Management's Discussion and Analysis of Financial Condition and Results of Operations are the analysis of our financial performance, financial condition and significant trends that may affect future performance. It should be read in conjunction with the consolidated financial statements and notes thereto included in Part II, Item 8 of this report. It should also be read together with "Risk factors" and "Cautionary Statement Regarding Forward-Looking Statements" in this report. OnJanuary 1, 2019 , we adopted Topic 842, Leases ("the new lease standard") by applying the modified retrospective approach. Results for reporting periods beginning afterJanuary 1, 2019 and balances atDecember 31, 2019 are presented in accordance with the new lease standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under previous generally accepted accounting principles inthe United States ("GAAP"). See Note 9 - Leases in the Notes to Consolidated Financial Statements included in Part II, Item 8. OnJanuary 1, 2018 , we adopted Topic 606, Revenue from Contracts with Customers, and all related ASUs to this Topic (collectively, "the revenue standard") by applying the modified retrospective method to all contracts that were not completed onJanuary 1, 2018 . Results for reporting periods beginning afterJanuary 1, 2018 are presented in accordance with the revenue standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under previous GAAP. See Note 12 - Revenue Recognition in the Notes to Consolidated Financial Statements included in Part II, Item 8. Partnership Overview We own, operate, develop and acquire pipelines and other midstream assets. As ofDecember 31, 2019 , our assets include interests in entities that own crude oil and refined products pipelines and terminals that serve as key infrastructure to (i) transport onshore and offshore crude oil production toGulf Coast and Midwest refining markets and (ii) deliver refined products from those markets to major demand centers. Our assets also include interests in entities that own natural gas and refinery gas pipelines which transport offshore natural gas to market hubs and deliver refinery gas from refineries and plants to chemical sites along theGulf Coast . For a description of our assets, please see Part I, Item 1 - Business and Properties of this report. 2019 developments include: •June 2019 Acquisition. InMay 2019 , we entered into a Contribution Agreement (the "May 2019 Contribution Agreement") with SPLC to acquire SPLC's remaining 25.97% ownership interest in Explorer and 10.125% ownership interest in Colonial for consideration valued at$800 million (the "June 2019 Acquisition"). TheJune 2019 Acquisition increased the Partnership's ownership interest in Explorer to 38.59% and in Colonial to 16.125%. We funded theJune 2019 Acquisition with$600 million in cash consideration from borrowings under our Ten Year Fixed Facility (as defined below) withShell Treasury Center (West) Inc. ("STCW") and non-cash equity consideration valued at$200 million from the issuance of 9,477,756 common units toShell Midstream LP Holdings LLC , an indirect subsidiary of Shell, and 193,424 general partner units to the general partner in order to maintain its 2% general partner interest in us. •Borrowings. InJune 2019 , we entered into a ten-year fixed rate credit facility with STCW with a borrowing capacity of$600 million (the "Ten Year Fixed Facility"). The Ten Year Fixed Facility was fully drawn to partially fund theJune 2019 Acquisition. We generate revenue from the transportation, terminaling and storage of crude oil and refined products through our pipelines and storage tanks, and we generate income from our equity and other investments. 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 theGulf Coast region ofthe 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 2019 and certain anticipated 2020 impacts to net income and cash available for distribution include:
•Hurricane Barry. As a result of Hurricane Barry, we incurred an impact of approximately$10 million to net income and cash available for distribution in the third quarter of 2019. Certain producers in theGulf of Mexico elected to shut- 51 -------------------------------------------------------------------------------- in and evacuate as a safety precaution, while others were forced to shut-in or curtail production due to onshore closures. There was no material impact to our people, assets or the environment as a result of the storm. •Planned Turnarounds. Certain connected producers had planned turnarounds during 2019. The impact to net income and cash available for distribution was approximately$10 million for the year endedDecember 31, 2019 . As a result of certain offshore planned producer turnarounds, we anticipate a similar impact in 2020 to both net income and cash available for distribution. •Storage Revenue Reimbursement from SPLC. We received approximately$9 million in the fourth quarter of 2019 from SPLC related to a storage revenue reimbursement provision contained in the Purchase and Sale Agreement entered into in 2016 under which we acquired an additional 20% interest in Mars. Pursuant to the Purchase and Sale Agreement, SPLC agreed to pay us up to$10 million if Mars inventory management fees do not meet certain levels for the calendar years 2017 through 2021. Refer to Note 5 - Equity Method Investments in the Notes to the Consolidated Financial Statements included in Part II, Item 8 for additional information. The broader market environment for our customers was challenging in 2019, and we expect it to remain so in 2020. The MLP market also changed significantly in 2019, as capital for high growth fueled by dropdown activity was constrained. We are fortunate to have the support of our sponsor, who has provided us favorable loan and equity terms, allowing us flexibility to acquire high quality assets from our affiliates. While we expect to retain this flexibility, in 2020 we anticipate moderating inorganic growth in our asset base and focusing on the sustainable operation of our core assets and organic growth of our business. Executive Overview Net income was$546 million and net income attributable to the Partnership was$528 million in 2019. We generated cash from operations of$597 million and increased our borrowing capacity by$600 million . Cash generated was primarily used to pay down debt with STCW. In addition, we completed theJune 2019 Acquisition for$800 million . As ofDecember 31, 2019 , we had cash and cash equivalents of$290 million , total debt of$2,692 million , and unused capacity under our revolving credit facilities of$896 million . Our 2019 operations and strategic initiatives demonstrated our continuing focus on our business strategies: •Maintain operational excellence through prioritization of safety, reliability and efficiency; •Growth through strategic acquisitions in key geographies to achieve integrated value; •Focus on advantageous commercial agreements with creditworthy counterparties to enhance financial results and deliver reliable distribution growth over the long-term; and •Optimize existing assets and pursue organic growth opportunities. 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) Adjusted EBITDA (defined below); and (iv) Cash Available for Distribution. Contracted Capacity and Throughput The amount of revenue our assets generate primarily depends on our transportation and storage services agreements with shippers and the volumes of crude oil, refinery gas and refined products that we handle through our pipelines, terminals and storage tanks. 52 -------------------------------------------------------------------------------- The commitments under our transportation, terminaling and storage services agreements with shippers and the volumes which we handle in our pipelines and storage tanks are primarily affected by the supply of, and demand for, crude oil, refinery gas, natural gas and refined products in the markets served directly or indirectly by our assets. This supply and demand is impacted by the market prices for these products in the markets we serve. We utilize the commercial arrangements we believe are the most prudent under the market conditions to deliver on 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.
