct costs for any leases that exist prior to adoption. We will not reassess whether any contracts entered into prior to adoption are leases. In January 2018, the FASB issued ASU 2018-01 to provide an optional transition practical expedient to not evaluate existing or expired land easements that were not previously accounted for as leases under existing guidance. We intend to elect this practical expedient. In July 2018, the FASB issued ASU 2018-11 which provides entities an optional transitional relief method that allows entities to not apply the new guidance in the comparative periods they present in their financial statements in the year of adoption. This update also provides an optional practical expedient for lessors to avoid separating lease and associated non-lease components within a contract if certain criteria are met. We are evaluating this most recent update and continue to evaluate all other available transition practical expedients offered in connection with the new standard.


9



As part of our implementation efforts to date, we have substantially completed the identification and aggregation of our lease contract population. We are reviewing these to determine the transition approach and assess the impact to our condensed consolidated financial statements upon adoption. We are also developing and starting to implement any necessary changes to existing processes and controls.

2. Revenue Recognition

Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

On January 1, 2018, we adopted Topic 606 and all related ASU’s to this Topic (collectively, “the new revenue standard”) by applying the modified retrospective method to all contracts that were not completed on January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented in accordance with the new revenue standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under previous GAAP. We recorded a non-cash cumulative effect transition adjustment to increase total opening equity (deficit) of $4.5 million, with the impact primarily due to the earlier recognition of revenue related to deficiency payments under minimum volume commitment contracts. Additionally, we recorded a non-cash cumulative effect transition adjustment related to our equity method investment for Mars which resulted in a total net decrease to total opening equity (deficit) of $2.3 million. See Note 5 - Equity Method Investments for additional information.

Revenue Recognition

The new revenue standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new revenue standard requires entities to recognize revenue through the application of a five-step model, which includes: identification of the contract; identification of the performance obligations; determination of the transaction price; allocation of the transaction price to the performance obligations; and recognition of revenue as the entity satisfies the performance obligations.

Our revenues are primarily generated from the transportation, terminaling and storage of crude oil, refinery gas and refined petroleum products through our pipelines, terminals and storage tanks. To identify the performance obligations, we considered all the products or services promised in the contracts with customers, whether explicitly stated or implied based on customary business practices. Revenue is recognized when each performance obligation is satisfied under the terms of the contract.

Each barrel of product transported or day of services provided is considered a distinct service that represents a performance obligation that would be satisfied over time if it were accounted for separately. The services provided over the contract period are a series of distinct services that are substantially the same, have the same pattern of transfer to the customer, and therefore, qualify as a single performance obligation. Since the customer simultaneously receives and consumes the benefits of services, we recognize revenue over time based on a measure of progress of volumes transported for transportation services contracts or number of days elapsed for storage and terminaling services contracts.

Product revenue related to allowance oil sales is recognized at the point in time when the control of the oil transfers to the customer.

For all performance obligations, payment is typically due in full within 30 days of the invoice date.

Disaggregation of Revenue

The following table provides information about disaggregated revenue by service type and customer type:


10



 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Transportation services revenue – third parties
 
$
54.7

 
$
87.0

Transportation services revenue – related parties (1)
 
42.2

 
72.8

   Total transportation services revenue
 
96.9

 
159.8

 
 
 
 
 
Storage services revenue – third parties
 
2.3

 
4.6

Storage services revenue – related parties
 
1.5

 
2.8

   Total storage services revenue
 
3.8

 
7.4

 
 
 
 
 
Terminaling services revenue – third parties
 

 

Terminaling services revenue – related parties
 
11.4

 
22.8

   Total terminaling services revenue (2)
 
11.4

 
22.8

 
 
 
 
 
Product revenue – third parties
 
1.4

 
1.4

Product revenue – related parties
 
1.7

 
9.6

   Total product revenue (3)
 
3.1

 
11.0

 
 
 
 
 
Total Topic 606 revenue
 
115.2

 
201.0

Lease revenue
 
14.1

 
27.9

   Total revenue
 
$
129.3

 
$
228.9

(1) Transportation services revenue - related parties for the three and six months ended June 30, 2018 includes $1.2 million and $2.4 million, respectively, of the non-lease service component in our transportation services contracts.
(2) Terminaling services revenue is entirely comprised of the non-lease service component in our terminaling services contracts.
(3) Product revenue is comprised of allowance oil sales.

Transportation services revenue

We have both long-term transportation contracts and month-to-month contracts for spot shippers that make nominations on our pipelines. Some of the long-term contracts entitle the customer to a specified amount of guaranteed capacity on the pipeline.
Transportation services are charged at a per barrel rate or other applicable unit of measure. We apply the allocation exception guidance for variable consideration related to market indexing for long-term transportation contracts because (a) the variable payment relates specifically to our efforts to transfer the distinct service and (b) we allocate the variable amount of consideration entirely to the distinct service which is consistent with the allocation objective. Except for guaranteed capacity payments as discussed below, transportation services are billed monthly as services are rendered.

