Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Shell Midstream Partners, L.P. (“we,” “us,” “our” or the “Partnership”) is a Delaware limited partnership formed on March 19, 2014, to own certain assets received from Shell Pipeline Company LP (“SPLC”) and other assets. We conduct our operations through our wholly owned subsidiary Shell Midstream Operating, LLC. Our general partner is Shell Midstream Partners GP LLC (“general partner”). References to “Shell” or “Parent” refer collectively to Royal Dutch Shell plc and its controlled affiliates, other than us, our subsidiaries and our general partner. We completed our initial public offering on November 3, 2014 (the “IPO”).
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and related notes in this quarterly report and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016 (our “2016 Annual
Report”) and the consolidated financial statements and related notes therein. Our 2016 Annual Report contains a discussion of other matters not included herein, such as disclosures regarding critical accounting policies and estimates and contractual obligations. You should also read the following discussion and analysis together with the risk factors set forth in our 2016 Annual Report and the “Cautionary Statement Regarding Forward-Looking Statements” in this report.
Partnership Overview
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, refined products and natural gas pipelines, and a crude tank storage and terminal system. Our pipelines and crude tank storage and terminal system serve as key infrastructure to transport and store onshore and offshore crude oil production to Gulf Coast and Midwest refining markets, to deliver Gulf Coast natural gas production to market hubs, and to deliver refined products from Gulf Coast refiners to major demand markets.
For a description of our assets, see
Part I, Item 1 - Business and Properties
in our 2016 Annual Report.
2017 developments include:
|
|
|
|
•
|
Increase in Borrowing Capacity.
We had a net increase in our borrowing capacity of $420.0 million. On March 1, 2017, we entered into a loan facility agreement with Shell Treasury Centre (West), Inc (
“
STCW
”
) with a borrowing capacity of $600.0 million (the
“
Five Year Fixed Facility
”
). On March 1, 2017, our 364-day revolving credit facility with STCW with a borrowing capacity of $180.0 million (
“
364-Day Revolver
”
) expired.
|
|
|
|
|
•
|
Expiration of Subordination Period.
On February 15, 2017, all of the subordinated units converted into common units following the payment of the cash distribution for the fourth quarter of 2016. Each of our 67,475,068 outstanding subordinated units converted into one common unit. The converted units will participate pro rata with the other common units in distributions of available cash. The conversion of the subordinated units does not impact the amount of cash distributions paid by us or the total number of outstanding units. The allocation of net income and cash distributions during the period were effected in accordance with terms of our partnership agreement.
|
We generate revenue primarily by charging tariffs and fees for transporting crude oil and refined petroleum products through our pipelines and terminaling and storing crude oil and refined petroleum products at our terminals and storage facilities. We generally do not own any of the crude oil or refined petroleum products we handle, nor do we engage in the trading of these commodities. We therefore have limited direct exposure to risks associated with fluctuating commodity prices, although these risks indirectly influence our activities and results of operations over the long term.
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 assets. Our revenue is generated from customers in the same industry, our Parent’s affiliates, integrated oil companies, marketers, and independent exploration, production and refining companies primarily within the Gulf Coast region of the United States. We believe these agreements promote stable and predictable cash flows.
Executive Overview
Net income was
$73.0 million
and net income attributable to the Partnership was
$70.8 million
during the three months ended March 31, 2017. We generated cash from operations of
$93.5 million
. As of March 31, 2017, we had cash and cash equivalents of
$154.6 million
, total debt (before amortization of issuance cost) of $686.9 million, and unused capacity under our credit facilities of
$703.1 million
.
Our 2017 operations and strategic initiatives demonstrate our continuing focus on our business strategies:
|
|
|
|
•
|
Operational Excellence
.
Our first priority is the safety, reliability and efficiency of our operations. SPLC, the operator of our Shell-operated assets, is an industry-recognized operator with over 100 years’ experience in the pipeline business. We benefit from Shell’s leadership in operational excellence and leverage Shell’s industry leading operating and asset integrity processes.
|
|
|
|
|
•
|
Fee-based businesses supported by long-term contracts with creditworthy counterparties.
We are focused on generating stable and predictable cash flows by providing fee-based transportation and midstream services to Shell and
|
third parties. We believe these agreements will substantially mitigate volatility in our cash flows by reducing our direct exposure to commodity price fluctuations.
|
|
|
|
•
|
Growth through strategic acquisitions in key geographies.
We plan to continue to pursue strategic acquisitions of assets from Shell and third parties. We believe our sponsor, Shell, will offer us opportunities to purchase additional midstream assets that it currently owns or that it may acquire or develop in the future. We also may have opportunities to pursue the acquisition or development of additional assets jointly with Shell.
|
|
|
|
|
•
|
Optimize existing assets and pursue organic growth opportunities.
We will seek to enhance the profitability of our existing assets by pursuing opportunities to increase throughput and storage volumes, by expanding our midstream service offerings and by managing costs and improving operating efficiencies. We also intend to consider opportunities to increase our revenues by evaluating and capitalizing on organic expansion projects. We pursue a corridor strategy in the offshore, owning the trunk pipelines that aggregate and transport produced volumes to major onshore markets. These corridors are designed to maintain relatively constant to growing volumes despite individual well and field declines by attracting new Gulf of Mexico production. Producers in new fields seek to reduce their costs and improve their market access by connecting to existing corridors.
|
How We Generate Revenue
Crude Oil Pipelines
Onshore Crude Pipeline
Our Zydeco pipeline system generates the majority of its revenue from transportation services agreements. Zydeco also transports volumes on a spot basis.
While a few rates on our assets were reduced to comply with the negative FERC index in 2016, such as the spot rates on Zydeco out of Houma, most rates on our assets were not affected due to the fact that the index did not apply to them or they were already below the index ceiling level. Additionally, our spot rates on Zydeco that were subject to the rate case filed against Zydeco with the FERC are not subject to adjustment through November 2017.
Zydeco’s FERC-approved transportation services agreements 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 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, and thereby not included in revenue or net income until the earlier of the shipment of the unused volumes or the expiration of the 12-month period, as provided for in the applicable contract. 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.
When our transportation services agreements expire, they will most likely be replaced with throughput and deficiency agreements. Throughput and deficiency agreements establish a minimum annual average volume for each year during a fixed period. If the customer falls below the minimum volume in a year, it is required to pay a deficiency payment equal to the difference at the end of the year, which may impact the timing of cash flows. Under current regulations, the rate under a throughput and deficiency agreement may be less than the equivalent spot rate, however, we are unable to predict the impact on revenues due to the effect of market conditions on contract negotiations. Typically, surplus volumes in a year can be reserved for use in subsequent years where there is a deficiency. We refer to our transportation services agreements and throughput and deficiency agreements as “ship-or-pay” contracts.
Offshore Crude Pipelines
Our offshore crude pipelines generate revenue under three types of long-term transportation agreements: life-of-lease agreements, life-of-lease agreements with a guaranteed return and buy-sell agreements. Some crude oil also moves on our offshore pipelines under posted tariffs. In addition, Mars charges inventory management fees.
