NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollar and unit amounts, except per unit data, are in millions)
(unaudited)
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1.
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ORGANIZATION AND BASIS OF PRESENTATION
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Organization
Unless the context requires otherwise, references to “we,” “us,” “our,” the “Partnership” and “ETE” mean Energy Transfer Equity, L.P. and its consolidated subsidiaries. References to the “Parent Company” mean Energy Transfer Equity, L.P. on a stand-alone basis.
In April 2017, Energy Transfer Partners, L.P. and Sunoco Logistics completed a merger transaction (the “Sunoco Logistics Merger”) in which Sunoco Logistics acquired Energy Transfer Partners, L.P. in a unit-for-unit transaction. Prior to the Sunoco Logistics Merger, Sunoco Logistics was a consolidated subsidiary of Energy Transfer Partners, L.P.
Under the terms of the transaction, the unitholders received
1.5
common units of Sunoco Logistics for each Energy Transfer Partners, L.P. common unit they owned. Under the terms of the merger agreement, Sunoco Logistics’ general partner was merged with and into ETP GP, with ETP GP surviving as an indirect wholly-owned subsidiary of ETE.
Based on the number of Energy Transfer Partners, L.P. common units outstanding at the closing of the merger, Sunoco Logistics issued approximately
832 million
Sunoco Logistics common units to Energy Transfer Partners, L.P. unitholders. In connection with the merger, the Energy Transfer Partners, L.P. Class H units were cancelled. The outstanding Energy Transfer Partners, L.P. Class E units, Class G units, Class I units and Class K units at the effective time of the merger were converted into an equal number of newly created classes of Sunoco Logistics units, with the same rights, preferences, privileges, duties and obligations as such classes of Energy Transfer Partners, L.P. units had immediately prior to the closing of the merger. Additionally, the outstanding Sunoco Logistics common units and Sunoco Logistics Class B units owned by Energy Transfer Partners, L.P. at the effective time of the merger were cancelled.
Prior to the Sunoco Logistics Merger, ETE owned
18.4 million
Energy Transfer Partners, L.P. common units (representing
3.3%
of the total outstanding common units),
81 million
Energy Transfer Partners, L.P. Class H units and
100
Energy Transfer Partners, L.P. Class I units. In connection with the Sunoco Logistics Merger, the Class H units were cancelled, and ETE now owns
27.5 million
ETP common units (representing
2.5%
of the total outstanding common units) and
100
ETP Class I units. The ETP Class I units have the same rights, privileges, duties and obligations as those historically associated with the Class I units prior to the Sunoco Logistics Merger.
At the time of the
Sunoco Logistics Merger
,
Energy Transfer Partners, L.P. changed its name from “Energy Transfer Partners, L.P.” to “Energy Transfer, LP” and Sunoco Logistics Partners L.P. changed its name to “Energy Transfer Partners, L.P.”
Energy Transfer, LP is a wholly-owned subsidiary of Energy Transfer Partners, L.P.
For purposes of maintaining clarity, the following references are used herein:
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References to “ETLP” refer to the entity named Energy Transfer, LP subsequent to the close of the merger;
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References to “Sunoco Logistics” refer to the entity named Sunoco Logistics Partners L.P. prior to the close of the merger; and
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References to “ETP” refer to the consolidated entity named Energy Transfer Partners, L.P. subsequent to the close of the merger.
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The consolidated financial statements of ETE presented herein include the results of operations of:
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•
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our controlled subsidiaries, ETP and Sunoco LP;
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consolidated subsidiaries of our controlled subsidiaries and our wholly-owned subsidiaries that own general partner interests and IDR interests in ETP and Sunoco LP; and
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our wholly-owned subsidiary, Lake Charles LNG.
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Our subsidiaries also own varying undivided interests in certain pipelines. Ownership of these pipelines has been structured as an ownership of an undivided interest in assets, not as an ownership interest in a partnership, limited liability company, joint venture or other forms of entities. Each owner controls marketing and invoices separately, and each owner is responsible for any loss, damage or injury that may occur to their own customers. As a result, we apply proportionate consolidation for our interests in these entities.
Business Operations
The Parent Company’s principal sources of cash flow are derived from its direct and indirect investments in the limited partner and general partner interests in ETP and Sunoco LP and cash flows from the operations of Lake Charles LNG. The Parent Company’s primary cash requirements are for general and administrative expenses, debt service requirements and distributions to its partners. Parent Company-only assets are not available to satisfy the debts and other obligations of ETE’s subsidiaries. In order to understand the financial condition of the Parent Company on a stand-alone basis, see Note
15
for stand-alone financial information apart from that of the consolidated partnership information included herein.
Our financial statements reflect the following reportable business segments:
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Investment in ETP, including the consolidated operations of ETP;
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Investment in Sunoco LP, including the consolidated operations of Sunoco LP;
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Investment in Lake Charles LNG, including the operations of Lake Charles LNG; and
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Corporate and Other, including the following:
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•
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activities of the Parent Company; and
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•
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the goodwill and property, plant and equipment fair value adjustments recorded as a result of the 2004 reverse acquisition of Heritage Propane Partners, L.P.
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Basis of Presentation
The unaudited financial information included in this Form 10-Q has been prepared on the same basis as the audited consolidated financial statements for the year ended
December 31, 2016
included as Exhibit 99.1 to our Form 8-K filed on October 2, 2017. In the opinion of the Partnership’s management, such financial information reflects all adjustments necessary for a fair presentation of the financial position and the results of operations for such interim periods in accordance with GAAP. All intercompany items and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been omitted pursuant to the rules and regulations of the SEC.
For prior periods reported herein, certain transactions related to the business of legacy Sunoco Logistics have been reclassified from cost of products sold to operating expenses; these transactions include sales between operating subsidiaries and their marketing affiliate. Additionally, there were other prior period amounts reclassified to conform to the
2017
presentation. Other than the reclassification of certain balances to assets and liabilities held for sale and certain revenues and expenses to discontinued operations, these reclassifications had no impact on net income or total equity.
Use of Estimates
The unaudited consolidated financial statements have been prepared in conformity with GAAP, which includes the use of estimates and assumptions made by management that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities that exist at the date of the consolidated financial statements. Although these estimates are based on management’s available knowledge of current and expected future events, actual results could be different from those estimates.
Subsidiary Common Unit Transactions
The Parent Company accounts for the difference between the carrying amount of its investments in ETP and Sunoco LP and the underlying book value arising from the issuance or redemption of units by ETP or Sunoco LP (excluding transactions with the Parent Company) as capital transactions.