Operations and Maintenance Expenses Our management seeks to maximize our profitability by effectively managing operations and maintenance expenses. These expenses are comprised primarily of labor expenses (including contractor services), insurance costs (including coverage for our consolidated assets and operated joint ventures), utility costs (including electricity and fuel) and repairs and maintenance expenses. Utility costs fluctuate based on throughput volumes and the grades of crude oil and types of refined products we handle. Our property and business interruption coverage is provided by a wholly owned subsidiary of Shell, which results in cost savings and improved coverage. Our other operations and maintenance expenses generally remain stable across broad ranges of throughput and storage volumes, but can fluctuate from period to period depending on the mix of activities, particularly maintenance activities, performed during a period. At times, the fluctuation in operations and maintenance expenses may materially increase due to the performance of planned maintenance, such as turnaround work and asset integrity work, and unplanned maintenance, such as repair of damage caused by a natural disaster. Adjusted EBITDA and Cash Available for Distribution Adjusted EBITDA and cash available for distribution have important limitations as analytical tools because they exclude some, but not all, items that affect net income and net cash provided by operating activities. You should not consider Adjusted EBITDA or cash available for distribution in isolation or as a substitute for analysis of our results as reported under GAAP. Additionally, because Adjusted EBITDA and cash available for distribution may be defined differently by other companies in our industry, our definition of Adjusted EBITDA and cash available for distribution may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. The GAAP measures most directly comparable to Adjusted EBITDA and cash available for distribution are net income and net cash provided by operating activities. Adjusted EBITDA and cash available for distribution should not be considered as an alternative to GAAP net income or net cash provided by operating activities. Please refer to "Results of Operations - Reconciliation of Non-GAAP Measures" for the reconciliation of GAAP measures net income and cash provided by operating activities to non-GAAP measures Adjusted EBITDA and cash available for distribution. We define Adjusted EBITDA as net income before income taxes, net interest expense, gain or loss from dispositions of fixed assets, allowance oil reduction to net realizable value, 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 cash available for distribution as Adjusted EBITDA attributable to the Partnership less maintenance capital expenditures attributable to the Partnership, net interest paid, cash reserves and income taxes paid, plus net adjustments from volume deficiency payments attributable to the Partnership, reimbursements from Parent included in partners' capital and certain one-time payments received. Cash available for distribution will not reflect changes in working capital balances. We believe that the presentation of these non-GAAP supplemental financial measures provides useful information to management and investors in assessing our financial condition and results of operations. We present these financial measures 53 -------------------------------------------------------------------------------- because we believe replacing our proportionate share of our equity method investments' net income with the cash received from such equity method investments more accurately reflects the cash flow from our business, which is meaningful to our investors. Adjusted EBITDA and cash available for distribution are non-GAAP supplemental financial measures that management and external users of our consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess: •our operating performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or, in the case of Adjusted EBITDA, financing methods;
•the ability of our business to generate sufficient cash to support our decision to make distributions to our unitholders;
•our ability to incur and service debt and fund capital expenditures; and
•the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities. Factors Affecting Our Business and Outlook 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 Sourcing and Refined Product Demand Dynamics To effectively manage our business, we monitor our market areas for both short-term and long-term shifts in crude oil and refined products supply and demand. Changes in crude oil supply such as new discoveries of reserves, declining production in older fields, 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. 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 theGulf 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 andU.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. 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. For example, production from Shell's Appomattox platform in theGulf of Mexico , which came online during 2019, tied into our existing Proteus and Endymion systems to bring crude onshore. Similarly, we expect to continue extending our corridor pipelines to provide developing growth regions in theGulf of Mexico with access via our existing corridors to onshore refining centers and market hubs. By way of example, in the latter part of 2019 we announced a solicitation of interest for a potential expansion of the Mars system to address growing production volumes in theGulf of Mexico regions served by Mars, and we anticipate bringing that project online in 2021. We believe this strategy will allow our offshore business to grow profitably throughout demand cycles. Changes inCustomer Contracting 54 -------------------------------------------------------------------------------- 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 substantially 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, and is impacted by shifts in supply and demand dynamics, the mix of services requested by the customers of our pipelines, competition and changes in regulatory requirements affecting our operations. Our business can also be impacted by asset integrity or customer interruptions and natural disasters. Two of our long-term transportation services agreements on the Zydeco system expired at the end of 2018, and another expired in the second quarter of 2019. These contracts represented approximately 30% of our revenues for both the years endedDecember 31, 2018 and 2017. As a result of the open season conducted in the second quarter of 2019, Zydeco was able to re-contract the expired volumes under throughput and deficiency agreements ("T&D agreements"). Although we have replaced the volumes from the expired contracts, the rates under the new T&D agreements are lower than those previously contracted, and therefore net income and cash available for distribution are lower. Further, two of these T&D agreements will expire in the fourth quarter of 2020; however, the shippers have the ability to extend the contracts for an additional six months. The ability to re-contract those T&D agreements could further impact net income and cash available for distribution. The market environment dictated the rates, terms and duration of these T&D agreements. Increases or decreases in available crude supply in theHouston market can affect demand for transportation to other markets, especially theLouisiana refining market. A number of factors could impact this, including increased production in fields withHouston connectivity and increased export capabilities atTexas Gulf Coast ports. Shippers may also choose alternate routes on which to ship. Alternatively,Louisiana refineries' availability and crude slates, as well as potential crude options atLouisiana Gulf Coast ports, can impactLouisiana demand for crude types available in theHouston market. Additionally, crude prices and basis differentials directly impact the price our customers are willing to pay to transport. Despite these challenges, we believe that 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. Revenue we generate from spot shipments typically has a corresponding positive impact on cash available for distribution. However, in the first half of 2019, previously committed shippers whose contracts expired at the end of 2018 had the ability to ship on credits earned related to under-shipments prior to the expiration of their contracts. As such, revenue is recognized for the usage of those credits, but cash is not received. For the contract that expired during the second quarter of 2019, the shipper had the ability to ship on previously earned credits into the fourth quarter of 2019. These credits were not material. The cumulative effect of the foregoing circumstances and challenges on Zydeco has had, and may continue to have, a material impact on our financial results. The impact on our net income and cash available for distribution in the first half of 2019, prior to re-contracting, was approximately$55 million . Changes in Commodity Prices and Customers' Volumes Crude oil prices have fluctuated significantly over the past few years, often with drastic moves in relatively short periods of time. At the start of 2019, prices increased from fourth quarter 2018 levels and remained relatively consistent throughout the remainder of the year. However, the current global geopolitical and economic uncertainty continues to contribute to future volatility in financial and commodity markets. 