Deferred revenue

Our transportation services agreements on Zydeco entitle the customer to a specified amount of guaranteed capacity on the pipeline. This capacity cannot be pro-rated even if the pipeline is oversubscribed. In exchange, the customer makes a specified monthly payment regardless of the volume transported. If the customer does not ship its full guaranteed volume in a given month, it makes the full monthly cash payment (i.e., deficiency payments) and it may ship the unused volume in a later month for no additional cash payment for up to 12 months, subject to availability on the pipeline. The cash payment received is recognized as deferred revenue, a contract liability under the new revenue standard. If there is insufficient capacity on the pipeline to allow the unused volume to be shipped, the customer forfeits its right to ship such unused volume. We do not refund any cash payments relating to unused volumes.

Deferred revenue under these arrangements was previously recognized into revenue once all contingencies or potential performance obligations associated with the related volumes had been satisfied or expired. Under the new revenue standard, we are required to estimate the likelihood that unused volumes will be shipped or forfeited at each reporting period based on additional data that becomes available and only to the extent that it is probable that a significant reversal of any incremental revenue will not occur. In some cases, this estimate could result in the earlier recognition of revenue.


11



Storage and terminaling services revenue

Storage and terminaling services are provided under short-term and long-term contracts, with a fixed price per month for committed storage and terminaling capacity, or under a monthly spot-rate for uncommitted storage or terminaling. Storage and terminaling services are billed monthly as services are rendered.

Reimbursements from customers

Under certain transportation, terminaling and storage service contracts, we receive reimbursements from customers to recover costs of construction, maintenance or operating costs either under a tariff surcharge per volume shipped or under separate reimbursement payments. Because we consider these amounts as consideration from customers associated with ongoing services to be provided to customers, we defer these payments in deferred revenue and recognize amounts in revenue over the life of the associated revenue contract as performance obligations are satisfied under the contract. We consider these payments to be revenue because control of the long-lived assets does not transfer to our customer upon completion. Our financial statements were not materially impacted by adoption of the new revenue standard related to reimbursements from customers.

Lease revenue

Certain of our long-term transportation and terminaling services contracts are accounted for as operating leases under Topic 840. These agreements have both a lease component and an implied operation and maintenance service component. We allocate the arrangement consideration between the lease components that fall within the scope of Topic 840 and any non-lease service components within the scope of the new revenue standard based on the relative stand-alone selling price of each component. We estimate the stand-alone selling price of the lease and non-lease service components based on an analysis of service-related and lease-related costs for each contract, adjusted for a representative profit margin. The contracts have a minimum fixed monthly payment for both the lease and non-lease service components. We present the non-lease service components under the new revenue standard within Transportation, terminaling and storage services revenue in the unaudited condensed consolidated statement of income.

Product revenue

We generate revenue by selling accumulated allowance oil inventory to customers. Sale of allowance oil is recorded as revenue, with specific cost based on a weighted average price per barrel recorded as cost of product sold.

Our contracts and tariffs contain terms for the customer to reimburse us for losses from evaporation or other loss in transit in the form of allowance oil. We obtain control of the excess oil not lost during transportation, if any. Prior to the adoption of the new revenue standard, allowance oil received was recorded as revenue on a gross basis with the resulting actual gain or loss recorded in operations and maintenance expense. The subsequent sale of allowance oil, net of the product cost, was recorded as operations and maintenance expenses. Under the new revenue standard, we include the excess oil retained during the period, if any, as non-cash consideration and include this amount in the transaction price.

Joint tariff

Under the joint tariff agreement between Zydeco and LOCAP, revenues were historically recorded on a net basis as an agent prior to the adoption of the new revenue standard. However, subsequent to the adoption of the new revenue standard, because we control the transportation service before it is transferred to the customer, we are the principal and, therefore, record revenues from these agreements on a gross basis.

Impact of adoption

In accordance with the new revenue standard, the following tables summarize the impact of adoption on our unaudited condensed consolidated financial statements as of and for the three and six months ended June 30, 2018:


12



 
 
Three Months Ended June 30, 2018
Unaudited Condensed Consolidated Statement of Income
 
As Reported Under Topic 606
 
Amounts Without Adoption of Topic 606
 
Effect of Change Increase/(Decrease)
Revenue
 
 
 
 
 
 
Transportation, terminaling and storage services – third parties
 
$
57.0

 
$
57.3

 
$
(0.3
)
Transportation, terminaling and storage services – related parties
 
55.1

 
43.7

 
11.4

Product revenue – third parties
 
1.4

 

 
1.4

Product revenue – related parties
 
1.7

 

 
1.7

Lease revenue – related parties
 
14.1

 
26.6

 
(12.5
)
Costs and expenses
 
 
 
 
 
 
Cost of product sold – third parties
 
1.2

 

 
1.2

Cost of product sold – related parties
 
1.2

 

 
1.2

Operations and maintenance – third parties
 
24.9

 
25.7

 
(0.8
)
Operations and maintenance – related parties
 
13.3

 
11.6

 
1.7

Net income
 
115.4

 
116.7

 
(1.3
)
 
 
Six Months Ended June 30, 2018
Unaudited Condensed Consolidated Statement of Income
 
