Document


    
 

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 September 30, 2017
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 187,782,369 common units outstanding as of November 3, 2017.
 




SHELL MIDSTREAM PARTNERS, L.P.
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 





PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

SHELL MIDSTREAM PARTNERS, L.P.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
September 30, 2017
 
December 31, 2016 (1)
 
 
(in millions of dollars)
ASSETS
Current assets
 
 

 
 

Cash and cash equivalents
 
$
171.9

 
$
121.9

Accounts receivable – third parties, net
 
12.9

 
20.8

Accounts receivable – related parties
 
16.2

 
12.1

Allowance oil
 
10.7

 
11.7

Prepaid expenses
 
1.2

 
6.5

Total current assets
 
212.9

 
173.0

Equity method investments
 
253.8

 
262.4

Property, plant and equipment, net
 
608.9

 
610.6

Cost investments
 
39.8

 
39.8

Other assets
 
1.3

 
0.6

Total assets
 
$
1,116.7

 
$
1,086.4

LIABILITIES
Current liabilities
 
 

 
 

Accounts payable – third parties
 
$
2.5

 
$
4.1

Accounts payable – related parties
 
10.5

 
5.4

Deferred revenue – third parties
 
6.5

 
6.0

Deferred revenue – related parties
 
20.8

 
7.9

Accrued liabilities – third parties
 
17.2

 
6.9

Accrued liabilities – related parties
 
5.9

 
5.1

Total current liabilities
 
63.4

 
35.4

Noncurrent liabilities
 
 
 
 
Debt payable – related party
 
1,000.6

 
686.0

Lease liability
 
24.4

 
24.9

Asset retirement obligations
 
1.4

 
1.4

Other unearned income
 
2.7

 
2.1

Total noncurrent liabilities
 
1,029.1

 
714.4

Total liabilities
 
1,092.5

 
749.8

Commitments and Contingencies (Note 11)
 


 


EQUITY
Common unitholders – public (98,832,233 and 88,367,308 units issued and outstanding as of September 30, 2017 and December 31, 2016)
 
2,770.4

 
2,485.7

Common unitholder – SPLC (88,950,136 and 21,475,068 units issued and
outstanding as of September 30, 2017 and December 31, 2016)
 
(510.2
)
 
(124.1
)
Subordinated unitholder – SPLC (zero and 67,475,068 units issued and
outstanding as of September 30, 2017 and December 31, 2016)
 

 
(389.6
)
General partner – SPLC (3,832,293 and 3,618,723 units issued and outstanding as of September 30, 2017 and December 31, 2016)
 
(2,256.8
)
 
(1,873.7
)
Total partners' capital
 
3.4

 
98.3

Noncontrolling interest
 
20.8

 
21.6

Net parent investment
 

 
216.7

Total equity
 
24.2

 
336.6

Total liabilities and equity
 
$
1,116.7

 
$
1,086.4

(1) Prior period financial information has been retrospectively adjusted for the acquisition of the Shell Delta, Na Kika and Refinery Gas Pipeline Operations. 
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,
 
 
2017
 
2016 (2)
 
2017 (1)
 
2016 (2)
 
 
(in millions of dollars, except per unit data)
Revenue
 
 

 
 
 
 
 
 
Transportation services and storage - third parties
 
$
52.9

 
$
53.8

 
$
163.7

 
$
174.9

Transportation services and storage - related parties
 
29.8

 
28.1

 
82.5

 
86.0

Lease revenue - related parties
 
11.7

 

 
19.4

 

Total revenue
 
94.4

 
81.9

 
265.6

 
260.9

Costs and expenses
 
 

 
 

 
 

 
 

Operations and maintenance – third parties
 
25.8

 
14.1

 
64.3

 
41.7

Operations and maintenance – related parties
 
8.4

 
7.5

 
26.6

 
22.6

General and administrative – third parties
 
1.0

 
2.2

 
5.6

 
6.4

General and administrative – related parties
 
8.6

 
7.4

 
25.2

 
22.3

Depreciation, amortization and accretion
 
8.9

 
9.1

 
28.0

 
27.1

Property and other taxes
 
3.6

 
2.6

 
11.2

 
10.3

Total costs and expenses
 
56.3

 
42.9

 
160.9

 
130.4

Operating income
 
38.1

 
39.0

 
104.7

 
130.5

Income from equity investments
 
41.2

 
21.4

 
117.1

 
70.2

Dividend income from cost investments
 
4.8

 
4.2

 
18.3

 
11.6

Other income
 
0.1

 

 
0.1

 

Investment, dividend and other income
 
46.1

 
25.6

 
135.5

 
81.8

Interest expense, net
 
9.7

 
2.8

 
22.0

 
7.8

Income before income taxes
 
74.5

 
61.8

 
218.2

 
204.5

Income tax expense
 

 

 

 

Net income
 
74.5

 
61.8

 
218.2

 
204.5

Less: Net income attributable to Parent
 

 
3.0

 
3.0

 
11.4

Less: Net income attributable to noncontrolling interests
 
1.9

 
2.5

 
6.3

 
17.7

Net income attributable to the Partnership
 
$
72.6

 
$
56.3

 
$
208.9

 
$
175.4

General partner's interest in net income attributable to the Partnership
 
$
17.6

 
$
7.2

 
$
44.0

 
$
15.3

Limited Partners' interest in net income attributable to the Partnership
 
$
55.0

 
$
49.1

 
$
164.9

 
$
160.1

 
 
 
 
 
 
 
 
 
Net income per Limited Partner Unit - Basic and Diluted:
 
 

 
 

 
 
 
 
Common
 
$
0.31

 
$
0.28

 
$
0.93

 
$
0.98

Subordinated
 
$

 
$
0.28

 
$

 
$
0.93

 
 
 
 
 
 
 
 
 
Distributions per Limited Partner Unit
 
$
0.3180

 
$
0.2638

 
$
0.9131

 
$
0.7488

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

 
 

 
 
 
 
Common units – public
 
90.2

 
88.3

 
89.0

 
77.7

Common units – SPLC
 
89.0

 
21.5

 
89.0

 
21.5

Subordinated units – SPLC
 

 
67.5

 

