NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Except as noted within the context of each note disclosure, the dollar amounts presented in the tabular data within these note disclosures are stated in millions of dollars.
1. Description of 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 purchased 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 September 30, 2021, 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 2 – Acquisitions and Other Transactions and Note 8 – (Deficit) Equity for additional details.
Description of the Business
We own, operate, develop and acquire pipelines and other midstream and logistics assets. As of September 30, 2021, 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.
The following table reflects our ownership interests as of September 30, 2021:
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|
|
|
|
|
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|
|
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)
|
100.0
|
%
|
|
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) Prior to May 1, 2021, we owned a 92.5% ownership interest in Zydeco and SPLC owned the remaining 7.5% ownership interest. Effective May 1, 2021, SPLC transferred its 7.5% ownership interest to us as part of the May 2021 Transaction. Refer to Note 2 —Acquisitions and Other Transactions for additional information.
Basis of Presentation
Our unaudited consolidated financial statements include all subsidiaries required to be consolidated under generally accepted accounting principles in the United States (“GAAP”). Our reporting currency is U.S. dollars, and all references to dollars are U.S. dollars. The accompanying unaudited consolidated financial statements and related notes have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete annual financial statements. The year-end consolidated balance sheet data was derived from audited financial statements. During interim periods, we follow the accounting policies disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020 (our “2020 Annual Report”), filed with the United States Securities and Exchange Commission (“SEC”) unless otherwise described herein. The unaudited consolidated financial statements for the three and nine months ended September 30, 2021 and September 30, 2020 include all adjustments we believe are necessary for a fair statement of the results of operations for the interim periods presented. These adjustments are of a normal recurring nature unless otherwise disclosed. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year. These unaudited consolidated financial statements and other information included in this Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements and notes thereto included in our 2020 Annual Report.
Our consolidated subsidiaries include Pecten, Sand Dollar, Triton, Zydeco, Odyssey and the Operating Company. Asset acquisitions of additional interests in previously consolidated subsidiaries and interests in equity 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.
Summary of Significant Accounting Policies
The accounting policies are set forth in Note 2 – Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements of our 2020 Annual Report. There have been no significant changes to these policies during the nine months ended September 30, 2021, other than those noted below.
Recent Accounting Pronouncements
Standards Adopted as of January 1, 2021
In August 2020, the FASB issued Accounting Standards Update (“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. We elected to early adopt effective January 1, 2021. The adoption of ASU 2020-06 did not have a material impact on our unaudited consolidated financial statements.
2. Acquisitions and Other Transactions
May 2021 Transaction
Effective May 1, 2021, Triton sold to Equilon Enterprises LLC d/b/a Shell Oil Products US (“SOPUS”), as designee of SPLC, substantially all of the assets associated with its clean products truck rack terminal and facility in Anacortes, Washington (the “Anacortes Assets”). In exchange for the Anacortes Assets, SPLC paid Triton $10 million in cash and transferred to the Operating Company, as designee of Triton, SPLC’s 7.5% interest in Zydeco (the “May 2021 Transaction”). Effective May 1, 2021, the Partnership owns a 100.0% ownership interest in Zydeco.
The May 2021 Transaction closed pursuant to a Sale and Purchase Agreement dated April 28, 2021 between Triton and SPLC, effective May 1, 2021 (the “May 2021 Sale and Purchase Agreement”). The May 2021 Sale and Purchase Agreement contains customary representations, warranties and covenants of Triton and SPLC. SPLC, on the one hand, and Triton, on the other hand, have agreed to indemnify each other and their respective affiliates, officers, directors and other representatives against certain losses resulting from any breach of their representations, warranties or covenants contained in the May 2021 Sale and Purchase Agreement, subject to certain limitations and survival periods.
In connection with the May 2021 Transaction, the Partnership and SPLC entered into a Termination of Voting Agreement dated April 28, 2021 and effective May 1, 2021, under which they agreed to terminate the Voting Agreement dated November 3, 2014 between the Partnership and SPLC, relating to certain governance matters for their respective direct and indirect ownership interests in Zydeco.
Auger Divestiture
On January 25, 2021, we executed an agreement to divest the 12” segment of the Auger pipeline; however, this agreement was subsequently terminated. As a result of the intended divestment, we recorded an impairment charge of approximately $3 million during the first quarter of 2021. On April 29, 2021, we executed a new agreement to divest this segment of pipeline, effective June 1, 2021. We received approximately $2 million in cash consideration for this sale. The remainder of the Auger pipeline continues to operate under the ownership of Pecten.
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 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”).
•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 also agreed to waive a portion of the distributions that would otherwise have been 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 and ending with the distribution made with respect to the first quarter of 2021.
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:
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|
Equity method investment (1)
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|
$
|
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 September 30, 2021. See Note 4 – 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 is treated for accounting purposes as simultaneously leasing 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 ASC Topic 842, Leases (“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, 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 9 – 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 approach of discounted cash flows at an average discount rate for each of the Mattox Transaction, the Norco Transaction and the GP/IDR Restructuring 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 8 – (Deficit) Equity for additional details.
3. Related Party Transactions
Related party transactions include transactions with SPLC and Shell, including those entities in which Shell has an ownership interest but does not have control.
Partnership Interests Restructuring Agreement
On February 27, 2020, we and our general partner entered into the Partnership Interests Restructuring Agreement, effective April 1, 2020, 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. Refer to Note 2 – Acquisitions and Other Transactions for additional information.
May 2021 Sale and Purchase Agreement
On April 28, 2021, we entered into the May 2021 Sale and Purchase Agreement between Triton and SPLC, effective May 1, 2021, pursuant to which we sold the Anacortes Assets in exchange for $10 million in cash and the remaining 7.5% interest in Zydeco.