As Reported Under Topic 606
 
Amounts Without Adoption of Topic 606
 
Effect of Change Increase/(Decrease)
Revenue
 
 
 
 
 
 
Transportation, terminaling and storage services – third parties
 
$
91.6

 
$
90.9

 
$
0.7

Transportation, terminaling and storage services – related parties
 
98.4

 
75.8

 
22.6

Product revenue – third parties
 
1.4

 

 
1.4

Product revenue – related parties
 
9.6

 

 
9.6

Lease revenue – related parties
 
27.9

 
53.0

 
(25.1
)
Costs and expenses
 
 
 
 
 
 
Cost of product sold – third parties
 
1.2

 

 
1.2

Cost of product sold – related parties
 
7.7

 

 
7.7

Operations and maintenance – third parties
 
68.0

 
69.0

 
(1.0
)
Operations and maintenance – related parties
 
26.7

 
22.4

 
4.3

Net income
 
180.2

 
183.1

 
(2.9
)


 
 
June 30, 2018
Unaudited Condensed Consolidated Balance Sheet
 
As Reported Under Topic 606
 
Amounts Without Adoption of Topic 606
 
Effect of Change Increase/(Decrease)
Deferred revenue – related party
 
$
6.7

 
$
8.3

 
$
(1.6
)

Contract Balances

We perform our obligations under a contract with a customer by providing services in exchange for consideration from the customer. The timing of our performance may differ from the timing of the customer’s payment, which results in the recognition of a contract asset or a contract liability. Although we did not have any contract assets as of June 30, 2018, we recognize a contract asset when we transfer goods or services to a customer and contractually bill an amount which is less than the revenue allocated to the related performance obligation. We recognize deferred revenue (contract liability) when the

13



customer’s payment of consideration precedes our performance. The following table provides information about receivables and contract liabilities from contracts with customers:

 
 
January 1, 2018
 
June 30, 2018
Receivables from contracts with customers – third parties
 
$
17.2

 
$
19.7

Receivables from contracts with customers – related parties
 
18.8

 
17.3

Deferred revenue – third parties
 
5.5

 
4.8

Deferred revenue – related party
 
9.4

 
6.7


Significant changes in the deferred revenue balances with customers during the period are as follows:
 
 
December 31, 2017
 
Transition Adjustment
 
Additions (1)
 
Reductions (2)
 
June 30, 2018
Deferred revenue – third parties
 
$
5.5

 

 
3.4

 
(4.1
)
 
$
4.8

Deferred revenue – related party
 
$
13.9

 
(4.5
)
 
1.5

 
(4.2
)
 
$
6.7

(1) 
Contract liability additions resulted from deficiency payments from minimum volume commitment contracts.
(2) 
Contract liability reductions resulted from revenue earned through the actual or estimated use and expiration of deficiency credits.

We currently have no assets recognized from the costs to obtain or fulfill a contract as of June 30, 2018.

Remaining Performance Obligations

As of June 30, 2018, contracts with remaining performance obligations primarily include minimum volume commitment contracts, long-term storage contracts and the service component of transportation and terminaling services contracts accounted for as operating leases.

The following table includes revenue expected to be recognized in the future related to performance obligations exceeding one year of their initial terms that are unsatisfied or partially unsatisfied as of June 30, 2018:

 
 
Total
 
2018
 
2019
 
2020
 
2021
 
2022 and beyond
Revenue expected to be recognized on multi-year committed shipper transportation contracts in place as of June 30, 2018 (1)
 
$
642.0

 
$
102.2

 
$
64.3

 
$
50.1

 
$
49.8

 
$
375.6

Revenue expected to be recognized on other multi-year transportation service contracts in place as of June 30, 2018 (2)
 
47.7

 
2.7

 
5.4

 
5.4

 
5.4

 
28.8

Revenue expected to be recognized on multi-year storage service contracts in place as of June 30, 2018
 
6.0

 
2.0

 
4.0

 

 

 

Revenue expected to be recognized on multi-year terminaling service contracts in place as of June 30, 2018 (2)
 
430.0

 
22.8

 
45.7

 
45.7

 
45.7

 
270.1

 
 
$
1,125.7

 
$
129.7

 
$
119.4

 
$
101.2

 
$
100.9

 
$
674.5

(1) Excludes revenue deferred for deficiency payments.
(2) Relates to the non-lease service components of certain of our long-term transportation and terminaling service contracts which are accounted for as operating leases.

As an exemption, we do not disclose the amount of remaining performance obligations for contracts with an original expected duration of one year or less or for variable consideration that is allocated entirely to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation.

