Shell Midstream Partners, L.P.("we," "us," "our" or "the Partnership") is a Delawarelimited partnership formed by Shell plc on March 19, 2014to 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 LLCor through direct ownership. Our general partner is Shell Midstream Partners GP LLC(the "general partner"). References to "Shell" or "Parent" refer collectively to Shell plc and its controlled affiliates, other than us, our subsidiaries and our general partner. The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes in this quarterly report and Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021(our "2021 Annual Report") and the consolidated financial statements and related notes therein. Our 2021 Annual Report contains a discussion of other matters not included herein, such as disclosures regarding critical accounting policies and estimates and contractual obligations. You should also read the following discussion and analysis together with Risk Factors set forth in our 2021 Annual Report.
Presentation of the partnership
We own, operate, develop and acquire pipelines and other midstream assets and logistics assets. As of
June 30, 2022, 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 Coastand 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. Our assets also include interests in entities that own natural gas and refinery gas pipelines that transport offshore natural gas to market hubs and deliver refinery gas from refineries and plants to chemical sites along the Gulf Coast.
For a description of our assets, please see Part I, Items 1 and 2. – Businesses and Properties of our 2021 Annual Report.
Developments for 2022 include:
•Take Private Proposal. On
February 11, 2022, the Board of Directors of our general partner (the "Board") received a non-binding, preliminary proposal letter from SPLC to acquire all of the Partnership's issued and outstanding common units not already owned by SPLC or its affiliates at a value of $12.89per each issued and outstanding publicly-held common unit (the "Proposal"). The Board appointed the conflicts committee to review, evaluate and negotiate the Proposal. Refer to Note 13 - Subsequent Events - Merger Agreement in the Notes to the Unaudited Consolidated Financial Statements in this report for additional information.
•Credit facilities. On
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 logistics assets at the
Shell Norco Manufacturing Complex(the "Norco Assets"). Our revenue is generated from customers in the same industry, our Parent's affiliates, integrated oil companies, marketers and independent exploration, production and refining companies primarily within the Gulf Coastregion of the United States. We generally do not own any of the crude oil, refinery gas or refined petroleum products we handle, nor do we engage in the trading of these commodities. We therefore have limited direct exposure to risks associated with fluctuating commodity prices, although these risks indirectly influence our activities and results of operations over the long-term.
Notable and certain expected 2022 impacts on net income and cash available for distribution (“CAFD”) include:
•Planned Turnarounds. Certain offshore connected producers will have planned turnarounds during 2022. We anticipate an impact of approximately
$15 millionto net income and CAFD from planned turnaround activity in 2022, of which approximately $14 millionhas been incurred in the six months ended June 30, 2022. •Colonial Rate Case. Colonial is currently involved in a rate case with the Federal Energy Regulatory Commission("FERC"). On April 27, 2022, the Administrative Law Judge issued a second partial initial decision addressing the issues not covered in the first partial initial decision. Colonial is reviewing the potential financial impacts that could 26 -------------------------------------------------------------------------------- result if the decision is adopted by the FERCin its forthcoming ruling. Depending upon the final outcome of the case, the potential adoption of such decision in whole or in part by the FERCcould adversely affect our equity method investment in Colonial, net income and CAFD. Due in part to the anticipated impacts of the rate case on Colonial's business, the board of directors of Colonial elected not to declare a dividend for the three months ended June 30, 2022. Throughout the first half of 2022, we have seen a significant increase in oil prices, most notably due to the ongoing Russian invasion of Ukraineand the associated impacts on the global markets. The responses of oil and gas producers to this situation, including as a result of government sanctions, is evolving and remains uncertain. As we navigate the current turbulent global environment, we anticipate continuing to moderate inorganic growth in our asset base and focusing on the sustainable operation of our core assets, cash preservation and the organic growth of our business throughout the remainder of 2022.
Net income was
$311 millionand net income attributable to the Partnership was $306 millionduring the six months ended June 30, 2022. We generated cash from operations of $341 million. As of June 30, 2022, we had cash and cash equivalents of $325 million, total debt of $2,542 millionand unused capacity under our credit facilities of $1,016 million.
Our operations and strategic initiatives for 2022 demonstrate our continued focus on our business strategies:
•Maintain operational excellence through prioritization of safety, reliability and efficiency; •Enhanced focus on cash optimization and reduced discretionary project spend; •Focus on advantageous commercial agreements with creditworthy counterparties to enhance financial results over the long-term; and •Optimize existing assets and pursue organic growth opportunities. Over the past two years, our business, as well as the market and economy as a whole, have dealt with unprecedented volatility and uncertainty. Even with these challenges, our assets have largely continued to deliver solid results that have allowed us to execute our business strategies. However, we continue to anticipate certain headwinds that may jeopardize our ability to generate sufficient cash to meet our quarterly obligations, including the pending
FERCrate case at Colonial and ongoing uncertainty in the macro-environment. Further, the transactions contemplated by the Proposal, if consummated, will alter our capital structure. Refer to Note 13 - Subsequent Events - Merger Agreement in the Notes to the Unaudited Consolidated Financial Statements in this report for additional information. To the extent the transactions contemplated by the Proposal are not consummated, identifying and executing acquisitions, whether from Shell or from third parties, will remain a key part of our strategy. However, if we do not make acquisitions on economically acceptable terms or if we incur a substantial amount of debt in connection with the acquisitions, our future growth will be limited, and the acquisitions we do make may reduce, rather than increase, our available cash. Our ability to obtain financing or access capital markets may also directly impact our ability to continue to pursue strategic acquisitions. Market demand for equity issued by master limited partnerships ("MLPs") may make it more challenging for us to fund our acquisitions with the issuance of equity in the capital markets. However, we believe our balance sheet offers us flexibility, providing us other financing options such as hybrid securities, purchases of common units by Shell and debt. While we expect to retain this flexibility, we anticipate continuing to moderate inorganic growth in our asset base and focusing on the sustainable operation of our core assets, cash preservation and organic growth of our business.
How we evaluate our operations
Our management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include: (i) revenue (including pipeline loss allowance ("PLA") from contracted capacity and throughput); (ii) operations and maintenance expenses (including capital expenses); (iii) net income attributable to the Partnership; (iv) Adjusted EBITDA (defined below); and (v) CAFD.
Capacity and throughput under contract
The amount of revenue generated by our assets is primarily dependent on our transportation and storage service agreements with shippers and the volumes of crude oil, refinery gas and refined products that we process through our pipelines, terminals and reservoirs. of storage.
The commitments made under our transportation, terminal and storage service agreements with shippers and the volumes we process in our pipelines and storage tanks are primarily affected by crude oil supply and demand, refinery gas, natural gas
27 -------------------------------------------------------------------------------- gas and refined products in the markets served directly or indirectly by our assets. This supply and demand is impacted by the market prices for these products in the markets we serve. The ongoing Russian invasion of
Ukraineand the associated impacts on the global markets have caused, and may continue to cause, disruptions in the U.S.economy and financial and energy markets. Responses of oil and gas producers to the changes in demand for, and price of, oil and natural gas are constantly evolving and unpredictable.