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, effective April 1, 2020, 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
We, our general partner, SPLC and the Operating Company entered into an Omnibus Agreement effective February 1, 2019 (the “2019 Omnibus Agreement”). On February 16, 2021, pursuant to the 2019 Omnibus Agreement, the Board of Directors of
our general partner (the “Board”) approved a decrease in the annual general and administrative fee to $10 million for 2021, based on a change in the cost of the services provided.
The 2019 Omnibus Agreement addresses, among other things, the following matters:
•our payment of an annual general and administrative fee of approximately $10 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.
Trade Marks License Agreement
We, our general partner and SPLC entered into a Trade Marks License Agreement with Shell Trademark Management Inc. effective as of February 1, 2019. The Trade Marks License Agreement grants us the use of certain Shell trademarks and trade names and expires on January 1, 2024 unless earlier terminated by either party upon 360 days’ notice.
Tax Sharing Agreement
For a discussion of the Tax Sharing Agreement, see Note 4 – Related Party Transactions – Tax Sharing Agreement in the Notes to Consolidated Financial Statements of our 2020 Annual Report.
Other Agreements
We have entered into several customary agreements with SPLC and Shell. These agreements include pipeline operating agreements, reimbursement agreements and services agreements. See Note 4 – Related Party Transactions – Other Agreements in the Notes to Consolidated Financial Statements of our 2020 Annual Report.
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 have been 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 and ending with the distribution made with respect to the first quarter of 2021.
Noncontrolling Interests
For Zydeco, there is no noncontrolling interest as of September 30, 2021 as a result of the May 2021 Transaction. Refer to Note 2 — Acquisitions and Other Transactions for additional information. The noncontrolling interest for Zydeco consisted of SPLC’s 7.5% retained ownership interest as of December 31, 2020. For Odyssey, the noncontrolling interest consists of GEL Offshore Pipeline LLC’s (“GEL”) 29% retained ownership interest as of both September 30, 2021 and December 31, 2020.
Other Related Party Balances
Other related party balances consist of the following:
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|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
Accounts receivable
|
|
$
|
30
|
|
|
$
|
21
|
|
|
Prepaid expenses
|
|
10
|
|
|
22
|
|
|
Other assets
|
|
2
|
|
|
2
|
|
|
Contract assets (1)
|
|
222
|
|
|
233
|
|
|
Accounts payable (2)
|
|
13
|
|
|
16
|
|
|
Deferred revenue
|
|
26
|
|
|
19
|
|
|
Accrued liabilities (3)
|
|
19
|
|
|
28
|
|
|
Debt payable (4)
|
|
2,691
|
|
|
2,692
|
|
|
Finance lease liability
|
|
2
|
|
|
2
|
|
|
Financing receivables (1)
|
|
294
|
|
|
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 September 30, 2021, Accrued liabilities reflects $14 million of accrued interest and $5 million of other accrued liabilities. As of December 31, 2020, Accrued liabilities reflects $16 million of accrued interest and $12 million of other accrued liabilities. Other accrued liabilities are primarily related to the accrued operations and maintenance expenses on the Norco Assets.
(4) Debt payable reflects borrowings outstanding after taking into account unamortized debt issuance costs of $3 million and $2 million as of September 30, 2021 and December 31, 2020, respectively.
Related Party Credit Facilities
We have entered into five credit facilities with Shell Treasury Center (West) Inc. (“STCW”), an affiliate of the Partnership: the 2021 Ten Year Fixed Facility, the Ten Year Fixed Facility, the Seven Year Fixed Facility, the Five Year Revolver due July 2023 and the Five Year Revolver due December 2022. On June 30, 2021, Zydeco entered into a termination of revolving loan facility agreement with STCW to terminate the 2019 Zydeco Revolver. For definitions and additional information regarding these credit facilities, see Note 6 – Related Party Debt in this report and Note 8 – Related Party Debt in the Notes to Consolidated Financial Statements of our 2020 Annual Report.
Related Party Revenues and Expenses
We provide crude oil transportation, terminaling and storage services to related parties under long-term contracts. We entered into these contracts in the normal course of our business. Our revenue from related parties for the three and nine months ended September 30, 2021 and September 30, 2020 is disclosed in Note 9 – 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 unaudited consolidated statements of income for the indicated periods. Included in these amounts, and disclosed below, is our share of operating and general corporate expenses, as well as the fees paid to SPLC under certain agreements.
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|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
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|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Allocated operating expenses
|
|
$
|
13
|
|
|
$
|
13
|
|
|
$
|
40
|
|
|
$
|
33
|
|
|
Major maintenance costs (1)
|
|
2
|
|
|
—
|
|
|
5
|
|
|
3
|
|
|
Insurance expense (2)
|
|
5
|
|
|
6
|
|
|
15
|
|
|
16
|
|
|
Other (3)
|
|
6
|
|
|
11
|
|
|
27
|
|
|
24
|
|
|
Operations and maintenance – related parties
|
|
$
|
26
|
|
|
$
|
30
|
|
|
$
|
87
|
|
|
$
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated general corporate expenses
|
|
$
|
7
|
|
|
$
|
8
|
|
|
$
|
19
|
|
|
$
|
25
|
|
|
Management Agreement fee
|
|
2
|
|
|
2
|
|
|
7
|
|
|
7
|
|
|
Omnibus Agreement fee
|
|
3
|
|
|
3
|
|
|
8
|
|
|
8
|
|
|
Other
|
|
—
|
|
|
(2)
|
|
|
—
|
|
|
—
|
|
|
General and administrative – related parties
|
|
$
|
12
|
|
|
$
|
11
|
|
|
$
|
34
|
|
|
$
|
40
|
|
(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. See Note 13 – Subsequent Events for additional information related to our insurance coverage.
(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 Business and Basis of Presentation – Basis of Presentation – Expense Allocations in the Notes to Consolidated Financial Statements of our 2020 Annual Report.