3. Acquisitions and Divestiture

May 2018 Acquisition

14




On May 11, 2018, we acquired SPLC’s ownership interests in Amberjack Pipeline Company LLC, a Delaware limited liability company (“Amberjack”), which is comprised of 75% of the issued and outstanding Series A membership interests of Amberjack and 50% of the issued and outstanding Series B membership interests of Amberjack for $1,220.0 million (the “May 2018 Acquisition”). The May 2018 Acquisition closed pursuant to a Purchase and Sale Agreement dated May 9, 2018 (the “May 2018 Purchase and Sale Agreement”) between us and SPLC, and is accounted for as a transaction between entities under common control on a prospective basis as an asset acquisition. We acquired historical carrying value of net assets under common control of $481.6 million which is included in Equity method investments in our unaudited condensed consolidated balance sheet. We recognized $738.4 million of consideration in excess of the historical carrying value of net assets acquired as a capital distribution to our general partner in accordance with our policy for common control transactions. We funded the May 2018 Acquisition with $494.0 million in borrowings under our Five Year Revolver due October 2019 (as defined in Note 8—Related Party Debt) and $726.0 million in borrowings under our Five Year Revolver due December 2022 (as defined in Note 8—Related Party Debt) with Shell Treasury Center (West) Inc. (“STCW”).

2017 Acquisitions

During 2017, we completed two acquisitions, as described below, that were considered transfers of businesses between entities under common control, and therefore the related acquired assets and liabilities were transferred at historical carrying value. Because these acquisitions were common control transactions in which we acquired businesses, our historical financial statements have been retrospectively adjusted as if we owned the acquired assets and liabilities for all periods presented.

December 2017 Acquisition

On December 1, 2017, we acquired a 100% interest in Triton, 41.48% of the issued and outstanding membership interest in LOCAP, an additional 22.9% interest in Mars, an additional 22.0% interest in Odyssey, and an additional 10.0% interest in Explorer from SPLC and Equilon Enterprises LLC d/b/a Shell Oil Products US (“SOPUS”) for $825.0 million (the “December 2017 Acquisition”). The December 2017 Acquisition closed pursuant to a Purchase and Sale Agreement (the “December 2017 Purchase and Sale Agreement”) among the Operating Company, us, SPLC and SOPUS. SPLC and SOPUS are each wholly owned subsidiaries of Shell. We funded the cash consideration for the December 2017 Acquisition from $825.0 million in borrowings under the Five Year Revolver due December 2022 (as defined in Note 8—Related Party Debt) and the Five Year Fixed Facility (as defined in Note 8—Related Party Debt).

May 2017 Acquisition

On May 10, 2017, we acquired a 100% interest in Delta, Na Kika and Refinery Gas Pipeline for $630.0 million (the “May 2017 Acquisition”). As part of the May 2017 Acquisition, SPLC and Shell GOM Pipeline Company LP (“Shell GOM”) contributed all but the working capital of Delta and Na Kika to Pecten, and Shell Chemical LP (“Shell Chemical”) contributed all but the working capital of Refinery Gas Pipeline to Sand Dollar. The May 2017 Acquisition closed pursuant to a Purchase and Sale Agreement dated May 4, 2017 (the “May 2017 Purchase and Sale Agreement”), among the Operating Company, us, Shell Chemical, Shell GOM and SPLC. Shell Chemical, Shell GOM and SPLC are each wholly owned subsidiaries of Shell. We funded the May 2017 Acquisition with $50.0 million of cash on hand, $73.1 million in borrowings under our Five Year Revolver due October 2019 (as defined in Note 8—Related Party Debt) and $506.9 million in borrowings under our Five Year Fixed Facility (as defined in Note 8—Related Party Debt).

Retrospective adjusted information tables

The following tables present our results of operations and of cash flows giving effect to the December 2017 Acquisition. This acquisition is accounted for as a transaction between entities under common control and was retrospectively adjusted for the period of our Parent’s ownership prior to the transaction. The historical financial statements already include the effect of retrospectively adjusting for the May 2017 Acquisition. The results of the December 2017 Acquisition prior to the closing date of the acquisition are included in the acquisition column and the consolidated results are included in “Consolidated Results” within the tables below:

15



 
 
Three Months Ended June 30, 2017
 
 
Shell Midstream Partners, L.P. (1)
 
December 2017 Acquisition (2)
 
Consolidated Results
Revenue
 
 

 
 
 
 
Transportation, terminaling and storage services – third parties
 
$
55.3

 
$
4.4

 
$
59.7

Transportation, terminaling and storage services – related parties
 
23.7

 
15.8

 
39.5

Lease revenue – related parties
 
7.8

 
5.4

 
13.2

Total revenue
 
86.8

 
25.6

 
112.4

Costs and expenses
 
 

 
 

 
 
Operations and maintenance – third parties
 
22.9

 
3.6

 
26.5

Operations and maintenance – related parties
 
7.1

 
2.9

 
10.0

General and administrative – third parties
 
2.8

 
0.9

 
3.7

General and administrative – related parties
 
8.2

 
3.4

 
11.6

Depreciation, amortization and accretion
 
9.6

 
1.7

 
11.3

Property and other taxes
 
3.4

 
0.8

 
4.2

Total costs and expenses
 
54.0

 
13.3

 
67.3

Operating income
 
32.8

 
12.3

 
45.1

Income from equity method investments
 
37.2

 
7.5

 
44.7

Dividend income from cost investments
 
6.2

 
3.2

 
9.4

Investment and dividend income
 
43.4

 
10.7

 
54.1

Interest expense, net
 
7.5

 

 
7.5

Income before income taxes
 
68.7

 
23.0

 
91.7

Income tax expense
 

 

 

Net income
 
68.7

 
23.0

 
91.7

Less: Net income attributable to Parent
 
1.0

 
20.5

 
21.5

Less: Net income attributable to noncontrolling interests
 
2.2

 
2.5

 
4.7

Net income attributable to the Partnership
 
$
65.5

 
$

 
$
65.5

(1) As previously reported in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017, including the effect of retrospectively adjusting for the May 2017 Acquisition.
(2) Our Parents’ results of the December 2017 Acquisition for the three months ended June 30, 2017.








