Document
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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 March 31, 2019 
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)

Delaware46-5223743
(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 every Interactive Data File required to be submitted 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 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






Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Units, Representing Limited Partner InterestsSHLXNew York Stock Exchange

The registrant had 223,811,781 common units outstanding as of May 2, 2019.





SHELL MIDSTREAM PARTNERS, L.P.
TABLE OF CONTENTS
 
Page
 
* SHELL and the SHELL Pecten are registered trademarks of Shell Trademark Management, B.V. used under license.



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

SHELL MIDSTREAM PARTNERS, L.P.
UNAUDITED CONSOLIDATED BALANCE SHEETS
March 31, 2019December 31, 2018
(in millions of dollars)
ASSETS
Current assets 
Cash and cash equivalents$226 $208 
Accounts receivable – third parties, net14 19 
Accounts receivable – related parties29 29 
Allowance oil11 13 
Prepaid expenses11 15 
Total current assets291 284 
Equity method investments814 823 
Property, plant and equipment, net740 742 
Operating lease right-of-use assets 5  
Other investments62 62 
Other assets – related parties3 3 
Total assets$1,915 $1,914 
LIABILITIES
Current liabilities
Accounts payable – third parties$7 $4 
Accounts payable – related parties9 9 
Deferred revenue – third parties1 8 
Deferred revenue – related party1 3 
Accrued liabilities – third parties12 13 
Accrued liabilities – related parties15 16 
Total current liabilities45 53 
Noncurrent liabilities
Debt payable – related party2,091 2,091 
Operating lease liabilities 5  
Finance lease liabilities 25 25 
Other unearned income 3 2 
Total noncurrent liabilities2,124 2,118 
Total liabilities2,169 2,171 
Commitments and Contingencies (Note 12)
(DEFICIT) EQUITY
Common unitholders – public (123,832,233 units issued and outstanding as of both March 31, 2019 and December 31, 2018)3,464 3,459 
Common unitholder – SPLC (99,979,548 units issued and outstanding as of both March 31, 2019 and December 31, 2018)(196)(198)
General partner – SPLC (4,567,588 units issued and outstanding as of both March 31, 2019 and December 31, 2018)(3,549)(3,543)
Total partners’ deficit(281)(282)
Noncontrolling interests27 25 
Total deficit(254)(257)
Total liabilities and deficit$1,915 $1,914 

The accompanying notes are an integral part of the consolidated financial statements.
3


SHELL MIDSTREAM PARTNERS, L.P.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
 
Three Months Ended March 31,
20192018
(in millions of dollars, except per unit data)
Revenue
Transportation, terminaling and storage services – third parties$42 $35 
Transportation, terminaling and storage services – related parties64 43 
Product revenue – third parties1  
Product revenue – related parties10 8 
Lease revenue – related parties14 14 
Total revenue131 100 
Costs and expenses
Operations and maintenance – third parties13 43 
Operations and maintenance – related parties14 13 
Cost of product sold – third parties1  
Cost of product sold – related parties8 7 
Loss from revision of asset retirement obligation2  
General and administrative – third parties1 2 
General and administrative – related parties11 13 
Depreciation, amortization and accretion12 11 
Property and other taxes4 6 
Total costs and expenses66 95 
Operating income65 5 
Income from equity method investments70 40 
Dividend income from other investments14 25 
Other income8 6 
Investment, dividend and other income92 71 
Interest expense, net20 11 
Income before income taxes137 65 
Income tax expense  
Net income137 65 
Less: Net income attributable to noncontrolling interests5 1 
Net income attributable to the Partnership$132 $64 
General partner's interest in net income attributable to the Partnership$27 $27 
Limited Partners' interest in net income attributable to the Partnership$105 $37 
Net income per Limited Partner Unit - Basic and Diluted:
Common$0.47 $0.18 
Distributions per Limited Partner Unit$0.415 $0.348 
Weighted average Limited Partner Units outstanding - Basic and Diluted:
Common units – public123.8 113.8 
Common units – SPLC100.0 95.6 
The accompanying notes are an integral part of the consolidated financial statements.
4


