Report of Independent Registered Public Accounting Firm
To the Unitholders of Shell Midstream Partners, L.P. and the Board of Directors of Shell Midstream Partners GP LLC
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Shell Midstream Partners, L.P. (the Partnership) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in (deficit) equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Partnership at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Partnership’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 22, 2021 expressed an unqualified opinion thereon.
Adoption of ASU No. 2014-09
As discussed in Note 5 to the consolidated financial statements, Amberjack Pipeline Company LLC, an investment accounted for by the equity method, changed its method for accounting for revenue in 2019, due to the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and the amendments in ASUs 2015-14, 2016-08, 2016-10 and 2016-12.
Basis for Opinion
These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on the Partnership’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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Presentation and Disclosure of Related Party Transactions
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Description of the Matter
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As described in Note 4 to the consolidated financial statements, the Partnership has material amounts of related party transactions as it regularly transacts with Royal Dutch Shell plc and its affiliates (“Shell”) in the normal course of business.
Auditing the presentation and disclosure of these related party transactions, including the completeness thereof, was challenging due to Shell’s involvement in many aspects of the Partnership’s business, including the revenue earned from providing transportation, terminaling, and storage services and lease revenues under long-term contracts with Shell, the direct and allocated expenses charged from Shell for services provided under operating and administrative management agreements, fees charged for general and administrative services provided by Shell, the acquisition of assets and equity investments from Shell, and reimbursements received under the Omnibus and other management or contribution agreements.
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How We Addressed the Matter in Our Audit
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We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Partnership’s process of identifying and disclosing related party transactions.
To test the completeness of related party transactions, we obtained a listing of all related party relationships and compared the listing to the Shell legal structure and evidence obtained from other audit procedures including, among others, inquiries of management and the audit committee, review of the board of directors and other committee meeting minutes, review of contracts and agreements, and testing of revenue and expense transactions. In addition, using the related party listing obtained, we performed procedures to test material related party account activity and account balances including, among others, testing the related and third party classification of transactions in revenue, expense and balance sheet accounts by inspecting source documentation and evaluating the aggregation and presentation of related party financial statement line items.
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Accounting for the April 2020 Transaction
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Description of the Matter
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As more fully described in Note 3 to the consolidated financial statements, the Partnership purchased certain logistics assets at the Shell Norco Manufacturing Complex (the “Norco Assets”) from Shell and entered into terminaling services agreements that leased the Norco Assets back to Shell (the “Norco Transaction”). Simultaneously with the closing of the Norco Transaction, the Partnership acquired 79% of the issued and outstanding membership interests in Mattox Pipeline Company LLC from Shell (the “Mattox Transaction), eliminated all of the incentive distribution rights, and converted the 2% economic general partner interest in the Partnership into a non-economic general partner interest (the “GP/IDR Restructuring”). As consideration for these transactions, the Partnership issued 50,782,904 Series A Preferred Units and 160,000,000 common units to Shell. Collectively, these transactions are referred to as the April 2020 Transaction.
Auditing the Partnership’s accounting for the April 2020 Transaction was complex due to the significant estimation uncertainty in the Partnership’s determination of the contract assets of $244 million recorded in connection with the April 2020 Transaction, which was dependent on the fair values of the consideration transferred and of the Norco Transaction, Mattox Transaction and GP/IDR Restructuring that were entered into simultaneously. The significant estimation uncertainty was primarily due to the sensitivity of the contract assets’ value to underlying assumptions used to fair value the components of the April 2020 Transaction. The Partnership used an income approach of discounted cash flows to estimate the fair values of the components. The significant assumptions used to estimate the fair value of the components primarily included the discount rates and certain assumptions that form the basis of forecasted cash flows, including projected revenues, operating expenses and capital expenditures. These significant assumptions are forward looking and could be affected by future economic and market conditions.
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How We Addressed the Matter in Our Audit
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We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Partnership’s process of accounting for the April 2020 Transaction. For example, we tested controls over the estimation of the fair values of the components used to determine the contract assets’ value, including the valuation models and underlying assumptions used to develop such estimates.
To test the amount of contract assets recognized in the April 2020 Transaction, we performed audit procedures that included, among others, evaluating the Partnership’s methodology to determine the contract assets’ value and the use of the income approach to estimate the fair values of each component and testing the significant assumptions used in each model, including the completeness and accuracy of the underlying data. For example, we compared the significant assumptions to current industry, market and economic trends, to customer contract terms, to the historical results of the underlying assets and to other guidelines used by companies within the same industry. We also involved our valuation specialists to assist in our evaluation of the valuation methodology applied by the Partnership and the significant assumptions used in estimating the fair values that affected the determination of the contract assets’ value.
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/s/ Ernst & Young LLP
We have served as the Partnership’s auditor since 2016.
Houston, Texas
February 22, 2021
SHELL MIDSTREAM PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
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December 31,
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2020
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2019
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(in millions of dollars)
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ASSETS
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Current assets
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Cash and cash equivalents
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$
|
320
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$
|
290
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Accounts receivable – third parties, net
|
20
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12
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Accounts receivable – related parties
|
21
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29
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Allowance oil
|
9
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12
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Prepaid expenses
|
24
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16
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Total current assets
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394
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|
359
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Equity method investments
|
1,013
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|
926
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Property, plant and equipment, net
|
699
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726
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Operating lease right-of-use assets
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4
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4
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Other investments
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2
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2
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Contract assets – related parties
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233
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—
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Other assets – related parties
|
2
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|
2
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Total assets
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$
|
2,347
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$
|
2,019
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LIABILITIES
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Current liabilities
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Accounts payable – third parties
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$
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5
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$
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5
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Accounts payable – related parties
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16
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10
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Deferred revenue – third parties
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4
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—
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Deferred revenue – related parties
|
19
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—
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Accrued liabilities – third parties
|
10
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|
|
12
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|
Accrued liabilities – related parties
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28
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19
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Total current liabilities
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82
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46
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Noncurrent liabilities
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Debt payable – related party
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2,692
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2,692
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Operating lease liabilities
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4
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4
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Finance lease liabilities
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24
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24
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Deferred revenue and other unearned income
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3
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2
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Total noncurrent liabilities
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2,723
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2,722
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Total liabilities
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2,805
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2,768
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Commitments and Contingencies (Note 15)
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(DEFICIT) EQUITY
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Preferred unitholders (50,782,904 and 0 units issued and outstanding as of December 31, 2020 and December 31, 2019)
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(1,059)
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—
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Common unitholders – public (123,832,233 units issued and outstanding as of both December 31, 2020 and December 31, 2019)
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3,382
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3,450
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Common unitholder – SPLC (269,457,304 and 109,457,304 units issued and outstanding as of December 31, 2020 and December 31, 2019)
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(2,497)
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(203)
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General partner – SPLC (0 and 4,761,012 units issued and
outstanding as of December 31, 2020 and December 31, 2019)
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—
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(4,014)
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Financing receivables – related parties
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(298)
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—
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Accumulated other comprehensive loss
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(9)
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(8)
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Total partners’ deficit
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(481)
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(775)
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Noncontrolling interests
|
23
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26
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Total deficit
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(458)
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(749)
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Total liabilities and deficit
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$
|
2,347
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$
|
2,019
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The accompanying notes are an integral part of the consolidated financial statements.
SHELL MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
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2020
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2019
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2018
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(in millions of dollars, except per unit data)
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Revenue
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Transportation, terminaling and storage services – third parties
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$
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123
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$
|
143
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$
|
209
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Transportation, terminaling and storage services – related parties
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282
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264
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229
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Product revenue – third parties
|
—
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5
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2
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Product revenue – related parties
|
19
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35
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29
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Lease revenue – related parties
|
57
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|
56
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56
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Total revenue
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481
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503
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|
525
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Costs and expenses
|
|
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Operations and maintenance – third parties
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48
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|
|
65
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|
|
108
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Operations and maintenance – related parties
|
114
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59
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54
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Cost of product sold
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24
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|
|
36
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|
|
32
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Loss (gain) from revision of ARO and disposition of fixed assets
|
—
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|
2
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(3)
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General and administrative – third parties
|
7
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|
11
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|
8
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|
General and administrative – related parties
|
49
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|
|
49
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|
|
52
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Depreciation, amortization and accretion
|
50
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|
|
49
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|
|
46
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|
Property and other taxes
|
20
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17
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|
|
16
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|
Total costs and expenses
|
312
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|
|
288
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|
|
313
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Operating income
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169
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215
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212
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Income from equity method investments
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417
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373
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|
|
235
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Dividend income from other investments
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—
|
|
|
14
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|
|
67
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|
Other income
|
40
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|
|
36
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|
|
31
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Investment, dividend and other income
|
457
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|
|
423
|
|
|
333
|
|
Interest income
|
23
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|
|
4
|
|
|
2
|
|
Interest expense
|
93
|
|
|
96
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|
|
64
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|
Income before income taxes
|
556
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|
|
546
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|
|
483
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|
Income tax expense
|
—
|
|
|
—
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|
|
1
|
|
Net income
|
556
|
|
|
546
|
|
|
482
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Less: Net income attributable to noncontrolling interests
|
13
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|
|
18
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|
18
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|
Net income attributable to the Partnership
|
$
|
543
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$
|
528
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$
|
464
|
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Preferred unitholder’s interest in net income attributable to the Partnership
|
36
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|
|
—
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|
|
—
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|
General partner’s interest in net income attributable to the Partnership
|
55
|
|
|
147
|
|
|
134
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|
Limited Partners’ interest in net income attributable to the Partnership’s common unitholders
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$
|
452
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$
|
381
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$
|
330
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|
Net income per Limited Partner Unit - Basic and Diluted:
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Common - basic
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$
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1.28
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$
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1.66
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$
|
1.50
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Common - diluted
|
$
|
1.25
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$
|
1.66
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$
|
1.50
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Distributions per Limited Partner Unit
|
$
|
1.8400
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$
|
1.7500
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$
|
1.4950
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Weighted average Limited Partner Units outstanding - Basic and Diluted:
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Common units - public - basic
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123.8
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123.8
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|
121.3
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|
Common units - SPLC - basic
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229.7
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|
105.4
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|
99.0
|
|
Common units - public - diluted
|
123.8
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|
123.8
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|
|
121.3
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|
Common units - SPLC - diluted
|
267.9
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|
105.4
|
|
|
99.0
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The accompanying notes are an integral part of the consolidated financial statements.
SHELL MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
(in millions of dollars)
|
Net income
|
|
556
|
|
|
$
|
546
|
|
|
$
|
482
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
Remeasurements of pension and other postretirement benefits related to equity method investments, net of tax
|
|
(1)
|
|
|
(2)
|
|
|
—
|
|
Comprehensive income
|
|
$
|
555
|
|
|
$
|
544
|
|
|
$
|
482
|
|
Less comprehensive income attributable to:
|
|
|
|
|
|
|
Noncontrolling interests
|
|
13
|
|
|
18
|
|
|
18
|
|
Comprehensive income attributable to the Partnership
|
|
$
|
542
|
|
|
$
|
526
|
|
|
$
|
464
|
|
The accompanying notes are an integral part of the consolidated financial statements.
SHELL MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
(in millions of dollars)
|
Cash flows from operating activities
|
|
|
|
|
|
Net income
|
$
|
556
|
|
|
$
|
546
|
|
|
$
|
482
|
|
Adjustments to reconcile net income to net cash provided by operating activities
|
|
|
|
|
|
Depreciation, amortization and accretion
|
50
|
|
|
49
|
|
|
46
|
|
Amortization of contract assets - related parties
|
11
|
|
|
—
|
|
|
—
|
|
Loss (gain) from revision of asset retirement obligation
|
—
|
|
|
2
|
|
|
(3)
|
|
Non-cash interest expense
|
1
|
|
|
1
|
|
|
1
|
|
Allowance oil reduction to net realizable value
|
8
|
|
|
1
|
|
|
5
|
|
Undistributed equity earnings
|
(4)
|
|
|
(6)
|
|
|
(6)
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
Accounts receivable
|
—
|
|
|
7
|
|
|
(7)
|
|
Allowance oil
|
(6)
|
|
|
—
|
|
|
(6)
|
|
Prepaid expenses and other assets
|
(7)
|
|
|
—
|
|
|
(4)
|
|
Accounts payable
|
7
|
|
|
2
|
|
|
(7)
|
|
Deferred revenue and other unearned income
|
24
|
|
|
(11)
|
|
|
(4)
|
|
Accrued liabilities
|
10
|
|
|
6
|
|
|
10
|
|
Net cash provided by operating activities
|
650
|
|
|
597
|
|
|
507
|
|
Cash flows from investing activities
|
|
|
|
|
|
Capital expenditures
|
(27)
|
|
|
(38)
|
|
|
(49)
|
|
Acquisitions from Parent
|
—
|
|
|
(90)
|
|
|
(482)
|
|
Contributions to investment
|
—
|
|
|
(25)
|
|
|
(28)
|
|
Return of investment
|
91
|
|
|
66
|
|
|
48
|
|
Net cash provided by (used in) investing activities
|
64
|
|
|
(87)
|
|
|
(511)
|
|
Cash flows from financing activities
|
|
|
|
|
|
Payment of equity issuance costs
|
(2)
|
|
|
—
|
|
|
—
|
|
Net proceeds from equity offerings
|
—
|
|
|
—
|
|
|
973
|
|
Borrowings under credit facilities
|
—
|
|
|
600
|
|
|
1,820
|
|
Repayments of credit facilities
|
—
|
|
|
—
|
|
|
(1,573)
|
|
Contributions from general partner
|
—
|
|
|
—
|
|
|
20
|
|
Capital distributions to general partner
|
—
|
|
|
(510)
|
|
|
(738)
|
|
Distributions to noncontrolling interests
|
(16)
|
|
|
(17)
|
|
|
(16)
|
|
Distributions to unitholders and general partner
|
(670)
|
|
|
(519)
|
|
|
(423)
|
|
|
|
|
|
|
|
Other contributions from Parent
|
2
|
|
|
19
|
|
|
12
|
|
Credit facility issuance costs
|
—
|
|
|
—
|
|
|
(1)
|
|
Receipt of principal payments on financing receivables
|
3
|
|
|
—
|
|
|
—
|
|
Repayment of principal on finance leases
|
(1)
|
|
|
(1)
|
|
|
—
|
|
Net cash (used in) provided by financing activities
|
(684)
|
|
|
(428)
|
|
|
74
|
|
Net increase in cash and cash equivalents
|
30
|
|
|
82
|
|
|
70
|
|
Cash and cash equivalents at beginning of the period
|
290
|
|
|
208
|
|
|
138
|
|
Cash and cash equivalents at end of the period
|
$
|
320
|
|
|
$
|
290
|
|
|
$
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
Non-cash investing and financing transactions:
|
|
|
|
|
|
Change in asset retirement obligation
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
Change in accrued capital expenditures
|
(5)
|
|
|
(3)
|
|
|
2
|
|
Other non-cash contributions from Parent
|
—
|
|
|
—
|
|
|
2
|
|
The accompanying notes are an integral part of the consolidated financial statements.
