8-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

(Amendment No. 1)

CURRENT REPORT

Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

Date of Report (date of earliest event reported): June 4, 2019

Shell Midstream Partners, L.P.

(Exact name of registrant as specified in its charter)

Delaware	001-36710	46-5223743
(State or other jurisdiction of incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

150 N. Dairy Ashford, Houston, Texas	77079
(Address of principal executive offices)	(Zip code)

Registrant’s telephone number, including area code: (832) 337-2034

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Units, Representing Limited Partner Interests	SHLX	New York Stock Exchange

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

* SHELL and SHELL Pecten are registered trademarks of Shell Trademark Management, B.V. used under license.

Explanatory Note

As reported in a Current Report on Form 8-K filed by Shell Midstream Partners, L.P. (the “Partnership”) on June 6, 2019 (the “Initial Form 8-K”), the Partnership and Shell Midstream Operating LLC, a wholly owned subsidiary of the Partnership, completed the previously announced acquisition of an additional 25.97% interest in Explorer Pipeline Company and an additional 10.125% interest in Colonial Pipeline Company (collectively, the “June 2019 Acquisition”).

This amendment is being filed to provide certain audited and unaudited financial statements and certain unaudited pro forma financial information for such transaction as required by Item 9.01. Except as set forth below, the Initial Form 8-K is unchanged.

Item 9.01 Financial Statements and Exhibits.

(a) Financial Statements of Businesses Acquired.

The audited historical financial statements of Colonial Pipeline Company as of and for the year ended December 31, 2018 and related notes to the financial statements, a copy of which is filed as Exhibit 99.1 hereto and incorporated herein by reference.

The unaudited historical financial statements of Colonial Pipeline Company as of March 31, 2019 and for the three months ended March 31, 2019 and 2018 and related notes to the financial statements, a copy of which is filed as Exhibit 99.2 hereto and incorporated herein by reference.

The audited historical financial statements of Explorer Pipeline Company as of and for the year ended December 31, 2018 and related notes to the financial statements, a copy of which is filed as Exhibit 99.3 hereto and incorporated herein by reference.

The unaudited historical financial statements of Explorer Pipeline Company as of March 31, 2019 and for the three months ended March 31, 2019 and 2018 and related notes to the financial statements, a copy of which is filed as Exhibit 99.4 hereto and incorporated herein by reference.

(b) Pro Forma Financial Information.

Unaudited pro forma consolidated financial statements of the Partnership as of and for the three months ended March 31, 2019 and for the year ended December 31, 2018, a copy of which is filed as Exhibit 99.5 hereto and incorporated herein by reference.

(d) Exhibits.

Number	Description
23.1	Consent of Ernst & Young, LLP, independent auditors of Colonial Pipeline Company.
23.2	Consent of Grant Thornton LLP, independent certified public accountants of Explorer Pipeline Company.
99.1	The audited historical financial statements of Colonial Pipeline Company as of and for the year ended December 31, 2018 and related notes to the financial statements.
99.2	The unaudited historical financial statements of Colonial Pipeline Company as of March 31, 2019 and for the three months ended March  31, 2019 and 2018 and related notes to the financial statements.
99.3	The audited historical financial statements of Explorer Pipeline Company as of and for the year ended December 31, 2018 and related notes to the financial statements.
99.4	The unaudited historical financial statements of Explorer Pipeline Company as of March 31, 2019 and for the three months ended March  31, 2019 and 2018 and related notes to the financial statements.
99.5	The unaudited pro forma consolidated financial statements of Shell Midstream Partners, L.P. as of and for the three months ended March 31, 2019 and for the year ended December 31, 2018.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

SHELL MIDSTREAM PARTNERS, L.P.
By:	Shell Midstream Partners GP LLC, its general partner
By:	/s/ Lori M. Muratta
	Lori M. Muratta
	Vice President, General Counsel and Secretary

Date: June 27, 2019

EX-23.1

Exhibit 23.1

Consent of Independent Auditors

We consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-228144 and No. 333-228146) of Shell Midstream Partners, L.P. of our report dated March 25, 2019 with respect to the financial statements of Colonial Pipeline Company, which appears in this Current Report on Form 8-K/A of Shell Midstream Partners, L.P.

/s/ Ernst & Young LLP

Atlanta, Georgia

June 26, 2019

EX-23.2

Exhibit 23.2

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We have issued our report dated February 28, 2019, with respect to the consolidated financial statements of Explorer Pipeline Company included in the Current Report of Shell Midstream Partners, L.P. on Form 8-K/A. We hereby consent to the incorporation by reference of said report in the Registration Statements of Shell Midstream Partners, L.P. on Forms S-3 (File No. 333-228146 and File No. 333-228144).

/s/ GRANT THORNTON LLP

Tulsa, Oklahoma

June 27, 2019

EX-99.1

Exhibit 99.1

Colonial Pipeline Company

Consolidated Financial Statements

Year Ended December 31, 2018

Contents

Report of Independent Auditors	1
Consolidated Financial Statements
Consolidated Balance Sheet	2
Consolidated Statement of Income	4
Consolidated Statement of Comprehensive Income	5
Consolidated Statement of Stockholders’ Deficiency	6
Consolidated Statement of Cash Flows	7
Notes to Consolidated Financial Statements	8

Report of the Independent Auditors

The Board of Directors and Stockholders

Colonial Pipeline Company

We have audited the accompanying consolidated financial statements of Colonial Pipeline Company, which comprise the consolidated balance sheet as of December 31, 2018, and the related consolidated statements of income, comprehensive income, stockholders’ deficiency and cash flows for the year then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Colonial Pipeline Company at December 31, 2018, and the consolidated results of its operations and its cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Atlanta, Georgia

March 25, 2019

1

Colonial Pipeline Company

Consolidated Balance Sheet

	December 31, 2018
	(In Thousands)
Assets
Current assets:
Cash and cash equivalents	$	159,046
Short-term investments		25,362
Accounts receivable:
Trade:
Affiliates		18,388
Non-affiliates		111,176
Other receivables		28,339
Prepaid taxes		726
Prepaid expenses and other current assets		20,263
Total current assets		363,300
Property, plant, and equipment, at cost:
Land		40,770
Pipeline		2,298,065
Buildings		70,562
Pumping and other station equipment		768,409
Tanks		347,614
Capitalized interest, labor, and other costs		130,997
Other equipment		100,130
Construction work in progress		141,869
		3,898,416
Less accumulated depreciation and amortization		(1,580,158	)
Net property, plant, and equipment		2,318,258
Intangible assets		263,278
Investments in affiliates		134,559
Goodwill		57,071
Other assets		17,680
Total assets	$	3,154,146

2

	December 31, 2018
	(In Thousands, Except Share Data)
Liabilities and net stockholders’ deficiency
Current liabilities:
Accounts payable and accrued expenses	$	154,624
Accrued compensation		27,738
Taxes payable		13,598
Accrued interest		28,928
Total current liabilities		224,888
Long-term debt		2,506,956
Deferred income taxes		469,177
Other noncurrent liabilities		100,903
Commitments and contingencies (Notes 8 and 9)
Net stockholders’ deficiency:
Common stock, $1,000 par value; 60,000 shares authorized, 36,000 shares issued		36,000
Additional paid-in capital		10,980
Accumulated other comprehensive loss		(22,678	)
Retained earnings		52,916
Treasury stock, 4,136 shares		(224,996	)
Net stockholders’ deficiency		(147,778	)
Total liabilities and net stockholders’ deficiency	$	3,154,146

See accompanying notes.

3

Colonial Pipeline Company

Consolidated Statement of Income

	Year Ended December 31, 2018
	(In Thousands)
Revenues:
Operating revenues:
Transportation	$	1,264,742
Line lease, storage, blending, and other		124,353
Total operating revenues		1,389,095
Non-operating revenues:
Interest and other income		7,787
Total revenues		1,396,882
Expenses:
Operating expenses:
Employee salaries, benefits, and taxes		159,326
Power		198,875
Ad valorem, franchise, and other taxes		49,596
Depreciation and amortization		77,065
Repairs and maintenance		124,586
Other		97,055
Total operating expenses		706,503
Non-operating expenses:
Interest and debt issue costs		127,986
Total non-operating expenses		127,986
Total expenses		834,489
Income from equity investments		41,586
Income before income tax expense		603,979
Income taxes:
Current		106,690
Deferred		29,314
Total income tax expense		136,004
Net income	$	467,975

See accompanying notes.

4

Colonial Pipeline Company

Consolidated Statement of Comprehensive Income

	Year Ended December 31, 2018
	(In Thousands)
Net income	$	467,975
Change in unrecognized pension and other postretirement costs, net of tax		12,263
Total other comprehensive income, net of tax		12,263
Comprehensive income	$	480,238

See accompanying notes.

5

Colonial Pipeline Company

Consolidated Statement of Stockholders’ Deficiency

	Common Stock Issued				Additional Paid-In Capital		Common Stock Held in Treasury						Accumulated Other Comprehensive			Retained			Net Stockholders’
	Shares		Amount				Shares			Amount			Loss			Earnings			Deficiency
	(In Thousands, Except Per Share Amounts)
Balance at December 31, 2017		36,000	$	36,000	$	10,980		(4,136	)	$	(224,996	)	$	(28,693	)	$	248,219		$	41,510
Net income		—		—		—		—			—			—			467,975			467,975
Unrecognized pension and postretirement benefit adjustments, net of tax of $3.8 million		—		—		—		—			—			12,263			—			12,263
Comprehensive income		—		—		—		—			—			—			—			480,238
TCJA Adjustment		—		—		—		—			—			(6,248	)		6,248			—
Cash dividends on common stock ($21,012 per share)		—		—		—		—			—			—			(669,526	)		(669,526	)
Balance at December 31, 2018		36,000	$	36,000	$	10,980		(4,136	)	$	(224,996	)	$	(22,678	)	$	52,916		$	(147,778	)

See accompanying notes.

6

Colonial Pipeline Company

Consolidated Statement of Cash Flows

	Year Ended December 31, 2018
	(In Thousands)
Operating activities
Net income	$	467,975
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		79,096
Deferred income tax expense		29,314
Equity investment earnings in excess of distributions received		(10,120	)
Changes in operating assets and liabilities:
Accounts receivable		(12,440	)
Prepaid expenses and other current assets		38,923
Other assets		(6,612	)
Accounts payable and accrued liabilities		(970	)
Other noncurrent liabilities		(24,331	)
Net cash provided by operating activities		560,835
Investing activities
Additions to property, plant, and equipment		(246,370	)
Purchases of short-term investments		(50,000	)
Maturities of short-term investments		25,000
Acquisition of business, net of cash acquired		(101,203	)
Proceeds from disposal or sale of assets		142
Net cash used in investing activities		(372,431	)
Financing activities
Net proceeds from issuance of long-term debt		543,543
Dividends paid		(669,526	)
Deferred financing costs paid		(5,919	)
Net cash used in financing activities		(131,902	)
Net increase in cash and cash equivalents		56,502
Cash and cash equivalents at beginning of year		102,544
Cash and cash equivalents at end of year	$	159,046

See accompanying notes.

7

Colonial Pipeline Company

Notes to Consolidated Financial Statements

December 31, 2018

1. Summary of Significant Accounting Policies

Description of Business and Basis of Presentation

Colonial Pipeline Company (Colonial or the Company) is an interstate common carrier that delivers liquid petroleum products, including gasoline, kerosene, home-heating oil, and jet fuel, to cities, airports, and military installations throughout the Southeast, Mid-Atlantic, and Northeast United States. The Company owns and operates the largest-volume refined liquid petroleum products pipeline in the United States, based on barrel-miles transported. Colonial’s pipeline system spans over 5,500 miles and connects Gulf Coast refineries to approximately 270 marketing terminals located near major population centers throughout the above-mentioned regions.

Shippers using Colonial’s pipeline include major and independent oil companies (including the Company’s stockholder companies and their related parties), wholesale marketing companies, airlines, trading companies, and the United States Department of Defense. Colonial’s shippers own the petroleum products transported through the Company’s pipeline system and bear related commodity price risk. The Company neither buys nor sells petroleum products in the ordinary course of business. In 2018, more than 230 shippers transported product through Colonial’s system.

Colonial’s stockholders are party to certain agreements relating to the governance of the Company and other matters. Each stockholder with a greater than 2.5% ownership interest nominates a director to the Company’s Board of Directors. Certain transactions, including but not limited to the incurrence of certain indebtedness, require approval by the Board of Directors and/or stockholders. Pursuant to the owners’ agreement, shares of the Company’s common stock may be transferred only by a cash sale, subject to a right of first refusal by the non-selling owners.

Colonial’s consolidated financial statements include a number of wholly owned subsidiaries. The Company uses the equity method of accounting to account for its investments in entities in which 1) its ownership interest is between 20% and 50%, and 2) the Company has the ability to exercise significant influence over the operating and financial policies of the investee.

The accompanying consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States for a non-regulated enterprise.

8

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies (continued)

The preparation of these financial statements requires the use of certain estimates by management in determining the Company’s assets, liabilities, revenues, expenses, and related disclosures. Actual results could differ from those estimates and such differences could be significant.

Transportation Revenue

Transportation revenue is billed once product is delivered. The Company accrues unbilled revenue based on the percentage of transportation completed for products in custody at the end of each accounting period.

Colonial serves a diverse group of customers. The Company’s six largest customers accounted for an aggregate 38% of the Company’s total transportation revenues for the year ended December 31, 2018.

Cash and Cash Equivalents

The Company considers all highly liquid investments, including overnight repurchase agreements and money market deposit accounts, with original maturities of three months or less to be cash equivalents. The carrying values of Cash and cash equivalents approximate their fair values.

Accounts Receivable

Accounts receivable are carried at the amount owed by shippers less an allowance for doubtful accounts, if deemed necessary. Colonial’s trade receivable balances are due from businesses that are heavily concentrated in the oil and gas industry. Such concentration could affect our overall credit risk as these energy-based customers could be similarly impacted by economic, regulatory, or other factors. The Company evaluates the collectability of accounts receivable based on review of a specific shipper’s ability to meet its financial obligations or as a result of changes in the overall aging of accounts receivable. As published in its Rules and Regulations Tariff, the Company retains a security interest in all petroleum products accepted from a shipper. In the event a shipper fails to satisfy any obligation to the Company, the Company maintains the right to hold or sell a shipper’s product until that shipper satisfies its obligations to Colonial.

9

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies (continued)

Property, Plant, and Equipment

Colonial states property, plant, and equipment at historical cost. For financial reporting purposes, the Company computes depreciation on the composite straight-line method at rates based upon the expected economic lives of the underlying assets. The estimated useful lives are determined based on a periodic study conducted by a third party. Significant assumptions used in these studies include forecasts of future supply and demand for refined petroleum products in the markets served by the Company’s assets and historical experience with service lives for similar asset groups. The weighted average rate of depreciation approximated 2.01% for the year ended December 31, 2018. For income tax purposes, accelerated depreciation methods are used based on lives that are substantially shorter than those used for financial reporting.

Depreciation rates by asset class for financial reporting purposes were as follows for the year ended December 31, 2018:

Pipeline	0.93%–1.85%
Buildings	1.80%
Pumping and other station equipment	2.31%–2.34%
Tanks	2.56%
Capitalized interest, labor, and other costs	1.52%
Other equipment	4.07%–11.40%

When depreciable property is retired, sold, or otherwise disposed, the gross carrying value is generally charged to accumulated depreciation. Any residual salvage or recovery value is generally credited to accumulated depreciation. Disposal costs in excess of salvage value are expensed as incurred. The Company constructs pipeline assets using either third-party contractors or Company employees. The costs of additions and improvements are capitalized, when such expenditures improve the condition or extend the economic life of the system compared with its originally constructed or acquired state. The Company expenses repairs and maintenance as incurred.

Additions to property, plant, and equipment as reflected within the Consolidated Statement of Cash Flows exclude approximately $28.8 million of accrued purchases whose payment remained pending as of December 31, 2018.

10

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies (continued)

Capitalized Interest

Interest cost is capitalized for all significant asset additions whose construction, installation, or other completion activity spans longer than one month in duration. Capitalized interest aggregated to approximately $3.7 million for the year ended December 31, 2018 and is included in Property, plant, and equipment in the accompanying Consolidated Balance Sheet.

Impairment of Long-Lived Assets

The Company assesses its long-lived assets for impairment if events or changes in circumstances occur that indicate that the carrying amount may not be fully recoverable. In the current year, there were no indicators of impairment identified. In the event the Company identifies such indicators, it will assess its assets for recoverability in part by estimating the future cash flows expected to result from the future use of the affected asset. If, during that assessment, the Company determined that the sum of the estimated undiscounted future cash flows was less than the carrying amount of the asset(s), then the Company would recognize an impairment charge accordingly. If an asset has multiple potential uses, its fair value determination will be based upon the highest and best use of that asset. If an asset requiring this evaluation is not traded in an active market and estimates of cash flows are used to estimate fair value, the Company would assign a probability to each cash flow estimate and calculate fair value based on the total of the probability-weighted cash flow estimates.