We use trade agreements that we believe are the most prudent under market conditions to implement our business strategy. The results of our operations will be impacted by our ability to:
•maintain utilization of and rates charged for our pipelines and storage facilities; •utilize the remaining uncommitted capacity on, or add additional capacity to, our pipeline systems; •increase throughput volumes on our pipeline systems by making connections to existing or new third-party pipelines or other facilities, primarily driven by the anticipated supply of, and demand for, crude oil and refined products; and •identify and execute organic expansion projects.
Operating and maintenance expenses
Our operating and maintenance expenses mainly consist of:
•labor expenses (including contractor services); •insurance costs (including coverage for our consolidated assets and operated joint ventures); •utility costs (including electricity and fuel); •repairs and maintenance expenses; and •major maintenance costs (related to the terminaling service agreements of the Norco Assets, which are expensed as incurred because the Partnership does not own the related assets). Certain costs naturally fluctuate based on throughput volumes and the grades of crude oil and types of refined products we handle, whereas other costs generally remain stable across broad ranges of throughput and storage volumes, but can vary depending upon the level of both planned and unplanned maintenance activity in the particular period. Our maintenance activity can be impacted by events such as turnarounds, asset integrity work and storms. Our management seeks to maximize our profitability by effectively managing operations and maintenance expenses. While cost effectiveness has always been a focus of the business, it is of increased importance given the current operating environment.
Adjusted EBITDA and cash available for distribution
Adjusted EBITDA and CAFD have important limitations as analytical tools because they exclude some, but not all, items that affect net income and net cash provided by operating activities. You should not consider Adjusted EBITDA or CAFD in isolation or as a substitute for analysis of our results as reported under generally accepted accounting principles in
the United States("GAAP"). Additionally, because Adjusted EBITDA and CAFD may be defined differently by other companies in our industry, our definition of Adjusted EBITDA and CAFD may not be comparable to similarly-titled measures of other companies, thereby diminishing their utility. The GAAP measures most directly comparable to Adjusted EBITDA and CAFD are net income and net cash provided by operating activities. Adjusted EBITDA and CAFD should not be considered as an alternative to GAAP net income or net cash provided by operating activities. Please refer to "Results of Operations - Reconciliation of Non-GAAP Measures" for the reconciliation of GAAP measures net income and cash provided by operating activities to non-GAAP measures, Adjusted EBITDA and CAFD. We define Adjusted EBITDA as net income before income taxes, interest expense, interest income, gain or loss from dispositions of fixed assets, allowance oil reduction to net realizable value, loss from revision of asset retirement obligation, and depreciation, amortization and accretion, plus cash distributed to us from equity method investments for the applicable period, less equity method distributions included in other income and income from equity method investments. We define Adjusted EBITDA attributable to the Partnership as Adjusted EBITDA less Adjusted EBITDA attributable to noncontrolling interests and Adjusted EBITDA attributable to Parent. We define CAFD as Adjusted EBITDA attributable to the Partnership less maintenance capital expenditures attributable to the Partnership, net interest paid by the Partnership, cash reserves, income taxes paid and distributions on our Series A perpetual convertible preferred units (the "Series A Preferred Units"), plus net adjustments from volume deficiency payments attributable to the Partnership, reimbursements from Parent included in partners' capital, principal and interest payments received on financing receivables and certain one-time payments received. CAFD will not reflect changes in working capital balances. 28 --------------------------------------------------------------------------------
We believe that the presentation of these supplemental non-GAAP financial measures provides useful information to management and investors in evaluating our financial condition and results of operations.
Adjusted EBITDA and CAFD are supplemental non-GAAP financial measures that management and external users of our consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess :
•our operating performance as compared to other publicly-traded partnerships in the midstream energy industry, without regard to historical cost basis or, in the case of Adjusted EBITDA, financing methods; •the ability of our business to generate sufficient cash to support our decision to make distributions to our unitholders; •our ability to incur and service debt and fund capital expenditures; and •the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
Factors Affecting Our Business and Prospects
We believe key factors that impact our business are the supply of, and demand for, crude oil, natural gas, refinery gas and refined products in the markets in which our business operates. We also believe that our customers' requirements, competition and government regulation of crude oil, refined products, natural gas and refinery gas play an important role in how we manage our operations and implement our long-term strategies. In addition, acquisition opportunities, whether from Shell or third parties, and financing options, will also impact our business. These factors are discussed in more detail below.
Changes in Crude Oil Supply and Refined Products Demand Dynamics
To effectively manage our business, we monitor our market areas for both short-term and long-term shifts in crude oil and refined products supply and demand. Changes in crude oil supply such as new discoveries of reserves, declining production in older fields, operational impacts at producer fields and the introduction of new sources of crude oil supply affect the demand for our services from both producers and consumers. In addition, general economic, regulatory, broad market and worldwide health considerations can also affect sourcing and demand dynamics for our services. This includes, but is not limited to, the impacts resulting from the ongoing Russian invasion of
Ukraine, as well as the lingering effects of the COVID-19 pandemic. One of the strategic advantages of our crude oil pipeline systems is their ability to transport attractively priced crude oil from multiple supply markets to key refining centers along the Gulf Coast. Our crude oil shippers periodically change the relative mix of crude oil grades delivered to the refineries and markets served by our pipelines. They also occasionally choose to store crude longer term when the forward price is higher than the current price (a "contango market"). While these changes in the sourcing patterns of crude oil transported or stored are reflected in changes in the relative volumes of crude oil by type handled by our pipelines, our total crude oil transportation revenue is primarily affected by changes in overall crude oil supply and demand dynamics, such as the impacts resulting from the ongoing Russian invasion of Ukraine, as well as U.S.exports. Similarly, our refined products pipelines have the ability to serve multiple major demand centers. Our refined products shippers periodically change the relative mix of refined products shipped on our refined products pipelines, as well as the destination points, based on changes in pricing and demand dynamics. While these changes in shipping patterns are reflected in relative types of refined products handled by our various pipelines, our total product transportation revenue is primarily affected by changes in overall refined products supply and demand dynamics, including the impacts resulting from the ongoing Russian invasion of Ukraine. Demand can also be greatly affected by refinery performance in the end market, as refined products pipeline demand will increase to fill the supply gap created by refinery issues. We can also be constrained by asset integrity considerations in the volumes we ship. We may elect to reduce cycling on our systems to reduce asset integrity risk, which in turn would likely result in lower revenues. As these supply and demand dynamics shift, we anticipate that we will continue to actively pursue projects that link new sources of supply to producers and consumers and to create new services or capacity arrangements that meet customer requirements. We expect to continue extending our corridor pipelines to provide developing growth regions in the Gulf of Mexicowith access via our existing corridors to onshore refining centers and market hubs. For example, the Mars system is expanding to address growing production volumes in the Gulf of Mexicoregions served by Mars. It is expected that the project will be fully operational in 2022. Incremental growth volumes began arriving into the Mars system in the first quarter of 2022, and we expect additional growth volumes to arrive into the system in the latter part of 2022, and continuing into 2023. We believe this strategy will allow our offshore business to grow profitably throughout demand cycles. 29 --------------------------------------------------------------------------------
We generate a portion of our revenue under long-term transportation service agreements with shippers, including ship-or-pay agreements and life-of-lease transportation agreements, some of which provide a guaranteed return, and storage service agreements with marketers, pipelines and refiners. Historically, the commercial terms of these long-term transportation and storage service agreements have mitigated volatility in our financial results by limiting our direct exposure to reductions in volumes due to supply or demand variability. Our business could be negatively affected if we are unable to renew or replace our contract portfolio on comparable terms, by sustained downturns or sluggishness in commodity prices, or the economy in general. Our business is also impacted by shifts in supply and demand dynamics, the mix of services requested by our pipeline customers, competition and changes in regulatory requirements affecting our operations. Other factors that can have an effect on our performance include asset integrity or customer interruptions, natural disasters or other events that could lead customers or connecting carriers to invoke force majeure or other defenses to avoid contractual performance. As contracts expire, there are several ways in which the associated revenue could be replaced in the future, such as through re-contracting or spot shipments, the outcome of which will be dependent on market and customer dynamics. The market environment at any given time will dictate the rates, terms and duration of agreements that shippers are willing to enter into, as well as the contracts that best satisfy the needs of our business and that will maximize earnings. As we have grown and broadened our business over the past several years, we have benefited from shifting our reliance away from the results of any one asset. For example, while Zydeco continues to serve an important market, and we strive to maximize the long-term value of the system to both shippers and the pipeline, we have diversified, and will continue to diversify, our risk across products, customers and geographies.
