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Edited Transcript of SHLX earnings conference call or presentation 1-Nov-19 2:00pm GMT

Q3 2019 Shell Midstream Partners LP Earnings Call

HOUSTON Nov 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Shell Midstream Partners LP earnings conference call or presentation Friday, November 1, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jamie Parker

Shell Midstream Partners, L.P. - IR Officer

* Kevin M. Nichols

Shell Midstream Partners, L.P. - President, CEO & Director of Shell Midstream Partners GP LLC

* Shawn J. Carsten

Shell Midstream Partners, L.P. - CFO, VP & Director of Shell Midstream Partners GP LLC

* Steven C. Ledbetter

Shell Midstream Partners, L.P. - VP of Commercial - Shell Midstream Partners GP LLC

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Conference Call Participants

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* Derek Bryant Walker

BofA Merrill Lynch, Research Division - VP

* Jeremy Bryan Tonet

JP Morgan Chase & Co, Research Division - Senior Analyst

* Ryan Michael Levine

Citigroup Inc, Research Division - Equity Analyst

* Selman Akyol

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research

* Shneur Z. Gershuni

UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst

* Theresa Chen

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Kevin, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Third Quarter 2019 Shell Midstream Partners Earnings Call. (Operator Instructions)

I will now turn the call over to Jamie Parker, Investor Relations Officer. You may begin your conference.

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Jamie Parker, Shell Midstream Partners, L.P. - IR Officer [2]

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Thank you. Welcome to the third quarter earnings conference call for Shell Midstream Partners. With me today are Kevin Nichols, CEO; Shawn Carsten, CFO; and Steve Ledbetter, VP Commercial and Business Development.

Slide 2 contains our safe harbor statement. We will be making forward-looking statements related to future events and expectations during the presentation and Q&A session. Actual results may differ materially from such statements and factors that could cause actual results to be different are included here as well as in yesterday's press release and under Risk Factors in our filings with the SEC.

Today's call also contains certain non-GAAP financial measures. Please refer to the earnings press release and Appendix 1 of this presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. We will take questions at the end of the presentation.

With that, I'll turn the call over to Kevin Nichols.

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Kevin M. Nichols, Shell Midstream Partners, L.P. - President, CEO & Director of Shell Midstream Partners GP LLC [3]

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Thanks, Jamie. Good morning, everyone, and thank you for joining me for the Shell Midstream Partners' third quarter webcast. On today's call, I'll discuss a few of the highlights for the quarter. And as always, I'll turn it over to Shawn to walk you through our financials.

I'm pleased with our third quarter performance as Shell Midstream Partners generated $141 million of net income, up from $115 million in the second quarter. Total cash available for distribution was $153 million, down $9 million from the prior quarter, primarily due to the onetime impact of Hurricane Barry. Our assets continue to demonstrate resilience, and we continue to meet our commitments to unitholders, as evidenced by our distribution for the third quarter. This puts us well on our way to delivering our mid-teens distribution growth guidance for 2019.

Across our portfolio, demand remains strong in and around our major onshore and offshore systems. As I look at the onshore systems, quarter-over-quarter volumes increased and were largely driven by the Zydeco system as this was the first full quarter with the new contracts in place. The remaining onshore pipelines and terminals continue to deliver in line with the prior quarter. If I switch to look at the offshore, we continue to see strong activity in and around our footprint.

Across our major corridors, we continue to deliver value. Volumes were roughly even with prior quarter, despite the previously mentioned impact from Hurricane Barry.

As you can see on the slide, we increased on Proteus and Endymion as the Appomattox fields continue to ramp up. Volumes were in line with the prior quarter on Amberjack. And in the Eastern Corridor, while we saw slightly lower volumes on Mars and Auger, mainly related to Hurricane Barry.

It is important to note, however, that we did not experience material damage to any of our assets as a result of the hurricane. And volumes ramped back up to normal as soon as the producers restart, and all impacts were within the guidance that we provided to you last quarter.

Looking longer term, I remain bullish on the Gulf of Mexico. Let me pause and focus for a moment on the Mars Corridor. We continue to see high utilization rates with the quarter running at an average of over 90% of capacity this past year. And with the anticipated new volumes from fields such as Vito, Powernap and other nearby prospects, we expect Mars to be reaching capacity. To meet this increased expected demand and other opportunities that we see, we recently announced a solicitation of interest for an expansion, offering priority service on the new incremental capacity for Mars. This demonstrates yet again that our corridor strategy is working, providing the partnership with cost-effective organic growth opportunities and we remain well positioned to capture the growth in the Gulf of Mexico.