SHELL MIDSTREAM PARTNERS, L.P.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS 

Three Months Ended March 31,
20192018
(in millions of dollars)
Cash flows from operating activities
Net income$137 $65 
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation, amortization and accretion12 $11 
Loss from revision of asset retirement obligation2  
Undistributed equity earnings(3)(1)
Changes in operating assets and liabilities
Accounts receivable5 13 
Allowance oil2  
Prepaid expenses and other assets4 3 
Accounts payable(1)5 
Deferred revenue and other unearned income(8)(2)
Accrued liabilities 15 
Net cash provided by operating activities150 109 
Cash flows from investing activities
Capital expenditures(10)(9)
Contributions to investment(5) 
Return of investment8 11 
Net cash (used in) provided by investing activities(7)2 
Cash flows from financing activities
Net proceeds from equity offerings 973 
Repayments of credit facilities (973)
Contributions from general partner 20 
Distributions to noncontrolling interests(3)(2)
Distributions to unitholders and general partner(129)(83)
Other contributions from Parent7 1 
Net cash used in financing activities(125)(64)
Net increase in cash and cash equivalents18 47 
Cash and cash equivalents at beginning of the period208 138 
Cash and cash equivalents at end of the period$226 $185 
Supplemental cash flow information
Non-cash investing and financing transactions:
Change in accrued capital expenditures$2 $5 
Other non-cash contributions from Parent 4 
 
The accompanying notes are an integral part of the consolidated financial statements.
5


SHELL MIDSTREAM PARTNERS, L.P.
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN (DEFICIT) EQUITY
Partnership
(in millions of dollars)Common Unitholders PublicCommon Unitholder SPLCGeneral Partner SPLCNoncontrolling InterestsTotal
Balance as of December 31, 2018$3,459 $(198)$(3,543)$25 $(257)
Impact of change in accounting policy (Note 3) (4)(5)— — (9)
Net income58 47 27 5 137 
Other contributions from Parent— — 7 — 7 
Distributions to unitholders and general partner(49)(40)(40)— (129)
Distributions to noncontrolling interests— — — (3)(3)
Balance as of March 31, 2019$3,464 $(196)$(3,549)$27 $(254)



Partnership
(in millions of dollars)Common Unitholders PublicCommon Unitholder SPLCGeneral Partner SPLCNoncontrolling InterestsTotal
Balance as of December 31, 2017$2,774 $(507)$(2,856)$23 $(566)
Impact of change in accounting policy(1)1 (2)— (2)
Net income21 16 27 1 65 
Net proceeds from equity offerings673 300 — — 973 
Contributions from general partner— — 20 — 20 
Other contributions from Parent— — 5 — 5 
Distributions to unitholders and general partner(33)(30)(20)— (83)
Distributions to noncontrolling interests— — — (2)(2)
Balance as of March 31, 2018$3,434 $(220)$(2,826)$22 $410 


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

6


SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
Except as noted within the context of each note disclosure, the dollar amounts presented in the tabular data within these note disclosures are stated in millions of dollars.

1. Description of 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 growth-oriented master limited partnership that owns, operates, develops and acquires pipelines and other midstream assets. As of March 31, 2019, 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.

We generate revenue from the transportation, terminaling and storage of crude oil and refined products through our pipelines and storage tanks, and generate income from our equity and other investments. Our operations consist of one reportable segment. 

The following table reflects our ownership, and Shell’s retained ownership as of March 31, 2019:
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 B75.0% / 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, L.L.C. (“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 % %




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Basis of Presentation

Our unaudited 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 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 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, 2018 (our “2018 Annual Report”), filed with the United States Securities and Exchange Commission (“SEC”). The unaudited consolidated financial statements for the three months ended March 31, 2019 and March 31, 2018 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 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 2018 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 equity and other 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.

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 2018 Annual Report. There have been no significant changes to these policies during the three months ended March 31, 2019, other than those noted below.