Changes in commodity prices and customer volumes
Crude oil prices have fluctuated significantly over the past few years, often with drastic moves in relatively short periods of time. While we saw an increase in both the demand for and price of crude oil throughout 2021, and a significant increase in price in the first half of 2022, it is not without continued uncertainty. Current global geopolitical and economic instability, particularly as it relates to the ongoing Russian invasion of
Ukraine, continues to contribute to future uncertainty, and potential volatility, in financial and commodity markets. One example of such global economic forces impacting crude oil prices was the stalemate among Organization of Petroleum Exporting Countries("OPEC") members and co-operating non- OPECresource holders (the "OPEC+ alliance"), which ultimately ended in mid-2021 and was resolved when the OPEC+ alliance agreed to phase out the COVID-19 production cuts from August 2021to December 2022. We expect that the OPEC+ alliance decision will cause the crude oil market to remain relatively tight in the near and medium-term, as this increased production will likely align with the higher global demand. The ongoing Russian invasion of Ukraineand resulting sanctions imposed on Russiaby the European Union, the United Statesand other countries have further tightened the crude oil market and elevated commodity prices. Although such sanctions do not directly impact our business or our customers, the effects of these measures may indirectly affect our business by affecting the price of crude oil, natural gas, refinery gas and refined products. Additionally, in order to address high oil prices, in March 2022President Biden announced a plan to release 1 million barrels of oil a day for a period of 6 months from the U.S.Strategic Petroleum Reserve. The release from the U.S.Strategic Petroleum Reserve was available in the market beginning in May 2022. While the scope of impact on commodity prices is somewhat unclear, the continued release could have a downward effect. Our direct exposure to commodity price fluctuations is limited to the PLA provisions in our tariffs. Indirectly, global demand for refined products and chemicals could impact our terminal operations and refined products and refinery gas pipelines, as well as our crude pipelines that feed U.S.manufacturing demand. Likewise, changes in the global market for crude oil could affect our crude oil pipelines and terminals and require expansion capital expenditures to reach growing export hubs. Demand for crude oil, refined products and refinery gas may decline in the areas we serve as a result of decreased production by our customers, depressed commodity prices, decreased third-party investment in the industry, increased competition and other adverse economic factors. Other global events, such as the ongoing Russian invasion of Ukraineand its associated impacts on the global markets, as well as the lingering impacts of the COVID-19 pandemic, could affect the exploration, production and refining industries generally, which, indirectly, may affect our business. However, fixed contracts with volume minimums and demand for tanks for storage are expected to moderate any impact on our terminaling and storage service revenue. Certain of our assets benefit from long-term fee-based arrangements and are strategically positioned to connect crude oil volumes originating from key onshore and offshore production basins to the Texasand Louisianarefining markets, where demand for throughput has remained strong. Historically, with the exception of the impacts of the COVID-19 pandemic, we have not experienced a material decline in throughput volumes on our crude oil pipeline systems as a result of lower crude oil prices. If crude oil prices drop to lower levels, as they did during the height of the COVID-19 pandemic, we will see a reduction in our transportation volumes if production coming into our systems is deferred and our associated allowance oil sales decrease. Our customers may also experience liquidity and credit problems or other unexpected events, which could cause them to defer development or repair projects, avoid our contracts in bankruptcy, invoke force majeure clauses or other defenses to avoid 30 --------------------------------------------------------------------------------
contractual performance, renegotiate our contracts on terms less attractive to us, or impair their ability to perform under our contracts.
Our throughput volumes on our refined products pipeline systems depend primarily on the volume of refined products produced at connected refineries and the desirability of our end markets. These factors in turn are driven by refining margins, maintenance schedules and market differentials. Refining margins depend on the cost of crude oil or other feedstocks and the price of refined products. These margins are affected by numerous factors beyond our control, including the domestic and global supply of and demand for crude oil and refined products.
Other changes in customer volumes
Onshore crude transportation volumes were lower in the three months ended
June 30, 2022(the " Current Quarter") and the six months ended June 30, 2022(the "Current Period") versus the three months ended June 30, 2021(the " Comparable Quarter") and the six months ended June 30, 2021(the "Comparable Period") primarily due to the expiration of a shipper contract in the Current Quarter. The decrease was partially offset by increased shipper activity on the remaining contracts and an increase in deliveries into Houmafrom certain offshore systems. Offshore crude transportation volumes were lower in the Current Quarterand Current Period versus the Comparable Quarterand Comparable Period primarily due to planned turnaround activities on various systems in the central and eastern corridors of the Gulf Coast, and lower deliveries from certain connected producers. Onshore terminaling and storage volumes decreased in the Current Quarterand Current Period versus the Comparable Quarterand Comparable Period due to scheduled maintenance at the Lockportfacility, as well as connecting carrier availability. Major Maintenance Projects A project is being completed on the Odyssey system to re-route two pipelines around the MP289C platform. We expect that the re-route work will be complete by mid-2023. The project is being funded by cash calls to the owners of Odyssey for their proportionate share. As such, we will fund 71% of the project.
For planned capital expenditures in 2022, see Capital Resources and Liquidity – Capital Expenditures and Investments.
Major expansion projects
The Mars system is expanding to address growing production volumes in the
Gulf of Mexicoregions served by Mars. SPLC has elected to fund the installation of the equipment necessary to enable greater throughput volumes on the system, but the revenue associated with increased throughput volumes will benefit Mars. Two major milestones were reached in 2021 with the placement of the pump module on the platform and the execution of definitive agreements with producers. It is expected that the project will be fully operational in 2022. Incremental growth volumes began arriving into the Mars system in the first quarter of 2022 with the startup of PowerNap, a tie-back to the Shell-operated Olympus production hub. We expect additional growth volumes to arrive into the system in the latter part of 2022, and continuing into 2023. Over the course of the next few years, we are considering expanding the Auger corridor in order to position the system to capture potential growth volumes in that region of the Gulf of Mexico.