Recent Accounting Pronouncements
ASU 2014-09
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09”), 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. The Partnership expects to adopt ASU 2014-09 in the first quarter of 2018 and will apply the cumulative catchup transition method, which requires recognition, upon the date of initial application, of the cumulative effect of the retrospective application of the standard.
We are continuing the process of evaluating our revenue contracts by segment and fee type to determine the potential impact of adopting the new standard. At this point in our evaluation process, we have determined that the timing and/or amount of revenue that we recognize on certain contracts (as discussed below) may be impacted by the adoption of the new standard; however, we are still in the process of quantifying these impacts and cannot say whether or not they would be material to our financial statements.
We currently anticipate a change to revenues and costs associated with the accounting for noncash consideration in multiple of ETP’s reportable segments as well as the accounting for certain processing contracts in ETP’s midstream operations. We do not expect these changes in the accounting for noncash consideration or processing contracts to impact net income.
We are still evaluating the potential impact of the adoption of ASU 2014-09 to contributions in aid of construction costs (“CIAC”) arrangements and materiality of any related changes. While we do not expect any impacts to net income from the application of the standard to other transactions, we have not concluded whether the application of the standard to CIAC transactions could impact net income.
We have substantially completed a detailed review of revenue contracts representative of Sunoco LP’s business segments and their revenue streams; however, we continue to evaluate contract modifications and new contracts that have been or will be entered prior to the adoption date. As a result of the evaluation performed to date, we have determined that the timing and/or amount of revenue that Sunoco LP recognizes on certain contracts will be impacted by the adoption of the new standard; however, we are quantifying these impacts and cannot currently conclude whether or not they would be material to the financial statements.
We continue to assess the impact of the disclosure requirements under the new standard and are evaluating the manner in which we will disaggregate revenue into categories that show how economic factors affect the nature, timing and uncertainty of revenue and cash flows generated from contracts with customers. In addition, we are in the process of implementing appropriate changes to our business processes, systems and controls to support recognition and disclosure under the new standard. We continue to monitor additional authoritative or interpretive guidance related to the new standard as it becomes available, as well as comparing our conclusions on specific interpretative issues to other peers in our industry, to the extent that such information is available to us.
ASU 2016-02
In February 2016, the FASB issued Accounting Standards Update No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”), which establishes the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Partnership is currently evaluating the impact that adopting this new standard will have on the consolidated financial statements and related disclosures.
ASU 2016-09
On January 1, 2017, the Partnership adopted Accounting Standards Update No. 2016-09,
Stock Compensation (Topic 718)
(“ASU 2016-09”). The objective of the update is to reduce complexity in accounting standards. The areas for simplification in this update involve several aspects of the accounting for employee 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 this standard did not have a material impact on the Partnership’s consolidated financial statements and related disclosures.
ASU 2016-16
In October 2016, the FASB issued Accounting Standards Update No. 2016-16,
Income Taxes (Topic 740): Intra-entity Transfers of Assets Other Than Inventory
(“ASU 2016-16”), which requires that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this update do not change GAAP for the pre-tax effects of an intra-entity asset transfer under Topic 810, Consolidation, or for an intra-entity transfer of inventory. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. The Partnership is currently evaluating the impact that adoption of this standard will have on the consolidated financial statements and related disclosures.
ASU 2016-17
On January 1, 2017, the Partnership adopted Accounting Standards Update No. 2016-17,
Consolidation (Topic 810): Interests Held Through Related Parties That Are Under Common Control
(“ASU 2016-17”), which amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (“VIE”) should treat indirect interests
in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. Under the amendments, a single decision maker is required to include indirect interests on a proportionate basis consistent with indirect interests held through other related parties. The adoption of this standard did not have an impact on the Partnership’s consolidated financial statements and related disclosures.
ASU 2017-04
In January 2017, the FASB issued ASU No. 2017-04 “
Intangibles-Goodwill and other (Topic 350): Simplifying the test for goodwill impairment.
” The amendments in this update remove the second step of the two-step test currently required by Topic 350. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. This ASU is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Partnership expects that the adoption of this standard will change its approach for measuring goodwill impairment; however, this standard requires prospective application and therefore will only impact periods subsequent to adoption.
Sunoco LP early adopted ASC No. 2017-04 during its interim goodwill impairment test in the second quarter of 2017. The Partnership plans to apply this ASU for its annual goodwill impairment test in the fourth quarter of 2017.
ASU 2017-12
In August 2017, the FASB issued ASU No. 2017-12 “
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.
” The amendments in this update improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the amendments in this update make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. This ASU is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Partnership is currently evaluating the impact that adopting this new standard will have on the consolidated financial statements and related disclosures.
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2.
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ACQUISITIONS AND DIVESTURES
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Rover Contribution Agreement
In July 2017, ETP announced that it had entered into a contribution agreement with a fund managed by Blackstone Energy Partners and Blackstone Capital Partners (“Blackstone”), for the purchase by Blackstone of a
49.9%
interest in the holding company that owns
65%
of the Rover pipeline (“Rover Holdco”). The agreement with Blackstone required Blackstone to contribute, at closing, funds to reimburse ETP for its pro rata share of the Rover construction costs incurred by ETP through the closing date, along with the payment of additional amounts subject to certain adjustments. The transaction closed in October 2017. As a result of this closing, Rover Holdco is now owned
50.1%
by ETP and
49.9%
by Blackstone.
Permian Express Partners
In February 2017, Sunoco Logistics formed Permian Express Partners LLC (“PEP”), a strategic joint venture with ExxonMobil. Sunoco Logistics contributed its Permian Express 1, Permian Express 2, Permian Longview and Louisiana Access pipelines. ExxonMobil contributed its Longview to Louisiana and Pegasus pipelines, Hawkins gathering system, an idle pipeline in southern Oklahoma, and its Patoka, Illinois terminal.
Assets contributed to PEP by ExxonMobil were reflected at fair value on the Partnership’s consolidated balance sheet at the date of the contribution, including
$547 million
of intangible assets and
$435 million
of property, plant and equipment.
In July 2017, ETP contributed an approximate
15%
ownership interest in Dakota Access, LLC (“Dakota Access”) and Energy Transfer Crude Oil Company, LLC (“ETCO”) to PEP, which resulted in an increase in ETP’s ownership interest in PEP to approximately
88%
. ETP maintains a controlling financial and voting interest in PEP and is the operator of all of the assets. As such, PEP is reflected as a consolidated subsidiary of ETP. ExxonMobil’s
interest in PEP is reflected as noncontrolling interest in the consolidated balance sheets.