Our life-of-lease agreements have a term equal to the life of the applicable mineral lease. Our life-of-lease agreements require producers to transport all production from the specified fields connected to the pipeline for the entire life of the lease.
This means that the dedicated production cannot be transported by any other means, such as barges or another pipeline. Some of these agreements can also include provisions to guarantee a return to the pipeline to enable the pipeline to recover its investment in the initial years despite the uncertainty in production volumes by providing for an annual transportation rate adjustment over a fixed period of time to achieve a fixed rate of return. The calculation for the fixed rate of return is usually based on actual project costs and operating costs. At the end of the fixed period, some rates will be locked in at the last calculated rate and adjusted thereafter based on the FERC index.
Odyssey, Poseidon, Proteus and Endymion provide for the transportation of crude oil through the use of buy-sell arrangements where crude is purchased at the receipt location into the pipeline and sold back to the counterparty at the destination at that price plus a transportation differential.
We expect to continue extending our corridor pipelines to provide developing growth regions in the Gulf of Mexico with access via our existing corridors to onshore refining centers and market hubs. We believe this strategy will allow our offshore business to grow profitably throughout demand cycles.
Product Loss Allowance
The majority of our long-term transportation agreements and tariffs for crude oil transportation include product loss allowance (“PLA”). PLA is an allowance for volume losses due to measurement difference set forth in crude oil transportation agreements, including long-term transportation agreements and tariffs for crude oil shipments. PLA is intended to assure proper measurement of the crude oil despite solids, water, evaporation and variable crude types that can cause mismeasurement. The PLA provides additional income for us if product losses on our pipelines are within the allowed levels; however, we are required to compensate our customers for any product losses that exceed the allowed levels. We take title to any excess loss allowance when product losses are within the allowed levels, and we sell that product several times per year at prevailing market prices.
Products Pipeline
Our refined products pipeline systems are held through our ownership in Bengal, Colonial and Explorer. The Bengal and Colonial systems connect Gulf Coast and southeastern U.S. refineries to major demand centers from Alabama to New York, while Explorer serves more than 70 major cities in 16 states from the Gulf Coast to the Midwest. All three of these systems provide transportation under throughput and deficiency agreements and on a spot basis. All three systems are FERC regulated, with Explorer’s rates being entirely market based while Colonial having a mix of market based and indexed rates.
Natural Gas Pipeline
The Cleopatra natural gas gathering system, in which we own a 1.0% interest, generates revenue under gas gathering agreements. These agreements are similar to the agreements that govern our offshore crude oil pipelines. We expect income from our natural gas pipeline to be insignificant for the year ending December 31, 2017.
Terminals and Storage Facilities
At Lockport, our storage tanks are utilized at approximately 80% capacity via three service and throughput contracts. One of the contracts expired in early 2017 and has been extended for one year under revised terms, and another will expire on December 31, 2017 and is currently under re-negotiation. The third contract expires on December 31, 2019. In addition to these three contracts, we are actively developing new business for the facility.
How We Evaluate Our Operations
Our management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include: (i) revenue (including PLA) from contracted capacity and throughput; (ii) operations and maintenance expenses (including capital expenses); (iii) Adjusted EBITDA (defined below); and (iv) Cash Available for Distribution.
Contracted Capacity and Throughput
The amount of revenue our assets generate primarily depends on our long-term transportation and storage service agreements with shippers and the volumes of crude oil and refined products that we handle through our pipelines and storage tanks. If shippers do not meet the minimum contracted volume commitments under our ship-or-pay contracts, we have the right
to charge for reserved capacity or for deficiency payments as described in “
How We Generate Revenue
.” Our assets also earn revenue by shipping crude oil and refined products on a spot rate basis in accordance with our tariff or posted rate sheets and under buy-sell agreements.
The commitments under our long-term transportation and storage service agreements with shippers and the volumes which we handle in our pipelines and storage tanks are primarily affected by the supply of, and demand for, crude oil, natural gas and refined products in the markets served directly or indirectly by our assets. This supply and demand is impacted by the market prices for crude oil, natural gas and refined products in the markets we serve. The results of our operations will be impacted by our ability to:
|
|
|
|
•
|
maintain utilization of and rates charged for our pipelines and storage facilities;
|
|
|
|
|
•
|
utilize the remaining uncommitted capacity on, or add additional capacity to, our pipeline systems;
|
|
|
|
|
•
|
increase throughput volumes on our pipeline systems by making connections to existing or new third party pipelines or other facilities, primarily driven by the anticipated supply of, and demand for, crude oil and refined products; and
|
|
|
|
|
•
|
identify and execute organic expansion projects.
|
Operations and Maintenance Expenses
Our management seeks to maximize our profitability by effectively managing operations and maintenance expenses. These expenses are comprised primarily of labor expenses (including contractor services), utility costs (including electricity and fuel) and repairs and maintenance expenses. Utility costs fluctuate based on throughput volumes and the grades of crude oil and types of refined products we handle. Our other operations and maintenance expenses generally remain relatively stable across broad ranges of throughput and storage volumes, but can fluctuate from period to period depending on the mix of activities, particularly maintenance activities, performed during that period.
Adjusted EBITDA and Cash Available for Distribution
Adjusted EBITDA and Cash Available for Distribution have important limitations as analytical tools because they exclude some, but not all, items that affect net income and net cash provided by operating activities. You should not consider Adjusted EBITDA or Cash Available for Distribution in isolation or as a substitute for analysis of our results as reported under GAAP. Additionally, because Adjusted EBITDA and Cash Available for Distribution may be defined differently by other companies in our industry, our definition of Adjusted EBITDA and Cash Available for Distribution may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
The GAAP measures most directly comparable to Adjusted EBITDA and Cash Available for Distribution are net income and net cash provided by operating activities. Adjusted EBITDA and Cash Available for Distribution should not be considered as an alternative to GAAP net income or net cash provided by operating activities. Please refer to “
Results of Operations -
Reconciliation of Non-GAAP Measures
” for the reconciliation of GAAP measures net income and cash provided by operating activities to non-GAAP measures, Adjusted EBITDA and Cash Available for Distribution.
We define Adjusted EBITDA as net income before income taxes, net interest expense, gain or loss from dispositions of fixed assets, allowance oil reduction to net realizable value, depreciation, amortization and accretion,
plus
cash distributed to us from equity investments for the applicable period,
less
income from equity investments. We define Adjusted EBITDA attributable to the Partnership as Adjusted EBITDA less Adjusted EBITDA attributable to noncontrolling interests.
We define Cash Available for Distribution as Adjusted EBITDA attributable to the Partnership less maintenance capital expenditures attributable to the Partnership, net interest paid, cash reserves and income taxes paid, plus net adjustments from volume deficiency payments attributable to the Partnership and certain one-time payments received. Cash Available for Distribution will not reflect changes in working capital balances.
We believe that the presentation of these non-GAAP supplemental financial measures provides useful information to management and investors in assessing our financial condition and results of operations. We present these financial measures because we believe replacing our proportionate share of our equity investments’ net income with the cash received from such equity investments more accurately reflects the cash flow from our business, which is meaningful to our investors.