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 feedU.S. manufacturing demand. Likewise, changes in the global market for crude oil could affect our crude oil pipeline 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 affecting the exploration, production and refining industries. 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 theTexas andLouisiana refining markets, where demand for throughput has remained strong. Historically, we have not experienced a material decline in throughput volumes on our crude oil pipeline systems as a result of lower crude oil prices. However, if crude oil prices remain at lower levels for a sustained period, we could see a reduction in our transportation volumes if production coming into our systems is deferred and our 55 -------------------------------------------------------------------------------- associated allowance oil sales decrease. Our customers may also experience liquidity and credit problems, which could cause them to defer development or repair projects, avoid our contracts in bankruptcy or renegotiate our contracts on terms that are less attractive to us or impair their ability to perform under our contracts. Our throughput volumes on our refined products pipeline systems depend primarily on the volume of refined products produced at connected refineries and the desirability of our end markets. These factors in turn are driven by refining margins, maintenance schedules and market differentials. Refining margins depend on the cost of crude oil or other feedstocks and the price of refined products. These margins are affected by numerous factors beyond our control, including the domestic and global supply of and demand for crude oil and refined products. We are currently experiencing relatively high demand for our pipeline systems that service refineries. Other Changes in Customers' Volumes Onshore crude transportation volumes were higher in 2019 versus 2018 primarily due to declaring Force Majeure in 2018 related to hydro-testing the Zydeco pipeline that resulted in 49 days of downtime, as well as from overall higher receipts from connecting offshore pipelines. Offshore crude transportation volumes were higher in 2019 versus 2018 primarily due to increased production at certain platforms and from several large fields in the centralGulf of Mexico , as well as an increase in receipt volume from a connecting pipeline system. Additionally, certain production was shut-in during 2018 for unplanned maintenance and returned to normal levels during 2019. Partially offsetting this increase was the impact of planned turnarounds and unplanned maintenance in 2019, as well as the impact of Hurricane Barry. Offshore storage volumes were lower in 2019 versus 2018 due to the increase in demand for exports reducing the need for storage. Major Maintenance Projects On the Zydeco pipeline system, we have finalized a directional drill project to address soil erosion over a two-mile section of our 22-inch diameter pipeline under theAtchafalaya River and Bayou Shaffer inLouisiana (the "directional drill project"). Zydeco incurred approximately$42 million in maintenance capital expenditures for the total project, of which$11 million was in 2019. In connection with the acquisitions of additional interests in Zydeco, SPLC agreed to reimburse us against our proportionate share of certain costs and expenses with respect to this project. During 2019, we filed claims for reimbursement from SPLC of$10 million , which were treated as capital contributions from our Parent. Although the project is fully operational, we expect that there will be approximately$4 million of expense incurred in the future related to final close out activities, for which our share will be reimbursed. For expected capital expenditures in 2020, refer to Capital Resources and Liquidity - Capital Expenditures. Major Expansion Projects InJune 2017 , Zydeco began construction on a tank expansion project inHouma to address future capacity shortfalls during tank maintenance which will allow us to service additional capacity, as well as allow for existing tanks to come out of service for regularly scheduled inspection and maintenance. The scope included interconnecting piping, dike expansion and associated facility work. The tanks were completed during the first quarter of 2019 and are operational. We built two 250,000 barrel working tanks at the existingHouma facility and have incurred growth capital expenditures of$47 million since inception, of which$7 million was incurred in 2019. On Mars, we announced a solicitation of interest for a potential expansion of the system in the latter part of 2019. The solicitation was intended to gauge producer interest in an expansion of capacity in order to transport volumes to market and would offer priority service on any new incremental capacity. Substantial interest was received from producers, and we are now scoping to accommodate expected additional demand and working to reach final investment decision in the first half of 2020. It is expected that the project would be fully operational in 2021. Customers We transport and store crude oil, refined products, natural gas, and refinery gas for a broad mix of customers, including shippers, producers, refiners, marketers and traders, and are connected to other crude oil and refined products pipelines. In addition to serving directly-connectedU.S. Gulf Coast markets, our crude oil and refined products pipelines have access to customers in various regions ofthe United States through interconnections with other major pipelines. Our customers use our 56 -------------------------------------------------------------------------------- transportation and storage services for a variety of reasons. Refiners typically require a secure and reliable supply of crude oil over a prolonged period of time to meet the needs of their specified refining diet and frequently enter into long-term firm transportation agreements to ensure a ready supply of crude oil, rate surety and sometimes sufficient transportation capacity over the life of the contract. 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. Refer to Note 14 - Transactions with Major Customers and Concentration of Credit Risk in the Notes to the Consolidated Financial Statements included in Part II, Item 8 for additional information. Competition Our pipeline systems compete primarily with other interstate and intrastate pipelines and with marine and rail transportation. Some of our competitors may expand or construct transportation systems that would create additional competition for the services we provide to our customers. For example, newly constructed transportation systems in the onshoreGulf of Mexico region may increase competition in the markets where our pipelines operate. In addition, future pipeline transportation capacity could be constructed in excess of actual demand, which could reduce the demand for our services, in the market areas we serve, and could lead to the reduction of the rates that we receive for our services. While we do see some variation from quarter-to-quarter resulting from changes in our customers' demand for transportation, this risk has historically been mitigated by the long-term, fixed rate basis upon which we have contracted a substantial portion of our capacity. However, two of our long-term transportation services agreements on the Zydeco system expired at the end of 2018, and another expired in the second quarter of 2019. These contracts represented approximately 30% of our revenues for both the years endedDecember 31, 2018 and 2017. As a result of the open season conducted in the second quarter of 2019, Zydeco was able to re-contract the expired volumes under T&D agreements. Although we have replaced the volumes from the expired contracts, the rates under the new T&D agreements are lower than those previously contracted, and therefore net income and cash available for distribution will be lower. Further, two of these contracts will expire in the fourth quarter of 2020; however, the shippers have the ability to extend the contracts for an additional six months. See "Changes inCustomer Contracting " for additional information. 