ExxonMobil’s contribution resulted in an increase of
$988 million
in noncontrolling interest, which is reflected in “Capital contributions from noncontrolling interest” in the consolidated statement of equity.
Sunoco LP Convenience Store Sale
On April 6, 2017, Sunoco LP entered into a definitive asset purchase agreement for the sale of a portfolio of approximately
1,112
Sunoco LP operated retail fuel outlets in 19 geographic regions, together with ancillary businesses and related assets, including the Laredo Taco Company, to 7-Eleven, Inc. for an aggregate purchase price of
$3.3 billion
(the “7-Eleven
Transaction”). The closing of the transaction contemplated by the asset purchase agreement is expected to occur within the fourth quarter of 2017 or early portion of the first quarter of 2018.
With the assistance of a third-party brokerage firm, Sunoco LP is continuing marketing efforts with respect to approximately
208
Stripes sites located in certain West Texas, Oklahoma and New Mexico markets, which were not included in the 7-Eleven purchase agreement.
Sunoco LP Real Estate Sale
In January 2017, with the assistance of a third-party brokerage firm, Sunoco LP launched a portfolio optimization plan to market and sell
97
real estate assets located in Florida, Louisiana, Massachusetts, Michigan, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Texas and Virginia. The properties will be sold through a sealed-bid sale. Of the
97
properties,
27
have been sold and an additional
14
are under contract to be sold.
31
are being sold to 7-Eleven and
10
are being sold in another transaction. The remaining
15
continue to be marketed by the third-party brokerage firm.
The assets under the asset purchase agreement, the
208
Stripes sites and the real estate assets subject to the portfolio optimization plan comprise the retail divestment presented as discontinued operations (“Retail Divestment”).
The Partnership has concluded that it meets the accounting requirements for reporting results of operations and cash flows of Sunoco LP’s continental United States retail convenience stores as discontinued operations and the related assets and liabilities as held for sale.
The following tables present the aggregate carrying amounts of assets and liabilities classified as held for sale in the consolidated balance sheet:
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September 30, 2017
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December 31, 2016
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Carrying amount of assets classified as held for sale:
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Cash and cash equivalents
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$
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24
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$
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20
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Inventories
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183
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188
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Other current assets
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91
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83
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Property, plant and equipment, net
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2,132
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2,185
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Goodwill
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1,216
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1,568
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Intangible assets, net
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499
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503
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Other non-current assets, net
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2
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2
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Total assets classified as held for sale in the Consolidated Balance Sheet
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$
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4,147
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$
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4,549
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Carrying amount of liabilities classified as held for sale:
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Other current and non-current liabilities
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81
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68
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Total liabilities classified as held for sale in the Consolidated Balance Sheet
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$
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81
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$
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68
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The results of operations associated with discontinued operations are presented in the following table:
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2017
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2016
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2017
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2016
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REVENUES
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$
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2,312
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$
|
1,970
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$
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6,580
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$
|
5,474
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COSTS AND EXPENSES
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Cost of products sold
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1,927
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1,585
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5,478
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|
4,445
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Operating expenses
|
236
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|
250
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727
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727
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Depreciation, depletion and amortization
|
5
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47
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68
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149
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Selling, general and administrative
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57
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37
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122
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|
74
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Total costs and expenses
|
2,225
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|
|
1,919
|
|
|
6,395
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|
5,395
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OPERATING INCOME
|
87
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|
|
51
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|
|
185
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|
79
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Interest expense, net
|
13
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|
7
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22
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22
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Other, net
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38
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1
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367
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4
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INCOME (LOSS) FROM DISCONTINUED OPERATIONS BEFORE INCOME TAX EXPENSE (BENEFIT)
|
36
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43
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(204
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)
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53
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Income tax expense
|
30
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|
31
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|
60
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|
29
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INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
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$
|
6
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$
|
12
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$
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(264
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)
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$
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24
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INCOME (LOSS) FROM DISCONTINUED OPERATIONS BEFORE INCOME TAX EXPENSE (BENEFIT) ATTRIBUTABLE TO ETE
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$
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—
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$
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—
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$
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(9
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)
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|
$
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—
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In connection with the classification of those assets as held-for-sale, the related goodwill was tested for impairment based on the assumed proceeds from the sale of those assets, resulting in goodwill impairment charges of
$320 million
recognized in the three months ended June 30, 2017 and
$44 million
recognized in the three months ended September 30, 2017.
3.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash on hand, demand deposits, and investments with original maturities of three months or less. We consider cash equivalents to include short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value.
We place our cash deposits and temporary cash investments with high credit quality financial institutions. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limit.
Non-cash investing activities were as follows:
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Nine Months Ended
September 30,
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2017
|
|
2016
|
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NON-CASH INVESTING ACTIVITIES:
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Accrued capital expenditures
|
$
|
1,237
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|
|
$
|
1,001
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Losses from subsidiary common unit issuances, net
|
(57
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)
|
|
(3
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)
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NON-CASH FINANCING ACTIVITIES:
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Contribution of property, plant and equipment from noncontrolling interest
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$
|
988
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|
|
$
|
—
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4.
INVENTORIES
Inventories consisted of the following:
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September 30, 2017
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December 31, 2016
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Natural gas and NGLs
|
$
|
609
|
|
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$
|
699
|
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Crude oil
|
696
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|
|
683
|
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Refined products
|
413
|
|
|
483
|
|
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Other
|
239
|
|
|
238
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Total inventories
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$
|
1,957
|
|
|
$
|
2,103
|
|
ETP utilizes commodity derivatives to manage price volatility associated with its natural gas inventories stored in our Bammel storage facility. Changes in fair value of designated hedged inventory are recorded in inventory on our consolidated balance sheets and cost of products sold in our consolidated statements of operations.
5.
FAIR VALUE MEASURES
Based on the estimated borrowing rates currently available to us and our subsidiaries for loans with similar terms and average maturities, the aggregate fair value and carrying amount of our consolidated debt obligations as of
September 30, 2017
were
$47.21 billion
and
$45.21 billion
, respectively. As of
December 31, 2016
, the aggregate fair value and carrying amount of our consolidated debt obligations were
$45.05 billion
and
$43.80 billion
, respectively. The fair value of our consolidated debt obligations is Level 2 valuation based on the respective debt obligations’ observable inputs used for similar liabilities.