SHELL MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN (DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership
|
|
|
|
|
(in millions of dollars)
|
Preferred Unitholder SPLC
|
|
Common Unitholders
Public
|
|
Common Unitholder
SPLC
|
|
General Partner
SPLC
|
|
Financing Receivables
|
|
Accumulated Other Comprehensive Loss
|
|
Noncontrolling
Interests
|
|
Total
|
Balance as of December 31, 2017
|
$
|
—
|
|
|
$
|
2,774
|
|
|
$
|
(507)
|
|
|
$
|
(2,856)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23
|
|
|
$
|
(566)
|
|
Impact of change in accounting policy (Note 12)
|
—
|
|
|
(1)
|
|
|
1
|
|
|
(2)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2)
|
|
Net income
|
—
|
|
|
182
|
|
|
147
|
|
|
135
|
|
|
—
|
|
|
—
|
|
|
18
|
|
|
482
|
|
Net proceeds from equity offerings
|
—
|
|
|
673
|
|
|
300
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
973
|
|
Contributions from general partner
|
—
|
|
|
—
|
|
|
—
|
|
|
20
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20
|
|
Other contributions from Parent
|
—
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13
|
|
Distributions to unitholders and general partner
|
—
|
|
|
(169)
|
|
|
(139)
|
|
|
(115)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(423)
|
|
Distribution to noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16)
|
|
|
(16)
|
|
May 2018 Acquisition
|
—
|
|
|
—
|
|
|
—
|
|
|
(738)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(738)
|
|
Balance as of December 31, 2018
|
$
|
—
|
|
|
$
|
3,459
|
|
|
$
|
(198)
|
|
|
$
|
(3,543)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25
|
|
|
$
|
(257)
|
|
Impact of change in accounting policy (Note 5)
|
—
|
|
|
(4)
|
|
|
(5)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9)
|
|
Net income
|
—
|
|
|
204
|
|
|
177
|
|
|
147
|
|
|
—
|
|
|
—
|
|
|
18
|
|
|
546
|
|
Other contributions from Parent
|
—
|
|
|
—
|
|
|
—
|
|
|
25
|
|
|
—
|
|
|
(6)
|
|
|
—
|
|
|
19
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2)
|
|
|
—
|
|
|
(2)
|
|
Distributions to unitholders and general partner
|
—
|
|
|
(209)
|
|
|
(177)
|
|
|
(133)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(519)
|
|
Distributions to noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(17)
|
|
|
(17)
|
|
June 2019 Acquisition
|
—
|
|
|
—
|
|
|
—
|
|
|
(510)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(510)
|
|
Balance as of December 31, 2019
|
$
|
—
|
|
|
$
|
3,450
|
|
|
$
|
(203)
|
|
|
$
|
(4,014)
|
|
|
$
|
—
|
|
|
$
|
(8)
|
|
|
$
|
26
|
|
|
$
|
(749)
|
|
Net income
|
36
|
|
|
160
|
|
|
292
|
|
|
55
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
556
|
|
Other contributions from Parent
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
—
|
|
|
(1)
|
|
Distributions to unitholders and general partner
|
(24)
|
|
|
(228)
|
|
|
(308)
|
|
|
(110)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(670)
|
|
Distributions to noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16)
|
|
|
(16)
|
|
Principal repayments on financing receivables
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
April 2020 Transaction
|
(1,071)
|
|
|
—
|
|
|
(2,280)
|
|
|
4,069
|
|
|
(301)
|
|
|
—
|
|
|
—
|
|
|
417
|
|
Balance as of December 31, 2020
|
$
|
(1,059)
|
|
|
$
|
3,382
|
|
|
$
|
(2,497)
|
|
|
$
|
—
|
|
|
$
|
(298)
|
|
|
$
|
(9)
|
|
|
$
|
23
|
|
|
$
|
(458)
|
|
The accompanying notes are an integral part of the consolidated financial statements.
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO 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 the Business and Basis of Presentation
Shell Midstream Partners, L.P. (“we,” “us,” “our,” “SHLX” 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 received 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”). 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.
Until April 1, 2020, our general partner owned an approximate 2% general partner economic interest in the Partnership, including the incentive distribution rights (“IDRs”). On April 1, 2020, we closed the transactions contemplated by the Partnership Interests Restructuring Agreement with our general partner dated February 27, 2020 (the “Partnership Interests Restructuring Agreement”), pursuant to which the IDRs were eliminated and the 2% general partner economic interest was converted into a non-economic general partner interest in the Partnership. As of December 31, 2020, our general partner holds a non-economic general partner interest in the Partnership, and affiliates of SPLC own a 68.5% limited partner interest (269,457,304 common units) and 50,782,904 Series A perpetual convertible preferred units (the “Series A Preferred Units”) in the Partnership. These common units and preferred units, on an as-converted basis, represent a 72% interest in the Partnership. See Note 3 — Acquisitions and Other Transactions and Note 11 — (Deficit) Equity for additional details.
Description of the Business
We own, operate, develop and acquire pipelines and other midstream and logistics assets. As of December 31, 2020, our assets include interests in entities that own (a) crude oil and refined products pipelines and terminals that serve as key infrastructure to transport onshore and offshore crude oil production to Gulf Coast and Midwest refining markets and deliver refined products from those markets to major demand centers and (b) storage tanks and financing receivables that are secured by pipelines, storage tanks, docks, truck and rail racks and other infrastructure used to stage and transport intermediate and finished products. The Partnership’s 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, refined products and intermediate and finished products through our pipelines, storage tanks, docks, truck and rail racks, generate income from our equity and other investments and generate interest income from financing receivables on certain logistic assets. Our operations consist of one reportable segment.
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reflects our ownership interests as of December 31, 2020:
|
|
|
|
|
|
|
SHLX 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”)(1)
|
92.5
|
%
|
Mattox Pipeline Company LLC (“Mattox”)
|
79.0
|
%
|
Amberjack Pipeline Company LLC (“Amberjack”) – Series A/Series B
|
75.0% / 50.0%
|
Mars Oil Pipeline Company LLC (“Mars”)
|
71.5
|
%
|
Odyssey Pipeline L.L.C. (“Odyssey”)
|
71.0
|
%
|
Bengal Pipeline Company LLC (“Bengal”)
|
50.0
|
%
|
Crestwood Permian Basin LLC (“Permian Basin”)
|
50.0
|
%
|
LOCAP LLC (“LOCAP”)
|
41.48
|
%
|
Explorer Pipeline Company (“Explorer”)
|
38.59
|
%
|
Poseidon Oil Pipeline Company, L.L.C. (“Poseidon”)
|
36.0
|
%
|
Colonial Enterprises, Inc. (“Colonial”)
|
16.125
|
%
|
Proteus Oil Pipeline Company, LLC (“Proteus”)
|
10.0
|
%
|
Endymion Oil Pipeline Company, LLC (“Endymion”)
|
10.0
|
%
|
Cleopatra Gas Gathering Company, LLC (“Cleopatra”)
|
1.0
|
%
|
(1) SPLC owns the remaining 7.5% ownership interest in Zydeco.
Basis of Presentation
Our 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 consolidated financial statements and related notes have been prepared under the rules and regulations of the Securities and Exchange Commission (the “SEC”). These rules and regulations conform to the accounting principles contained in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification, the single source of GAAP.
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 method 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.
Expense Allocations. Our consolidated statements of income also include expense allocations for certain functions performed by SPLC and Shell on our behalf. Such costs are included in either general and administrative expenses or operations and maintenance expenses in the accompanying consolidated statements of income, depending on the nature of the employee’s role in our operations. The expense allocations have been determined on a basis that we, SPLC and Shell consider to be a reasonable reflection of the utilization of the services provided or the benefit received during the periods presented.
See Note 4 — Related Party Transactions for details of operating agreements impacting expense allocations, as well as details of related party transactions.
Cash. For all consolidated subsidiaries, we establish our own cash accounts for the funding of our operating and investing activities. Funds are not commingled with the cash of other entities.
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies
Principles of Consolidation
Our consolidated financial statements include all subsidiaries where we have control. The assets and liabilities in the accompanying consolidated financial statements have been reflected on a historical basis. All significant intercompany accounts and transactions are eliminated upon consolidation. See Note 1 — Description of the Business and Basis of Presentation for additional details.
Regulation
Certain businesses are subject to regulation by various authorities including, but not limited to, FERC. Regulatory bodies exercise statutory authority over matters such as construction, rates and ratemaking and agreements with customers.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported of assets, liabilities, revenues and expenses in the accompanying consolidated financial statements and notes. Actual results could differ from those estimates.
Common Control Transactions
Assets and businesses acquired from our Parent and its subsidiaries are accounted for as common control transactions whereby the net assets acquired are combined with ours at our Parent’s historical carrying value. If any recognized consideration transferred in such a transaction exceeds the carrying value of the net assets acquired, the excess is treated as a capital distribution to our general partner, similar to a dividend. If the carrying value of the net assets acquired exceeds any recognized consideration transferred including, if applicable, the fair value of any limited partner units issued, then our Parent would record an impairment, and our net assets acquired would be recorded at fair value. Cash consideration up to the carrying value of net assets acquired is presented as an investing activity in our consolidated statement of cash flows. Cash consideration in excess of the carrying value of net assets acquired is presented as a financing activity in our consolidated statement of cash flows. Assets and businesses sold to our Parent are also common control transactions accounted for using historical carrying value with any resulting gain treated as a contribution from Parent.
Revenue Recognition
Our revenues are primarily generated from the transportation, terminaling and storage of crude oil, refined gas and refined petroleum products through our pipelines, terminals, storage tanks, docks, truck and rail racks. We recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. We recognize revenue through the application of a five-step model, which includes: identification of the contract; identification of the performance obligations; determination of the transaction price; allocation of the transaction price to the performance obligations; and recognition of revenue as the entity satisfies the performance obligations. See Note 12 — Revenue Recognition for information and disclosures related to revenue from contracts with customers.
Leases, Sale Leaseback
When entering into sale-leaseback transactions as a buyer-lessor, the requirements in Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and all related accounting standards updates to such Topic (collectively, “the revenue standard”) are applied in determining whether the transfer of an asset shall be accounted for as a sale of the asset by assessing whether it satisfies a performance obligation under the contract by transferring control of an asset. If the seller-lessee transfers control of an asset to us, we account for the transfer of the asset as a purchase and recognize the transferred asset. The subsequent leaseback of the asset is accounted for in accordance with ASC Topic 842, Leases (the “lease standard”), in the same manner as any other lease. If the seller-lessee does not transfer the control of an asset to us, the failed sale-leaseback transaction is accounted for as a financing arrangement. Transactions in which control of an asset is not transferred are accounted for as financing receivables in accordance with ASC Topic 310, Receivables. Since the seller-lessee did not transfer the control of assets to us in the April 2020 Transaction (defined in Note 3 — Acquisitions and Other Transactions below), we did not recognize the transferred assets, and instead they were accounted for as financing receivables. Receivables issued in exchange for the Partnership’s capital stock are presented as a component of the partners’ (deficit) equity. Since the Partnership issued common units and preferred units as consideration in exchange for the financing receivables in the April 2020 Transaction, we recorded the financing receivables as contra-equity. Refer to Note 3 — Acquisitions and Other
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Transactions and Note 11 – (Deficit) Equity for additional details. We recognize interest income on the financing receivables on the basis of the imputed interest rate determined in accordance with ASC Topic 835, Interest.
Cash and Cash Equivalents
Our cash and cash equivalents includes cash and short-term highly liquid overnight deposits.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable represent valid claims against customers for products sold or services rendered, net of allowances for doubtful accounts. We assess the creditworthiness of our counterparties on an ongoing basis and require security, including prepayments and other forms of collateral, when appropriate. We establish provisions for losses on third-party accounts receivable due from shippers and operators based on current expected credit losses. As of December 31, 2020 and 2019, we did not have a material amount of allowance for doubtful accounts.
Equity Method Investments
We account for investments where we have the ability to exercise significant influence, but not control, under the equity method of accounting. Income from equity method investments represents our proportionate share of net income generated by the equity method investees. Differences in the basis of the investments and the underlying net asset value of the investees, if any, are amortized into net income over the remaining useful lives of the underlying assets. Equity method investments are assessed for impairment whenever changes in the facts and circumstances indicate a loss in value has occurred, if the loss is deemed to be other-than-temporary. When the loss is deemed to be other-than-temporary, the carrying value of the equity method investment is written down to fair value.
Property, Plant and Equipment
Our property, plant and equipment is recorded at its historical cost of construction or, upon acquisition, at either the fair value of the assets acquired or the historical carrying value to the entity that placed the asset in service. Expenditures for major renewals and betterments are capitalized while those minor replacement, maintenance and repairs that do not improve or extend asset life are expensed when incurred. For constructed assets, we capitalize all construction-related direct labor and material costs, as well as indirect construction costs. We capitalize interest on certain projects. For 2020, 2019 and 2018, the total amount of interest capitalized was immaterial.
We use the straight-line method to depreciate property, plant and equipment based on the estimated useful life of the asset. We report gains or losses on dispositions of fixed assets as Loss (gain) from revision of asset retirement obligations (“AROs”) and disposition of fixed assets in the accompanying consolidated statements of income.
Impairment of Long-lived Assets
We evaluate long-lived assets of identifiable business activities for impairment when events or changes in circumstances indicate, in our management’s judgment, that the carrying value of such assets may not be recoverable. These events include a significant decrease in the market value of the asset, changes in the manner in which we intend to use a long-lived asset, decisions to sell an asset and adverse changes in the legal or business environment such as adverse actions by regulators. If an event occurs, which is a determination that involves judgment, we perform an impairment assessment by comparing estimated undiscounted future cash flows associated with the asset to the asset’s net book value. If the net book value exceeds our estimate of undiscounted future cash flows, an impairment is calculated as the amount the net book value exceeds the estimated fair value associated with the asset. We determined that there were no asset impairments in 2020, 2019 or 2018.
Income Taxes
We are not a taxable entity for U.S. federal income tax purposes or for the majority of states that impose an income tax. Taxes on our net income are generally borne by our partners through the allocation of taxable income. Our income tax expense results from partnership activity in the state of Texas, as conducted by Zydeco, Sand Dollar and Triton. Income tax expense for 2020, 2019 and 2018 was immaterial.
Other Investments
We account for equity investments in entities where we do not have control or significant influence at fair value with changes in fair value recognized in net income when the fair value is readily determinable. For investments without readily determinable fair values, we carry such investments at cost less impairments, if any. These investments are remeasured either upon the
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
occurrence of an observable price change or upon identification of impairment. These investments are reported as Other investments in our consolidated balance sheets and dividends received are reported in Dividend income from other investments in our consolidated income statements. Our equity investments which are accounted for at cost as they do not have readily determinable fair values, consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Ownership
|
|
Amount
|
|
Ownership
|
|
Amount
|
Cleopatra
|
1.0
|
%
|
|
$
|
2
|
|
|
1.0
|
%
|
|
$
|
2
|
|
During the years ended December 31, 2020 and 2019, we did not identify the occurrence of an observable price change or an identification of impairment for these equity investments.
Asset Retirement Obligations
AROs represent contractual or regulatory obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the asset. Our AROs were zero as of both December 31, 2020 and 2019.
Our assets include pipelines and terminals that have contractual or regulatory obligations that will need to be settled at retirement. The settlement date of these obligations will depend mostly on the various supply sources that connect to our systems and the ongoing demand for usage in the markets we serve. We expect these supply sources and market demands to continue for the foreseeable future. As the settlement dates of obligations are indeterminate, there is not sufficient information to make a reasonable estimate of the ARO of our remaining assets as of December 31, 2020 and 2019.
We re-evaluate our AROs in each reporting period, and future developments could impact the amounts we record.
Pensions and Other Postretirement Benefits
We do not have our own employees. Employees that work on our pipelines or terminals are employees of SPLC, and we share employees with other SPLC-controlled and non-controlled entities. For presentation of these accompanying consolidated financial statements, our portion of payroll costs and employee benefit plan costs have been allocated as a charge to us by SPLC and Shell Oil Company. Shell Oil Company sponsors various employee pension and postretirement health and life insurance plans. For purposes of these accompanying consolidated financial statements, we are considered to be participating in the benefit plans of Shell Oil Company. We participate in the following defined benefits plans: Shell Oil Pension Plan, Shell Oil Retiree Health Care Plan and Pennzoil-Quaker State Retiree Medical & Life Insurance. As a participant in these benefit plans, we recognize as expense in each period an allocation from Shell Oil Company, and we do not recognize any employee benefit plan assets or liabilities. See Note 4 — Related Party Transactions for total pension and benefit expenses under these plans.
Legal
We are subject to litigation and regulatory proceedings as the result of our business operations and transactions. We use both internal and external counsel in evaluating our potential exposure to adverse outcomes from orders, judgments or settlements. In general, we expense legal costs as incurred. When we identify specific litigation that is expected to continue for a significant period of time, is probable to occur and may require substantial expenditures, we identify a range of possible costs expected to be required to litigate the matter to a conclusion or reach an acceptable settlement, and we accrue for the most probable outcome. To the extent that actual outcomes differ from our estimates, or additional facts and circumstances cause us to revise our estimates, our earnings will be affected.
Environmental Matters
We are subject to federal, state, and local environmental laws and regulations. Environmental expenditures are expensed or capitalized depending on their economic benefit. We expense costs such as permits, compliance with existing environmental regulations, remedial investigations, soil sampling, testing and monitoring costs to meet applicable environmental laws and regulations where prudently incurred or determined to be reasonably possible in the ordinary course of business. We are permitted to recover such expenditures through tariff rates charged to customers. We also expense costs that relate to an existing condition caused by past environmental incidents, which do not contribute to current or future revenue generation. We record environmental liabilities when environmental assessments and/or remedial efforts are probable and we can reasonably estimate the costs. Generally, our recording of these accruals coincides with our completion of a feasibility study or our
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
commitment to a formal plan of action. We recognize receivables for anticipated associated insurance recoveries when such recoveries are deemed to be probable.