 
67.5

(1) The financial information for the nine months ended September 30, 2017 reflects adjustments for the acquisition of the Shell Delta, Na Kika and Refinery Gas Pipeline Operations from January 1, 2017 through May 9, 2017.
(2) Prior period financial information has been retrospectively adjusted for the acquisition of the Shell Delta, Na Kika and Refinery Gas Pipeline Operations. 
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,
 
 
2017 (1)
 
2016 (2)
 
 
(in millions of dollars)
Cash flows from operating activities
 
 

 
 

Net income
 
$
218.2

 
$
204.5

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

 
 

Depreciation, amortization and accretion
 
28.0

 
27.1

Non-cash interest expense
 
0.3

 
0.2

Allowance oil reduction to net realizable value
 
0.3

 

Undistributed equity earnings
 
(4.1
)
 
2.7

Changes in operating assets and liabilities
 
 

 
 

Accounts receivable
 
(0.9
)
 
7.3

Allowance oil
 
(1.7
)
 
(3.8
)
Prepaid expenses and other assets
 
4.4

 
5.0

Accounts payable
 
3.6

 
(2.3
)
Deferred revenue
 
14.0

 
(0.4
)
Accrued liabilities
 
13.9

 
8.2

Net cash provided by operating activities
 
276.0

 
248.5

Cash flows from investing activities
 
 

 
 

Capital expenditures
 
(35.5
)
 
(28.8
)
Acquisitions
 
(200.7
)
 
(120.0
)
Purchase price adjustment
 
0.4

 

Return of investment
 
12.3

 
9.6

April 2017 Divestiture
 
0.8

 

Net cash used in investing activities
 
(222.7
)
 
(139.2
)
Cash flows from financing activities
 
 

 
 

Net proceeds from public offerings
 
277.9

 
818.1

Borrowing under credit facility
 
580.0

 
296.7

Contributions from general partner
 
5.8

 
9.8

Repayment of credit facilities
 
(265.0
)
 
(410.0
)
Capital distributions to general partner
 
(429.3
)
 
(599.2
)
Distributions to noncontrolling interest
 
(8.6
)
 
(17.1
)
Distributions to unitholders and general partner
 
(190.4
)
 
(126.0
)
Net distributions to Parent
 
(6.3
)
 
(16.9
)
Other contributions from Parent
 
13.6

 
3.1

Proceeds from April 2017 Divestiture
 
20.2

 

Capital lease payments
 
(0.5
)
 

Credit facility issuance costs
 
(0.7
)
 

Net cash used in financing activities
 
(3.3
)
 
(41.5
)
Net increase in cash and cash equivalents
 
50.0

 
67.8

Cash and cash equivalents at beginning of the period
 
121.9

 
93.0

Cash and cash equivalents at end of the period
 
$
171.9

 
$
160.8

Supplemental cash flow information
 
 

 
 

Non-cash investing and financing transactions
 
 

 
 

Net assets not contributed to the Partnership
 
$
(12.7
)
 
$

Change in accrued capital expenditures
 
1.5

 
(5.3
)
Other non-cash contributions from Parent
 
1.5

 
0.3

Other non-cash capital distributions to general partner
 

 
(7.1
)
Other non-cash contribution from general partner
 

 
7.1

Other non-cash credit facilities issuance costs
 

 
(0.6
)
 (1) The financial information for the nine months ended September 30, 2017 reflects adjustments for the acquisition of the Shell Delta,Na Kika and Refinery Gas Pipeline Operations from January 1, 2017 through May 9, 2017.
(2) Prior period financial information has been retrospectively adjusted for the acquisition of the Shell Delta, Na Kika and Refinery Gas Pipeline Operations.
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
 
Non- controlling Interest
 
Net Parent Investment (1)
 
Total (1)
Balance as of December 31, 2016
 
$
2,485.7

 
$
(124.1
)
 
$
(389.6
)
 
$
(1,873.7
)
 
$
21.6

 
$
216.7

 
$
336.6

Net income
 
83.9

 
81.0

 

 
44.0

 
6.3

 
3.0

 
218.2

Other contributions from Parent
 

 

 

 
13.5

 

 

 
13.5

Net proceeds from public offering
 
277.9

 

 

 
5.8

 

 

 
283.7

Distributions to unitholders and general partner
 
(77.1
)
 
(58.8
)
 
(18.7
)
 
(35.8
)
 

 

 
(190.4
)
Distribution to noncontrolling interest
 

 

 

 

 
(8.6
)
 

 
(8.6
)
Proceeds from April 2017 divestiture
 

 

 

 
18.7

 
1.5

 

 
20.2

Expiration of subordinated period
 

 
(408.3
)
 
408.3

 

 

 

 

May 2017 Acquisition
 

 

 

 
(429.3
)
 

 
(200.7
)
 
(630.0
)
Net assets not contributed to the Partnership
 

 

 

 

 

 
(19.0
)
 
(19.0
)
Balance as of September 30, 2017
 
$
2,770.4

 
$
(510.2
)
 
$

 
$
(2,256.8
)
 
$
20.8

 
$

 
$
24.2

 (1) Prior period financial information has been retrospectively adjusted for the acquisition of the Shell Delta, Na Kika and Refinery Gas Pipeline Operations.

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 nine months ended September 30, 2017, the three and nine months ended September 30, 2016, and at December 31, 2016, has been retrospectively adjusted for the acquisition of the Shell Delta, Na Kika and Refinery Gas Pipeline Operations (see Note 2 - Acquisitions and Divestitures).

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 on March 19, 2014 to own and operate assets, including certain assets acquired 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” or “Parent” refer collectively to Royal Dutch Shell plc (“RDS”) 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 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 onshore and offshore crude oil production to Gulf Coast and Midwest refining markets and to deliver refined products from those markets to major demand centers, as well as interests in entities that own natural gas and refinery gas pipelines which transport offshore natural gas to market hubs and deliver refinery gas from refineries and plants to chemical sites along the Gulf Coast.

As of September 30, 2017, we own interests in nine crude oil pipeline systems, three refined products systems, one natural gas gathering pipeline system, one gas pipeline system, and a crude tank storage and terminal system. The following table reflects our ownership, and Shell's retained ownership as of September 30, 2017.
 