Pension and Retirement Savings Plans
Employees who directly or indirectly support our operations participate in the pension, postretirement health and life insurance and defined contribution benefit plans sponsored by Shell, which include other Shell subsidiaries. Our share of pension and postretirement health and life insurance costs for the three and nine months ended September 30, 2021 were $1 million and $4 million, respectively, and for the three and nine months ended September 30, 2020 were $1 million and $4 million, respectively. Our share of defined contribution benefit plan costs for the three and nine months ended September 30, 2021 were less than $1 million and $1 million, respectively, and for the three and nine months ended September 30, 2020 were less than $1 million and $2 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 unaudited consolidated statements of income, 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 4 – Equity Method Investments for additional details.
Severance
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. For both the three and nine months ended September 30, 2021, these costs were not material. For the three and nine months ended September 30, 2020, we recorded voluntary and involuntary severance costs of $1 million and $6 million, respectively.
Sale Leaseback
Pursuant to the terminaling services agreements entered into among Triton, SOPUS and Shell Chemical related to the Norco Assets acquired in the April 2020 Transaction, 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. The annual payments are subject to annual Consumer Price Index adjustments. See Note 9 Revenue Recognition for additional details.
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.
We recognize interest income on the financing receivables 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 and reduction in the financing receivables for both the three and nine months ended September 30, 2021 and September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Interest income
|
|
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
23
|
|
|
$
|
15
|
|
|
Reduction in the financing receivables
|
|
|
|
|
2
|
|
|
1
|
|
|
4
|
|
|
2
|
|
|
Cash payments for interest income
|
|
|
|
|
7
|
|
|
7
|
|
|
22
|
|
|
12
|
|
|
Cash payments on principal of the financing receivables
|
|
|
|
|
2
|
|
|
1
|
|
|
4
|
|
|
2
|
|
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 ASC Topic 606, Revenue from Contracts with Customers (“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 unaudited consolidated statements of income. See Note 9 – Revenue Recognition for additional details related to revenue recognized on the service components and amortization of the contract assets.
4. 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:
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
|
|
Ownership
|
|
Investment Amount
|
|
Ownership
|
|
Investment Amount
|
|
Mattox
|
|
79.0%
|
|
$
|
159
|
|
|
79.0%
|
|
$
|
163
|
|
|
Amberjack – Series A / Series B
|
|
75.0% / 50.0%
|
|
362
|
|
|
75.0% / 50.0%
|
|
382
|
|
|
Mars
|
|
71.5%
|
|
153
|
|
|
71.5%
|
|
152
|
|
|
Bengal
|
|
50.0%
|
|
86
|
|
|
50.0%
|
|
88
|
|
|
Permian Basin
|
|
50.0%
|
|
81
|
|
|
50.0%
|
|
83
|
|
|
LOCAP
|
|
41.48%
|
|
16
|
|
|
41.48%
|
|
12
|
|
|
Explorer
|
|
38.59%
|
|
70
|
|
|
38.59%
|
|
73
|
|
|
Poseidon
|
|
36.0%
|
|
—
|
|
|
36.0%
|
|
—
|
|
|
Colonial
|
|
16.125%
|
|
52
|
|
|
16.125%
|
|
29
|
|
|
Proteus
|
|
10.0%
|
|
13
|
|
|
10.0%
|
|
14
|
|
|
Endymion
|
|
10.0%
|
|
16
|
|
|
10.0%
|
|
17
|
|
|
|
|
|
|
$
|
1,008
|
|
|
|
|
$
|
1,013
|
|
For the three and nine months ended September 30, 2021, distributions received from equity method investments were $83 million and $334 million, respectively. For the three and nine months ended September 30, 2020, distributions received from equity method investments were $142 million and $412 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. The amortization is included in Income from equity method investments. As of September 30, 2021 and December 31, 2020, the unamortized basis differences included in our equity investments were $78 million and $84 million, respectively. For both the three and nine months ended September 30, 2021 and September 30, 2020, the net amortization expense was $2 million and $6 million, respectively.
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 for this investment. As we
have no commitments to provide further financial support to Poseidon, we have recorded excess distributions in Other income of $8 million and $32 million for the three and nine months ended September 30, 2021, respectively, and $7 million and $25 million for the three and nine months ended September 30, 2020, 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.
Earnings from our equity method investments were as follows during the periods indicated:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Mattox (1)
|
|
$
|
15
|
|
|
$
|
15
|
|
|
$
|
45
|
|
|
$
|
30
|
|
|
Amberjack
|
|
23
|
|
|
28
|
|
|
78
|
|
|
86
|
|
|
Mars
|
|
12
|
|
|
33
|
|
|
66
|
|
|
92
|
|
|
Bengal
|
|
2
|
|
|
5
|
|
|
7
|
|
|
14
|
|
|
Explorer
|
|
17
|
|
|
9
|
|
|
50
|
|
|
33
|
|
|
Colonial
|
|
13
|
|
|
14
|
|
|
35
|
|
|
59
|
|
|
Other (2)
|
|
4
|
|
|
5
|
|
|
12
|
|
|
16
|
|
|
|
|
$
|
86
|
|
|
$
|
109
|
|
|
$
|
293
|
|
|
$
|
330
|
|
(1) We acquired an interest in Mattox in April 2020. The acquisition of this interest has been accounted for prospectively.
(2) Included in Other is the activity associated with our investments in Permian Basin, LOCAP, Proteus and Endymion.
Effective June 4, 2021, Amberjack executed an agreement to divest a small segment of the Amberjack pipeline that is no longer utilized nor deemed a material component in the operation of the pipeline. As a result of the divestment, Amberjack recorded an impairment charge of approximately $4 million during the second quarter of 2021. Our share of approximately $3 million impacted our Income from equity method investments in our unaudited consolidated statements of income. The remainder of the Amberjack pipeline continues to operate under its existing ownership structure.
