NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The terms “we,” “our,” “us” and “Spectra Energy Partners” as used in this report refer collectively to Spectra Energy Partners, LP and its subsidiaries unless the context suggests otherwise. These terms are used for convenience only and are not intended as a precise description of any separate legal entity within Spectra Energy Partners.
Nature of Operations.
Spectra Energy Partners, through its subsidiaries and equity affiliates, is engaged in the transmission, storage and gathering of natural gas and the transportation and storage of crude oil through interstate pipeline systems. We are a Delaware master limited partnership.
We manage our business in two reportable segments: U.S. Transmission and Liquids. The U.S. Transmission segment provides interstate transmission, storage and gathering of natural gas. The Liquids segment provides transportation of crude oil.
On February 27, 2017, Enbridge Inc. (Enbridge) and Spectra Energy Corp (Spectra Energy) completed a merger transaction (the Merger) resulting in Spectra Energy being a wholly owned subsidiary of Enbridge. As a result of the Merger, we became an indirect subsidiary of Enbridge through Enbridge’s ownership of Spectra Energy. As of
September 30, 2017
, Enbridge and its subsidiaries collectively owned a
75%
ownership interest in us (a 73% limited partner interest and a 2% general partner interest), together with 100% of our incentive distribution rights, and the remaining
25%
limited partner interest was publicly owned.
Basis of Presentation.
The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) for interim consolidated financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all of the information and notes required by U.S. GAAP for annual consolidated financial statements and should therefore be read in conjunction with our annual consolidated financial statements and notes presented in our Annual Report on Form 10-K for the year ended
December 31, 2016
. In the opinion of management, the condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our financial position, results of operations and cash flows for the interim periods reported. These condensed consolidated financial statements follow the same significant accounting policies as those included in our annual consolidated financial statements for the year ended
December 31, 2016
, except for the adoption of new standards. See Note 14 for additional information on the adoption of new standards.
2. Segment Information
We manage our business in
two
reportable segments: U.S. Transmission and Liquids. The remainder of our business operations is presented as “Other,” and consists of certain corporate costs.
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|
|
|
|
|
|
|
|
Condensed Consolidated Statements of Operations
|
Total Operating Revenues
|
|
Depreciation and Amortization
|
|
Segment EBITDA/ Consolidated Earnings Before Income Taxes
|
|
(in millions)
|
Three Months Ended September 30, 2017
|
|
|
|
|
|
U.S. Transmission
|
$
|
595
|
|
|
$
|
78
|
|
|
$
|
589
|
|
Liquids
|
98
|
|
|
8
|
|
|
67
|
|
Total reportable segments
|
693
|
|
|
86
|
|
|
656
|
|
Other
|
—
|
|
|
—
|
|
|
(21
|
)
|
Depreciation and amortization
|
—
|
|
|
—
|
|
|
86
|
|
Interest expense
|
—
|
|
|
—
|
|
|
75
|
|
Interest income and other
|
—
|
|
|
—
|
|
|
1
|
|
Total consolidated
|
$
|
693
|
|
|
$
|
86
|
|
|
$
|
475
|
|
Three Months Ended September 30, 2016
|
|
|
|
|
|
U.S. Transmission
|
$
|
535
|
|
|
$
|
71
|
|
|
$
|
392
|
|
Liquids
|
93
|
|
|
7
|
|
|
60
|
|
Total reportable segments
|
628
|
|
|
78
|
|
|
452
|
|
Other
|
—
|
|
|
—
|
|
|
(21
|
)
|
Depreciation and amortization
|
—
|
|
|
—
|
|
|
78
|
|
Interest expense
|
—
|
|
|
—
|
|
|
53
|
|
Interest income and other
|
—
|
|
|
—
|
|
|
—
|
|
Total consolidated
|
$
|
628
|
|
|
$
|
78
|
|
|
$
|
300
|
|
Nine Months Ended September 30, 2017
|
|
|
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|
U.S. Transmission
|
$
|
1,783
|
|
|
$
|
234
|
|
|
$
|
1,548
|
|
Liquids
|
305
|
|
|