SHLX Ownership
 
Shell's Retained Ownership
 
 
 
 
Pecten Midstream LLC (“Pecten”)
100.0
%
 

Sand Dollar Pipeline LLC (“Sand Dollar”)
100.0
%
 

Zydeco Pipeline Company LLC (“Zydeco”)
92.5
%
 
7.5
%
Bengal Pipeline Company LLC (“Bengal”)
50.0
%
 

Odyssey Pipeline LLC (“Odyssey”)
49.0
%
 
22.0
%
Mars Oil Pipeline Company LLC (“Mars”)
48.6
%
 
22.9
%
Poseidon Oil Pipeline Company LLC (“Poseidon”)
36.0
%
 

Proteus Oil Pipeline Company, LLC (“Proteus”)
10.0
%
 

Endymion Oil Pipeline Company, LLC (“Endymion”)
10.0
%
 

Colonial Pipeline Company (“Colonial”)
6.0
%
 
10.12
%
Explorer Pipeline Company (“Explorer”)
2.62
%
 
35.97
%
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 and storage of crude oil and refined products through our pipelines and storage tanks and from income from our equity and cost method investments. Our operations consist of one reportable segment.

Basis of Presentation

Our 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

7



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, 2016 (our “2016 Annual Report”), 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, 2017 and 2016 include all adjustments we believe are necessary for a fair statement of the results 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 consolidated financial statements and notes thereto included in our 2016 Annual Report.

The acquisition of Delta, Na Kika and Refinery Gas Pipeline (the “Shell Delta, Na Kika and Refinery Gas Pipeline Operations” or “Delta, Na Kika and Refinery Gas Pipeline”) was a transfer of businesses between entities under common control, which requires it to be accounted for as if the transfer had occurred at the beginning of the period of transfer, with prior periods retrospectively adjusted to furnish comparative financial information. Accordingly, the accompanying financial statements and notes have been retrospectively adjusted to include the historical results and financial position of the Shell Delta, Na Kika and Refinery Gas Pipeline Operations prior to the effective date of the acquisition. See Note 2 - Acquisitions and Divestitures for 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 2016 Annual Report. There have been no significant changes to these policies during the nine months ended September 30, 2017, other than those noted below.

Revenue Recognition

Certain transportation services agreements with a related party are considered operating leases under GAAP. Revenues from these agreements are recorded within Lease revenue - related parties in the condensed consolidated statements of income. See Note 3-Related Party Transactions for additional information.

Recently Adopted Accounting Pronouncements

In October 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-17 to Topic 810, Consolidation, making changes on how a reporting entity should treat indirect interests in an entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of a variable interest entity. The update was effective for us as of January 1, 2017. The adoption of this update did not have a material impact on our financial statements.

In March 2016, the FASB issued ASU 2016-07 to Topic 323, Investments - Equity Method and Joint Ventures, to eliminate the need for an entity to retroactively adopt the equity method of accounting when an investment becomes qualified for the use of the equity method of accounting due to an increase in level of ownership or degree of influence. The update was effective for us as of January 1, 2017. The adoption of this update did not have a material impact on our financial statements.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which will supersede nearly all existing revenue recognition guidance under GAAP. The ASU'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 update is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. The update allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements. We will adopt the requirements of the new standard in the first quarter of 2018 under the modified retrospective transition method.

As part of our implementation efforts to date, all of our revenue contracts have been subject to review to evaluate the effect of the new standard on our revenue recognition practices. We have also made progress in evaluating new disclosure

8



requirements and identifying impacts to our business processes, systems and controls to support recognition and disclosure under the new guidance.

We expect the adoption of the new standard will change the way we recognize revenue from our committed shippers under transportation services agreements. We anticipate the new standard will result in earlier recognition of revenue related to cash collected from customers for shortfalls under these agreements, which is recorded as deferred revenue. We currently recognize deferred revenue under these arrangements into revenue once all contingencies or potential performance obligations associated with the related volumes have been satisfied or expired. Upon adoption of the new standard and application of the breakage model to our deferred revenue, we anticipate a cumulative transition adjustment resulting from the earlier recognition of revenue with a corresponding adjustment to beginning retained earnings and are in the process of quantifying the impact.

We have also identified potential contracts or elements of contracts that may require a change in presentation on our income statement, specifically related to the service component of leases, product loss allowance, gross versus net presentation and reimbursements of capital expenditures. Currently, we do not anticipate these to materially impact our financial statements as there will be no net impact to income before taxes. However, this is still under review and subject to our ongoing assessment of the guidance.

For additional information on accounting pronouncements issued prior to September 2017, refer to Note 2—Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements of our 2016 Annual Report.


2. Acquisitions and Divestitures    

On May 10, 2017, we acquired a 100% interest in Delta, Na Kika and Refinery Gas Pipeline for $630.0 million in consideration (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 (as defined in Note 7—Related Party Debt), and $506.9 million in borrowings under our Five Year Fixed Facility (as defined in Note 7—Related Party Debt) with Shell Treasury Center (West) Inc. (“STCW”), an affiliate of Shell. Total transaction costs of $0.8 million were expensed as incurred. The terms of the May 2017 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 May 2017 Purchase and Sale Agreement, Shell Chemical has agreed to reimburse us for costs and expenses incurred in connection with the conversion of a section of pipe from the Convent refinery to Sorrento from refinery gas service to butane service. The May 2017 Purchase and Sale Agreement contains other customary representations, warranties and covenants.

In connection with the May 2017 Purchase and Sale Agreement, we granted Shell Chemical a purchase option and right of first refusal with respect to Refinery Gas Pipeline and certain other related assets and the ownership interests in Sand Dollar. The purchase option may be triggered by, among other things, (i) a third party obtaining the right to use any or all of a Refinery Gas Pipeline; (ii) the loss of all volume on a Refinery Gas Pipeline that would result in it being permanently shutdown for two years or more; (iii) the termination of a transportation services agreement between Shell Chemical and Sand Dollar (“Refinery Gas Pipeline Agreement”); (iv) the expiration of the term of a Refinery Gas Pipeline Agreement; or (v) a change of control of our general partner; provided, however, that in the case of (i) through (iv), the purchase option would only be applicable to the Refinery Gas Pipeline impacted by such event. In addition, in the event that Sand Dollar receives an offer to sell all or a portion of the Refinery Gas Pipelines or the ownership interests in Sand Dollar from a third party, Shell Chemical has a right of first refusal with respect to such Refinery Gas Pipelines or ownership interests, as applicable, for so long as any Refinery Gas Pipeline Agreement between Shell Chemical and Sand Dollar is in effect. 

