Acquisitions

On August 9, 2016, we acquired a 2.62% equity interest in Explorer from SPLC (the “August 2016 Acquisition”) for $26.2 million. The August 2016 Acquisition was made in connection with SPLC’s right, as a current shareholder of Explorer, to acquire a portion of the equity interest being divested by another shareholder of Explorer. SPLC separately owns a 35.97% equity interest in Explorer. The August 2016 Acquisition closed on August 9, 2016 pursuant to a Share Purchase and Sale Agreement among us, the Operating Company and SPLC, and is accounted for as a transaction between entities under common control. We funded the August 2016 Acquisition with $26.3 million of cash on hand. Total transaction costs of $0.1 million were incurred. The terms of the August 2016 Acquisition were approved by the Board of Directors of our general partner (the “Board”). See Note 2 – Summary of Significant Accounting Policies – Common Control Transactions in the Notes to Consolidated Financial Statements of our 2015 Annual Report for further discussion of how we account for the acquisition of assets and businesses under common control.

On May 23, 2016, we acquired an additional 30.0% interest in Zydeco, an additional 1.0% interest in Bengal and an additional 3.0% interest in Colonial for $700.0 million in consideration (the “May 2016 Acquisition”). The May 2016 Acquisition closed pursuant to a Contribution Agreement (the “May 2016 Contribution Agreement”) dated May 17, 2016 among us, the Operating Company and SPLC and became effective on April 1, 2016, and is accounted for as a transaction between entities under common control. We funded the May 2016 Acquisition with $345.8 million from the net proceeds of a registered public offering of 10,500,000 common units representing limited partner interests in us (the “May 2016 Offering”), $50.4 million of cash on hand and $296.7 million in borrowings under the Five Year Revolver (as defined in Note 7—Related Party Debt) with Shell Treasury Center (West) Inc. (“STCW”), an affiliate of Shell. The remaining $7.1 million in consideration consisted of an issuance of 214,285 general partner units to our general partner in order to maintain its 2.0% general partner interest in us. Total transaction costs of $0.4 million were incurred in association with the May 2016 Acquisition. The terms of the May 2016 Acquisition were approved by the Board and by the conflicts committee of the Board, which consists entirely of independent directors. The conflicts committee engaged an independent financial advisor and legal counsel. In accordance with the May 2016 Contribution Agreement, SPLC has agreed to reimburse us for our proportionate share of certain costs and expenses incurred by Zydeco after April 1, 2016 with respect to a directional drill project to address soil erosion over a two-mile section of our 22-inch diameter pipeline under the Atchafalaya River and Bayou Shaffer in Louisiana. Such reimbursements will be treated as an additional capital contribution from the general partner at the time of payment. The May 2016 Contribution Agreement contained customary representations and warranties and indemnification by SPLC.

In connection with the May 2016 Acquisition we acquired book value of net assets under common control as follows:



Cost investment ⁽¹⁾	$	5.2
Equity method investments⁽²⁾	1.5
Partner's capital ⁽³⁾	87.0
May 2016 Acquisition	$	93.7


⁽¹⁾	Book value of 3.0% additional interest in Colonial contributed by SPLC.


⁽²⁾	Book value of 1.0% additional interest in Bengal contributed by SPLC.


⁽³⁾	Book value of 30.0% additional interest in Zydeco from SPLC’s noncontrolling interest.

We recognized $606.3 million of consideration in excess of the book value of net assets acquired as a capital distribution to our general partner in accordance with our policy for common control transactions. This capital distribution is comprised of $599.2 million in cash and $7.1 million in general partner units issued.

On November 17, 2015, we acquired from SPLC a 100% interest in Pecten, which holds the Shell Auger and Lockport Operations. The acquisition of Pecten was a transfer of a business between entities under common control, which requires it to be accounted for as if the transfer had occurred at the beginning of the period of transfer, with prior periods retrospectively adjusted to furnish comparative financial information. Accordingly, the accompanying financial statements and notes for the three and nine months ended September 30, 2015 have been retrospectively adjusted to include the historical results of the business of Auger and Lockport prior to the acquisition's effective date of October 1, 2015. See Note 3 – Acquisitions in the Notes to Consolidated Financial Statements of our 2015 Annual Report for further discussion of this acquisition.