24
|
|
|
197
|
|
Total reportable segments
|
2,088
|
|
|
258
|
|
|
1,745
|
|
Other
|
—
|
|
|
—
|
|
|
(92
|
)
|
Depreciation and amortization
|
—
|
|
|
—
|
|
|
258
|
|
Interest expense
|
—
|
|
|
—
|
|
|
191
|
|
Interest income and other
|
—
|
|
|
—
|
|
|
2
|
|
Total consolidated
|
$
|
2,088
|
|
|
$
|
258
|
|
|
$
|
1,206
|
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
U.S. Transmission
|
$
|
1,602
|
|
|
$
|
210
|
|
|
$
|
1,209
|
|
Liquids
|
268
|
|
|
22
|
|
|
174
|
|
Total reportable segments
|
1,870
|
|
|
232
|
|
|
1,383
|
|
Other
|
—
|
|
|
—
|
|
|
(63
|
)
|
Depreciation and amortization
|
—
|
|
|
—
|
|
|
232
|
|
Interest expense
|
—
|
|
|
—
|
|
|
165
|
|
Interest income and other
|
—
|
|
|
—
|
|
|
2
|
|
Total consolidated
|
$
|
1,870
|
|
|
$
|
232
|
|
|
$
|
925
|
|
3. Net Income Per Limited Partner Unit and Cash Distributions
We determined basic and diluted net income per limited partner unit as follows:
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|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(in millions, except per unit amounts)
|
Net income—controlling interests
|
|
$
|
460
|
|
|
$
|
275
|
|
|
$
|
1,105
|
|
|
$
|
860
|
|
Less: Net income attributable to:
|
|
|
|
|
|
|
|
|
General partner’s interest in general partner units—2%
|
|
10
|
|
|
5
|
|
|
23
|
|
|
17
|
|
General partner’s interest in incentive distribution rights
|
|
91
|
|
|
76
|
|
|
261
|
|
|
209
|
|
Limited partners’ interest in net income attributable to common units
|
|
$
|
359
|
|
|
$
|
194
|
|
|
$
|
821
|
|
|
$
|
634
|
|
Weighted average limited partner units outstanding—basic and diluted
|
|
311
|
|
|
304
|
|
|
310
|
|
|
296
|
|
Net income per limited partner unit—basic and diluted
|
|
$
|
1.15
|
|
|
$
|
0.64
|
|
|
$
|
2.65
|
|
|
$
|
2.14
|
|
Our partnership agreement requires that, within
60 days
after the end of each quarter, we distribute all of our Available Cash, as defined below, to unitholders of record on the applicable record date.
Available Cash.
Available Cash, for any quarter, consists of all cash and cash equivalents on hand at the end of that quarter:
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•
|
less the amount of cash reserves established by the general partner to:
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|
•
|
provide for the proper conduct of business,
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|
|
•
|
comply with applicable law, any debt instrument or other agreement, or
|
|
|
•
|
provide funds for minimum quarterly distributions to the unitholders and to the general partner for any one or more of the next four quarters,
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|
|
•
|
plus, if the general partner so determines, all or a portion of cash and cash equivalents on hand on the date of determination of Available Cash for the quarter.
|
Incentive Distribution Rights.
The general partner holds incentive distribution rights beyond the first target distribution in accordance with the partnership agreement as follows:
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|
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|
|
Marginal Percentage
Interest in Distributions
|
Distribution Targets
|
|
Portion of Quarterly Distribution Per Common Unit
|
|
Common
Unitholders
|
|
General
Partner
|
Minimum Quarterly Distribution
|
|
$0.30
|
|
98
|
%
|
|
2
|
%
|
First Target Distribution
|
|
above $0.30 up to $0.345
|
|
98
|
%
|
|
2
|
%
|
Second Target Distribution
|
|
above $0.345 up to $0.375
|
|
85
|
%
|
|
15
|
%
|
Third Target Distribution
|
|
above $0.375 up to $0.45
|
|
75
|
%
|
|
25
|
%
|
Thereafter
|
|
above $0.45
|
|
50
|
%
|
|
50
|
%
|
To the extent these incentive distributions are made to the general partner, there will be more Available Cash proportionately allocated to our general partner than to holders of common units. A cash distribution of
$0.72625
per limited partner unit was declared on
November 1, 2017
and is payable on
November 29, 2017
to unitholders of record at the close of business on
November 13, 2017
.