In connection with the May 2017 Acquisition we acquired historical carrying value of property, plant and equipment, net and other assets under common control as follows:


9



Delta
$
40.1

Na Kika
26.0

Refinery Gas Pipeline
134.6

May 2017 Acquisition
$
200.7


We recognized $429.3 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. During the three months ended September 30, 2017, we adjusted the historical carrying value of property, plant and equipment acquired in connection with the May 2017 Acquisition. The adjustment resulted in a decrease to property, plant and equipment of $9.9 million with a corresponding increase to the capital distribution to our general partner. For the period from closing through September 30, 2017, we recognized $40.1 million in revenues and $18.9 million of net earnings related to the assets acquired.

Retrospective adjusted information tables

The following tables present our financial position and our results of operations and of cash flows giving effect to the May 2017 Acquisition of the Delta, Na Kika and Refinery Gas Pipeline Operations. The results of Delta, Na Kika and Refinery Gas Pipeline prior to the closing date of the acquisition are included in “Delta, Na Kika and Refinery Gas Pipeline Operations” and the consolidated results are included in “Consolidated Results” within the tables below:

10



 
 
December 31, 2016
 
 
Shell Midstream Partners, L.P. (1)
 
Delta, Na Kika and Refinery Gas Pipeline Operations (2)
 
Consolidated Results
ASSETS
 
 
Current assets
 
 

 
 

 
 
Cash and cash equivalents
 
$
121.9

 
$

 
$
121.9

Accounts receivable – third parties, net
 
18.4

 
2.4

 
20.8

Accounts receivable – related parties
 
10.1

 
2.0

 
12.1

Allowance oil
 
9.0

 
2.7

 
11.7

Prepaid expenses
 
6.0

 
0.5

 
6.5

Total current assets
 
165.4

 
7.6

 
173.0

Equity method investments
 
262.4

 

 
262.4

Property, plant and equipment, net
 
398.0

 
212.6

 
610.6

Cost investments
 
39.8

 

 
39.8

Other assets
 

 
0.6

 
0.6

Total assets
 
$
865.6

 
$
220.8

 
$
1,086.4

LIABILITIES
 
 
Current liabilities
 
 

 
 

 
 
Accounts payable – third parties
 
$
1.5

 
$
2.6

 
$
4.1

Accounts payable – related parties
 
5.2

 
0.2

 
5.4

Deferred revenue – third parties
 
6.0

 

 
6.0

Deferred revenue – related parties
 
7.9

 

 
7.9

Accrued liabilities – third parties
 
5.6

 
1.3

 
6.9

Accrued liabilities – related parties
 
5.1

 

 
5.1

Total current liabilities
 
31.3

 
4.1

 
35.4

Noncurrent liabilities
 
 
 
 
 
 
Debt payable – related party
 
686.0

 

 
686.0

Lease liability – related party
 
24.9

 

 
24.9

Asset retirement obligations
 
1.4

 

 
1.4

Other unearned income
 
2.1

 

 
2.1

Total noncurrent liabilities
 
714.4

 

 
714.4

Total liabilities
 
745.7

 
4.1

 
749.8

Commitments and Contingencies (Note 11)
 

 

 

EQUITY
 
 
Common unitholders – public
 
2,485.7

 

 
2,485.7

Common unitholder – SPLC
 
(124.1
)
 

 
(124.1
)
Subordinated unitholder
 
(389.6
)
 

 
(389.6
)
General partner – SPLC
 
(1,873.7
)
 

 
(1,873.7
)
Total partners' capital
 
98.3

 

 
98.3

Noncontrolling interest
 
21.6

 

 
21.6

Net parent investment
 

 
216.7

 
216.7

Total equity
 
119.9

 
216.7

 
336.6

Total liabilities and equity
 
$
865.6

 
$
220.8

 
$
1,086.4

(1) As previously reported in our Annual Report on Form 10-K for 2016.
(2) The financial position of the Delta, Na Kika and Refinery Gas Pipeline Operations as of December 31, 2016.


11



 
 
Three Months Ended September 30, 2016
 
 
Shell Midstream Partners, L.P. (1)
 
Delta, Na Kika and Refinery Gas Pipeline Operations (2)
 
Consolidated Results
 
 
 
Revenue
 
 

 
 
 
 
Third parties
 
$
46.1

 
$
7.7

 
$
53.8

Related parties
 
21.8

 
6.3

 
28.1

Total revenue
 
67.9

 
14.0

 
81.9

Costs and expenses
 
 

 
 

 
 
Operations and maintenance – third parties
 
11.4

 
2.7

 
14.1

Operations and maintenance – related parties
 
5.3

 
2.2

 
7.5

General and administrative – third parties
 
2.2

 

 
2.2

General and administrative – related parties
 
5.7

 
1.7

 
7.4

Depreciation, amortization and accretion
 
6.0

 
3.1

 
9.1

Property and other taxes
 
1.3

 
1.3

 
2.6

Total costs and expenses
 
31.9

 
11.0

 
42.9

Operating income
 
36.0

 
3.0

 
39.0

Income from equity investments
 
21.4

 

 
21.4

Dividend income from cost investments
 
4.2

 

 
4.2

Investment and dividend income
 
25.6

 

 
25.6

Interest expense, net
 
2.8

 

 
2.8

Income before income taxes
 
58.8

 
3.0

 
61.8

Income tax expense
 

 

 

Net income
 
58.8

 
3.0

 
61.8

Less: Net income attributable to Parent
 

 
3.0

 
3.0

Less: Net income attributable to noncontrolling interests
 
2.5

 

 
2.5

Net income attributable to the Partnership
 
$
56.3

 
$

 
$
56.3

(1) As previously reported in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2016.
(2) Our Parents' results of the Delta, Na Kika and Refinery Gas Pipeline Operations from July 1, 2016 through September 30, 2016.