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 economic regulation by various federal, state and/or local agencies. For example, our interstate common carrier pipeline systems are subject to economic regulation byFERC . InMay 2019 , Zydeco, Mars,LOCAP and Colonial filed withFERC to increase rates subject toFERC's indexing adjustment methodology by approximately 4.3% starting onJuly 1, 2019 . OnMarch 21, 2019 ,FERC issued a Notice of Inquiry ("NOI") in Docket No. PL19-4-000 seeking comments on whether it should modify its policies concerning the determination of return on equity ("ROE") for utilities, and on whether any policy changes concerning utility ROEs should be applied to oil and natural gas pipelines. The NOI includes a discussion on:FERC's use of the discounted cash flow ("DCF") methodology for utilities and pipelines; other financial models that can be used to determine ROE; and the decisions on use of DCF in the utility sector that led to issuance of the NOI. The NOI seeks comments on eight topics and on several technical sub-issues within each topic, including on whether to apply a single ROE policy across oil pipelines, natural gas pipelines and utilities. Initial comments were filed onJune 26, 2019 , and reply comments were filedJuly 26, 2019 . We will continue to monitor developments in this area. OnJuly 18, 2018 ,FERC issued Order No. 849, which adopts procedures to address the impact of the TCJA and its Revised Policy Statement on Treatment of Income Taxes in Docket No. PL17-1-000, issued onMarch 15, 2018 (the "Revised Policy Statement").FERC contemporaneously issued Order on Rehearing in Docket No. PL17-1-000, which affirmsFERC's position 57 -------------------------------------------------------------------------------- in the Revised Policy Statement that eliminated the recovery of an income tax allowance by master limited partnership ("MLP") oil and gas pipelines in cost-of-service-based rates. In Order No. 849, however,FERC has clarified its general disallowance of MLP income tax allowance recovery by providing that an MLP will not be precluded in a future proceeding from making a claim that it is entitled to an income tax allowance.FERC will permit an MLP to demonstrate that its recovery of an income tax allowance does not result in a "double-recovery of investors' income tax costs."FERC affirmed Order No. 849 on rehearing onApril 18, 2019 . Parties also have sought judicial review of the Revised Policy Statement, and that challenge, initially filed inMarch 2019 , is pending in theU.S. Court of Appeals for the D.C. Circuit . As was the case with the Revised Policy Statement,FERC did not propose any industry-wide action regarding review of rates for crude oil and liquids pipelines in itsJuly 2018 issuances. MLP owned crude oil and liquids pipelines are required to report Page 700 information in their FERC Form 6 annual reports.FERC intends to address the impact of the elimination of the income tax allowance, as well as the corporate income tax reduction enacted as part of the TCJA in its five-year review of the oil pipeline rate index level in 2020.FERC will also implement the elimination of the income tax allowance in proceedings involving review of initial cost-of-service rates, rate changes, and rate complaints. For crude oil and liquids pipelines owned by non-MLP partnerships and other pass-through businesses,FERC will address such issues as they arise in subsequent proceedings. We believe thatFERC's recent decisions, including the Revised Policy Statement and issuances inJuly 2018 , will not have a material impact on our operations and financial performance. SinceFERC only maintains jurisdiction over interstate crude oil and liquids pipelines, the recent decisions are not expected to have an impact on rates charged through our offshore operations.FERC also does not maintain jurisdiction over certain of the onshore assets in which we have interests. Rates related to these assets should not be impacted byFERC's decision. For ourFERC -regulated rates charged through our interstate crude oil and liquids pipelines, the rates are based on either a negotiated or market-based rate, which are below the cost-of-service rates established byFERC . As such, neither our negotiated nor market-based rate revenue for ourFERC -regulated assets would be subject to the income tax recovery disallowance. Additionally, we have evaluated the impact ofFERC's recent policy changes on our non-operated joint ventures. Due to the nature of their assets, operations and/or their entity form, we do not believe there will be any material impact to their operations and earnings. OnOctober 20, 2016 ,FERC issued an Advance Notice of Proposed Rulemaking in Docket No. RM17-1-000 regarding changes to the oil pipeline rate index methodology and data reporting on Page 700 ofFERC's Form No. 6. In an effort to improveFERC's ability to ensure that oil pipeline rates are just and reasonable under the ICA,FERC is considering making the following changes to their current indexing methodologies for oil pipelines: 1) Deny index increases for any pipeline whose Form No. 6, Page 700 revenues exceed costs by 15% for both of the prior two years; 2) Deny index increases that exceed by 5% the cost changes reported on Page 700; and 3) Apply the new criteria to costs more closely associated with the pipeline's proposed rates than with total company-wide costs and revenues now reported on Page 700. Initial comments were filed onJanuary 19, 2017 , and reply comments were filed onMarch 17, 2017 , and, onFebruary 14, 2020 ,FERC issued a meeting notice indicating that it intends to act on the proposed rulemaking during a meeting currently scheduled forFebruary 20, 2020 . We will continue to monitor developments in this area. Acquisition Opportunities We plan to continue to pursue acquisitions of complementary assets from Shell, as well as from third parties. Since our initial public offering, we have acquired approximately$5,700 million of assets from Shell and its affiliates. We also may pursue acquisitions jointly with Shell. Given the size and scope of Shell's footprint and its significant ownership interest in us, we expect acquisitions from Shell will be a growth mechanism for the foreseeable future. However, Shell and its affiliates are under no obligation to sell or offer to sell us additional assets or to pursue acquisitions jointly with us, and we are under no obligation to buy any additional assets from them or to pursue any joint acquisitions with them. We will continue to focus our acquisition strategy on transportation and midstream assets. We believe that we will be well positioned to acquire midstream assets from Shell, as well as from third parties, should such opportunities arise. Identifying and executing acquisitions is a key part of our strategy. However, if we do not make acquisitions on economically acceptable terms or if we incur a substantial amount of debt in connection with the acquisitions, our future growth will be limited, and the acquisitions we do make may reduce, rather than increase, our available cash. Our ability to obtain financing or access capital markets may also directly impact our ability to continue to pursue strategic acquisitions. The level of current market demand for equity issued by MLPs may make it more challenging for us to fund our acquisitions with the issuance of equity in capital markets. However, we 58 -------------------------------------------------------------------------------- believe our balance sheet offers us flexibility, providing us other financing options such as hybrid securities, purchases of common units by our sponsor and debt. Results of Operations 2019 2018 2017 Revenue (1)$ 503 $ 525 $ 470 Costs and expenses Operations and maintenance (1) 124 162 150 Cost of product sold (1) 36 32 - Loss (gain) from revision of ARO and disposition of fixed assets 2 (3) - General and administrative 60 60 58 Depreciation, amortization and accretion 49 46 45 Property and other taxes 17 16 17 Total costs and expenses (1) 288 313 270 Operating income 215 212 200 Income from equity method investments 373 235 187 Dividend income from other investments 14 67 37 Other income 36 31 - Investment, dividend and other income 423 333 224 Interest expense, net 92 62 32 Income before income taxes 546 483 392 Income tax expense - 1 - Net income 546 482 392 Less: Net income attributable to the Parent - - 77 Less: Net income attributable to noncontrolling interests 18 18 20