Long-lived assets to be disposed of are recorded at the lower of their carrying amount or estimated fair value less cost to sell. The Company did not record impairment charges with regard to its long-lived assets during the year ended December 31, 2018. Asset impairment tests are subjective in nature as they are based on both internal forecasting assumptions and assessments of legal, regulatory, and other external market conditions.

11

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies (continued)

Goodwill

As of December 31, 2018, the Company’s Consolidated Balance Sheet reflects a total of $57.1 million in goodwill. Goodwill is an asset that represents the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized, including expected acquisition synergies. The Company’s business combination during the year ended December 31, 2018, is discussed in Note 2 Acquisition.

Goodwill is not amortized but is tested for impairment at least annually or more frequently if indicators of impairment exist. Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. The fair value of a reporting unit is determined using a discounted cash flow methodology. A company’s reporting units are determined based upon whether discrete financial information is available and reviewed regularly, whether those units constitute a business, and the extent of economic similarities between those reporting units for purposes of aggregation. Colonial has two reporting units.

When the Company evaluates the potential for goodwill impairment, it assesses a range of qualitative factors including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for its products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel and overall financial performance. If, after completing this qualitative assessment, the Company finds that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company would proceed to the two-step impairment test. The Company performed a qualitative assessment for the year ended December 31, 2018, and determined that its fair value continues to exceed its carrying value. Accordingly, the Company did not perform the two-step goodwill impairment test.

12

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies (continued)

Identifiable Intangible Assets

The Company’s identifiable intangible assets primarily result from rights-of-way agreements with various property owners and customer relationships acquired through business combinations. Information summarizing the Company’s identifiable intangible assets is as follows:

	December 31, 2018
	Gross		Accumulated			Net
	Carrying Amount		Amortization			Amount
	(In Thousands)
Indefinite-lived intangible assets:
Rights-of-way	$	205,538	$	—		$	205,538
Finite-lived intangible assets:
Customer relationships		61,000		(3,710	)		57,290
Rights-of-way license		1,168		(718	)		450
Total finite-lived intangible assets		62,168		(4,428	)		57,740
Total identifiable intangible assets	$	267,706	$	(4,428	)	$	263,278

The Company has concluded that its rights-of-way agreements have indefinite useful lives. Intangible assets deemed to have indefinite lives are not amortized but are subject to impairment tests on at least an annual basis. The annual impairment test used to evaluate the recoverability of indefinite lived intangible assets compares the carrying value of the assets to their estimated fair value. This test requires the use of valuation techniques utilizing estimates and assumptions regarding the current fair value of the Company’s rights-of-way. The Company’s assessment of impairment of rights-of-way is done on a system-wide basis, given the nature of Colonial’s operations and identifiable cash flows. The Company did not record impairment charges with regard to its indefinite-lived assets during the periods presented within the accompanying Consolidated Financial Statements. Further, the Company does not have a history of recording such charges.

The Company’s acquired customer relationships are contractual and have finite useful lives. Amortization of finite-lived intangible assets is recognized over their estimated useful lives using a straight-line method. The estimated useful lives for finite-lived intangible assets range from 20 years to approximately 23 years.

Total amortization expense for identifiable intangible assets was $2.3 million for the year ended December 31, 2018. The estimated amortization expense for each of the succeeding five years is expected to be approximately $3.1 million.

13

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies (continued)

Environmental Costs, Damage Claims, and Related Recoveries

The Company expenses environmental costs that relate to an existing condition caused by past operations and that have no significant future economic benefit to the Company. The expense is recorded on an undiscounted basis when the costs become probable and can be reasonably estimated. The timing of initial expense recognition for environmental remediation costs coincides with the discovery of contamination, and, if necessary, estimates are updated concurrent with subsequent changes in the anticipated scope and costs of any required remediation activity. Future environmental costs cannot be reliably determined in many circumstances due to the early stage of investigations, the uncertainties associated with specific remediation methods utilized, changing environmental laws and interpretations, and other factors that impact the method and cost of remediation.

The Company records liabilities for damage claims resulting from the release of petroleum products or from other matters as related liabilities become probable and can be reasonably estimated. Environmental liabilities and damage claims reflect management estimates, which may consider the advice of legal counsel or other parties, and are not recorded on a discounted basis due to the unpredictable nature of related payments. The Company records recoveries under policies and other contracted arrangements when the amount of recovery is known and recoupment is deemed probable of occurrence. Expected recoveries are presented as assets within the Company’s Consolidated Balance Sheet and are not netted against the liability that may give rise to a recovery.

Asset Retirement Obligations

Asset retirement obligations arise from either contractual or legal obligations related to retirement, abandonment, or removal of an asset. When an asset retirement obligation is incurred, the Company recognizes a liability for the estimated fair value of the asset retirement obligation. Such costs are capitalized as part of the carrying amount of the related asset and depreciated over the asset’s useful life. Upon settlement of a liability, the obligation is settled for its recorded amount or a gain or loss is recognized.

14

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies (continued)

As of December 31, 2018, Colonial’s asset retirement obligations totaled $4.4 million. The Company reflects these obligations within Other noncurrent liabilities of the accompanying Consolidated Balance Sheet. The changes in the Company’s recorded asset retirement obligations were as follows for the year ended December 31, 2018:

	Amount
	(In Thousands)
Asset retirement obligations, beginning of year	$	4,159
Liabilities settled		—
Accretion expense		234
Asset retirement obligations, end of year	$	4,393

Recent Accounting Pronouncements

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which provides guidance related to the treatment of stranded tax effects in accumulated other comprehensive income (AOCI) resulting from the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA). The guidance permits companies to reclassify the stranded tax effects in AOCI to retained earnings and is effective for fiscal years beginning after December 15, 2018. As described further in Note 7 Income Taxes, the Company prospectively adopted ASU 2018-02 in 2018.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes. This amendment requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This standard was prospectively adopted in 2018 and did not have a material impact on the Company’s financial condition, results of operations or cash flows.

15

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies (continued)

In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715) – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This standard requires an employer to report the service cost component of a retirement benefit plan in the same financial statement line item as other compensation costs arising from services rendered by the pertinent employees during the period and present other components of net periodic benefit cost outside of income from operations. This standard is effective for the Company for the year ended December 31, 2019, and will not have a material impact on the Company’s results of operations, financial condition or cash flows.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The two permitted transition methods are the full retrospective method, which requires retrospective presentation of all periods presented, and the modified retrospective method, in which the cumulative effect of applying the standard would be recognized at the date of initial application. This standard is effective for the Company for the year ended December 31, 2019, and is not expected to have a material impact on the Company’s results of operations, financial condition or cash flows.

Colonial also considered other recently issued accounting pronouncements, including the lease and goodwill impairment standards that do not become effective for the Company until the end of or during fiscal years 2020 and 2022, respectively. While Colonial’s evaluation of these standards remains ongoing, the Company has initially concluded that these standards are not expected to have a material impact on the Company’s results of operations, financial condition or cash flows.

Subsequent Events

Other than those disclosed throughout these notes to consolidated financial statements, no significant events occurred subsequent to the balance sheet date but prior to March 25, 2019, the date the financial statements were available for issuance, that would have a material impact on the consolidated financial statements.

16

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

2. Acquisition

On May 1, 2018 (the Closing Date), the Company acquired all of the membership interests of Northstar Port Arthur LLC (Northstar), the owner of a marine terminal located in Port Arthur, Texas. The purchase price for the transaction was $101.2 million. The acquisition expands the Company’s footprint and operational capabilities in the Gulf Coast region. The transaction was accounted for as a business combination in accordance with relevant accounting literature.

Beginning on the Closing Date, the Company included the operating results of Northstar on a consolidated basis within its consolidated financial statements. The contribution of Northstar’s revenues and expenses to Colonial’s financial results from the Closing Date to December 31, 2018, was immaterial. The Company expensed all acquisition and transition costs associated with the acquisition, which approximated $1.8 million. Under the acquisition method of accounting, Colonial made a preliminary assignment of the acquisition price to Northstar’s net tangible and intangible assets based on their estimated fair values as of the Closing Date. The excess of the acquisition price over the net tangible and identifiable intangible assets has been recorded as Goodwill within the Consolidated Balance Sheet. This goodwill is deductible for income tax purposes.

The Company continues to gather additional information about the fair value of the acquired assets and liabilities. Accordingly, the assignment of the purchase price presented herein, including amounts recorded as goodwill and intangible assets, is preliminary. The assignment could change as the purchase price assignment is finalized. A summary of the preliminary purchase price is as follows:

Net Assets Acquired (In Thousands)
Assets acquired:
Cash and cash equivalents	$	16
Accounts receivable		737
Property, plant, and equipment		21,896
Customer relationships		49,500
Goodwill		29,501
Total assets acquired		101,650
Liabilities assumed:
Accounts payable and accrued expenses		(431	)
Total liabilities assumed		(431	)
Net assets acquired	$	101,219

17

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

2. Acquisition (continued)

Of the total purchase price, $49.5 million has been allocated to identifiable intangible assets, namely customer relationships. The value allocated to customer relationships is being amortized on a straight-line basis over a period of 20 years. Amortization expense for these customer relationships was $1.7 million from the Closing Date to December 31, 2018.

Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized, including expected acquisition synergies.

3. Long-Term Debt and Other Borrowing Facilities

Long-term debt and other borrowings were as follows at December 31, 2018:

	Amount
	(In Thousands)
Unsecured notes:
3.50% notes, due October 15, 2020 (net of unamortized discount of $115)	$	274,885
3.75% notes, due October 1, 2025 (net of unamortized discount of $647)		349,353
8.375% notes, due November 1, 2030 (net of unamortized discount of $888)		174,112
7.63% notes, due April 15, 2032 (net of unamortized discount of $48)		399,952
6.58% notes, due August 28, 2032 (net of unamortized discount of $61)		184,939
6.375% notes, due August 1, 2037 (net of unamortized discount of $612)		249,388
4.20% notes, due April 15, 2043 (net of unamortized discount of $2,201)		347,799
4.25% notes, due April 15, 2048 (net of unamortized discount of $6,296)		543,704
Total debt, excluding deferred financing costs		2,524,132
Unamortized deferred financing costs		(17,176	)
Less: amounts due within one year		—
Long-term debt, net	$	2,506,956

18

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

3. Long-Term Debt and Other Borrowing Facilities (continued)

The Company’s deferred financing charges are associated with long-term debt and revolving credit agreements. Deferred financing costs at December 31, 2018 totaled $28.7 million and are amortized over the lives of the related debt agreements. Accumulated amortization related to deferred financing costs at December 31, 2018 totaled $11.5 million.

The Company’s unamortized deferred financing costs are presented as a direct reduction of the current value of long-term debt. Amortization expense related to deferred financing costs for the year ended December 31, 2018 was $1.5 million and was included in the Interest and debt issuance cost line item within the Consolidated Statement of Income.

On March 29, 2018, Colonial issued $550 million of 4.25% senior unsecured notes due 2048. The terms of the unsecured notes indenture are consistent with the Company’s existing indentures. The Company has used the net proceeds from this offering (1) to partially fund capital expenditures for growth projects, as well as infrastructure improvements and initiatives that extend the useful life of the pipeline system and (2) to partially fund a dividend to stockholders, consistent with prior practices. Any remaining net proceeds will be used for general corporate purposes.

The Company’s unsecured notes are governed by unsecured note indentures that contain provisions that restrict the Company from entering into certain transactions and that also require semi-annual payments of interest. The principal amounts associated with these notes are due at maturity. Colonial believes it is in compliance with its debt covenants as of December 31, 2018, and the Company believes that, during the next twelve months, its liquidity and capital resources will be sufficient to meet its current working capital, capital expenditure, and other anticipated cash requirements.

The Company issues commercial paper to fund working capital requirements and capital expenditures. As of December 31, 2018, there were no commercial paper notes outstanding. The Company maintains a revolving credit facility with a group of banks, which serves as back-up liquidity for the Company’s commercial paper program. As of December 31, 2018, Colonial’s borrowing capacity on the existing credit facility was $500 million. This facility was scheduled to expire on April 28, 2021. However, on March 15, 2018, the Company extended the term for an additional one-year period. The expiration date of the credit facility is now April 28, 2022. At December 31, 2018, no amounts were outstanding under this revolving credit agreement. The Company pays a facility fee that varies based upon the Company’s debt ratings.

19

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

3. Long-Term Debt and Other Borrowing Facilities (continued)

For the year ended December 31, 2018, cash interest paid (net of amounts capitalized) totaled $121.0 million.

The Company had outstanding letters of credit and insurance bonds of $8.7 million at December 31, 2018. At December 31, 2018, the aggregate fair value of the Company’s unsecured notes approximated $2.8 billion. These fair values are based primarily upon the quoted market prices for similar instruments (a Level 2 fair value measurement).

4. Fair Value of Financial Instruments

The carrying amounts reflected in the consolidated balance sheet for cash and cash equivalents, short-term investments, accounts receivable, prepaid expenses and other current assets, and accounts payable and accrued expenses approximate their respective fair values based on the short-term nature of these instruments. The carrying amount of commercial paper borrowings, when applicable, approximates their fair value based upon the variable rates charged on the borrowings and the short terms to maturity (typically seven days or less) for these instruments.

Relevant accounting literature establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value.

Level 1 inputs are quoted market prices in active markets for identical assets or liabilities. Such inputs are the basis for the fair values of the Company’s deferred compensation plan assets which are included in Other assets presented within the Consolidated Balance Sheet. Level 2 inputs are observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities or other inputs that are observable or can be corroborated by observable market data. The fair value of the overnight repurchase agreements is determined based upon the quoted market prices for the U.S. Treasury securities associated with the repurchase agreements that are reflected within Cash and cash equivalents on the Consolidated Balance Sheet.

20

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

4. Fair Value of Financial Instruments (continued)

Assets and liabilities measured at fair value on a recurring basis are summarized in the following table. These amounts do not include the value of outstanding checks and other cash balances that are not subject to repurchase agreements.

	Fair Value at December 31, 2018
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In Thousands)
Assets:
Deferred compensation assets	$	5,444	$	—	$	—	$	5,444
Overnight repurchase agreements		—		117,000		—		117,000
Total assets	$	5,444	$	117,000	$	—	$	122,444

21

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

5. Employee Benefit Plans

Defined Benefit Pension Plans

The Company sponsors a defined benefit pension plan (Retirement Plan) that covers approximately 30% of its active employees. Benefits are integrated with Social Security and are primarily based on years of service and employee compensation. As of April 1, 2006, new hires were no longer eligible to participate in the Company’s Retirement Plan. The following tables set forth the change in projected benefit obligation and change in plan assets for the Retirement Plan as of December 31, 2018:

	Retirement Plan
	(In Thousands)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year	$	152,136
Service cost		5,086
Interest cost		4,417
Settlement		(14,568	)
Actuarial gain		(16,110	)
Benefits paid		(1,049	)
Projected benefit obligation at end of year	$	129,912
Change in retirement plan assets:
Fair value of plan assets at beginning of year	$	86,972
Actual return on plan assets		(252	)
Employer contribution		40,000
Expenses		(278	)
Benefits paid		(15,617	)
Fair value of retirement plan assets at end of year	$	110,825
Funded status	$	(19,087)
Amounts recognized in consolidated balance sheet:
Other noncurrent liabilities	$	(19,087	)

22

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

5. Employee Benefit Plans (continued)

The following table sets forth the change in accumulated other comprehensive loss (net of tax) for the Retirement Plan as of December 31, 2018:

	Retirement Plan
	(In Thousands)
Accumulated other comprehensive loss at beginning of year (net of tax)	$	26,713
Amortization of net actuarial gain recognized during the year (a)		(2,801	)
Net settlement loss recognized during the year		(2,381	)
Net actuarial gain occurring during the year		(6,100	)
Adjustment related to the TCJA (see Note 7)		6,248
Accumulated other comprehensive loss at end of year (net of tax)	$	21,679

^(a) Included in the computation of net periodic pension cost.

23

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

5. Employee Benefit Plans (continued)

Net periodic benefit expense for the Retirement Plan recognized during 2018 (in thousands) was:

	Retirement Plan
	(In Thousands)
Service cost	$	5,386
Interest cost		4,417
Expected return on plan assets		(7,862	)
Settlement loss		3,129
Amortization of prior service cost		—
Amortization of net loss		3,681
Net periodic benefit expense	$	8,751

Assumptions used as of January 1 to determine net periodic benefit expense for 2018 were:

	Retirement Plan
Discount rate		3.37	%
Expected long-term rate of return		8.00
Rate of increase in compensation levels		3.75

Assumptions used to determine the projected benefit obligation for the Retirement Plan as of December 31, 2018 were:

	Retirement Plan
Discount rate		4.02	%
Rate of increase in compensation levels		3.75

24

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

5. Employee Benefit Plans (continued)

Colonial considers factors such as target asset class allocations and long-term rates of return (both historical actual and expected) when calculating the expected long-term return on plan assets. The Company adjusts the expected long-term rate of return when there are fundamental changes in expected returns on the plan investments or changes in the target asset allocations.

