Document
10-QFALSESep 30, 20182018Q3SHLXShell Midstream Partners, L.P.12/31Large Accelerated 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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, 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 (§232.405 of this chapter) 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 November 2, 2018.





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, 2018December 31, 2017
(in millions of dollars)
ASSETS 
Current assets 
Cash and cash equivalents $199.5 $137.7 
Accounts receivable – third parties, net 18.4 17.2 
Accounts receivable – related parties 35.6 23.8 
Allowance oil 15.7 12.4 
Prepaid expenses 1.5 12.5 
Total current assets 270.7 203.6 
Equity method investments 819.6 362.6 
Property, plant and equipment, net 743.7 736.5 
Cost investments 62.1 62.1 
Other assets – related parties 2.6 1.7 
Total assets $1,898.7 $1,366.5 
LIABILITIES 
Current liabilities 
Accounts payable – third parties $4.5 $4.0 
Accounts payable – related parties 10.3 11.6 
Deferred revenue – third parties 6.3 5.5 
Deferred revenue – related party 4.3 13.9 
Accrued liabilities – third parties 18.7 12.7 
Accrued liabilities – related parties 14.2 7.2 
Total current liabilities 58.3 54.9 
Noncurrent liabilities 
Debt payable – related party 2,090.5 1,844.0 
Lease liability 23.8 24.3 
Asset retirement obligations 6.7 6.6 
Other unearned income 2.6 2.6 
Total noncurrent liabilities 2,123.6 1,877.5 
Total liabilities 2,181.9 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 September 30, 2018 and December 31, 2017) 3,450.6 2,773.5 
Common unitholder – SPLC (99,979,548 and 88,950,136 units issued and outstanding as of September 30, 2018 and December 31, 2017) (205.1)(507.2)
General partner – SPLC (4,567,588 and 3,832,293 units issued and outstanding as of September 30, 2018 and December 31, 2017) (3,552.6)(2,855.5)
Total partners’ capital (307.1)(589.2)
Noncontrolling interests 23.9 23.3 
Total deficit (283.2)(565.9)
Total liabilities and deficit $1,898.7 $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
September 30, 
Nine Months Ended
September 30, 
2018
2017 (1)
2018
2017 (1)
(in millions of dollars, except per unit data)
Revenue 
Transportation, terminaling and storage services – third parties $58.6 $57.5 $150.2 $176.4 
Transportation, terminaling and storage services – related parties 65.5 47.2 163.9 131.1 
Product revenue – third parties 0.8  2.2  
Product revenue – related parties 14.6  24.2  
Lease revenue – related parties 14.0 17.1 41.9 35.8 
Total revenue 153.5 121.8 382.4 343.3 
Costs and expenses 
Operations and maintenance – third parties 20.9 29.5 88.9 75.0 
Operations and maintenance – related parties 13.1 11.1 39.8 34.8 
Cost of product sold – third parties 0.7  1.9  
Cost of product sold – related parties 13.1  20.8  
General and administrative – third parties 1.2 1.5 5.3 7.2 
General and administrative – related parties 12.5 12.1 39.3 35.8 
Depreciation, amortization and accretion 11.6 10.7 34.4 33.3 
Property and other taxes 2.5 4.5 12.5 13.6 
Total costs and expenses 75.6 69.4 242.9 199.7 
Operating income 77.9 52.4 139.5 143.6 
Income from equity method investments 72.7 49.1 161.3 140.5 
Dividend income from cost investments 14.9 7.7 52.6 27.2 
Other income 7.8  24.1  
Investment, dividend and other income 95.4 56.8 238.0 167.7 
Interest expense, net 19.0 9.7 42.9 22.0 
Income before income taxes 154.3 99.5 334.6 289.3 
Income tax expense 0.1  0.2  
Net income 154.2 99.5 334.4 289.3 
Less: Net income attributable to Parent  22.0  66.0 
Less: Net income attributable to noncontrolling interests 5.9 4.9 11.4 14.4 
Net income attributable to the Partnership $148.3 $72.6 $323.0 $208.9 
General partner's interest in net income attributable to the Partnership $36.0 $17.6 $94.6 $44.0 
Limited Partners' interest in net income attributable to the Partnership $112.3 $55.0 $228.4 $164.9 
Net income per Limited Partner Unit - Basic and Diluted: 
Common $0.50 $0.31 $1.04 $0.93 
Distributions per Limited Partner Unit $0.3820 $0.3180 $1.0950 $0.9131 
Weighted average Limited Partner Units outstanding - Basic and Diluted: 
Common units – public 123.8 90.2 120.6 89.0 
Common units – SPLC 100.0 89.0 98.5 89.0 
(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 