16



 
 
Six Months Ended June 30, 2017
 
 
Shell Midstream Partners, L.P. (1)
 
December 2017 Acquisition (2)
 
Consolidated Results
Revenue
 
 

 
 
 
 
Transportation, terminaling and storage services – third parties
 
$
110.8

 
$
8.1

 
$
118.9

Transportation, terminaling and storage services – related parties
 
52.6

 
31.3

 
83.9

Lease revenue – related parties
 
7.8

 
10.9

 
18.7

Total revenue
 
171.2

 
50.3

 
221.5

Costs and expenses
 
 

 
 

 
 
Operations and maintenance – third parties
 
38.5

 
7.0

 
45.5

Operations and maintenance – related parties
 
18.2

 
5.5

 
23.7

General and administrative – third parties
 
4.6

 
1.1

 
5.7

General and administrative – related parties
 
16.6

 
7.1

 
23.7

Depreciation, amortization and accretion
 
19.1

 
3.5

 
22.6

Property and other taxes
 
7.6

 
1.5

 
9.1

Total costs and expenses
 
104.6

 
25.7

 
130.3

Operating income
 
66.6

 
24.6

 
91.2

Income from equity method investments
 
75.9

 
15.5

 
91.4

Dividend income from cost investments
 
13.5

 
6.0

 
19.5

Investment and dividend income
 
89.4

 
21.5

 
110.9

Interest expense, net
 
12.3

 

 
12.3

Income before income taxes
 
143.7

 
46.1

 
189.8

Income tax expense
 

 

 

Net income
 
143.7

 
46.1

 
189.8

Less: Net income attributable to Parent
 
3.0

 
41.0

 
44.0

Less: Net income attributable to noncontrolling interests
 
4.4

 
5.1

 
9.5

Net income attributable to the Partnership
 
$
136.3

 
$

 
$
136.3

(1) As previously reported in our Quarterly Report on Form 10-Q for the six months ended June 30, 2017, including the effect of retrospectively adjusting for the May 2017 Acquisition.
(2) Our Parents’ results of the December 2017 Acquisition for the six months ended June 30, 2017.

























17



 
 
Six months Ended June 30, 2017
 
 
Shell Midstream Partners, L.P. (1)
 
December 2017 Acquisition (2)
 
Consolidated Results
 
 
 
 
 
 
 
Cash flows from operating activities
 
 

 
 
 
 
Net income
 
$
143.7

 
$
46.1

 
$
189.8

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

 
 
 
 
Depreciation, amortization and accretion
 
19.1

 
3.5

 
22.6

Non-cash interest expense
 
0.1

 

 
0.1

Allowance oil reduction to net realizable value
 
0.3

 

 
0.3

Undistributed equity earnings
 
(1.5
)
 
(2.7
)
 
(4.2
)
Changes in operating assets and liabilities
 
 

 
 
 
 
Accounts receivable
 
(14.2
)
 
(0.3
)
 
(14.5
)
Allowance oil
 
0.7

 

 
0.7

Prepaid expenses and other assets
 
1.8

 
0.1

 
1.9

Accounts payable
 
5.2

 
(0.6
)
 
4.6

Deferred revenue and other unearned income
 
10.4

 

 
10.4

Accrued liabilities
 
9.7

 
(1.3
)
 
8.4

Net cash provided by operating activities
 
175.3

 
44.8

 
220.1

Cash flows from investing activities
 
 

 
 
 
 
Capital expenditures
 
(20.9
)
 
(4.9
)
 
(25.8
)
Acquisitions from Parent
 
(210.6
)
 

 
(210.6
)
Purchase price adjustment
 
0.4

 

 
0.4

Return of investment
 
8.4

 
2.1

 
10.5

April 2017 Divestiture
 
0.8

 

 
0.8

Net cash used in investing activities
 
(221.9
)
 
(2.8
)
 
(224.7
)
Cash flows from financing activities
 
 

 
 
 
 
Net proceeds from public offerings
 
2.9

 

 
2.9

Borrowings under credit facility
 
580.0

 

 
580.0

Contributions from general partner
 
0.1

 

 
0.1

Proceeds from April 2017 Divestiture
 
20.2

 

 
20.2

Capital distributions to general partner
 
(419.4
)
 

 
(419.4
)
Distributions to noncontrolling interests
 
(6.6
)
 
(5.1
)
 
(11.7
)
Distributions to unitholders and general partner
 
(122.2
)
 