Net income attributable to the Partnership
464$ 295 General partner's interest in net income attributable to the Partnership$ 147 $ 134 $ 64 Limited Partners' interest in net income attributable to the Partnership$ 381 $ 330 $ 231 Adjusted EBITDA attributable to the Partnership (2)$ 730 $ 616 $ 380 Cash available for distribution attributable to the Partnership (2)$ 619 $
536
(1) As a result of the adoption of the revenue standard effectiveJanuary 1, 2018 , amounts prior to adoption have not been adjusted under the modified retrospective method and continue to be reported in accordance with our historic accounting under previous GAAP. (2) For a reconciliation of Adjusted EBITDA and Cash available for distribution attributable to the Partnership to their most comparable GAAP measures, please read "-Reconciliation of Non-GAAP Measures." 59 -------------------------------------------------------------------------------- Pipeline throughput (thousands of barrels per day) (1) 2019 2018 2017 Zydeco - Mainlines 657 623 611 Zydeco - Other segments 267 249 359 Zydeco total system 924 872 970 Amberjack total system 362 324 256 Mars total system 546 516 469 Bengal total system 511 539 581 Poseidon total system 265 235 254 Auger total system 77 58 60 Delta total system 258 228 219 Na Kika total system 39 42 39 Odyssey total system 145 115 116 Colonial total system 2,617 2,616 2,536 Explorer total system 650 649 612 LOCAP total system 1,172 1,228 1,228 Other systems 348 344 322
Terminals (2) (3)
Revenue per barrel ($ per barrel) Zydeco total system (4)$ 0.52 $ 0.74 $ 0.66 Amberjack total system (4) 2.37 2.50 2.43 Mars total system (4) 1.31 1.19 1.41 Bengal total system (4) 0.41 0.34 0.34 Auger total system (4) 1.43 1.34 1.12 Delta total system (4) 0.58 0.57 0.54 Na Kika total system (4) 0.80 0.79 0.72 Odyssey total system (4) 0.92 0.88 0.90 Lockport total system (5) 0.22 0.21 0.25 (1) Pipeline throughput is defined as the volume of delivered barrels. For additional information regarding our pipeline and terminal systems, refer to Part I, Item I - Business and Properties - Our Assets and Operations. (2) Terminaling throughput is defined as the volume of delivered barrels and storage is defined as the volume of stored barrels. (3) 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 throughput. (4) 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. (5) 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. 60 -------------------------------------------------------------------------------- Reconciliation of Non-GAAP Measures The following tables present a reconciliation of Adjusted EBITDA and cash available for distribution to net income and net cash provided by operating activities, the most directly comparable GAAP financial measures, for each of the periods indicated.
Please read "-Adjusted EBITDA and Cash Available for Distribution" for more information.
2019 2018 2017
Reconciliation of Adjusted EBITDA and Cash Available for Distribution to Net Income Net income
$ 546 $ 482 $ 392 Add: Loss (gain) from revision of ARO and disposition of fixed assets 2 (3) - Allowance oil reduction to net realizable value 1 5 - Depreciation, amortization and accretion 49 46 45 Interest expense, net 92 62 32 Income tax expense - 1 - Cash distribution received from equity method investments 466 301 199
Less:
Equity method distributions included in other income 33 24 - Income from equity method investments 373 235 187 Adjusted EBITDA 750 635 481
Less:
Adjusted EBITDA attributable to Parent - - 80 Adjusted EBITDA attributable to noncontrolling interests 20 19 21 Adjusted EBITDA attributable to the Partnership 730 616 380
Less:
Net interest paid attributable to the Partnership (1) 92
62 32 Income taxes paid attributable to the Partnership - - -
Maintenance capex attributable to the Partnership (2) 28
25 28
Add:
Net adjustments from volume deficiency payments attributable to the Partnership (10) (4) 5 Reimbursements from Parent included in partners' capital 19 11 16
- 19
Cash available for distribution attributable to the Partnership
$ 619
(1) Amount represents both paid and accrued interest attributable to the period. (2) EffectiveApril 1, 2017 , the amount is inclusive of cash paid during the period, as well as accruals incurred for work performed during the period. 61
-------------------------------------------------------------------------------- 2019 2018 2017 Reconciliation of Adjusted EBITDA and Cash Available for Distribution to Net Cash Provided by Operating Activities Net cash provided by operating activities$ 597 $ 507 $ 432 Add: Interest expense, net 92 62 32 Income tax expense - 1 - Return of investment 66 48 18 Less: Change in deferred revenue and other unearned income (11) (4) 6 Non-cash interest expense 1 1 - Allowance oil reduction to net realizable value 1 5 - Change in other assets and liabilities 14 (19) (5) Adjusted EBITDA 750 635 481
Less:
Adjusted EBITDA attributable to Parent - - 80
Adjusted EBITDA attributable to noncontrolling interests 20
19 21 Adjusted EBITDA attributable to the Partnership 730 616 380
Less:
Net interest paid attributable to the Partnership (1) 92 62 32 Income taxes paid attributable to the Partnership - - - Maintenance capex attributable to the Partnership (2) 28 25 28
Add:
Net adjustments from volume deficiency payments attributable to the Partnership (10) (4) 5
Reimbursements from Parent included in partners' capital 19
11 16 April 2017 divestiture attributable to the Partnership - - 19
Cash available for distribution attributable to the Partnership
$ 619
(1) Amount represents both paid and accrued interest attributable to the period. (2) EffectiveApril 1, 2017 , the amount is inclusive of cash paid during the period, as well as accruals incurred for work performed during the period. 62
-------------------------------------------------------------------------------- The following discussion includes a comparison of our Results of Operations and Capital Resources and Liquidity - Cash Flows from Our Operations for 2019 and 2018. A discussion of changes in our Results of Operations and Capital Resources and Liquidity - Cash Flows from Our Operations from 2017 to 2018 has been omitted from the Form 10-K, but may be found in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Form 10-K for the year endedDecember 31, 2018 , filed with theSEC onFebruary 21, 2019 . 2019 Compared to 2018 Revenues Total revenue decreased by$22 million in 2019 as compared to 2018, comprised of$31 million attributable to transportation, terminaling and storage services revenue, partially offset by an increase of$9 million attributable to product revenue. Transportation services revenue decreased primarily due to certain committed contracts that expired either at the end of 2018 or during 2019, as well as planned turnaround activity and the impact of Hurricane Barry. The decrease in revenue was partially offset by lower revenues in 2018 due to the impact of Zydeco being out of service for 49 days as a result of hydro-testing in 2018. Further, revenue increased related to improved volumes at certain connected production facilities in 2019, primarily those that were negatively impacted in 2018 as a result of unplanned maintenance. Terminaling services revenue, as well as the portion of transportation services revenue related to the non-lease service component of certain of our transportation services agreements, was relatively flat. Storage revenue and lease revenue were also relatively consistent in 2019 and 2018.