The following tables present our condensed consolidated statement of income and condensed consolidated statement of cash flows for the three and nine ended September 30, 2015 giving effect to the acquisition of Pecten. The results of Pecten prior to the effective date of the acquisition are included in “Shell Auger and Lockport Operations” and the consolidated results are included in “Consolidated Results” within the tables below:



Condensed Consolidated Statement of Income	Three Months Ended September 30, 2015
				Shell Auger
	Shell Midstream			and Lockport		Consolidated
	Partners, L.P. ⁽¹⁾			Operations ⁽²⁾		Results

Revenue
Third parties	$	57.5		$	7.5	$	65.0
Related parties	14.9			16.3		31.2
Total revenue	72.4			23.8		96.2
Costs and expenses
Operations and maintenance – third parties	9.2			3.0		12.2
Operations and maintenance – related parties	3.6			0.9		4.5
General and administrative – third parties	1.6			0.2		1.8
General and administrative – related parties	4.9			1.4		6.3
Depreciation, amortization and accretion	3.5			1.9		5.4
Property and other taxes	0.7			0.2		0.9
Total costs and expenses	23.5			7.6		31.1
Operating income	48.9			16.2		65.1
Income from equity investments	24.1			—		24.1
Dividend income from investment	2.7			—		2.7
Other income	0.1			—		0.1
Investment, dividend and other income	26.9			—		26.9
Interest expense, net	1.7			—		1.7
Income before income taxes	74.1			16.2		90.3
Income tax expense	(0.3		)	—		(0.3		)
Net income	74.4			16.2		90.6
Less: Net income attributable to Parent	—			16.2		16.2
Less: Net income attributable to noncontrolling interests	20.1			—		20.1
Net income attributable to the Partnership	$	54.3		$	—	$	54.3

⁽¹⁾ As previously reported in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015.

⁽²⁾ Results of the Shell Auger and Lockport Operations from July 1, 2015 through September 30, 2015.



Condensed Consolidated Statement of Income	Nine Months Ended September 30, 2015
			Shell Auger
	Shell Midstream		and Lockport		Consolidated
	Partners, L.P. ⁽¹⁾		Operations ⁽²⁾		Results
Revenue
Third parties	$	145.3	$	19.8	$	165.1
Related parties	36.4		40.4		76.8
Total revenue	181.7		60.2		241.9
Costs and expenses
Operations and maintenance – third parties	23.8		8.2		32.0
Operations and maintenance – related parties	10.9		3.3		14.2
General and administrative – third parties	6.6		0.2		6.8
General and administrative – related parties	14.7		3.1		17.8
Depreciation, amortization and accretion	10.4		5.6		16.0
Property and other taxes	7.1		0.5		7.6
Total costs and expenses	73.5		20.9		94.4
Operating income	108.2		39.3		147.5
Income from equity investments	47.4		—		47.4
Dividend income from investment	6.6		—		6.6
Other income	1.1		—		1.1
Investment, dividend and other income	55.1		—		55.1
Interest expense, net	2.2		—		2.2
Income before income taxes	161.1		39.3		200.4
Income tax expense	—		—		—
Net income	161.1		39.3		200.4
Less: Net income attributable to Parent	—		39.3		39.3
Less: Net income attributable to noncontrolling interests	51.0		—		51.0
Net income attributable to the Partnership	$	110.1	$	—	$	110.1

⁽¹⁾ As previously reported in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015.

⁽²⁾ Results of the Shell Auger and Lockport Operations from January 1, 2015 through September 30, 2015.