For 2020, 2019 and 2018, the environmental cleanup costs incurred were immaterial. At both December 31, 2020 and 2019, the accruals for environmental clean-up costs pursuant to a Consent Decree issued in 1998 by the State of Washington Department of Ecology with respect to our products terminal located in Seattle, Washington were immaterial. The costs relate to ongoing groundwater compliance monitoring and other remedial activities. Refer to Note 4 — Related Party Transactions under the Omnibus Agreement (defined below) for additional details.
We routinely conduct reviews of potential environmental issues and claims that could impact our assets or operations. These reviews assist us in identifying environmental issues and estimating the costs and timing of remediation efforts. In making environmental liability estimations, we consider the material effect of environmental compliance, pending legal actions against us and potential third-party liability claims. Often, as the remediation evaluation and effort progresses, additional information is obtained, requiring revisions to estimated costs. These revisions are reflected in our income statement in the period in which they are probable and reasonably estimable.
Other Contingencies
We recognize liabilities for other contingencies when we have an exposure that indicates it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Where the most likely outcome of a contingency can be reasonably estimated, we accrue a liability for that amount. Where the most likely outcome cannot be estimated, a range of potential losses is established and if no one amount in that range is more likely than any other, the lower end of the range is accrued.
Fair Value Estimates
We measure assets and liabilities requiring fair value presentation or disclosure using an exit price (i.e., the price that would be received to sell an asset or paid to transfer a liability) and disclose such amounts according to the quality of valuation inputs under the following hierarchy:
Level 1: Quoted prices in an active market for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are directly or indirectly observable.
Level 3: Unobservable inputs that are significant to the fair value of assets or liabilities.
We classify the fair value of an asset or liability based on the lowest level of input significant to its measurement. A fair value initially reported as Level 3 will be subsequently reported as Level 2 if the unobservable inputs become inconsequential to its measurement or corroborating market data becomes available. Asset and liability fair values initially reported as Level 2 will be subsequently reported as Level 3 if corroborating market data becomes unavailable.
The carrying amounts of our accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their short-term nature.
Net income per limited partner unit
Prior to the April 2020 Transaction, we used the two-class method when calculating the net income per unit applicable to limited partners as there were different participating securities included in the calculation – including common units, general partner units and IDRs. After the April 2020 Transaction, the IDRs were eliminated, the 2% general partner economic interest was converted into a non-economic general partner interest in the Partnership and the newly issued Series A Preferred Units did not qualify as participating securities. Since the transaction occurred during 2020, the two-class method was still applied to the year-to-date calculation but was not applied to calculations for any quarterly periods beginning with the second quarter of 2020. See Note 11 — (Deficit) Equity for additional information.
Reclassifications
Certain reclassifications have been made to prior period amounts in our consolidated statements of income and consolidated balance sheets to conform to the current period presentation. The net effect of these reclassifications was not material to our consolidated financial statements.
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements
Standards Adopted as of January 1, 2020
In June 2016, the FASB issued Accounting Standards Update (“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 measurement of current expected credit losses under the new guidance is applicable to financial assets measured at amortized cost, including third-party trade receivables. We adopted the new standard effective January 1, 2020, using the modified retrospective method for all financial assets measured. No cumulative-effect adjustment to retained earnings was required upon adoption. The adoption of ASU 2016-13 did not have a material impact on our consolidated financial statements.
Standards Not Adopted as of December 31, 2020
In August 2020, the FASB issued ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity. The update will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models may result in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. This update also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021 for SEC filers, excluding smaller reporting companies. Early adoption is permitted, but not earlier than January 1, 2021, including interim periods within that year. Management is currently evaluating the appropriate date of adoption and the effect of the adoption of this update on our consolidated financial statements. The effect will largely depend on the composition and terms of our financial instruments at the time of adoption.
3. Acquisitions and Other Transactions
April 2020 Transaction
On April 1, 2020, we closed the following transactions (together referred to as the “April 2020 Transaction”):
•Pursuant to a Purchase and Sale Agreement dated as of February 27, 2020 (the “Purchase and Sale Agreement”) between the Partnership and Triton, SPLC, Shell GOM Pipeline Company LLC (“SGOM”), Shell Chemical LP (“Shell Chemical”) and Equilon Enterprises LLC d/b/a Shell Oil Products US (“SOPUS”), we acquired 79% of the issued and outstanding membership interests in Mattox from SGOM (the “Mattox Transaction”), and SOPUS and Shell Chemical transferred to Triton, as a designee of the Partnership, certain logistics assets at the Shell Norco Manufacturing Complex located in Norco, Louisiana (such assets, the “Norco Assets,” and such transaction, the “Norco Transaction”); and
•Simultaneously with the closing of the transactions contemplated by the Purchase and Sale Agreement, we also closed the transactions contemplated by the Partnership Interests Restructuring Agreement, pursuant to which we eliminated all of the IDRs and converted the 2% economic general partner interest in the Partnership into a non-economic general partner interest (the “GP/IDR Restructuring”). Our general partner or its assignee has also agreed to waive a portion of the distributions that would otherwise be payable on the common units issued to SPLC as part of the April 2020 Transaction, in an amount of $20 million per quarter for each of four consecutive fiscal quarters, beginning with the distribution made with respect to the second quarter of 2020.
As consideration for the April 2020 Transaction, the Partnership issued 50,782,904 Series A Preferred Units to SPLC at a price of $23.63 per unit, plus 160,000,000 newly issued common units. Certain third-party fair value appraisals were performed to determine the fair value of the total consideration as well as the fair values of each of the Mattox Transaction, the Norco Transaction and the GP/IDR Restructuring, as of April 1, 2020. Because the components of the April 2020 Transaction were entered in contemplation of each other and were transactions among entities under common control, the fair values of the April 2020 Transaction were used solely for the purpose of allocating a portion of the consideration on a relative fair value basis to the Norco Transaction.
In connection with the April 2020 Transaction, the Partnership recorded the following balances as of April 1, 2020:
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
Equity method investment (1)
|
|
$
|
174
|
|
|
|
Financing receivables – related parties (2)
|
|
302
|
|
|
|
Contract assets - related parties (3)
|
|
244
|
|
|
|
April 2020 Transaction
|
|
$
|
720
|
|
|
|
|
|
|
|
|
(1) Equity method investment was recorded at SGOM’s historical carrying value of the 79% interest in Mattox. See more discussion in the section entitled “Mattox Transaction” below.
(2) Financing receivables under the failed sale leaseback were recorded at the fair value of the property, plant and equipment of the Norco Assets transferred by SOPUS and Shell Chemical and recognized as a component of the Partners’ deficit. See more discussion in the section entitled “Norco Transaction” below.
(3) Contract assets were recorded based on the difference between the consideration allocated to the Norco Transaction and the financing receivables. See more discussion in the section entitled “Norco Transaction” below.
Mattox Transaction
We acquired 79% of the issued and outstanding membership interests in Mattox from SGOM. The acquisition was accounted for as a transaction among entities under common control on a prospective basis as an asset acquisition. As a result of the Mattox Transaction, we have significant influence, but not control, over Mattox and account for this investment as an equity method investment. As such, we recorded the acquired equity interests in Mattox at SGOM’s historical carrying value of $174 million, which is included in Equity method investments in our consolidated balance sheet as of December 31, 2020. See Note 5 —Equity Method Investments for additional details.
Norco Transaction
SOPUS and Shell Chemical transferred certain logistics assets at the Shell Norco Manufacturing Complex located in Norco, Louisiana, which are comprised of crude, chemicals, intermediate and finished product pipelines, storage tanks, docks, truck and rail racks and supporting infrastructure, to Triton, as a designee of the Partnership. The Partnership simultaneously leased the Norco Assets back to SOPUS and Shell Chemical pursuant to the terminaling services agreements entered into among Triton, SOPUS and Shell Chemical related to the Norco Assets. The Partnership receives an annual net payment of $140 million, which is the total annual payment pursuant to the terminaling services agreements of $151 million, less $11 million, which primarily represents the allocated utility costs from SOPUS related to the Norco Assets. Both payments are subject to annual Consumer Price Index adjustments.
The transfer of the Norco Assets combined with the terminaling services agreements were accounted for as a failed sale leaseback under the lease standard, as control of the assets did not transfer to the Partnership. As a result, the transaction was treated as a financing arrangement. As the Norco Transaction was entered into simultaneously and in contemplation of the Mattox Transaction and the GP/IDR Restructuring components, we allocated $546 million of the fair value of the consideration of the April 2020 Transaction to the Norco Transaction based on its relative stand-alone fair value to the other components of the April 2020 Transaction. From this amount, we recorded financing receivables of $302 million, based on the fair value of the Norco Assets’ property, plant and equipment transferred from SOPUS and Shell Chemical, using a combination of market and cost valuation approaches. The financing receivables were recorded as the fair value of property, plant and equipment because the annual payments received by the Partnership are directly related to the lease of the property, plant and equipment of the Norco Assets. Since the financing receivables from SOPUS and Shell Chemical arose from transactions involving the issuance of the Partnership’s common and preferred units, the financing receivables are presented as a component of (deficit) equity and not as assets on the balance sheet.
As of April 1, 2020, we also recorded contract assets in the amount of $244 million, which represent the difference between the allocated fair value of the Norco Transaction of $546 million and the recognized financing receivables of $302 million. The contract assets represent the excess of the fair value embedded within the terminaling services agreements transferred by the Partnership to SOPUS and Shell Chemical as part of entering into the terminaling services agreements. See Note 12 — Revenue Recognition for additional details.
The amount of contract assets recognized was dependent on the allocated fair value of the consideration to the Norco Transaction, which was determined using the fair values of the consideration transferred and the fair values of each of the three components of the April 2020 Transaction. The newly issued common units were valued using a market approach based on the market opening price of the Partnership’s common units as of April 1, 2020, less a discount for the waiver described above and a marketability discount. The Series A Preferred Units were valued using an income approach based on a trinomial lattice model. Further, the fair values of the three components of the April 2020 Transaction were determined using an income
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
approach of discounted cash flows at an average discount rate for each of the Mattox Transaction, the Norco Transaction and the GP/IDR Restructuring components of 14%, 11% and 20%, respectively.
GP/IDR Restructuring
On April 1, 2020, we also closed the transactions contemplated by the Partnership Interests Restructuring Agreement, which included the elimination of all the IDRs and the cancellation of all of the general partner units, both of which were held by our general partner, and amended and restated our partnership agreement to reflect these and other changes (as so amended, the “Second Amended and Restated Partnership Agreement”). The 2% general partner economic interest was converted into a non-economic general partner interest. Because the components of the April 2020 Transaction were among entities under common control, our general partner’s negative equity balance of $4 billion at April 1, 2020 was transferred to SPLC’s equity accounts, allocated between its holdings of common units and preferred units, based on the relative fair value of the consideration related to the issuance of common units and preferred units in the April 2020 Transaction.
Upon the closing of the April 2020 Transaction, the Partnership had 393,289,537 common units outstanding, of which SPLC’s wholly owned subsidiary, Shell Midstream LP Holdings LLC (“LP Holdings”), owned 269,457,304 common units in the Partnership, representing an aggregate 68.5% limited partner interest. The Partnership also had 50,782,904 of Series A Preferred Units outstanding, which are entitled to receive a quarterly distribution of $0.2363 per unit and all of which are owned by LP Holdings. See Note 11 — (Deficit) Equity for additional details.
2019 Acquisition
On June 6, 2019, we acquired SPLC’s remaining 25.97% ownership interest in Explorer and 10.125% ownership interest in Colonial for consideration valued at $800 million (the “June 2019 Acquisition”). The June 2019 Acquisition increased our ownership interest in Explorer to 38.59% and in Colonial to 16.125%. The June 2019 Acquisition closed pursuant to a Contribution Agreement dated May 10, 2019 (the “May 2019 Contribution Agreement”) between us and SPLC, and is accounted for as a transaction between entities under common control on a prospective basis as an asset acquisition. As such, we recorded the acquired equity interests at SPLC’s historical carrying value of $90 million, which is included in Equity method investments in our consolidated balance sheet. In addition, as a transfer between entities under common control, we recorded Accumulated other comprehensive loss of $6 million related to historical remeasurements of pension and other postretirement benefits provided by Explorer and Colonial to their employees. We recognized $510 million of cash consideration in excess of the historical carrying value of equity interests acquired as a capital distribution to our general partner in accordance with our policy for common control transactions. We funded the June 2019 Acquisition with $600 million in cash consideration from borrowings under our Ten Year Fixed Facility (as defined in Note 8 — Related Party Debt) with Shell Treasury Center (West) Inc. (“STCW”) and non-cash equity consideration valued at $200 million. Pursuant to the May 2019 Contribution Agreement, the number of common units representing the equity consideration was determined by dividing the contribution amount (25% of total consideration of $800 million) by the price per unit of $20.68, which represents the volume weighted average sales prices of the common units calculated for the five trading day period ended on April 30, 2019, less the general partner units issued to our general partner in order to maintain its 2% general partner interest in us. The equity issued consisted of 9,477,756 common units issued to LP Holdings, an indirect subsidiary of Shell, and 193,424 general partner units issued to our general partner in order to maintain its 2% general partner interest in us. These common and general partner units issued were assigned no book value because the cash consideration exceeded the historical carrying value of equity interests acquired. Accordingly, the units issued had no impact on partner capital accounts, other than changing ownership percentages.
As a result of the June 2019 Acquisition, we now have significant influence over both Explorer and Colonial and account for these investments as equity method investments (see Note 5 — Equity Method Investments for further details).
2018 Acquisition
On May 11, 2018, we acquired SPLC’s ownership interests in Amberjack, which is comprised of 75% of the issued and outstanding Series A membership interests of Amberjack and 50% of the issued and outstanding Series B membership interests of Amberjack, for $1,220 million (the “May 2018 Acquisition”). The May 2018 Acquisition closed pursuant to a Purchase and Sale Agreement dated May 9, 2018 between us and SPLC, and is accounted for as a transaction between entities under common control on a prospective basis as an asset acquisition. We acquired historical carrying value of net assets under common control of $482 million, which is included in Equity method investments in our consolidated balance sheet. We recognized $738 million of consideration in excess of the historical carrying value of net assets acquired as a capital distribution to our general partner in accordance with our policy for common control transactions. We funded the May 2018 Acquisition with $494 million in borrowings under our Five Year Revolver due July 2023 (as defined in Note 8 — Related Party Debt) and $726 million in borrowings under our Five Year Revolver due December 2022 (as defined in Note 8 — Related Party Debt) with STCW.
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Related Party Transactions
Related party transactions include transactions with SPLC and Shell, including those entities in which Shell has an ownership interest but does not have control.
Acquisition Agreements
Refer to Note 3 — Acquisitions and Other Transactions for a description of other applicable agreements.
Partnership Interests Restructuring Agreement
On February 27, 2020, we and our general partner entered into the Partnership Interests Restructuring Agreement, pursuant to which the IDRs were eliminated and the 2% general partner economic interest was converted into a non-economic general partner interest in the Partnership.
Purchase and Sale Agreement
On February 27, 2020, we entered into the Purchase and Sale Agreement by and among Triton, SPLC, SGOM, Shell Chemical and SOPUS, pursuant to which we acquired 79% of the issued and outstanding membership interests in Mattox from SGOM and SOPUS and Shell Chemical transferred to Triton, as a designee of the Partnership, the Norco Assets.
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, the Operating Company and Shell Oil Company terminated the Omnibus Agreement effective as of February 1, 2019, and we, our general partner, SPLC and the Operating Company entered into a new Omnibus Agreement effective February 1, 2019 (the “2019 Omnibus Agreement”). On February 18, 2020, pursuant to the 2019 Omnibus Agreement, the Board of Directors of our general partner (the “Board”) approved a 3% inflationary increase to the annual general and administrative fee for 2020.
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 assets acquired at our initial public offering (such offering, the “IPO,” and such assets “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 2020 and 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
We have entered into a tax sharing agreement with Shell. Pursuant to this agreement, we have agreed to reimburse Shell for state and local income and franchise taxes attributable to any activity of our operating subsidiaries and reported on Shell’s state or local income or franchise tax returns filed on a combined or unitary basis. Reimbursements under this agreement equal the
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amount of tax our applicable operating subsidiaries would be required to pay with respect to such activity, if such subsidiaries were to file a combined or unitary tax return separate from Shell. Shell will compute and invoice us for the tax reimbursement amount within 15 days of Shell filing its combined or unitary tax return on which such activity is included. We may be required to make prepayments toward the tax reimbursement amount to the extent that Shell is required to make estimated tax payments during the relevant tax year. The tax sharing agreement currently in place is effective for all taxable periods ending on or after December 31, 2017. The current agreement replaced a similar tax sharing agreement between Zydeco and Shell, which was effective for all tax periods ending before December 31, 2017. Reimbursements settled in the years ended December 31, 2020, 2019 and 2018 were not material to our consolidated statements of income.