On June 18, 2021, the board of directors of Colonial elected not to declare a dividend for the three months ended June 30, 2021. Subsequently, on September 22, 2021, the board of directors of Colonial made the same election for the three months ended September 30, 2021.
Under the lease standard, the adoption date for our equity method investments followed 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 was 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.
We assess our equity method investments 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. We evaluated whether an impairment indicator existed as of September 30, 2021. Based on expectations of market conditions, we determined that there was no triggering event that required us to update our impairment evaluation of our 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 unaudited income statement data for our equity method investments on a 100% basis. However, during periods in which an acquisition occurs, the selected unaudited income statement data reflects activity from the date of the acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2021
|
|
|
|
Total revenues
|
|
Total operating expenses
|
|
Operating income
|
|
Net income
|
|
Statements of Income
|
|
|
|
|
|
|
|
|
|
Mattox
|
|
$
|
22
|
|
|
$
|
3
|
|
|
$
|
19
|
|
|
$
|
19
|
|
|
Amberjack
|
|
57
|
|
|
13
|
|
|
44
|
|
|
44
|
|
|
Mars
|
|
39
|
|
|
21
|
|
|
18
|
|
|
18
|
|
|
Bengal
|
|
12
|
|
|
8
|
|
|
4
|
|
|
4
|
|
|
Explorer
|
|
107
|
|
|
47
|
|
|
60
|
|
|
46
|
|
|
Colonial
|
|
319
|
|
|
173
|
|
|
146
|
|
|
87
|
|
|
Poseidon
|
|
27
|
|
|
8
|
|
|
19
|
|
|
17
|
|
|
Other (1)
|
|
51
|
|
|
32
|
|
|
19
|
|
|
19
|
|
(1) Included in Other is the activity associated with our investments in Permian Basin, LOCAP, Proteus and Endymion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2021
|
|
|
|
Total revenues
|
|
Total operating expenses
|
|
Operating income
|
|
Net income
|
|
Statements of Income
|
|
|
|
|
|
|
|
|
|
Mattox
|
|
$
|
66
|
|
|
$
|
9
|
|
|
$
|
57
|
|
|
$
|
57
|
|
|
Amberjack
|
|
199
|
|
|
49
|
|
|
150
|
|
|
149
|
|
|
Mars
|
|
160
|
|
|
65
|
|
|
95
|
|
|
95
|
|
|
Bengal
|
|
37
|
|
|
23
|
|
|
14
|
|
|
14
|
|
|
Explorer
|
|
315
|
|
|
140
|
|
|
175
|
|
|
134
|
|
|
Colonial
|
|
915
|
|
|
515
|
|
|
400
|
|
|
229
|
|
|
Poseidon
|
|
103
|
|
|
27
|
|
|
76
|
|
|
72
|
|
|
Other (1)
|
|
160
|
|
|
94
|
|
|
66
|
|
|
63
|
|
(1) Included in Other is the activity associated with our investments in Permian Basin, LOCAP, Proteus and Endymion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2020
|
|
|
|
Total revenues
|
|
Total operating expenses
|
|
Operating income
|
|
Net income
|
|
Statements of Income
|
|
|
|
|
|
|
|
|
|
Mattox (1)
|
|
$
|
22
|
|
|
$
|
3
|
|
|
$
|
19
|
|
|
$
|
19
|
|
|
Amberjack
|
|
69
|
|
|
16
|
|
|
53
|
|
|
54
|
|
|
Mars
|
|
68
|
|
|
22
|
|
|
46
|
|
|
46
|
|
|
Bengal
|
|
19
|
|
|
9
|
|
|
10
|
|
|
10
|
|
|
Explorer
|
|
75
|
|
|
42
|
|
|
33
|
|
|
25
|
|
|
Colonial
|
|
319
|
|
|
172
|
|
|
147
|
|
|
89
|
|
|
Poseidon
|
|
36
|
|
|
9
|
|
|
27
|
|
|
26
|
|
|
Other (2)
|
|
53
|
|
|
30
|
|
|
23
|
|
|
20
|
|
(1) Our interest in Mattox was acquired on April 1, 2020.
(2) Included in Other is the activity associated with our investments in Permian Basin, LOCAP, Proteus and Endymion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
|
|
Total revenues
|
|
Total operating expenses
|
|
Operating income
|
|
Net income
|
|
Statements of Income
|
|
|
|
|
|
|
|
|
|
Mattox (1)
|
|
$
|
44
|
|
|
$
|
6
|
|
|
$
|
38
|
|
|
$
|
38
|
|
|
Amberjack
|
|
219
|
|
|
52
|
|
|
167
|
|
|
167
|
|
|
Mars
|
|
201
|
|
|
71
|
|
|
130
|
|
|
130
|
|
|
Bengal
|
|
51
|
|
|
24
|
|
|
27
|
|
|
27
|
|
|
Explorer
|
|
251
|
|
|
132
|
|
|
119
|
|
|
91
|
|
|
Colonial
|
|
1,068
|
|
|
501
|
|
|
567
|
|
|
374
|
|
|
Poseidon
|
|
99
|
|
|
26
|
|
|
73
|
|
|
68
|
|
|
Other (2)
|
|
167
|
|
|
91
|
|
|
76
|
|
|
68
|
|
(1) Our interest in Mattox was acquired on April 1, 2020. Mattox’s total revenues, total operating expenses and operating income (on a 100% basis) for the nine months ended September 30, 2020 were $62 million, $9 million and $53 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. For the three and nine months ended September 30, 2021, we made capital contributions of less than $1 million and approximately $3 million, respectively. We did not make any capital contributions during the three and nine months ended September 30, 2020.