And finally, before I turn it over to Shawn, let me touch on IDRs. I understand this is an important topic to you, our investors. And what I can offer is that our sponsors are aware of the market sentiment around IDRs and discussions are ongoing. As a reminder, the IDR waiver that we put in place 3 quarters ago continues to provide benefits to the partnership through this quarter. And as soon as I have more guidance, I will let you know. But let me finish with this. We continue to have strong sponsor support and Shell believes in the partnership and the value that it provides.

So with that, let me turn the call over to Shawn to walk you through the financial performance for the quarter. Shawn?

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Shawn J. Carsten, Shell Midstream Partners, L.P. - CFO, VP & Director of Shell Midstream Partners GP LLC [4]

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Thanks, Kevin. As I reflect on the full quarter results, I'm encouraged that our diversified portfolio has delivered the expected returns for our partnership. So let me cover a few of our key financial metrics for the quarter.

Our total revenue was $125 million, up about $4 million from the prior quarter. Now this is primarily related to higher Zydeco transportation revenue due to the new contracts being in place for full quarter along with higher allowance oil sales, which compared -- when compared to the second quarter.

Our operating expenses were $76 million, an increase of $3 million from the prior quarter. As expected, this increase is related to the seasonal project spend in our terminals as well as higher cost of goods sold for the allowance oil.

Income from equity investments was $115 million, up $35 million from the second quarter. This is mostly driven by a full quarter's income related to the additional interest we acquired in Colonial and Explorer.

And other income was $8 million, down about $4 million for the quarter, primarily related to the final Auger business interruption insurance payment that we received in the second quarter.

In total, adjusted EBITDA attributable to the partnership was $186 million, down about $1 million from the prior quarter. And after interest expense, maintenance capital and other adjustments, total cash available for distribution was $153 million.

Our partnership declared a distribution of $0.445 per LP unit. This represented a 3.5% increase over the prior quarter, and all this resulted in a coverage ratio for the quarter of 1.1x.

So now let me move on to few updates. First, let me remind you of the previously guided producer turnaround impacts in the Gulf. We expect an impact of around $5 million in the fourth quarter as some turnarounds previously planned for Q3 were delayed to Q4.

Also in the fourth quarter, we expect to receive approximately $9 million from Shell Pipeline Company. And this is related to the agreement entered into when we acquired an additional interest in Mars in 2016. At the time of that transaction, the assets were experiencing historic highs on storage revenues. So we -- the partnership negotiated the ability to recoup certain amounts from Shell Pipeline as storage fees did not meet certain financial thresholds.

Now subsequent to the transaction, storage revenues did revert to long-term trends, hence creating the settlement with our sponsor.

And finally, in the CapEx space, we incurred $11 million in the third quarter, of which $6 million was related to growth capital. And the growth capital is primarily in the continued expansion of the Permian gas gathering system.

And now to the partnership's balance sheet and liquidity. As of September 30, the partnership had total debt outstanding of $2.7 billion, which equates to a debt-to-EBITDA ratio of 3.6x based on an annualized Q3 adjusted EBITDA.

We're comfortable with our balance sheet, which will allow us flexibility to continue to grow our business.

So with all that, we will now take your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Shneur Gershuni with UBS.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [2]

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Maybe we can sort of touch on the IDRs. I know that you sort of talked about it in your prepared remarks. It's obviously taken longer than what's been a typical practice within the industry. So I really kind of have 2 questions with respect to the IDRs before getting into growth. The first is, can you concretely confirm that there'll be some sort of resolution in one form or another before the next declaration?

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Kevin M. Nichols, Shell Midstream Partners, L.P. - President, CEO & Director of Shell Midstream Partners GP LLC [3]

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Yes. Thank you. I appreciate the question. Understand everyone's desire to have some direction on this. At this time, I'm not going to provide a time line or date. Certainly, the IDRs and the approach to IDRs is a sponsor decision. But broader than that, the management team looks at the strategy of the business and other forward guidance that we'll be looking to provide. And when we put that holistic strategy together, I will come back and provide that when ready.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [4]

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Okay. So absent that, when you think about the options that you're putting together for a holistic strategy, what options are you considering and scenarios that you're running and evaluating? Are you considering a C-Corp conversion? Or are you just thinking more about an IDR conversion versus an extension of waivers?