Recent Accounting Pronouncements

Standards Adopted as of January 1, 2019

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-02 to Topic 842, Leases. As permitted, we adopted the new standard using the modified retrospective approach, effective January 1, 2019, which provides a method for recording existing leases at the beginning of the period of adoption. As such, results and balances prior to January 1, 2019 are not adjusted and continue to be reported in accordance with our historical accounting under previous GAAP.  

See Note 7 — Leases for additional information and disclosures required by the new standard.

Standards Not Yet Adopted 

In June 2016, the FASB issued ASU 2016-13 to Topic 326, Financial Instruments  Credit Losses: Measurement of Credit Losses on Financial Instruments, which replaces the current incurred loss impairment method with a method that reflects expected credit losses on financial instruments. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018. While we are still evaluating the impact of ASU 2016-13, we do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

2. 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.




8


Acquisition Agreements

For a description of applicable agreements, see Note 4—Acquisitions and Divestiture in the Notes to Consolidated Financial Statements of our 2018 Annual Report.

2019 Omnibus Agreement

On November 3, 2014, we entered into an Omnibus Agreement with SPLC and our general partner concerning our payment of an annual general and administrative services fee to SPLC as well as our reimbursement of certain costs incurred by SPLC on our behalf. On February 19, 2019, we, our general partner, SPLC, Operating Company and Shell Oil Company terminated the Omnibus Agreement effective as of February 1, 2019, and we, our general partner, SPLC and Operating Company entered into a new Omnibus Agreement effective February 1, 2019 (the “2019 Omnibus Agreement”). 

The 2019 Omnibus Agreement addresses, among other things, the following matters:

our payment of an annual general and administrative fee of approximately $11 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; and
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.

Under the 2019 Omnibus Agreement, SPLC agreed to indemnify us against tax liabilities relating to our assets acquired at initial public offering (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 three months ended March 31, 2019, neither we nor SPLC made any claims for indemnification under the 2019 Omnibus Agreement.

Trade Marks License Agreement

We, our general partner and SPLC entered into a Trade Marks License Agreement with Shell Trademark Management Inc. effective as of February 1, 2019. The Trade Marks License Agreement grants us the use of certain Shell trademarks and trade names and expires on January 1, 2024 unless earlier terminated by either party upon 360 days’ notice.

Tax Sharing Agreement

For a discussion of the Tax Sharing Agreement, see Note 5—Related Party Transactions—Tax Sharing Agreement in the Notes to Consolidated Financial Statements of our 2018 Annual Report.

Other Agreements

We have entered into several customary agreements with SPLC and Shell. These agreements include pipeline operating agreements, reimbursement agreements and services agreements. See Note 5—Related Party Transactions—Other Agreements in the Notes to Consolidated Financial Statements of our 2018 Annual Report.

Partnership Agreement

On December 21, 2018, we executed Amendment No. 2 (the “Second Amendment”) to the Partnership’s First Amended and
Restated Agreement of Limited Partnership dated November 3, 2014. Under the Second Amendment, our sponsor agreed to
waive $50 million of distributions in 2019 by agreeing to reduce distributions to holders of the incentive distribution rights (“IDR’s”) by: (1) $17 million for the three months ended March 31, 2019, (2) $17 million for the three months ending June 30, 2019 and (3) $16 million for the three months ending September 30, 2019.



9


Noncontrolling Interests

For Zydeco, noncontrolling interest consists of SPLC’s 7.5% retained ownership interest as of both March 31, 2019 and December 31, 2018. For Odyssey, noncontrolling interest consists of GEL Offshore Pipeline LLC’s (“GEL”) 29.0% retained ownership interest as of both March 31, 2019 and December 31, 2018.