5. Property, Plant and Equipment
Property, plant and equipment, net, consists of the following as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciable
Life
|
|
September 30, 2021
|
|
December 31, 2020
|
|
Land
|
|
—
|
|
|
$
|
12
|
|
|
$
|
12
|
|
|
Building and improvements
|
|
10 - 40 years
|
|
46
|
|
|
47
|
|
|
Pipeline and equipment (1)
|
|
10 - 30 years
|
|
1,240
|
|
|
1,263
|
|
|
Other
|
|
5 - 25 years
|
|
35
|
|
|
34
|
|
|
|
|
|
|
1,333
|
|
|
1,356
|
|
|
Accumulated depreciation and amortization (2)
|
|
|
|
(679)
|
|
|
(661)
|
|
|
|
|
|
|
654
|
|
|
695
|
|
|
Construction in progress
|
|
|
|
8
|
|
|
4
|
|
|
Property, plant and equipment, net
|
|
|
|
$
|
662
|
|
|
$
|
699
|
|
(1) As of both September 30, 2021 and December 31, 2020, includes costs of $366 million and $372 million, respectively, related to assets under operating leases (as lessor). As of both September 30, 2021 and December 31, 2020, includes cost of $23 million related to assets under capital lease (as lessee).
(2) As of September 30, 2021 and December 31, 2020, includes accumulated depreciation of $151 million and $147 million, respectively, related to assets under operating leases (as lessor). As of both September 30, 2021 and December 31, 2020, includes accumulated amortization of $9 million and $8 million, respectively, related to assets under capital lease (as lessee).
Depreciation and amortization expense on property, plant and equipment for the three and nine months ended September 30, 2021 was $12 million and $37 million, respectively, and for the three and nine months ended September 30, 2020 was $13 million and $39 million, respectively, and is included in costs and expenses in the accompanying unaudited consolidated statements of income. Depreciation and amortization expense on property, plant and equipment includes amounts pertaining to assets under operating (as lessor) and capital (as lessee) leases.
May 2021 Transaction
Effective May 1, 2021, Triton sold to SOPUS, as designee of SPLC, the Anacortes Assets. In exchange for the Anacortes Assets, SPLC paid Triton $10 million in cash and transferred to the Operating Company, as designee of Triton, SPLC’s 7.5%
interest in Zydeco. Effective May 1, 2021, the Partnership owns a 100.0% ownership interest in Zydeco. Refer to Note 2 – Acquisitions and Other Transactions for additional information on this transaction.
Auger Divestiture
On January 25, 2021, we executed an agreement to divest the 12” segment of the Auger pipeline; however, this agreement was subsequently terminated. As a result of the intended divestment, we recorded an impairment charge of approximately $3 million during the first quarter of 2021. On April 29, 2021, we executed a new agreement to divest this segment of pipeline, effective June 1, 2021. We received approximately $2 million in cash consideration for this sale. The remainder of the Auger pipeline will continue to operate under the ownership of Pecten. Refer to Note 2 – Acquisitions and Other Transactions for additional information on this divestiture.
6. Related Party Debt
Consolidated related party debt obligations comprise the following as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
|
|
Outstanding Balance
|
|
Total Capacity
|
|
Available Capacity
|
|
Outstanding Balance
|
|
Total Capacity
|
|
Available Capacity
|
|
2021 Ten Year Fixed Facility
|
|
$
|
600
|
|
|
$
|
600
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
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
|
|
|
—
|
|
|
2019 Zydeco Revolver (1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30
|
|
|
30
|
|
|
Unamortized debt issuance costs
|
|
(3)
|
|
|
n/a
|
|
n/a
|
|
(2)
|
|
|
n/a
|
|
n/a
|
|
Debt payable – related party
|
|
$
|
2,691
|
|
|
$
|
3,560
|
|
|
$
|
866
|
|
|
$
|
2,692
|
|
|
$
|
3,590
|
|
|
$
|
896
|
|
(1) The 2019 Zydeco Revolver was terminated effective June 30, 2021. See below for additional information.
For the three and nine months ended September 30, 2021, interest and fee expenses associated with our borrowings, net of capitalized interest, were $20 million and $61 million, respectively, and for the three and nine months ended September 30, 2020, interest and fee expenses associated with our borrowings, net of capitalized interest, were $22 million and $69 million, respectively. We paid $20 million and $61 million for interest, respectively, during the three and nine months ended September 30, 2021, and we paid $22 million and $71 million for interest, respectively, during the three and nine ended September 30, 2020.
On June 30, 2021, Zydeco entered into a termination of revolving loan facility agreement with STCW to terminate the 2019 Zydeco Revolver. Zydeco had not borrowed any funds under this facility, and therefore, no further obligations existed at the time of termination.
On March 16, 2021, we entered into a ten-year fixed rate credit facility with STCW with a borrowing capacity of $600 million (the “2021 Ten Year Fixed Facility”). The 2021 Ten Year Fixed Facility bears an interest rate of 2.96% per annum and matures on March 16, 2031. No issuance fee was incurred in connection with the 2021 Ten Year Fixed Facility. The 2021 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 2021 Ten Year Fixed Facility. The 2021 Ten Year Fixed Facility was fully drawn on March 23, 2021, and the borrowings were used to repay the borrowings under, and replace, the Five Year Fixed Facility. In consideration for STCW’s consent to the early prepayment of the Five Year Fixed Facility, the Partnership incurred a fee of approximately $2 million, which was paid on March 23, 2021. The Five Year Fixed Facility automatically terminated in connection with the early prepayment.
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 September 30, 2021, the carrying amount and estimated fair value of total debt (before amortization of issuance costs) was $2,694 million and $2,876 million, respectively. 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.