In October 2015, Spectra Energy acquired our
33.3%
ownership interest in Sand Hills Pipeline, LLC (Sand Hills) and DCP Southern Hills Pipeline, LLC (Southern Hills). In consideration for this transaction, we retired
21,560,000
of our common units and
440,000
of our general partner units held by Spectra Energy, resulting in a reduction of any associated distributions payable to Spectra Energy. In addition, and as a component of the transaction, Spectra Energy waived its right to receive aggregate quarterly distributions on its incentive distribution rights, if any, by
$4 million
per quarter for a period of 12 consecutive quarters ending on September 30, 2018.
4. Variable Interest Entities
Sabal Trail.
We own a
50%
interest in Sabal Trail Transmission, LLC (Sabal Trail), a joint venture that operates a pipeline originating in Alabama that transports natural gas to Florida (the Sabal Trail pipeline). Sabal Trail is a variable interest entity (VIE) due to insufficient equity at risk to finance its activities.
On July 3, 2017, the Sabal Trail pipeline was placed into service. In accordance with the Sabal Trail LLC Agreement, upon the commencement of commercial service of the Sabal Trail pipeline, the power to direct Sabal Trail’s activities became shared with its members. Consequently, we are no longer the primary beneficiary and as a result deconsolidated the assets, liabilities and noncontrolling interest related to Sabal Trail at the in-service date.
At deconsolidation, our interest in Sabal Trail was recorded at its fair value of
$1.9 billion
. We recognized a gain of
$106 million
related to the remeasurement of the retained equity interest to its fair value. The gain was recorded in Earnings from Equity Investments on the Condensed Consolidated Statements of Operations. The fair value was determined using the income approach which is based on the present value of future cash flows. The inputs used in the development of the fair value, representative of a Level 3 fair value measurement, include, but are not limited to, the amount and timing of projected future cash flows and a
9%
discount rate used to measure the risks inherent in the future cash flows.
Subsequent to deconsolidation, we determined that we continue to have the ability to exercise significant influence over Sabal Trail and accounted for it under the equity method. Our maximum exposure to loss is
$2.0 billion
. We have an investment in Sabal Trail of
$1.9 billion
as of
September 30, 2017
, classified as Investments in and Loans to Unconsolidated Affiliates on our Condensed Consolidated Balance Sheets.
Nexus.
We own a
50%
interest in Nexus Gas Transmission, LLC (Nexus), a joint venture that is constructing a greenfield natural gas pipeline from Ohio to Michigan and leasing capacity on third party pipelines in order to provide transportation of Appalachian Basin natural gas to markets in Ohio, Michigan, and the Dawn Hub in Ontario, Canada through the Vector Pipeline. Nexus is a VIE due to insufficient equity at risk to finance its activities. We determined that we are not the primary beneficiary because the power to direct the activities of Nexus that most significantly impact its economic performance is shared. We account for Nexus under the equity method. Our maximum exposure to loss is
$1.0 billion
. We have an investment in Nexus of
$533 million
and
$356 million
as of
September 30, 2017
and
December 31, 2016
, respectively, classified as Investments in and Loans to Unconsolidated Affiliates on our Condensed Consolidated Balance Sheets.
In December 2016, we issued performance guarantees to a third party and an affiliate on behalf of Nexus. See Note 12 for further discussion of the guarantee arrangement.
PennEast Pipeline.
In June 2017, we purchased an additional 10% interest in PennEast Pipeline (PennEast) from PSEG Power Gas Holdings, LLC, increasing our ownership interest in PennEast to
20%
. PennEast is a joint venture that is proposing to construct a natural gas pipeline originating in northeastern Pennsylvania, and ending near Pennington, Mercer County, New Jersey. PennEast is a VIE due to insufficient equity at risk to finance its activities. We determined that we are not the primary beneficiary because the power to direct the activities of PennEast that most significantly impact its economic performance is shared. We account for PennEast under the equity method. Our maximum exposure to loss is
$274 million
. We have an investment in PennEast of
$47 million
and
$11 million
as of
September 30, 2017
and
December 31, 2016
, respectively, classified as Investments in and Loans to Unconsolidated Affiliates on our Condensed Consolidated Balance Sheets.