12



 
 
Nine Months Ended September 30, 2016
 
 
Shell Midstream Partners, L.P. (1)
 
Delta, Na Kika and Refinery Gas Pipeline Operations (2)
 
Consolidated Results
 
 
 
Revenue
 
 

 
 
 
 
Third parties
 
$
149.8

 
$
25.1

 
$
174.9

Related parties
 
65.9

 
20.1

 
86.0

Total revenue
 
215.7

 
45.2

 
260.9

Costs and expenses
 
 

 
 

 
 
Operations and maintenance – third parties
 
33.1

 
8.6

 
41.7

Operations and maintenance – related parties
 
15.9

 
6.7

 
22.6

General and administrative – third parties
 
6.2

 
0.2

 
6.4

General and administrative – related parties
 
17.3

 
5.0

 
22.3

Depreciation, amortization and accretion
 
17.7

 
9.4

 
27.1

Property and other taxes
 
6.4

 
3.9

 
10.3

Total costs and expenses
 
96.6

 
33.8

 
130.4

Operating income
 
119.1

 
11.4

 
130.5

Income from equity investments
 
70.2

 

 
70.2

Dividend income from cost investments
 
11.6

 

 
11.6

Investment and dividend income
 
81.8

 

 
81.8

Interest expense, net
 
7.8

 

 
7.8

Income before income taxes
 
193.1

 
11.4

 
204.5

Income tax expense
 

 

 

Net income
 
193.1

 
11.4

 
204.5

Less: Net income attributable to Parent
 

 
11.4

 
11.4

Less: Net income attributable to noncontrolling interests
 
17.7

 

 
17.7

Net income attributable to the Partnership
 
$
175.4

 
$

 
$
175.4

(1) As previously reported in our Quarterly Report on Form 10-Q for the nine month period ended September 30, 2016.
(2) Our Parents' results of the Delta, Na Kika and Refinery Gas Pipeline Operations from January 1, 2016 through September 30, 2016.


13



 
 
Nine Months Ended September 30, 2016
 
 
Shell Midstream Partners, L.P. (1)
 
Delta, Na Kika and Refinery Gas Pipeline Operations (2)
 
Consolidated Results
 
 
 
 
 
Cash flows from operating activities
 
 

 
 

 
 
Net income
 
$
193.1

 
$
11.4

 
$
204.5

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

 
 

 
 
Depreciation, amortization and accretion
 
17.7

 
9.4

 
27.1

Non-cash interest expense
 
0.2

 

 
0.2

Undistributed equity earnings
 
2.7

 

 
2.7

Changes in operating assets and liabilities
 
 

 
 

 
 
Accounts receivable
 
6.6

 
0.7

 
7.3

Allowance oil
 
(3.6
)
 
(0.2
)
 
(3.8
)
Prepaid expenses
 
4.3

 
0.7

 
5.0

Accounts payable
 
(1.6
)
 
(0.7
)
 
(2.3
)
Deferred revenue
 
(0.4
)
 

 
(0.4
)
Accrued liabilities
 
5.1

 
3.1

 
8.2

Net cash provided by operating activities
 
224.1

 
24.4

 
248.5

Cash flows from investing activities
 
 

 
 

 
 
Capital expenditures
 
(21.3
)
 
(7.5
)
 
(28.8
)
Acquisitions
 
(120.0
)
 

 
(120.0
)
Return of investment
 
9.6

 

 
9.6

Net cash used in investing activities
 
(131.7
)
 
(7.5
)
 
(139.2
)
Cash flows from financing activities
 
 

 
 

 
 
Net proceeds from public offerings
 
818.1

 

 
818.1

Borrowing under credit facility
 
296.7

 

 
296.7

Contributions from general partner
 
9.8

 

 
9.8

Repayment of credit facilities
 
(410.0
)
 

 
(410.0
)
Capital distributions to general partner
 
(599.2
)
 

 
(599.2
)
Distributions to noncontrolling interest
 
(17.1
)
 

 
(17.1
)
Distributions to unitholders and general partner
 
(126.0
)
 

 
(126.0
)
Net distributions to Parent
 

 
(16.9
)
 
(16.9
)
Other contribution from Parent
 
3.1

 

 
3.1

Net cash used in financing activities
 
(24.6
)
 
(16.9
)
 
(41.5
)
Net increase in cash and cash equivalents
 
67.8

 

 
67.8

Cash and cash equivalents at beginning of the period
 
93.0

 

 
93.0

Cash and cash equivalents at end of the period
 
$
160.8

 
$

 
$
160.8

Supplemental Cash Flow Information
 
 

 
 

 
 
Non-cash investing and financing transactions
 
 

 
 

 
 
Change in accrued capital expenditures
 
$
(1.1
)
 
$
(4.2
)
 
$
(5.3
)
Other non-cash contributions from Parent
 
0.3

 

 
0.3

Other non-cash capital distributions to general partner
 
(7.1
)
 

 
(7.1
)
Other non-cash contribution from general partner
 
7.1

 

 
7.1

Other non-cash credit facilities issuance costs
 
(0.6
)
 

 
(0.6
)
(1) As previously reported in our Quarterly Report on Form 10-Q for the nine month period ended September 30, 2016.
(2) Our Parents' results of the Delta, Na Kika and Refinery Gas Pipeline Operations from January 1, 2016 through September 30, 2016.

14





On April 28, 2017, Zydeco divested a small segment of its pipeline system (the “April 2017 Divestiture”) to Equilon Enterprises LLC d/b/a Shell Oil Products US (“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.

On August 9, 2016, we acquired a 2.62% equity interest in Explorer from SPLC (the “August 2016 Acquisition”) for $26.2 million. The August 2016 Acquisition was made in connection with SPLC’s right, as a current shareholder of Explorer, to acquire a portion of the equity interest being divested by another shareholder of Explorer. SPLC separately owns a 35.97% equity interest in Explorer. The August 2016 Acquisition closed on August 9, 2016 pursuant to a Share Purchase and Sale Agreement among us, the Operating Company and SPLC, and is accounted for as a transaction between entities under common control. We funded the August 2016 Acquisition with $26.3 million of cash on hand. Total transaction costs of $0.1 million were incurred. The terms of the August 2016 Acquisition were approved by the Board.