 
(122.2
)
Net distributions to Parent
 
(6.3
)
 
(36.9
)
 
(43.2
)
Other contributions from Parent
 
12.4

 

 
12.4

Credit facility issuance costs
 
(0.7
)
 

 
(0.7
)
Other
 
(0.3
)
 

 
(0.3
)
Net cash provided by (used in) financing activities
 
60.1

 
(42.0
)
 
18.1

Net increase in cash and cash equivalents
 
13.5

 

 
13.5

Cash and cash equivalents at beginning of the period
 
121.9

 
0.2

 
122.1

Cash and cash equivalents at end of the period
 
$
135.4

 
$
0.2

 
$
135.6

Supplemental Cash Flow Information
 
 

 
 
 
 
Non-cash investing and financing transactions
 
 

 
 
 
 
Distribution of working capital to Parent
 
$
(2.8
)
 
$

 
$
(2.8
)
Change in accrued capital expenditures
 
2.7

 
(0.9
)
 
1.8

Other non-cash contributions from Parent
 
1.1

 

 
1.1

(1) As previously reported in our Quarterly Report on Form 10-Q for the six months ended June 30, 2017, including the effect of retrospectively adjusting for the May 2017 Acquisition.
(2) Our Parents’ results of the December 2017 Acquisition for the six months ended June 30, 2017.


18



Divestiture

On April 28, 2017, Zydeco divested a small segment of its pipeline system (the “April 2017 Divestiture”) to SOPUS as part of the Motiva JV separation. The April 2017 Divestiture closed pursuant to a Pipeline Sale and Purchase Agreement (the “April 2017 Pipeline Sale and Purchase Agreement”) dated April 28, 2017 among Zydeco and SOPUS. We received $21.0 million in cash consideration for this sale, of which $19.4 million is attributable to the Partnership. The cash consideration represents $0.8 million for the book value of net assets divested and $20.2 million in excess proceeds received from our Parent. The April 2017 Pipeline Sale and Purchase Agreement contained customary representations and warranties and indemnification by SOPUS.

4. Related Party Transactions

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

Acquisition Agreements

Refer to Note 3—Acquisitions and Divestiture for a description of applicable agreements. For a discussion of all other related party acquisition agreements, see Note 4—Related Party Transactions in the Notes to Consolidated Financial Statements of our 2017 Annual Report.

Omnibus Agreement

On November 3, 2014, we entered into an Omnibus Agreement with SPLC and our general partner concerning 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. This agreement addresses the following matters:

our payment of an annual general and administrative fee of $8.5 million for the provision of certain services by SPLC;
our obligation to reimburse SPLC for certain direct or allocated costs and expenses incurred by SPLC on our behalf;
our obligation to reimburse SPLC for all expenses incurred by SPLC as a result of us becoming and continuing as a publicly traded entity; we will reimburse our general partner for these expenses to the extent the fees relating to such services are not included in the general and administrative fee; and
the granting of a license from Shell to us with respect to using certain Shell trademarks and trade names.

Under the Omnibus Agreement, SPLC indemnified us against certain enumerated risks. Of those two indemnity obligations, one expired in 2017 and one remains. Under the remaining indemnification, SPLC agreed to indemnify us against tax liabilities relating to our initial assets that are identified prior to the date that is 60 days after the expiration of the statute of limitations applicable to such liabilities. This obligation has no threshold or cap. We in turn agreed to indemnify SPLC against events and conditions associated with the ownership or operation of our initial assets (other than any liabilities against which SPLC is specifically required to indemnify us as described above).

During the six months ended June 30, 2018, neither we nor SPLC made any claims for indemnification under the Omnibus Agreement.

Tax Sharing Agreement

For a discussion of the Tax Sharing Agreement, see Note 4—Related Party Transactions—Tax Sharing Agreement in the Notes to Consolidated Financial Statements of our 2017 Annual Report.

Partnership Agreement

On February 26, 2018, Shell Midstream Partners GP LLC, the general partner of the Partnership, executed Amendment No. 1 to the Partnership’s Amended and Restated Agreement of Limited Partnership dated November 3, 2014 (the “Amendment”), in response to changes to the Internal Revenue Code enacted by the Bipartisan Budget Act of 2015 relating to partnership audit and adjustment procedures. The Amendment did not have a material effect on our unaudited condensed consolidated financial statements.

Noncontrolling Interests


19



For Zydeco, noncontrolling interest consists of SPLC’s 7.5% retained ownership interest as of both June 30, 2018 and December 31, 2017. For Odyssey, noncontrolling interest consists of GEL Offshore Pipeline LLC’s (“GEL”) 29.0% retained ownership interest as of both June 30, 2018 and December 31, 2017.