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Kevin M. Nichols, Shell Midstream Partners, L.P. - President, CEO & Director of Shell Midstream Partners GP LLC [5]

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Yes. So you have a couple of things mixed in there. With regards to the approach to the IDRs, I'm not going to comment on the various different things that are ongoing in discussions or that the sponsor is considering. With regards to the forward guidance in the -- for the strategy of the company, I think you can look for similar type guidance that we've provided in the past and that would include things like distribution, growth rates, funding strategy, update on the runway, base business growth and those types of sets of guidance.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [6]

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Okay. Maybe transitioning a little bit here. You've mentioned in prior calls about the fact that SHLX is a growth-oriented MLP and that you have a line of sight to the growth. Can you walk us through how that will materialize with respect to SHLX kind of given the line of sight that you have? And I know that you mentioned Mars, for example, but what kind of EBITDA uplift are you kind of thinking that this line of sight actually does for EBITDA, as, I think, on a 2- to 3-year basis versus now? Is it up 30%, 40%? How do we define this line of sight of growth?

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Kevin M. Nichols, Shell Midstream Partners, L.P. - President, CEO & Director of Shell Midstream Partners GP LLC [7]

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Yes. And I appreciate that. I think you're looking for clarity with regards to the go-forward strategy 2020 and beyond. We're not going to provide the specific forward guidance at this time. With regards to the types of growth opportunities, I mean, one of them is -- an example of it today is the Mars expansion. We've seen organic growth opportunities in the offshore with new fields connecting into our existing systems. And we have said all along that Shell continues to invest in the United States. It's the single largest investment place for Royal Dutch Shell. And with that, there's infrastructure opportunities and needs that will come with that similar to Mattox that we recently commissioned, the Falcon pipeline that we're building and other opportunities. So those are the kinds of things that we'll have and we'll feature, but giving specific guidance at this time, I will just refer you back to when we're ready, we'll give you that holistic strategy.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [8]

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Okay. So I guess, we're waiting for a lot at this point.

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Operator [9]

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Our next question comes from Theresa Chen with Barclays.

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [10]

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So I'd like to dig a little deeper into the Mars expansion. Do you see this as kind of like a first inning of many expansions to your systems in the GoM, given that it continues to be a bright spot fundamentally looking past at the hurricane volatility? Or is this just more of like a one-off thing to service the needs of the producers there?

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Kevin M. Nichols, Shell Midstream Partners, L.P. - President, CEO & Director of Shell Midstream Partners GP LLC [11]

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Yes. Thanks. Today, I have Steve Ledbetter here, who's our VP of Commercial. So maybe, Steve, you can kind of talk to the Gulf.

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Steven C. Ledbetter, Shell Midstream Partners, L.P. - VP of Commercial - Shell Midstream Partners GP LLC [12]

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Yes, sure. So thanks for the -- Theresa -- the question, Theresa. Again, this is Steve Ledbetter, Vice President of Commercial, and I'm happy to be here with you this morning. The question was really around a onetime element, this being the expansion. And I think the way I'd characterize this is, we continue to be very bullish about the Gulf and our corridor strategy is working, and this is one example where we look to provide sustainable solutions for producer needs as we continue to see growth opportunities out there. So while I won't characterize, there will be others. We continue to look at these opportunities, and we'll announce to the market at the present time or at the time that we have good confidence about them.

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [13]

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And for this one, in particular, do you have any sort of ranges in mind in terms of cost and economics?

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Steven C. Ledbetter, Shell Midstream Partners, L.P. - VP of Commercial - Shell Midstream Partners GP LLC [14]

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Yes. So I can appreciate the desire to understand kind of the structure and the financial outcome of the expansion. But what I'd say is, we're happy with where we are in the solicitation of interest, but that is going to somewhat influence not only the approach we take to the expansion, but also likely the outcomes. And at this point, we're not -- we prefer not to give guidance around that. What I will also say is, given our corridor strategy in the way we construct our commercial contracts, we were able to de-risk the investment that ensures opportunities that we take on are ultimately accretive to the partnership.