5. Intangible Asset
During the first quarter of 2016 we entered into a project coordination agreement (PCA) with NextEra, Duke Energy Corporation and Williams Partners L.P. In accordance with the agreement, payments were made based on our proportional ownership interest in the Sabal Trail project as certain milestones of the project were met.
As of September 30, 2017, all milestones were achieved and paid, totaling
$120 million
. As of September 30, 2016, two milestones had been achieved and payments totaling
$80 million
were made. Payments are classified as Investing Activities — Purchase of Intangible, Net on our Condensed Consolidated Statements of Cash Flows. This PCA is an intangible asset and is classified as Investments and Other Assets — Other Assets, Net on our Condensed Consolidated Balance Sheets.
The intangible asset will be amortized over a period of
25
years beginning at the time of in-service of the Sabal Trail pipeline, which occurred July 3, 2017. Total amortization expense for intangible assets was approximately
$1 million
for the period ended
September 30, 2017
. The amortization expense for each of the next five years is estimated to be approximately
$5 million
.
6. Goodwill
We perform our goodwill impairment test annually and evaluate goodwill when events or changes in circumstances indicate that its carrying value may not be recoverable. We completed our annual goodwill impairment test as of April 1, 2017 and no impairments were identified.
We perform our annual review for goodwill impairment at the reporting unit level, which is identified by assessing whether the components of our operating segments constitute businesses for which discrete financial information is available, whether segment management regularly reviews the operating results of those components and whether the economic and regulatory characteristics are similar. We determined that our reporting units are equivalent to our reportable segments.
As permitted under accounting guidance on testing goodwill for impairment, we perform either a qualitative assessment or a quantitative assessment of each of our reporting units based on management’s judgment. With respect to our qualitative assessments, we consider events and circumstances specific to us, such as macroeconomic conditions, industry and market considerations, cost factors and overall financial performance, when evaluating whether it is more likely than not that the fair values of our reporting units are less than their respective carrying amounts.
7. Marketable Securities and Restricted Funds
We routinely invest excess cash and various restricted balances in securities such as commercial paper, corporate debt securities, and other money market securities in the United States, as well as equity securities in Canada. We do not purchase marketable securities for speculative purposes, therefore we do not have any securities classified as trading securities. While we do not routinely sell marketable securities prior to their scheduled maturity dates, some of our investments may be held and restricted for the purposes of funding future capital expenditures and National Energy Board (NEB) regulatory requirements, so these investments are classified as available-for-sale (AFS) marketable securities as they may occasionally be sold prior to their scheduled maturity dates due to the unexpected timing of cash needs. Initial investments in securities are classified as purchases of the respective type of securities (AFS marketable securities or held-to-maturity (HTM) marketable securities). Maturities of securities are classified within Investing Activities - Proceeds from sales and maturities of securities in the Condensed Consolidated Statements of Cash Flows.
AFS Securities
.
We had
$3 million
and
$10 million
of AFS securities classified as Investments and Other Assets — Other Assets, Net on the Condensed Consolidated Balance Sheets as of
September 30, 2017
and
December 31, 2016
, respectively. These investments include
$3 million
and
$1 million
of restricted funds held and collected from customers for Canadian pipeline abandonment in accordance with the NEB's regulatory requirements, as of
September 30, 2017
and
December 31, 2016
, respectively, as well as
$9 million
of restricted funds related to certain construction projects as of
December 31, 2016
.
At
September 30, 2017
, the weighted-average contractual maturity of outstanding AFS securities was less than
one year
.
There were
no
material gross unrecognized holding gains or losses associated with investments in AFS securities at
September 30, 2017
or
December 31, 2016
.
HTM Securities
.
All of our HTM securities are restricted funds. We had
$4 million
and
$3 million
of money market securities classified as Current Assets — Other on the Condensed Consolidated Balance Sheets as of
September 30, 2017
and
December 31, 2016
, respectively. These securities are restricted pursuant to certain Express-Platte pipeline system (Express-Platte) debt agreements.
At
September 30, 2017
, the weighted-average contractual maturity of outstanding HTM securities was less than
one year
.
There were
no
material gross unrecognized holding gains or losses associated with investments in HTM securities at
September 30, 2017
or
December 31, 2016
.