Other Related Party Balances

Other related party balances consist of the following:
March 31, 2019December 31, 2018
Accounts receivable$29 $29 
Prepaid expenses11 15 
Other assets3 3 
Accounts payable (1)
9 9 
Deferred revenue1 3 
Accrued liabilities (2)
15 16 
Debt payable (3)
2,091 2,091 
(1) Accounts payable reflects amounts owed to SPLC for reimbursement of third-party expenses incurred by SPLC for our benefit.
(2) As of March 31, 2019, accrued liabilities reflects $14 million accrued interest and $1 million other accrued liabilities. As of December 31, 2018, accrued liabilities reflects $14 million accrued interest and $2 million other accrued liabilities.
(3) Debt payable reflects borrowings outstanding after taking into account unamortized debt issuance costs of $3 million as of both March 31, 2019 and December 31, 2018.

Related Party Credit Facilities

We have entered into four credit facilities with Shell Treasury Center (West) Inc. (“STCW”): the Seven Year Fixed Facility, the Five Year Revolver due July 2023, the Five Year Revolver due December 2022 and the Five Year Fixed Facility. Zydeco has also entered into the Zydeco Revolver with STCW. For definitions and additional information regarding these credit facilities, see Note 9—Related Party Debt in the Notes to Consolidated Financial Statements of our 2018 Annual Report.

Related Party Revenues and Expenses

We provide crude oil transportation, terminaling and storage services to related parties under long-term contracts. We entered into these contracts in the normal course of our business. Our revenue from related parties for the three months ended March 31, 2019 and March 31, 2018 are disclosed in Note 9 – Revenue Recognition.

In the three months ended March 31, 2019 and March 31, 2018, we converted excess allowance oil to cash through sales to affiliates of Shell of $2 million and $1 million net proceeds, respectively. We include the revenue in Product revenue – related parties and the cost in Cost of product sold – related parties.

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, which is included within Operations and maintenance – related parties, was $4 million for both the three months ended March 31, 2019 and March 31, 2018.

The following table shows related party expenses, including certain personnel costs, incurred by Shell and SPLC on our behalf that are reflected in the accompanying unaudited consolidated statements of income for the indicated periods. Included in these amounts, and disclosed below, is our share of operating and general corporate expenses, as well as the fees paid to SPLC under certain agreements.
10


 
Three Months Ended March 31,
20192018
Operations and maintenance – related parties$14 $13 
General and administrative – related parties11 13 
Allocated operating expenses$5 $4 
Allocated general corporate expenses7 8 
Management Agreement fee2 2 
Omnibus Agreement fee3 2 

For a discussion of services performed by Shell on our behalf, see Note 1 – Description of Business and Basis of Presentation – Basis of Presentation in the Notes to Consolidated Financial Statements of our 2018 Annual Report.

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 both the three months ended March 31, 2019 and March 31, 2018 were $2 million. Our share of defined contribution benefit plan costs for both the three months ended March 31, 2019 and March 31, 2018 were $1 million. Pension and defined contribution benefit plan expenses are included in either General and administrative – related parties or Operations and maintenance – related parties, depending on the nature of the employee’s role in our operations.

Share-based Compensation

Certain SPLC and Shell employees supporting our operations as well as other Shell operations were historically granted awards
under the Performance Share Plan (“PSP”), Shell’s incentive compensation program. Share-based compensation expense is
included in General and administrative – related parties in the accompanying unaudited consolidated statements of income. These costs for the three months ended March 31, 2019 and March 31, 2018 were not material.

Equity and Other Investments

We have equity and other investments in entities, including Colonial and Explorer, in which SPLC also owns interests. In some cases, we may be required to make capital contributions or other payments to these entities. See Note 3 – Equity Method Investments for additional details.

Reimbursements

The following table reflects reimbursements from our Parent for the three months ended March 31, 2019 and March 31, 2018:
Three Months Ended March 31,
20192018
Cash received (1)
$7 $1 
Changes in receivable from Parent (2)
 3 
Total reimbursements (3)
$7 $4 
(1) These reimbursements are included in Other contributions from Parent in the accompanying unaudited consolidated statements of cash flows.
(2) These reimbursements are included in Other non-cash contributions from Parent in the accompanying unaudited consolidated statements of cash flows.
(3) These reimbursements are included in Other contributions from Parent in the accompanying unaudited consolidated statements of (deficit) equity and are exclusive of zero and $1 million for the three months ended March 31, 2019 and March 31, 2018, respectively, related to contributions from Parent.