We also intend to expand our
We transport and store crude oil, refined products, natural gas and refinery gas for a broad mix of customers, including producers, refiners, marketers and traders, and are connected to other crude oil and refined products pipelines. In addition to serving directly-connected
U.S. Gulf Coastmarkets, our crude oil and refined products pipelines have access to customers in various regions of the United Statesthrough interconnections with other major pipelines. Our customers use our transportation and storage services for a variety of reasons. Refiners typically require a secure and reliable supply of crude oil over a prolonged period of time to meet the needs of their specified refining diet and frequently enter into long-term firm transportation agreements to ensure a ready supply of a specific mix of crude oil grades, rate surety and sometimes sufficient transportation capacity over the life of the contract. Similarly, chemical sites require a secure and reliable supply of refinery gas to crackers and enter into long-term firm transportation agreements to ensure steady supply. Producers of crude oil and natural gas require the ability to deliver their product to market and frequently enter into firm transportation contracts to ensure that they will have sufficient capacity available to deliver their product to delivery points with greater market liquidity. Marketers and traders generate income from buying and selling crude oil and refined products to capitalize on price differentials over time or between markets. Our customer mix can vary over time and largely depends on the crude oil and refined products supply and demand dynamics in our markets.
Our pipeline systems compete primarily with other interstate and intrastate pipelines and with marine and rail transportation. Some of our competitors may expand or construct transportation systems that would create additional competition for the services we provide to our customers. For example, newly-constructed transportation systems in the onshore
Gulf of Mexicoregion may increase competition in the markets where our pipelines operate. In addition, future pipeline transportation capacity could be constructed in excess of actual demand in the market areas we serve, which could reduce the demand for our services, and could lead to the reduction of the rates that we receive for our services. While we do see some variation from quarter-to-quarter resulting from changes in our customers' demand for transportation, we have historically been able to partially mitigate this risk with the longer-term, fixed-rate nature of several of our contracts. Our storage terminal competes with surrounding providers of storage tank services. Some of our competitors have expanded terminals and built new pipeline connections, and third parties may construct pipelines that bypass our location. These, or similar events, could have a material adverse impact on our operations. Our refined products terminals generally compete with other terminals that serve the same markets. These terminals may be owned by major integrated oil and gas companies or by independent terminaling companies. While fees for terminal storage and throughput services are not regulated, they are subject to competition from other terminals serving the same markets. However, our contracts provide for stable, long-term revenue, which is not impacted by market competitive forces. Regulation
Our assets are subject to regulation by various federal, state and local agencies; for example, our interstate common carrier pipeline systems are subject to economic regulation by the
April 8, 2022, the Pipeline and Hazardous Materials Safety Administration("PHMSA") published a new final rule titled "Required valve installation and minimum rupture detection standards." This rule has amendments to both the liquid and gas pipeline safety regulations around valve placement and rupture/leak detection. The majority of the requirements regarding valve placement and rupture detection in this new rule apply to new construction or pipeline replacements. There are some provisions around emergency response and emergency notifications that apply to all regulated lines. The rule is being reviewed to determine the impact to our operations, and an action plan will be created to adjust processes and procedures as needed for compliance with the rule. We are also subject to various cybersecurity requirements, including recent changes as a result of the May 2021cyberattack impacting Colonial. We have a 16.125% ownership interest in Colonial, which owns and operates a pipeline that runs throughout the southern and eastern United States(the "Colonial pipeline"). On May 7, 2021, the computerized equipment managing the Colonial pipeline was the target of a cyberattack, and while Colonial proactively took certain systems offline to contain the threat, it paid a ransom in the form of cryptocurrency to regain control of the equipment. For additional information about cybersecurity risks and the cybersecurity programs and protocols we have in place to protect against those risks, see Part I, Items 1 and 2. Business and Properties - Information Technology and Cyber-security and Item 1A. Risk Factors - IT/Cyber-security/Data Privacy/Terrorism Risks in our 2021 Annual Report. 32 -------------------------------------------------------------------------------- In May 2021, the Transportation Security Administration("TSA") issued a security directive, which was its initial regulatory response to the Colonial pipeline ransomware attack. The first security directive requires pipeline owners and operators to report confirmed and potential cybersecurity incidents to the Cybersecurity and Infrastructure Security Agency("CISA") within 12 hours of discovery, designate a cybersecurity coordinator to be available 24 hours a day, seven days a week, review current practices and identify any gaps and related remediation measures to address cyber-related risks and report the results to the TSAand CISA within 30 days. In July 2021, the TSAissued a second security directive imposing additional obligations on owners and operators of TSA-designated critical pipelines. In addition to the requirements under the first directive, the second directive requires pipeline owners and operators to develop and implement specific mitigation measures to protect against ransomware attacks and other known threats to information technology and operational technology systems, develop and implement a cybersecurity contingency and recovery plan, as well as to conduct cybersecurity assessments. On May 29, 2022, having received feedback from us and other industry participants, the TSAissued a revised version of the first security directive, revising the reporting period for cybersecurity incidents to CISA within 24 hours of discovery. On July 21, 2022, the TSAupdated its second directive to focus less on prescriptive security measures and other technical requirements, and instead focusing on a performance-based model to provide more flexibility as technology advances. The revised security directive retains the requirements that pipeline owners and operators take various mitigation measures to protect against cybersecurity attacks and other known threats, develop the plans and conduct the assessments described above; however, companies are permitted more flexibility in achieving the cybersecurity goals as set forth by the TSAdirectives. The Cyber Incident Reporting for Critical Infrastructure Act ("CIRCIA") was signed into law on March 15, 2022. CIRCIA will require all owners and operators of critical infrastructure to report cyber incidents to CISA within 72 hours and ransomware payments within 24 hours. These new requirements will become effective once CISA promulgates rules pursuant to the Act. CISA is required to issue a notice of proposed rulemaking by March 2024and issue a final rule within 18 months of issuing the proposed rule. On June 14, 2021, as part of the self-executing provisions of the Protecting our Infrastructure of Pipelines and Enhancing Safety Act of 2020, PHMSA published an advisory bulletin requiring operators to update inspection and maintenance plans to address eliminating hazardous leaks and minimizing releases of natural gas by December 27, 2021. This advisory bulletin is expected to have minimal impact on our operations but will require minor updates to our inspection and maintenance manuals. In early 2021, PHMSA issued a revised map of the ecological High Consequence Areas ("HCAs") in the Gulf of Mexico. This revised map expanded the ecological HCA of the Gulf of Mexicoto include previously excluded dolphin and whale habitats. The HCA now encompasses most of the Gulf of Mexico. This places most liquid pipelines in the Gulf of Mexicoin an HCA and subject to the assessment requirements of 49 CFR 195.452. This may impact certain operational activity such as the frequency at which certain inspections need to be performed and the types of inspections required at those intervals. The holistic impact to our business is uncertain at this time, but we expect that all companies with comparable Gulf of