On May 23, 2016, we acquired an additional 30.0% interest in Zydeco, an additional 1.0% interest in Bengal and an additional 3.0% interest in Colonial for $700.0 million in consideration (the “May 2016 Acquisition”). The May 2016 Acquisition closed pursuant to a Contribution Agreement (the “May 2016 Contribution Agreement”) dated May 17, 2016 among us, the Operating Company and SPLC and became effective on April 1, 2016, and is accounted for as a transaction between entities under common control. We funded the May 2016 Acquisition with $345.8 million from the net proceeds of a registered public offering of 10,500,000 common units representing limited partner interests in us (the “May 2016 Offering”), $50.4 million of cash on hand and $296.7 million in borrowings under the Five Year Revolver (as defined in Note 7—Related Party Debt) with STCW, an affiliate of Shell. The remaining $7.1 million in consideration consisted of an issuance of 214,285 general partner units to our general partner in order to maintain its 2.0% general partner interest in us. Total transaction costs of $0.4 million were incurred in association with the May 2016 Acquisition. The terms of the May 2016 Acquisition were approved by 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 May 2016 Contribution Agreement, SPLC has agreed to reimburse us for our proportionate share of certain costs and expenses incurred by Zydeco after April 1, 2016 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. The May 2016 Contribution Agreement contained customary representations and warranties and indemnification by SPLC.

In connection with the May 2016 Acquisition we acquired book value of net assets under common control as follows:


Cost investment (1)
$
5.2

Equity method investments(2)
1.5

Partner's capital (3)
87.0

May 2016 Acquisition
$
93.7


(1) 
Book value of 3.0% additional interest in Colonial contributed by SPLC.
(2) 
Book value of 1.0% additional interest in Bengal contributed by SPLC.
(3) 
Book value of 30.0% additional interest in Zydeco from SPLC’s noncontrolling interest.

We recognized $606.3 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. This capital distribution was comprised of $599.2 million in cash and $7.1 million in general partner units issued.


3. 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.

15




Acquisition Agreements

See the description of the May 2017 Purchase and Sale Agreement related to the May 2017 Acquisition and the April 2017 Pipeline Sale and Purchase Agreement related to the April 2017 Divestiture as further described in Note 2—Acquisitions and Divestitures. 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 2016 Annual Report.

Commercial Agreements

Omnibus Agreement

On November 3, 2014, in connection with our initial public offering (“IPO”), and the acquisition of Zydeco, 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 indemnity obligations, two remain. First, SPLC agreed to be responsible for unknown environmental liabilities arising out of the ownership and operation of our initial assets prior to the closing of the IPO, to the extent identified before November 3, 2017. SPLC's indemnification of us against these environmental liabilities and certain other liabilities is subject to an aggregate limit of $15.0 million, of which $10.7 million remains.

Second, 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 nine months ended September 30, 2017, 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 in the Notes to Consolidated Financial Statements of our 2016 Annual Report.

Other Agreements

In connection with the IPO and our acquisitions from Shell, we have entered into several customary agreements with SPLC and Shell. These agreements include pipeline operating agreements, reimbursement agreements and services agreements.

Noncontrolling Interest

Noncontrolling interest consists of SPLC's 7.5% retained ownership interest in Zydeco as of September 30, 2017 and December 31, 2016. Noncontrolling interest was 57.0% at the time of IPO, decreased to 37.5% with the May 2015 Acquisition, and further decreased to 7.5% with the May 2016 Acquisition.


16



Other Related Party Balances

Other related party balances consist of the following:

 
 
September 30, 2017
 
December 31, 2016
Accounts receivable
 
$
16.2

 
$
12.1

Prepaid expenses
 
0.6

 
3.2

Other assets
 
0.7

 

Accounts payable (1)
 
10.5

 
5.4

Deferred revenue
 
20.8

 
7.9

Accrued liabilities (2)
 
5.9

 
5.1

Debt payable (3)
 
1,000.6

 
686.0

Lease liability (4)
 

 
24.9

 
(1) Accounts payable reflects amounts owed to SPLC for reimbursement of third-party expenses incurred by SPLC for our benefit.
(2) As of September 30, 2017, accrued liabilities reflects $5.5 million accrued interest and $0.4 million other accrued liabilities. As of December 31, 2016, accrued liabilities reflects $2.6 million accrued interest, $1.6 million fuel accrual and $0.9 million other accrued liabilities.
(3) Debt payable reflects borrowings outstanding after taking into account unamortized debt issuance costs of $1.3 million and $0.9 million as of September 30, 2017 and December 31, 2016, respectively.
 (4) As part of the Motiva JV separation effective May 2017, Motiva is no longer a related party. As of September 30, 2017, this is a third-party balance.

Related Party Credit Facilities

We have entered into three credit facilities with Shell Treasury Center West (“STCW”), an affiliate of Shell: the Five Year Revolver, the Five Year Fixed Facility and the 364-Day Revolver. The 364-Day Revolver expired as of March 1, 2017, and has not been replaced. Zydeco has also entered into the Zydeco Revolver with STCW. For definitions and 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 terms consistent with those provided to third parties. Our transportation services revenue from related parties was $28.6 million and $77.9 million for the three and nine months ended September 30, 2017, respectively, and $25.8 million and $79.5 million for the three and nine months ended September 30, 2016, respectively. Storage revenues from related parties were $1.2 million and $4.6 million for the three and nine months ended September 30, 2017, respectively, and $2.3 million and $6.5 million for the three and nine months ended September 30, 2016, respectively. Additionally, we have certain transportation services agreements with a related party that are considered operating leases under GAAP and are recorded within Lease revenue - related parties in the condensed consolidated statement of income. Lease revenues from related parties were $11.7 million and $19.4 million for the three and nine months ended September 30, 2017, respectively, and zero for both the three and nine months ended September 30, 2016. These agreements were each entered into for terms of ten years, with the option to extend for two additional five year terms.