Each year, the Company selects discount rates used to calculate pension obligations based on the Citigroup Pension Discount Curve. The expected cash flow is matched with the yield curve to derive a single discount rate specific to this plan. Colonial utilizes a full yield curve approach in the estimation of these interest and service cost components of net periodic benefit costs for pension and other postretirement benefits by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows.

Pension contributions in 2018 were $40.0 million. As of the date of this report, the Company continued to evaluate what level of pension contributions it might make, if any, during 2019.

25

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

5. Employee Benefit Plans (continued)

The expected future benefit payments, which reflect expected future service, for the Retirement Plan are as follows:

Year	Amount
	(In Thousands)
2019	$	8,714
2020		8,565
2021		9,113
2022		10,241
2023		10,253
2024–2028		51,759

The expected amounts to be recognized in net periodic benefit cost in the coming year are as follows:

	Amount
	(In Thousands)
Net actuarial loss	$	1,350

The percentage of fair value of the Retirement Plan’s total assets by asset class as of December 31, 2018 was:

	Retirement Plan
Fixed income		91	%
Domestic equity		5
International equity		4
Total		100	%

26

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

5. Employee Benefit Plans (continued)

The Company endeavors to pay benefits as promised by the Retirement Plan in such a way that associated cost and risk remain reasonably manageable. To meet this objective, the Company seeks to achieve and maintain a fully funded status. The strategy for achieving and maintaining a fully funded status may vary with this plan’s current funding level. Asset allocation decisions are based on the returns and risks relative to the plan’s liability. Current target ranges are approximately up to 10% for stocks and up to 90% for fixed income investments. The Retirement Plan’s investments consist primarily of equity and fixed income securities.

The following table summarizes the Company’s Retirement Plan assets measured at fair value:

	Fair Value at December 31, 2018
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Input (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In Thousands)
Equity securities:
Collective funds	$	—	$	10,114	$	—	$	10,114
Fixed income securities:
Collective funds		—		98,678		—		98,678
Money market funds		2,033		—		—		2,033
Fair value of plan assets	$	2,033	$	108,792	$	—	$	110,825

27

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

5. Employee Benefit Plans (continued)

Equity securities are comprised of investments in equity mutual funds and collective funds. Fixed income securities are comprised of investments in exchange traded funds, common trust funds, and money market funds. Investments in mutual funds are valued using quoted market prices multiplied by the number of shares owned. Investments in collective funds are valued at the net asset value per share multiplied by the number of shares held as of the measurement date. Investments in money market funds are valued at the net asset value per share multiplied by the number of shares held as of the measurement date.

During 2018, retiring or other vested participants electing a lump-sum distribution of their pensions resulted in payments by the Retirement Plan that totaled $14.6 million. During 2018, the settlements resulted in the Company recognizing previously unrecognized actuarial losses totaling $3.1 million.

The Company also has a nonqualified pension plan that provides supplemental benefits to certain executive employees. This plan is unfunded and the projected benefit obligation was $6.1 million at December 31, 2018. Benefit payments totaled $2.8 million during 2018. The plan incurred a settlement loss of $0.8 million during 2018.

Savings Plans

The Company sponsors a defined contribution savings plan in which substantially all employees are eligible to participate. The Company matches employee contributions up to 6% of the employee’s base salary. The Company’s contributions to the plan were $4.9 million for the year ended December 31, 2018.

The Company also sponsors a portable plan known as the Core Savings Plan. This plan provides employees with an annual benefit of 4% of salary that is contributed to a tax deferred account. Employees participating in the Retirement Plan were provided a one-time option to participate in the Core Savings Plan or remain in the Retirement Plan. Employees hired on or after April 1, 2006, are eligible to participate in the Core Savings Plan, but are not eligible to participate in the Company’s Retirement Plan. The Company’s contributions to the Core Savings Plan were $2.4 million for the year ended December 31, 2018.

28

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

5. Employee Benefit Plans (continued)

Postretirement Benefit Plan

The Company sponsors a postretirement benefit plan (Postretirement Benefit Plan) which provides life insurance benefits to retirees.

The following table sets forth the change in accumulated postretirement benefit obligation, funded status, and the amounts recognized in the accompanying balance sheet as of December 31, 2018:

	Amount
	(In Thousands)
Change in accumulated benefit obligation:
Accumulated benefit obligation at beginning of year	$	15,067
Service cost		273
Interest cost		465
Plan participant contributions		2
Actuarial gain		(1,964	)
Benefits paid		(87	)
Accumulated benefit obligation at end of year	$	13,756
Amounts recognized in consolidated balance sheet:
Other noncurrent liabilities	$	(13,756	)
Amounts recognized in accumulated other comprehensive income:
Net actuarial loss	$	17
Total (before tax effect)	$	17

29

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

5. Employee Benefit Plans (continued)

Net periodic expense for the Company’s Postretirement Benefit Plan includes the following as of January 1, 2018:

	Amount
	(In Thousands)
Service cost	$	273
Interest cost		465
Amortization of actuarial (gain) loss		39
Net periodic benefit expense	$	777

A discount rate assumption of 3.52% was used as of January 1, 2018 to determine net periodic benefit expense for the fiscal year.

A discount rate assumption of 4.15% was used to determine the postretirement benefit obligation as of December 31, 2018.

The expected amounts to be recognized in net periodic benefit cost in the coming year are as follows:

	Amount
	(In Thousands)
Net actuarial loss	$	—

30

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

5. Employee Benefit Plans (continued)

The expected future benefit payments for the Postretirement Benefit Plan are as follows:

Year	Amount
	(In Thousands)
2019	$	553
2020		576
2021		599
2022		621
2023		643
2024–2028		3,509

6. Related-Party Matters

Operating revenues from stockholder companies (or related parties of stockholder companies) were approximately $113.7 million for the year ended December 31, 2018.

The Company owns a 50% interest in Bengal Pipeline Company, LLC (Bengal), a joint venture with Shell Midstream Operating LLC, a member of Colonial’s membership group. The Company records its investment in Bengal under the equity method of accounting. For the year ended December 31, 2018, the Company recognized $20.5 million in earnings from the Bengal joint venture. These earnings are included in the Income from equity investments line item within the Consolidated Statement of Income.

The Company’s original investment in Bengal totaled approximately $84.2 million, including $68.9 million of assets constructed solely for the joint venture under the terms of a contribution agreement between Colonial and Shell. As of December 31, 2018, the Company’s share of members’ equity recorded by Bengal approximated $67.0 million.

The historical difference between the original carrying value of the Company’s investment in Bengal and the Company’s share of members’ equity recorded by Bengal is approximately $17.2 million and is being amortized over the estimated life of the contributed assets (35 years). The unamortized difference as of December 31, 2018 is $11.0 million.

31

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

6. Related-Party Matters (continued)

The Company is a party to an administrative services agreement and a tank farm operating agreement with Bengal. Under these agreements, the Company operates a tank farm for Bengal and provides certain administrative services to Bengal. These agreements were renewed in 2018 and expire in December 2021, and are renewable by either party upon written notice of intent. The Company has recorded revenues of approximately $4.5 million for services rendered under these agreements during 2018.

The Company, through a wholly-owned subsidiary, owns a 50% interest in Powder Springs Logistics, LLC (Powder Springs), a joint venture with an unrelated third party. Under the terms of the Powder Springs LLC agreement, in exchange for a 50% interest, each party has agreed to contribute up to $33.0 million to construct a blending facility and an analyzer building. As of December 31, 2018, the Company has invested $31.0 million in Powder Springs, which commenced commercial operations in March 2017. The Company recorded its investment in Powder Springs under the equity method of accounting, and earnings from this investment are included in the Income from equity investments line item of the Consolidated Statement of Income. For the year ended December 31, 2018, the Company recognized $20.3 million in earnings from the Powder Springs joint venture.

In connection with the joint venture, the Company entered into certain agreements with Powder Springs. These agreements include various license, access, use agreements and a land lease. These agreements have an initial term of ten years.

7. Income Taxes

Deferred income tax assets and liabilities were comprised of the following at December 31, 2018:

	Amount
	(In Thousands)
Deferred income tax assets	$	34,475
Deferred income tax liabilities		(503,652	)
Net deferred income tax liabilities	$	(469,177	)

32

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

7. Income Taxes (continued)

Deferred income taxes result principally from temporary differences for deductions taken in income tax returns for depreciation based upon useful lives and methods that are different from the useful lives and methods used in recording depreciation in the accompanying financial statements. Deferred income taxes also arise from the recognition of transportation revenue accruals as well as certain other liabilities that are accrued in different periods for tax and financial reporting purposes.

For the year ended December 31, 2018, cash taxes paid totaled $64.3 million.

A reconciliation between the Company’s effective tax rate and the U.S. statutory rate is as follows:

	2018
U.S. statutory rate applied to income before income taxes		21.0	%
State income taxes, net of federal benefit		3.4
Deferred tax benefit due to tax law change		(1.0	)
Other (all differences less than 1%)		(0.9	)
		22.5	%

On December 22, 2017, the TCJA was signed into law. The TCJA reduced the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. Colonial recorded income taxes for 2018 at the newly enacted rate. In 2018, the Company recorded an additional $6.3 million benefit upon finalizing the re-measurement of net deferred tax liabilities. The IRS continues to issue regulations that provide further interpretation and guidance on the law and each respective state‘s adoption of the provisions contained in the Tax Reform Legislation remains uncertain. The ultimate impact of these matters cannot be determined at this time.

33

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

7. Income Taxes (continued)

In the first quarter of 2018, the Company prospectively adopted ASU 2018-02 and recorded a $6.2 million adjustment that effectively increased retained earnings and decreased tax effects otherwise “stranded” in AOCI. The effect of this adjustment is presented in the Consolidated Statement of Stockholders’ Deficiency.

The change in the Company’s unrecognized tax benefits during 2018 was as follows:

	Amount
	(In Thousands)
Unrecognized tax benefits, beginning of year	$	6,114
Additions based on tax positions related to the current year		131
Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations		(207	)
Reductions due to settlements		(5,907	)
Additions due to federal tax law change		—
Unrecognized tax benefits, end of year	$	131

The total amount of gross unrecognized tax benefits that, if recognized, would affect the effective tax rate was $0.1 million at December 31, 2018. The above amounts exclude accrued interest and estimated penalties. During the year ended December 31, 2018, the Company recognized a benefit of approximately $0.2 million in connection with the expiration of the applicable statute of limitations related to tax years 2013–2014.

In the second quarter of 2018, the Company settled an examination by the state of Tennessee for calendar years 2013 through 2015. The settlement of examination resulted in the reversal of $5.9 million of uncertain tax positions related to tax years 2013 through 2017.

34

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

7. Income Taxes (continued)

The Company believes it is reasonably possible that unrecognized tax benefits may be recognized by the end of 2019 as a result of a lapse of applicable statute of limitations. Such amounts are insignificant, both individually and in aggregate, and will be offset by other increases in unrecognized tax benefits. No penalties related to unrecognized tax benefits were recognized during 2018. When applicable, the Company recognizes interest and penalties in operating expenses.

The Company files income tax returns with the Internal Revenue Service (IRS) and states in which the pipeline operates or has employees. As of December 31, 2018, the Company’s tax years 2014 through 2017 are subject to examination by the IRS and various state and local authorities. The Company settled the examination by the IRS of the 2014 calendar year. The results of the examination did not have a material impact on the consolidated financial statements. As of December 31, 2018, the Company is under examination by the IRS for the 2016 calendar year. The results of this examination are not currently expected to have a material impact upon the Company’s financial statements, results of operations or cash flows.

8. Contingencies

Colonial operates within an industry whose regulations afford shippers and other parties with a formal mechanism to protest and file complaints against the Company regarding its primary source of revenue – tariffs that are charged to customers that utilize the Company’s transportation-related services. Separately, the Company is party to certain negotiated, multi-year business agreements that may restrict the Company from taking certain prospective tariff rate actions. Accordingly, Colonial is subject to various legal claims and other loss contingencies that arise from the conduct of its normal business and operations. While the Company is partially insured for certain types of events, its insurance programs do not provide the Company protection from losses that may arise from tariff-based challenges. Colonial establishes accruals for legal contingencies when the costs associated with those matters become probable of occurrence and can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for such claims. However, unless otherwise disclosed, the Company cannot make a meaningful estimate of actual costs or a range of reasonably possible losses that could be higher or lower than the amounts accrued. While the ultimate effect of the contingencies addressed herein cannot be determined at this time, the Company does not currently anticipate that these contingencies will have a material impact on the Company’s financial position, its results of operations, or its cash flow unless otherwise disclosed.

35

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

8. Contingencies (continued)

Matters Pertaining to Customer Actions

Between 2012 and 2014, certain of Colonial’s airline shippers contacted the Company indicating the intent to file with the FERC complaints alleging unlawful charges by Colonial, a few of which did file complaints with the FERC. All such issues were settled and, to the extent they involved actual complaints with the FERC, were the subject of formal settlement filings. As part of these settlements, Colonial agreed to make lump sum payments to certain of these shippers and agreed to certain incentive rates for an established period of time in exchange for the shippers’ agreement not to challenge Colonial’s rates during the term of the settlement. The settlements have different effective dates and different terms. One of the settlements, involving two shippers, expired June 30, 2018, and another expired December 31, 2018.

On November 22, 2017, three of Colonial’s shippers filed a complaint with the FERC challenging that the Company’s rates are unjust and unreasonable. These shippers are seeking reparations reaching back two years prior to the filing and during the pendency of the complaint. An adverse outcome could also result in a reduction of the Company’s prospective rates, including its market-based rates. Since then, several other shippers have filed similar complaints or motions to intervene. The latter complaints ask the FERC to consolidate the complaint with the original complaint so that the cases may be heard together. Colonial filed answers to these complaints. Colonial’s answers state that it believes it has substantial defenses to the complaints, which the Company intends to pursue vigorously.

On September 20, 2018, the FERC issued an order to consolidate the complaints and set the combined complaint for settlement and hearing. Subsequent to the order, additional complaints have been filed, which have also been consolidated. As part of the order, the FERC established separate proceedings for complaints regarding the Company’s market-based rates and the Company’s cost-based rates and transmix and product loss practices. It is not possible at this time for Colonial to reasonably estimate the potential exposure it may face if these complaints are successful. However, considering the magnitude and breadth of the allegations, they could have a material adverse impact on the Company’s financial condition, its results of operations, and its overall liquidity.

Separately, the FERC has initiated an investigation into certain of Colonial’s line apportionment practices that include, but are not limited to, Colonial’s administration of shipper history transfers and its capacity allocation program. This investigation was undertaken by the FERC in response to a complaint that was filed in 2016 by a limited number of shippers and is not expected to affect the amounts that Colonial charges for transportation services.

36

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

8. Contingencies (continued)

Finally, FERC has been requested to make various changes to its policy regarding the allowance of income taxes in pipeline rates, including a mandatory reduction in rates to reflect the impact of the reduction in corporate income tax rates set forth by the TCJA. FERC noted that it would not take industry-wide action at this time to reduce oil pipelines rates. Instead, the effects of the TCJA would be factored into the level of the index that will be in effect for the five-year period beginning July 1, 2021.

Matters Pertaining to System Integrity Events

In early September 2016, a product release that involved one of Colonial’s pipelines was reported near Helena, Alabama. Unpaid incident costs are reflected within the Accounts payable and accrued expenses line item of the Consolidated Balance Sheet.

On October 31, 2016, a contract crew was excavating Colonial’s primary gasoline pipeline near Helena, Alabama, to prepare for work required as a result of the previously described September 2016 release. During the excavation, an incident occurred that resulted in a product release and fire, and caused the Company to shut down its primary gasoline pipeline. The incident resulted in two fatalities as well as the hospitalization of several contractors. Colonial restarted the affected pipeline on November 6, 2016. Unpaid amounts are reflected within the Accounts payable and accrued expenses line item of the Consolidated Balance Sheet. During 2018, parties impacted by this incident filed suit against Colonial. Provisional reserves related to this matter are reflected within the Consolidated Balance Sheet.

During June 2018, the Company received insurance proceeds totaling $20.4 million related to the above described event, $8.7 million of which represents business interruption reimbursement and has been recorded in Transportation within the Consolidated Statement of Income. The remaining $11.7 million of proceeds represents cost recovery reimbursement.

The investigations of these events remain ongoing. The ultimate costs of these incidents are unknown at this time, and it is possible that the Company may incur additional fines, penalties, or other financial or operational costs related to these events.