Mexicooperations will be similarly impacted. In May 2021, Zydeco, Mars and LOCAPfiled with the FERCto decrease rates subject to the FERC'sindexing adjustment methodology that were previously at their ceiling levels by 0.5812% starting on July 1, 2021. On January 20, 2022, the FERCfiled an order requiring carriers to recalculate their ceiling levels and file any necessary rate reductions to be effective March 1, 2022using a revised formula. All the FERCceiling levels were recalculated as directed and necessary rate reductions filed before the March 1deadline. Rate complaints are currently pending at the FERCin Docket Nos. OR18-7-002, et al. challenging Colonial's tariff rates, its market power and its practices and charges related to transmix and product volume loss. A partial initial decision from the Administrative Law Judge was issued on December 1, 2021finding that Colonial lacks the ability to exercise market power in the 90-county Gulf Coastgeographic origin market, but no longer lacks the ability to exercise market power in the 16-county Tuscaloosa-Moundville geographic origin market. The partial initial decision also found that Colonial's method of net recoveries of product loss is unjust and unreasonable and that Colonial should adopt a fixed allowance oil deduction for shortages in deliveries and determine the amount of reparations, if any, owed to shippers. This document is a recommendation to the FERCbased on the facts surrounding the case, the law and FERCprecedent. The FERCmay decide to adopt the recommendations made or make different determinations. If the FERCadopts the partial initial decision in whole, in addition to the changes in product loss charges described above, which may adversely affect Colonial, Colonial's rates in respect of the 16-county Tuscaloosa-Moundville geographic origin market will no longer be market-based and could be reduced. Subsequently, on April 27, 2022, the Administrative Law Judge issued a second partial initial decision addressing the issues not covered in the first partial initial decision. The parties to the case filed briefs on the recommendations in June 2022and will be filing reply briefs in August 2022. Colonial continues to review the decision in preparation for filing reply briefs and to evaluate the 33 --------------------------------------------------------------------------------
the potential financial impacts that could result if the decision is adopted by the
In 2020, the
FERCcommenced the five-year review of the oil pipeline rate index formula in Docket No. RM20-14-000. The FERCissued an initial order on December 17, 2020adopting a new formula of PPI-FG plus 0.78% for the next five-year period commencing on July 1, 2021. On January 20, 2022, the FERCissued an order on rehearing revising the formula set in the December 17, 2020order to PPI-FG minus 0.21%. The lower indexing adjustment resulted from the FERCadjusting the data set used to assess pipeline cost changes; taking into account the elimination of the income tax allowance and previously accrued accumulated deferred income tax balances for MLP-owned pipelines; and using updated cost data for 2014. The rehearing order required pipelines to recalculate their rate ceiling levels using the PPI-FG minus 0.21% formula for the period July 1, 2021to June 30, 2022. For any rate that exceeded the recalculated ceiling level, the pipeline was required to file a rate reduction with the FERCto be effective March 1, 2022. Judicial appeals of the FERC'sorder on rehearing have been filed with the U.S. Court of Appeals for the Fifth Circuitand in the U.S. Court of Appeals for the District of Columbia Circuit. The Fifth Circuit issued an order on May 11, 2022that approved the transfer of this petition to the D.C. Circuit Court, although certain parties have sought review of that order by the Fifth Circuit en banc. Once the matters regarding venue are resolved, the case is expected to proceed. We do not expect these rate recalculations to have a material effect on our financial position, operating results or cash flows.
For more information about federal, state and local regulations affecting our business, please read Part I, Articles 1 and 2. Businesses and Properties of our 2021 Annual Report.
The following tables and discussion are a summary of our results of operations, including a reconciliation of Adjusted EBITDA and CAFD to net income and net cash provided by operating activities, the most directly comparable GAAP financial measures, for each of the periods indicated. Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Revenue $ 149
$ 148$ 284 $ 287Costs and expenses Operations and maintenance 44 45 85 83 Cost of product sold 14 7 23 11 Impairment of fixed assets - - - 3 General and administrative 14 13 27 25 Depreciation, amortization and accretion 13 12 25 25 Property and other taxes 5 6 10 11 Total costs and expenses 90 83 170 158 Operating income 59 65 114 129 Income from equity method investments 97 105 205 207 Other income 9 10 19 24 Investment and other income 106 115 224 231 Interest income 8 7 16 15 Interest expense 22 21 43 42 Income before income taxes 151 166 311 333 Income tax expense - - - - Net income 151 166 311 333 Less: Net income attributable to noncontrolling interests 3 4 5 8 Net income attributable to the Partnership 148 162 306 325 Preferred unitholder's interest in net income attributable to the Partnership 12 12 24 24 Limited Partners' interest in net income attributable to the Partnership's common unitholders $ 136 $ 150$ 282 $ 301Adjusted EBITDA attributable to the Partnership (1) $ 191 $ 207$ 373 $ 408Cash available for distribution attributable to the Partnership's common unitholders (1) $ 164
(1) For a reconciliation of Adjusted EBITDA and CAFD attributable to the Partnership to their most comparable GAAP measures, please read “-Reconciliation of Non-GAAP Measures”.
-------------------------------------------------------------------------------- Three Months Ended June 30, Six Months Ended June 30, Pipeline throughput (thousands of barrels per day) (1) 2022 2021 2022 2021 Zydeco - Mainlines 622 673 579 657 Zydeco - Other segments 66 42 54 30 Zydeco total system 688 715 633 687 Amberjack total system 317 335 328 333 Mars total system 432 484 460 491 Bengal total system 315 341 310 346 Poseidon total system 262 263 251 300 Auger total system 41 55 40 75 Delta total system 206 234 215 238 Na Kika total system 48 60 60 55 Odyssey total system 99 125 98 132 Colonial total system 2,411 2,205 2,416 2,101 Explorer total system 618 727 541 586 Mattox total system (2) 114 103 117 104 LOCAP total system 881 801 804 811 Other systems 447 440 450 479 Terminals (3) (4)
Lockportterminaling throughput and storage volumes 205 253 217 252 Revenue per barrel ($ per barrel) Zydeco total system (5) $ 0.59 $
Amberjack total system (5)
2.19 2.30 2.28 2.37 Mars total system (5) 1.57 1.29 1.41 1.31 Bengal total system (5) 0.34 0.40 0.35 0.41 Auger total system (5) 1.80 1.77 1.81 1.72 Delta total system (5) 0.80 0.64 0.73 0.65 Na Kika total system (5) 1.10 0.93 0.90 0.99 Odyssey total system (5) 1.06 1.03 1.02 1.00 Lockport total system (6) 0.25 0.20 0.23 0.21 Mattox total system (7) 1.52 1.52 1.52 1.52 (1) Pipeline throughput is defined as the volume of delivered barrels. For additional information regarding our pipeline and terminal systems, refer to Part I, Items 1 and 2. - Business and Properties - Our Assets and Operations in our 2021 Annual Report. (2) The actual delivered barrels for Mattox are disclosed in the above table for the comparative periods. However, Mattox is billed by monthly minimum quantity per dedication and transportation agreements. Based on the contracted volume determined in the agreements, the thousands of barrels per day (for revenue calculation purposes) for Mattox are 170 barrels per day for both the three and six months ended
June 30, 2022, and 154 barrels per day for both the three and six months ended June 30, 2021. (3) Terminaling throughput is defined as the volume of delivered barrels and storage is defined as the volume of stored barrels. (4) Refinery Gas Pipeline and our refined products terminals are not included above as they generate revenue under transportation and terminaling service agreements, respectively, that provide for guaranteed minimum revenue and/or throughput. (5) Based on reported revenues from transportation and allowance oil divided by delivered barrels over the same time period. Actual tariffs charged are based on shipping points along the pipeline system, volume and length of contract. (6) Based on reported revenues from transportation and storage divided by delivered and stored barrels over the same time period. Actual rates are based on contract volume and length. (7) Mattox is billed at a fixed rate of $1.52per barrel for the monthly minimum quantity in accordance with the terms of dedication and transportation agreements. 36
Reconciliation of Non-GAAP Measures
The following tables provide a reconciliation of adjusted EBITDA and CAFD to net income and net cash provided by operating activities, the most directly comparable GAAP financial measures, for each of the periods indicated.