As of September 30, 2017, future minimum payments to be received under the ten year contract term of these agreements were estimated to be:

 
 
Total
 
Less than 1 year
 
Years 2 to 3
 
Years 4 to 5
 
More than 5 years
Operating leases
 
$
443.6

 
$
46.3

 
$
92.6

 
$
92.6

 
$
212.1



During the three and nine months ended September 30, 2017, we converted excess allowance oil to cash through sales to affiliates of Shell and recognized a gain of $0.1 million and $0.8 million, respectively, and for the three and nine months ended

17



September 30, 2016, we recognized a gain of $0.3 million and $0.8 million, respectively, from such sales in Operations and maintenance expense.

During the three and nine months ended September 30, 2017, Zydeco, Bengal, Odyssey, Mars, Poseidon, Proteus, Endymion, Colonial, Explorer and Cleopatra paid cash distributions to us of $71.4 million and $249.1 million, of which $24.1 million and $105.5 million related to Zydeco. During the three and nine months ended September 30, 2016, Zydeco, Bengal, Mars, Poseidon, Colonial and Explorer paid cash distributions to us of $63.9 million and $174.8 million, of which $35.1 million and $80.7 million related to Zydeco.

During the three and nine months ended September 30, 2017, we were allocated $3.4 million and $8.4 million, respectively, and during the three and nine months ended September 30, 2016, we were allocated $2.3 million and $7.8 million respectively, of indirect general corporate expenses incurred by SPLC and Shell which are included within general and administrative expenses in the condensed consolidated statements of income. 

Beginning July 1, 2014, Zydeco entered into an operating and management agreement (the “Management Agreement”) with SPLC under which SPLC provides general management and administrative services to us. As a result, we are not allocated corporate expenses from SPLC or Shell, but are allocated direct expenses and our proportionate share of field and regional expenses, including payroll expenses not covered under the Management Agreement. Beginning October 1, 2015, Pecten entered into an operating and management agreement under which we are not allocated corporate expenses from SPLC or Shell, but are allocated direct expenses and our proportionate share of field and regional expenses from SPLC. Beginning May 10, 2017, Sand Dollar entered into an operating and management agreement under which we are not allocated corporate expenses from SPLC or Shell, but are allocated direct expenses and our proportionate share of field and regional expenses from SPLC. 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. For a discussion of these agreements and other agreements between Pecten and SPLC, see Note 4—Related Party Transactions in the Notes to Consolidated Financial Statements of our 2016 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 nine months ended September 30, 2017 was $2.1 million and $5.1 million, respectively, and for the three and nine months ended September 30, 2016, was $1.2 million and $4.2 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 condensed consolidated statements of income for the indicated periods:
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Operations and maintenance - related parties
 
$
8.4

 
$
7.5

 
$
26.6

 
$
22.6

General and administrative - related parties (1)
 
8.6

 
7.4

 
25.2

 
22.3


(1) For the three and nine months ended September 30, 2017, we incurred $2.1 million and $6.1 million under the Management Agreement and $2.2 million and $6.4 million under the Omnibus Agreement for the general and administrative fee. For the three and nine months ended September 30, 2016 we incurred $1.9 million and $5.8 million under the Management Agreement and $2.2 million and $6.4 million under the Omnibus Agreement for the general and administrative fee.


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, 2017 were $1.2 million and $2.9 million, respectively, and for the three and nine months ended September 30, 2016 were $0.9 million and $2.6 million, respectively. Our share of defined contribution benefit plan costs for the three and nine months ended September 30, 2017 were $0.5 million and $1.1 million, respectively and for the three and nine months ended September 30, 2016 were $0.4 million and $1.1 million, respectively. Pension and defined contribution benefit plan expenses are included in either general and

18



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.

Equity and Cost Method Investments

We have equity and cost method investments in entities, including Odyssey, Mars, Colonial and Explorer in which Shell also owns interests. 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.

Reimbursements from Our General Partner

During the three and nine months ended September 30, 2017, we filed claims for reimbursement from our Parent of $3.1 million and $13.6 million, respectively. This reflects our proportionate share of Zydeco directional drill project costs and expenses of $2.2 million and $12.1 million, respectively, for the three and nine months ended September 30, 2017. Additionally, this includes reimbursement for the Refinery Gas Pipeline gas to butane service conversion project of $0.9 million and $1.5 million for the three and nine months ended September 30, 2017, respectively. During the three and nine months ended September 30, 2016, we received reimbursement from our Parent for our proportionate share of Zydeco directional drill costs and expenses of $0.1 million and $0.4 million, respectively, as well as reimbursement for certain costs and expenses incurred by Pecten for storm water improvements at Lockport of $1.0 million and $1.2 million, respectively. These reimbursements are treated as a capital contribution from our general partner.

4. Equity Method Investments

Equity investments in affiliates comprise the following as of the dates indicated:
 
 
September 30, 2017
 
December 31, 2016
 
 
Ownership
 
Investment Amount
 
Ownership
 
Investment Amount
Bengal
 
50.0%
 
$
78.2

 
50.0%
 
$
76.1

Odyssey 
 
49.0%
 
3.6

 
49.0%
 
3.0

Mars
 
48.6%
 
129.7

 
48.6%
 
130.2

Poseidon
 
36.0%
 
4.8

 
36.0%
 
13.2

Proteus
 
10.0%
 
17.6

 
10.0%
 
19.1

Endymion
 
10.0%
 
19.9

 
10.0%
 
20.8

 
 
 
 
$
253.8

 
 
 
$
262.4

 

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 September 30, 2017 and December 31, 2016, the unamortized basis differences included in our equity investments are $28.4 million and $30.9 million, respectively. For the three and nine months ended September 30, 2017, the net amortization expense was $0.7 million and $2.1 million, respectively. For the three and nine months ended September 30, 2016, the net amortization expense was $0.3 million and $1.1 million, respectively.