Other Agreements
We have entered into several customary agreements with SPLC and Shell. These agreements include pipeline operating agreements, reimbursement agreements and services agreements.
Operating Agreements
On December 1, 2019, we entered into an Operating and Administrative Management Agreement with SPLC (the “2019 Operating Agreement”). Pursuant to the 2019 Operating Agreement, SPLC provides certain operations, maintenance and administrative services for the assets wholly owned by Pecten, Sand Dollar and Triton (collectively, the “Owners”). The Owners are required to reimburse SPLC for certain costs in connection with the services that SPLC provides pursuant to the 2019 Operating Agreement. SPLC and the Owners each provide standard indemnifications as operator and asset owners, respectively. Upon entering into the 2019 Operating Agreement, certain operating agreements previously entered into between SPLC and each of the Owners were terminated.
In December 2017, we were assigned an operating agreement for Odyssey, whereby SPLC performs physical operations and maintenance services and provides general and administrative services for Odyssey. Odyssey is required to reimburse SPLC for costs and expenses incurred in connection with such services. Also pursuant to the agreement, SPLC and Odyssey agree to standard indemnifications as operator and asset owner, respectively.
Beginning July 1, 2014, Zydeco entered into an operating and management agreement with SPLC under which SPLC provides general management and administrative services to us. Therefore, we do not receive allocated corporate expenses from SPLC or Shell under this agreement. We receive direct and allocated field and regional expenses including payroll expenses not covered under this agreement.
Partnership Agreement
Concurrently with the execution of the Partnership Interests Restructuring Agreement, on April 1, 2020, we executed the Second Amended and Restated Partnership Agreement, which amended and restated the Partnership’s First Amended and Restated Agreement of Limited Partnership dated November 3, 2014, (“First Amended and Restated Partnership Agreement”) as the same was previously amended, in its entirety. Under the Second Amended and Restated Partnership Agreement, the IDRs were eliminated, the economic general partnership interest was converted into a non-economic general partner interest, and our general partner or its assignee agreed to waive a portion of the distributions that would otherwise be payable on the common units issued to SPLC as part of the April 2020 Transaction, in an amount of $20 million per quarter for four consecutive fiscal quarters, beginning with the distribution made with respect to the second quarter of 2020. The transaction closed simultaneously with the closing of the transactions described in Note 3 — Acquisitions and Other Transactions—April 2020 Transaction.
Prior to the execution of the Second Amended and Restated Partnership Agreement, on December 21, 2018, we executed Amendment No. 2 (the “Second Amendment”) to the First Amended and Restated Partnership Agreement. Under the Second Amendment, our general partner agreed to waive $50 million of distributions in 2019 by agreeing to reduce distributions to holders of the IDRs by: (1) $17 million for the three months ended March 31, 2019, (2) $17 million for the three months ended June 30, 2019 and (3) $16 million for the three months ended September 30, 2019.
Noncontrolling Interests
For Zydeco, noncontrolling interest consists of SPLC’s 7.5% retained ownership interest as of December 31, 2020, 2019 and 2018. For Odyssey, noncontrolling interest consists of GEL Offshore Pipeline LLC’s (“GEL”) 29.0% retained ownership interest as of December 31, 2020, 2019 and 2018.
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Related Party Balances
Other related party balances consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Accounts receivable
|
$
|
21
|
|
|
$
|
29
|
|
Prepaid expenses
|
22
|
|
|
15
|
|
Other assets
|
2
|
|
|
2
|
|
Contract assets (1)
|
233
|
|
|
—
|
|
Accounts payable (2)
|
16
|
|
|
10
|
|
Deferred revenue
|
19
|
|
|
—
|
|
Accrued liabilities (3)
|
28
|
|
|
19
|
|
Debt payable (4)
|
2,692
|
|
|
2,692
|
|
Financing receivables (1)
|
298
|
|
|
—
|
|
(1) Contract assets and Financing receivables were recognized in connection with the April 2020 Transaction. Refer to the section entitled “Sale Leaseback” below for additional details. Financing receivables were presented as a component of (deficit) equity.
(2) Accounts payable reflects amounts owed to SPLC for reimbursement of third-party expenses incurred by SPLC for our benefit.
(3) As of December 31, 2020, Accrued liabilities reflects $16 million accrued interest and $12 million other accrued liabilities, which are primarily related to the accrued operation and maintenance expenses on the Norco Assets. As of December 31, 2019, Accrued liabilities reflects $18 million accrued interest and $1 million other accrued liabilities.
(4) Debt payable reflects borrowings outstanding net of unamortized debt issuance costs of $2 million as of both December 31, 2020 and December 31, 2019.
Related Party Credit Facilities
We have entered into five credit facilities with STCW: the Ten Year Fixed Facility, 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 2019 Zydeco Revolver with STCW. See Note 8 — Related Party Debt for definitions and additional information regarding these credit facilities.
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 2020, 2019 and 2018 is disclosed in Note 12 — Revenue Recognition.
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 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.
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Allocated operating expenses
|
$
|
45
|
|
|
$
|
18
|
|
|
$
|
15
|
|
Major maintenance costs (1)
|
6
|
|
|
—
|
|
|
—
|
|
Insurance expense (2)
|
20
|
|
|
18
|
|
|
15
|
|
Other (3)
|
43
|
|
|
23
|
|
|
24
|
|
Operations and maintenance – related parties
|
$
|
114
|
|
|
$
|
59
|
|
|
$
|
54
|
|
|
|
|
|
|
|
Allocated general corporate expenses
|
$
|
29
|
|
|
$
|
28
|
|
|
$
|
33
|
|
Management Agreement fee
|
9
|
|
|
9
|
|
|
9
|
|
Omnibus Agreement fee
|
11
|
|
|
11
|
|
|
9
|
|
Other
|
—
|
|
|
1
|
|
|
1
|
|
General and administrative – related parties
|
$
|
49
|
|
|
$
|
49
|
|
|
$
|
52
|
|
(1) Major maintenance costs are expensed as incurred in connection with the maintenance services of the Norco Assets. Refer to section entitled “Sale Leaseback” below for additional details.
(2) The majority of our insurance coverage is provided by a wholly owned subsidiary of Shell. The remaining coverage is provided by third-party insurers.
(3) Other expenses primarily relate to salaries and wages, other payroll expenses and special maintenance.
For a discussion of services performed by Shell on our behalf, see Note 1 — Description of the Business and Basis of Presentation – Basis of Presentation – Expense Allocations.
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 2020, 2019 and 2018 was $5 million, $6 million and $6 million, respectively. Our share of defined contribution benefit plan costs for 2020, 2019 and 2018 was $2 million, $2 million and $3 million, respectively. Pension and defined contribution benefit plan expenses are included in either General and administrative – related parties or Operations and maintenance – related parties in the accompanying consolidated statements of income, depending on the nature of the employee’s role in our operations.
Severance
We have recorded voluntary and involuntary severance costs of $7 million and $3 million in 2020 and 2018, respectively. These costs for 2019 were not material. Severance 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.
Equity and Other Investments
We have equity and other investments in various entities. In some cases we may be required to make capital contributions or other payments to these entities. See Note 5 — Equity Method Investments for additional details.
Reimbursements from Our General Partner
Historically, reimbursements received were primarily related to the directional drill project on the Zydeco pipeline system (the
“directional drill project”). As the directional drill project was completed at the end of 2019, the amounts incurred by the
project in 2020, and associated claims for reimbursement from our Parent, were not material. In 2019 and 2018, the amounts were $19 million and $12 million, respectively. These reimbursements are included in Other contributions from Parent in the accompanying consolidated statements of cash flows and consolidated statements of (deficit) equity. For each of these periods, this amount reflects our proportionate share of the directional drill project costs and expenses.
Further, in the fourth quarter of 2019, we received approximately $9 million from SPLC with respect to a Mars storage revenue reimbursement provision contained in the Purchase and Sale Agreement entered into in 2016 that was recognized as an additional capital contribution. See Note 5 — Equity Method Investments for additional details.
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sale Leaseback
Pursuant to the terminaling services agreement entered into among Triton, SOPUS and Shell Chemical related to the Norco Assets acquired in the April 2020 Transaction (see Note 3 — Acquisitions and Other Transactions), the Partnership receives an annual net payment of $140 million, which is the total annual payment pursuant to the terminaling service agreements of $151 million, less $11 million, which primarily represents the allocated utility costs from SOPUS related to the Norco Assets. Both annual payments are subject to annual Consumer Price Index adjustments.
The transfer of the Norco Assets, combined with the terminaling services agreements, were accounted for as a failed sale leaseback under the lease standard. As a result, the transaction was treated as a financing arrangement in which the underlying assets were not recognized in property, plant and equipment of the Partnership as control of the Norco Assets did not transfer to the Partnership, and instead were recorded as financing receivables from SOPUS and Shell Chemical on April 1, 2020 in the amount of $302 million.
We recognize interest income on the financing receivables recorded in the April 2020 Transaction on the basis of an imputed interest rate of 11.1% related to SOPUS and 7.4% related to Shell Chemical. The following table shows the interest income, reduction in the financing receivables, as well as the cash payments received for interest income and cash principal payments received on financing receivables for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2020
|
Interest income
|
|
$
|
23
|
|
Reduction in the financing receivables
|
|
3
|
|
Cash payments received for interest income
|
|
20
|
|
Cash principal payments received on financing receivables
|
|
3
|
|
The transfer of the Norco Assets and the terminaling services agreements as a result of the April 2020 Transaction have operation and maintenance service components and major maintenance service components (together “service components”). Consistent with our operating lease arrangements, we allocate a portion of the arrangement’s transaction price to any service components within the scope of the revenue standard and defer the revenue, if necessary, until the point at which the performance obligation is met. We present the revenue earned from the service components under the revenue standard within Transportation, terminaling and storage services – related parties in the consolidated statements of income. Contract assets were also recorded in the amount of $244 million as of April 1, 2020. See Note 12 — Revenue Recognition for additional details related to revenue recognized on the service components and amortization of the contract assets.
5. Equity Method Investments
For each of the following investments, we have the ability to exercise significant influence over these investments based on certain governance provisions and our participation in the significant activities and decisions that impact the management and economic performance of the investments.
Equity method investments comprise the following as of the dates indicated:
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
|
Ownership
|
|
Amount
|
|
Ownership
|
|
Amount
|
Mattox (1)
|
79%
|
|
$
|
163
|
|
|
—
|
|
$
|
—
|
|
Amberjack – Series A / Series B
|
75.0% / 50.0%
|
|
382
|
|
|
75.0% / 50.0%
|
|
426
|
|
Mars
|
71.5%
|
|
152
|
|
|
71.5%
|
|
161
|
|
Bengal
|
50.0%
|
|
88
|
|
|
50.0%
|
|
88
|
|
Permian Basin
|
50.0%
|
|
83
|
|
|
50.0%
|
|
91
|
|
LOCAP
|
41.48%
|
|
12
|
|
|
41.48%
|
|
9
|
|
Explorer (2)
|
38.59%
|
|
73
|
|
|
38.59%
|
|
88
|
|
Poseidon
|
36.0%
|
|
—
|
|
|
36.0%
|
|
—
|
|
Colonial (2)
|
16.125%
|
|
29
|
|
|
16.125%
|
|
30
|
|
Proteus
|
10.0%
|
|
14
|
|
|
10.0%
|
|
15
|
|
Endymion
|
10.0%
|
|
17
|
|
|
10.0%
|
|
18
|
|
|
|
|
$
|
1,013
|
|
|
|
|
$
|
926
|
|
(1) Mattox was acquired as part of the April 2020 Transaction. This interest has been accounted for on a prospective basis. See below for additional information.
(2) As part of the June 2019 Acquisition, these interests have been accounted for prospectively. See below for additional information.
We acquired a 79% interest in Mattox from SGOM in the April 2020 Transaction. This investment qualifies for equity method accounting, as we exercise significant influence but do not control this investment. Upon acquisition, we recorded SGOM’s historical carrying value of the equity interests transferred as a transaction between entities under common control, totaling $174 million. We recognize equity earnings for Mattox prospectively from the date of acquisition, and record the distributions from Mattox as a reduction to the equity method investment balance.
We acquired an additional 25.97% interest in Explorer and an additional 10.125% interest in Colonial in the June 2019 Acquisition. As a result, these investments now qualify for equity method accounting as we have the ability to exercise significant influence over these investments as of the acquisition date. Prior to the acquisition date, Explorer and Colonial were accounted for as Other investments without readily determinable fair values and were therefore carried at cost. Upon acquisition, we added our Parent’s historical carrying value of the equity interests transferred as a transaction between entities under common control, totaling $90 million, to the basis of our previously held interests of $60 million as this is the date these investments qualified for equity method accounting. Since the June 2019 Acquisition, we record distributions from these investments as reductions to the respective equity method investment balances for Explorer and Colonial as these amounts are no longer considered dividend income due to the change in the method of accounting. We recognize equity earnings for both Explorer and Colonial prospectively from the date of acquisition.
For the years ended December 31, 2020, 2019 and 2018, distributions received from equity method investments were $541 million, $466 million and $301 million, respectively.
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 December 31, 2020 and 2019, the unamortized basis differences included in our equity method investments are $84 million and $92 million, respectively. For the years ended 2020, 2019 and 2018, the net amortization expense was $8 million, $6 million and $4 million, respectively, which is included in Income from equity method investments.
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 $37 million, $33 million and $24 million in Other income for the years ended December 31, 2020, 2019 and 2018, respectively. Once our cumulative share of equity earnings becomes greater than the cumulative amount of distributions received, we will resume the equity method of accounting as long as the equity method investment balance remains greater than zero.
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings from our equity method investments were as follows during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
Mattox (1)
|
|
$
|
45
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Amberjack (2)
|
|
102
|
|
|
125
|
|
|
80
|
|
|
|
|
|
Mars
|
|
114
|
|
|
126
|
|
|
108
|
|
|
|
|
|
Bengal
|
|
18
|
|
|
24
|
|
|
21
|
|
|
|
|
|
Explorer (3)
|
|
44
|
|
|
41
|
|
|
—
|
|
|
|
|
|
Colonial (3)
|
|
75
|
|
|
40
|
|
|
—
|
|
|
|
|
|
Poseidon (4)
|
|
—
|
|
|
—
|
|
|
6
|
|
|
|
|
|
Other (5)
|
|
19
|
|
|
17
|
|
|
20
|
|
|
|
|
|
|
|
$
|
417
|
|
|
$
|
373
|
|
|
$
|
235
|
|
|
|
|
|
(1) We acquired an interest in Mattox in the April 2020 Transaction. The acquisition of this interest has been accounted for prospectively.
(2) We acquired an interest in Amberjack in the May 2018 Acquisition. The acquisition of this interest has been accounted for prospectively.
(3) We acquired additional interests in Explorer and Colonial in the June 2019 Acquisition. The acquisition of these interests has been accounted for prospectively.
(4) As stated above, the equity method of accounting has been suspended in 2018 for Poseidon and excess distributions are recorded in Other income.
(5) 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, which both adopted on January 1, 2018. As a result of adopting the revenue standard January 1, 2019 and 2018 by Amberjack and Mars, respectively, we recognized our proportionate share of each investment’s cumulative effect transition adjustment increasing the opening deficit in the amounts of $9 million and $7 million, respectively. The Amberjack adjustment is related to its dedication and transportation agreements, which contain tiered pricing arrangements resulting in a deferral of revenue. The Mars adjustment related to its transportation and dedication agreement and method of recognition as a stand-ready obligation, which resulted in a deferral of the recognition of revenue over the life of the contract, whereas under previous GAAP revenue was recognized upon physical delivery. The adoption of the revenue standard by our other equity method investments was not material.
Under the lease standard, 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, with the exception of Permian Basin, which adopted on January 1, 2019. There has been no material impact on the Partnership’s consolidated financial statements as a result of the adoption of the lease standard by our equity method investees.
On October 23, 2019, we entered into a Settlement Agreement with SPLC (the “Settlement Agreement”) with respect to the storage revenue reimbursement provision contained in the Purchase and Sale Agreement entered into in 2016 under which we acquired an additional 20% interest in Mars. As a result of the Settlement Agreement, we received approximately $9 million during the fourth quarter of 2019 from SPLC that was recognized as an additional capital contribution. Pursuant to the Purchase and Sale Agreement, SPLC agreed to pay us up to $10 million if Mars inventory management fees do not meet certain levels for the calendar years 2017 through 2021.