Other Restricted Funds
.
In addition to the AFS and HTM securities that were restricted funds as described above, we had other restricted funds totaling
$2 million
and
$5 million
classified as Investments and Other Assets — Other Assets, Net on the Condensed Consolidated Balance Sheets at
September 30, 2017
and
December 31, 2016
, respectively. These restricted funds are related to certain construction projects.
Changes in restricted balances are presented within Investing Activities on our Condensed Consolidated Statements of Cash Flows.
8. Debt
Credit Facility
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
Maturity Date
|
|
Total Facility
|
|
Commercial Paper Outstanding at September 30, 2017
|
|
Available
|
|
|
|
|
(in millions)
|
Spectra Energy Partners, LP
|
|
2021-2022
|
|
$
|
2,500
|
|
|
$
|
2,033
|
|
|
$
|
467
|
|
On September 1, 2017, we amended our credit agreement. We extended the expiration date of the commitment of
$2.3 billion
to August 2022. The remaining
$0.2 billion
of commitments will expire in April 2021.
The issuances of commercial paper, letters of credit and revolving borrowings reduce the amount available under the credit facility. As of
September 30, 2017
, there were no letters of credit issued or revolving borrowings outstanding under the credit facility.
Our credit agreements contain various covenants. Failure to meet those covenants beyond applicable grace periods could result in accelerated due dates and/or termination of the agreements. We were in compliance with these covenants as of
September 30, 2017
. In addition, our credit agreements allow for acceleration of payments or termination of the agreements due to nonpayment, or in some cases, due to the acceleration of our other significant indebtedness or other significant indebtedness of some of our subsidiaries. Our debt and credit agreements do not contain provisions that trigger an acceleration of indebtedness based solely on the occurrence of a material adverse change in our financial condition or results of operations.
Debt Issuances
. On June 7, 2017, we issued
$400
million of variable-rate senior unsecured note due in 2020. Net proceeds from the offering were used to fully repay and terminate the variable-rate senior unsecured term loan due in November 2018.
9. Fair Value Measurements
The following presents, for each of the fair value hierarchy levels, assets and liabilities that are measured at fair value on a recurring basis as of
September 30, 2017
and
December 31, 2016
:
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|
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|
|
|
|
|
|
|
|
|
Description
|
Condensed Consolidated Balance Sheet Caption
|
|
September 30, 2017
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
(in millions)
|
Canadian equity securities
|
Investments and other assets — other assets, net
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate swaps
|
Investments and other assets — other assets, net
|
|
6
|
|
|
—
|
|
|
6
|
|
|
—
|
|
Total Assets
|
|
$
|
9
|
|
|
$
|
3
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
Current liabilities — other
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
Total Liabilities
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
Condensed Consolidated Balance Sheet Caption
|
|
December 31, 2016
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
(in millions)
|
Corporate debt securities
|
Cash and cash equivalents
|
|
$
|
145
|
|
|
$
|
—
|
|
|
$
|
145
|
|
|
$
|
—
|
|
Corporate debt securities
|
Investments and other assets — other assets, net
|
|
9
|
|
|
—
|
|
|
9
|
|
|
—
|
|
Canadian equity securities
|
Investments and other assets — other assets, net
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
Interest rate swaps
|
Investments and other assets — other assets, net
|
|
9
|
|
|
—
|
|
|
9
|
|
|
—
|
|
Total Assets
|
|
$
|
164
|
|
|
$
|
1
|
|
|
$
|
163
|
|
|
$
|
—
|
|
Level 1
Level 1 valuations represent quoted unadjusted prices for identical instruments in active markets.
Level 2 Valuation Techniques
Fair values of our financial instruments that are actively traded in the secondary market, including our long-term debt, are determined based on market-based prices. These valuations may include inputs such as quoted market prices of the exact or similar instruments, broker or dealer quotations, or alternative pricing sources that may include models or matrix pricing tools, with reasonable levels of price transparency.
For interest rate swaps, we utilize data obtained from a third-party source for the determination of fair value. Both the future cash flows for the fixed-leg and floating-leg of our swaps are discounted to present value.