Please read "-Adjusted EBITDA and Cash Available for Distribution" for more information. Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Reconciliation of Adjusted EBITDA and Cash Available for Distribution to Net Income Net income $ 151
$ 166$ 311 $ 333Add: Impairment of fixed assets - - - 3 Depreciation, amortization and accretion 16 17 32 33 Interest income (8) (7) (16) (15) Interest expense 22 21 43 42 Cash distributions received from equity method investments 119 128 230 251
Equity method distributions included in other income 9 10 17 24 Income from equity method investments 97 105 205 207 Adjusted EBITDA (1) 194 210 378 416
Adjusted EBITDA attributable to noncontrolling interests 3 3 5 8 Adjusted EBITDA attributable to the Partnership 191 207 373 408
Series A Preferred Units distribution 12 12 24 24 Net interest paid by the Partnership (2) 22 21 43 42 Maintenance capex attributable to the Partnership 5 3 7 5
Principal and interest payments received on financing receivables 11 8 18 17 Net adjustments from volume deficiency payments attributable to the Partnership - (5) 3 (7) 2021 Transactions (3) - 12 - 12 Reimbursement from Parent included in partner's capital (4) 1 - 1 - Cash available for distribution attributable to the Partnership's common unitholders $ 164
(1) Excludes principal and interest payments received on financing receivables. (2) Amount represents both paid and accrued interest attributable to the period. (3) Amount in 2021 includes the one-time
$10 millionpayment received as part of the May 2021Transaction, as well as the cash received as part of the Auger Divestiture. Refer to Note 2 - Acquisitions and Other Transactions in the Notes to the Unaudited Consolidated Financial Statements for additional information. (4) Amount in 2022 relates to reimbursement for final close out activities associated with the directional drill project on Zydeco that was finalized and operational in 2019. 37 -------------------------------------------------------------------------------- Six
Reconciliation of Adjusted EBITDA and cash available for distribution to net cash provided by operating activities Net cash provided by operating activities
$ 351Add: Interest income (16) (15) Interest expense 43 42 Return of investment 41 30 Less: Change in deferred revenue and other unearned income 8 (5) Change in other assets and liabilities 23 (3) Adjusted EBITDA (1) 378 416
Adjusted EBITDA attributable to noncontrolling interests 5 8 Adjusted EBITDA attributable to the Partnership 373 408
Series A Preferred Units distribution 24 24 Net interest paid by the Partnership (2) 43 42 Maintenance capex attributable to the Partnership 7 5
Principal and interest payments received on financing receivables
Net Shortfall Payment Adjustments attributable to the Partnership
3 (7) 2021 Transactions (3) - 12 Reimbursement from Parent included in partner's capital (4) 1 -
Cash Available for Distribution Attributable to Ordinary Unitholders of the Partnership
(1) Excludes principal and interest payments received on financing receivables. (2) Amount represents both paid and accrued interest attributable to the period. (3) Amount in 2021 includes the one-time
$10 millionpayment received as part of the May 2021Transaction, as well as the cash received as part of the Auger Divestiture. Refer to Note 2 - Acquisitions and Other Transactions in the Notes to the Unaudited Consolidated Financial Statements for additional information. (4) Amount in 2022 relates to reimbursement for final close out activities associated with the directional drill project on Zydeco that was finalized and operational in 2019. 38
Total revenue increased by
Product revenue increased by
$9 millionrelated to higher sales of allowance oil for certain of our onshore and offshore crude pipelines in the Current Quarteras compared to the Comparable Quarter. Transportation services revenue decreased primarily due to the expiration of a shipper contract on the Zydeco system in the Current Quarter, coupled with lower average tariff rates for the mix of barrels shipped in the Current Quarterversus the Comparable Quarter. Additionally, there was lower throughput on Odyssey in the Current Quarter, primarily as a result of lower deliveries from producers. Lastly, there was lower transportation services revenue on Pecten primarily as a result of lower throughput largely due to planned maintenance activities from producers in the Current Quarter. These decreases were partially offset by an increase in deliveries into Houmafrom certain offshore systems, as well as an overall increase in allowance oil prices in the Current Quarter. Terminaling services revenue increased as a result of a contractual inflation adjustment in the latter part of 2021 related to the service components of the terminaling services agreements for the Norco Assets. However, this increase was offset by lower revenue related to the major maintenance service component on the Norco Assets due to lower capital expenditure in the Current Quarter.
Costs and expenses
Total costs and expenses increased
$7 millionin the Current Quarteras compared to the Comparable Quarterprimarily due to an increase of $7 millionof cost of product sold, $1 millionof general and administrative expenses and $1 millionof depreciation expense. These increases were partially offset by decreases of $1 millionof operations and maintenance expenses and $1 millionof property and other taxes.
Cost of goods sold increased primarily due to higher quota oil sales in
General and administrative expenses increased in the
Current Quarterversus the Comparable Quarterprimarily due to an increase in professional services and associated fees. Operations and maintenance expenses decreased in the Current Quarterversus the Comparable Quarterprimarily due to larger physical gains on allowance oil in the Current Quarter, as well as lower non-routine maintenance expenses on the Norco Assets. This decrease was almost entirely offset by higher project spend across various assets.
Property tax expense decreased due to changes in property tax assessment estimates.
Investment and Other Income
Investment and other income decreased
Interest income and expenses
Interest income and interest expense both increased
Current period versus comparable period
Total revenue decreased by
$3 millionin the Current Period as compared to the Comparable Period comprised of decreases of $17 millionattributable to transportation services revenue and $1 millionattributable to lease revenue. These decreases were partially offset by increases of $14 millionin product revenue and $1 millionin terminaling services revenue in the Current Period versus the Comparable Period. Transportation services revenue decreased for Pecten primarily due to planned maintenance activities on certain systems in the Current Period. Transportation services revenue also decreased as a result of the expiration of a shipper contract on the Zydeco system in the Current Period, coupled with lower average tariff rates for the mix of barrels shipped in the Current Period versus the Comparable Period, as well as lower overall spot shipments in the Current Period. These decreases were partially offset by an overall increase in allowance oil prices in the Current Period.
Rental income decreased due to the sale of Anacortes assets during the comparable period.
Product sales increased by
Terminaling services revenue increased as a result of a contractual inflation adjustment in the latter part of 2021 related to the service components of the terminaling services agreements for the Norco Assets.
Costs and expenses
Total costs and expenses increased
$12 millionin the Current Period as compared to the Comparable Period primarily due to an increase of $12 millionof cost of product sold, $2 millionof operations and maintenance expenses and $2 millionof general and administrative expenses. These increases were partially offset by decreases of $3 millionas a result of no impairment of fixed assets in Current Period and a decrease of $1 millionof property and other taxes.
Cost of goods sold increased due to higher quota oil sales in the current period compared to the comparable period.
Operations and maintenance expenses increased in the Current Period as compared to the Comparable Period mainly as a result of higher project spend and maintenance activities in the Current Period. This increase was partially offset by larger physical gains on allowance oil in the Current Period.