Adjusted EBITDA and Cash Available for Distribution are non-GAAP supplemental financial measures that management and external users of our consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess:
|
|
|
|
•
|
our operating performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or, in the case of Adjusted EBITDA, financing methods;
|
|
|
|
|
•
|
the ability of our business to generate sufficient cash to support our decision to make distributions to our unitholders;
|
|
|
|
|
•
|
our ability to incur and service debt and fund capital expenditures; and
|
|
|
|
|
•
|
the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
|
Factors Affecting Our Business and Outlook
Substantially all of our revenue is derived from long-term transportation service agreements with shippers, including ship-or-pay agreements and life-of-lease agreements, some of which provide a guaranteed return, and storage service agreements with marketers, pipelines and refiners. We believe the commercial terms of these long-term transportation and storage service agreements substantially mitigate volatility in our cash flows by limiting our direct exposure to reductions in volumes due to supply or demand variability. Our business can, however, be negatively affected by sustained downturns or sluggishness in commodity prices or the economy in general, and is impacted by shifts in supply and demand dynamics, the mix of services requested by the customers of our pipelines, competition and changes in regulatory requirements affecting our operations.
We believe key factors that impact our business are the supply of, and demand for, crude oil, natural gas and refined products in the markets in which our business operates. We also believe that our customers’ requirements, competition and government regulation of crude oil and refined products pipelines play an important role in how we manage our operations and implement our long-term strategies. These factors are discussed in more detail below.
Changes in Crude Oil Sourcing and Refined Product Demand Dynamics
To effectively manage our business, we monitor our market areas for both short-term and long-term shifts in crude oil and refined products supply and demand. Changes in crude oil supply such as new discoveries of reserves, declining production in older fields and the introduction of new sources of crude oil supply, affect the demand for our services from both producers and consumers. One of the strategic advantages of our crude oil pipeline systems is their ability to transport attractively priced crude oil from multiple supply markets to key refining centers along the Gulf Coast. Our crude oil shippers periodically change the relative mix of crude oil grades delivered to the refineries and markets served by our pipelines. They also occasionally choose to store crude longer term when the forward price is higher than the current price (a “contango market”). While these changes in the sourcing patterns of crude oil transported or stored are reflected in changes in the relative volumes of crude oil by type handled by our pipelines, our total crude oil transportation revenue is primarily affected by changes in overall crude oil supply and demand dynamics.
Similarly, our refined products pipelines have the ability to serve multiple major demand centers. Our refined products shippers periodically change the relative mix of refined products shipped on our refined products pipelines, as well as the destination points, based on changes in pricing and demand dynamics. While these changes in shipping patterns are reflected in relative types of refined products handled by our various pipelines, our total product transportation revenue is primarily affected by changes in overall refined products supply and demand dynamics. Demand can also be greatly affected by refinery performance in the end market, as refined products pipeline demand will increase to fill the supply gap created by refinery issues.
We can also be constrained by asset integrity considerations in the volumes we ship. We may elect to reduce cycling on our systems to reduce asset integrity risk, which in turn would likely result in lower revenues.
As these supply and demand dynamics shift, we anticipate that we will continue to actively pursue projects that link new sources of supply to producers and consumers. Similarly, as demand dynamics change, we anticipate that we will create new services or capacity arrangements that meet customer requirements.
Changes in Commodity Prices and Customers
’
Volumes
Crude oil prices declined substantially during 2015 and have fluctuated throughout 2016 and 2017. The current global geopolitical and economic uncertainty may contribute to continued volatility in financial and commodity markets in the near to medium term. Our direct exposure to commodity price fluctuations is limited to the PLA provisions in our tariffs. We have indirect exposure to commodity price fluctuations to the extent such fluctuations affect the shipping patterns of our customers. Our assets benefit from long-term fee based arrangements, and are strategically positioned to connect crude oil volumes originating from key onshore and offshore production basins to the Texas and Louisiana refining markets, where demand for throughput has remained strong. We have not experienced a material decline in throughput volumes on our crude oil pipeline systems as a result of lower crude oil prices. However, if crude oil prices remain at low levels for a sustained period, we could see a reduction in our transportation volumes if production coming into our systems is deferred and our associated allowance oil sales decrease. Our customers may also experience liquidity and credit problems, which could cause them to defer development or repair projects, avoid our contracts in bankruptcy, or renegotiate our contracts on terms that are less attractive to us or impair their ability to perform under our contracts.
Our throughput volumes on our refined products pipeline systems depend primarily on the volume of refined products produced at connected refineries and the desirability of our end markets. These factors in turn are driven by refining margins, maintenance schedules and market differentials. Refining margins depend on the cost of crude oil or other feedstocks and the price of refined products. These margins are affected by numerous factors beyond our control, including the domestic and global supply of and demand for crude oil and refined products. We are currently experiencing relatively high demand for our pipeline systems which service refineries.
Other Changes in Customers
’
Volumes
Zydeco volumes were higher in the Current Quarter versus the Comparable Quarter, primarily to Louisiana markets. The increase was driven by a new joint tariff agreement entered into in September 2016 with a connecting carrier which provided incremental capacity to Louisiana market hubs. Additionally, volumes have increased due to connections with multiple pipelines out of the Houston and Nederland/Port Neches areas of Texas seeking access to the Louisiana refining market. Completion of the Port Neches connection to the Sunoco Nederland terminal and the joint tariff agreement are expected to continue enhancing volumes able to access the important Clovelly and St. James, Louisiana markets. However, Zydeco experienced lower volumes in the Current Quarter to Nederland and Lake Charles due to the use of an alternate competing route by certain shippers.
Transportation volumes on Auger were lower in the Current Quarter versus the Comparable Quarter due to declining production volumes. In addition, certain connected producers directed flow to other markets in response to local market pricing changes.
Transportation volumes at Lockport were lower in the Current Quarter versus the Comparable Quarter due to a reduction in Lockport storage volume and a competitor pipeline that connects to Patoka. Of the three service and throughput contracts at Lockport, one contract expired in early 2017 and has been extended for one year under revised terms, and another will expire on December 31, 2017 and is currently under re-negotiation. The third contract expires on December 31, 2019. In addition to these three contracts, we are actively developing new business for the facility.
Although Mars experienced higher demand for storage as shippers took advantage of the contango market in the first two months of 2017, shippers have recently moved volume out of storage thereby increasing transportation volumes. Overall, receipts into Mars were materially stronger during the Current Quarter versus the Comparable Quarter due to receipts from a connecting system and stronger performance from wells in the Mars corridor.
Looking forward to the second quarter of 2017, we expect our customers' planned maintenance activity will cause a decrease in volumes. Additionally, we expect an increase in planned maintenance projects on our assets. As a result, there could be an adverse effect on Cash Available for Distribution of between an estimated $9.0 million and $12.0 million, as compared to the first quarter of 2017. Also in the second quarter, we received proceeds of $21.0 million from the sale of a 5.5-mile segment of our Zydeco pipeline system.
Major Maintenance Projects
We currently have two major maintenance projects in 2017.