Borrowings and repayments under our credit facilities for the nine months ended September 30, 2021 and September 30, 2020 are disclosed in our unaudited consolidated statements of cash flows. See Note 8 – (Deficit) Equity for additional information regarding the source of our repayments, if applicable to the period. Borrowings under each of the Five Year Revolver due July 2023 and the Five Year Revolver due December 2022 bear interest at the three-month London Interbank Offered Rate (“LIBOR”) plus a margin or, in certain instances (including if LIBOR is 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.
For additional information on our credit facilities, refer to Note 8 – Related Party Debt in the Notes to Consolidated Financial Statements in our 2020 Annual Report.
7. Accumulated Other Comprehensive Income (Loss)
For both the three and nine months ended September 30, 2021, we recorded remeasurements losses of less than $1 million related to the pension and other post-retirement benefits provided by Explorer and Colonial to their employees. For both the three and nine months ended September 30, 2020, we recorded remeasurements gains of $2 million related to these benefits plans. We are not a sponsor of these benefit plans.
8. (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 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.
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. During both the nine months ended September 30, 2021 and September 30, 2020, we did not have any sales under this program.
Units Outstanding
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.
As of both September 30, 2021 and 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
As of both September 30, 2021 and December 31, 2020, we had 50,782,904 preferred units outstanding. 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 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 at least 20 trading days (whether or not consecutive) in a period of 30 consecutive trading days, including the last trading day of such 30 trading day period, ending on and including the trading day immediately preceding the date on which the Partnership sends notice to the holders of Series A preferred units of its election to convert such Series A preferred units. 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 ended 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 is not 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 three and nine months ended September 30, 2021, the aggregate amounts of cumulative preferred distributions paid were $12 million and $36 million, respectively, and the per unit amount for the three and nine months ended September 30, 2021 was $0.2363 and $0.7089, respectively.
Under the Second Amended and Restated Partnership Agreement, our general partner or its assignee agreed to waive a portion of the distributions that would otherwise have been 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 and ending with the distribution made with respect to the first quarter of 2021. See Note 3 — Related Party Transactions for terms of the Second Amended and Restated Partnership Agreement.
The following table details the distributions declared and/or paid for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Paid or
|
|
|
|
Public
|
|
SPLC
|
|
SPLC
|
|
General Partner
|
|
|
|
Distributions
per Limited
Partner Unit
|
|
to be Paid
|
|
Three Months Ended
|
|
Common
|
|
Preferred
|
|
Common
|
|
IDRs
|
|
2%
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per unit amounts)
|
|
February 14, 2020
|
|
December 31, 2019
|
|
$
|
57
|
|
|
$
|
—
|
|
|
$
|
50
|
|
|
$
|
52
|
|
|
$
|
3
|
|
|
$
|
162
|
|
|
$
|
0.4600
|
|
|
May 15, 2020
|
|
March 31, 2020
|
|
57
|
|
|
—
|
|
|
50
|
|
|
52 (2)
|
|
3 (3)
|
|
162
|
|
|
0.4600
|
|
|
August 14, 2020
|
|
June 30, 2020 (1)
|
|
57
|
|
|
12
|
|
|
104
|
|
|
—
|
|
|
—
|
|
|
173
|
|
|
0.4600
|
|
|
November 13, 2020
|
|
September 30, 2020 (1)
|
|
57
|
|
|
12
|
|
|
104
|
|
|
—
|
|
|
—
|
|
|
173
|
|
|
0.4600
|
|
|
February 12, 2021
|
|
December 31, 2020 (1)
|
|
57
|
|
|
12
|
|
|
104
|
|
|
—
|
|
|
—
|
|
|
173
|
|
|
0.4600
|
|
|
May 14, 2021
|
|
March 31, 2021 (1)
|
|
57
|
|
|
12
|
|
|
104
|
|
|
—
|
|
—
|
|
173
|
|
|
0.4600
|
|
|
August 13, 2021
|
|
June 30, 2021
|
|
37
|
|
|
12
|
|
|
81
|
|
|
—
|
|
|
—
|
|
|
130
|
|
|
0.3000
|
|
|
November 12, 2021
|
|
September 30, 2021 (4)
|
|
37
|
|
|
12
|
|
|
81
|
|
|
—
|
|
|
—
|
|
|
130
|
|
|
0.3000
|
|
(1) Includes the impact of waived distributions to SPLC with respect to the April 2020 Transaction as described above.
(2) 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 further payments with respect to the IDRs, as they were cancelled as a part of the April 2020 Transaction.
(3) This amount represents the final distribution payment on the 2% economic general partner interest. Our general partner is not entitled to any further payments with respect to the economic general partner interest, as it was converted into a non-economic general partner interest as a part of the April 2020 Transaction.
(4) See Note 13 – Subsequent Events for additional information.
Distributions to Noncontrolling Interests
There was no distribution to SPLC for its noncontrolling interest in Zydeco for the three months ended September 30, 2021 as a result of the May 2021 Transaction. Refer to Note 2 — Acquisitions and Other Transactions for additional information. Distributions to SPLC for its noncontrolling interest in Zydeco for the nine months ended September 30, 2021 were less than $1 million, and for the three and nine months ended September 30, 2020 were $1 million and $4 million, respectively.
Distributions to GEL for its noncontrolling interest in Odyssey for the three and nine months ended September 30, 2021 were $3 million and $10 million, respectively, and for the three and nine months ended September 30, 2020 were $2 million and $8 million, respectively.
See Note 3 – Related Party Transactions for additional details.
9. 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; allocation of the transaction price to the performance obligations; and recognition of revenue as the entity satisfies the performance obligations.