Based on our updated forecast and expectations of market conditions, we determined that there was a triggering event as of December 7, 2020 for our Permian Basin equity method investment that required us to update our impairment evaluation. The updated forecast had reductions in forecasted volumes gathered and processed by Permian Basin. Based on our evaluation, we determined that the fair value of our investment in Permian Basin was in excess of the carrying value as of December 7, 2020, and, therefore, there was no other-than-temporary impairment. However, if the facts and circumstances change in the near-term for Permian Basin and indicate a loss in value that is other-than-temporary, we will re-evaluate whether the carrying amount of this equity method investment may not be recoverable.
The fair value of the Permian Basin investment was determined based upon applying both the discounted cash flow method, which is an income approach, and a market approach. The discounted cash flow fair value estimate is based on known and knowable information at the measurement date. The significant assumptions that were used to develop the estimate of fair value
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
under the discounted cash flow method include management's best estimates of the expected future cash flows, including prices and volumes, the weighted average cost of capital and the long-term growth rate. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, we cannot provide assurance that actual amounts will not vary significantly from estimated amounts.
Due to the continuing effects of the COVID-19 pandemic, we also evaluated whether an impairment indicator existed as of December 31, 2020 for our other equity method investments. Based on our current forecast and expectations of market conditions, we determined that there was no triggering event that required us to update our impairment evaluation of these equity method investments. However, if the facts and circumstances change in the near-term and indicate a loss in value that is other-than-temporary, we will re-evaluate whether the carrying amount of our equity method investments may not be recoverable.
Summarized Financial Information
The following tables present aggregated selected balance sheet and income statement data for our equity method investments on a 100% basis. However, during periods in which an acquisition occurs, the selected balance sheet and income statement data reflects activity from the date of the acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2020
|
|
|
Total revenues
|
|
Total operating expenses
|
|
Operating income
|
|
Net income
|
Statements of Income
|
|
|
|
|
|
|
|
|
Mattox (1)
|
|
$
|
66
|
|
|
$
|
9
|
|
|
$
|
57
|
|
|
$
|
57
|
|
Amberjack
|
|
280
|
|
|
78
|
|
|
202
|
|
|
201
|
|
Mars
|
|
259
|
|
|
97
|
|
|
162
|
|
|
163
|
|
Bengal
|
|
65
|
|
|
30
|
|
|
35
|
|
|
35
|
|
Explorer
|
|
329
|
|
|
175
|
|
|
154
|
|
|
119
|
|
Colonial
|
|
1,395
|
|
|
660
|
|
|
735
|
|
|
473
|
|
Poseidon
|
|
147
|
|
|
36
|
|
|
111
|
|
|
105
|
|
Other (2)
|
|
220
|
|
|
123
|
|
|
97
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
|
Current assets
|
|
Non-current assets
|
|
Total assets
|
|
Current liabilities
|
|
Non-current liabilities
|
|
Equity (deficit)
|
|
Total liabilities and equity (deficit)
|
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mattox (1)
|
|
$
|
13
|
|
|
$
|
204
|
|
|
$
|
217
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
205
|
|
|
$
|
217
|
|
Amberjack
|
|
44
|
|
|
836
|
|
|
880
|
|
|
10
|
|
|
124
|
|
|
746
|
|
|
880
|
|
Mars
|
|
47
|
|
|
269
|
|
|
316
|
|
|
23
|
|
|
103
|
|
|
190
|
|
|
316
|
|
Bengal
|
|
33
|
|
|
161
|
|
|
194
|
|
|
7
|
|
|
—
|
|
|
187
|
|
|
194
|
|
Explorer
|
|
74
|
|
|
537
|
|
|
611
|
|
|
49
|
|
|
459
|
|
|
103
|
|
|
611
|
|
Colonial
|
|
501
|
|
|
3,105
|
|
|
3,606
|
|
|
245
|
|
|
3,508
|
|
|
(147)
|
|
|
3,606
|
|
Poseidon
|
|
31
|
|
|
176
|
|
|
207
|
|
|
10
|
|
|
238
|
|
|
(41)
|
|
|
207
|
|
Other (2)
|
|
35
|
|
|
920
|
|
|
955
|
|
|
56
|
|
|
486
|
|
|
413
|
|
|
955
|
|
(1) Our interest in Mattox was acquired in the April 2020 Transaction. Mattox’s total revenues, total operating expenses and operating income (on a 100% basis) were $85 million, $12 million and $73 million, respectively.
(2) Included in Other is the activity associated with our investments in Permian Basin, LOCAP, Proteus and Endymion.
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
|
|
Total revenues
|
|
Total operating expenses
|
|
Operating income
|
|
Net income
|
Statements of Income
|
|
|
|
|
|
|
|
|
Amberjack
|
|
$
|
315
|
|
|
$
|
73
|
|
|
$
|
242
|
|
|
$
|
243
|
|
Mars
|
|
282
|
|
|
104
|
|
|
178
|
|
|
179
|
|
Bengal
|
|
77
|
|
|
30
|
|
|
47
|
|
|
47
|
|
Explorer (1)
|
|
258
|
|
|
115
|
|
|
143
|
|
|
111
|
|
Colonial (2)
|
|
829
|
|
|
449
|
|
|
380
|
|
|
255
|
|
Poseidon
|
|
132
|
|
|
35
|
|
|
97
|
|
|
87
|
|
Other (3)
|
|
190
|
|
|
108
|
|
|
82
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
Current assets
|
|
Non-current assets
|
|
Total assets
|
|
Current liabilities
|
|
Non-current liabilities
|
|
Equity (deficit)
|
|
Total liabilities and equity (deficit)
|
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amberjack
|
|
$
|
56
|
|
|
$
|
804
|
|
|
$
|
860
|
|
|
$
|
4
|
|
|
$
|
32
|
|
|
$
|
824
|
|
|
$
|
860
|
|
Mars
|
|
57
|
|
|
173
|
|
|
230
|
|
|
8
|
|
|
22
|
|
|
200
|
|
|
230
|
|
Bengal
|
|
35
|
|
|
157
|
|
|
192
|
|
|
6
|
|
|
—
|
|
|
186
|
|
|
192
|
|
Explorer (1)
|
|
93
|
|
|
530
|
|
|
623
|
|
|
44
|
|
|
442
|
|
|
137
|
|
|
623
|
|
Colonial (2)
|
|
323
|
|
|
2,920
|
|
|
3,243
|
|
|
519
|
|
|
2,873
|
|
|
(149)
|
|
|
3,243
|
|
Poseidon
|
|
30
|
|
|
190
|
|
|
220
|
|
|
16
|
|
|
246
|
|
|
(42)
|
|
|
220
|
|
Other (3)
|
|
60
|
|
|
917
|
|
|
977
|
|
|
73
|
|
|
469
|
|
|
435
|
|
|
977
|
|
(1) Our interest in Explorer was acquired on June 6, 2019. Explorer total revenues, total operating expenses and operating income (on a 100% basis) was $443 million, $196 million and $247 million, respectively.
(2) Our interest in Colonial was acquired on June 6, 2019. Colonial total revenues, total operating expenses and operating income (on a 100% basis) was $1,437 million, $735 million and $702 million, respectively.
(3) Included in Other is the activity associated with our investments in Permian Basin, LOCAP, Proteus and Endymion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
|
|
Total revenues
|
|
Total operating expenses
|
|
Operating income
|
|
Net income
|
Statements of Income
|
|
|
|
|
|
|
|
|
Amberjack (1)
|
|
$
|
204
|
|
|
$
|
47
|
|
|
$
|
157
|
|
|
$
|
157
|
|
Mars
|
|
241
|
|
|
87
|
|
|
154
|
|
|
154
|
|
Bengal
|
|
69
|
|
|
28
|
|
|
41
|
|
|
41
|
|
Poseidon
|
|
116
|
|
|
35
|
|
|
81
|
|
|
73
|
|
Other (2)
|
|
152
|
|
|
67
|
|
|
85
|
|
|
76
|
|
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
Current assets
|
|
Non-current assets
|
|
Total assets
|
|
Current liabilities
|
|
Non-current liabilities
|
|
Equity (deficit)
|
|
Total liabilities and equity (deficit)
|
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amberjack (1)
|
|
$
|
46
|
|
|
$
|
846
|
|
|
$
|
892
|
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
884
|
|
|
$
|
892
|
|
Mars
|
|
53
|
|
|
178
|
|
|
231
|
|
|
5
|
|
|
18
|
|
|
208
|
|
|
231
|
|
Bengal
|
|
27
|
|
|
156
|
|
|
183
|
|
|
9
|
|
|
—
|
|
|
174
|
|
|
183
|
|
Poseidon
|
|
19
|
|
|
203
|
|
|
222
|
|
|
16
|
|
|
243
|
|
|
(37)
|
|
|
222
|
|
Other (2)
|
|
50
|
|
|
876
|
|
|
926
|
|
|
65
|
|
|
456
|
|
|
405
|
|
|
926
|
|
(1) Our interest in Amberjack was acquired on May 11, 2018. Amberjack total revenues, total operating expenses and operating income (on a 100% basis) was $295 million, $74 million and $221 million, respectively.
(2) 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 made capital contributions to Permian Basin of zero, $25 million and $28 million in 2020, 2019 and 2018, respectively.
6. Property, Plant and Equipment
Property, plant and equipment, net consists of the following as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Depreciable Life
|
|
2020
|
|
2019
|
Land
|
—
|
|
|
$
|
12
|
|
|
$
|
11
|
|
Building and improvements
|
10 - 40 years
|
|
47
|
|
|
40
|
|
Pipeline and equipment (1)
|
10 - 30 years
|
|
1,263
|
|
|
1,228
|
|
Other
|
5 - 25 years
|
|
34
|
|
|
33
|
|
|
|
|
1,356
|
|
|
1,312
|
|
Accumulated depreciation and amortization (2)
|
|
|
(661)
|
|
|
(613)
|
|
|
|
|
695
|
|
|
699
|
|
Construction in progress
|
|
|
4
|
|
|
27
|
|
Property, plant and equipment, net
|
|
|
$
|
699
|
|
|
$
|
726
|
|
(1) As of December 31, 2020 and 2019, includes cost of $372 million and $369 million, respectively, related to assets under operating leases (as lessor). As of both December 31, 2020 and 2019, includes cost of $23 million related to assets under capital lease (as lessee).
(2) As of December 31, 2020 and 2019, includes accumulated depreciation of $147 million and $133 million, respectively, related to assets under operating leases (as lessor), which commenced in May 2017 and December 2017. As of December 31, 2020 and 2019, includes accumulated depreciation of $8 million and $6 million, respectively, related to assets under capital lease (as lessee).
Depreciation and amortization expense on property, plant and equipment for 2020, 2019 and 2018 was $50 million, $49 million and $46 million, respectively, and is included in cost and expenses in the accompanying consolidated statements of income. Depreciation and amortization expense on property, plant and equipment includes amounts pertaining to assets under operating (as lessor) and capital leases (as lessee).
We evaluate long-lived assets for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount of our assets may not be recoverable. Due to the continuing effects of the COVID-19 pandemic, we evaluated whether an impairment indicator existed during the year ended December 31, 2020. Based on our current forecast and expectations of market conditions, we determined that there was no triggering event that required us to update our impairment evaluation of property, plant and equipment. However, if current volatile market conditions deteriorate further or continue for an extended period of time, we may be required to assess the recoverability of our long-lived assets, which could result in an impairment.
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Accrued Liabilities – Third Parties
Accrued liabilities – third parties consist of the following as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Project accruals
|
$
|
4
|
|
|
$
|
5
|
|
Property taxes
|
5
|
|
|
4
|
|
Other accrued liabilities
|
1
|
|
|
3
|
|
Total accrued liabilities – third parties
|
$
|
10
|
|
|
$
|
12
|
|
See Note 4 — Related Party Transactions for a discussion of Accrued liabilities – related parties.
8. Related Party Debt
Consolidated related party debt obligations comprise the following as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
Outstanding Balance
|
|
Total Capacity
|
|
Available Capacity
|
|
Outstanding Balance
|
|
Total Capacity
|
|
Available Capacity
|
Ten Year Fixed Facility
|
|
$
|
600
|
|
|
$
|
600
|
|
|
$
|
—
|
|
|
$
|
600
|
|
|
$
|
600
|
|
|
$
|
—
|
|
Seven Year Fixed Facility
|
|
600
|
|
|
600
|
|
|
—
|
|
|
600
|
|
|
600
|
|
|
—
|
|
Five Year Revolver due July 2023
|
|
494
|
|
|
760
|
|
|
266
|
|
|
494
|
|
|
760
|
|
|
266
|
|
Five Year Revolver due December 2022
|
|
400
|
|
|
1,000
|
|
|
600
|
|
|
400
|
|
|
1,000
|
|
|
600
|
|
Five Year Fixed Facility
|
|
600
|
|
|
600
|
|
|
—
|
|
|
600
|
|
|
600
|
|
|
—
|
|
2019 Zydeco Revolver
|
|
—
|
|
|
30
|
|
|
30
|
|
|
—
|
|
|
30
|
|
|
30
|
|
Unamortized debt issuance costs
|
|
(2)
|
|
|
n/a
|
|
n/a
|
|
(2)
|
|
|
n/a
|
|
n/a
|
Debt payable – related party
|
|
$
|
2,692
|
|
|
$
|
3,590
|
|
|
$
|
896
|
|
|
$
|
2,692
|
|
|
$
|
3,590
|
|
|
$
|
896
|
|
Interest and fee expenses associated with our borrowings, net of capitalized interest, were $90 million, $92 million and $61 million for 2020, 2019 and 2018, respectively, of which we paid $92 million, $88 million and $53 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 fixed rate credit facilities 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 December 31, 2020, the carrying amount and estimated fair value of total debt (before amortization of issuance costs) was $2,694 million and $2,928 million, respectively. As of December 31, 2019, the carrying amount and estimated fair value of total debt (before amortization of issuance costs) was $2,694 million and $2,825 million, respectively.
The Ten Year Fixed Facility was fully drawn on June 6, 2019 to partially fund the June 2019 Acquisition.
The Seven Year Fixed Facility was fully drawn on August 1, 2018 and the borrowings were used to partially repay borrowings under the Five Year Revolver due December 2022.
On May 11, 2018, we funded the May 2018 Acquisition with $494 million in borrowings under the Five Year Revolver due July 2023 and $726 million in borrowings under the Five Year Revolver due December 2022.
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.
Borrowings and repayments under our credit facilities for 2020, 2019 and 2018 are disclosed in our consolidated statements of cash flows. See Note 11 – (Deficit) Equity for additional information regarding the source of our repayments, if applicable to the period. Borrowings under the Five Year Revolver due July 2023, the Five Year Revolver due December 2022 and the 2019 Zydeco Revolver bear interest at the three-month LIBOR rate plus a margin or, in certain instances (including if LIBOR is
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
discontinued) at an alternate interest rate as described in each respective revolver. Over the next few years, LIBOR will be discontinued globally, and as such, a new benchmark will take its place. We are in discussion with our Parent to further clarify the reference rate(s) applicable to our revolving credit facilities once LIBOR is discontinued, and we are evaluating any potential impact on our facilities.
Credit Facility Agreements
Ten Year Fixed Facility
On June 4, 2019, we entered into a ten-year fixed rate credit facility with STCW with a borrowing capacity of $600 million (the “Ten Year Fixed Facility”). The Ten Year Fixed Facility bears an interest rate of 4.18% per annum and matures on June 4, 2029. No issuance fee was incurred in connection with the Ten Year Fixed Facility. The Ten Year Fixed Facility contains customary representations, warranties, covenants and events of default, the occurrence of which would permit the lender to accelerate the maturity date of amounts borrowed under the Ten Year Fixed Facility.
Seven Year Fixed Facility
On July 31, 2018, we entered into a seven-year fixed rate credit facility with STCW with a borrowing capacity of $600 million (the “Seven Year Fixed Facility”). We incurred an issuance fee of $1 million, which was paid on August 7, 2018. The Seven Year Fixed Facility contains customary representations, warranties, covenants and events of default, the occurrence of which would permit the lender to accelerate the maturity date of amounts borrowed under the Seven Year Fixed Facility.
The Seven Year Fixed Facility bears an interest rate of 4.06% per annum and matures on July 31, 2025.
Five Year Revolver due July 2023
On August 1, 2018, we amended and restated the five year revolving credit facility originally due October 2019 such that the facility will now mature on July 31, 2023 (the “Five Year Revolver due July 2023”). The Five Year Revolver due July 2023 has a borrowing capacity of $760 million and will continue to bear interest at LIBOR plus a margin and we continue to pay interest of 0.19% on any unused capacity. Commitment fees began to accrue beginning on the date we entered into the agreement.