On the Zydeco pipeline system we are in the execution stage of 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 (the “directional drill
project”). In December 2016, the necessary permits were received and the directional drill project commenced in January 2017 allowing for performance of the work during optimal weather and water conditions. Zydeco expects to incur approximately
$24.0 million
in maintenance capital expenditures for the total project, of which approximately
$22.2 million
would be attributable to our ownership share. From late 2015 through
March 31, 2017
, Zydeco incurred
$10.3 million
of capitalized costs related to this project. In connection with the acquisitions of additional interests in Zydeco, SPLC agreed to reimburse us for our proportionate share of certain costs and expenses with respect to the project. We intend to finance our pro rata share of these expenditures which are not covered by reimbursement by SPLC from cash on hand or borrowings under our working capital facility. During the
three
months ended
March 31, 2017
, we filed claims for reimbursement from SPLC of
$6.4 million
.
We expect Lockport’s maintenance capital expenditures to be approximately $
3.8 million
in 2017. This includes electrical improvements, tank inspections and maintenance.
Major Expansion Projects
Zydeco is planning a tank expansion project in Houma to address future capacity shortfalls during tank maintenance which will allow us to service additional capacity, as well as allow for existing tanks to come out of service for regularly scheduled inspection and maintenance. We plan to build two 250,000 barrel working tanks at the existing Houma facility for a total of
$44.1 million
, of which
$19.3 million
is associated with 2017 activity. The remaining spend is currently estimated for 2018. During the three months ended March 31, 2017, Zydeco incurred
$3.6 million
of capitalized costs related to this project. The scope includes interconnecting piping, dike expansion and associated facility work.
Customers
We transport and store crude oil and refined products for a broad mix of customers, including producers, refiners, marketers and traders, and are connected to other crude oil and refined products pipelines. In addition to serving directly-connected Gulf Coast markets, our pipelines have access to customers in various regions of the United States through interconnections with other major pipelines. Our customers use our transportation and storage services for a variety of reasons. Refiners typically require a secure and reliable supply of crude oil over a prolonged period of time to meet the needs of their specified refining diet and frequently enter into long-term firm transportation agreements to ensure a ready supply of crude oil, rate surety and sometimes sufficient transportation capacity over the life of the contract. Producers of crude oil and natural gas require the ability to deliver their product to market and frequently enter into firm transportation contracts to ensure that they will have sufficient capacity available to deliver their product to delivery points with greater market liquidity. Marketers and traders generate income from buying and selling crude oil and refined products to capitalize on price differentials over time or between markets. Our customer mix can vary over time and largely depends on the crude oil and refined products supply and demand dynamics in our markets.
Competition
Our pipeline systems compete primarily with other interstate and intrastate pipelines and with marine and rail transportation. Some of our competitors may expand or construct transportation systems that would create additional competition for the services we provide to our customers. In addition, future pipeline transportation capacity could be constructed in excess of actual demand, which could reduce the demand for our services, in the market areas we serve, and could lead to the reduction of the rates that we receive for our services. As a result of a substantial majority of our capacity being reserved on a long-term, fixed-rate basis, our revenue is not significantly affected by variation in customers’ actual usage.
Our storage terminal competes with surrounding providers of storage tank services. Some of our competitors have expanded terminals and built new pipeline connections, and third parties may construct pipelines that bypass our location. These, or similar events, could have a material impact on our operations.
Regulation
Our assets are subject to regulation by various federal, state and local agencies.
Under its current policy, FERC permits regulated interstate oil and gas pipelines, including those owned by master limited partnerships, to include an income tax allowance in their cost of service used to calculate cost-based transportation rates. The allowance is intended to reflect the actual or potential tax liability attributable to the regulated entity’s operating income, regardless of the form of ownership. On July 1, 2016, in
United Airlines, Inc. v FERC
, the United States Court of Appeals for the D.C. Circuit vacated a pair of FERC orders to the extent they permitted an interstate refined petroleum products pipeline owned by a master limited partnership to include an income tax allowance in its cost-of-service-based rates. The D.C. Circuit
held that FERC had failed to demonstrate that the inclusion of an income tax allowance in the pipeline’s rates would not lead to an over-recovery of costs attributable to regulated service. The D.C. Circuit instructed FERC on remand to fashion a remedy to ensure that the pipeline’s rates do not allow it to over-recover its costs. Following the D.C. Circuit’s decision, FERC issued a Notice of Inquiry on December 15, 2016 in Docket No. PL17-1-000 requesting comments regarding how to address any double recovery from FERC’s current income tax allowance and rate of return policies. Initial comments were filed on March 8, 2017, and reply comments were filed on April 7, 2017. The outcome of this proceeding could affect FERC’s income tax allowance policy for cost-based rates charged by regulated pipelines going forward. To the extent that we charge cost-of-service based rates, those rates could be affected by any changes in FERC’s income tax allowance policy to the extent our rates are subject to complaint or challenge by FERC acting on its own initiative, or to the extent that we propose new cost-of-service rates or changes to our existing rates.
On October 20, 2016, the Federal Energy Regulatory Commission issued an Advance Notice of Proposed Rulemaking (“ANOPR”) in Docket No. RM17-1-000 regarding changes to the oil pipeline rate index methodology and data reporting on the Page 700 of the FERC Form No. 6. In an effort to improve the Commission’s ability to ensure that oil pipeline rates are just and reasonable under the Interstate Commerce Act (“ICA”), the Commission is considering making the following changes to their current indexing methodologies for oil pipelines:
|
|
|
|
1)
|
Deny index increases for any pipeline whose Form No. 6, Page 700 revenues exceed costs by 15% for both of the prior two years;
|
|
|
|
|
2)
|
Deny index increases that exceed by 5% the cost changes reported on Page 700; and
|
|
|
|
|
3)
|
Apply the new criteria to costs more closely associated with the pipeline’s proposed rates than with total company-wide costs and revenues now reported on Page 700.
|
Initial comments were filed on January 19, 2017, and reply comments were filed on March 17, 2017. We will continue to monitor developments in this area.
For more information on federal, state and local regulations affecting our business, please read Part I, Items 1 and 2,
Business and Properties
in our 2016 Annual Report.
Acquisition Opportunities
We plan to continue to pursue acquisitions of complementary assets from SPLC and other subsidiaries of Shell, as well as from third parties. We also may pursue acquisitions jointly with SPLC. Given the size and scope of SPLC’s footprint and its significant ownership interest in us, we expect acquisitions from SPLC will be an important growth mechanism over the next few years. Neither SPLC nor any of its affiliates is under any obligation, however, to sell or offer to sell us additional assets or to pursue acquisitions jointly with us, and we are under no obligation to buy any additional assets from them or to pursue any joint acquisitions with them. We will continue to focus our acquisition strategy on transportation and midstream assets. We believe that we will be well positioned to acquire midstream assets from SPLC, other subsidiaries of Shell, and third parties should such opportunities arise. Identifying and executing acquisitions is a key part of our strategy. However, if we do not make acquisitions on economically acceptable terms or if we incur a substantial amount of debt in connection with the acquisitions, our future growth will be limited, and the acquisitions we do make may reduce, rather than increase, our available cash.