Product revenue increased in 2019 versus 2018 and relates to sales of allowance oil for certain of our onshore and offshore crude pipelines.
Costs and Expenses Total costs and expenses decreased$25 million in 2019 primarily due to$38 million in lower operations and maintenance expenses. This decrease was partially offset by$4 million of higher cost of product sold due to more allowance oil sales in 2019 and a net realizable value adjustment on allowance oil inventory, a$5 million higher loss on revision of asset retirement obligation,$3 million of additional depreciation expense and$1 million in higher property taxes due to changes in property tax appraisal estimates. Operations and maintenance expenses decreased primarily due to the impact in 2018 of Zydeco being out of service for 49 days as a result of hydro-testing, as well as a larger gain on pipeline operations in 2019. This decrease was partially offset by an increase in insurance expense.
General and administrative expenses were flat.
Investment, Dividend and Other Income Investment, dividend and other income increased$90 million in 2019 as compared to 2018. Income from equity method investments increased by$138 million , primarily as a result of the equity earnings associated with the acquisition of additional interests in Explorer and Colonial inJune 2019 , as well as the acquisition of Amberjack inMay 2018 . Additionally, there was higher income from Mars and Amberjack as a result of increased production from several fields in theGulf of Mexico . Other income increased by$5 million primarily related to distributions from Poseidon, partially offset by higher business continuity insurance proceeds received in 2018 than in 2019 in connection with the fire at the Enchilada platform impacting Auger. These increases were partially offset by a decrease in dividend income from other investments of$53 million due to the change in accounting for Explorer and Colonial as equity method investments rather than other investments following the acquisition of additional interests inJune 2019 . We were entitled to distributions from Explorer and Colonial with respect to the period beginningApril 1, 2019 as these were paid after the acquisition date and were no longer considered dividend income.
Interest Expense
Interest expense increased by
63 -------------------------------------------------------------------------------- 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 ofDecember 31, 2019 was$1,186 million consisting of$290 million cash on hand and$896 million available capacity under our revolving credit facilities. OnAugust 1, 2019 , Zydeco entered into a senior unsecured revolving loan facility agreement with STCW, effectiveAugust 6, 2019 (the "2019 Zydeco Revolver"). The 2019 Zydeco Revolver has a borrowing capacity of$30 million and matures onAugust 6, 2024 . Borrowings under the credit facility bear interest at the three-month LIBOR rate plus a margin or, in certain instances, including if LIBOR is discontinued, STCW may specify another benchmark rate generally accepted in the loan market to apply in relation to the advances in place of LIBOR. No issuance fee was incurred in connection with the 2019 Zydeco Revolver. OnJune 4, 2019 , we entered into the Ten Year Fixed Facility, which bears an interest rate of 4.18% per annum and matures onJune 4, 2029 . No issuance fee was incurred in connection with the Ten Year Fixed Facility. The Ten Year Fixed Facility contains customary representations, warranties, covenants and events of default, the occurrence of which would permit the lender to accelerate the maturity date of amounts borrowed under the Ten Year Fixed Facility. The Ten Year Fixed Facility was fully drawn onJune 6, 2019 to partially fund theJune 2019 Acquisition. OnDecember 21, 2018 , we and our general partner executed the Second Amendment to the Partnership's First Amended and Restated Agreement of Limited Partnership datedNovember 3, 2014 . Under the Second Amendment, our sponsor agreed to waive$50 million of distributions in 2019 by agreeing to reduce distributions to holders of the incentive distribution rights by: (1)$17 million for the quarter endedMarch 31, 2019 , (2)$17 million for the quarter endedJune 30, 2019 and (3)$16 million for the quarter endedSeptember 30, 2019 . During 2018, we negotiated with STCW to increase our borrowing capacity by$600 million through the addition of the Seven Year Fixed Facility effectiveJuly 31, 2018 . The Seven Year Fixed Facility was fully drawn onAugust 1, 2018 and the borrowings were used to partially repay borrowings under the Five Year Revolver dueDecember 2022 . Additionally, onAugust 1, 2018 , we amended and restated the Five Year Revolver dueOctober 2019 such that the facility will now mature onJuly 31, 2023 and is now referred to as the Five Year Revolver dueJuly 2023 . Credit Facility Agreements As ofDecember 31, 2019 , we have entered into the following credit facilities: Current Interest Total Capacity Rate Maturity Date 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 760 2.93 % July 31, 2023 Five Year Revolver due December December 1, 2022 2022 1,000 2.94 % Five Year Fixed Facility 600 3.23 % March 1, 2022 2019 Zydeco Revolver (1) 30 2.59 % August 6, 2024
(1) Effective
Borrowings under the Five Year Revolver dueJuly 2023 , the Five Year Revolver dueDecember 2022 and the 2019 Zydeco Revolver bear interest at the three-month LIBOR rate plus a margin or, in certain instances, including if LIBOR is discontinued, other interest rate alternatives as described in each respective revolver. Our weighted average interest rate for 2019 and 2018 was 3.8% and 3.5%, 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 64 -------------------------------------------------------------------------------- interest rate on the total variable rate debt of$894 million as ofDecember 31, 2019 would 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.