As of December 31, 2020, the annualized weighted average interest rate for the Five Year Revolver due July 2023 was 2.06%. There was no issuance fee associated with this amendment. All other material terms and conditions of the Five Year Revolver due July 2023 remain unchanged.
The Five Year Revolver due July 2023 was originally entered into on November 3, 2014, and provides that loans advanced under the facility can have a term ending on or before its maturity date.
Five Year Revolver due December 2022
On December 1, 2017, we entered into a five year revolving credit facility with STCW (the “Five Year Revolver due December 2022”) with a borrowing capacity of $1,000 million and paid an issuance fee of $2 million. Borrowings under the Five Year Revolver due December 2022 bear interest at the three-month LIBOR rate plus a margin, or, in the alternative, the percentage rate per annum which is the rate notified to us by STCW in accordance with the terms of the Five Year Revolver due December 2022 as soon as practicable and in any event before interest is due to be paid in respect of a loan. Additionally, we pay interest of 0.19% on any unused capacity. As of December 31, 2020, the weighted average interest rate for the Five Year Revolver due December 2022 was 2.26%. Commitment fees began to accrue beginning on the date we entered into the agreement. The Five Year Revolver due December 2022 matures on December 1, 2022.
Five Year Fixed Facility
On March 1, 2017, we entered into a Loan Facility Agreement with STCW with a borrowing capacity of $600 million (the “Five Year Fixed Facility”) and paid an issuance fee of $1 million. The Five Year Fixed Facility provides that we may not repay or prepay amounts borrowed without the consent of the lender and amounts repaid or prepaid may not be re-borrowed.
The Five Year Fixed Facility bears a fixed interest rate of 3.23% per annum. The Five Year Fixed Facility matures on March 1, 2022.
Zydeco Revolving Credit Facility Agreement
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 6, 2019, the senior unsecured revolving credit facility agreement between Zydeco and STCW, dated August 6, 2014, expired. On August 1, 2019, Zydeco entered into a senior unsecured revolving loan facility agreement with STCW, effective August 6, 2019 (the “2019 Zydeco Revolver”). The 2019 Zydeco Revolver has a borrowing capacity of $30 million and matures on August 6, 2024. Borrowings under the credit facility bear interest at the three-month LIBOR rate plus a margin, or, in certain instances, including if LIBOR is discontinued, STCW may specify another benchmark rate generally accepted in the loan market to apply in relation to the advances in place of LIBOR. No issuance fee was incurred in connection with the 2019 Zydeco Revolver. As of December 31, 2020, the interest rate for the 2019 Zydeco Revolver was 0.86%.
Covenants
Under the Ten Year Fixed Facility, the Seven Year Fixed Facility, the Five Year Revolver due July 2023, the Five Year Revolver due December 2022, the Five Year Fixed Facility, and the 2019 Zydeco Revolver, we (and Zydeco in the case of the 2019 Zydeco Revolver) have agreed, among other things:
•to restrict additional indebtedness not loaned by STCW;
•to give the applicable facility pari passu ranking with any new indebtedness; and
•to refrain from securing our assets except as agreed with STCW.
These facilities also contain customary events of default, such as nonpayment of principal, interest and fees when due and violation of covenants, as well as cross-default provisions under which a default under one credit facility may trigger an event of default in another facility with the same borrower. Any breach of covenants included in our debt agreements that could result in our related party lender demanding payment of the unpaid principal and interest balances will have a material adverse effect upon us and would likely require us to seek to renegotiate these debt arrangements with our related party lender and/or obtain new financing from other sources. As of December 31, 2020 and 2019, we were in compliance with the covenants contained in the Ten Year Fixed Facility, Seven Year Fixed Facility, the Five Year Revolver due July 2023, the Five Year Revolver due December 2022 and the Five Year Fixed Facility, and Zydeco was in compliance with the covenants contained in the 2019 Zydeco Revolver.
Borrowings and repayments under our credit facilities for 2020, 2019 and 2018 are disclosed in our consolidated statements of cash flows. See Note 3 — Acquisitions and Other Transactions for additional information regarding our use of borrowings. See Note 11 — (Deficit) Equity for additional information regarding the source of our repayments.
9. Leases
Adoption of ASC Topic 842 “Leases”
On January 1, 2019, we adopted the 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 right-of-use (“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
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 consolidated balance sheets. Finance leases (as lessee) are included in Property, plant and equipment, Accrued liabilities – third parties and Finance lease liabilities in our 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 interest rate, we use our incremental borrowing rate (“IBR”) 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. 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 cancellable 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 that are reasonably certain of occurring.
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 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 balance sheet data related to leases at December 31, 2020 and 2019 and our lease costs as of and for the year ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
Classification
|
|
December 31, 2020
|
|
December 31, 2019
|
Assets
|
|
|
|
|
|
|
Operating lease assets
|
|
Operating lease right-of-use assets
|
|
$
|
4
|
|
|
$
|
4
|
|
Finance lease assets
|
|
Property, plant and equipment, net (1)
|
|
16
|
|
|
17
|
|
Total lease assets
|
|
|
|
$
|
20
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Finance
|
|
Accrued liabilities - third parties
|
|
$
|
1
|
|
|
$
|
1
|
|
Noncurrent
|
|
|
|
|
|
|
Operating
|
|
Operating lease liabilities
|
|
4
|
|
|
4
|
|
Finance
|
|
Finance lease liabilities
|
|
24
|
|
|
24
|
|
Total lease liabilities
|
|
|
|
$
|
29
|
|
|
$
|
29
|
|
(1) Finance lease assets are recorded net of accumulated amortization of $8 million as of December 31, 2020 and $6 million as of December 31, 2019.
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease cost
|
|
Classification
|
|
December 31, 2020
|
|
December 31, 2019
|
Operating lease cost (1)
|
|
Operations and maintenance - third parties
|
|
$
|
—
|
|
|
$
|
—
|
|
Finance lease cost (cost resulting from lease payments):
|
|
|
|
|
Amortization of leased assets
|
|
Depreciation and amortization
|
|
1
|
|
|
1
|
|
Interest on lease liabilities
|
|
Interest expense, net
|
|
4
|
|
|
4
|
|
Total lease cost
|
|
|
|
$
|
5
|
|
|
$
|
5
|
|
(1) Amounts for each year ended December 31, 2020 and 2019 were less than $1 million.
Other information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases (1)
|
|
$
|
—
|
|
|
$
|
—
|
|
Operating cash flows from finance leases
|
|
(3)
|
|
|
(4)
|
|
Financing cash flows from finance leases
|
|
(1)
|
|
|
(1)
|
|
(1) Amounts for each year ended December 31, 2020 and 2019 were less than $1 million .
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Weighted-average remaining lease term (years):
|
|
|
|
|
Operating leases
|
|
19
|
|
20
|
Finance leases
|
|
10
|
|
11
|
|
|
|
|
|
Weighted-average discount rate:
|
|
|
|
|
Operating leases
|
|
5.8
|
%
|
|
5.8
|
%
|
Finance leases
|
|
14.3
|
%
|
|
14.3
|
%
|
Annual maturity analysis
The future annual maturity of lease payments as of December 31, 2020 for the above lease obligations was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity of lease liabilities
|
|
Operating Leases (1)
|
|
Finance Leases (2)
|
|
Total
|
2021
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
4
|
|
2022
|
|
1
|
|
|
4
|
|
|
5
|
|
2023
|
|
—
|
|
|
4
|
|
|
4
|
|
2024
|
|
1
|
|
|
4
|
|
|
5
|
|
2025
|
|
—
|
|
|
5
|
|
|
5
|
|
Remainder
|
|
5
|
|
|
28
|
|
|
33
|
|
Total lease payments
|
|
7
|
|
|
49
|
|
|
56
|
|
Less: Interest (3)
|
|
(3)
|
|
|
(24)
|
|
|
(27)
|
|
Present value of lease liabilities (4)
|
|
$
|
4
|
|
|
$
|
25
|
|
|
$
|
29
|
|
(1) Operating lease payments include $2 million related to options to extend lease terms that are reasonably certain of being exercised.
(2) Includes $24 million in principal and excludes $8 million in executory costs.
(3) Calculated using the interest rate for each lease.
(4) Includes the current portion of $1 million for the finance lease.
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lessor accounting
We have certain transportation and terminaling services agreements with related parties entered into prior to the adoption date of January 1, 2019 that are considered operating leases and include both a lease component and an implied operation and maintenance service component (“non-lease service component”). Certain of these agreements were entered into for terms of ten years with the option to extend for two additional terms of five years each. One of these contracts was amended to include an option for the lessee to extend for a fourteen-month term prior to the original extension options. However, it is reasonably certain that the original extension options of the two additional five-year terms will not be exercised for this contract. Further, we have agreements with an initial term of ten years with the option to extend for up to ten additional one-year terms. As is the case with certain of our agreements, when the renewal options are reasonably certain to be exercised, the payments are included in the future maturity of lease payments. Our transportation, terminaling and storage services revenue and lease revenue from related parties for the years ended December 31, 2020 and 2019 are disclosed in Note 12 — Revenue Recognition.
Our risk management strategy for the residual assets is mitigated by the long-term nature of the underlying assets and the long-term nature of our lease agreements.
Significant assumptions and judgments
Lease and non-lease components. Certain of our revenues are accounted for under the lease standard, as the underlying contracts convey the right to control the use of the identified asset for a period of time. We allocate the arrangement consideration between the lease components that fall within the scope of the lease standard and any non-lease service components within the scope of the revenue standard based on the relative stand-alone selling price of each component. See Note 12 — Revenue Recognition for additional information regarding the allocation of the consideration in a contract between the lease and non-lease service components.
Annual maturity analysis
As of December 31, 2020, future annual maturity of lease payments to be received under the contract terms of these operating leases, which includes only the lease components of these leases, was estimated to be:
|
|
|
|
|
|
|
|
|
Maturity of lease payments
|
|
Operating leases (1)
|
2021
|
|
$
|
56
|
|
2022
|
|
56
|
|
2023
|
|
56
|
|
2024
|
|
56
|
|
2025
|
|
56
|
|
Remainder
|
|
451
|
|
Total lease payments
|
|
$
|
731
|
|
(1) Operating lease payments include $366 million related to options to extend lease terms that are reasonably certain of being exercised.
Other
As of December 31, 2020 and 2019, we had short-term payment obligations relating to capital expenditures totaling $1 million and $5 million, respectively. These represent unconditional payment obligations to vendors for products and services delivered in connection with capital projects.
10. Accumulated Other Comprehensive Loss
As a result of the transactions contemplated by the June 2019 Acquisition, we recorded an accumulated other comprehensive loss related to pension and other post-retirement benefits provided by Explorer and Colonial to their employees. We are not a sponsor of these benefits plans. The June 2019 Acquisition is accounted for as a transaction between entities under common control on a prospective basis, and we have recorded the acquisition on our consolidated balance sheet at SPLC’s historical basis, which included accumulated other comprehensive loss. In 2020 and 2019, we recorded $1 million and $2 million, respectively, in other comprehensive loss related to remeasurements related to these pension and other post-retirement benefits.
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. (Deficit) Equity
General Partner and IDR Restructuring
Prior to April 1, 2020, our capital accounts were comprised of a 2% general partner interest and 98% limited partner interests. On April 1, 2020, in connection with the closing of the April 2020 Transaction, we closed on the transactions contemplated by the Partnership Interests Restructuring Agreement, pursuant to which we eliminated all of the IDRs and converted the 2% economic general partner interest in the Partnership into a non-economic general partner interest. As a result, 4,761,012 general partner units and the IDRs were canceled and are no longer outstanding, and therefore, no longer participate in distributions of cash from the Partnership. Because the transaction was among entities under common control, our general partner’s negative equity balance of $4 billion at April 1, 2020 was transferred to SPLC’s equity accounts, allocated between its holdings of common units and preferred units, based on the relative fair value of the common units and preferred units issued as consideration in the April 2020 Transaction.
Shelf Registrations
We have a universal shelf registration statement on Form S-3 on file with the SEC under which we, as a well-known seasoned issuer, have the ability to issue and sell an indeterminate amount of common units and partnership securities representing limited partner units. We also have on file with the SEC a shelf registration statement on Form S-3 relating to $1,000,000,000 of common units and partnership securities representing limited partner units to be used in connection with the at-the-market equity distribution program, direct sales or other sales consistent with the plan of distribution set forth in the registration statement.
Public Offerings and Private Placement
On February 6, 2018, we completed the sale of 25,000,000 common units in a registered public offering for $673 million net proceeds ($680 million gross proceeds, or $27.20 per common unit, less $6 million of underwriter’s fees and $1 million of transaction fees). In connection with the issuance of common units, we issued 510,204 general partner units to our general partner for $14 million in order to maintain its 2% general partner interest in us. On February 6, 2018, we also completed the sale of 11,029,412 common units in a private placement with LP Holdings for an aggregate purchase price of $300 million, or $27.20 per common unit. In connection with the issuance of the common units, we issued 225,091 general partner units to our general partner for $6 million in order to maintain its 2% general partner interest in us. We used net proceeds from these sales to repay $247 million of borrowings outstanding under the Five Year Revolver due July 2023 and $726 million of borrowings outstanding under the Five Year Revolver due December 2022, as well as for general partnership purposes.
At-the-Market Program
We have an “at-the-market” equity distribution program pursuant to which we may issue and sell common units for up to $300 million in gross proceeds. We did not have any sales under this program during 2020, 2019 or 2018.
Units Outstanding
The changes in the number of units outstanding from December 31, 2018 through December 31, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in units)
|
SPLC Preferred
|
|
Public
Common
|
|
SPLC
Common
|
|
General
Partner
|
Balance as of December 31, 2018
|
—
|
|
|
123,832,233
|
|
|
99,979,548
|
|
|
4,567,588
|
|
June 2019 Acquisition
|
—
|
|
|
—
|
|
|
9,477,756
|
|
|
193,424
|
|
Balance as of December 31, 2019
|
—
|
|
|
123,832,233
|
|
|
109,457,304
|
|
|
4,761,012
|
|
April 2020 Acquisition
|
50,782,904
|
|
|
—
|
|
|
160,000,000
|
|
|
(4,761,012)
|
|
Balance as of December 31, 2020
|
50,782,904
|
|
|
123,832,233
|
|
|
269,457,304
|
|
|
—
|
|
Common units
The common units represent limited partner interests in us. The holders of common units, both public and SPLC, are entitled to participate in partnership distributions and have limited rights of ownership as provided for under the Second Amended and Restated Partnership Agreement.
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2020, we had 393,289,537 common units outstanding, of which 123,832,233 were publicly owned. SPLC owned 269,457,304 common units representing an aggregate 68.5% limited partner interest in us.
Series A Preferred Units
On April 1, 2020, as partial consideration for the April 2020 Transaction, we issued 50,782,904 Series A Preferred Units to SPLC at a price of $23.63 per preferred unit. The Series A Preferred Units are a new class of equity security that rank senior to all common units with respect to distribution rights and rights upon liquidation. The Series A Preferred Units have voting rights, distribution rights and certain redemption rights, and are also convertible (at the option of the Partnership and at the option of the holder, in each case under certain circumstances) and are otherwise subject to the terms and conditions as set forth in the Second Amended and Restated Partnership Agreement. We classified the Series A Preferred Units as permanent equity since they are not redeemable for cash or other assets 1) at a fixed or determinable price on a fixed or determinable date; 2) at the option of the holder; or 3) upon the occurrence of an event that is not solely within the control of the issuer.
Conversion
At the option of Series A Preferred Unitholders. Beginning with the earlier of (1) January 1, 2022 and (2) immediately prior to the liquidation of the Partnership, the Series A Preferred Units are convertible by the preferred unitholders, at the preferred unitholders’ option, into common units on a one-for-one basis, adjusted to give effect to any accrued and unpaid distributions on the applicable preferred units.
At the option of the Partnership. The Partnership shall have the right to convert the Series A Preferred Units on a one-for-one basis, adjusted to give effect to any accrued and unpaid distributions on the applicable Series A Preferred Units, into common units at any time from and after January 1, 2023, if the closing price of the common units is greater than $33.082 per unit (140% of the Series A Preferred Unit Issue Price (as defined in the Second Amended and Restated Partnership Agreement)) for any 20 trading days during the 30 trading-day period immediately preceding notice of the conversion. The conversion rate for the Series A Preferred Units shall be the quotient of (a) the sum of (i) $23.63, plus (ii) any unpaid cash distributions on the applicable Series A Preferred Units, divided by (b) $23.63.