37

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

8. Contingencies (continued)

Environmental and Regulatory Matters

Colonial’s operations are subject to federal, state, and local laws and regulations that govern the transportation, handling, storage, and disposal of hazardous substances, and the remediation of sites that may be affected by such activity. Permits and environmental controls are required for certain of the Company’s operations, and these permits and controls are subject to modification, renewal, and revocation by their issuing authorities. Environmental laws and regulations have generally become stricter in recent years, and the cost of responding to future changes may be substantial. While the Company believes that it is currently in compliance with all material environmental laws and regulations, and that it has taken reasonable steps to ensure such compliance, there can be no assurance that it will not incur significant costs to remediate violations of such laws and regulations or to comply with changes in, or stricter or different interpretation of, existing laws and regulations. Such costs could have a material adverse effect on the Company’s financial results.

Accrued liabilities for legal and regulatory contingencies as well as environmental matters totaled $83.9 million at December 31, 2018. The Company classifies these liabilities as current or noncurrent based on management’s estimate regarding the timing of payments. Colonial anticipates that it will expend approximately $34.1 million of the amounts accrued as of December 31, 2018, during the next twelve months. These accruals contemplate legal, regulatory, and environmental contingencies involving 41 incident sites and do not include amounts involving the customer actions or the unpaid emergency response costs referenced earlier in this report. Due to the nature of these contingencies, the timing of the distribution of related payments is not estimable.

The estimates of the Company’s liabilities that are discussed throughout this report are based upon currently available facts, existing technology, and presently enacted laws and regulations. When the available information is only sufficient to estimate a range of probable liability and no amount within the range is more likely to be paid than any other, the lower end of the estimated range is used to determine the liability. Estimates of environmental liabilities may be revised in accordance with results of additional testing and geological studies, the success of remediation initiatives addressing the most significant areas of contamination, the rate at which site conditions may change, and the requirements of various regulatory agencies that may be monitoring the Company’s efforts. While it is reasonably possible that material liabilities in excess of amounts recorded may exist, the Company is presently unable to make further estimates regarding such amounts.

38

Colonial Pipeline Company

Notes to Consolidated Financial Statements (continued)

8. Contingencies (continued)

Self-Insurance

Colonial is partially self-insured for risks including, but not limited to, environmental damage arising from events whose onset may be either sudden or gradual, physical loss to property, workers’ compensation, and automobile liability. As of December 31, 2018, the Company’s self-insured retention for claims involving the majority of these risks was limited to $20 million per occurrence. Colonial’s insurance program provides up to $800 million of indemnification for environmental events, which is subject to the aforementioned self-insurance retention thresholds. The Company’s insurance does not cover every potential risk associated with operating a pipeline and other facilities.

9. Commitments

Colonial is obligated under agreements with various electric power companies that provide the continuous availability of substantially all of the Company’s electric power requirements. The majority of these agreements, which are designed to optimize electric power rates, covers periods ranging from one-to-ten years and includes certain minimum billing provisions.

The Company is party to certain negotiated, multi-year business agreements with common carriers, shippers, and/or related parties of shippers that may restrict the Company from taking certain prospective tariff rate actions.

Rental expense for the year ended December 31, 2018 was $8.3 million. The following amounts represent future minimum payment commitments as of December 31, 2018, under non-cancelable operating leases that extend beyond one year:

Year	Amount
	(In Thousands)
2019	$	6,264
2020		6,561
2021		6,514
2022		3,996
2023		3,262
Thereafter		12,033
Total	$	38,630

39

EX-99.2

Exhibit 99.2

Colonial Pipeline Company

INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTH PERIODS ENDED

MARCH 31, 2019 AND 2018

(Unaudited)

Colonial Pipeline Company

Interim Condensed Consolidated Balance Sheets

	(Unaudited)
	March 31, 2019			December 31, 2018
Assets
Current assets
Cash and cash equivalents	$	200,142,180		$	159,046,497
Short-term investments		25,524,974			25,362,032
Accounts receivable, net:
Trade:
Affiliates		14,650,277			18,388,000
Non-affiliates		126,833,885			111,175,811
Other receivables		21,899,816			28,339,495
Prepaid expenses and other current assets		13,831,813			20,987,942
Total current assets		402,882,945			363,299,777
Property, plant, and equipment, at cost		3,921,703,635			3,898,416,478
Less accumulated depreciation		(1,580,091,395	)		(1,580,158,490	)
Net property, plant, and equipment		2,341,612,240			2,318,257,988
Intangible assets		262,503,190			263,278,451
Investment in affiliates		128,452,390			134,558,558
Goodwill		57,071,321			57,071,321
Other assets		18,748,516			17,680,284
Total assets	$	3,211,270,602		$	3,154,146,379
Liabilities and net stockholders’ deficiency:
Accounts payable and accrued liabilities	$	164,015,879		$	154,623,813
Accrued compensation		14,666,388			27,738,669
Taxes payable		43,997,021			13,598,012
Accrued interest		48,404,812			28,928,500
Total current liabilities		271,084,100			224,888,994
Long-term debt, net		2,507,107,238			2,506,955,637
Deferred income taxes		480,154,422			469,177,667
Other non-current liabilities		101,454,245			100,902,547
Commitments and contingencies (Note G)
Net stockholders’ deficiency:
Common stock, $1,000 par value; 60,000 shares authorized; 36,000 shares issued		36,000,000			36,000,000
Additional paid-in capital		10,980,000			10,980,000
Accumulated other comprehensive loss		(22,388,686	)		(22,678,088	)
Retained earnings		51,875,147			52,915,486
Treasury stock, 4,136 shares		(224,995,864	)		(224,995,864	)
Net stockholders’ deficiency		(148,529,403	)		(147,778,466	)
Total liabilities and net stockholders’ deficiency	$	3,211,270,602		$	3,154,146,379

See accompanying notes

1

Colonial Pipeline Company

Interim Condensed Consolidated Statements of Income

and Retained Earnings

(Unaudited)

	Three Months Ended March 31,
	2019		2018
Revenues:
Operating revenues:
Transportation	$	335,833,462	$	304,837,369
Line lease, storage, blending and other		33,343,094		30,960,665
Total operating revenues		369,176,556		335,798,034
Non-operating revenues:
Interest and other income		1,694,802		1,164,883
Total revenues		370,871,358		336,962,917
Expenses:
Operating expense:
Employee expense		38,125,011		35,401,676
Power		52,299,485		51,965,897
Ad valorem, franchise and other taxes		13,558,792		12,748,024
Depreciation and amortization		20,037,659		18,519,836
Other operating expenses		42,003,313		35,803,290
Total operating expenses		166,024,260		154,438,723
Non-operating expenses:
Interest expense and debt issue costs		32,628,225		28,239,537
Total expenses		198,652,485		182,678,260
Income from equity investments		7,908,696		8,757,562
Income before income tax expense		180,127,569		163,042,219
Income taxes:
Current		29,044,992		28,580,980
Deferred		14,406,708		11,928,540
Total income tax expense		43,451,700		40,509,520
Net income	$	136,675,869	$	122,532,699
Retained earnings at beginning of period	$	52,915,486	$	248,218,700
Accumulated other comprehensive income reclass		—		6,248,114
Dividends declared		137,716,208		324,630,432
Retained earnings at end of period	$	51,875,147	$	52,369,081

See accompanying notes

2

Colonial Pipeline Company

Interim Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended March 31,
	2019		2018
Net income	$	136,675,869	$	122,532,699
Change in unrecognized pension and other postretirement costs, net of tax		289,402		—
Total other comprehensive income, net of tax		289,402		—
Comprehensive income	$	136,965,271	$	122,532,699

See accompanying notes

3

Colonial Pipeline Company

Interim Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended March 31,
	2019			2018
Operating activities
Net income	$	136,675,869		$	122,532,699
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		20,572,804			18,956,768
Deferred income tax expense		14,406,708			11,928,540
Loss on disposition or sale of assets		—			1,595
Equity investment earnings net of distributions received		5,982,975			(1,222,364	)
Changes in operating assets and liabilities:
Accounts receivable		(5,643,614	)		45,765,948
Prepaid expenses and other current assets		7,156,129			32,532,893
Other assets		(1,138,274	)		741,119
Accounts payable and accrued liabilities		55,791,345			(40,350,444	)
Other noncurrent liabilities		872,410			561,160
Total adjustments		98,000,483			68,915,215
Net cash provided by operating activities		234,676,352			191,447,914
Investing activities
Additions to property, plant, and equipment		(55,518,641	)		(62,432,279	)
Proceeds from disposal or sale of assets		37,723			39,136
Net cash used in investing activities		(55,480,918	)		(62,393,143	)
Financing activities
Net proceeds from commercial paper		—			30,000,000
Net proceeds from issuance of long-term debt		—			543,543,000
Dividends paid		(137,716,208	)		(324,630,432	)
Deferred financing costs paid		(383,543	)		(4,987,500	)
Net cash (used in) provided by financing activities		(138,099,751	)		243,925,068
Net increase in cash and cash equivalents		41,095,683			372,979,839
Cash and cash equivalents at beginning of period		159,046,497			102,544,062
Cash and cash equivalents at end of period	$	200,142,180		$	475,523,901

See accompanying notes

4

Colonial Pipeline Company

Notes to Interim Condensed Consolidated Financial Statements

Note A – Basis of Presentation

The accompanying financial statements are presented on a consolidated basis and include the accounts of Colonial Pipeline Company and its subsidiaries (Colonial or the Company). The unaudited Interim Condensed Consolidated Financial Statements included herein have been prepared by management in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and present the Company’s financial position, results of operations, and cash flows. These condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present fairly the consolidated results for the interim condensed periods presented. Certain information and footnote disclosures normally included in the Company’s annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. However, management believes that the disclosures included in this quarterly document are adequate to make the information presented not misleading. These financial statements and related disclosures should be read in conjunction with the Company’s audited consolidated financial statements as of December 31, 2018, as further information regarding the Company’s accounting policies are retained therein. Operating results for the three-month period ended March 31, 2019 are not necessarily indicative of the results that may be expected and ultimately realized for the year ending December 31, 2019.

Note B – Recent Accounting Pronouncements

In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715) – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This standard requires an employer to report the service cost component of a retirement benefit plan in the same financial statement line item as other compensation costs arising from services rendered by the pertinent employees during the period and present other components of net periodic benefit cost outside of income from operations. This standard is effective for the Company for the year ended December 31, 2019 and will not have a material impact on the Company’s results of operations, financial condition or cash flows.

In February 2016, the FASB issued ASU 2016-02, Leases, and subsequent amendments, which requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for leases with lease terms greater than twelve months as well as enhanced disclosure requirements. Leases will be classified as either a financing lease or an operating lease. An entity has the option to adopt the ASU i) at the beginning of the earliest period presented using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements; or ii) at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without restating prior periods. There are various practical expedients an entity may elect to apply. This guidance is effective for the Company for the year ended December 31, 2020. The Company is still evaluating the impact this ASU will have on the Company’s results of operations, financial condition, or cash flows.

5

Note B – Recent Accounting Pronouncements (continued)

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The two permitted transition methods are the full retrospective method, which requires retrospective presentation of all periods presented, and the modified retrospective method, in which the cumulative effect of applying the standard would be recognized at the date of initial application. This standard is effective for the Company for the year ended December 31, 2019 and is not expected to have a material impact on the Company’s results of operations, financial condition or cash flows.

Colonial also considered other recently issued accounting pronouncements and is currently evaluating the impact these standards will have on the Company’s results of operations, financial condition or cash flows.

Note C – Fair Value of Financial Instruments

The carrying amounts reflected in the Interim Condensed Consolidated Balance Sheets for cash and cash equivalents, short-term investments, accounts receivable, prepaid expenses and other current assets, and accounts payable and accrued expense approximate their respective fair values based on the short-term nature of these instruments. The carrying amount of commercial paper borrowings, when applicable, approximates its fair value based upon the variable rates charged on the borrowings and the short terms to maturity (typically seven days or less) for these instruments.

Relevant accounting literature establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value.

Level 1 inputs are quoted market prices in active markets for identical assets or liabilities. Such inputs are the basis for the fair values of the Company’s deferred compensation plan assets, which are included in Other assets within the Interim Condensed Consolidated Balance Sheets.

Level 2 inputs are observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities or other inputs that are observable or can be corroborated by observable market data. The fair value of the Company’s overnight repurchase agreement is determined based upon the quoted market prices for the U.S. Treasury securities associated with the repurchase agreements that are reflected within Cash and cash equivalents within the Interim Condensed Consolidated Balance Sheets.

6

Note C – Fair Value of Financial Instruments (continued)

Assets and liabilities measured at fair value on a recurring basis are summarized in the tables below and do not include the value of outstanding checks and other cash balances that are not subject to repurchase agreements:

	Fair Value at March 31, 2019
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In Thousands)
Assets:
Deferred compensation assets	$	6,456	$	—	$	—	$	6,456
Overnight repurchase agreements		—		150,000		—		150,000
Total assets	$	6,456	$	150,000	$	—	$	156,456
	Fair Value at December 31, 2018
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In Thousands)
Assets:
Deferred compensation assets	$	5,444	$	—	$	—	$	5,444
Overnight repurchase agreements		—		150,000		—		150,000
Total assets	$	5,444	$	150,000	$	—	$	155,444

7

Note D – Related-Party Matters

Operating revenues from stockholder companies (or related parties of stockholder companies) were approximately $30.9 million and $28.3 million for the three-month periods ended March 31, 2019 and 2018, respectively.

The Company owns a 50% interest in Bengal Pipeline Company, LLC (Bengal), a joint venture with Shell Midstream Partners, L.P. (SHLX). SHLX is a member of Colonial’s ownership group. The Company records its investment in Bengal under the equity method of accounting. Income from this joint venture is recorded in the Income from equity investments line item of the Interim Condensed Consolidated Statements of Income and Retained Earnings.

The Company is a party to an administrative services agreement and a tank farm operating agreement with Bengal. Under these agreements, the Company operates a tank farm for Bengal and provides certain administrative services to Bengal. These agreements were renewed in 2018 and expire in December 2021, and are renewable by either party upon written notice of intent. The Company has recorded revenues of approximately $1.2 million and $1.1 million for services rendered under these agreements during the first three months of 2019 and 2018, respectively.

The Company, through a wholly-owned subsidiary, owns a 50% interest in Powder Springs Logistics, LLC (Powder Springs), a joint venture with an unrelated third party. The Company records its investment in Powder Springs under the equity method of accounting. Income from this joint venture is recorded in the Income from equity investments line item of the Interim Condensed Consolidated Statements of Income and Retained Earnings.

In connection with the joint venture, the Company entered into certain agreements with Powder Springs. These agreements include various license, access, use agreements and a land lease which have an initial term of ten years, expiring in 2027.

8

Note E – Long-Term Debt and Other Borrowing Facilities

Long-term debt and other borrowings were as follows at:

	March 31, 2019			December 31, 2018
	(In Thousands)
Unsecured notes:
3.50% notes, due October 15, 2020 (net of unamortized discount of $99 and $115 at March 31, 2019 and December 31, 2018, respectively)	$	274,901		$	274,885
3.75% notes, due October 1, 2025 (net of unamortized discount of $623 and $647 at March 31, 2019 and December 31, 2018, respectively)		349,377			349,353
8.375% notes, due November 1, 2030 (net of unamortized discount of $870 and $888 at March 31, 2019 and December 31, 2018, respectively)		174,130			174,112
7.63% notes, due April 15, 2032 (net of unamortized discount of $47 and $48 at March 31, 2019 and December 31, 2018, respectively)		399,953			399,952
6.58% notes, due August 28, 2032 (net of unamortized discount of $60 and $61 at March 31, 2019 and December 31, 2018, respectively)		184,940			184,939
6.375% notes, due August 1, 2037 (net of unamortized discount of $603 and $612 at March 31, 2019 and December 31, 2018, respectively)		249,397			249,388
4.20% notes, due April 15, 2043 (net of unamortized discount of $2,178 and $2,201 at March 31, 2019 and December 31, 2018, respectively)		347,822			347,799
4.25% notes, due April 15, 2048 (net of unamortized discount of $6,242 and $6,296 at March 31, 2019 and December 31, 2018, respectively)		543,758			543,704
Total debt, excluding deferred financing costs		2,524,278			2,524,132
Unamortized deferred financing costs		(17,171	)		(17,176	)
Less: amounts due within one year		—			—
Long-term debt, net	$	2,507,107		$	2,506,956

On March 29, 2018, Colonial issued $550 million of 4.25% senior unsecured notes due 2048. The terms of the unsecured notes indenture are consistent with the Company’s existing indentures. The Company used the net proceeds from this offering (1) to partially fund capital expenditures for growth projects, as well as infrastructure improvements and initiatives that extend the useful life of the pipeline system and (2) to partially fund a dividend to stockholders, consistent with prior practices. Remaining net proceeds have been used for general corporate purposes.