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Operator [15]

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(Operator Instructions) Our next question comes from Jeremy Tonet with JPMorgan.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [16]

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I appreciate that maybe you're not in a position right now to provide too much forward guidance, but just wanted to touch on the philosophy for distribution growth in general. It seems like with SHLX having almost a 9% yield here, it seems like distribution growth really only benefits the IDRs at this stage. Just wondering what you can say as far as philosophically, thoughts about returning capital.

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Kevin M. Nichols, Shell Midstream Partners, L.P. - President, CEO & Director of Shell Midstream Partners GP LLC [17]

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Yes. Thank you. And again, I appreciate the desire for folks to have forward-looking guidance growth rate being one of those. I'm not going to be able to provide that today or even give an indication of where we'll head with that. I think it's better answered when we come back with the holistic strategy, which will take into consideration current market sentiment, current market conditions and the base business and what we see going forward. We have a really diversified set of assets in the partnership already today, a healthy base business. We have a strong Gulf of Mexico business that is capturing organic growth for little-to-no capital investment, and we have flexibility in our balance sheet to do different things going forward. So I'm confident that, what I will say is, we are going to be confident in delivering our promise to the marketplace and our distribution growth through 2019. And I'll just ask that you be patient just a little bit longer until we can give you that holistic strategy.

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Shawn J. Carsten, Shell Midstream Partners, L.P. - CFO, VP & Director of Shell Midstream Partners GP LLC [18]

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And Jeremy, I might add. This is Shawn. Just that -- as always, the management team is committed to reach the guidance we provided in the markets in the past. But the long-term gain for this MLP is around creating a long-term sustainable entity over all of our unitholders. And so we want to make sure that we have a cohesive holistic strategy that allow that wheel to turn around.

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Operator [19]

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Our next question comes from Derek Walker with Bank of America.

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Derek Bryant Walker, BofA Merrill Lynch, Research Division - VP [20]

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Just a quick one on Mars. Steve, I know you gave us a little bit of color there. But can you maybe provide a little bit of scope? Is it just pumps and DRAs, I think before you said it wasn't necessarily needed for necessarily a new pipe around there, but just any sort of thoughts around what operationally do you think that expansion could be?

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Steven C. Ledbetter, Shell Midstream Partners, L.P. - VP of Commercial - Shell Midstream Partners GP LLC [21]

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Yes. Thanks for the question. What we're looking to do right now, capacity-wise, is we're offering priority service around 65,000 barrels a day, and you're correct. This is -- the scope of this does include some pumps as well as some piping modifications, both topside and subsea. It is not building a large trunk line from the beach to the platform, which the outcome of that gives kind of win-win solutions for both the producers as well as the partnership as well.

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Derek Bryant Walker, BofA Merrill Lynch, Research Division - VP [22]

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Got it. And then on Slide 6, just -- is that really just the forecast there? Is that really just coming from Vito and Powernap? Is there any other sort of elements there that we should be thinking about that is driving that growth?

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Steven C. Ledbetter, Shell Midstream Partners, L.P. - VP of Commercial - Shell Midstream Partners GP LLC [23]

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Sorry, can you go ahead and repeat the question? I'm not sure I fully understood what you asked for.

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Derek Bryant Walker, BofA Merrill Lynch, Research Division - VP [24]

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Yes, there is -- on Slide 6, there's an estimated throughput. And I just wanted to see what's driving that forecast. Is it just coming from Vito and Powernap? Or is there anything else that we should be thinking about?

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Steven C. Ledbetter, Shell Midstream Partners, L.P. - VP of Commercial - Shell Midstream Partners GP LLC [25]

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Yes. So these are with the currently sanctioned projects that will flow into our corridor.

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Derek Bryant Walker, BofA Merrill Lynch, Research Division - VP [26]

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Okay.

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Steven C. Ledbetter, Shell Midstream Partners, L.P. - VP of Commercial - Shell Midstream Partners GP LLC [27]

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As we continue to look across the landscape, we're in active conversations and continue to evaluate opportunities as we grow in our position in Gulf.

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Derek Bryant Walker, BofA Merrill Lynch, Research Division - VP [28]

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Okay. Great. Then maybe just a quick one on Zydeco. Kevin, now that you have one quarter under your belt with the new contracts. Can you just kind of talk a little bit around how you're viewing Zydeco's competitive dynamics and given further recent trends here that we're seeing?