Disaggregation of Revenue
The following table provides information about disaggregated revenue by service type and customer type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Transportation services revenue – third parties
|
|
$
|
31
|
|
|
$
|
24
|
|
|
$
|
107
|
|
|
$
|
78
|
|
|
Transportation services revenue – related parties (1)
|
|
36
|
|
|
31
|
|
|
131
|
|
|
127
|
|
|
Storage services revenue – third parties
|
|
2
|
|
|
2
|
|
|
6
|
|
|
6
|
|
|
Storage services revenue – related parties
|
|
2
|
|
|
2
|
|
|
6
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminaling services revenue – related parties (2)
|
|
30
|
|
|
31
|
|
|
91
|
|
|
73
|
|
|
Terminaling services revenue – major maintenance service – related parties (3)
|
|
2
|
|
|
—
|
|
|
6
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue – related parties (4)
|
|
11
|
|
|
5
|
|
|
26
|
|
|
14
|
|
|
Total Topic 606 revenue
|
|
114
|
|
|
95
|
|
|
373
|
|
|
308
|
|
|
Lease revenue – related parties
|
|
14
|
|
|
15
|
|
|
42
|
|
|
43
|
|
|
Total revenue
|
|
$
|
128
|
|
|
$
|
110
|
|
|
$
|
415
|
|
|
$
|
351
|
|
(1) Transportation services revenue - related parties includes $2 million and $4 million, respectively, of the non-lease service component in our transportation services contracts for both the three and nine months ended September 30, 2021 and 2020.
(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 3 – 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 3 – Related Party Transactions for additional details.
(4) Product revenue - related parties 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 components under the revenue standard within Transportation, terminaling and storage services – related parties in the unaudited consolidated statements of income.
Revenues from the lease components of these agreements are recorded within Lease revenue – related parties in the unaudited consolidated statements of income. Some of these agreements were 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 September 30, 2021, 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
|
|
$
|
619
|
|
|
$
|
105
|
|
|
$
|
210
|
|
|
$
|
210
|
|
|
$
|
94
|
|
Terminaling services revenue - Norco Assets
In April 2020, the Partnership closed the transaction pursuant to which the Norco Assets were transferred from SOPUS and Shell Chemical to Triton. In connection with closing this 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 an additional five-year term. 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. The terminaling service agreements contain an inflation escalation clause, pursuant to which the annual payments increase on July 1 of each year commencing on July 1, 2021. The inflation adjustment is based on the rate of change in the annual Consumer Price Index (“CPI”) published by U.S. Department of Labor’s Bureau of Labor Statistics. On July 1, 2021, the annual payments were escalated by applying a CPI adjustment of 4.86%. After such escalation, the Partnership receives an annual net payment of $147 million, which is the total annual payment of $158 million, less $11 million related to the allocated utility costs from SOPUS.
These agreements have components related to financing receivables, for which the interest income is recognized in the unaudited consolidated statements of income and principal payments are recognized as a reduction to the financing receivables in the unaudited 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 unaudited 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. Index-based inflation escalations represent variable consideration. In the period when index-based inflation escalations become effective, such escalations will be allocated based on the relative standalone selling prices established at the inception of the terminaling service agreements.
In the third quarter of 2021, a force majeure was declared under the terminaling service agreements as a result of Hurricane Ida when the Norco Assets were shut down following the hurricane. This event resulted in a combined decrease to terminaling service revenue and interest income of less than $1 million for the three months ended September 30, 2021.
Contract Balances
The following table provides information about receivables and contract liabilities from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2021
|
|
September 30, 2021
|
|
Receivables from contracts with customers – third parties
|
|
$
|
19
|
|
|
$
|
7
|
|
|
Receivables from contracts with customers – related parties
|
|
18
|
|
|
24
|
|
|
Contract assets – related parties
|
|
233
|
|
|
222
|
|
|
Deferred revenue – third parties
|
|
4
|
|
|
—
|
|
|
Deferred revenue – related parties (1)
|
|
19
|
|
|
26
|
|
(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.
In connection with the April 2020 Transaction, we also recorded contract assets 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 $3 million and $11 million, respectively, for the three and nine months ended September 30, 2021, and $4 million and $8 million, respectively, for the three and nine months ended September 30, 2020. We had $222 million and $233 million contract assets recognized from the costs to obtain or fulfill a contract as of September 30, 2021 and December 31, 2020, respectively.
The estimated future amortization related to the contract assets for the next five years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder of 2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
2026
|
|
Amortization
|
$
|
4
|
|
|
$
|
16
|
|
|
$
|
16
|
|
|
$
|
17
|
|
|
$
|
18
|
|
|
$
|
15
|
|
Significant changes in the deferred revenue balances with customers during the period are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Additions (1)
|
|
Reductions (2)
|
|
September 30, 2021
|
|
Deferred revenue – third parties
|
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
(6)
|
|
|
$
|
—
|
|
|
Deferred revenue – related parties
|
|
19
|
|
|
17
|
|
|
(10)
|
|
|
26
|
|
(1) Deferred revenue additions resulted from $10 million deficiency payments from minimum volume commitment contracts and $9 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.
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 September 30, 2021:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Remainder of 2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025 and beyond
|
|
Revenue expected to be recognized on multi-year committed shipper transportation contracts
|
|
$
|
426
|
|
|
$
|
16
|
|
|
$
|
63
|
|
|
$
|
63
|
|
|
$
|
57
|
|
|
$
|
227
|
|
|
Revenue expected to be recognized on other multi-year transportation service contracts (1)
|
|
30
|
|
|
2
|
|
|
6
|
|
|
6
|
|
|
4
|
|
|
12
|
|
|
Revenue expected to be recognized on multi-year storage service contracts
|
|
21
|
|
|
2
|
|
|
10
|
|
|
4
|
|
|
5
|
|
|
—
|
|
|
Revenue expected to be recognized on multi-year terminaling service contracts (1)
|
|
275
|
|
|
11
|
|
|
45
|
|
|
45
|
|
|
45
|
|
|
129
|
|
|
Revenue expected to be recognized on multi-year operation and major maintenance terminaling service contracts(2)
|
|
1,500
|
|
|
30
|
|
|
111
|
|
|
111
|
|
|
111
|
|
|
1,137
|
|
|
|
|
$
|
2,252
|
|
|
$
|
61
|
|
|
$
|
235
|
|
|
$
|
229
|
|
|
$
|
222
|
|
|
$
|
1,505
|
|
(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 under the revenue standard, 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.