We have commodity derivatives and interest rate derivatives that are accounted for as assets and liabilities at fair value in our consolidated balance sheets. We determine the fair value of our assets and liabilities subject to fair value measurement by using the highest possible “level” of inputs. Level 1 inputs are observable quotes in an active market for identical assets and liabilities. We consider the valuation of marketable securities and commodity derivatives transacted through a clearing broker with a published price from the appropriate exchange as a Level 1 valuation. Level 2 inputs are inputs observable for similar assets and liabilities. We consider OTC commodity derivatives entered into directly with third parties as a Level 2 valuation since the values of these derivatives are quoted on an exchange for similar transactions. Additionally, we consider our options transacted through our clearing broker as having Level 2 inputs due to the level of activity of these contracts on the exchange in which they trade. We consider the valuation of our interest rate derivatives as Level 2 as the primary input, the LIBOR curve, is based on quotes from an active exchange of Eurodollar futures for the same period as the future interest swap settlements. Level 3 inputs are unobservable. During the
nine months ended
September 30, 2017
,
no
transfers were made between any levels within the fair value hierarchy.
The following tables summarize the gross fair value of our financial assets and liabilities measured and recorded at fair value on a recurring basis as of
September 30, 2017
and
December 31, 2016
based on inputs used to derive their fair values:
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Fair Value Measurements at
September 30, 2017
|
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Fair Value Total
|
|
Level 1
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Level 2
|
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Assets:
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Commodity derivatives:
|
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Natural Gas:
|
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|
|
|
|
|
Basis Swaps IFERC/NYMEX
|
16
|
|
|
16
|
|
|
—
|
|
|
Swing Swaps IFERC
|
2
|
|
|
—
|
|
|
2
|
|
|
Fixed Swaps/Futures
|
28
|
|
|
28
|
|
|
—
|
|
|
Forward Physical Swaps
|
3
|
|
|
—
|
|
|
3
|
|
|
Power:
|
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Forwards
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11
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|
—
|
|
|
11
|
|
|
Futures
|
1
|
|
|
1
|
|
|
—
|
|
|
Options — Puts
|
1
|
|
|
1
|
|
|
—
|
|
|
Natural Gas Liquids – Forwards/Swaps
|
213
|
|
|
213
|
|
|
—
|
|
|
Refined Products — Futures
|
4
|
|
|
4
|
|
|
—
|
|
|
Crude – Futures
|
2
|
|
|
2
|
|
|
—
|
|
|
Total commodity derivatives
|
281
|
|
|
265
|
|
|
16
|
|
|
Total assets
|
$
|
281
|
|
|
$
|
265
|
|
|
$
|
16
|
|
|
Liabilities:
|
|
|
|
|
|
|
Interest rate derivatives
|
$
|
(210
|
)
|
|
$
|
—
|
|
|
$
|
(210
|
)
|
|
Commodity derivatives:
|
|
|
|
|
|
|
Natural Gas:
|
|
|
|
|
|
|
Basis Swaps IFERC/NYMEX
|
(22
|
)
|
|
(22
|
)
|
|
—
|
|
|
Swing Swaps IFERC
|
(3
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
Fixed Swaps/Futures
|
(22
|
)
|
|
(22
|
)
|
|
—
|
|
|
Forward Physical Swaps
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
Power:
|
|
|
|
|
|
|
Forwards
|
(9
|
)
|
|
—
|
|
|
(9
|
)
|
|
Futures
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
Natural Gas Liquids – Forwards/Swaps
|
(261
|
)
|
|
(261
|
)
|
|
—
|
|
|
Refined Products — Futures
|
(3
|
)
|
|
(3
|
)
|
|
—
|
|
|
Crude — Futures
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
Total commodity derivatives
|
(323
|
)
|
|
(311
|
)
|
|
(12
|
)
|
|
Total liabilities
|
$
|
(533
|
)
|
|
$
|
(311
|
)
|
|
$
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
December 31, 2016
|
|
|
Fair Value Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
Natural Gas:
|
|
|
|
|
|
|
|
|
Basis Swaps IFERC/NYMEX
|
14
|
|
|
14
|
|
|
—
|
|
|
—
|
|
|
Swing Swaps IFERC
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
Fixed Swaps/Futures
|
96
|
|
|
96
|
|
|
—
|
|
|
—
|
|
|
Forward Physical Contracts
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
Power:
|
|
|
|
|
|
|
|
|
Forwards
|
4
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
Futures
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
Options — Calls
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
Natural Gas Liquids — Forwards/Swaps
|
233
|
|
|
233
|
|
|
—
|
|
|
—
|
|
|
Refined Products — Futures
|
2
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
Crude - Futures
|
9
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
Total commodity derivatives
|
363
|
|
|
356
|
|
|
7
|
|
|
—
|
|
|
Total assets
|
$
|
363
|
|
|
$
|
356
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate derivatives
|
$
|
(193
|
)
|
|
$
|
—
|
|
|
$
|
(193
|
)
|
|
$
|
—
|
|
|
Embedded derivatives in Preferred Units
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
Commodity derivatives:
|
|
|
|
|
|
|
|
|
Natural Gas:
|
|
|
|
|
|
|
|
|
Basis Swaps IFERC/NYMEX
|
(11
|
)
|
|
(11
|
)
|
|
—
|
|
|
—
|
|
|
Swing Swaps IFERC
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
Fixed Swaps/Futures
|
(149
|
)
|
|
(149
|
)
|
|
—
|
|
|
—
|
|
|
Power:
|
|
|
|
|
|
|
|
|
Forwards
|
(5
|
)
|
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
Futures
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
Natural Gas Liquids — Forwards/Swaps
|
(273
|
)
|
|
(273
|
)
|
|
—
|
|
|
—
|
|
|
Refined Products — Futures
|
(23
|
)
|
|
(23
|
)
|
|
—
|
|
|
—
|
|
|
Crude - Futures
|
(13
|
)
|
|
(13
|
)
|
|
—
|
|
|
—
|
|
|
Total commodity derivatives
|
(478
|
)
|
|
(470
|
)
|
|
(8
|
)
|
|
—
|
|
|
Total liabilities
|
$
|
(672
|
)
|
|
$
|
(470
|
)
|
|
$
|
(201
|
)
|
|
$
|
(1
|
)
|
6.