9

Note E – Long-Term Debt and Other Borrowing Facilities (continued)

The Company’s unsecured notes are governed by unsecured note indentures that contain provisions that restrict the Company from entering into certain transactions and that also require semi-annual payments of interest. The principal amounts associated with these notes are due at maturity. Colonial believes it is in compliance with its debt covenants as of March 31, 2019, and the Company believes that, during the next twelve months, its liquidity and capital resources will be sufficient to meet its current working capital, capital expenditure, and other anticipated cash requirements.

The Company issues commercial paper to fund working capital requirements and capital expenditures. As of March 31, 2019 and December 31, 2018, there were no commercial paper notes outstanding. The Company maintains a revolving credit facility with a group of banks, which serves as back-up liquidity for the Company’s commercial paper program. As of March 31, 2019 and December 31, 2018, Colonial’s borrowing capacity on the existing credit facility was $500 million. This facility is scheduled to expire on April 28, 2022. At March 31, 2019 and December 31, 2018, no amounts were outstanding under this revolving credit agreement. The Company pays a facility fee that varies based upon the Company’s debt ratings.

Note F – Subsequent Events

Other than those transactions described throughout these Notes to Interim Condensed Consolidated Financial Statements, no significant events occurred subsequent to the balance sheet date but prior to the June 26, 2019 issuance of this report that would have a material impact on the interim consolidated financial statements.

Note G – Commitments and Contingencies

Colonial operates within an industry whose regulations afford shippers and other parties with a formal mechanism to protest and file complaints against the Company regarding its primary source of revenue – tariffs that are charged to customers that utilize the Company’s transportation-related services. Separately, the Company is party to certain negotiated, multi-year business agreements that may restrict the Company from taking certain prospective tariff rate actions. Accordingly, Colonial is subject to various legal claims and other loss contingencies that arise from the conduct of its normal business and operations. While the Company is partially insured for certain types of events, its insurance programs do not provide the Company protection from losses that may arise from tariff-based challenges. Colonial establishes accruals for legal contingencies when the costs associated with those matters become probable of occurrence and can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for such claims. However, unless otherwise disclosed, the Company cannot make a meaningful estimate of actual costs or a range of reasonably possible losses that could be higher or lower than the amounts accrued. While the ultimate effect of the contingencies addressed herein cannot be determined at this time, the Company does not currently anticipate that these contingencies will have a material impact on the Company’s financial position, its results of operations, or its cash flow unless otherwise disclosed.

10

Note G – Commitments and Contingencies (continued)

Matters Pertaining to Customer Actions

Between 2012 and 2014, certain of Colonial’s airline shippers contacted the Company indicating the intent to file with the FERC complaints alleging unlawful charges by Colonial, a few of which did file complaints with the FERC. All such issues were settled and, to the extent they involved actual complaints with the FERC, were the subject of formal settlement filings. As part of these settlements, Colonial agreed to make lump sum payments to certain of these shippers and agreed to certain incentive rates for an established period of time in exchange for the shippers’ agreement not to challenge Colonial’s rates during the term of the settlement. The settlements have different effective dates and different terms. One of the settlements, involving two shippers, expired June 30, 2018 and another settlement expired December 31, 2018.

On November 22, 2017, three of Colonial’s shippers filed a complaint with the FERC challenging that the Company’s rates are unjust and unreasonable. These shippers are seeking reparations reaching back two years prior to the filing and during the pendency of the complaint. An adverse outcome could also result in a reduction of the Company’s prospective rates, including its market- based rates. Since then, several other shippers have filed similar complaints or motions to intervene. The latter complaints ask the FERC to consolidate the complaint with the original complaint so that the cases may be heard together. Colonial filed answers to these complaints. Colonial’s answers state that it believes it has substantial defenses to the complaints, which the Company intends to pursue vigorously. On September 20, 2018, the FERC issued an order to consolidate the complaints and set the combined complaint for settlement and hearing. Subsequent to the order, additional complaints have been filed, the majority of which have also been consolidated. As part of the order, the FERC established separate proceedings for complaints regarding (a) the Company’s market-based rates and (b) the Company’s index-based rates and transmix and product loss practices. On April 30, 2019, an order was issued terminating the settlement proceedings. On May 2, 2019, the FERC issued an order that designated a judge for the rate case hearing. It is not possible at this time for Colonial to reasonably estimate the potential exposure it may face if these complaints are successful. However, considering the magnitude and breadth of the allegations, they could have a material adverse impact on the Company’s financial condition, its results of operations, and its overall liquidity.

Separately, the FERC has initiated an investigation into certain of Colonial’s line apportionment practices that include, but are not limited to, Colonial’s administration of shipper history transfers and its capacity allocation program. This investigation was undertaken by the FERC in response to a complaint that was filed in 2016 by a limited number of shippers and is not expected to affect the amounts that Colonial charges for transportation services.

Finally, the FERC has been requested to make various changes to its policy regarding the allowance of income taxes in pipeline rates, including a mandatory reduction in rates to reflect the impact of the reduction in corporate income tax rates set forth by the TCJA. The FERC noted that it would not take industry-wide action at this time to reduce oil pipelines rates. Instead, the effects of the TCJA would be factored into the level of the index that will be in effect for the five-year period beginning July 1, 2021.

11

Note G – Commitments and Contingencies (continued)

Matters Pertaining to System Integrity Events

In early September 2016, a product release that involved one of Colonial’s pipelines was reported near Helena, Alabama.

On October 31, 2016, a contract crew was excavating Colonial’s primary gasoline pipeline near Helena, Alabama, to prepare for work required as a result of the previously described September 2016 release. During the excavation, an incident occurred that resulted in a product release and fire, and caused the Company to shut down its primary gasoline pipeline. The incident resulted in two fatalities as well as the hospitalization of several contractors. Colonial restarted the affected pipeline on November 6, 2016. During 2018, parties impacted by the incident filed suit against Colonial. Provisional reserves related to this matter are reflected within the Interim Condensed Consolidated Balance Sheets.

The investigations of these events remain ongoing. The ultimate costs of these incidents are unknown at this time, and it is possible that the Company may incur additional fines, penalties, or other financial or operational costs related to these events.

Environmental and Regulatory Matters

Colonial’s operations are subject to federal, state, and local laws and regulations that govern the transportation, handling, storage, and disposal of hazardous substances, and the remediation of sites that may be affected by such activity. Permits and environmental controls are required for certain of the Company’s operations, and these permits and controls are subject to modification, renewal, and revocation by their issuing authorities. Environmental laws and regulations have generally become stricter in recent years, and the cost of responding to future changes may be substantial. While the Company believes that it is currently in compliance with all material environmental laws and regulations, and that it has taken reasonable steps to ensure such compliance, there can be no assurance that it will not incur significant costs to remediate violations of such laws and regulations or to comply with changes in, or stricter or different interpretation of, existing laws and regulations. Such costs could have a material adverse effect on the Company’s financial results.

Accrued liabilities for legal and regulatory contingencies totaled $83.7 million and $83.9 million at March 31, 2019 and December 31, 2018, respectively. The Company classifies these liabilities as current or noncurrent based on management’s estimate regarding the timing of payments. Colonial anticipates that it will expend approximately $33.9 million of the amount accrued as of March 31, 2019 during the next twelve months. These accruals contemplate legal and environmental contingencies involving 39 incident sites and do not include amounts involving the customer referenced earlier in this report. Due to the nature of these contingencies, the timing of the distribution of related payments is not estimable.

12

Note G – Commitments and Contingencies (continued)

The estimates of the Company’s liabilities that are discussed throughout this report are based upon currently available facts, existing technology, and presently enacted laws and regulations. When the available information is only sufficient to estimate a range of probable liability and no amount within the range is more likely to be paid than any other, the lower end of the estimated range is used to determine the liability. Estimates of environmental liabilities may be revised in accordance with results of additional testing and geological studies, the success of remediation initiatives addressing the most significant areas of contamination, the rate at which site conditions may change, and the requirements of various regulatory agencies that may be monitoring the Company’s efforts. While it is reasonably possible that material liabilities in excess of amounts recorded may exist, the Company is presently unable to make further estimates regarding such amounts.

Self-Insurance

Colonial is partially self-insured for risks including, but not limited to, environmental damage arising from events whose onset may be either sudden or gradual, physical loss to property, workers’ compensation, and automobile liability. As of March 31, 2019, the Company’s self- insured retention for claims involving the majority of these risks was limited to $20 million per occurrence. Colonial’s insurance program provides up to $800 million of indemnification for environmental events, which is subject to the aforementioned self-insurance retention thresholds. The Company’s insurance does not cover every potential risk associated with operating a pipeline and other facilities.

Note H – Defined Benefit Pension Plan

Colonial does not expect to make a qualified pension contribution during 2019.

Note I – Income Taxes

Colonial files income tax returns with the Internal Revenue Service (IRS) and states in which the pipeline operates or has employees. The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for any discrete items in the relevant period. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made.

On December 22, 2017, the TCJA was signed into law. The TCJA reduced the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. Colonial prospectively adopted ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, and recorded a $6.2 million adjustment that effective increased retained earnings and decreased tax effects otherwise “stranded” in AOCI. The effect of this adjustment is presented in the Interim Condensed Consolidated Statements of Income and Retained Earnings.

13

Note I – Income Taxes (continued)

The IRS continues to issue regulations that provide further interpretation and guidance on the law and each respective state‘s adoption of the provisions contained in the Tax Reform Legislation remains uncertain. The Company does not believe these regulations will have a material impact on the Company’s results of operations, financial condition or cash flows.

The Company files income tax returns with the Internal Revenue Service (IRS) and states in which the pipeline operates or has employees. As of March 31, 2019, the Company’s tax years 2015 through 2017 are subject to examination by the IRS and the Company’s tax years 2014 through 2017 are subject to examination by certain state and local authorities. The Company is currently under examination by the IRS for the 2016 calendar year and the state of New Jersey for calendar years 2014 through 2017. The result of these examinations is not currently expected to have a material impact upon the Company’s financial statements, results of operations or cash flows.

Note J – Acquisition

On May 1, 2018 (the Closing Date), the Company acquired all of the membership interests of Northstar Port Arthur LLC (Northstar), the owner of a marine terminal located in Port Arthur, Texas. The purchase price for the transaction was $101.2 million. The acquisition expands the Company’s footprint and operational capabilities in the Gulf Coast region. The transaction was accounted for as a business combination in accordance with relevant accounting literature.

Beginning on the Closing Date, the Company included the operating results of Northstar on a consolidated basis within its consolidated financial statements. The contribution of Northstar’s revenues and expenses to Colonial’s financial results presented herein is immaterial. The Company expensed all acquisition and transaction costs associated with the acquisition. Under the acquisition method of accounting, Colonial made an assignment of the acquisition price to Northstar’s net tangible and intangible assets based on their estimated fair values as of the Closing Date. The excess of the acquisition price over the net tangible and identifiable intangible assets has been recorded as Goodwill within the Interim Condensed Consolidated Balance Sheets. This goodwill is deductible for income tax purposes.

14

Note J – Acquisition (continued)

A summary of the purchase price allocation is as follows:

Net Assets Acquired (in thousands):
Assets acquired:
Cash and cash equivalents	$	16
Accounts receivable		737
Property, plant and equipment		21,896
Customer relationships		49,500
Goodwill		29,501
Total assets acquired		101,650
Liabilities assumed:
Accounts payable and accrued expenses		(431	)
Total liabilities assumed		(431	)
Net assets acquired	$	101,219

Of the total purchase price, $49.5 million has been allocated to identifiable intangible assets, namely customer relationships. The value allocated to customer relationships is being amortized on a straight-line basis over a period of 20 years. Amortization expense for these customer relationships was $0.6 million for the three-month period ending March 31, 2019. Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized, including expected synergies from the acquisition.

15

EX-99.3

Exhibit 99.3

Consolidated Financial Statements and Report

of Independent Certified Public Accountants

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

December 31, 2018

Contents

Report of Independent Certified Public Accountants	1
Consolidated balance sheet	3
Consolidated statement of income and retained earnings	4
Consolidated statement of comprehensive income	5
Consolidated statement of cash flows	6
Notes to consolidated financial statements	7

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors and Stockholders

Explorer Pipeline Company

We have audited the accompanying consolidated financial statements of Explorer Pipeline Company (a Delaware corporation) and subsidiary, which comprise the consolidated balance sheet as of December 31, 2018, and the related consolidated statements of income and retained earnings, comprehensive income, and cash flows for the year then ended, and the related notes to the financial statements.

Management’s responsibility for the financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

1

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Explorer Pipeline Company and subsidiary as of December 31, 2018, and the results of their operations and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

/s/ GRANT THORNTON LLP

Tulsa, Oklahoma

February 28, 2019

2

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Consolidated balance sheet

December 31, 2018

	2018
Assets
Current assets:
Cash and cash equivalents	$	2,568,353
Accounts receivable - trade		45,199,411
Accounts receivable - affiliates		3,938,800
Income tax receivable		13,202,563
Unbilled revenue - trade		4,500,400
Unbilled revenue - affiliates		258,344
Warehouse stock inventory		16,426,011
Other current assets		6,757,950
Total current assets		92,851,832
Property, plant and equipment, at cost (note 3)		1,008,191,591
Accumulated depreciation		(480,559,470	)
Net property, plant and equipment		527,632,121
Other non-current assets		7,784,294
Total assets	$	628,268,247
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable - trade	$	18,631,419
Accounts payable - affiliates		2,918,438
Income tax payable		386,035
Interest payable		2,493,548
Other current liabilities		11,758,817
Current maturities of long-term debt		6,652,470
Total current liabilities		42,840,727
Long-term debt, less current maturities (note 4)		338,274,365
Deferred income taxes, net		82,067,903
Other non-current liabilities		20,788,222
Commitments and contingencies (note 7)
Stockholders’ equity:
Common stock, $1 par value per share; 21,920 authorized and issued as of December 31, 2018		21,920
Accumulated other comprehensive loss		(6,423,315	)
Retained earnings		150,698,425
Total stockholders’ equity		144,297,030
Total liabilities and stockholders’ equity	$	628,268,247

See accompanying notes to consolidated financial statements.

3

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Consolidated statement of income and retained earnings

December 31, 2018

	2018
Revenues:
Transportation revenue	$	409,669,260
Allowance oil revenue		9,589,061
Storage revenue		2,045,500
Blending revenue		7,128,437
Other income		13,061,091
Total revenues		441,493,349
Operating expenses:
Operations and maintenance		109,063,099
General and administrative		43,718,042
Taxes, other than income taxes		12,329,734
Depreciation		26,733,317
Interest expense		14,782,385
Total operating expenses		206,626,577
Income before income taxes		234,866,772
Income taxes:
Current income tax expense (note 5)		49,210,500
Deferred income tax expense (note 5)		5,871,666
Total income taxes		55,082,166
Net income		179,784,606
Retained earnings, beginning of year		180,644,380
Retained earnings, available		360,428,986
Less: dividends paid		(209,730,561	)
Retained earnings, end of year	$	150,698,425

See accompanying notes to consolidated financial statements.

4

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Consolidated statement of comprehensive income

December 31, 2018

	2018
Net income	$	179,784,606
Other comprehensive gain, net of tax:
Pension and other postretirement benefits		1,020,140
Comprehensive income	$	180,804,746

See accompanying notes to consolidated financial statements.

5

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Consolidated statement of cash flows

December 31, 2018

	2018
Cash from operating activities:
Net income	$	179,784,606
Reconciliation of net income to net cash provided by operating activities:
Depreciation		26,733,317
Amortization of debt issuance cost		252,882
Loss on the sale of assets		—
Deferred income tax expense		6,188,490
Pension plan expense		2,792,979
Post retirement medical plan expense		462,546
Changes in assets and liabilities:
Decrease in accounts receivable		12,166,401
Increase in inventories		(1,321,375	)
Decrease in income taxes		18,079,434
Decrease in other assets		13,478,178
Decrease in accounts payable and accrued liabilities		(7,878,291	)
Minimum pension liability - employer contributions		1,465,000
Decrease in other liabilities		(3,148,621	)
Net cash provided by operating activities		249,055,546
Cash from investing activities:
Purchases of property and equipment		(25,093,975	)
Proceeds from sale of property and equipment		83,782
Net cash used in investing activities		(25,010,193	)
Cash from financing activities:
Proceeds from borrowings		69,000,000
Payments on debt		(81,048,824	)
Debt issuance costs		—
Dividends paid		(209,730,561	)
Net cash used in financing activities		(221,779,385	)
Net increase in cash and cash equivalents		2,265,968
Cash and cash equivalents, beginning of period		302,385
Cash and cash equivalents, end of period	$	2,568,353
Supplemental cash flows:
Capital expenditures included in accrued liabilities and accounts payable	$	1,808,281
Cash paid for interest	$	14,104,829
Cash paid for income taxes	$	32,182,000
Impact of pension accounting:
Increase in other current liabilities and other non-current liabilities	$	(1,313,801	)
Increase to accumulated other comprehensive loss	$	1,020,140
Decrease to deferred income tax liability	$	293,661

See accompanying notes to consolidated financial statements.