General and administrative expenses increased primarily due to an increase in professional services and related fees.
Property tax expense decreased due to changes in property tax assessment estimates.
Investment and Other Income Investment and other income decreased
$7 millionin the Current Period as compared to the Comparable Period. Other income decreased by $5 millionrelated to $7 millionof lower distributions from Poseidon in the Current Period, partially offset by the receipt of $2 millionof insurance proceeds in the Current Period related to hurricane impacts in the third quarter of 2021. Income from equity method investments decreased by $2 millionprimarily as a result of lower equity earnings from Explorer, partially offset by higher equity earnings from Colonial. Interest Income and Expense Interest income and interest expense both increased $1 millionin the Current Period as compared to the Comparable Period mainly due to higher interest rates in the Current Period versus the Comparable Period. 40 --------------------------------------------------------------------------------
Capital resources and liquidity
We expect our ongoing sources of liquidity to include cash generated from operations, borrowings under our credit facilities and our ability to access the capital markets. We believe this access to credit along with cash generated from operations will be sufficient to meet our short-term working capital requirements and long-term capital expenditure requirements and to make quarterly cash distributions. Our liquidity as of
June 30, 2022was $1,341 million, consisting of $325 millioncash and cash equivalents and $1,016 millionof available capacity under our credit facilities.
Credit Facility Agreements
Total Capacity Current Interest Rate Maturity Date 2021 Ten Year Fixed Facility $ 600 2.96 % March 16, 2031 Ten Year Fixed Facility 600 4.18 % June 4, 2029 Seven Year Fixed Facility 600 4.06 % July 31, 2025 Five Year Revolver due
July 2023(1) 760 2.17 % July 31, 2023 Five Year Revolver due December 2022 (1) 1,000 2.18 % December 1, 2022
(1) These revolving credit facilities will expire in 2022 and 2023, respectively, and as such, we are currently evaluating our renewal options.
June 30, 2021, Zydeco entered into a termination of revolving loan facility agreement with Shell Treasury Center (West) Inc.("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. 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. Refer to Note 6 - Related Party Debt in the Notes to the Unaudited Consolidated Financial Statements in this report for additional information. Borrowings under the Five Year Revolver due July 2023and the Five Year Revolver due December 2022bear interest at the three-month London Interbank Offered Rate ("LIBOR") rate plus a margin or, in certain instances (including if LIBOR is discontinued), at an alternate interest rate as described in each respective revolver. LIBOR is being 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 once determined, will assess the financial impact, if any. Our weighted average interest rate for the six months ended June 30, 2022and June 30, 2021was 3.2% and 3.0%, respectively. The weighted average interest rate includes drawn and undrawn interest fees, but does not consider the amortization of debt issuance costs or capitalized interest. A 1/8 percentage point (12.5 basis points) increase in the interest rate on the total variable rate debt of $744 millionas of June 30, 2022would increase our consolidated annual interest expense by approximately $1 million. We will need to rely on the willingness and ability of our related party lender to secure additional debt, our ability to use cash from operations and/or obtain new debt from other sources to repay/refinance such loans when they come due and/or to secure additional debt as needed.
For definitions and additional information on our credit facilities, refer to Note 6 - Related Party Debt in the Notes to the Unaudited Consolidated Financial Statements in this report and Note 8 - Related Party Debt in the Notes to the Consolidated Financial Statements included in Part II, Item 8 in our 2021 Annual Report.
Cash flow from our operations
Operating Activities. We generated
$341 millionin cash flow from operating activities in the Current Period compared to $351 millionin the Comparable Period. The decrease in cash flows was primarily driven by lower undistributed equity earnings from our equity method investments in the Current Period. This decrease was partially offset by the timing of receipt of receivables and deferred revenue, and payment of accruals. 41 -------------------------------------------------------------------------------- Investing Activities. Our cash flow provided by investing activities was $34 millionin the Current Period compared to $35 millionin the Comparable Period. The decrease in cash flow provided by investing activities was primarily due to higher capital expenditures in the Current Period compared to Comparable Period, and no cash received from any transactions in the Current Period compared to proceeds received from the May 2021Transaction and the Auger Divestiture in the Comparable Period. This is offset by a higher return of investment and lower contribution to investment in the Current Period compared to the Comparable Period. Financing Activities. Our cash flow used in financing activities was $411 millionin the Current Period compared to $353 millionin the Comparable Period. The increase in cash flow used in financing activities was primarily due to partial repayment of outstanding debt in the Current Period. This increase was partially offset by lower distributions to unitholders and non-controlling interests in the Current Period, as well as the receipt of other contributions from both our Parent and a noncontrolling interest in the Current Period and a prepayment fee paid in the Comparable Period.
Capital expenditure and investments
Our operations can be capital intensive, requiring investments to maintain, expand, upgrade or enhance existing operations and to meet environmental and operational regulations. Our capital requirements consist of maintenance capital expenditures and expansion capital expenditures. Examples of maintenance capital expenditures are those made to replace partially or fully depreciated assets, to maintain the existing operating capacity of our assets and to extend their useful lives, or other capital expenditures that are incurred in maintaining existing system volumes and related cash flows. In contrast, expansion capital expenditures are those made to acquire additional assets to grow our business, to expand and upgrade our systems and facilities and to construct or acquire new systems or facilities. We regularly explore opportunities to improve service to our customers and maintain or increase our assets' capacity and revenue. We may incur substantial amounts of capital expenditures in certain periods in connection with large maintenance projects that are intended to only maintain our assets' capacity or revenue.
We have made capital expenditures and investments of
A summary of our capital expenditures and investments is shown in the table below: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Expansion capital expenditures $ - $ - $ - $ - Maintenance capital expenditures 5 3 7 4 Total capital expenditures paid 5 3 7 4 (Decrease) increase in accrued capital expenditures 1 - 1 1 Total capital expenditures incurred 6 3 8 5 Contributions to investment - 1 - 3 Total capital expenditures and investments $ 6
$ 4$ 8 $ 842
We expect total capital expenditures and investments to be approximately
Actual Expected Total Expected Six Months Ended Six Months Ending 2022 Capital June 30, 2022 December 31, 2022 Expenditures Expansion capital expenditures Pecten $ - $ 2 $ 2 Total expansion capital expenditures incurred - 2 2
Maintenance capital expenditure
Zydeco $ 1 $ 2 $ 3 Pecten - 2 2 Triton 1 3 4 Odyssey 6 23 29 Total maintenance capital expenditures incurred 8 30 38 Contributions to investment - 3 3 Total capital expenditures and investments $ 8 $ 35 $ 43
Expansion and maintenance expenses
Pecten had no expansion capital expenditures for both the three and six months ended
June 30, 2022, and we expect Pecten's expansion capital expenditures to be approximately $2 millionfor the remainder of 2022. These expected expenditures relate to the potential expansion of the Auger corridor. Zydeco's maintenance capital expenditures for the three and six months ended June 30, 2022were less than $1 millionand $1 million, respectively, primarily for the Houmamotor control center upgrade. We expect Zydeco's maintenance capital expenditures to be approximately $2 millionfor the remainder of 2022, of which approximately $1 millionis related to the Houmatank maintenance projects and $1 millionis related to various other maintenance projects.