NET INCOME PER LIMITED PARTNER UNIT
A reconciliation of income and weighted average units used in computing basic and diluted income per unit is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Income from continuing operations
|
$
|
798
|
|
|
$
|
29
|
|
|
$
|
1,475
|
|
|
$
|
777
|
|
|
Less: Income (loss) from continuing operations attributable to noncontrolling interest
|
546
|
|
|
(180
|
)
|
|
763
|
|
|
15
|
|
|
Income from continuing operations, net of noncontrolling interest
|
252
|
|
|
209
|
|
|
712
|
|
|
762
|
|
|
Less: General Partner’s interest in income
|
1
|
|
|
—
|
|
|
2
|
|
|
2
|
|
|
Less: Convertible Unitholders’ interest in income
|
11
|
|
|
2
|
|
|
25
|
|
|
3
|
|
|
Income from continuing operations available to Limited Partners
|
$
|
240
|
|
|
$
|
207
|
|
|
$
|
685
|
|
|
$
|
757
|
|
|
Basic Income from Continuing Operations per Limited Partner Unit:
|
|
|
|
|
|
|
|
|
Weighted average limited partner units
|
1,079.1
|
|
|
1,045.5
|
|
|
1,077.9
|
|
|
1,045.0
|
|
|
Basic income from continuing operations per Limited Partner unit
|
$
|
0.22
|
|
|
$
|
0.20
|
|
|
$
|
0.64
|
|
|
$
|
0.72
|
|
|
Basic loss from discontinued operations per Limited Partner unit
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
|
Diluted Income from Continuing Operations per Limited Partner Unit:
|
|
|
|
|
|
|
|
|
Income from continuing operations available to Limited Partners
|
$
|
240
|
|
|
$
|
207
|
|
|
$
|
685
|
|
|
$
|
757
|
|
|
Dilutive effect of equity-based compensation of subsidiaries and distributions to Convertible Unitholders
|
10
|
|
|
2
|
|
|
25
|
|
|
3
|
|
|
Diluted income from continuing operations available to Limited Partners
|
$
|
250
|
|
|
$
|
209
|
|
|
$
|
710
|
|
|
$
|
760
|
|
|
Weighted average limited partner units
|
1,079.1
|
|
|
1,045.5
|
|
|
1,077.9
|
|
|
1,045.0
|
|
|
Dilutive effect of unconverted unit awards and Convertible Units
|
69.2
|
|
|
55.2
|
|
|
69.4
|
|
|
26.3
|
|
|
Diluted weighted average limited partner units
|
1,148.3
|
|
|
1,100.7
|
|
|
1,147.3
|
|
|
1,071.3
|
|
|
Diluted income from continuing operations per Limited Partner unit
|
$
|
0.22
|
|
|
$
|
0.19
|
|
|
$
|
0.62
|
|
|
$
|
0.71
|
|
|
Diluted loss from discontinued operations per Limited Partner unit
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
7.
DEBT OBLIGATIONS
Parent Company Indebtedness
The Parent Company’s indebtedness, including its senior notes, senior secured term loan and senior secured revolving credit facility, is secured by all of its and certain of its subsidiaries’ tangible and intangible assets.
Energy Transfer Equity, L.P. Senior Notes Offering
In October 2017, ETE issued
$1 billion
aggregate principal amount of
4.25%
senior notes due 2023. The
$990 million
net proceeds from the offering are intended to be used to repay a portion of the outstanding indebtedness under ETE’s term loan facility and for general partnership purposes.
The senior notes were registered under the Securities Act of 1933 (as amended). The Partnership may redeem some or all of the senior notes at any time, or from time to time, pursuant to the terms of the indenture and related indenture supplements related to the senior notes. The balance is payable upon maturity. Interest on the senior notes is paid semi-annually.
ETE Term Loan Facility
On February 2, 2017, the Partnership entered into a Senior Secured Term Loan Agreement (the “Term Credit Agreement”) with Credit Suisse AG, Cayman Islands Branch, as administrative agent, and the other lenders party thereto. The Term Credit Agreement has a scheduled maturity date of February 2, 2024, with an option for the Parent Company to extend the term subject to the terms and conditions set forth therein. The Term Credit Agreement contains an accordion feature, under which the total commitments may be increased, subject to the terms thereof.
Pursuant to the Term Credit Agreement, the Term Lenders have provided senior secured financing in an aggregate principal amount of
$2.2 billion
(the “Term Loan Facility”). The Parent Company is not required to make any amortization payments with respect to the term loans under the Term Credit Agreement.
Under certain circumstances and subject to certain reinvestment rights, the Parent Company is required to prepay the term loan in connection with dispositions of (a) IDRs in ETP or (b) equity interests of any person which owns, directly or indirectly, IDRs in ETP, in each case, with a percentage ranging from 50% to 75% of such net proceeds in excess of $50 million.
Under the Term Credit Agreement, the obligations of the Parent Company are secured by a lien on substantially all of the Parent Company’s and certain of its subsidiaries’ tangible and intangible assets including (i) approximately 27.5 million common units representing limited partner interests in ETP owned by the Partnership; and (ii) the Partnership’s 100% equity interest in Energy Transfer Partners, L.L.C. and Energy Transfer Partners GP, L.P., through which the Partnership indirectly holds all of the outstanding general partnership interests and IDRs in ETP.
The Term Loan Facility is not guaranteed by any of the Partnership’s subsidiaries.
Interest accrues on advances at a LIBOR rate or a base rate, based on the election of the Parent Company for each interest period, plus an applicable margin. The applicable margin for LIBOR rate loans is
2.75%
and the applicable margin for base rate loans is
1.75%
. Proceeds of the borrowings under the Term Credit Agreement were used to refinance amounts outstanding under the Parent Company’s existing term loan facilities and to pay transaction fees and expenses related to the Term Loan Facility and other transactions incidental thereto.
On October 18, 2017, ETE amended its existing Term Credit Agreement (the “Amendment”) to reduce the applicable margin for LIBOR rate loans from
2.75%
to
2.00%
and for base rate loans from
1.75%
to
1.00%
.
In connection with the Amendment, the Partnership prepaid a portion of amounts outstanding under the senior secured term loan agreement.
Revolving Credit Facility
On March 24, 2017, the Parent Company entered into a Credit Agreement (the “Revolver Credit Agreement”) with Credit Suisse AG, Cayman Islands Branch as administrative agent and the other lenders party thereto (the “Revolver Lenders”). The Revolver Credit Agreement has a scheduled maturity date of March 24, 2022 and includes an option for the Parent Company to extend the term, in each case subject to the terms and conditions set forth therein. Pursuant to the Revolver Credit Agreement, the Revolver Lenders have committed to provide advances up to an aggregate principal amount of
$1.5 billion
at any one time outstanding, and the Parent Company has the option to request increases in the aggregate commitments by up to
$500 million
in additional commitments. As part of the aggregate commitments under the facility, the Revolver Credit Agreement provides for letters of credit to be issued at the request of the Parent Company in an aggregate amount not to exceed a
$150 million
sublimit. Under the Revolver Credit Agreement, the obligations of the Partnership are secured by a lien on substantially all of the Partnership’s and certain of its subsidiaries’ tangible and intangible assets.