6

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to consolidated financial statements

December 31, 2018

1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Description of Business

Explorer Pipeline Company and subsidiary (the “Company”) owns and operates an approximately 1,830 mile common carrier pipeline that primarily transports gasoline, diesel, diluent and jet fuel from the Gulf Coast refining complex to the Midwest United States. Through connections with other refined petroleum pipelines, the Company serves more than seventy cities in sixteen states. The Company is dependent upon continued refined products demand in the population centers it serves, and the availability of petroleum products supplied by its customers. The Company’s transportation revenues derived from its affiliates were 8% for the year ended December 31, 2018. The Company had 59 non-affiliate customers in 2018. Transportation revenues include revenues from 11 significant non-affiliates for 63% in 2018.

The pipeline operations of the Company are subject to the regulatory authority of the Federal Energy Regulatory Commission (“FERC”) as to rate filings, accounting and other matters.

b. Principles of Consolidation

The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiary, Explorer Pipeline Services Company. All intercompany balances and transactions have been eliminated in consolidation.

c. Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents.

The Company’s cash balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) which at times exceed the FDIC insurance limits. However, management believes that the Company’s counterparty risks are minimal based on the creditworthiness, reputation and history of the institutions selected.

d. Transportation Revenue

Transportation revenue is recorded at delivery, with the exception of year-end when one half of the revenue on shipments in transit is accrued.

e. Warehouse Stock Inventory

Warehouse stock inventory, which primarily consists of critical spare parts, is stated at the lower of average cost or market.

f. Property, Plant and Equipment

Property, plant and equipment are stated at cost, including direct labor incurred in connection with the construction of pipeline assets. Retirements and sales of property, plant and equipment are charged to accumulated depreciation as prescribed by FERC. Depreciation is calculated using the straight line method at rates approved by FERC. These rates range from 2.25% to 20.00% per annum.

7

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to consolidated financial statements - continued

December 31, 2018

g. Impairments

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company did not recognize any impairment expense in 2018.

h. Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

On December 22, 2017, the President signed the Tax Cuts and Jobs Act (“TCJA”) into law, which enacted significant changes to the federal income tax laws. According to generally accepted accounting standards, a company is required to record the effects of an enacted tax law or rate change in the period of enactment. Effective January 1, 2018, the federal corporate tax rate decreased from 35 percent to 21 percent as a result of the TCJA.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely to be realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The tax years 2014 through 2018 remain subject to examination by the major tax jurisdictions.

i. Pension and Other Postretirement Plans

The Company has a defined benefit pension plan covering all employees employed prior to January 1, 2007. The benefits are based on years of service and employee compensation. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. The Company also sponsors a defined benefit healthcare plan for all eligible retired employees and their eligible dependents.

The Company records annual amounts relating to its pension and postretirement plans based on calculations that incorporate actuarial and various other assumptions, including discount rates, mortality, assumed rates of return, compensation increases, turnover rates and healthcare cost trend rates. The Company reviews its assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is appropriate to do so. The effect of modifications to those assumptions is recorded in accumulated other comprehensive income and amortized to net periodic cost over future periods using the corridor method. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience and market conditions. The net periodic costs are recognized as retirees and their eligible dependents render the actions necessary to earn the postretirement benefits.

j. Environmental Remediation Contingencies

Liabilities for environmental remediation contingencies, environmental remediation costs arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. The costs for a specific clean-up site are discounted if the aggregate amount of the obligation and the amount and timing of the cash payments

8

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to consolidated financial statements - continued

December 31, 2018

for that site are fixed or reliably determinable based upon information derived from the remediation plan for that site. Recoveries from third parties that are probable of realization are separately recorded, and are not offset against the related environmental liability.

Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of a remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. The discounted and undiscounted amount of the environmental remediation obligations is $3,506,554 and $3,683,850 as of December 31, 2018. The discount rate used was 4.04% at December 31, 2018. The discounted liability is reflected in other current liabilities and other non-current liabilities on the consolidated balance sheet.

Recoveries for environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. The insurance receivable is reflected in other current assets and other non-current assets on the consolidated balance sheet. Insurance receivables included in other current assets were $543,366 at December 31, 2018.

k. Asset Retirement Obligation

The Company is obligated by contractual or regulatory requirements to remove certain pipeline assets and/or perform other remediation of sites where such assets are located upon the retirement of those assets. The Company will record an asset retirement obligation for pipeline assets in the periods in which settlement dates are reasonably determinable.

l. Business Interruption Insurance Reimbursements

The Company received $7,210,753 in insurance reimbursements related to Hurricane Harvey in the year ended December 31, 2018. Insurance proceeds for the year ended December 31, 2018 were included in Other Income as these funds were the final settlement received related to the claim and did not directly offset costs incurred, and rather paid for potential unearned revenue from the incident.

m. Use of Estimates

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. These estimates include depreciation periods for property, plant and equipment, pension and postretirement benefit obligations and environmental remediation contingencies.

n. Recent Accounting Pronouncements

In March 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost”, which requires that an employer disaggregate the service cost component from other components of net benefit cost. This ASU also provides explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. This ASU is effective for the Company for annual reporting periods beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, 2019, given the Company is not considered a public business entity as defined by the Securities and Exchange Commission (“SEC”). The Company is evaluating the impact that this new guidance will have on the consolidated financial statements.

9

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to consolidated financial statements - continued

December 31, 2018

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”, which is intended to provide guidance for cash flow statement classification. The guidance provides for settlement of zero coupon debt instruments that are insignificant in relation to the effective interest rate of the borrower; for contingent consideration payments made after a business combination; for proceeds from the settlement of corporate-owned life insurance policies; for beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The Company is required to apply the guidance for the annual period beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the impact that this new guidance will have on the consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which is intended to provide guidance for lessees that will be required to recognize various conditions for all leases (with the exception of short-term leases) at the commencement. The guidance provides that a lease liability which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The Company is required to apply the guidance for the annual period beginning after December 15, 2019. Early adoption is permitted. In July 2018, the FASB issued additional guidance which permits an additional, optional method of adoption. Under the original standard issued in 2016, lessees and lessors were required to apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest period presented in the financial statements. However, under the new transition method allowed, an entity may elect to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company is evaluating the impact that this new guidance will have on the consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” which clarifies the principles for recognizing revenue based on the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for the Company for annual reporting periods beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, 2019, given the Company is not considered a public business entity as defined by the SEC. The guidance permits two methods of adoption: retrospectively to each prior reporting periods presented (the full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method).

The Company is in the process of assessing the impact of the new revenue recognition model on its consolidated financial statements by assessing the performance obligations in its contracts with customers and the impact of timing of revenue recognition on the income statement; however, a quantitative impact, if any, cannot be estimated at this time. Management has educated the business development group on the new revenue recognition standard and continues to evaluate additional guidance issued by the FASB and industry groups. The Company expects to adopt the new standard using the modified retrospective method for the year ended December 31, 2019, and does not expect to record a cumulative effect of the initial adoption of the new standard.

10

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to consolidated financial statements - continued

December 31, 2018

2 - COMPANY OWNERSHIP

The Company’s stockholders at December 31, 2018:

	Shares		Percentage
Phillips 66 Partners Holdings LLC		4,809		21.94	%
Shell Pipeline Company LP		5,693		25.97	%
Shell Midstream Operating LLC		2,767		12.62	%
MPLX Operations LLC		5,372		24.51	%
Sunoco Pipeline LP		3,279		14.96	%
Total shares authorized and issued		21,920		100.00	%

3 - PROPERTY, PLANT AND EQUIPMENT

A summary of property, plant and equipment by class of asset as of December 31, 2018 is as follows:

	2018
Land	$	7,539,036
Right-of-way		26,594,972
Line pipe and fittings		500,764,909
Buildings		19,763,695
Tanks, pumping and station equipment		401,316,558
Office furniture, vehicles and other		37,571,980
Noncarrier property		277,306
Construction in progress		14,363,135
	$	1,008,191,591

Total depreciation of property, plant and equipment for 2018 was $26,733,317. The Company capitalized interest of $0 in the year ended December 31, 2018.

4 - DEBT

The Company has a $100,000,000 Revolving Credit agreement and a $65,000,000 Advancing Term loan facility with Bank of Oklahoma, BANCFIRST and US Bank, executed August 21, 2014, which was originally set to mature on August 21, 2019. The credit facility was refinanced on August 14, 2018 and will mature on August 14, 2023. There was $65,000,000 outstanding on the Advancing Term loan as of December 31, 2018. There was $4,000,000 outstanding under the Revolving Credit agreement at December 31, 2018.

The deferred debt issuance costs related to the Company’s credit facility are classified as a noncurrent asset due to the revolving nature of that facility. Deferred debt issuance costs are being amortized over the lives of the respective terms. Amortization of deferred debt issuance costs was $252,882 for 2018 and is reflected in interest expense on the consolidated statement of income and retained earnings.

11

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to consolidated financial statements - continued

December 31, 2018

Required annual principal payments are as follows as of December 31, 2018:

	L			P			Advancing Term		Revolver		Total
2019	$	6,818,182		$	—		$	—	$	—	$	6,818,182
2020		6,818,182			—			—		—		6,818,182
2021		6,818,182			—			—		—		6,818,182
2022		6,818,182			—			—		—		6,818,182
2023		—			—			65,000,000		4,000,000		69,000,000
Thereafter		—			250,000,000			—		—		250,000,000
Less deferred debt issuance cost		(575,895	)		(769,998	)		—		—		(1,345,893	)
	$	26,696,833		$	249,230,002		$	65,000,000	$	4,000,000	$	344,926,835
Less current maturities:		6,652,470			—			—		—		6,652,470
Long-term debt	$	20,044,363		$	249,230,002		$	65,000,000	$	4,000,000	$	338,274,365

The notes have certain restrictive financial debt covenants, the most significant of which are a leverage ratio and a coverage ratio. The Company was in compliance with all restrictive financial debt covenants as of December 31, 2018.

The Company had letters of credit outstanding of $2,420,000 at December 31, 2018 related to insurance company requirements, current projects and remediation projects. All letters of credit outstanding reduced the amount available on the revolving line of credit. At December 31, 2018, there was $95,080,000 available for borrowings on the line of credit.

5 - INCOME TAXES

Income tax expense (benefit) for the year ended December 31, 2018 consists of:

	2018
Current:
Federal	$	43,261,816
State		5,948,684
		49,210,500
Deferred:
Federal		5,871,666
State		—
		5,871,666
	$	55,082,166

Temporary differences between the consolidated financial statement carrying amounts and tax basis of property, plant and equipment (principally, differences in depreciation), certain accrued liabilities and pension and other postretirement benefit plan liabilities contributed to substantially all of the net deferred tax liability at December 31, 2018.

12

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to consolidated financial statements - continued

December 31, 2018

6 - PENSION AND OTHER POSTRETIREMENT BENEFITS

The Company has a defined benefit pension plan covering all employees employed prior to January 1, 2007. The benefits are based on years of service and employee’s compensation.

In addition to the defined benefit pension plan, the Company makes available postretirement medical benefits to all eligible retired employees and their eligible dependents. For the year ended December 31, 2018, participants under the age of 65 were eligible to receive reimbursement through a Health Reimbursement Account for eligible premium expenses associated with health insurance enrollment. For the 2018 Plan Year, eligible retirees were eligible for up to $500 per month of eligibility and eligible retirees plus eligible dependents were eligible for up to $1,200 per month of eligibility. Upon reaching age 65, participants pay all of any Part D Prescription Plan and 30% of the fully insured rate for the cost of medical benefits.

In September 2015, the Company’s board of directors approved to amend the Company’s postretirement plan to no longer include life benefits. In November 2015, the plan was amended and became effective January 1, 2016. Due to this change being approved prior to December 31, 2015, the accrued benefit cost was adjusted and the prior service cost of $4,474,046 is being amortized from accumulated other comprehensive loss into net periodic benefit cost over the next 2.5 years:

2019	$	813,463
2020		813,463
2021		406,731

For the year ending December 31, 2018 the plan was contributory and participants under age 65 paid approximately 35% of the cost of medical benefits. Upon reaching age 65, participants paid 30% of the cost of medical benefits.

The measurement date used to determine pension and other postretirement benefit obligations and plan assets for the pension plan and the postretirement benefit plan is December 31.

The following table sets forth the plans’ benefit obligations, fair value of plan assets, and funded status at December 31, 2018:

	Pension Benefits			Postretirement Benefits
	2018			2018
Projected benefit obligation	$	(38,339,572	)	$	(10,082,284	)
Fair value of plan assets		29,695,654			—
Funded status	$	(8,643,918	)	$	(10,082,284	)
Accrued benefit cost	$	(8,643,918	)	$	(10,082,284	)

Accrued benefit cost is reflected in other current and other non-current liabilities on the consolidated balance sheet.

Accumulated other comprehensive (income)/loss is $6,423,315 related to the plans at December 31, 2018. This amount is primarily comprised of net actuarial loss of $10,410,771 at December 31, 2018.

The accumulated benefit obligation for the pension plan was $33,531,170 at December 31, 2018.

13

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to consolidated financial statements - continued

December 31, 2018

Net periodic benefit cost (gain) recognized and other changes in plan assets and benefit obligations recognized in accumulated other comprehensive income (loss) in 2018 were:

	Pension Benefits			Postretirement Benefits
	2018			2018
Net periodic benefit cost (gain) recognized	$	1,974,681		$	(107,018	)
Other changes in plan assets and benefit obligations:
Net actuarial loss/(gain)		1,995,159			(1,073,512	)
Amortization of net (loss)/gain		(3,048,911	)		—
Amortization of prior service cost		—			813,463
Total recognized in accumulated other comprehensive income (loss)		(1,053,752	)		(260,049	)
Total recognized in net periodic benefit cost and accumulated other comprehensive income (loss)	$	920,929		$	(367,067)

The net loss for the defined benefit pension plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year is $803,000. The prior service credit for the defined benefit postretirement plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year is $813,463.

Weighted average assumptions used to determine benefit obligations at December 31, 2018 were as follows:

	Pension benefits			Postretirement benefits
	2018			2018
Discount rate		4.02	%		4.17	%
Rate of compensation increase		3.00	%		—

Weighted average assumptions used to determine net periodic benefit cost for the year ended December 31, 2018 were as follows:

	Pension benefits			Postretirement benefits
	2018			2018
Discount rate		3.37	%		3.56	%
Expected long-term rate of return on plan assets		6.00	%		—
Rate of compensation increase		3.00	%		—

The Company’s overall expected long-term rate of return on assets is 6.00%. The expected long-term rate of return is based on the portfolio as a whole and not on the sum of the returns on individual asset categories. The return is based exclusively on historical returns, without adjustments.

For measurement purposes, a 6.25% annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 2018, decreasing to an ultimate 4.75% trend in 2030.

14

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to consolidated financial statements - continued

December 31, 2018

The following table summarizes benefit costs, benefits paid and employer contributions for the year ended December 31, 2018:

	Pension benefits		Postretirement benefits
	2018		2018
Benefit cost	$	3,835,138	$	(107,018	)
Benefits paid		6,388,436		243,899
Employer contributions		1,465,000		243,899

a. Plan Assets

The asset allocations of the Company’s pension benefits at December 31, 2018 were as follows:

	Pension benefits—Plan assets
			Fair value measurements at December 31, 2018
	Total		Quoted prices in active markets for identical assets (Level 1)		Significant observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Asset category:
Cash and money markets	$	5,892,924	$	5,892,924	$	—	$	—
Mutual funds		23,802,730		23,802,730
Total	$	29,695,654	$	29,695,654	$	—	$	—

	Plan assets
	December 31,
	2018
Asset category:
Cash and money markets		19.8	%
Mutual Funds		80.2	%
Total		100.0	%

The Company’s investment policies and strategies for the pension plan use target allocations for the individual asset categories. The Company’s investment goals are to maximize returns subject to specific risk management policies. Its risk management policies permit investments in mutual funds, and prohibit direct investments in debt and equity securities and derivative financial instruments. The Company addresses diversification by the use of mutual fund investments whose underlying investments are in domestic and international fixed income securities and domestic and international equity securities. These mutual funds are readily marketable and can be sold to fund benefit payment obligations as they become payable.

15

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to consolidated financial statements - continued

December 31, 2018

b. Cash Flows

The Company’s funding policy is to contribute annually no less than the minimum requirement under the Employee Retirement Income Security Act of 1974. Pursuant to this policy, the Company expects to contribute $3,244,217 and $319,901 to its pension plan and postretirement benefit plan, respectively, in 2019.