Level 3 Valuation Techniques
Level 3 valuation techniques include the use of pricing models, discounted cash flow methodologies or similar techniques where at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.
Financial Instruments
The fair values of financial instruments that are recorded and carried at book value are summarized in the following table. Judgment is required in interpreting market data to develop the estimates of fair value. These estimates are not necessarily indicative of the amounts we could have realized in current markets.
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September 30, 2017
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|
December 31, 2016
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Book
Value
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|
Approximate
Fair Value
|
|
Book
Value
|
|
Approximate
Fair Value
|
|
|
(in millions)
|
Note receivable, noncurrent (a)
|
|
$
|
71
|
|
|
$
|
71
|
|
|
$
|
71
|
|
|
$
|
71
|
|
Long-term debt, including current maturities (b)
|
|
6,256
|
|
|
6,635
|
|
|
6,672
|
|
|
6,855
|
|
________
|
|
(a)
|
Included within Investments in and Loans to Unconsolidated Affiliates.
|
|
|
(b)
|
Excludes commercial paper, unamortized items and fair value hedge carrying value adjustments.
|
The fair value of our long-term debt is determined based on market-based prices as described in the Level 2 valuation technique described above and is classified as Level 2.
The fair values of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, note receivable-noncurrent, accounts payable, commercial paper and short-term money market securities are not materially different from their carrying amounts because of the short-term nature of these instruments or because the stated rates approximate market rates.
During the
nine months ended September 30,
2017
and
2016
, there were no material adjustments to assets and liabilities measured at fair value on a nonrecurring basis.
10. Risk Management and Hedging Activities
Changes in interest rates expose us to risk as a result of our issuance of variable and fixed-rate debt and commercial paper. We are exposed to foreign currency risk from the Canadian portion of the Express-Platte pipeline. We employ established policies and procedures to manage our risks associated with these market fluctuations, which may include the use of derivatives, mostly around interest rate exposures.
At
September 30, 2017
, we had
“pay floating - receive fixed” interest rate swaps outstanding with a total notional amount of
$0.9 billion
to hedge against changes in the fair value of our fixed-rate that arise as a result of changes in market interest rates
. These swaps also allow us to transform a portion of the underlying interest payments related to our long-term debt securities from fixed-rate to variable-rate interest payments in order to achieve our desired mix of fixed and variable-rate debt. Our "pay floating
- received fixed"
interest rate derivative instruments are designated and qualify as fair value hedges. The gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk is recognized in the Condensed Consolidated Statements of Operations. During the
nine months ended September 30, 2017
, the amounts recognized were immaterial.
Our earnings and cash flows are also exposed to variability in longer term interest rates ahead of anticipated fixed rate debt issuances. Forward starting interest rate swaps are used to hedge against the effect of future interest rate movements.
During the third quarter 2017, we implemented a program to significantly mitigate our exposure to long-term interest rate variability on select forecast term debt issuances by executing
$1.1 billion
of “pay fixed - receive floating” 10 year interest rate swaps with an average swap rate of
2.4%
. The forward starting swaps are designated and qualify as cash flow hedges with the
$3 million
unrealized loss on the derivative
recognized in change in unrealized loss on cash flow hedges on our Condensed Consolidated Statements of Comprehensive Income.
Information about our interest rate swaps that had netting or rights of offset arrangements are as follows:
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September 30, 2017
|
|
December 31, 2016
|
|
Gross Amounts
Presented in
the Condensed
Consolidated
Balance Sheet
|
|
Amounts Not
Offset in the
Condensed
Consolidated
Balance Sheet
|
|
Net
Amount
|
|
Gross Amounts
Presented in
the Condensed
Consolidated
Balance Sheet
|
|
Amounts Not
Offset in the
Condensed
Consolidated
Balance Sheet
|
|
Net
Amount
|
Description
|
(in millions)
|
Assets
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
9
|
|
Liabilities
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
11. Commitments and Contingencies
Environmental
We are subject to various U.S. federal, state and local laws and regulations, as well as Canadian federal and provincial laws, relating to the protection of the environment. These laws and regulations can change from time to time, imposing new obligations on us.