Other Related Party Balances

Other related party balances consist of the following:

 
 
June 30, 2018
 
December 31, 2017
Accounts receivable
 
$
24.8

 
$
23.8

Prepaid expenses
 
4.9

 
11.9

Other assets
 
2.6

 
1.7

Accounts payable (1)
 
12.6

 
11.6

Deferred revenue
 
6.7

 
13.9

Accrued liabilities (2)
 
11.5

 
7.2

Debt payable (3)
 
2,091.5

 
1,844.0

(1) Accounts payable reflects amounts owed to SPLC for reimbursement of third party expenses incurred by SPLC for our benefit.
(2) As of June 30, 2018, accrued liabilities reflects $11.0 million accrued interest and $0.5 million other accrued liabilities. As of December 31, 2017, accrued liabilities reflects $6.6 million accrued interest and $0.6 million other accrued liabilities.
(3) Debt payable reflects borrowings outstanding after taking into account unamortized debt issuance costs of $2.5 million and $2.9 million as of June 30, 2018 and December 31, 2017, respectively.

Related Party Credit Facilities

We have entered into three credit facilities with STCW: the Five Year Revolver due December 2022, the Five Year Revolver due October 2019 and the Five Year Fixed Facility. Zydeco has also entered into the Zydeco Revolver with STCW. For definitions and additional information regarding these credit facilities, see Note 8—Related Party Debt in the Notes to Consolidated Financial Statements of our 2017 Annual Report.

Related Party Revenues and Expenses

We provide crude oil transportation, terminaling and storage services to related parties, primarily under long-term contracts. We entered into these contracts in the normal course of our business. Related party revenues consist of the following:

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Transportation and terminaling services revenue – related parties
 
$
53.6

 
$
38.1

 
$
95.6

 
$
80.6

Product revenue – related parties
 
1.7

 

 
9.6

 

Storage services revenue – related parties
 
1.5

 
1.4

 
2.8

 
3.3

Lease revenue – related parties
 
14.1

 
13.2

 
27.9

 
18.7

Total revenue – related parties
 
$
70.9

 
$
52.7

 
$
135.9

 
$
102.6


We have certain transportation and terminaling services agreements with related parties that are considered operating leases under GAAP. Certain of these agreements were entered into for terms of ten years with the option to extend for two additional five year terms, and we have additional agreements with an initial term of ten years with the option to extend for up to ten additional one year terms. As of June 30, 2018, future minimum payments to be received under the ten-year contract term of these operating leases, which includes both the lease and non-lease service components of these leases, are estimated to be:


20



 
 
Total
 
Less than 1 year
 
Years 2 to 3
 
Years 4 to 5
 
More than 5 years
Operating leases
 
$
974.8

 
$
106.4

 
$
212.8

 
$
212.8

 
$
442.8


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 under this agreement. We will continue to receive direct and allocated field and regional expenses, including payroll expenses not covered under the Management Agreement. In addition, beginning October 1, 2015, Pecten entered into an operating and management agreement under which we receive direct and allocated field and regional expenses from SPLC. Beginning May 10, 2017, Sand Dollar entered into an operating and management agreement under which we receive direct and allocated expenses from SPLC. On December 1, 2017, our general partner, SPLC and Triton entered into an operating and administrative management agreement pursuant to which we receive direct and allocated expenses from our general partner. On December 1, 2017, our general partner, SPLC and Odyssey entered into an operating and administrative management agreement pursuant to which we receive direct and allocated expenses from our general partner. The expenses under these agreements 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. For a discussion of these agreements, see Note 4—Related Party Transactions in the Notes to Consolidated Financial Statements of our 2017 Annual Report.

The majority of our insurance coverage is provided by a wholly owned subsidiary of Shell with the remaining coverage provided by third-party insurers. The related party portion of insurance expense for the three and six months ended June 30, 2018 was $3.7 million and $7.3 million, respectively, and for the three and six months ended June 30, 2017 was $1.4 million and $3.4 million, respectively.

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 unaudited condensed consolidated statements of income for the indicated periods:
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Operations and maintenance – related parties
 
$
13.3

 
$
10.0

 
$
26.7

 
$
23.7

General and administrative – related parties
 
13.9

 
11.6

 
26.8

 
23.7


For a discussion of services performed by Shell on our behalf, see Note 1 - Description of Business and Basis of Presentation - Basis of Presentation in the Notes to Consolidated Financial Statements of our 2017 Annual Report. Pursuant to various operating and administrative management agreements described above, we are allocated indirect operating and general corporate expenses from Shell. Our allocated share of operating expenses, which are included within operations and maintenance – related parties, for the three and six months ended June 30, 2018 were $3.0 million and $7.4 million, respectively, and for the three and six months ended June 30, 2017 were $3.4 million and $7.6 million, respectively. Additionally, our allocated share of general corporate expenses, which are included within general and administrative expenses – related parties, during the three and six months ended June 30, 2018 were $8.3 million and $15.9 million, respectively, and for the three and six months ended June 30, 2017 were $6.3 million and $13.5 million, respectively. Included in these general and administrative expenses for the three and six months ended June 30, 2018 are $2.2 million and $4.3 million, respectively, under the Management Agreement and $2.1 million and $4.2 million, respectively, under the Omnibus Agreement. Included in these general and administrative expenses for the three and six months ended June 30, 2017 are $2.0 million and $4.0 million, respectively, under the Management Agreement and $2.1 million and $4.2 million, respectively, under the Omnibus Agreement.