The expected benefits are based on the same assumptions used to measure the Company’s benefit obligations at December 31, 2018 and include estimated future employee service. The aggregate pension and postretirement benefits expected to be paid in the future years are:

2019	$	3,564,118
2020		3,334,398
2021		2,855,115
2022		4,619,920
2023		3,262,446
Thereafter		17,421,459

The Company also has a contributory thrift plan which is available to substantially all employees. The Company matches employee contributions up to 6% of the employee’s base salary. In addition, a separate 401(k) plan went into effect January 1, 2007 for all employees hired subsequently. Total contributions by the Company to the two plans were $1,937,707 for 2018.

7 - COMMITMENTS AND CONTINGENCIES

The Company leases various office premises and equipment. All of the Company’s leases are classified as operating leases.

The Company has entered into both cancelable and non-cancelable agreements for pipeline right-of-way. All right-of-way agreements are essentially future lease commitments since they relate to the operation of the pipeline and are necessary for its continued operation. The annual rental payments for these agreements were $462,987 for December 31, 2018.

The following is a schedule by year of minimum future rentals on operating leases for office premises, equipment and right-of-way commitments as of December 31, 2018:

2019	$	2,848,359
2020		1,965,449
2021		1,609,232
2022		1,632,277
2023		464,869
Thereafter		3,751,604

Total rental expense was $4,655,540 for the year ended December 31, 2018 and is reflected in general and administrative expenses on the consolidated statement of income and retained earnings. It is expected that, in the normal course of business, leases that expire will be renewed or replaced by other leases.

The Company must maintain certain levels of throughput volumes through the terminals. The rates paid by the Company under the agreements approximate current market rates. In addition to the terminal agreements, the Company’s minimum commitments are approximately 4 million barrels for 2019.

16

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to consolidated financial statements - continued

December 31, 2018

The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

8 - FAIR VALUE MEASUREMENTS

a. Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, accounts receivable, receivables from affiliates, interest and other receivables, other current assets, accounts payable, accrued expenses and other current liabilities, and accrued interest approximate fair value because of the short maturity of these instruments. The estimated fair value of the Company’s Series L and P unsecured notes and credit facility at December 31, 2018 was $360,482,960. The carrying amount of these notes was $346,272,728 at December 31, 2018.

The fair values of the financial instruments discussed above represent management’s best estimates of the amounts that would be received to sell those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants at that date. Those fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Company’s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by the Company based on the best information available in the circumstances.

The fair value of the Company’s long-term debt is measured using quoted offered side prices when quoted market prices are available. If quoted market prices are not available, the fair value is determined by discounting the future cash flows of each instrument at rates that reflect, among other things, market interest rates and the Company’s credit standing. In determining an appropriate spread to reflect its credit standing, the Company considers credit default swap spreads, bond yields of other long term debt offered by the Company and interest rates currently offered to the Company for similar debt instruments of comparable maturities by the Company’s bankers as well as other banks that regularly compete to provide financing to the Company.

b. Fair Value Hierarchy

The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

• Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

• Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

• Level 3 inputs are unobservable inputs for the asset or liability.

The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

The consolidated financial statements as of and for the year ended December 31, 2018 do not include any nonrecurring fair value measurements relating to assets or liabilities.

17

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to consolidated financial statements - continued

December 31, 2018

9 - RELATED PARTIES

In the normal course of business, the Company has transactions with its affiliates. The Company’s transportation revenues derived from its affiliates were 8% for the year ended December 31, 2018.

10 - SUBSEQUENT EVENTS

Management has evaluated subsequent events through February 28, 2019, the date these financial statements were available to be issued. No subsequent events were identified requiring recognition or disclosure in the accompanying consolidated financial statements.

18

EX-99.4

Exhibit 99.4

Condensed Consolidated Interim Financial Statements

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

As of March 31, 2019 and for the three months ended March 31, 2019 and 2018

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Condensed consolidated interim balance sheets

(unaudited)

	March 31, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	13,457,360		$	2,568,353
Accounts receivable—trade		47,650,051			45,199,411
Accounts receivable—affiliates		4,268,772			3,938,800
Income tax receivable		4,802,004			13,202,563
Unbilled revenue—trade		4,500,400			4,500,400
Unbilled revenue—affiliates		258,344			258,344
Warehouse stock inventory		16,123,174			16,426,011
Other current assets		5,482,305			6,757,950
Total current assets		96,542,410			92,851,832
Property, plant and equipment, at cost (note 3)		1,010,168,216			1,008,191,591
Accumulated depreciation		(487,251,345	)		(480,559,470	)
Net property, plant and equipment		522,916,871			527,632,121
Other non-current assets		8,260,335			7,784,294
Total assets	$	627,719,616		$	628,268,247
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable—trade	$	19,235,799		$	18,631,419
Accounts payable—affiliates		3,064,259			2,918,438
Income tax payable		972,434			386,035
Interest payable		4,365,508			2,493,548
Other current liabilities		14,580,811			11,758,817
Current maturities of long-term debt		6,652,470			6,652,470
Total current liabilities		48,871,281			42,840,727
Long-term debt, less current maturities (note 4)		338,274,365			338,274,365
Deferred income taxes, net		83,132,009			82,067,903
Other non-current liabilities		21,263,320			20,788,222
Commitments and contingencies (note 6)
Stockholders’ equity:
Common stock, $1 par value per share; 21,920 authorized and issued as of March 31, 2019 and December 31, 2018		21,920			21,920
Accumulated other comprehensive loss		(6,423,315	)		(6,423,315	)
Retained earnings		142,580,036			150,698,425
Total stockholders’ equity		136,178,641			144,297,030
Total liabilities and stockholders’ equity	$	627,719,616		$	628,268,247

See accompanying notes to condensed consolidated interim financial statements.

1

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Condensed consolidated interim statements of income and retained earnings

(unaudited)

	Three Months Ended
	March 31, 2019			March 31, 2018
Revenues:
Transportation revenue	$	84,298,691		$	98,751,838
Allowance oil revenue		1,755,199			2,166,531
Storage revenue		886,040			602,250
Blending revenue		1,228,199			1,343,841
Other income		1,223,257			1,218,981
Total revenues		89,391,386			104,083,441
Operating expenses:
Operations and maintenance		21,948,156			27,121,675
General and administrative		10,490,507			9,956,006
Taxes, other than income taxes		3,285,890			3,248,235
Depreciation		6,854,913			6,634,724
Interest expense		3,650,799			3,596,009
Total operating expenses		46,230,265			50,556,649
Income before income taxes		43,161,121			53,526,792
Income taxes:
Current income taxes (note 5)		8,918,123			11,139,459
Deferred income taxes (note 5)		1,064,106			1,329,154
Total income taxes		9,982,229			12,468,613
Net income		33,178,892			41,058,179
Retained earnings, beginning of period		150,698,425			180,644,380
Retained earnings, available		183,877,317			221,702,559
Less: dividends paid		(41,297,281	)		(42,502,880	)
Retained earnings, end of period	$	142,580,036		$	179,199,679

See accompanying notes to condensed consolidated interim financial statements.

2

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Condensed consolidated interim statements of cash flows

(unaudited)

	Three Months Ended March 31,
	2019			2018
Cash from operating activities
Net income	$	33,178,892		$	41,058,179
Reconciliation of net income to net cash provided by operating activities:
Depreciation		6,854,913			6,634,724
Amortization of debt isuance cost		63,220			63,220
Deferred income tax expense		1,064,106			—
Changes in assets and liabilities:
(Increase) decrease in accounts receivable		(2,780,612	)		8,127,703
(Increase) decrease in inventories		302,837			(128,870	)
Decrease in income taxes		8,986,958			15,924,031
Decrease in other assets		736,384			5,303,423
Increase (decrease) in accounts payable and accrued liabilities		5,444,152			(2,320,827	)
Increase (decrease) in other liabilities		475,098			(1,022,284	)
Net cash provided by operating activities		54,325,948			73,639,299
Cash from investing activities:
Purchases of property and equipment		(2,146,860	)		(5,852,334	)
Proceeds from sale of property and equipment		7,200			42,165
Net cash used in investing activities		(2,139,660	)		(5,810,169	)
Cash from financing activities:
Payments on debt		—			(7,668,142	)
Dividends paid		(41,297,281	)		(42,502,880	)
Net cash used in financing activities		(41,297,281	)		(50,171,022	)
Net increase in cash and cash equivalents		10,889,007			17,658,108
Cash and cash equivalents, beginning of period		2,568,353			302,385
Cash and cash equivalents, end of period	$	13,457,360		$	17,960,493
Supplemental cash flows:
Cash paid for interest	$	1,633,501		$	1,689,925

See accompanying notes to condensed consolidated interim financial statements.

3

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to condensed consolidated interim financial statements

March 31, 2019 and 2018

(unaudited)

1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Description of Business

Explorer Pipeline Company and subsidiary (the “Company”) owns and operates an approximate 1,830 mile common carrier pipeline that primarily transports gasoline, diesel, diluent and jet fuel from the Gulf Coast refining complex to the Midwest United States. Through connections with other refined petroleum pipelines, the Company serves more than seventy cites in sixteen states. The Company is dependent upon continued refined products demand in the population centers it serves, and the availability of petroleum products supplied by its customers. Approximately 7% of the Company’s operating revenues were derived from its affiliates for both of the three months ended March 31, 2019 and 2018. The Company had approximately 44 and 51 non-affiliate customers for the three months ended March 31, 2019 and 2018, respectively. Operating revenues include revenues from 10 significant non-affiliates for approximately 71% and 64% of operating revenues for the three months ended March 31, 2019 and 2018, respectively.

The pipeline operations of the Company are subject to the regulatory authority of the Federal Energy Regulatory Commission (“FERC”) as to rate filings, accounting and other matters.

b. Principles of Consolidation

The condensed consolidated financial statements include the financial statements of the Company and its wholly owned subsidiary, Explorer Pipeline Services Company. All significant intercompany balances and transactions have been eliminated in consolidation.

c. Interim Financial Statements

The accompanying condensed consolidated financial statements of the Company have not been audited by the Company’s independent certified public accountants, except that the condensed consolidated balance sheet at December 31, 2018 is derived from the audited consolidated financial statements. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments necessary to present fairly the Company’s consolidated financial statements. All such adjustments are of normal, recurring nature. In preparing the accompanying condensed consolidated financial statements, management has made certain estimates and assumptions that affect reported amounts in the condensed consolidated financial statements and disclosures. Actual results may differ from those estimates. The results for interim periods are not necessarily indicative of annual results.

Certain disclosures have been condensed in or omitted from these consolidated financial statements. Accordingly, these condensed notes to the consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2018.

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. These estimates include depreciation periods for property, plant and equipment, pension and postretirement benefit obligations and environmental remediation contingencies.

4

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to condensed consolidated interim financial statements - continued

March 31, 2019 and 2018

(unaudited)

d. Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents.

The Company’s cash balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) which at times exceed the FDIC insurance limits. However, management believes that the Company’s counterparty risks are minimal based on the creditworthiness, reputation and history of the institutions selected.

e. Transportation Revenue

Transportation revenue is recorded at delivery, with the exception of period end when one half of the revenue on shipments in transit is accrued.

f. Warehouse Stock Inventory

Warehouse stock inventory, which primarily consists of critical spare parts, is stated at the lower of average cost or market.

g. Property, Plant and Equipment

Property, plant and equipment are stated at cost, including direct labor incurred in connection with the construction of pipeline assets. Retirements and sales of property, plant and equipment are charged to accumulated depreciation as prescribed by FERC. Depreciation is calculated using the straight line method at rates approved by FERC. These rates range from 2.25% to 20.00% per annum.

h. Impairments

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company did not recognize any impairment expense for the three months ended March 31, 2019 or 2018.

i. Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

5

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to condensed consolidated interim financial statements - continued

March 31, 2019 and 2018

(unaudited)

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The tax years 2014 through 2018 remain subject to examination by the major tax jurisdictions.

j. Pension and Other Postretirement Plans

The Company has a defined benefit pension plan covering all employees employed prior to January 1, 2007. The benefits are based on years of service and employee compensation. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. The Company also sponsors a defined benefit healthcare plan for all eligible retired employees and their eligible dependents.

The Company records annual amounts relating to its pension and postretirement plans based on calculations that incorporate actuarial and various other assumptions, including discount rates, mortality, assumed rates of return, compensation increases, turnover rates and healthcare cost trend rates. The Company reviews its assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is appropriate to do so. The effect of modifications to those assumptions is recorded in accumulated other comprehensive income and amortized to net periodic cost over future periods using the corridor method. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience and market conditions. The net periodic costs are recognized as retirees and their eligible dependents render the actions necessary to earn the postretirement benefits.

k. Environmental Remediation Contingencies

Liabilities for environmental remediation contingencies, environmental remediation costs arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. The costs for a specific clean-up site are discounted if the aggregate amount of the obligation and the amount and timing of the cash payments for that site are fixed or reliably determinable based upon information derived from the remediation plan for that site. Recoveries from third parties that are probable of realization are separately recorded, and are not offset against the related environmental liability.

Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of a remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Recoveries for environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. The discounted liability is reflected in other current liabilities and other non-current liabilities on the consolidated balance sheet. The insurance receivable is reflected in other current assets and other non-current assets on the consolidated balance sheet.

6

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to condensed consolidated interim financial statements - continued

March 31, 2019 and 2018

(unaudited)

l. Asset Retirement Obligation

The Company is obligated by contractual or regulatory requirements to remove certain pipeline assets and/or perform other remediation of sites where such assets are located upon the retirement of those assets. The Company will record an asset retirement obligation for pipeline assets in the periods in which settlement dates are reasonably determinable.

m. Recent Accounting Pronouncements

In March 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost”, which requires that an employer disaggregate the service cost component from other components of net benefit cost. This ASU also provides explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. This ASU is effective for the Company for annual reporting periods beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, 2019, given the Company is not considered a public business entity as defined by the Securities and Exchange Commission (“SEC”). The Company is evaluating the impact that this new guidance will have on the consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”, which is intended to provide guidance for cash flow statement classification. The guidance provides for settlement of zero coupon debt instruments that are insignificant in relation to the effective interest rate of the borrower; for contingent consideration payments made after a business combination; for proceeds from the settlement of corporate-owned life insurance policies; for beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The Company is required to apply the guidance for the annual period beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the impact that this new guidance will have on the consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which is intended to provide guidance for lessees that will be required to recognize various conditions for all leases (with the exception of short-term leases) at the commencement. The guidance provides that a lease liability which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The Company is required to apply the guidance for the annual period beginning after December 15, 2019. Early adoption is permitted. In July 2018, the FASB issued additional guidance which permits an additional, optional method of adoption. Under the original standard issued in 2016, lessees and lessors were required to apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest period presented in the financial statements. However, under the new transition method allowed, an entity may elect to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company is evaluating the impact that this new guidance will have on the consolidated financial statements.

7

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to condensed consolidated interim financial statements - continued

March 31, 2019 and 2018

(unaudited)

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” which clarifies the principles for recognizing revenue based on the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for the Company for annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019, given the Company is not considered a public business entity as defined by the SEC. The guidance permits two methods of adoption: retrospectively to each prior reporting periods presented (the full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method).

The Company is in the process of assessing the impact of the new revenue recognition model on its consolidated financial statements by assessing the performance obligations in its contracts with customers and the impact of timing of revenue recognition on the income statement; however, a quantitative impact, if any, cannot be estimated at this time. Management has educated the business development group on the new revenue recognition standard and continues to evaluate additional guidance issued by the FASB and industry groups. The Company expects to adopt the new standard using the modified retrospective method for the year ended December 31, 2019, and does not expect to record a cumulative effect of the initial adoption of the new standard.

2 - COMPANY OWNERSHIP

The Company’s stockholders at March 31, 2019:

	Shares		Percentage
Phillips 66 Partners Holdings LLC		4,809		21.94	%
Shell Pipeline Company LP		5,693		25.97	%
Shell Midstream Operating LLC		2,767		12.62	%
MPLX Operations LLC		5,372		24.51	%
Sunoco Pipeline LP		3,279		14.96	%
Total shares authorized and issued		21,920		100.00	%

8

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to condensed consolidated interim financial statements - continued

March 31, 2019 and 2018

(unaudited)

3 - PROPERTY, PLANT AND EQUIPMENT

A summary of property, plant and equipment by class of asset as of March 31, 2019 and December 31, 2018 is as follows:

	March 31, 2019		December 31, 2018
Land	$	7,539,036	$	7,539,036
Right-of-way		26,678,529		26,594,972
Line pipe and fittings		502,601,373		500,764,909
Buildings		19,878,504		19,763,695
Tanks, pumping and station equipment		407,309,815		401,316,558
Office furniture, vehicles and other		39,428,491		37,571,980
Noncarrier property		277,305		277,306
Construction in progress		6,455,163		14,363,135
	$	1,010,168,216	$	1,008,191,591

Total depreciation of property, plant and equipment for the three months ended March 31, 2019 and 2018 was $6,854,913 and $6,634,724, respectively. The Company did not capitalize any interest for the three months ended March 31, 2019 and 2018.