During the three months ended March 31, 2019 and March 31, 2018, we filed claims for reimbursement from our Parent of $7 million and $4 million, respectively. This reflects our proportionate share of Zydeco directional drill project costs and expenses.

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3. Equity Method Investments

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

Equity method investments comprise the following as of the dates indicated:
March 31, 2019
December 31, 2018
OwnershipInvestment AmountOwnershipInvestment Amount
Amberjack – Series A / Series B75.0% / 50.0%$444 75.0% / 50.0%  $458 
Mars71.5 167 71.5 169 
Bengal50.0 84 50.0 82 
Permian Basin50.0 76 50.0 72 
LOCAP41.48 9 41.48 8 
Poseidon36.0  36.0  
Proteus10.0 16 10.0 16 
Endymion10.0 18 10.0 18 
$814 $823 

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 March 31, 2019 and December 31, 2018, the unamortized basis differences included in our equity investments are $39 million and $40 million, respectively. For both the three months ended March 31, 2019 and March 31, 2018, the net amortization expense was $1 million.

During the first quarter of 2018, the investment amount for Poseidon was reduced to zero due to distributions received that were in excess of our investment balance and we, therefore, suspended the equity method of accounting. As we have no commitments to provide further financial support to Poseidon, we have recorded excess distributions of $8 million and $1 million in Other income as of March 31, 2019 and March 31, 2018, respectively. Once our cumulative share of equity earnings becomes greater than the amount of distributions received, we will resume the equity method of accounting as long as the equity method investment balance remains greater than zero.

Our equity method investments balance was affected by the following during the periods indicated:
Three Months Ended March 31, 2019Three Months Ended March 31, 2018
Distributions ReceivedIncome from Equity Investments Impact of Change in Accounting PolicyDistributions ReceivedIncome from Equity InvestmentsImpact of Change in Accounting Policy
Amberjack (1)
$37 $32 $(9)$ $ $ 
Mars31 29  32 25 (7)
Bengal3 5  4 4  
Poseidon (2)
8   9 6  
Other (3)
4 4  6 5  
$83 $70 $(9)$51 $40 $(7)
(1) We acquired an interest in Amberjack in May 2018. The acquisition of this interest has been accounted for prospectively.
(2) As stated above, the equity method of accounting has been suspended for Poseidon and excess distributions are recorded in Other income.
(3) Included in Other is the activity associated with our investments in Permian Basin, LOCAP, Proteus and Endymion.

The adoption of the revenue standard for the majority of our equity method investments followed the non-public business entity adoption date of January 1, 2019 for their stand-alone financial statements, with the exception of Mars and Permian Basin who adopted on January 1, 2018. As a result of the adoption of the revenue standard on January 1, 2019, we recognized our proportionate share of Amberjack's cumulative effect transition adjustments as a decrease to opening equity (deficit) in the amount of $9 million under the modified retrospective transition method.

12


Under the new lease standard (as defined in Note 7 - Leases), the adoption date for our equity method investments will follow the non-public business entity adoption date of January 1, 2020 for their stand-alone financial statements.

Summarized Financial Information

The following tables present aggregated selected unaudited income statement data for our equity method investments (on a 100% basis): 

Three Months Ended March 31, 2019
Total revenues Total operating expenses Operating income Net income
Statements of Income
Amberjack$81 $19 $62 $62 
Mars63 22 41 41 
Bengal18 7 11 11 
Poseidon31 9 22 20 
Other (1)
30 18 12 9 
(1) Included in Other is the activity associated with our investments in Permian Basin, LOCAP, Proteus and Endymion.


Three Months Ended March 31, 2018
Total revenues Total operating expenses Operating income Net income
Statements of Income
Mars$57 $21 $36 $36 
Bengal15 4 11 9 
Poseidon29 9 20 19 
Other (1)
39 18 21 19 
(1) Included in Other is the activity associated with our investments in Permian Basin, LOCAP, Proteus and Endymion.