Pecten’s maintenance capital expenditures for the three and six months ended
Triton's maintenance capital expenditures for both the three and six months ended
June 30, 2022was $1 million. We expect Triton's maintenance capital expenditures to be approximately $3 millionfor the remainder of 2022, of which approximately $1 millionis related to the Des Plaines truck, tank and control center upgrades. The remaining maintenance capital expenditure is related to various other routine maintenance projects. Odyssey's maintenance capital expenditures for the three and six months ended June 30, 2022were $5 millionand $6 million, respectively, related to a project to re-route two pipelines around the MP289C platform. We expect Odyssey's maintenance capital expenditures to be approximately $23 millionfor the remainder of 2022 related to this pipeline re-route project.
We do not expect any maintenance capital expenditure for Sand Dollar in 2022.
We expect capital expenditures for the remainder of the year to be funded primarily by cash flow from operations.
In accordance with the Member Interest Purchase Agreement dated
October 16, 2017, pursuant to which we acquired a 50% interest in Permian Basin, we will make capital contributions for our pro rata interest in Permian Basinto fund capital and other expenditures, as approved by a supermajority (75%) vote of the members. We did not make any capital contribution in the three and six months ended June 30, 2022, and expect to make approximately $3 millionin capital contributions during the remainder of 2022.
Off-balance sheet arrangements
We have not entered into any transaction, agreement or other contractual arrangement that would result in off-balance sheet liabilities.
Environmental issues and compliance costs
Our operations are subject to extensive and frequently changing federal, state and local laws, regulations and ordinances relating to the protection of the environment. Among other things, these laws and regulations govern the emission or discharge of pollutants into or onto the land, air and water, the handling and disposal of solid and hazardous wastes and the remediation of contamination. As with the industry in general, compliance with existing and anticipated environmental laws and regulations increases our overall cost of business, including our capital costs to construct, maintain, operate and upgrade equipment and facilities. While these laws and regulations affect our maintenance capital expenditures and net income, we believe they do not affect our competitive position, as the operations of our competitors are similarly affected. We believe our facilities are in substantial compliance with applicable environmental laws and regulations. However, these laws and regulations are subject to changes, or to changes in the interpretation of such laws and regulations, by regulatory authorities, and continued and future compliance with such laws and regulations may require us to incur significant expenditures. Additionally, violation of environmental laws, regulations and permits can result in the imposition of significant administrative, civil and criminal penalties, injunctions limiting our operations, investigatory or remedial liabilities or construction bans or delays in the construction of additional facilities or equipment. Additionally, a release of hydrocarbons or hazardous substances into the environment could, to the extent the event is not insured, subject us to substantial expenses, including costs to comply with applicable laws and regulations and to resolve claims by third parties for personal injury or property damage or claims by the
U.S.federal government or state governments for natural resources damages. These impacts could directly and indirectly affect our business and have an adverse impact on our financial position, results of operations and liquidity if we do not recover these expenditures through the rates and fees we receive for our services. We believe our competitors must comply with similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including, but not limited to, the type of competitor and location of its operating facilities. For additional information, refer to Environmental Matters, Items 1 and 2. Business and Properties in our 2021 Annual Report. We accrue for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs can be reasonably estimated. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. New or expanded environmental requirements, which could increase our environmental costs, may arise in the future. We believe we substantially comply with all legal requirements regarding the environment; however, as not all of the associated costs are fixed or presently determinable (even under existing legislation) and may be affected by future legislation or regulations, it is not possible to predict all of the ultimate costs of compliance, including remediation costs that may be incurred and penalties that may be imposed.
Significant Accounting Policies and Estimates
Our significant accounting policies and estimates are presented in Part II, point 7. Management report and analysis of the financial situation and results of operations – Significant accounting policies and estimates of our 2021 annual report.
44 -------------------------------------------------------------------------------- CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This report includes forward-looking statements. You can identify our forward-looking statements by the words "anticipate," "estimate," "believe," "budget," "continue," "could," "intend," "may," "plan," "potential," "predict," "seek," "should," "would," "expect," "objective," "projection," "forecast," "goal," "guidance," "outlook," "effort," "target" and similar expressions. We based the forward-looking statements on our current expectations, estimates and projections about us and the industries in which we operate in general. We caution you these statements are not guarantees of future performance as they involve assumptions that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may differ materially from what we have expressed in the forward-looking statements. Any differences could result from a variety of factors, including the following: •Whether the proposed Transaction to acquire all of our issued and outstanding common units not already owned by SPLC or its affiliates will be consummated in 2022 or at all. •The proposed Transaction includes risks that it may not be consummated or the benefits contemplated therefrom may not be realized, including the ability to obtain the requisite regulatory approval and the satisfaction of the other conditions to the consummation of the proposed Transaction, and the potential impact of the announcement or consummation of the proposed Transaction on relationships, including with employees, suppliers, customers, competitors and credit rating agencies. •The continued ability of Shell and our non-affiliate customers to satisfy their obligations under our commercial and other agreements. •The volume of crude oil, refined petroleum products and refinery gas we transport or store and the prices that we can charge our customers. •The tariff rates with respect to volumes that we transport through our regulated assets, which rates are subject to review and possible adjustment imposed by federal and state regulators. •Changes in revenue we realize under the loss allowance provisions of our fees and tariffs resulting from changes in underlying commodity prices. •Our ability to renew or replace our third-party contract portfolio on comparable terms. •Fluctuations in the prices for crude oil, refined petroleum products and refinery gas, including fluctuations due to political or economic measures taken by various countries. •The level of production of refinery gas by refineries and demand by chemical sites. •The level of onshore and offshore (including deepwater) production and demand for crude oil by
U.S.refiners. •Changes in global economic conditions and the effects of a global economic downturn on the business of Shell and the business of its suppliers, customers, business partners and credit lenders. •The ongoing COVID-19 pandemic and related governmental regulations and travel restrictions (including our vaccine mandate for offshore employees), and any resulting reduction in the global demand for oil and natural gas. •Availability of acquisitions and financing for acquisitions on our expected timing and acceptable terms. •Changes in, and availability to us, of the equity and debt capital markets. •Liabilities associated with the risks and operational hazards inherent in transporting and/or storing crude oil, refined petroleum products and refinery gas. •Curtailment of operations or expansion projects due to unexpected leaks, spills or severe weather disruption, including disruptions caused by hurricanes; riots, strikes, lockouts or other industrial disturbances; or failure of information technology systems due to various causes, including unauthorized access or attack. •Costs or liabilities associated with federal, state and local laws and regulations, including those that may be implemented by the current U.S.presidential administration, relating to environmental protection and safety, including spills, releases and pipeline integrity. •Costs associated with compliance with evolving environmental laws and regulations on climate change. •Costs associated with compliance with safety regulations and system maintenance programs, including pipeline integrity management program testing and related repairs. •Changes in tax status or applicable tax laws. •Changes in the cost or availability of third-party vessels, pipelines, rail cars and other means of delivering and transporting crude oil, refined petroleum products and refinery gas. •Direct or indirect effects on our business resulting from actual or threatened terrorist incidents or acts of war, including the ongoing Russian invasion of Ukraine, its associated impacts on global commodity markets and the resulting political and economic sanctions on Russia. •The effect of releases from the U.S.Strategic Petroleum Reserve. 45 --------------------------------------------------------------------------------
•The factors generally described in Part I, point 1A. Risk factors in our 2021 annual report.
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