Interest accrues on advances at a LIBOR rate or a base rate, based on the election of the Parent Company for each interest period, plus an applicable margin. The issuing fees for letters of credit are also based on an applicable margin. The applicable margin used in connection with interest rates and fees is based on the then applicable leverage ratio of the Parent Company. The applicable margin for LIBOR rate loans and letter of credit fees ranges from
1.75%
to
2.50%
and the applicable margin for base rate loans ranges from
0.75%
to
1.50%
. The Parent Company will also pay a commitment fee based on its leverage ratio on the actual daily unused amount of the aggregate commitments. As of
September 30, 2017
, there were
$1.19 billion
outstanding borrowings under the Parent Company revolver credit facility and the amount available for future borrowings was
$309 million
.
Subsidiary Indebtedness
Sunoco LP Term Loan
Sunoco LP has a term loan agreement which provides secured financing in an aggregate principal amount of up to
$2.035 billion
due 2019. In January 2017, Sunoco LP entered into a limited waiver to its term loan, under which the agents and lenders party thereto waived and deemed remedied the miscalculations of Sunoco LP’s leverage ratio as set forth in its previously delivered compliance certificates and the resulting failure to pay incremental interest owed under the term loan. As of
September 30, 2017
, the balance on the term loan was
$1.24 billion
.
ETP Senior Notes Redemption
In October 2017,
ETP
redeemed all of the outstanding
$500 million
aggregate principal amount of ETLP’s
6.50%
senior notes due July 2021 and all of the outstanding
$700 million
aggregate principal amount of ETLP’s
5.50%
senior notes due April 2023.
The aggregate amount paid to redeem these notes, including call premiums, was approximately
$1.23 billion
.
ETP Senior Notes Offering
In September 2017, Sunoco Logistics Partners Operations L.P., a subsidiary of ETP, issued
$750 million
aggregate principal amount of
4.00%
senior notes due 2027 and
$1.50 billion
aggregate principal amount of
5.40%
senior notes due 2047. The
$2.22 billion
net proceeds from the offering were used to redeem all of the
$500 million
aggregate principal amount of ETLP’s
6.5%
senior notes due 2021, to repay borrowings outstanding under the Sunoco Logistics
Credit Facility (described below) and for general partnership purposes.
The senior notes were registered under the Securities Act of 1933 (as amended).
ETP
may redeem some or all of the senior notes at any time, or from time to time, pursuant to the terms of the indenture and related indenture supplements related to the senior notes. The principal is payable upon maturity. Interest on the senior notes is paid semi-annually. The senior notes are guaranteed by
ETP
on a senior unsecured basis as long as it guarantees any of Sunoco Logistics Partners Operations L.P.’s other long-term debt.
As a result of the parent guarantee, the senior notes will rank equally in right of payment with
ETP’s existing and future senior debt, and senior in right of payment to any subordinated debt ETP may incur.
ETLP Credit Facility
The ETLP Credit Facility allows for borrowings of up to
$3.75 billion
and matures in November 2019. The indebtedness under the ETLP Credit Facility is unsecured, is not guaranteed by any of the Partnership’s subsidiaries and has equal rights to holders of our current and future unsecured debt. In September 2016, ETLP initiated a commercial paper program under the borrowing limits established by the
$3.75 billion
ETLP Credit Facility.
As of
September 30, 2017
,
the ETLP Credit Facility had
$2.06 billion
of outstanding borrowings, all of which was
commercial paper.
Sunoco Logistics Credit Facilities
ETP maintains the Sunoco Logistics
$2.50 billion
unsecured revolving credit facility (the “Sunoco Logistics Credit Facility”), which matures in March 2020. The Sunoco Logistics Credit Facility contains an accordion feature, under which the total aggregate commitment may be increased to
$3.25 billion
under certain conditions.
As of
September 30, 2017
,
the Sunoco Logistics Credit Facility had
$35 million
of outstanding borrowings.
In December 2016, Sunoco Logistics entered into an agreement for a 364-day maturity credit facility (“364-Day Credit Facility”), due to mature on the earlier of the occurrence of the Sunoco Logistics Merger or in December 2017, with a total lending capacity of
$1.00 billion
.
In connection with the Sunoco Logistics Merger, the 364-Day Credit Facility was terminated and repaid in May 2017.
Sunoco LP Credit Facility
Sunoco LP maintains a
$1.50 billion
revolving credit agreement, which was amended in April 2015 from the initially committed amount of
$1.25 billion
and matures in September 2019. In January 2017, Sunoco LP entered into a limited waiver to its revolving credit facility, under which the agents and lenders party thereto waived and deemed remedied the miscalculations of Sunoco LP’s leverage ratio as set forth in its previously delivered compliance certificates and the resulting failure to pay incremental interest owed under the revolving credit facility. As of
September 30, 2017
, the Sunoco LP credit facility had
$644 million
of outstanding borrowings and
$9 million
in standby letters of credit. The unused availability on the revolver at
September 30, 2017
was
$847 million
.
On October 16, 2017, Sunoco LP entered into the Fifth Amendment to the Credit Agreement with the lenders party thereto and Bank of America, N.A., in its capacity as a letter of credit issuer, as swing line lender, and as administrative agent. The Fifth Amendment amended the agreement to (i) permit the dispositions contemplated by the Retail Divestment, (ii) extend the interest coverage ratio covenant of
2.25x
through maturity, (iii) modify the definition of consolidated EBITDA to include the pro forma effect of the divestitures and the new fuel supply contracts, and (iv) modify the leverage ratio covenant.
Bakken Credit Facility
In August 2016, Energy Transfer Partners, L.P., Sunoco Logistics and Phillips 66 completed project-level financing of the Bakken Pipeline. The
$2.50 billion
credit facility provides substantially all of the remaining capital necessary to complete the projects. As of
September 30, 2017
,
$2.50 billion
was outstanding under this credit facility.
PennTex Revolving Credit Facility
PennTex previously maintained a
$275 million
revolving credit commitment (the “PennTex Revolving Credit Facility”).
In August 2017, the PennTex Revolving Credit Facility was repaid and terminated.