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Kevin M. Nichols, Shell Midstream Partners, L.P. - President, CEO & Director of Shell Midstream Partners GP LLC [29]

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Yes. Let me start, and then I'll turn it over to Steve, who manages the Commercial aspect of it and the asset management. So I think the contracts and the business that we envisioned when we renegotiated those contracts and signed up customers are unfolding exactly how we expected. So the volumes are flowing, the system is full. And of course, part of that is building an export highway that connects into loop as well as connected to the other refining centers. But maybe if there's any more detail, I'll ask Steve.

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Steven C. Ledbetter, Shell Midstream Partners, L.P. - VP of Commercial - Shell Midstream Partners GP LLC [30]

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No, I don't think there's too much more color, Kevin, but I'd just say that we're pleased with the outcome of that strategy and we are in active discussions right now about how we ensured we optimize what we can deliver, and that is about being competitive, efficient and confident in flexibility through that route. So pretty pleased with where we are today.

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Operator [31]

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Our next question comes from Selman Akyol with Stifel.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [32]

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And I appreciate your comments in terms of delivering on the guidance that you've laid out in terms of distribution growth for this year, and you're going to hit that. I think previously, hadn't you also said that you wanted your distribution growth, wanted to be in the top quartile for growth going forward? And I'm just wondering is there any changes to that sort of longer-term outlook.

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Kevin M. Nichols, Shell Midstream Partners, L.P. - President, CEO & Director of Shell Midstream Partners GP LLC [33]

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Yes. First and foremost, you're right, delivery in the mid-teens distribution growth for 2019, I stand -- or we stand behind that. With regards to top quartile or where we want to position that distribution growth going forward, we're going to factor in all of the current market conditions, peers, what our growth opportunities are going forward, and we'll build that into our holistic strategy. So I won't update that guidance at this time.

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Operator [34]

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Our next question comes from Ryan Levine with Citi.

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Ryan Michael Levine, Citigroup Inc, Research Division - Equity Analyst [35]

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Understanding you want to optimize the IDR decision, are there any additional drop-down candidates that have become ready to drop in the last quarter to help in that process? And is that a key consideration in the timing of any decision-making?

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Kevin M. Nichols, Shell Midstream Partners, L.P. - President, CEO & Director of Shell Midstream Partners GP LLC [36]

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Yes. So again, I'm not going to give forward guidance to drops or what will be a component of that strategy going forward. As far as readiness of assets, though, that is a strength where we are uniquely positioned with our sponsor Shell. As you've seen in the past, the high-quality assets that we've been able to acquire, they underpin significant integrated value for Shell. They're mainstream midstream assets of a really high caliber, and we've talked to our runway before. And these types of assets on the runway has not changed. So we have a quality set of assets. My team and organization continues to prepare a suite of assets that we could have available for us to execute on any strategy that we put in place.

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Shawn J. Carsten, Shell Midstream Partners, L.P. - CFO, VP & Director of Shell Midstream Partners GP LLC [37]

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And longer term, Ryan, this is Shawn, I'd also highlight that just has been discussed at Shell's Management Day, there's about $10 billion going into the U.S., so roughly 40% of the group's capital investment is going into the U.S. So as new investment comes in, new infrastructure goes along with that. So our runway continues to grow. So for longer term, we're very comfortable. We have lots of assets to talk about.

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Kevin M. Nichols, Shell Midstream Partners, L.P. - President, CEO & Director of Shell Midstream Partners GP LLC [38]

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Well, I would add one more component to that is that we have flexibility as has been demonstrated in the past that we have multiple different ways that we can access that runway.

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Ryan Michael Levine, Citigroup Inc, Research Division - Equity Analyst [39]

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I appreciate the color. I guess, one follow-up. So you mentioned that your team is working to ready those assets. Are there any challenges in that readying process whether it's accounting or elsewhere that could complicate any future drops?

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Kevin M. Nichols, Shell Midstream Partners, L.P. - President, CEO & Director of Shell Midstream Partners GP LLC [40]

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Nothing out of the ordinary. It's what we've always been facing. In some cases, you have to carve out of it some financials behind them, but nothing has changed from our ability to prepare assets.

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Operator [41]

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Thank you. We have no further questions. I would now like to turn the call back to Jamie Parker.

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Jamie Parker, Shell Midstream Partners, L.P. - IR Officer [42]

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Thank you very much for your interest in Shell Midstream Partners. If you have any additional questions following today's presentation, please feel free to give me a call directly. My contact information can be found in the presentation materials as well as on our website, shellmidstreampartners.com.

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Operator [43]

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Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.