Capital Contributions

We make capital contributions for our pro rata interest in Permian Basin to fund capital and other expenditures. We have made capital contributions of $5 million during the first quarter of 2019.

4. Property, Plant and Equipment

Property, plant and equipment consist of the following as of the dates indicated:
 
Depreciable
Life
March 31, 2019December 31, 2018
Land
— $12 $11 
Building and improvements
10 - 40 years40 39 
Pipeline and equipment (1)
10 - 30 years1,196 1,162 
Other
5 - 25 years18 18 
1,266 1,230 
Accumulated depreciation and amortization (2)
(579)(567)
687 663 
Construction in progress
53 79 
Property, plant and equipment, net
$740 $742 
(1) As of both March 31, 2019 and December 31, 2018, includes cost of $366 million, related to assets under operating lease (as lessor). As of both March 31, 2019 and December 31, 2018, includes cost of $23 million related to right-of-use (“ROU”) assets under finance lease (as lessee).
13


(2) As of March 31, 2019 and December 31, 2018, includes accumulated depreciation of $124 million and $121 million, respectively, related to assets under operating lease (as lessor). As of both March 31, 2019 and December 31, 2018, includes accumulated amortization of $5 million, related to ROU assets under finance lease (as lessee).

Depreciation and amortization expense on property, plant and equipment for the three months ended March 31, 2019 and March 31, 2018 of $12 million and $11 million, respectively, is included in costs and expenses in the accompanying unaudited consolidated statements of income. Depreciation and amortization expense on property, plant and equipment includes amounts pertaining to assets under operating (as lessor) and finance leases (as lessee).

5. Accrued Liabilities Third Parties

Accrued liabilities – third parties consist of the following as of the dates indicated:
 
March 31, 2019December 31, 2018
Project accruals$5 $7 
Property taxes5 4 
Other accrued liabilities2 2 
Total accrued liabilities – third parties$12 $13 
 
See Note 2—Related Party Transactions for a discussion of Accrued liabilities – related parties.

6. Related Party Debt

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

March 31, 2019December 31, 2018
Outstanding BalanceTotal CapacityAvailable CapacityOutstanding BalanceTotal CapacityAvailable Capacity
Seven Year Fixed Facility$600 $600 $ $600 $600 $ 
Five Year Revolver due July 2023494 760 266 494 760 266 
Five Year Revolver due December 2022400 1,000 600 400 1,000 600 
Five Year Fixed Facility600 600  600 600  
Zydeco Revolver 30 30  30 30 
Unamortized debt issuance costs(3)n/a n/a (3)n/a n/a 
Debt payable – related party$2,091 $2,990 $896 $2,091 $2,990 $896 

For the three months ended March 31, 2019 and March 31, 2018, interest and fee expenses associated with our borrowings were $20 million and $10 million, respectively, of which we paid $20 million and $11 million, respectively.

Borrowings under our revolving credit facilities approximate fair value as the interest rates are variable and reflective of market rates, which results in Level 2 instruments. The fair value of our Five Year Fixed Facility and our Seven Year Fixed Facility is estimated based on the published market prices for issuances of similar risk and tenor and is categorized as Level 2 within the fair value hierarchy. As of March 31, 2019, the carrying amount and estimated fair value of total debt (before amortization of issuance costs) was $2,094 million and $2,131 million, respectively. As of December 31, 2018, the carrying amount and estimated fair value of total debt (before amortization of issuance costs) was $2,094 million and $2,099 million, respectively.

On February 6, 2018, we used net proceeds from sales of common units and from our general partner’s proportionate capital contribution to repay $247 million of borrowings outstanding under our Five Year Revolver due July 2023 and $726 million of borrowings outstanding under our Five Year Revolver due December 2022.

For additional information on our credit facilities, refer to Note 9 – Related Party Debt in the Notes to Consolidated Financial Statements in our 2018 Annual Report.