Seasonality
We do not expect our operations will be subject to significant seasonal variation in demand or supply.
Results of Operations
The following tables and discussion are a summary of our results of operations, including a reconciliation of Adjusted EBITDA and Cash Available for Distribution to net income and net cash provided by operating activities, the most directly comparable GAAP financial measures, for each of the periods indicated. Adjusted EBITDA and Cash Available for Distribution should not be considered as an alternative to GAAP net income or net cash provided by operating activities. Adjusted EBITDA and Cash Available for Distribution have important limitations as an analytical tool because it excludes some, but not all, items that affect net income and net cash provided by operating activities. You should not consider Adjusted EBITDA or Cash Available for Distribution in isolation or as a substitute for analysis of our results as reported under GAAP. Please read “How We Evaluate Our Operations-Adjusted EBITDA and Cash Available for Distribution.”
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
(in millions of dollars)
|
|
|
|
|
|
Revenue
|
$
|
70.2
|
|
|
$
|
76.7
|
|
|
|
Costs and expenses
|
|
|
|
|
|
Operations and maintenance
|
21.4
|
|
|
14.8
|
|
|
|
General and administrative
|
8.0
|
|
|
7.8
|
|
|
|
Depreciation, amortization and accretion
|
6.2
|
|
|
5.9
|
|
|
|
Property and other taxes
|
2.8
|
|
|
3.2
|
|
|
|
Total costs and expenses
|
38.4
|
|
|
31.7
|
|
|
|
Operating income
|
31.8
|
|
|
45.0
|
|
|
|
Income from equity investments
|
38.7
|
|
|
23.2
|
|
|
|
Dividend income from cost investments
|
7.3
|
|
|
2.8
|
|
|
|
Investment and dividend income
|
46.0
|
|
|
26.0
|
|
|
|
Interest expense, net
|
4.8
|
|
|
3.0
|
|
|
|
Income before income taxes
|
73.0
|
|
|
68.0
|
|
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
|
Net income
|
73.0
|
|
|
68.0
|
|
|
|
Less: Net income attributable to noncontrolling interests
|
2.2
|
|
|
12.7
|
|
|
|
Net income attributable to the Partnership
|
$
|
70.8
|
|
|
$
|
55.3
|
|
|
|
General partner's interest in net income attributable to the Partnership
|
$
|
12.1
|
|
|
$
|
3.1
|
|
|
|
Limited Partners' interest in net income attributable to the Partnership
|
$
|
58.7
|
|
|
$
|
52.2
|
|
|
|
Adjusted EBITDA attributable to the Partnership
(1)
|
$
|
86.6
|
|
|
$
|
65.5
|
|
|
|
Cash available for distribution
(1)
|
$
|
90.5
|
|
|
$
|
59.7
|
|
|
(1)
Please read
“
Reconciliation of Non-GAAP Measures.
”
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Pipeline throughput (thousands of barrels per day)
(1)
|
2017
|
|
2016
|
|
Zydeco – Mainlines
|
592
|
|
|
559
|
|
|
Zydeco – Other segments
|
555
|
|
|
361
|
|
|
Zydeco total system
|
1,147
|
|
|
920
|
|
|
Mars total system
|
440
|
|
|
295
|
|
|
Bengal total system
|
579
|
|
|
567
|
|
|
Poseidon total system
|
260
|
|
|
250
|
|
|
Auger total system
|
92
|
|
|
136
|
|
|
Odyssey total system
|
114
|
|
|
108
|
|
|
Other systems
|
337
|
|
|
—
|
|
|
|
|
|
|
|
Terminals
(2)
|
|
|
|
|
Lockport terminaling throughput and storage volumes
|
209
|
|
|
218
|
|
|
|
|
|
|
|
Revenue per barrel ($ per barrel)
|
|
|
|
|
Zydeco total system
(3)
|
$
|
0.54
|
|
|
$
|
0.64
|
|
|
Mars total system
(3)
|
1.46
|
|
|
1.78
|
|
|
Bengal total system
(3)
|
0.34
|
|
|
0.33
|
|
|
Auger total system
(3)
|
1.14
|
|
|
1.30
|
|
|
Odyssey total system
(3)
|
0.95
|
|
|
0.96
|
|
|
Lockport total system
(4)
|
0.24
|
|
|
0.23
|
|
(1)
Pipeline throughput is defined as the volume of delivered barrels. For additional information regarding our pipeline and terminal systems, refer to
Part I, Item I - Business and Properties - Our Assets and Operations
in our 2016 Annual Report.
(2)
Terminaling throughput is defined as the volume of delivered barrels and storage is defined as the volume of stored barrels.
(3)
Based on reported revenues from transportation and allowance oil divided by delivered barrels over the same time period. Actual tariffs charged are based on shipping points along the pipeline system, volume and length of contract.
(4)
Based on reported revenues from transportation and storage divided by delivered and stored barrels over the same time period. Actual rates are based on contract volume and length.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
(in millions of dollars)
|
2017
|
|
2016
|
|
|
Reconciliation of Adjusted EBITDA and Cash Available for Distribution to Net Income
|
|
|
|
|
|
Net income
|
$
|
73.0
|
|
|
$
|
68.0
|
|
|
|
Add:
|
|
|
|
|
|
Depreciation, amortization and accretion
|
6.2
|
|
|
5.9
|
|
|
|
Interest expense, net
|
4.8
|
|
|
3.0
|
|
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
|
Cash distribution received from equity investments
|
43.9
|
|
|
26.3
|
|
|
|
Less:
|
|
|
|
|
|
Income from equity investments
|
38.7
|
|
|
23.2
|
|
|
|
Adjusted EBITDA
|
89.2
|
|
|
80.0
|
|
|
|
Less:
|
|
|
|
|
|
Adjusted EBITDA attributable to noncontrolling interests
|
2.6
|
|
|
14.5
|
|
|
|
Adjusted EBITDA attributable to the Partnership
|
86.6
|
|
|
65.5
|
|
|
|
Less:
|
|
|
|
|
|
Net interest paid attributable to the Partnership
|
4.8
|
|
|
2.1
|
|
|
|
Income taxes paid attributable to the Partnership
|
—
|
|
|
—
|
|
|
|
Maintenance capex attributable to the Partnership
|
5.2
|
|
|
2.7
|
|
|
|
Add:
|
|
|
|
|
|
Net adjustments from volume deficiency payments attributable to the Partnership
|
7.5
|
|
|
(1.1
|
)
|
|
|
Reimbursements from Parent included in partners' capital
|
6.4
|
|
|
0.1
|
|
|
|
Cash available for distribution attributable to the Partnership
(1)
|
$
|
90.5
|
|
|
$
|
59.7
|
|
|
(1)
Excluding non-recurring items (reimbursements from Parent), cash available for distribution attributable to the Partnership would be
$84.1 million
for the
three
months ended
March 31, 2017
and
$59.6 million
for the
three
months ended
March 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2017
|
|
|
2017
|
|
2016
|
|
(in millions of dollars)
|
|
|
|
|
Reconciliation of Adjusted EBITDA and Cash Available for Distribution to Net Cash Provided by Operating Activities
|
|
|
|
|
Net cash provided by operating activities
|
$
|
93.5
|
|
|
$
|
72.4
|
|
|
Add:
|
|
|
|
|
Interest expense, net
|
4.8
|
|
|
3.0
|
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
Return of investment
|
6.0
|
|
|
4.1
|
|
|
Less:
|
|
|
|
|
Deferred revenue
|
8.5
|
|
|
(1.8
|
)
|
|
Non-cash interest expense
|
—
|
|
|
0.1
|
|
|
Change in other assets and liabilities
|
6.6
|
|
|
1.2
|
|
|
Adjusted EBITDA
|
89.2
|
|
|
80.0
|
|
|
Less:
|
|
|
|
|
Adjusted EBITDA attributable to noncontrolling interests
|
2.6
|
|
|
14.5
|
|
|
Adjusted EBITDA attributable to the Partnership
|
86.6
|
|
|
65.5
|
|
|
Less:
|
|
|
|
|
Net interest paid attributable to the Partnership
|
4.8
|
|
|
2.1
|
|
|
Income taxes paid attributable to the Partnership
|
—
|
|
|
—
|
|
|
Maintenance capex attributable to the Partnership
|
5.2
|
|
|
2.7
|
|
|
Add:
|
|
|
|
|
Net adjustments from volume deficiency payments attributable to the Partnership
|
7.5
|
|
|
(1.1
|
)
|
|
Reimbursements from Parent included in partners' capital
|
6.4
|
|
|
0.1
|
|
|
Cash Available for Distribution attributable to the Partnership
(1)
|
$
|
90.5
|
|
|
$
|
59.7
|
|
(1)
Excluding non-recurring items (reimbursements from Parent), cash available for distribution attributable to the Partnership would be
$84.1 million
for the
three
months ended
March 31, 2017
and
$59.6 million
for the
three
months ended
March 31, 2016
.