19



Our equity investments in affiliates balance was affected by the following during the periods indicated:
 
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
 
 
Distributions Received
 
Income from Equity Investments
 
Purchase Price Adjustment
 
Distributions received
 
Income from Equity investments
 
Purchase Price Adjustment
Bengal
 
$
5.5

 
$
6.2

 
$

 
$
14.8

 
$
16.9

 
$

Odyssey 
 
4.4

 
5.0

 

 
13.1

 
13.7

 

Mars
 
21.9

 
22.0

 

 
64.2

 
63.7

 

Poseidon
 
9.6

 
7.3

 

 
28.9

 
20.5

 

Proteus
 
0.6

 
0.3

 

 
2.3

 
1.1

 
0.3

Endymion
 
0.5

 
0.4

 

 
2.0

 
1.2

 
0.1

 
 
$
42.5

 
$
41.2

 

 
$
125.3

 
$
117.1

 
$
0.4

 



 
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
 
 
Distributions Received
 
Income from Equity Investments
 
Distributions Received
 
Income from Equity Investments
Bengal
 
$
2.7

 
$
5.2

 
$
16.1

 
$
15.9

Mars
 
11.5

 
8.6

 
34.5

 
31.7

Poseidon
 
10.5

 
7.6

 
31.9

 
22.6

 
 
$
24.7

 
$
21.4

 
$
82.5

 
$
70.2




The following tables present aggregated selected unaudited income statement data for our equity method investments (on a 100% basis):
 
 
Three Months Ended September 30, 2017
 
 
Total Revenues
 
Total Operating Expenses
 
Operating Income
 
Net Income
Statements of Income
 
 
 
 
 
 
 
 
Bengal
 
$
18.7

 
$
6.8

 
$
11.9

 
$
11.9

Odyssey
 
11.1

 
1.0

 
10.1

 
10.1

Mars
 
66.0

 
19.5

 
46.5

 
46.5

Poseidon
 
30.6

 
8.2

 
22.4

 
20.7

Proteus
 
7.6

 
2.9

 
4.7

 
4.4

Endymion
 
8.2

 
3.3

 
4.9

 
4.9


 
 
Nine Months Ended September 30, 2017
 
 
Total Revenues
 
Total Operating Expenses
 
Operating Income
 
Net Income
Statements of Income
 
 
 
 
 
 
 
 
Bengal
 
$
54.6

 
$
21.1

 
$
33.5

 
$
33.4

Odyssey
 
30.8

 
3.0

 
27.8

 
27.8

Mars
 
197.3

 
63.7

 
133.6

 
133.6

Poseidon
 
88.0

 
24.8

 
63.2

 
58.7

Proteus
 
22.8

 
9.0

 
13.8

 
12.9

Endymion
 
25.3

 
9.6

 
15.7

 
14.9


20



 
 
Three Months Ended September 30, 2016
 
 
Total Revenues
 
Total Operating Expenses
 
Operating Income
 
Net Income
Statements of Income
 
 
 
 
 
 
 
 
Bengal
 
$
17.3

 
$
7.2

 
$
10.1

 
$
10.3

Mars
 
54.0

 
23.1

 
30.9

 
30.9

Poseidon
 
31.3

 
8.2

 
23.1

 
22.0

 
 
Nine Months Ended September 30, 2016
 
 
Total Revenues
 
Total Operating Expenses
 
Operating Income
 
Net Income
Statements of Income
 
 
 
 
 
 
 
 
Bengal
 
$
52.3

 
$
20.7

 
$
31.6

 
$
31.7

Mars
 
175.5

 
62.1

 
113.4

 
113.4

Poseidon
 
90.7

 
22.5

 
68.2

 
64.7


The difference between operating income and net income represents interest expense or interest income.



5. Property, Plant and Equipment

Property, plant and equipment consist of the following as of the dates indicated:
 
 
 
Depreciable
Life
 
September 30, 2017
 
December 31, 2016
Land
 

 
$
2.0

 
$
2.0

Building and improvements
 
10 - 40 years

 
37.0

 
29.6

Pipeline and equipment (1)
 
10 - 30 years

 
888.2

 
895.7

Other
 
5 - 25 years

 
15.5

 
16.9

 
 
 
 
942.7

 
944.2

Accumulated depreciation and amortization (2)
 
 
 
(368.1
)
 
(354.8
)
 
 
 
 
574.6

 
589.4

Construction in progress
 
 
 
34.3

 
21.2

Property, plant and equipment, net
 
 
 
$
608.9

 
$
610.6


(1) As of September 30, 2017, includes cost of $163.4 million related to assets under operating lease (as lessor), which commenced in May 2017. As of September 30, 2017 and December 31, 2016, includes cost of $22.8 million related to assets under capital lease (as lessee).
(2) As of September 30, 2017, includes accumulated depreciation of $32.1 million related to assets under operating lease (as lessor), which commenced in May 2017. As of September 30, 2017 and December 31, 2016, includes accumulated depreciation of $2.7 million and $1.6 million, respectively, related to assets under capital lease (as lessee).

Depreciation and amortization expense on property, plant and equipment for the three and nine months ended September 30, 2017 was $8.9 million and $28.0 million, respectively, and for the three and nine months ended September 30, 2016 was $9.1 million and $27.1 million, respectively. Depreciation and amortization expense is included in cost and expenses in the accompanying condensed consolidated statements of income. Depreciation and amortization expense on property, plant and equipment includes amounts pertaining to assets under operating and capital leases.


21



6. Accrued Liabilities - Third Parties

Accrued liabilities - third parties consist of the following as of the dates indicated:
 
 
 
September 30, 2017
 
December 31, 2016
Transportation, project engineering
 
$
7.8

 
$
4.2

Property taxes
 
7.2

 
0.6

Professional fees
 
0.5

 
0.3

Other accrued liabilities
 
1.7

 
1.8

Accrued liabilities - third parties
 
$
17.2

 
$
6.9

 
For a discussion of accrued liabilities - related parties, see Note 3—Related Party Transactions.


7. Related Party Debt

Consolidated related party debt obligations comprise the following as of the dates indicated:

 
 
September 30, 2017
 
December 31, 2016
Five Year Fixed Facility, fixed rate, due March 1, 2022 (1)
 
$
506.9

 
$

Five Year Revolver, variable rate, due October 31, 2019 (2)
 
495.0

 
686.9

Zydeco Revolver, variable rate, due August 6, 2019 (3)