Environmental risk is inherent to liquid hydrocarbon and natural gas pipeline operations, and we and our affiliates are, at times, subject to environmental remediation at various contaminated sites. We manage this environmental risk through appropriate environmental policies and practices to minimize any impact our operations may have on the environment. To the extent that we are unable to recover payment for environmental liabilities from insurance or other potentially responsible parties, we will be responsible for payment of liabilities arising from environmental incidents associated with the operating activities of our liquids and natural gas businesses.
Litigation
We are subject to various legal and regulatory actions and proceedings which arise in the normal course of business, including interventions in regulatory proceedings and challenges to regulatory approvals and permits by special interest groups. While the final outcome of such actions and proceedings cannot be predicted with certainty, management believes that the resolution of such actions and proceedings will not have a material impact on our interim consolidated financial position or results of operations.
12. Guarantees
We have various financial guarantees which are issued in the normal course of business. We enter into these arrangements to facilitate a commercial transaction with a third party by enhancing the value of the transaction to the third party. To varying degrees, these guarantees involve elements of performance and credit risk, which are not included on our Condensed Consolidated Balance Sheets. The possibility of having to perform under these guarantees is largely dependent upon future operations of various subsidiaries, investees and other third parties, or the occurrence of certain future events.
In December 2016, we issued performance guarantees to a third party and an affiliate on behalf of an equity method investee. These guarantees were issued to enable the equity method investee to enter into long-term transportation contracts with the third party. While the likelihood is remote, the maximum potential amount of future payments we could have been required to make as of
September 30, 2017
was
$84 million
. These performance guarantees expire in
2032
.
As of
September 30, 2017
, the amounts recorded for the guarantees described above are not material, either individually or in the aggregate.
13. Issuances of Common Units
During the
nine months ended September 30, 2017
, we issued
2.6 million
common units to the public under our at-the-market program, and approximately
52,000
general partner units to our general partner in order for it to maintain a 2% general partner interest. Total net proceeds were
$115 million
, including approximately
$2 million
of proceeds from our general partner.
14. New Accounting Pronouncements
ADOPTION OF NEW STANDARDS
Simplifying the Measurement of Goodwill Impairment
Effective January 1, 2017, we early adopted Accounting Standards Update (ASU) 2017-04 and applied the standard on a prospective basis. Under the new guidance, goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value; this amount should not exceed the carrying amount of goodwill. The adoption of the pronouncement did not have a material impact on our consolidated financial statements.
Clarifying the Definition of a Business in an Acquisition
Effective January 1, 2017, we early adopted ASU 2017-01 on a prospective basis. The new standard was issued with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (disposals) of assets or businesses. The adoption of the pronouncement did not have a material impact on our consolidated financial statements.
Accounting for Intra-Entity Asset Transfers
Effective January 1, 2017, we early adopted ASU 2016-16 on a modified retrospective basis. The new standard was issued with the intent of improving the accounting for the income tax consequences of intra-entity asset transfers other than inventory. Under the new guidance, an entity should recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The adoption of the pronouncement did not have a material impact on our consolidated financial statements.
Improvements to Employee Share-Based Payment Accounting
Effective January 1, 2017, we adopted ASU 2016-09 and applied certain amendments on a modified retrospective basis with the remaining amendments applied on a prospective basis. The new standard was issued with the intent of simplifying and improving several aspects of accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The adoption of the pronouncement did not have a material impact on our consolidated financial statements.
Simplifying the Embedded Derivatives Analysis for Debt Instruments
Effective January 1, 2017, we adopted ASU 2016-06 on a modified retrospective basis. The new guidance simplifies the embedded derivative analysis for debt instruments containing contingent call or put options. The adoption of the pronouncement did not have a material impact on our consolidated financial statements.
FUTURE ACCOUNTING POLICY CHANGES
Improvements to Accounting for Hedging Activities
ASU 2017-12 was issued in August 2017 with the main objective of better aligning a company’s risk management activities and the resulting hedge accounting reflected in the financial statements. The amendments allow cash flow hedging of contractually specified components in financial and non-financial items and make fair value hedges of interest rate risks more effective in certain circumstances. Under the new guidance, hedge ineffectiveness is no longer required to be measured and hedging instruments’ fair value changes will be recorded in the same income statement line as the hedged item. The ASU also allows the initial quantitative hedge effectiveness assessment to be performed at any time before the end of the quarter in which the hedge is designated. After initial quantitative testing is performed, an ongoing qualitative effectiveness assessment is permitted. The Company is currently assessing the impact of the new standard on the consolidated financial statements. The accounting update is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted, and is to be applied on a modified retrospective basis.