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Borrowings and repayments under our credit facilities for the three months ended March 31, 2019 and March 31, 2018 are disclosed in our unaudited consolidated statements of cash flows. See Note 8 – (Deficit) Equity for additional information regarding the source of our repayments. 

7. Leases

Adoption of ASC Topic 842 “Leases”

On January 1, 2019, we adopted ASC Topic 842 (“the new lease standard”) by applying the modified retrospective approach to all leases on January 1, 2019. We elected the package of practical expedients upon transition that permits us to not reassess (1) whether any contracts entered into prior to adoption are or contain leases, (2) the lease classification of existing leases and (3) initial direct costs for any leases that existed prior to adoption. We also elected the practical expedient to not evaluate existing or expired land easements that were not accounted for as leases under previous guidance. Generally, we account for term-based land easements where we control the use of the land surface as leases.

Upon adoption on January 1, 2019, we recognized operating lease ROU assets and corresponding lease liabilities of $5 million. As lessor, the accounting for operating leases has not changed and the adoption did not have an impact on our existing transportation and terminaling services agreements that are considered operating leases. As lessee, the accounting for finance leases (capital leases) was substantially unchanged.

Lessee accounting

We determine if an arrangement is or contains a lease at inception. Our assessment is based on (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period and (3) whether we have the right to direct the use of the asset. Leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any one of these criteria. The lease classification affects the expense recognition in the income statement. Operating lease costs are recorded entirely in operating expenses. Finance lease costs are split, where amortization of the ROU asset is recorded in operating expenses and an implied interest component is recorded in interest expense.

Under the new lease standard, operating leases (as lessee) are included in Operating lease right-of-use assets, Accrued liabilities - third parties and Operating lease liabilities in our unaudited consolidated balance sheets. Finance leases (as lessee) are included in Property, plant and equipment, Accrued liabilities – third parties and Finance lease liabilities in our unaudited consolidated balance sheets. ROU assets and lease liabilities are recognized at commencement date based on the present value of the future minimum lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at transition date in determining the present value of future payments. The ROU asset includes any lease payments made but excludes lease incentives and initial direct costs incurred, if any. Our ROU assets and lease liabilities may include options to extend the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

We have long-term non-cancelable third-party operating leases for land. Several of the leases provide for renewal terms. We hold cancelable easements or rights-of-way arrangements from landowners permitting the use of land for the construction and operation of our pipeline systems. Obligations under these easements are not material to the results of our operations.  In addition, Odyssey has a third-party operating lease for use of offshore platform space at Main Pass 289C. This lease will continue to be in effect until the continued operation of the platform is uneconomic.

We are also obligated under two finance leases. We have a terminaling services agreement in which we took possession of certain storage tanks located in Port Neches, Texas and a lease of offshore platform space on the Garden Banks 128 “A” platform.

Lease extensions. Many of our leases have options to either extend or terminate the lease. In determining the lease term, we considered all available contract extensions which are reasonably certain of occurring. In many cases, the lease term is equal to the economic life of the underlying asset.




15


Significant assumptions and judgments

Incremental borrowing rate. We are generally not made aware of the interest rate implicit in a lease due to several reasons, including: (1) uncertainty as to the total amount of the costs incurred by the lessor in negotiating the lease or whether certain costs incurred by the lessor would qualify as initial direct costs and (2) uncertainty as to the lessor’s expectation of the residual value of the asset at the end of the lease. Therefore, we use our incremental borrowing rate (“IBR”) at the commencement of the lease and estimate the IBR for each lease agreement taking into consideration lease contract term, collateral and entity credit ratings, and use sensitivity analyses to evaluate the reasonableness of the rates determined.

Lease balances and costs

The following tables summarize our lease costs as of and for the three months ended March 31, 2019:

LeasesClassificationMarch 31, 2019
Assets
Operating lease assetsOperating lease right-of-use assets$5 
Finance lease assets
Property, plant and equipment, net (1)
18 
Total lease assets$