4 - DEBT

The Company has a $100,000,000 Revolving Credit agreement and a $65,000,000 Advancing Term loan facility with Bank of Oklahoma, BANCFIRST and US Bank, executed August 21, 2014, which was originally set to mature on August 21, 2019. The credit facility was refinanced on August 14, 2018 and will mature on August 14, 2023. There was $65,000,000 outstanding on the Advancing Term loan as of March 31, 2019 and at December 31, 2018. There was $4,000,000 outstanding under the Revolving Credit agreement at March 31, 2019 and at December 31, 2018.

The deferred debt costs related to the Company’s credit facility remain classified as a noncurrent asset due to the revolving nature of that facility. Deferred debt costs are being amortized over the lives of the respective terms. Amortization of deferred debt issuance costs was $63,220 for both the three months ended March 31, 2019 and 2018, and is reflected in interest expense on the consolidated statements of income and retained earnings.

9

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to condensed consolidated interim financial statements - continued

March 31, 2019 and 2018

(unaudited)

Required annual principal payments are as follows as of March 31, 2019:

	L			P			Advancing Term		Revolver		Total
2019	$	6,818,182		$	—		$	—		4,000,000	$	10,818,182
2020		6,818,182			—			—		—		6,818,182
2021		6,818,182			—			—		—		6,818,182
2022		6,818,182			—			—		—		6,818,182
2023		—			—			65,000,000		—		65,000,000
Thereafter		—			250,000,000			—		—		250,000,000
Less deferred debt issuance cost		(575,895	)		(769,998	)		—		—		(1,345,893	)
	$26,696,833			$249,230,002			$65,000,000		$4,000,000		$344,926,835
Less current maturities:		6,652,470			—			—		—		6,652,470
Long-term debt	$	20,044,363		$	249,230,002		$	65,000,000	$	4,000,000	$	338,274,365

The notes have certain restrictive financial debt covenants, the most significant of which are a leverage ratio and a coverage ratio. The Company was in compliance with all restrictive financial debt covenants as of March 31, 2019 and December 31, 2018.

At both March 31, 2019 and December 31, 2018, the Company had letters of credit outstanding of approximately $2,420,000, related to insurance company requirements, current projects and remediation projects. All letters of credit outstanding reduced the amount available on the revolving line of credit.

5 - INCOME TAXES

The effective income tax rates were 23% for both the three months ended March 31, 2019 and 2018. Total income tax expense for the three months ended March 31, 2019 and 2018 differed from amounts computed by applying the United States federal statutory rates to pre-tax income primarily due to state income taxes and the impact of permanent differences between book and taxable income.

6 - COMMITMENTS AND CONTINGENCIES

The Company leases pipeline right-of-way and office premises and equipment. All of the Company’s leases are classified as operating leases.

The Company has entered into both cancelable and non-cancelable leases for pipeline right-of-way. All right-of-way leases are essentially future lease commitments since they relate to the operation of the pipeline and are necessary for its continued operation.

The rental payments for these right-of way leases were approximately $119,000 for the three months ended March 31, 2019 and 2018. Total rental expense was approximately $1,028,000 and $964,000 for the three months ended March 31, 2019 and 2018, respectively, and is reflected in general and administrative expenses on the consolidated statements of income and retained earnings.

10

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to condensed consolidated interim financial statements - continued

March 31, 2019 and 2018

(unaudited)

The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

7 - RELATED PARTIES

In the normal course of business, the Company has transactions with its affiliates. Approximately 7% of the Company’s operating revenues were derived from its affiliates for the three months ended March 31, 2019 and 2018, respectively.

8 - SUBSEQUENT EVENTS

On May 10, 2019, Shell Midstream Partners, L.P. (“SHLX”) entered into an agreement with Shell Pipeline Company LP (“SPLC”) to acquire SPLC’s 25.97% interest in the Company. The acquisition was completed on June 6, 2019. As a result, the ownership percentage of the Company by Shell Midstream Operating LLC, a wholly-owned subsidiary of SHLX, has increased from 12.62% to 38.59%.

Management has evaluated subsequent events through June 27, 2019, the date these financial statements were available to be issued. No subsequent events other than those previously disclosed were identified requiring recognition or disclosure in the accompanying condensed consolidated interim financial statements.

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EX-99.5

Exhibit 99.5

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

Background

The unaudited pro forma consolidated financial statements of Shell Midstream Partners, L.P. (“we,” “us,” “our” or “the Partnership”) as of and for the three months ended March 31, 2019 and for the year ended December 31, 2018 are based upon our historical audited and unaudited financial statements.

On June 4, 2019, Shell Midstream Partners, L.P. (the “Partnership”) and Shell Treasury Center (West) Inc. (“STCW”), an affiliate of the Partnership, entered into a ten-year fixed rate credit facility with a borrowing capacity of $600 million (the “Ten Year Fixed Facility”). The Ten Year Fixed Facility bears an interest rate of 4.18% per annum and matures on June 4, 2029. 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 on June 6, 2019 and the borrowings were used to partially fund the Partnership’s acquisition of an additional 25.97% interest in Explorer Pipeline Company (“Explorer”) and an additional 10.125% interest in Colonial Pipeline Company (“Colonial”) (the “June 2019 Acquisition”).

On June 6, 2019, the Partnership and Shell Midstream Operating LLC, a wholly owned subsidiary of the Partnership (the “Operating Company”), completed the previously announced June 2019 Acquisition. The June 2019 Acquisition closed pursuant to a Contribution Agreement, dated as of May 10, 2019, by and among Shell Pipeline Company LP (“SPLC”), a wholly owned subsidiary of Royal Dutch Shell plc, the Partnership and the Operating Company. The total consideration for the June 2019 Acquisition was $800 million, which consisted of $600 million in cash consideration from borrowings under the Partnership’s Ten Year Fixed Facility (as defined above) and equity consideration valued at $200 million from the issuance of 9,477,756 common units in a private placement to Shell Midstream LP Holdings LLC, a wholly owned subsidiary of SPLC, and the issuance of 193,424 general partner units to Shell Midstream Partners GP LLC, the general partner of the Partnership (the “General Partner”), in order for the General Partner to maintain its 2% general partner interest in the Partnership.

Basis of Presentation

Pro Forma Financial Statements

The unaudited pro forma consolidated balance sheet as of March 31, 2019 has been prepared as though the June 2019 Acquisition and associated financing occurred on March 31, 2019. The unaudited pro forma consolidated statement of income for the three months ended March 31, 2019 has been prepared as though the June 2019 Acquisition and associated financing occurred on January 1, 2018.

The unaudited pro forma consolidated statement of income for the year ended December 31, 2018 has been prepared as though the June 2019 Acquisition and associated financing occurred on January 1, 2018.

The unaudited pro forma consolidated financial statements reflect the pro forma effects of:

• June 2019 Acquisition. Acquisition by us from SPLC of its remaining interests in Colonial and Explorer. The June 2019 Acquisition will be reported by the Partnership at historical cost as the June 2019 Acquisition is considered a transfer of an asset between entities under common control.

• Financing. Borrowings under our new Ten Year Fixed Facility of $600 million and resulting interest expense.

• Equity Consideration. Reflects 9,477,756 common units in a private placement with Shell Midstream LP Holdings LLC, a wholly owned subsidiary of SPLC. 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.

No adjustments have been made to our historical audited and unaudited financial statements to reflect other events subsequent to the period shown by such financial statements.

The unaudited pro forma consolidated financial statements should be read in conjunction with our historical audited and unaudited financial statements as well as the related notes in our other filings with the Securities and Exchange Commission.

1

The adjustments to the historical audited and unaudited financial statements are based upon currently available information and certain estimates and assumptions. Actual effects of these transactions will differ from the pro forma adjustments. The unaudited pro forma consolidated financial statements are not necessarily indicative of the results that would have occurred if the transaction had been completed on the dates indicated or what could be achieved in the future. However, we believe the assumptions provide a reasonable basis for presenting the significant effects of the transactions as contemplated and the pro forma adjustments are factually supportable, give appropriate effect to the expected impact of events directly attributable to the conveyance, and reflect those items expected to have a continuing impact on the Partnership for purposes of the unaudited pro forma consolidated statement of income.

2

Financial Statements of the Partnership

Shell Midstream Partners, L.P. Unaudited Pro Forma Consolidated Balance Sheet As of March 31, 2019

	Shell Midstream Partners, L.P.			June 2019 Acquisition			Pro Forma Adjustments			Shell Midstream Partners, L.P. Pro Forma
	(in millions of dollars)
ASSETS
Current assets
Cash and cash equivalents	$	226		$	—		$	600	(b)	$	226
					—			(600	)(c)
Accounts receivable – third parties, net		14			—			—			14
Accounts receivable – related parties		29			—			—			29
Allowance oil		11			—			—			11
Prepaid expenses		11			—			—			11
Total current assets		291			—			—			291
Equity method investments		814			72	(a)		56	(d)		942
Property, plant and equipment, net		740			—			—			740
Operating lease right-of-use assets		5			—						5
Other investments		62			—			(60	)(e)		2
Other assets – related parties		3			—			—			3
Total assets	$	1,915		$	72		$	(4)		$	1,983
LIABILITIES
Current liabilities
Accounts payable – third parties	$	7		$	—		$	—		$	7
Accounts payable – related parties		9			—			—			9
Deferred revenue – third parties		1			—			—			1
Deferred revenue – related parties		1			—			—			1
Accrued liabilities – third parties		12			—			—			12
Accrued liabilities – related parties		15			—			—			15
Total current liabilities		45			—			—			45
Noncurrent liabilities
Debt payable – related party		2,091			—			600	(b)		2,691
Operating lease liabilities		5			—			—			5
Finance lease liabilities		25			—			—			25
Other unearned income		3			—			—			3
Total noncurrent liabilities		2,124			—			600			2,724
Total liabilities		2,169			—			600			2,769
(DEFICIT) EQUITY
Common unitholders – public		3,464			—			—			3,464
Common unitholder – SPLC		(196	)		—			—			(196	)
General partner – SPLC		(3,549	)		75	(a)		(600	)(c)		(4,080	)
					—			(6	)(d)
Accumulated other comprehensive loss		—			(3	)(a)		2	(d)		(1	)
Total partners’ deficit		(281	)		72			(604	)		(813	)
Noncontrolling interest		27			—			—			27
Total deficit		(254	)		72			(604	)		(786	)
Total liabilities and deficit	$	1,915		$	72		$	(4	)	$	1,983

3

Shell Midstream Partners, L.P. Unaudited Pro Forma Consolidated Statement of Income Three Months Ended March 31, 2019

	Shell Midstream Partners, L.P.		June 2019 Acquisition			Pro Forma Adjustments			Shell Midstream Partners, L.P. Pro Forma
	(in millions of dollars, except per unit data)
Revenue
Transportation, terminaling and storage services – third parties	$	42	$	—		$	—		$	42
Transportation, terminaling and storage services – related parties		64		—			—			64
Product revenue—third parties		1		—			—			1
Product revenue—related parties		10		—			—			10
Lease revenue—related parties		14		—			—			14
Total revenue		131		—			—			131
Costs and expenses
Operations and maintenance – third parties		13		—			—			13
Operations and maintenance – related parties		14		—			—			14
Cost of product sold—third parties		1		—			—			1
Cost of product sold—related parties		8		—			—			8
Loss from revision of asset retirement obligation		2		—			—			2
General and administrative – third parties		1		—			—			1
General and administrative – related parties		11		—			—			11
Depreciation, amortization and accretion		12		—			—			12
Property and other taxes		4		—			—			4
Total costs and expenses		66		—			—			66
Operating income		65		—			—			65
Income from equity method investments		70		22	(f)		12	(g)		104
Dividend income from other investments		14		—			(13	)(h)		1
Other income		8		—			—			8
Investment, dividend and other income		92		22			(1	)		113
Interest expense, net		20		—			6	(i)		26
Income before income taxes		137		22			(7	)		152
Income tax expense		—		—			—			—
Net income		137		22			(7	)		152
Less: Net income attributable to noncontrolling interests		5		—			—			5
Net income attributable to the Partnership	$	132	$	22		$	(7	)	$	147
General partner’s interest in net income attributable to the Partnership	$	27							$	28
Limited partner’s interest in net income attributable to the Partnership	$	105							$	119
Net income per Limited Partner Unit – Basic and Diluted:
Common	$	0.47							$	0.51
Weighted average Limited Partner Units outstanding – Basic and Diluted:
Common units – public		123.8								123.8
Common units – SPLC		100.0								109.5	(j)

4

Shell Midstream Partners, L.P. Unaudited Pro Forma Consolidated Statement of Income Twelve Months Ended December 31, 2018

	Shell Midstream Partners, L.P.			June 2019 Acquisition			Pro Forma Adjustments			Shell Midstream Partners, L.P. Pro Forma
	(in millions of dollars, except per unit data)
Revenue
Transportation, terminaling and storage services – third parties	$	209		$	—		$	—		$	209
Transportation, terminaling and storage services – related parties		229			—			—			229
Product revenue – third parties		2			—			—			2
Product revenue – related parties		29			—			—			29
Lease revenue – related parties		56			—			—			56
Total revenue		525			—			—			525
Costs and expenses
Operations and maintenance – third parties		108			—			—			108
Operations and maintenance – related parties		54			—			—			54
Cost of product sold – third parties		7			—			—			7
Cost of product sold – related parties		25			—			—			25
(Gain) loss from revision of ARO and disposition of fixed assets		(3	)		—			—			(3	)
General and administrative – third parties		8			—			—			8
General and administrative – related parties		52			—			—			52
Depreciation, amortization and accretion		46			—			—			46
Property and other taxes		16			—			—			16
Total costs and expenses		313			—			—			313
Operating income		212			—			—			212
Income from equity method investments		235			92	(f)		48	(g)		375
Dividend income from other investments		67			—			(67	)(h)		—
Other income		31			—			—			31
Investment, dividend and other income		333			92			(19	)		406
Interest expense, net		63			—			25	(i)		88
Income before income taxes		482			92			(44	)		530
Income tax expense		—			—			—			—
Net income		482			92			(44	)		530
Less: Net income attributable to noncontrolling interests		18			—			—			18
Net income attributable to the Partnership	$	464		$	92		$	(44	)	$	512
General partner’s interest in net income attributable to the Partnership	$	134								$	141
Limited partner’s interest in net income attributable to the Partnership	$	330								$	371
Net income per Limited Partner Unit – Basic and Diluted:
Common	$	1.50								$	1.62
Weighted average Limited Partner Units outstanding – Basic and Diluted:
Common units – public		121.3									121.3
Common units – SPLC		99.0									108.4	(j)

5

Shell Midstream Partners, L.P.

Notes to Unaudited Pro Forma

Consolidated Financial Statements

Pro Forma Adjustments

The following items related to the transaction are reflected in the adjustments below:

a. Represents the historical carrying value of SPLC’s interest in Colonial and Explorer acquired as part of the June 2019 Acquisition.

b. Reflects proceeds from borrowings under the Ten Year Fixed Facility totaling $600 million to partially fund the June 2019 Acquisition.

c. Reflects the cash consideration payment to SPLC of $600 million. In addition, non-cash equity consideration of $200 million, or $20.68 per unit, was issued for a total gross consideration of $800 million for the June 2019 Acquisition.

d. Reflects SPLC’s historical carrying value under the equity method of its investment in Colonial and Explorer that was accounted for under the cost method by the Partnership.

e. Reflects the elimination of the Partnership’s historical carrying value of its cost investment in Colonial and Explorer.

f. Reflects the Partnership’s incremental income from equity investment in Explorer and Colonial, consisting of 25.97% ownership interest in Explorer and 10.125% ownership interest in Colonial, as if the June 2019 Acquisition had occurred on January 1, 2018.

g. Reflects equity in earnings of SPLC’s investment in Colonial and Explorer that was accounted for under the cost method by the Partnership.

h. Reflects the elimination of the Partnership’s income from its historical investment in Colonial and Explorer accounted for under the cost method.

i. Reflects interest expense at a fixed rate of 4.18% on the borrowings from the Ten Year Fixed Facility used to partially fund the June 2019 Acquisition.

j. Reflects the weighted average limited partner units outstanding for SPLC which includes the equity issuance of 9,477,756 common units in a private placement with Shell Midstream LP Holdings LLC, a wholly owned subsidiary of SPLC.

Pro Forma Net Income Per Unit

Net income per unit applicable to common limited partner units is computed by dividing the common limited partner’s interest in net income attributable to the Partnership for the period by the weighted average number of common units outstanding for the period. Any excess of distributions declared over net income shall be allocated to the partners based on their respective sharing of income specified in our partnership agreement. Pro forma basic net income per unit is determined by dividing the pro forma net income available to common unitholders of the Partnership by the number of common and general partner units assumed to be outstanding as a result of the offering and sale of common units. For the purposes of this calculation, we have assumed common units and general partner units issued as a result of this offering to be outstanding since January 1, 2018.

6