Compliance with Our Covenants
We and our subsidiaries were in compliance with all requirements, tests, limitations, and covenants related to our respective credit agreements as of
September 30, 2017
.
8.
PREFERRED UNITS
In January 2017, Energy Transfer Partners, L.P. repurchased all of its
1.9 million
outstanding Preferred Units for cash in the aggregate amount of
$53 million
.
9.
EQUITY
ETE
The changes in ETE common units and Convertible Units during the
nine months ended September 30,
2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Convertible Units
|
|
Number of Common Units
|
|
Outstanding at December 31, 2016
|
329.3
|
|
|
1,046.9
|
|
|
Issuance of common units
|
—
|
|
|
32.2
|
|
|
Outstanding at September 30, 2017
|
329.3
|
|
|
1,079.1
|
|
ETE Equity Distribution Agreement
In March 2017, the Partnership entered into an equity distribution agreement with an aggregate offering price up to
$1 billion
. There was no activity under the distribution agreements for the
nine months ended
September 30, 2017
.
Series A Convertible Preferred Units
As of
September 30, 2017
, the Partnership had
329.3 million
Series A Convertible Preferred Units outstanding with a carrying value of
$377 million
.
ETE January 2017 Private Placement and ETP Unit Purchase
In January 2017, ETE issued
32.2 million
common units representing limited partner interests in the Partnership to certain institutional investors in a private transaction for gross proceeds of approximately
$580 million
, which ETE used to purchase
23.7 million
newly issued ETP common units for approximately
$568 million
.
Repurchase Program
During the
nine months ended
September 30, 2017
, ETE did not repurchase any ETE common units under its current buyback program. As of
September 30, 2017
,
$936 million
remained available to repurchase under the current program.
Subsidiary Equity Transactions
The Parent Company accounts for the difference between the carrying amount of its investment in ETP and Sunoco LP and the underlying book value arising from the issuance or redemption of units by ETP and Sunoco LP (excluding transactions with the Parent Company) as capital transactions. As a result of these transactions, during the
nine months ended
September 30, 2017
, we recognized decreases in partners’ capital of
$57 million
.
ETP Common Unit Transaction
In connection with the Sunoco Logistics Merger, the previous Energy Transfer Partners, L.P. equity distribution agreement was terminated. In May 2017, ETP entered into an equity distribution agreement with an aggregate offering price up to
$1.00 billion
.
During the
nine months ended September 30,
2017
, ETP received proceeds of
$498 million
,
net of
$5 million
of commissions, from the issuance of common units pursuant to equity distribution agreements, which were used for general partnership purposes.
In connection with the Sunoco Logistics Merger, the previous Energy Transfer Partners, L.P. distribution reinvestment plan was terminated.
In July 2017, ETP initiated a new distribution reinvestment plan. During the
nine months ended
September 30, 2017
,
distributions of
$106 million
were reinvested under the distribution reinvestment plan.
ETP
August 2017 Units Offering
In August 2017,
ETP
issued
54 million
ETP common units
in an underwritten public offering. Net proceeds of
$997 million
from the offering were used by
ETP
to repay amounts outstanding under its revolving credit facilities, to fund capital expenditures and for general partnership purposes.
Bakken Equity Sale
In February 2017, Bakken Holdings Company LLC, an entity in which ETP indirectly owns a
100%
membership interest, sold a
49%
interest in its wholly-owned subsidiary, Bakken Pipeline Investments LLC, to MarEn Bakken Company LLC, an entity jointly owned by Marathon Petroleum Corporation and Enbridge Energy Partners, L.P., for
$2.00 billion
in cash.
Bakken Pipeline Investments LLC indirectly owns a
75%
interest in each of Dakota Access and ETCO.
The remaining
25%
of each of Dakota Access and ETCO is owned by wholly-owned subsidiaries of Phillips 66.
In July 2017, ETP contributed a portion of its ownership interest in Dakota Access and ETCO to PEP, a strategic joint venture with ExxonMobil. ETP continues to consolidate Dakota Access and ETCO subsequent to this transaction.
PennTex Tender Offer and Limited Call Right Exercise
In June 2017, ETP purchased all of the outstanding PennTex common units not previously owned by ETP for
$20.00
per common unit in cash.
ETP now owns all of the economic interests of PennTex, and PennTex common units are no longer publicly traded or listed on the NASDAQ.
Sunoco LP Common Unit Transactions
During the
nine months ended September 30,
2017
, Sunoco LP received net proceeds of
$33 million
from the issuance of
1.3 million
Sunoco LP common units pursuant to its equity distribution agreement. Sunoco LP intends to use the proceeds from any sales for general partnership purposes. As of
September 30, 2017
,
$295 million
of Sunoco LP’s common units remained available to be issued under the equity distribution agreement.
Sunoco LP Series A Preferred Units
On March 30, 2017, the Partnership purchased Sunoco LP’s
12.0 million
series A preferred units representing limited partner interests in Sunoco LP in a private placement transaction for an aggregate purchase price of
$300 million
.
The distribution rate of Sunoco LP Series A Preferred Units is 10.00%, per annum, of the $25.00 liquidation preference per unit until March 30, 2022, at which point the distribution rate will become a floating rate of 8.00% plus three-month LIBOR of the liquidation preference.
Parent Company Quarterly Distributions of Available Cash
Following are distributions declared and/or paid by us subsequent to
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Record Date
|
|
Payment Date
|
|
Rate
|
|
December 31, 2016 (1)
|
|
February 7, 2017
|
|
February 21, 2017
|
|
$
|
0.2850
|
|
|
March 31, 2017 (1)
|
|
May 10, 2017
|
|
May 19, 2017
|
|
0.2850
|
|
|
June 30, 2017
(1)
|
|
August 7, 2017
|
|
August 21, 2017
|
|
$
|
0.2850
|
|
|
September 30, 2017
(1)
|
|
November 7, 2017
|
|
November 20, 2017
|
|
0.2950
|
|
|
|
|
|
(1)
|
Certain common unitholders elected to participate in a plan pursuant to which those unitholders elected to forego their cash distributions on all or a portion of their common units for a period of up to nine quarters commencing with the distribution for the quarter ended March 31, 2016 and, in lieu of receiving cash distributions on these common units for each such quarter, each said unitholder received Convertible Units (on a one-for-one basis for each common unit as to which the participating unitholder elected be subject to this plan) that entitled them to receive a cash distribution of up to
$0.11
per Convertible Unit.