Condensed Consolidated Statement of Cash Flows	Nine Months Ended September 30, 2015
				Shell Auger
	Shell Midstream			and Lockport			Consolidated
	Partners, L.P. ⁽¹⁾			Operations ⁽²⁾			Results
Cash flows from operating activities
Net income	$	161.1		$	39.3		$	200.4
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation, amortization and accretion	10.4			5.6			16.0
Allowance oil reduction to net realizable value	0.9			0.1			1.0
Changes in operating assets and liabilities
Accounts receivable	6.6			0.2			6.8
Allowance oil	(2.1		)	(0.4		)	(2.5		)
Prepaid expenses	2.5			—			2.5
Accounts payable	(5.2		)	(0.4		)	(5.6		)
Deferred revenue	(7.3		)	—			(7.3		)
Accrued liabilities	11.2			1.3			12.5
Net cash provided by operating activities	178.1			45.7			223.8
Cash flows from investing activities
Capital expenditures	(7.6		)	(3.6		)	(11.2		)
Acquisitions	(85.9		)	—			(85.9		)
Return of investment	4.5			—			4.5
Payment of pre-IPO distributions from investments to SPLC	(11.9		)	—			(11.9		)
Net cash used in investing activities	(100.9		)	(3.6		)	(104.5		)
Cash flows from financing activities
Borrowing under credit facilities	420.8			—			420.8
Net proceeds from private placement	297.7			—			297.7
Contribution from general partner	6.1			—			6.1
Capital distributions to general partner	(712.1		)	—			(712.1		)
Distributions to noncontrolling interest	(55.9		)	—			(55.9		)
Distributions to unitholders and general partner	(66.2		)	—			(66.2		)
Credit facilities issuance costs	(0.3		)	—			(0.3		)
Net distribution to Parent	—			(42.1		)	(42.1		)
Net cash used in financing activities	(109.9		)	(42.1		)	(152.0		)
Net increase in cash and cash equivalents	(32.7		)	—			(32.7		)
Cash and cash equivalents at beginning of the period	150.2			—			150.2
Cash and cash equivalents at end of the period	$	117.5		$	—		$	117.5
Supplemental Cash Flow Information
Non-cash investing transactions
Change in accrued capital expenditures	$	(0.4	)	$	—		$	(0.4	)
Contribution of fixed assets from Parent	0.4			—			0.4

⁽¹⁾ As previously reported in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015.

⁽²⁾ Results of the Shell Auger and Lockport Operations from January 1, 2015 through September 30, 2015.

On July 1, 2015, Shell Oil Products US (“SOPUS”) conveyed to us its 36.0% interest in Poseidon (the “July 2015 Acquisition”) for $350.0 million in cash. The July 2015 Acquisition closed pursuant to a contribution agreement dated July 1, 2015 (the “Poseidon Contribution Agreement”) among the Operating Company, the Partnership and SOPUS and is accounted for as a transaction between entities under common control. We have recorded this asset acquisition prospectively from the effective date. Poseidon is a Delaware Limited Liability Company formed in February 1996 to design, construct, own and operate a non-Federal Energy Regulatory Commission (“FERC”) regulated crude oil pipeline system located offshore Louisiana in the central region of the Gulf of Mexico. We account for our interest in Poseidon using the equity method of accounting.

In connection with the July 2015 Acquisition we acquired book value of net assets under common control of $30.5 million which is included in Equity method investments in our consolidated balance sheet. We recognized $319.5 million of consideration in excess of the book value of net assets acquired as a capital distribution to our General Partner in accordance with our policy for common control transactions.

On May 18, 2015, we acquired an additional 19.5% interest in Zydeco and an additional 1.388% interest in Colonial for $448.0 million in cash (the “May 2015 Acquisition”). The May 2015 Acquisition closed pursuant to a Purchase and Sale Agreement dated May 12, 2015 (“Purchase and Sale Agreement”) among us, the Operating Company and SPLC and became effective on April 1, 2015, and was accounted for as a transaction between entities under common control. We funded the May 2015 Acquisition with $297.7 million from the Private Placement (as defined in Note 8—Equity), $80.0 million of cash on hand and $70.8 million in borrowings under the Five Year Revolver with STCW. Total transaction costs of $0.5 million were incurred in association with the May 2015 Acquisition. The terms of the May 2015 Acquisition were approved by the Board and by the conflicts committee of the Board, which consists entirely of independent directors. The conflicts committee engaged an independent financial advisor and legal counsel. In accordance with the Purchase and Sale Agreement, SPLC agreed to reimburse us for our proportionate share of certain costs and expenses incurred by Zydeco after April 1, 2015 with respect to a directional drill project to address soil erosion over a two-mile section of our 22-inch diameter pipeline under the Atchafalaya River and Bayou Shaffer in Louisiana. Such reimbursements will be treated as an additional capital contribution from the general partner at the time of payment.

In connection with the May 2015 Acquisition we acquired book value of net assets under common control as follows:



Cost investment ⁽¹⁾	$	2.5
Partner's capital ⁽²⁾	52.9
May 2015 Acquisition	$	55.4

⁽¹⁾Book value of 1.388% additional interest in Colonial contributed by SPLC.

⁽²⁾Book value of 19.5% additional interest in Zydeco from SPLC's noncontrolling interest.

We recognized $392.6 million of consideration in excess of the book value of net assets acquired as a capital distribution to our general partner in accordance with our policy for common control transactions.