Nine Months Ended September 30, 
2018
2017 (1)
(in millions of dollars)
Cash flows from operating activities
Net income $334.4 $289.3 
Adjustments to reconcile net income to net cash provided by operating activities 
Depreciation, amortization and accretion 34.4 33.3 
Non-cash interest expense 0.7 0.3 
Allowance oil reduction to net realizable value  0.3 
Undistributed equity earnings (2.5)(6.9)
Changes in operating assets and liabilities 
Accounts receivable (12.9)(1.9)
Allowance oil (3.3)(1.7)
Prepaid expenses and other assets 10.1 4.2 
Accounts payable (5.3)2.8 
Deferred revenue and other unearned income (4.2)14.0 
Accrued liabilities 16.2 12.5 
Net cash provided by operating activities 367.6 346.2 
Cash flows from investing activities 
Capital expenditures (38.3)(42.4)
Acquisitions from Parent (481.6)(200.7)
Contributions to investment (21.0) 
Purchase price adjustment  0.4 
Return of investment 41.2 13.2 
April 2017 Divestiture  0.8 
Net cash used in investing activities (499.7)(228.7)
Cash flows from financing activities 
Net proceeds from equity offerings 973.3 277.9 
Borrowings under credit facilities 1,820.0 580.0 
Repayments of credit facilities (1,572.9)(265.0)
Contributions from general partner 20.0 5.8 
Proceeds from April 2017 Divestiture  20.2 
Capital distributions to general partner (738.4)(429.3)
Distributions to noncontrolling interests (11.1)(16.4)
Distributions to unitholders and general partner (302.2)(190.4)
Net distributions to Parent  (62.1)
Other contributions from Parent 6.9 13.6 
Credit facility issuance costs (1.3)(0.7)
Other (0.4)(0.5)
Net cash provided by (used in) financing activities 193.9 (66.9)
Net increase in cash and cash equivalents 61.8 50.6 
Cash and cash equivalents at beginning of the period 137.7 122.1 
Cash and cash equivalents at end of the period $199.5 $172.7 
Supplemental cash flow information 
Non-cash investing and financing transactions 
Net assets not contributed to the Partnership $ $(12.7)
Change in accrued capital expenditures 1.1 0.7 
Other contributions from Parent 2.2 1.5 
(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 126.4 102.0 94.6 11.4 334.4 
Net proceeds from equity offerings 673.3 300.0 — — 973.3 
Contributions from general partner — — 20.0 — 20.0 
Other contributions from Parent — — 9.0 — 9.0 
Distributions to unitholders and general partner (121.2)(100.9)(80.1)— (302.2)
Distributions to noncontrolling interests — — — (11.1)(11.1)
May 2018 Acquisition— — (738.4)— (738.4)
Balance as of September 30, 2018$3,450.6 $(205.1)$(3,552.6)$23.9 $(283.2)


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 nine months ended September 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 Royal Dutch Shell plc 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. Our general partner is Shell Midstream Partners GP LLC (“general partner” or “sponsor”). 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 September 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 September 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 nine months ended September 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 September 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 nine months ended September 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 in the second quarter of 2018.

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:

September 30, 2018December 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 September 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 currently plan to elect these most recent practical expedients and will 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 completed the identification and aggregation of our lease contract population. We have substantially completed our review of these lease contracts to determine the transition approach as well as any necessary changes to existing processes and controls. We expect that the adoption will impact our consolidated financial statements and related disclosures as the standard requires the recognition on the balance sheet of a right-of-use asset and corresponding lease liability for our operating leases where we are the lessee. As our evaluation is ongoing, we have not yet quantified the amount of the asset and liability that will be recognized on our consolidated balance sheet.

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 September 30, 2018 Nine Months Ended September 30, 2018 
Transportation services revenue – third parties $56.8 $143.8 
Transportation services revenue – related parties (1)
52.0 124.8 
Total transportation services revenue 108.8 268.6 
Storage services revenue – third parties 1.8 6.4 
Storage services revenue – related parties 2.1 4.9 
Total storage services revenue 3.9 11.3 
Terminaling services revenue – related parties 11.4 34.2 
Total terminaling services revenue (2)
11.4 34.2 
Product revenue – third parties 0.8 2.2 
Product revenue – related parties 14.6 24.2 
Total product revenue (3)
15.4 26.4 
Total Topic 606 revenue 139.5 340.5 
Lease revenue 14.0 41.9 
Total revenue $153.5 $382.4 
(1) Transportation services revenue - related parties for the three and nine months ended September 30, 2018 includes $1.2 million and $3.6 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.

Storage and terminaling services revenue

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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 product 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 expenses. 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 a certain joint tariff agreement, 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 this agreement 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 nine months ended September 30, 2018:

12


Three Months Ended September 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$58.6 $58.7 $(0.1)
Transportation, terminaling and storage services – related parties65.5 55.0 10.5 
Product revenue – third parties0.8  0.8 
Product revenue – related parties14.6  14.6 
Lease revenue – related parties14.0 26.6 (12.6)
Costs and expenses
Operations and maintenance – third parties20.9 22.3 (1.4)
Operations and maintenance – related parties13.1 10.7 2.4 
Cost of product sold – third parties0.7  0.7 
Cost of product sold – related parties13.1  13.1 
Net income154.2 155.9 (1.7)

Nine Months Ended September 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 $150.2 $149.6 $0.6 
Transportation, terminaling and storage services – related parties 163.9 130.8 33.1 
Product revenue – third parties
2.2  2.2 
Product revenue – related parties 24.2  24.2 
Lease revenue – related parties 41.9 79.6 (37.7)
Costs and expenses 
Operations and maintenance – third parties 88.9 91.3 (2.4)
Operations and maintenance – related parties 39.8 33.1 6.7 
Cost of product sold – third parties 1.9  1.9 
Cost of product sold – related parties 20.8  20.8 
Net income 334.4 339.0 (4.6)


September 30, 2018 
Unaudited Condensed Consolidated Balance Sheet As Reported Under Topic 606 Amounts Without Adoption of Topic 606 Effect of Change Increase 
Deferred revenue – related party $4.3 $4.2 $0.1 

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

January 1, 2018September 30, 2018
Receivables from contracts with customers – third parties $17.2 $18.4 
Receivables from contracts with customers – related parties 18.8 28.8 
Deferred revenue – third parties 5.5 6.3 
Deferred revenue – related party 9.4 4.3 

Significant changes in the deferred revenue balances with customers during the period are as follows:
December 31, 2017Transition Adjustment 
Additions (1)
Reductions (2)
September 30, 2018
Deferred revenue – third parties $5.5 $ $6.5 $(5.7)$6.3 
Deferred revenue – related party 13.9 (4.5)2.7 (7.8)