10. 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 8 – (Deficit) Equity for a discussion of the elimination of our general partner’s IDRs and 2% economic interest effective April 1, 2020. For the three and nine months ended September 30, 2021 and September 30, 2020, our Series A Preferred Units were dilutive to net income per limited partner unit.
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 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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2021 (1)
|
|
2020 (1)
|
|
2021 (1)
|
|
2020
|
|
Net income
|
|
*
|
|
*
|
|
*
|
|
$
|
423
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interests
|
|
*
|
|
*
|
|
*
|
|
9
|
|
|
Net income attributable to the Partnership
|
|
*
|
|
*
|
|
*
|
|
414
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
General partner’s distribution declared
|
|
*
|
|
*
|
|
*
|
|
55
|
|
|
Preferred unitholder’s interest in net income
|
|
*
|
|
*
|
|
*
|
|
24
|
|
|
Limited partners’ distribution declared on common units
|
|
*
|
|
*
|
|
*
|
|
429
|
|
|
Distributions in excess of income
|
|
*
|
|
*
|
|
*
|
|
$
|
(94)
|
|
(1) 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. Therefore, the allocation of net income attributable to the Partnership to arrive at net income per limited partner unit is not applicable for the three and nine months ended September 30, 2021, nor to the three months ended September 30, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2021
|
|
Nine Months Ended September 30, 2021
|
|
|
|
Limited Partners’ Common Units
|
|
|
|
(in millions of dollars, except per unit data)
|
|
Net income attributable to the Partnership’s common unitholders (basic)
|
|
$
|
115
|
|
|
$
|
416
|
|
|
Dilutive effect of preferred units
|
|
12
|
|
|
36
|
|
|
Net income attributable to the Partnership’s common unitholders (diluted)
|
|
$
|
127
|
|
|
$
|
452
|
|
|
|
|
|
|
|
|
Weighted average units outstanding - Basic
|
|
393.3
|
|
|
393.3
|
|
|
Dilutive effect of preferred units
|
|
50.8
|
|
|
50.8
|
|
|
Weighted average units outstanding - Diluted
|
|
444.1
|
|
|
444.1
|
|
|
Net income per limited partner unit:
|
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
|
$
|
1.06
|
|
|
Diluted
|
|
$
|
0.29
|
|
|
$
|
1.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2020
|
|
|
|
Limited Partners’ Common Units
|
|
|
|
(in millions of dollars, except per unit data)
|
|
Net income attributable to the Partnership’s common unitholders (basic)
|
|
$
|
123
|
|
|
Dilutive effect of preferred units
|
|
12
|
|
|
Net income attributable to the Partnership’s common unitholders (diluted)
|
|
$
|
135
|
|
|
|
|
|
|
Weighted average units outstanding - Basic
|
|
393.3
|
|
|
Dilutive effect of preferred units
|
|
50.8
|
|
|
Weighted average units outstanding - Diluted
|
|
444.1
|
|
|
Net income per limited partner unit:
|
|
|
|
Basic
|
|
$
|
0.31
|
|
|
Diluted
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
|
|
General Partner
|
|
Limited Partners’ Common Units
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of dollars, except per unit data)
|
|
Distributions declared
|
|
$
|
55
|
|
|
$
|
429
|
|
|
$
|
484
|
|
|
Distributions in excess of income
|
|
—
|
|
|
(94)
|
|
|
(94)
|
|
|
Net income attributable to the Partnership's common unitholders (basic)
|
|
$
|
55
|
|
|
$
|
335
|
|
|
$
|
390
|
|
|
Dilutive effect of preferred units
|
|
|
|
24
|
|
|
|
Net income attributable to the Partnership's common unitholders (dilutive)
|
|
|
|
$
|
359
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average units outstanding - Basic
|
|
|
|
340.1
|
|
|
|
|
Dilutive effect of preferred units
|
|
|
|
33.9
|
|
|
|
|
Weighted average units outstanding - Diluted
|
|
|
|
374.0
|
|
|
|
|
Net income per limited partner unit:
|
|
|
|
|
|
|
|
Basic
|
|
|
|
$
|
0.98
|
|
|
|
|
Diluted
|
|
|
|
$
|
0.96
|
|
|
|
11. 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 both the three and nine months ended September 30, 2021 and September 30, 2020 was not material.
With the exception of the operations of Colonial, Explorer and LOCAP, which are treated as corporations for federal income tax purposes, the operations of the Partnership are not subject to federal income tax.
12. Commitments and Contingencies
Environmental Matters
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. As of both September 30, 2021 and December 31, 2020, 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.
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.
13. Subsequent Events
We have evaluated events that occurred after September 30, 2021 through the issuance of these unaudited consolidated financial statements. Any material subsequent events that occurred during this time have been properly recognized or disclosed in the unaudited consolidated financial statements and accompanying notes.
Distribution
On October 20, 2021, the Board declared cash distributions of $0.3000 per limited partner common unit and $0.2363 per limited partner preferred unit for the three months ended September 30, 2021. These distributions will be paid on November 12, 2021 to unitholders of record as of November 2, 2021.
Insurance Coverage
The majority of our insurance coverage is currently provided by a wholly-owned subsidiary of Shell, with the remaining coverage provided by third-party insurers. This insurance expires on October 31, 2021, and we are in the final stages of negotiating replacement insurance, for which we expect a third-party insurer to provide the first 5% of coverage with the remaining coverage to be provided by an affiliate of Shell as a reinsurer.