Three Months Ended March 31, 2017
(“Current Quarter”) compared to the
Three Months Ended March 31, 2016
(“Comparable Quarter”)
Revenues
Total revenue decreased by $6.5 million in the Current Quarter, or 8.5%, comprised of $6.3 million attributable to transportation services revenue and by $0.2 million related to storage service revenue.
Transportation services revenue for Pecten decreased by $6.5 million primarily attributable to expiration of the surcharge on Auger rates related to the recovery of earlier improvements on the line and a decrease in volume due to declining production on certain wells in the Current Quarter. Lockport storage services revenue decreased by $0.2 million related to a reduction in storage volume in the Current Quarter.
Transportation services revenue for Zydeco increased by $0.2 million, primarily attributable to a $1.9 million increase related to delivered volumes, partially offset by a $1.7 million decrease in expiring credits on committed transportation agreements. The increase in volumes was attributable to a new joint tariff agreement entered into in September 2016 with a connecting carrier, changes in certain customers’ sourcing strategies, and maintenance at certain refineries in the Comparable Quarter, offset by a decrease in spot rates due to the FERC settlement.
Costs and Expenses
Total costs and expenses increased $6.7 million in the Current Quarter due to $6.6 million in operations and maintenance expense, $0.3 million of higher depreciation due to the completion of certain projects and $0.2 million of general and administrative expense. These increases are partially offset by $0.4 million of lower property taxes due to changes in Zydeco property tax appraisal estimates.
Operations and maintenance expense increased by $6.6 million due to losses on pipeline operations related to allowance oil, a new joint tariff agreement entered into in September 2016, higher insurance costs related to additional interests in assets acquired over the course of 2016, and higher maintenance costs.
General and administrative expense increased by $0.2 million primarily due to higher salaries, partially offset by lower professional fees.
Investment and Dividend Income
Investment and dividend income is comprised of earnings from our equity investments and the dividend income from our cost investments. The Current Quarter earnings from our equity investments increased by $15.5 million primarily due to higher revenue on Mars, coupled with our acquisitions of an additional 20.0% interest in Mars, as well as a 49.0% interest in Odyssey and 10.0% interests in Proteus and Endymion in the latter half of 2016. The increase of $4.5 million in dividend income is due to our acquisition in 2016 of an additional 3.0% interest in Colonial, a 2.62% interest in Explorer and a 1.0% interest in Cleopatra.
Interest Expense
Interest expense increased by $1.8 million due to additional borrowings outstanding under our credit facilities during the Current Quarter versus Comparable Quarter.
Capital Resources and Liquidity
We expect our ongoing sources of liquidity to include cash generated from operations and borrowings under our credit facilities. In addition, we believe this access to credit along with cash generated from operations will be sufficient to meet our short-term working capital requirements and long-term capital expenditure requirements and to make quarterly cash distributions. Our liquidity as of
March 31, 2017
was
$857.7 million
consisting of
$154.6 million
cash and cash equivalents and
$703.1 million
of available capacity under our credit facilities.
Credit Facility Agreements
We have entered into the Five Year Fixed Facility and the Five Year Revolver with borrowing capacities of $600.0 million and $760.0 million, respectively. In addition, Zydeco has entered into the Zydeco Revolver with a borrowing capacity of $30.0 million.
Borrowings under the Five Year Revolver and the Zydeco Revolver bear interest at the three-month LIBOR rate plus a margin. Our weighted average interest rate for the
three
months ended
March 31, 2017
and 2016 was
2.3%
and
1.8%
, respectively. The weighted average interest rate includes drawn and undrawn interest fees, but does not consider the amortization of debt issuance costs or capitalized interest. A 1/8 percentage point (12.5 basis points) increase in the interest rate on the total debt of
$686.9 million
as of
March 31, 2017
would increase our consolidated annual interest expense by approximately
$0.9 million
. Our current interest rates for outstanding and future borrowings are
2.3%
under our Five Year Revolver and
2.6%
under the Zydeco Revolver. Borrowings under the Five Year Fixed Facility bear interest at
3.23%
per annum.
The Five Year Revolver, the Five Year Fixed Facility and the Zydeco Revolver mature on October 31, 2019, March 1, 2022 and August 6, 2019 respectively. We will need to rely on the willingness and ability of our related party lender to secure additional debt, our ability to use cash from operations and/or obtain new debt from other sources to repay/refinance such loans when they come due and/or to secure additional debt as needed.
The 364-Day Revolver matured on March 1, 2017. There was no balance outstanding during the period.
As of
March 31, 2017
, we were in compliance with the covenants contained in the Five Year Revolver and the Five Year Fixed Facility, and Zydeco was in compliance with the covenants contained in the Zydeco Revolver.
For additional information on our credit facilities, refer to
Note 6 - Related Party Debt
in the Notes to the Unaudited Condensed Consolidated Financial Statements.
Equity Registration Statements
On March 2, 2016, we commenced an “at-the-market” equity distribution program pursuant to which we may issue and sell common units of up to $300.0 million in gross proceeds. This program is registered with the SEC on an effective registration statement on Form S-3. On February 28, 2017, we entered into an Amended and Restated Equity Distribution Agreement with the Managers named therein.