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 six months ended June 30, 2018 were $1.7 million and $3.3 million, respectively, and for the three and six months ended June 30, 2017 were $1.5 million and $3.1 million, respectively. Our share of defined contribution benefit plan costs for both the three and six months ended June 30, 2018 were $0.7 million and $1.3 million, respectively, and for the three and six months ended June 30, 2017 were $0.6 million and $1.2 million, respectively. Pension and defined contribution benefit plan expenses are included in either general and administrative expenses

21



- related parties or operations and maintenance expenses - related parties in the accompanying unaudited condensed consolidated statements of income, depending on the nature of the employee’s role in our operations.

Equity and Cost Method Investments

We have equity and cost method investments in entities, including Colonial and Explorer, in which SPLC also owns interests. In some cases, we may be required to make capital contributions or other payments to these entities. See Note 5 – Equity Method Investments for additional details.

Reimbursements

The following table reflects reimbursements from our Parent for the three and six months ended June 30, 2018 and 2017:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Cash received (1)
 
$
4.8

 
$
6.8

 
$
5.9

 
$
9.4

Changes in receivable from Parent (2)
 
(3.1
)
 
(2.7
)
 
0.2

 
1.1

Total reimbursements (3)
 
$
1.7

 
$
4.1

 
$
6.1

 
$
10.5

(1) These reimbursements are included in Other contributions from Parent in the accompanying consolidated statements of cash flows.
(2) These reimbursements are included in Other non-cash contributions from Parent in the accompanying consolidated statements of cash flows.
(3) These reimbursements are included in Other contributions from Parent in the accompanying consolidated statements of equity (deficit) and are exclusive of $1.6 million for the six months ended June 30, 2018 related to contributions from Parent.

During the three and six months ended June 30, 2018, we filed claims for reimbursement from our Parent of $1.7 million and $6.1 million. This reflects our proportionate share of the Zydeco directional drill project costs and expenses. During the three and six months ended June 30, 2017, we filed claims for reimbursement from our parent of $4.1 million and $10.5 million, respectively. This reflects our proportionate share of Zydeco directional drill project costs and expenses of $3.5 million and $9.9 million, respectively. Additionally, this includes reimbursement for the Refinery Gas Pipeline gas to butane service conversion project of $0.6 million for both the three and six months ended June 30, 2017.

5. Equity Method Investments

For each of the following investments, we have the ability to exercise significant influence over these investments based on certain governance provisions and our participation in the significant activities and decisions that impact the management and economic performance of the investments.

Equity method investments comprise the following as of the dates indicated:
 
 
June 30, 2018
 
December 31, 2017
 
 
Ownership
 
Investment Amount
 
Ownership
 
Investment Amount
Amberjack – Series A / Series B
 
75.0% / 50.0%
 
$
465.7

 
—%
 
$

Mars
 
71.5%
 
168.9

 
71.5%
 
187.4

Bengal
 
50.0%
 
80.6

 
50.0%
 
79.7

Permian Basin
 
50.0%
 
61.5

 
50.0%
 
49.4

LOCAP
 
41.48%
 
8.4

 
41.48%
 
6.9

Poseidon
 
36.0%
 

 
36.0%
 
2.3

Proteus
 
10.0%
 
16.8

 
10.0%
 
17.4

Endymion
 
10.0%
 
19.0

 
10.0%
 
19.5

 
 
 
 
$
820.9

 
 
 
$
362.6

     

Unamortized differences in the basis of the initial investments and our interest in the separate net assets within the financial statements of the investees are amortized into net income over the remaining useful lives of the underlying assets. As of June 30, 2018 and December 31, 2017, the unamortized basis differences included in our equity investments are $42.2 million and $41.4 million, respectively. For the three and six months ended June 30, 2018, the net amortization expense was $0.9

22



million and $1.9 million, respectively, and for the three and six months ended June 30, 2017, the net amortization expense was $0.9 million and $1.9 million, respectively.

During the first quarter of 2018, the investment amount for Poseidon was reduced to zero due to distributions received that were in excess of our investment balance and we, therefore, suspended the equity method of accounting. As we have no commitments to provide further financial support to Poseidon, we have recorded excess distributions of $8.9 million and $9.6 million, respectively, in Other income in our unaudited condensed consolidated statement of income for the three and six months ended June 30, 2018. Once our cumulative share of equity earnings becomes greater than the amount of distributions received, we will resume the equity method of accounting as long as the equity method investment balance remains greater than zero.

Our equity method investments balance was affected by the following during the periods indicated:
 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
 
Distributions Received
 
Income from Equity Investments
 
Distributions Received
 
Income from Equity Investments
 
Impact of Change in Accounting Policy
Amberjack (1)
 
$
31.9

 
$
16.0

 
$
31.9

 
$
16.0

 
$

Mars
 
25.4

 
21.2

 
57.6

 
46.0

 
(6.9
)
Bengal
 
4.9

 
5.4

 
8.9

 
9.8

 

Poseidon (2)
 
8.9

 

 
18.3

 
6.4

 

Other (3)
 
6.3

 
5.8

 
11.8

 
10.4