As of
For definitions and additional information on our credit facilities, refer to Note 8 - Related Party Debt in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. Equity Issuances OnJune 6, 2019 , in connection with theJune 2019 Acquisition, we issued 9,477,756 common units toShell Midstream LP Holdings LLC , an indirect subsidiary of Shell. In connection with the issuance of the common units, we issued 193,424 general partner units to the general partner in order to maintain its 2% general partner interest in us. The non-cash equity consideration from this issuance was valued at$200 million pursuant to theMay 2019 Contribution Agreement and was used to partially fund theJune 2019 Acquisition. OnFebruary 6, 2018 , we completed the sale of 25,000,000 common units in a registered public offering for approximately$673 million net proceeds. Additionally, we completed the sale of 11,029,412 common units in a private placement withShell Midstream LP Holdings LLC , an indirect subsidiary of Shell, for an aggregate purchase price of$300 million . See Note 11 - (Deficit) Equity in the Notes to Consolidated Financial Statements included in Part II, Item 8 for additional information. Cash Flows from Our Operations Operating Activities. We generated$597 million in cash flow from operating activities in 2019 compared to$507 million in 2018. The increase in cash flows was primarily driven by an increase in equity investment income related to the acquisition of Amberjack inMay 2018 and the acquisition of additional interests in Explorer and Colonial inJune 2019 , as well as the timing of receipt of receivables and payment of accruals in 2019. Investing Activities. Our cash flow used in investing activities was$87 million in 2019 compared to$511 million in 2018. The decrease in cash flow used in investing activities was primarily due to a smaller acquisition from Parent in 2019 than 2018, as well as lower capital expenditures, lower contributions toPermian Basin and a higher return of investment in 2019. Financing Activities. Our cash flow used in financing activities was$428 million in 2019 compared to cash flow provided by financing activities of$74 million in 2018. The decrease in cash flow provided by financing activities was primarily due to lower borrowings under credit facilities, increased distributions paid to the unitholders and our general partner, lower contributions from our general partner and the lack of net proceeds from equity offerings in 2019. The decrease in cash flow provided by financing activities was partially offset by the lack of repayments of credit facilities in 2019, as well as lower capital distributions to our general partner. Capital Expenditures 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 incurred capital expenditures of$35 million ,$51 million and$58 million for 2019, 2018 and 2017, respectively. The decrease in capital expenditures from 2018 to 2019 is primarily due to lower spend on theHouma tank expansion project for Zydeco, coupled with slightly lower capital contributions toPermian Basin in 2019. 65 --------------------------------------------------------------------------------
A summary of our capital expenditures is shown in the table below:
2019 2018
2017
Expansion capital expenditures$ 10 $ 25 $ 18 Maintenance capital expenditures 28 24
40
Total capital expenditures paid 38 49
58
(Decrease) increase in accrued capital expenditures (3) 2
-
Total capital expenditures incurred$ 35 $ 51 $ 58 Contributions to investment$ 25 $ 28 $ -
We expect total capital expenditures to be approximately
Actual Capital
Expenditures Expected Capital Expenditures
2019 2020 Expansion capital expenditures Zydeco $ 7 $ 2 Total expansion capital expenditures incurred 7 2 Maintenance capital expenditures Zydeco 19 25 Pecten 3 2 Triton 6 4 Sand Dollar - 2 Odyssey - 1 Total maintenance capital expenditures incurred 28 34 Contributions to investment 25 10 Total capital expenditures and investments $ 60 $ 46
Total expansion capital expenditures in 2019 are related to the
Zydeco's maintenance capital expenditures for 2019 were$19 million , primarily for the directional drill project. In connection with the acquisition of additional interests in Zydeco, SPLC agreed to reimburse us for our proportionate share of certain costs and expenses incurred by Zydeco with respect to the directional drill project. During 2019, we filed claims for reimbursement from SPLC of$10 million . We expect Zydeco's maintenance capital expenditures to be approximately$25 million for 2020, of which$16 million is for a pipeline exposure requiring replacement and$4 million is related to an upgrade of the motor control center atHouma . The remaining spend is related to routine maintenance. Pecten's maintenance capital expenditures for 2019 were$3 million , and we expect Pecten's maintenance capital expenditures to be approximately$2 million in 2020. These expenditures relate to electrical improvements at theLockport terminal and various improvements on Delta. Triton's maintenance capital expenditures for 2019 were$6 million . This includes vapor recovery improvements at the Des Plaines terminal and tank and facility work at Colex andDes Plaines terminals. We expect Triton's maintenance capital expenditures to be approximately$4 million in 2020 related to routine maintenance at the various terminals. We expect Sand Dollar's maintenance capital expenditures to be approximately$2 million in 2020 related to a hurricane protection project. We expect Odyssey's maintenance capital expenditures to be approximately$1 million in 2020 related to routine maintenance.
We anticipate that both maintenance and expansion capital expenditures for 2020 will be funded primarily with cash from operations.
66 -------------------------------------------------------------------------------- Capital Contribution In accordance with the Member Interest Purchase Agreement datedOctober 16, 2017 pursuant to which we acquired a 50% interest inPermian Basin for$50 million consideration and initial capital contributions, we will make capital contributions for our pro rata interest inPermian Basin to fund capital and other expenditures, as approved by supermajority (75%) vote of the members. We have made capital contributions of$25 million in 2019, and expect to make capital contributions of approximately$10 million in 2020. Contractual Obligations A summary of our contractual obligations, as ofDecember 31, 2019 , is shown in the table below (in millions): Total Less than 1 year Years 1 to 3 Years 3 to 5 More than 5 years Operating leases for land and platform space$ 8 $ - $ 1$ 1 $ 6 Finance leases (1) 61 5 10 10 36 Other agreements (2) 41 6 12 12 11 Debt obligation (3) 2,694 - 1,000 494 1,200 Interest payments on debt (4) 506 97 176 108 125 Total$ 3,310 $ 108$ 1,199 $ 625 $ 1,378 (1) Finance leases includePort Neches storage tanks andGarden Banks 128 "A" platform. Finance leases include$27 million in interest,$25 million in principal and$9 million in executory costs. (2) Includes a joint tariff agreement and Odyssey tie-in agreement. (3) See Note 8 - Related Party Debt in the Notes to Consolidated Financial Statements included in Part II, Item 8 for additional information. (4) Interest payments were calculated based on rates in effect atDecember 31, 2019 for variable rate borrowings. Odyssey entered into an operating lease datedMay 12, 1999 with a third party for usage of offshore platform space atMain Pass 289C. Additionally, Odyssey entered into a tie-in agreement effectiveJanuary 2012 with a third party, which allowed producers to install the tie-in connection facilities and tying into the system. The agreements will continue to be in effect until the continued operation of the platform is uneconomic. OnDecember 1, 2014 , we entered into a terminal services agreement with a related party in which we were to take possession of certain storage tanks located inPort Neches, Texas , effectiveDecember 1, 2015 . OnOctober 26, 2015 , the terminal services agreement was amended to provide for an interim in-service period for the purposes of commissioning the tanks in which we paid a nominal monthly fee. Our capitalized costs and related capital lease obligation commenced effectiveDecember 1, 2015 , and the storage tanks were placed in-service onSeptember 1, 2016 . Under this agreement, in the eighteenth month after the in-service date, actual fixed and variable costs could be compared to premised costs. If the actual and premised operating costs differ by more than 5.0%, the lease would be adjusted accordingly and this adjustment will be effective for the remainder of the lease. No adjustment has been made to date. The imputed interest rate on the capital portion of the lease is 15.0%. OnSeptember 1, 2016 , which is the in-service date of the capital lease for thePort Neches storage tanks, a joint tariff agreement with a third party became effective. The tariff will be reviewed annually and the rate updated based onFERC's indexing adjustment to rates effectiveJuly 1 of each year. EffectiveJuly 1, 2019 there was an approximately 4.3% increase to this rate based onFERC's indexing adjustment. The initial term of the agreement is ten years with automatic one-year renewal terms with the option to cancel prior to each renewal period. Off-Balance Sheet Arrangements We have not entered into any transactions, agreements or other contractual arrangements that would result in off-balance sheet liabilities. Critical Accounting Policies and Estimates Critical accounting policies are those that are important to our financial condition and require management's most