During the quarter ended March 31, 2016, we completed the sale of
750,000
common units under this program for
$25.4 million
net proceeds (
$25.5 million
gross proceeds, or an average price of $34.00 per common unit, less
$0.1 million
of transaction fees). In connection with the issuance of the common units, we issued
15,307
general partner units to our general partner for
$0.5 million
in order to maintain its 2.0% general partner interest in us. We used the net proceeds from these sales of common units and from our general partner’s proportionate capital contribution to repay borrowings outstanding under the Five Year Revolver and the 364-Day Revolver and for general partnership purposes. During the quarter ended March 31, 2017, we did not sell any common units under this program.
On March 29, 2016, we completed the sale of
12,650,000
common units in a registered public offering (the “March 2016 Offering”) for
$395.1 million
net proceeds (
$401.6 million
gross proceeds, or
$31.75
per common unit, less
$6.3 million
of underwriter's fees and
$0.2 million
of transaction fees). In connection with the issuance of the common units, we issued
258,163
general partner units to our general partner for
$8.2 million
in order to maintain its
2.0%
general partner interest in us. We used the net proceeds from the March 2016 Offering and from our general partner’s proportionate capital contribution to repay borrowings outstanding under the Five Year Revolver and the 364-Day Revolver and for general partnership purposes.
Cash Flows
Operating Activities
. We generated
$93.5 million
in cash flow from operating activities in the Current Quarter compared to
$72.4 million
in the Comparable Quarter. The increase was primarily driven by increases in investment income, working capital and deferred revenue, partially offset by a decrease in operating income and an increase in interest expense in the Current Quarter.
Investing Activities
. Our cash flow used in investing activities was
$0.9 million
in the Current Quarter compared to
$0.6 million
in the Comparable Quarter. The increase in cash flow used in investing activities was primarily due to higher expansion capital expenditures on Zydeco in the Current Quarter, partially offset by an increase in return of investment and a purchase price adjustment received related to the acquisition in December 2016.
Financing Activities
. Our cash flow used in financing activities was
$59.9 million
in the Current Quarter compared to
$26.8 million
used in the Comparable Quarter. The increase in cash flow used in financing activities was primarily due to an increase in distributions paid to the unitholders and the general partner in the Current Quarter and net proceeds from public offerings in the Comparable Quarter. These increases were partially offset by the repayment of borrowings under our revolving credit facilities in the Comparable Quarter and a decrease in distributions to noncontrolling interest.
Capital Expenditures
Our operations can be capital intensive, requiring investments to maintain, expand, upgrade or enhance existing operations and to meet environmental and operational regulations. Our capital requirements consist of maintenance capital expenditures and expansion capital expenditures. Examples of maintenance capital expenditures are those made to replace partially or fully depreciated assets, to maintain the existing operating capacity of our assets and to extend their useful lives, or other capital expenditures that are incurred in maintaining existing system volumes and related cash flows. In contrast, expansion capital expenditures are those made to acquire additional assets to grow our business, to expand and upgrade our systems and facilities and to construct or acquire new systems or facilities. We regularly explore opportunities to improve service to our customers and maintain or increase our assets' capacity and revenue. We may incur substantial amounts of capital expenditures in certain periods in connection with large maintenance projects that are intended to only maintain our assets' capacity or revenue.
We incurred capital expenditures of
$12.0 million
and
$5.1 million
for the Current Quarter and the Comparable Quarter, respectively. The increase in capital expenditures is primarily due to the directional drill project and the Houma tank expansion project for Zydeco, and electrical improvements for Lockport in the Current Quarter.
A summary of our capital expenditures is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
2016
|
|
(in millions of dollars)
|
|
|
|
|
|
Expansion capital expenditures
|
|
$
|
1.8
|
|
|
$
|
1.3
|
|
|
Maintenance capital expenditures
|
|
5.5
|
|
|
3.4
|
|
|
Total capital expenditures paid
|
|
7.3
|
|
|
4.7
|
|
|
Increase in accrued capital expenditures
|
|
4.7
|
|
|
0.4
|
|
|
Total capital expenditures incurred
|
|
$
|
12.0
|
|
|
$
|
5.1
|
|
We expect total capital expenditures to be approximately
$55.2 million
for 2017, a summary of which is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Capital Expenditures
|
|
Expected Capital Expenditures
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Nine Months Ended December 31, 2017
|
|
Total Expected 2017 Capital Expenditures
|
|
(in millions of dollars)
|
|
|
|
|
|
|
|
Expansion capital expenditures
|
|
|
|
|
|
|
|
Zydeco
|
|
$
|
3.6
|
|
|
$
|
15.7
|
|
|
$
|
19.3
|
|
|
Lockport
|
|
—
|
|
|
2.5
|
|
|
2.5
|
|
|
Total expansion capital expenditures
|
|
3.6
|
|
|
18.2
|
|
|
21.8
|
|
|
Maintenance capital expenditures
|
|
|
|
|
|
|
|
Zydeco
|
|
7.2
|
|
|
21.8
|
|
|
29.0
|
|
|
Lockport
|
|
1.1
|
|
|
2.7
|
|
|
3.8
|
|
|
Auger
|
|
0.1
|
|
|
0.5
|
|
|
0.6
|
|
|
Total maintenance capital expenditures
|
|
8.4
|
|
|
25.0
|
|
|
33.4
|
|
|
Total capital expenditures
|
|
$
|
12.0
|
|
|
$
|
43.2
|
|
|
$
|
55.2
|
|
We currently expect Zydeco’s maintenance capital expenditures to be approximately $
29.0 million
for 2017. Approximately
$14.8 million
is for the directional drill project. In connection with the acquisition of additional interests in Zydeco, SPLC agreed to reimburse us for our proportionate share of certain costs and expenses incurred by Zydeco with respect to the directional drill project. During the three months ended
March 31, 2017
, Zydeco has incurred
$6.9 million
capitalized costs related to this project, of which
$6.4 million
is reimbursable, and $0.3 million on various maintenance and pipeline integrity projects. Zydeco's remaining maintenance capital expenditures of approximately
$14.2 million
for 2017 are related to various Houma maintenance and pipeline integrity projects.
We expect Auger and Lockport’s maintenance capital expenditures to be approximately
$4.4 million
for 2017. This includes
$3.8 million
for electrical improvements and tank inspections for Lockport and
$0.6 million
for piping modifications for Auger. During the
three
months ended
March 31, 2017
, we incurred
$1.1 million
related to these Lockport projects and
$0.1 million
related to these Auger projects.
We currently expect Zydeco’s expansion capital expenditures to be
$19.3 million
for 2017 for the Houma tank expansion project. During the
three
months ended
March 31, 2017
, Zydeco has incurred
$3.6 million
related to this Houma project. We expect expansion capital expenditures for Lockport to be approximately
$2.5 million
for a new pipeline connection and Auger's expansion capital expenditures to remain immaterial.
With the exception of the Zydeco directional drill project, we anticipate that both maintenance and expansion capital expenditures for the remainder of the year will be funded primarily with cash from operations.