Voting
The Series A Preferred Units are entitled to vote on an as-converted basis with the common units and have certain other class voting rights with respect to any amendment to the Second Amended and Restated Partnership Agreement. In the event of any liquidation of the Partnership, the Series A Preferred Units are entitled to receive, out of the assets of the Partnership available for distribution to the partners or any assignees, prior and in preference to any distribution of any assets of any junior securities, the value in each holder’s capital account in respect of such Series A Preferred Units.
Change of Control
Upon the occurrence of certain events involving a change of control in which more than 90% of the consideration payable to the holders of the common units is payable in cash, the Series A Preferred Units will automatically convert into common units at the then-applicable conversion rate. Upon the occurrence of certain other events involving a change of control, the holders of the Series A Preferred Units may elect, among other potential elections, to convert the Series A Preferred Units to common units at the then-applicable conversion rate.
Special Distribution
Each Series A Preferred Unit has the right to share in any special distributions by the Partnership of cash, securities or other property pro rata with the common units or any other securities, on an as-converted basis, provided that special distributions shall not include regular quarterly distributions paid in the normal course of business on the common units.
Distributions to our Unitholders
In connection with the April 2020 Transaction, commencing with the quarter ending June 30, 2020, the holders of the Series A Preferred Units are entitled to cumulative quarterly distributions at a rate of $0.2363 per Series A Preferred Unit, payable quarterly in arrears no later than 60 days after the end of the applicable quarter. The Partnership will not be entitled to pay any distributions on any junior securities, including any of the common units, prior to paying the quarterly distribution payable to the Series A Preferred Units, including any previously accrued and unpaid distributions. For the year ended December 31, 2020, the aggregate and per unit amounts of cumulative preferred distributions paid were $36 million and $0.7089, respectively.
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the Second Amended and Restated Partnership Agreement, our general partner or its assignee has agreed to waive a portion of the distributions that would otherwise be payable on the common units issued to SPLC as part of the April 2020 Transaction, in an amount of $20 million per quarter for four consecutive fiscal quarters, beginning with the distribution made with respect to the second quarter of 2020. See Note 4 — Related Party Transactions for terms of the Second Amended and Restated Partnership Agreement.
Under the Second Amendment, our general partner elected to waive $50 million of distributions with respect to the IDRs in 2019 to be used for future investment by the Partnership. See Note 4 — Related Party Transactions for terms of the Second Amendment.
The following table details the distributions declared and/or paid for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Paid or to be Paid
|
|
Three Months Ended
|
|
Public Common
|
|
SPLC Preferred
|
|
SPLC Common
|
|
General Partner
|
|
|
|
Distributions per Limited Partner Unit
|
|
|
IDRs
|
|
2%
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per unit amounts)
|
|
|
|
|
February 14, 2018
|
|
December 31, 2017
|
|
$
|
33
|
|
|
$
|
—
|
|
|
$
|
30
|
|
|
$
|
18
|
|
|
$
|
2
|
|
|
$
|
83
|
|
|
$
|
0.33300
|
|
May 15, 2018
|
|
March 31, 2018
|
|
43
|
|
|
—
|
|
|
35
|
|
|
26
|
|
|
2
|
|
|
106
|
|
|
0.34800
|
|
August 14, 2018
|
|
June 30, 2018
|
|
46
|
|
|
—
|
|
|
36
|
|
|
29
|
|
|
2
|
|
|
113
|
|
|
0.36500
|
|
November 14, 2018
|
|
September 30, 2018
|
|
47
|
|
|
—
|
|
|
38
|
|
|
33
|
|
|
3
|
|
|
121
|
|
|
0.38200
|
|
February 14, 2019
|
|
December 31, 2018
|
|
49
|
|
|
—
|
|
|
40
|
|
|
37
|
|
|
3
|
|
|
129
|
|
|
0.40000
|
|
May 15, 2019
|
|
March 31, 2019 (1)
|
|
51
|
|
|
—
|
|
|
42
|
|
|
23
|
|
|
3
|
|
|
119
|
|
|
0.41500
|
|
August 14, 2019
|
|
June 30, 2019 (1)
|
|
53
|
|
|
—
|
|
|
47
|
|
|
28
|
|
|
3
|
|
|
131
|
|
|
0.43000
|
|
November 14, 2019
|
|
September 30, 2019 (1)
|
|
56
|
|
|
—
|
|
|
48
|
|
|
33
|
|
|
3
|
|
|
140
|
|
|
0.44500
|
|
February 14, 2020
|
|
December 31, 2019
|
|
57
|
|
|
—
|
|
|
50
|
|
|
52
|
|
|
3
|
|
|
162
|
|
|
0.46000
|
|
May 15, 2020
|
|
March 31, 2020
|
|
57
|
|
|
—
|
|
|
50
|
|
|
52 (3)
|
|
3 (4)
|
|
162
|
|
|
0.46000
|
|
August 14, 2020
|
|
June 30, 2020 (2)
|
|
57
|
|
|
12
|
|
|
104
|
|
|
—
|
|
|
—
|
|
|
173
|
|
|
0.46000
|
|
November 13, 2020
|
|
September 30, 2020 (2)
|
|
57
|
|
|
12
|
|
|
104
|
|
|
—
|
|
|
—
|
|
|
173
|
|
|
0.46000
|
|
February 12, 2021
|
|
December 31, 2020 (2)(5)
|
|
57
|
|
|
12
|
|
|
104
|
|
|
—
|
|
|
—
|
|
|
173
|
|
|
0.46000
|
|
(1) Includes the impact of waived distributions to the holders of IDRs with respect to the Second Amendment as described above.
(2) Includes the impact of waived distributions to SPLC with respect to the April 2020 Transaction as described above.
(3) This amount represents the Final IDR Payment (as defined in the Partnership Interests Restructuring Agreement) to which our general partner (or its assignee) was entitled pursuant to the Partnership Interests Restructuring Agreement. Also pursuant to the Partnership Interests Restructuring Agreement, our general partner agreed (on its own behalf and on behalf of its assignees) to waive any distributions that it would otherwise be entitled to receive with respect to the newly-issued 160 million common units that it received in the April 2020 Transaction for the quarter in which it receives the Final IDR Payment. Our general partner is not entitled to any payments with respect to the IDRs going forward, as they have been cancelled as a part of the April 2020 Transaction.
(4) This amount represents the final distribution payment on the 2% economic general partner interest. Our general partner is not entitled to any payments with respect to the economic general partner interest going forward, as it was converted into a non-economic general partner interest as a part of the April 2020 Transaction.
(5) See Note 16 — Subsequent Event(s) for additional information.
Distributions to Noncontrolling Interests
Distributions to SPLC for its noncontrolling interest in Zydeco were $5 million, $4 million and $7 million in 2020, 2019 and 2018, respectively. Distributions to GEL for its noncontrolling interest in Odyssey were $11 million, $13 million and $9 million in 2020, 2019 and 2018, respectively. See Note 4 — Related Party Transactions for additional details.
12. Revenue Recognition
The revenue standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The revenue standard requires entities to recognize revenue through the application of a five-step model, which includes: identification of the contract; identification of the performance obligations; determination of the transaction price;
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
allocation of the transaction price to the performance obligations; and recognition of revenue as the entity satisfies the performance obligations.
Our revenues are primarily generated from the transportation, terminaling and storage of crude oil, refinery gas and refined petroleum products through our pipelines, terminals, storage tanks, docks, truck and rail racks. To identify the performance obligations, we considered all the products or services promised in the contracts with customers, whether explicitly stated or implied based on customary business practices. Revenue is recognized when each performance obligation is satisfied under the terms of the contract.
Each barrel of product transported or day of services provided is considered a distinct service that represents a performance obligation that would be satisfied over time if it were accounted for separately. The services provided over the contract period are a series of distinct services that are substantially the same, have the same pattern of transfer to the customer, and, therefore, qualify as a single performance obligation. Since the customer simultaneously receives and consumes the benefits of services, we recognize revenue over time based on a measure of progress of volumes transported for transportation services contracts or number of days elapsed for storage and terminaling services contracts.
Product revenue related to allowance oil sales is recognized at the point in time when the control of the oil transfers to the customer.
For all performance obligations, payment is typically due in full within 30 days of the invoice date.
Disaggregation of Revenue
The following table provides information about disaggregated revenue by service type and customer type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Transportation services revenue – third parties
|
|
$
|
114
|
|
|
$
|
134
|
|
|
$
|
200
|
|
Transportation services revenue – related parties (1)
|
|
164
|
|
|
210
|
|
|
176
|
|
Storage services revenue – third parties
|
|
9
|
|
|
9
|
|
|
9
|
|
Storage services revenue – related parties
|
|
8
|
|
|
7
|
|
|
7
|
|
Terminaling services revenue – related parties (2)
|
|
103
|
|
|
47
|
|
|
46
|
|
Terminaling services revenue – major maintenance service – related parties (3)
|
|
7
|
|
|
—
|
|
|
—
|
|
Product revenue – third parties (4)
|
|
—
|
|
|
5
|
|
|
2
|
|
Product revenue – related parties (4)
|
|
19
|
|
|
35
|
|
|
29
|
|
Total Topic 606 revenue
|
|
424
|
|
|
447
|
|
|
469
|
|
Lease revenue – related parties
|
|
57
|
|
|
56
|
|
|
56
|
|
Total revenue
|
|
$
|
481
|
|
|
$
|
503
|
|
|
$
|
525
|
|
(1) Transportation services revenue – related parties for each of 2020, 2019 and 2018 includes $5 million of non-lease service component in our transportation services contract.
(2) Terminaling services revenue – related parties is comprised of the service components in our terminaling services contracts, including the operation and maintenance service components related to the Norco Assets in connection with the April 2020 Transaction. See Note 4 – Related Party Transactions for additional details.
(3) Terminaling services revenue – major maintenance service – related parties is comprised of the service components related to providing required major maintenance to the Norco Assets in connection with the April 2020 Transaction. See Note 4 – Related Party Transactions for additional details.
(4) Product revenue is comprised of allowance oil sales.
Lease revenue
Certain of our long-term transportation and terminaling services contracts with related parties are accounted for as operating leases. These agreements have both lease and non-lease service components. We allocate the arrangement consideration between the lease components and any non-lease service components based on the relative stand-alone selling price of each component. We estimate the stand-alone selling price of the lease and non-lease service components based on an analysis of service-related and lease-related costs for each contract, adjusted for a representative profit margin. The contracts have a minimum fixed monthly payment for both the lease and non-lease service components. We present the non-lease service
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
components under the revenue standard within Transportation, terminaling and storage services – related parties in the consolidated statements of income.
Revenues from the lease components of these agreements are recorded within Lease revenue – related parties in the consolidated statements of income. Some of these agreements were each entered into for terms of ten years, with the option for the lessee to extend for two additional five-year terms. One of these contracts was amended to include an option for the lessee to extend for a fourteen-month term prior to the original extension options. However, it is reasonably certain that the original extension options of the two additional five-year terms will not be exercised for this contract. Further, we have agreements with initial terms of ten years with the option for the lessee to extend for up to ten additional one-year terms. As of December 31, 2020, future minimum payments of both the lease and non-lease service components to be received under the ten-year contract term of these operating leases were estimated to be:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less than 1 year
|
|
Years 2 to 3
|
|
Years 4 to 5
|
|
More than 5 years
|
Operating leases
|
|
$
|
735
|
|
|
$
|
111
|
|
|
$
|
220
|
|
|
$
|
220
|
|
|
$
|
184
|
|
Transportation services revenue
We have both long-term transportation contracts and month-to-month contracts for spot shippers that make nominations on our pipelines. Some of the long-term contracts entitle the customer to a specified amount of guaranteed capacity on the pipeline. Transportation services are charged at a per barrel rate or other applicable unit of measure. We apply the allocation exception guidance for variable consideration related to market indexing for long-term transportation contracts because (a) the variable payment relates specifically to our efforts to transfer the distinct service and (b) we allocate the variable amount of consideration entirely to the distinct service, which is consistent with the allocation objective. Except for guaranteed capacity payments as discussed below, transportation services are billed monthly as services are rendered.
Our contracts and tariffs contain terms for the customer to reimburse us for losses from evaporation or other loss in transit in the form of allowance oil. Allowance oil represents the net difference between the tariff PLA volumes and the actual volumetric losses. We obtain control of the excess oil not lost during transportation, if any. Under the revenue standard, we include the excess oil retained during the period, if any, as non-cash consideration and include this amount in the transaction price for transportation services on a net basis. Our allowance oil revenue is valued at the average market price of the relevant type of crude oil during the month product was transported. Gains from pipeline operations that relate to allowance oil are recorded in Operations and maintenance expenses in the accompanying consolidated statements of income.
As a result of FERC regulations, revenues we collect may be subject to refund. We establish reserves for these potential refunds based on actual expected refund amounts on the specific facts and circumstances. We had no reserves for potential refunds as of December 31, 2020 and 2019.
Storage and terminaling services revenue
Storage and terminaling services are provided under short-term and long-term contracts, with a fixed price per month for committed storage and terminaling capacity, or under a monthly spot-rate for uncommitted storage or terminaling. Since the customer simultaneously receives and consumes the benefits of services, we recognize revenue over time based on the number of days elapsed. We apply the allocation exception guidance for variable consideration related to market indexing for long-term contracts because (a) the variable payment relates specifically to our efforts to transfer the distinct service and (b) we allocate the variable amount of consideration entirely to the distinct service, which is consistent with the allocation objective. Storage and terminaling services are billed monthly as services are rendered.
Terminaling services revenue - Norco Assets
In April 2020, the Partnership closed the April 2020 Transaction pursuant to which the Norco Assets were transferred from SOPUS and Shell Chemical to Triton. In connection with closing the April 2020 Transaction, Triton entered into terminaling service agreements with SOPUS and Shell Chemical related to the Norco Assets. These terminaling service agreements were entered into for an initial term of fifteen years, with the option to extend for additional five-year terms. The transfer of the Norco Assets, combined with the terminaling services agreements, were accounted for as a failed sale leaseback under the lease standard. The Partnership receives an annual net payment of $140 million, which is the total annual payment pursuant to the terminaling service agreements of $151 million, less $11 million, which primarily represents the allocated utility costs from SOPUS related to the Norco Assets.
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These agreements have components related to financing receivables, for which the interest income is recognized in the consolidated statements of income and principal payments are recognized as a reduction to the financing receivables in the consolidated balance sheet. Revenue related to the operation and maintenance service components and major maintenance service components are presented within Transportation, terminaling and storage services – related parties in the consolidated statements of income.
The operation and maintenance service components consist of the Partnership’s obligation to operate the Norco Assets over the life of the agreements. It is considered a distinct service that represents a performance obligation that would be satisfied over time if it were accounted for separately. The services provided over the contract period are a series of distinct services that are substantially the same, have the same pattern of transfer to the customer, and, therefore, qualify as a single performance obligation. Since the customer simultaneously receives and consumes the benefits of services, we recognize revenue over time based on the number of days elapsed.
The major maintenance service components consist of the Partnership’s obligation to provide major maintenance on the Norco Assets such that the current capacity available to the customers is maintained over the life of the agreements. It is considered a distinct service that represents a performance obligation that would be satisfied over time if it were accounted for separately. The services provided over the contract period are a series of distinct services that are substantially the same, have the same pattern of transfer to the customer, and, therefore, qualify as a single performance obligation. Since the customer simultaneously receives and consumes the benefits of services, we recognize revenue over time using the input method (cost-to-cost method) based on the ratio of actual major maintenance costs incurred to date to the total forecasted major maintenance costs over the contract term.
We allocate the arrangement consideration between the components based on the relative stand-alone selling price of each component in accordance with the revenue standard. The Partnership established the stand-alone selling price for the financing components based off an expected return on the assets being financed. The Partnership established the stand-alone selling price for the service components using expected cost-plus margin approach based on the Partnership’s forecasted costs of satisfying the performance obligation plus an appropriate margin for the service. The key assumptions include forecasts of the future operation and maintenance costs and major maintenance costs and the expected margin with respect to the service components and the expected return on the assets with respect to the financing components.
Deferred revenue
Our FERC-approved transportation services agreements on Zydeco entitle the customer to a specified amount of guaranteed capacity on the pipeline. This capacity cannot be pro-rated even if the pipeline is oversubscribed. In exchange, the customer makes a specified monthly payment regardless of the volume transported. If the customer does not ship its full guaranteed volume in a given month, it makes the full monthly cash payment (i.e., deficiency payments) and it may ship the unused volume in a later month for no additional cash payment for up to 12 months, subject to availability on the pipeline. The cash payment received is recognized as deferred revenue, a contract liability under the revenue standard. If there is insufficient capacity on the pipeline to allow the unused volume to be shipped, the customer forfeits its right to ship such unused volume. We do not refund any cash payments relating to unused volumes.