difficult, subjective or complex judgments. Different amounts would be reported under different operating conditions or under alternative assumptions. We apply those accounting policies that we believe best reflect the underlying business and economic events, consistent with GAAP. Our more critical accounting policies include those related to long-lived assets, equity method investments and revenue 67 -------------------------------------------------------------------------------- recognition. Inherent in such policies are certain key assumptions and estimates. We periodically update the estimates used in the preparation of the financial statements based on our latest assessment of the current and projected business and general economic environment. Our significant accounting policies are summarized in Note 2 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. We believe the following to be our most critical accounting policies applied in the preparation of our financial statements. Long-Lived Assets Key estimates related to long-lived assets include useful lives, recoverability of carrying values and existence of any retirement obligations. Such estimates could be significantly modified. The carrying values of long-lived assets could be impaired by significant changes or projected changes in supply and demand fundamentals of oil, natural gas, refinery gas or refined products (which could have a negative impact on operating rates or margins), new technological developments, new competitors, adverse changes associated withthe United States and global economies and with governmental actions. We evaluate long-lived assets for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, including when negative conditions such as significant current or projected operating losses exist. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and the operational performance of our businesses. Actual impairment losses incurred could vary significantly from amounts estimated. Long-lived assets assessed for impairment are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Additionally, future events could cause us to conclude that impairment indicators exist and that associated long-lived assets of our businesses are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. The estimated useful lives of long-lived assets range from five to 40 years. Depreciation of these assets under the straight-line method over their estimated useful lives totaled$49 million and$46 million for 2019 and 2018, respectively. If the useful lives of the assets were found to be shorter than originally estimated, depreciation charges would be accelerated. Additional information concerning long-lived assets and related depreciation and amortization appears in Note 6 - Property, Plant and Equipment in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. Equity Method Investments We account for investments where we have the ability to exercise significant influence, but not control, under the equity method of accounting. Income from equity method investments represents our proportionate share of net income generated by the equity method investees. Differences in the basis of the investments and the separate net asset value of the investees, if any, are amortized into net income over the remaining useful lives of the underlying assets. Equity method investments are assessed for impairment whenever changes in the facts and circumstances indicate a loss in value has occurred, if the loss is deemed to be other than temporary. When the loss is deemed to be other than temporary, the carrying value of the equity method investment is written down to fair value. Revenue Recognition We adopted the revenue standard onJanuary 1, 2018 . See Note 12 - Revenue Recognition in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information. We recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. We recognize revenue through the application of a five-step model, which includes: identification of the contract; identification of the performance obligations; determination of the transaction price; allocation of the transaction price to the performance obligations; and recognition of revenue as the entity satisfies the performance obligations. We generate a portion of our revenue under long-term agreements by charging fees for the transportation, terminaling and storage of crude oil and refined products and for the transportation of refinery gas through our assets. Contract obligations are billed monthly. Transportation revenue is billed as services are rendered, and we accrue revenue based on nominations for that accounting month. We estimate this revenue based on contract data, regulatory information and preliminary throughput and allocation measurements, among other items. Additionally, we refer to our transportation services agreements and throughput and deficiency agreements as "ship-or-pay" contracts. As a result ofFERC regulations, revenues we collect may be subject to refund. We establish reserves for these potential refunds based on actual expected refund amounts on the specific facts and circumstances. We had no reserves for potential refunds as ofDecember 31, 2019 and 2018. The majority of our long-term transportation agreements and tariffs for crude oil transportation include PLA. PLA is an allowance for volume losses due to measurement differences set forth in crude oil transportation agreements. PLA is intended 68 -------------------------------------------------------------------------------- to assure proper measurement of the crude oil despite solids, water, evaporation and variable crude types that can cause mismeasurement. PLA provides additional revenue for us if product losses on our pipelines are within the allowed levels, and we are required to compensate our customers for any product losses that exceed the allowed levels. We take title to any excess loss allowance when product losses are within the allowed levels, and we sell that product several times per year at prevailing market prices. Certain transportation and terminaling services agreements with related parties are considered operating leases under GAAP. Revenues from these agreements are recorded within "Lease revenue-related parties" in the accompanying consolidated statement of income. See Note 12 - Revenue Recognition in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.
Recent Accounting Pronouncements Please read Note 2 - Summary of Significant Accounting Policies - Recent Accounting Pronouncements included in Part II, Item 8 of this report. Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Market risk is the risk of loss arising from adverse changes in market rates and prices. With the exception of buy/sell arrangements on some of our offshore pipelines and our allowance oil retained, we do not take ownership of the crude oil or refined products that we transport and store for our customers, and we do not engage in the trading of any commodities. We therefore have limited direct exposure to risks associated with fluctuating commodity prices. Our long-term transportation agreements and tariffs for crude oil shipments include PLA. The PLA provides additional revenue for us at a stated factor per barrel. If product losses on our pipelines are within the allowed levels we retain the benefit, otherwise we are required to compensate our customers for any product losses that exceed the allowed levels. We take title to any excess product that we transport when product losses are within allowed level, and we sell that product several times per year at prevailing market prices. This allowance oil revenue, which accounted for approximately 6% of our total revenue in each of 2019 and 2018, is subject to more volatility than transportation revenue, as it is directly dependent on our measurement capability and commodity prices. As a result, the income we realize under our loss allowance provisions will increase or decrease as a result of changes in the mix of product transported, measurement accuracy and underlying commodity prices. We do not intend to enter into any hedging agreements to mitigate our exposure to decreases in commodity prices through our loss allowances. We may also have risk associated with changes in policy or other actions taken byFERC . Please see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting our Business and Outlook - Regulation" for additional information. Interest Rate Risk We are exposed to the risk of changes in interest rates, primarily as a result of variable rate borrowings under our revolving credit facilities. To the extent that interest rates increase, interest expense for these revolvers will also increase. As of bothDecember 31, 2019 andDecember 31, 2018 , the Partnership had$894 million in outstanding variable rate borrowings under these revolving credit facilities. A hypothetical change of 12.5 basis points in the interest rate of our variable rate debt would impact the Partnership's annual interest expense by approximately$1 million for both the years ended 2019 and 2018. We do not currently intend to enter into any interest rate hedging agreements, but will continue to monitor interest rate exposure. Our fixed rate debt does not expose us to fluctuations in our results of operations or liquidity from changes in market interest rates. Changes in interest rates do affect the fair value of our fixed rate debt. See Note 8 - Related Party Debt in the accompanying Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for further discussion of our borrowings and fair value measurements. 69
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