Clarifying Guidance on the Application of Modification Accounting on Stock Compensation
ASU 2017-09 was issued in May 2017 with the intent to clarify the scope of modification accounting and when it should be applied to a change to the terms or conditions of a share based payment award. Under the new guidance, modification accounting is required for all changes to share based payment awards, unless all of the following conditions are met: 1) there is
no change to the fair value of the award, 2) the vesting conditions have not changed, and 3) the classification of the award as an equity instrument or a debt instrument has not changed. The accounting update is effective for annual periods beginning after December 15, 2017 and is to be applied on a prospective basis. The adoption of ASU 2017-09 is not expected to have a material impact on our consolidated financial statements.
Clarifying Guidance on Derecognition and Partial Sales of Nonfinancial Assets
ASU 2017-05 was issued in February 2017 with the intent of clarifying the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets. The ASU clarifies the scope provisions of nonfinancial assets and how to allocate consideration to each distinct asset, and amends the guidance for derecognition of a distinct nonfinancial asset in partial sale transactions. We are currently assessing the impact of the new standard on the consolidated financial statements. The accounting update is effective for annual and interim periods beginning after December 15, 2017 and is to be applied on a retrospective or modified retrospective basis.
Improving the Presentation of Net Periodic Benefit Cost related to Defined Benefit Plans
ASU 2017-07 was issued in March 2017 primarily to improve the income statement presentation of the components of net periodic pension cost and net periodic postretirement benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. In addition, only the service-cost component of net benefit cost is eligible for capitalization. The accounting update is effective for annual and interim periods beginning after December 15, 2017 and is to be applied on a retrospective basis for the statement of earnings presentation component and a prospective basis for the capitalization component. The Company is currently assessing the impact of the new standard on the consolidated financial statements.
Accounting for Credit Losses
ASU 2016-13 was issued in June 2016 with the intent of providing financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. Current treatment uses the incurred loss methodology for recognizing credit losses that delays the recognition until it is probable a loss has been incurred. The amendment adds a new impairment model, known as the current expected credit loss model that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the Financial Accounting Standards Board believes will result in more timely recognition of such losses. We are currently assessing the impact of the new standard on our consolidated financial statements. The accounting update is effective for annual and interim periods beginning on or after December 15, 2019.
Recognition of Leases
ASU 2016-02 was issued in February 2016 with the intent to increase transparency and comparability among organizations. It requires lessees of operating lease arrangements to recognize lease assets and lease liabilities on the statement of financial position and disclose additional key information about lease agreements. The accounting update also replaces the current definition of a lease and requires that an arrangement be recognized as a lease when a customer has the right to obtain substantially all of the economic benefits from the use of an asset, as well as the right to direct the use of the asset. We are currently assessing the impact of the new standard on our consolidated financial statements. The accounting update is effective for fiscal years beginning after December 15, 2018 and is to be applied using a modified retrospective approach.
Revenue from Contracts with Customers
ASU 2014-09 was issued in 2014 with the intent of significantly enhancing consistency and comparability of revenue recognition practices across entities and industries. The new standard establishes a single, principles-based five-step model to be applied to all contracts with customers and introduces new and enhanced disclosure requirements. The standard is effective January 1, 2018. The new revenue standard permits either a full retrospective method of adoption with restatement of all prior periods presented, or a modified retrospective method with the cumulative effect of applying the new standard recognized as an adjustment to opening retained earnings in the period of adoption. We have decided to adopt the new revenue standard using the modified retrospective method.
We have reviewed a sample of our revenue contracts in order to evaluate the effect of the new standard on our revenue recognition practices. Based on our initial assessment, estimates of variable consideration which will be required under the new standard for certain revenue contracts, may result in changes to the pattern or timing of revenue recognition for those contracts. While we have not yet completed the assessment, we do not expect these changes will have a material impact on revenue or earnings (loss).We have also developed and tested processes to generate the disclosures required under the new standard.