Under the revenue standard, we are required to estimate the likelihood that unused volumes will be shipped or forfeited at each reporting period based on additional data that becomes available and only to the extent that it is probable that a significant reversal of revenue will not occur. In some cases, this estimate could result in the earlier recognition of revenue.
We also recognize deferred revenue on the major maintenance service components of the terminaling service agreement related to Norco Assets when we invoice SOPUS and Shell Chemical for the minimum volume commitment. Please refer to the Terminaling services revenues - Norco Assets section above for additional revenue recognition discussion.
Reimbursements from customers
Under certain transportation, terminaling and storage service contracts, we receive reimbursements from customers to recover costs of construction, maintenance or operating costs either under a tariff surcharge per volume shipped or under separate reimbursement payments. Because we consider these amounts as consideration from customers associated with ongoing services to be provided to customers, we defer these payments in deferred revenue and recognize amounts in revenue over the life of the associated revenue contract as performance obligations are satisfied under the contract. We consider these payments to be revenue because control of the long-lived assets does not transfer to our customer upon completion. Our financial statements were not materially impacted by adoption of the revenue standard related to reimbursements from customers.
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Product revenue
We generate revenue by selling accumulated allowance oil inventory to customers. The sale of allowance oil is recorded as product revenue, with specific cost based on a weighted average price per barrel recorded as cost of product sold.
Joint tariff
Under a certain joint tariff, we record revenues on a gross basis within Transportation, terminaling and storage services – third parties or related parties because we control the transportation service before it is transferred to the customer and are therefore the principal.
Contract Balances
We perform our obligations under a contract with a customer by providing services in exchange for consideration from the customer. The timing of our performance may differ from the timing of the customer’s payment, which results in the recognition of a contract asset or a contract liability. We recognize a contract asset when we transfer goods or services to a customer and contractually bill an amount which is less than the revenue allocated to the related performance obligation. We recognize deferred revenue (contract liability) when the customer’s payment of consideration precedes our performance. The following table provides information about receivables and contract liabilities from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2020
|
|
December 31, 2020
|
Receivables from contracts with customers – third parties
|
|
$
|
11
|
|
|
$
|
19
|
|
Receivables from contracts with customers – related parties
|
|
24
|
|
|
18
|
|
Contract Assets - related parties
|
|
—
|
|
|
233
|
|
Deferred revenue – third parties
|
|
—
|
|
|
4
|
|
Deferred revenue – related parties (1)
|
|
—
|
|
|
19
|
|
(1) Deferred revenue - related parties is related to deficiency credits from certain minimum volume commitment contracts and certain components of our terminaling service contracts on the Norco Assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2019
|
|
December 31, 2019
|
Receivables from contracts with customers – third parties
|
|
$
|
19
|
|
|
$
|
11
|
|
Receivables from contracts with customers – related parties
|
|
21
|
|
|
24
|
|
Deferred revenue – third parties
|
|
8
|
|
|
—
|
|
Deferred revenue – related parties
|
|
3
|
|
|
—
|
|
In connection with the April 2020 Transaction, we also recorded contract assets in the amount of $244 million as of April 1, 2020 based on the difference between the consideration allocated to the Norco Transaction and the recognized financing receivables. The contract assets represent the excess of the fair value embedded within the terminaling services agreements transferred by the Partnership to SOPUS and Shell Chemical as part of entering into the terminaling services agreements. The contract assets balance is amortized in a pattern consistent with the recognition of revenue on the service components of the contract. The portion of the contract assets related to operations and maintenance is amortized on a straight-line basis over a fifteen-year period, and the portion related to major maintenance is amortized based on the ratio of actual major maintenance costs incurred to the total projected major maintenance costs over the fifteen year term. We recorded amortization as a component of Transportation, terminaling and storage services – related parties of $11 million for the year ended December 31, 2020. We had no contract assets recognized from the costs to obtain or fulfill a contract as of December 31, 2019.
The estimated future amortization related to the contract assets for the next five years is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
Amortization
|
$
|
15
|
|
|
$
|
16
|
|
|
$
|
16
|
|
|
$
|
17
|
|
|
$
|
17
|
|
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant changes in the deferred revenue balances with customers during the period are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Additions (1)
|
|
Reductions (2)
|
|
December 31, 2020
|
Deferred revenue – third parties
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
(4)
|
|
|
$
|
4
|
|
Deferred revenue – related parties
|
|
—
|
|
|
21
|
|
|
(2)
|
|
|
19
|
|
(1) Deferred revenue additions resulted from $24 million deficiency payments from minimum volume commitment contracts and $5 million of deferred revenue related to the major maintenance service components of our terminaling service contracts on the Norco Assets.
(2) Deferred revenue reductions resulted from revenue earned through the actual or estimated use and expiration of deficiency credits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Additions (1)
|
|
Reductions (2)
|
|
December 31, 2019
|
Deferred revenue – third parties
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
(8)
|
|
|
$
|
—
|
|
Deferred revenue – related parties
|
|
3
|
|
|
—
|
|
|
(3)
|
|
|
—
|
|
(1) Deferred revenue additions resulted from deficiency payments from minimum volume commitment contracts.
(2) Deferred revenue reductions resulted from revenue earned through the actual or estimated use and expiration of deficiency credits.
Remaining Performance Obligations
The following table includes revenue expected to be recognized in the future related to performance obligations exceeding one year of their initial terms that are unsatisfied or partially unsatisfied as of December 31, 2020:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025 and beyond
|
Revenue expected to be recognized on multi-year committed shipper transportation contracts
|
|
$
|
472
|
|
|
$
|
63
|
|
|
$
|
63
|
|
|
$
|
63
|
|
|
$
|
57
|
|
|
$
|
226
|
|
Revenue expected to be recognized on other multi-year transportation service contracts (1)
|
|
34
|
|
|
6
|
|
|
6
|
|
|
6
|
|
|
5
|
|
|
11
|
|
Revenue expected to be recognized on multi-year storage service contracts
|
|
17
|
|
|
4
|
|
|
4
|
|
|
4
|
|
|
5
|
|
|
—
|
|
Revenue expected to be recognized on multi-year terminaling service contracts (1)
|
|
335
|
|
|
48
|
|
|
48
|
|
|
48
|
|
|
48
|
|
|
143
|
|
Revenue expected to be recognized on multi-year operation and major maintenance terminaling service contracts(2)
|
|
1,508
|
|
|
106
|
|
|
106
|
|
|
106
|
|
|
106
|
|
|
1,084
|
|
Total
|
|
$
|
2,366
|
|
|
$
|
227
|
|
|
$
|
227
|
|
|
$
|
227
|
|
|
$
|
221
|
|
|
$
|
1,464
|
|
(1) Relates to the non-lease service components of certain of our long-term transportation and terminaling service contracts which are accounted for as operating leases.
(2) Relates to the operation and maintenance service components and the major maintenance service components of our terminaling service contracts on the Norco Assets in connection with the April 2020 Transaction.
As an exemption, we do not disclose the amount of remaining performance obligations for contracts with an original expected duration of one year or less or for variable consideration that is allocated entirely to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation.
13. Net Income Per Limited Partner Unit
Net income per unit applicable to common limited partner units is computed by dividing the respective limited partners’ interest in net income attributable to the Partnership for the period by the weighted average number of common units outstanding for the period. Prior to April 1, 2020, the classes of participating securities included common units, general partner units and IDRs. Because we had more than one class of participating securities, we used the two-class method when calculating the net income per unit applicable to limited partners. Effective April 1, 2020, the classes of participating securities included only common units, as the general partner units and the IDRs were eliminated and the Series A Preferred Units are not considered a participating security. See Note 11 – (Deficit) Equity for a discussion of the elimination of our general partner’s IDRs and 2% economic interest effective April 1, 2020. For the year ended December 31, 2020, our Series A Preferred Units were dilutive to net income per limited partner unit. Basic and diluted net income per unit are the same for prior periods because we did not have any potentially dilutive units outstanding for those periods presented.
Net income earned by the Partnership is allocated between the classes of participating securities in accordance with the terms of our partnership agreement as in effect on the date such calculation is performed, after giving effect to priority income
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
allocations to the holders of the Series A Preferred Units if applicable. Earnings are allocated based on actual cash distributions declared to our unitholders, including those attributable to the IDRs prior to the second quarter of 2020, if applicable. To the extent net income attributable to the Partnership exceeds or is less than cash distributions, this difference is allocated based on the unitholders’ respective ownership percentages. For the diluted net income per limited partner unit calculation under the Second Amended and Restated Partnership Agreement, the Series A Preferred Units are assumed to be converted at the beginning of the period into common limited partner units on a one-for-one basis, and the distribution formula for available cash is recalculated using the available cash amount increased only for the preferred distributions, which would have been attributable to the common units after conversion.
The following tables show the allocation of net income attributable to the Partnership to arrive at net income per limited partner unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Net income
|
$
|
556
|
|
|
$
|
546
|
|
|
$
|
482
|
|
Less:
|
|
|
|
|
|
Net income attributable to noncontrolling interests
|
13
|
|
|
18
|
|
|
18
|
|
Net income attributable to the Partnership
|
543
|
|
|
528
|
|
|
464
|
|
Less:
|
|
|
|
|
|
General partner’s distribution declared (1)
|
55
|
|
|
148
|
|
|
135
|
|
Preferred unitholder’s interest in net income
|
36
|
|
|
—
|
|
|
—
|
|
Limited partners’ distribution declared on common units (2)
|
590
|
|
|
404
|
|
|
334
|
|
Distributions in excess of income
|
$
|
(138)
|
|
|
$
|
(24)
|
|
|
$
|
(5)
|
|
(1) For 2019, this includes the impact of waived distributions to the holders of the IDRs. See Note 4 — Related Party Transactions for additional information.
(2) For 2020, this includes the impact of waived distributions to SPLC. See Note 4 — Related Party Transactions for additional information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
General Partner
|
|
Limited Partners’ Common Units
|
|
Total
|
|
|
|
|
|
|
|
(in millions of dollars, except per unit data)
|
Distributions declared (1)
|
$
|
55
|
|
|
$
|
590
|
|
|
$
|
645
|
|
Distributions in excess of income
|
—
|
|
|
(138)
|
|
|
(138)
|
|
Net income attributable to the Partnership’s common unitholders (basic)
|
$
|
55
|
|
|
$
|
452
|
|
|
$
|
507
|
|
Dilutive effect of preferred units
|
|
|
36
|
|
|
|
Net income attributable to the Partnership’s common unitholders (diluted)
|
|
|
$
|
488
|
|
|
|
|
|
|
|
|
|
Weighted average units outstanding - Basic
|
|
|
353.5
|
|
|
|
Dilutive effect of preferred units
|
|
|
38.2
|
|
|
|
Weighted average units outstanding - Diluted
|
|
|
391.7
|
|
|
|
|
|
|
|
|
|
Net income per limited partner unit:
|
|
|
|
|
|
Basic
|
|
|
$
|
1.28
|
|
|
|
Diluted
|
|
|
$
|
1.25
|
|
|
|
(1) This includes the impact of waived distributions to SPLC. See Note 4 — Related Party Transactions for additional information.
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
General Partner
|
|
Limited Partners’ Common Units
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
(in millions of dollars, except per unit data)
|
Distributions declared (1)
|
$
|
148
|
|
|
$
|
404
|
|
|
|
|
$
|
552
|
|
Distributions in excess of income
|
(1)
|
|
|
(23)
|
|
|
|
|
(24)
|
|
Net income attributable to the Partnership
|
$
|
147
|
|
|
$
|
381
|
|
|
|
|
$
|
528
|
|
Weighted average units outstanding:
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
229.2
|
|
|
|
|
|
Net income per limited partner unit:
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
$
|
1.66
|
|
|
|
|
|
(1) This includes the impact of waived distributions to the holders of the IDRs. See Note 4 — Related Party Transactions for additional information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
General Partner
|
|
Limited Partners’ Common Units
|
|
Total
|
|
|
|
|
|
|
|
(in millions of dollars, except per unit data)
|
Distributions declared
|
$
|
135
|
|
|
$
|
334
|
|
|
$
|
469
|
|
Distributions in excess of income
|
(1)
|
|
|
(4)
|
|
|
(5)
|
|
Net income attributable to the Partnership
|
$
|
134
|
|
|
$
|
330
|
|
|
$
|
464
|
|
Weighted average units outstanding:
|
|
|
|
|
|
Basic and diluted
|
|
|
220.3
|
|
|
|
Net income per limited partner unit:
|
|
|
|
|
|
Basic and diluted
|
|
|
$
|
1.50
|
|
|
|
14. Transactions with Major Customers and Concentration of Credit Risk
Our Parent and its affiliates accounted for approximately 75%, 70% and 60% of our total revenues for 2020, 2019 and 2018, respectively. There is no third-party customer that accounted for a 10% or greater share of consolidated revenues or net accounts receivable for the year ended December 31, 2020.
We have a concentration of revenues and trade receivables due 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. These concentrations of customers may impact our overall exposure to credit risk as they may be similarly affected by changes in economic, regulatory, regional and other factors. We are potentially exposed to concentration of credit risk primarily through our accounts receivable with our Parent. These receivables have payment terms of 30 days or less, and there has been no history of collectability issues. We monitor the creditworthiness of third-party major customers. We manage our exposure to credit risk through credit analysis, credit limit approvals and monitoring procedures, and for certain transactions, we may request letters of credit, prepayments or guarantees. As of December 31, 2020 and 2019, there were no such arrangements with customers.
We have concentrated credit risk for cash by maintaining deposits in a major bank, which may at times exceed amounts covered by insurance provided by the United States Federal Deposit Insurance Corporation (“FDIC”). We monitor the financial health of the bank, have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk. As of December 31, 2020 and 2019, we had approximately $320 million and $289 million, respectively, in cash and cash equivalents in excess of FDIC limits.
15. Commitments and Contingencies
Environmental Matters
SHELL MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We are subject to federal, state and local environmental laws and regulations. We routinely conduct reviews of potential environmental issues and claims that could impact our assets or operations. These reviews assist us in identifying environmental issues and estimating the costs and timing of remediation efforts. In making environmental liability estimations, we consider the material effect of environmental compliance, pending legal actions against us and potential third-party liability claims. Often, as the remediation evaluation and effort progresses, additional information is obtained, requiring revisions to estimated costs. These revisions are reflected in our income in the period in which they are probable and reasonably estimable. For both December 31, 2020 and 2019, these costs and any related liabilities are not material.
Legal Proceedings
We are named defendants in lawsuits and governmental proceedings that arise in the ordinary course of business. For each of our outstanding legal matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies and the likelihood of an unfavorable outcome. While there are still uncertainties related to the ultimate costs we may incur, based upon our evaluation and experience to date, we do not expect that the ultimate resolution of these matters will have a material adverse effect on our financial position, operating results or cash flows.
Indemnification
Under the 2019 Omnibus Agreement, certain tax liabilities are indemnified by SPLC. See Note 4 — Related Party Transactions for additional information.
Other Commitments
Odyssey entered into a tie-in agreement effective January 2012 with a third party, which allowed producers to install the tie-in connection facilities and tying into the system. The agreement will continue to be in effect until the continued operation of the platform is uneconomic.
We hold cancellable 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.
16. Subsequent Event(s)
We have evaluated events that occurred after December 31, 2020 through the issuance of these consolidated financial statements. Any material subsequent events that occurred during this time have been properly recognized or disclosed in the consolidated financial statements and accompanying notes.
Distribution
On January 20, 2021, the Board declared a cash distribution of $0.4600 per limited partner unit and $0.2363 per limited partner preferred unit for the three months ended December 31, 2020. The distribution was paid on February 12, 2021 to unitholders of record as of February 2, 2021.
Assets Held for Sale
On January 25, 2021, we executed an agreement to divest the 12” segment of the Auger pipeline, effective March 1, 2021. The remainder of the Auger pipeline will continue to operate under the ownership of Pecten. As a result of the divestment, we expect to record an impairment charge of approximately $3 million during the first quarter of 2021.
2019 Omnibus Agreement
On February 16, 2021, pursuant to the 2019 Omnibus Agreement, the Board approved a decrease to the annual general and administrative fee for 2021 based on a change in the cost of the services provided. The annual fee for 2021 will be $10 million for the provision of certain services provided by SPLC to us.