Contractual Obligations
A summary of our contractual obligations, as of
March 31, 2017
, is shown in the table below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less than 1 year
|
|
Years 2 to 3
|
|
Years 4 to 5
|
|
More than 5 years
|
|
Operating lease for land
|
$
|
0.6
|
|
|
$
|
0.5
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Capital lease for Port Neches storage tanks
(1)
|
72.8
|
|
|
5.0
|
|
|
10.1
|
|
|
10.1
|
|
|
47.6
|
|
|
Joint tariff agreement
|
48.4
|
|
|
5.1
|
|
|
10.3
|
|
|
10.3
|
|
|
22.7
|
|
|
Debt obligation
(2)
|
686.9
|
|
|
—
|
|
|
686.9
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
808.7
|
|
|
$
|
10.6
|
|
|
$
|
707.4
|
|
|
$
|
20.4
|
|
|
$
|
70.3
|
|
(1)
Includes
$39.2 million
in interest,
$22.8 million
in principal and
$10.8 million
in executory costs
.
(2)
See
Note 6 - Related Party Debt
in the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information.
On December 1, 2014, we entered into a terminal services agreement with a related party in which we were to take possession of certain storage tanks located in Port Neches, Texas, effective December 1, 2015. On October 26, 2015, the terminal services agreement was amended to provide for an interim in-service period for the purposes of commissioning the tanks in which we paid a nominal monthly fee. Our capitalized costs and related capital lease obligation commenced effective December 1, 2015. Upon the in-service date of September 1, 2016, our monthly lease payment was increased to
$0.4 million
. In the eighteenth month after the in-service date, actual fixed and variable costs will be compared to premised costs. If the actual and premised operating costs differ by more than 5.0%, the lease will be adjusted accordingly and this adjustment will be effective for the remainder of the lease.
On September 1, 2016, which is the in-service date of the capital lease for the Port Neches storage tanks, a joint tariff agreement with a third party became effective and requires monthly payments of approximately $0.4 million. The tariff will be analyzed annually and updated based on the FERC indexing adjustment to rates effective July 1 of each year. The initial term of the agreement is ten years with automatic one year renewal terms with the option to cancel prior to each renewal period.
Off-Balance Sheet Arrangements
We have not entered into any transactions, agreements or other contractual arrangements that would result in off-balance sheet liabilities.
Environmental Matters and Compliance Costs
We are subject to extensive federal, state and local environmental laws and regulations. These laws, which change frequently, regulate the discharge of materials into the environment or otherwise relate to protection of the environment. Compliance with these laws and regulations may require us to obtain permits or other approvals to conduct regulated activities, remediate environmental damage from any discharge of petroleum or chemical substances from our facilities or install additional pollution control equipment on our equipment and facilities. Our failure to comply with these or any other environmental or safety-related regulations could result in the assessment of administrative, civil or criminal penalties, the imposition of investigatory and remedial liabilities, and the issuance of injunctions that may subject us to additional operational constraints. For additional information, refer to
FERC and State Common Carrier Regulations Part I, Items 1 and 2. Business and Properties
in our 2016 Annual Report.
Future additional expenditures may be required to comply with the Clean Air Act and other federal, state and local requirements for our assets. These requirements could result in additional compliance costs and additional operating restrictions on our business, each of which could have an adverse impact on our financial position, results of operations and liquidity.
If we do not recover these expenditures through the rates and other fees we receive for our services, our operating results will be adversely affected. We believe that our competitors must comply with similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including, but not limited to, the type of competitor and location of its operating facilities.
We accrue for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs can be reasonably estimated. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. New or expanded environmental requirements, which could increase our environmental costs, may arise in the future. We believe we comply with all legal requirements regarding the environment, but since not all of them are fixed or presently determinable (even under existing legislation) and may be affected by future legislation or regulations, it is not possible to predict all of the ultimate costs of compliance, including remediation costs that may be incurred and penalties that may be imposed.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are set forth in Part II, Item 7
,
Management’s Discussion and Analysis of Financial Condition and Results of Operation- Critical Accounting Policies and Estimates
in our 2016 Annual Report. As of
March 31, 2017
, there have been no significant changes to our critical accounting policies and estimates since our 2016 Annual Report was filed.
Recent Accounting Pronouncements
Please refer to
Note 1- Description of Business and Basis of Presentation
in the
Notes to the Unaudited Condensed Consolidated Financial Statements
for a discussion of recently adopted accounting pronouncements and new accounting pronouncements.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements. You can identify our forward-looking statements by the words “anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions.
We based the forward-looking statements on our current expectations, estimates and projections about us and the industries in which we operate in general. We caution you that these statements are not guarantees of future performance as they involve assumptions that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecasted in the forward-looking statements. Any differences could result from a variety of factors, including the following:
|
|
|
|
•
|
The continued ability of Shell and our non-affiliate customers to satisfy their obligations under our commercial and other agreements and the impact of lower market prices for oil, and refined products.
|
|
|
|
|
•
|
The volume of crude oil and refined petroleum products we transport or store and the prices that we can charge our customers.
|
|
|
|
|
•
|
The tariff rates with respect to volumes that we transport through our regulated assets, which rates are subject to review and possible adjustment imposed by federal and state regulators.
|
|
|
|
|
•
|
Changes in revenue we realize under the loss allowance provisions of our fees and tariffs resulting from changes in underlying commodity prices.
|
|
|
|
|
•
|
Fluctuations in the prices for crude oil and refined petroleum products.
|
|
|
|
|
•
|
The level of onshore and offshore (including deepwater) production and demand for crude by U.S. refiners.
|
|
|
|
|
•
|
Changes in global economic conditions and the effects of a global economic downturn on the business of Shell and the business of its suppliers, customers, business partners and credit lenders.
|
|
|
|
|
•
|
Liabilities associated with the risks and operational hazards inherent in transporting and storing crude oil and refined petroleum products.
|
|
|
|
|
•
|
Curtailment of operations or expansion projects due to unexpected leaks or spills, severe weather disruption; riots, strikes, lockouts or other industrial disturbances; or failure of information technology systems due to various causes, including unauthorized access or attack.
|
|
|
|
|
•
|
Costs or liabilities associated with federal, state and local laws and regulations relating to environmental protection and safety, including spills, releases and pipeline integrity.
|
|
|
|
|
•
|
Costs associated with compliance with evolving environmental laws and regulations on climate change.
|
|
|
|
|
•
|
Costs associated with compliance with safety regulations and system maintenance programs, including pipeline integrity management program testing and related repairs.
|
|
|
|
|
•
|
Changes in the cost or availability of third-party vessels, pipelines, rail cars and other means of delivering and transporting crude oil and refined petroleum products.
|
|
|
|
|
•
|
Direct or indirect effects on our business resulting from actual or threatened terrorist incidents or acts of war.
|
|
|
|
|
•
|
Availability of acquisitions and financing for acquisitions on our expected timing and acceptable terms.
|
|
|
|
|
•
|
Changes in, and availability to us, of the equity and debt capital markets.
|
|
|
|
|
•
|
The factors generally described in
Part I, Item 1A. Risk Factors
of our 2016 Annual Report.
|