|
Our distributions declared with respect to our Convertible Units subsequent to
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Record Date
|
|
Payment Date
|
|
Rate
|
|
December 31, 2016
|
|
February 7, 2017
|
|
February 21, 2017
|
|
$
|
0.1100
|
|
|
March 31, 2017
|
|
May 10, 2017
|
|
May 19, 2017
|
|
0.1100
|
|
|
June 30, 2017
|
|
August 7, 2017
|
|
August 21, 2017
|
|
0.1100
|
|
|
September 30, 2017
|
|
November 7, 2017
|
|
November 20, 2017
|
|
0.1100
|
|
ETP Quarterly Distributions of Available Cash
Following the Sunoco Logistics Merger, cash distributions are declared and paid in accordance with the ETP’s limited partnership agreement, which was Sunoco Logistics’ limited partnership agreement prior to the Sunoco Logistics Merger. Under the agreement, within 45 days after the end of each quarter, ETP distributes all cash on hand at the end of the quarter, less reserves established by the general partner in its discretion. This is defined as "available cash" in ETP’s partnership agreement. The general partner has broad discretion to establish cash reserves that it determines are necessary or appropriate to properly conduct ETP's business. ETP will make quarterly distributions to the extent there is sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to the general partner.
If cash distributions exceed
$0.0833
per unit in a quarter, the general partner receives increasing percentages, up to
50 percent
,
of the cash distributed in excess of that amount. These distributions are referred to as “incentive distributions.” The percentage interests shown for the unitholders and the general partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution.
For the quarter ended
December 31, 2016
, Energy Transfer Partners, L.P. and Sunoco Logistics paid distributions on
February 14, 2017
of
$0.7033
and
$0.52
, respectively, per common unit.
Following are distributions declared and/or paid by ETP subsequent to the Sunoco Logistics Merger:
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Record Date
|
|
Payment Date
|
|
Rate
|
|
March 31, 2017
|
|
May 10, 2017
|
|
May 15, 2017
|
|
$
|
0.5350
|
|
|
June 30, 2017
|
|
August 7, 2017
|
|
August 14, 2017
|
|
0.5500
|
|
|
September 30, 2017
|
|
November 7, 2017
|
|
November 14, 2017
|
|
0.5650
|
|
ETE has agreed to relinquish its right to the following amounts of incentive distributions from ETP in future periods:
|
|
|
|
|
|
|
|
|
|
|
Total Year
|
|
2017 (remainder)
|
|
$
|
173
|
|
|
2018
|
|
153
|
|
|
2019
|
|
128
|
|
|
Each year beyond 2019
|
|
33
|
|
Sunoco LP Quarterly Distributions of Available Cash
Following are distributions declared and/or paid by Sunoco LP subsequent to
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Record Date
|
|
Payment Date
|
|
Rate
|
|
December 31, 2016
|
|
February 13, 2017
|
|
February 21, 2017
|
|
$
|
0.8255
|
|
|
March 31, 2017
|
|
May 9, 2017
|
|
May 16, 2017
|
|
0.8255
|
|
|
June 30, 2017
|
|
August 7, 2017
|
|
August 15, 2017
|
|
0.8255
|
|
|
September 30, 2017
|
|
November 7, 2017
|
|
November 14, 2017
|
|
0.8255
|
|
Accumulated Other Comprehensive Income
The following table presents the components of AOCI, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
Available-for-sale securities
|
$
|
7
|
|
|
$
|
2
|
|
|
Foreign currency translation adjustment
|
(5
|
)
|
|
(5
|
)
|
|
Actuarial gain related to pensions and other postretirement benefits
|
9
|
|
|
7
|
|
|
Investments in unconsolidated affiliates, net
|
3
|
|
|
4
|
|
|
Subtotal
|
14
|
|
|
8
|
|
|
Amounts attributable to noncontrolling interest
|
(14
|
)
|
|
(8
|
)
|
|
Total AOCI, net of tax
|
$
|
—
|
|
|
$
|
—
|
|
For the nine months ended September 30, 2017, the Partnership’s income tax expense
included the impact of a one-time adjustment to deferred tax balances as a result of a change in apportionment and corresponding state tax rates resulting from the Sunoco Logistics Merger in April 2017, which resulted in incremental income tax expense of approximately
$68 million
during the periods presented. The remainder of the increase in the effective income tax rate was primarily due to higher nondeductible expenses among the Partnership’s consolidated corporate subsidiaries. In addition, for the three months ended September 30, 2017, the Partnership recognized a
$154 million
deferred tax gain resulting from internal restructuring among its subsidiaries that resulted in a change in tax status for one of the subsidiaries. For the three and nine months ended September 30, 2016, the Partnership’s income tax benefit primarily resulted from losses among the Partnership’s consolidated corporate subsidiaries.
11.
REGULATORY MATTERS, COMMITMENTS, CONTINGENCIES AND ENVIRONMENTAL LIABILITIES
Contingent Residual Support Agreement – AmeriGas
In connection with the closing of the contribution of its propane operations in January 2012,
ETLP (formerly Energy Transfer Partners, L.P.)
agreed to provide contingent residual support of
$1.55 billion
of intercompany borrowings made by AmeriGas and certain of its affiliates with maturities through 2022 from a finance subsidiary of AmeriGas that have maturity dates and repayment terms that mirror those of an equal principal amount of senior notes issued by this finance company subsidiary to third-party purchasers. In 2016, AmeriGas repurchased certain of its senior notes, which caused a reduction in the amount supported by ETLP under the contingent residual support agreement. In February 2017, AmeriGas repurchased a portion of its
7.00%
senior notes
.
The remaining outstanding
7.00%
senior notes were repurchased in May 2017, and ETLP no longer provides contingent residual support for any AmeriGas notes.
FERC Audit
In March 2016, the FERC commenced an audit of Trunkline for the period from January 1, 2013 to present to evaluate Trunkline’s compliance with the requirements of its FERC gas tariff, the accounting regulations of the Uniform System of Accounts as prescribed by the FERC, and the FERC’s annual reporting requirements. The audit is ongoing.
Commitments
In the normal course of our business, we purchase, process and sell natural gas pursuant to long-term contracts and we enter into long-term transportation and storage agreements. Such contracts contain terms that are customary in the industry. We believe that the terms of these agreements are commercially reasonable and will not have a material adverse effect on our financial position or results of operations.
We have certain non-cancelable leases for property and equipment, which require fixed monthly rental payments and expire at various dates through
2047.
The table below reflects rental expense under these operating leases included in operating expenses in the accompanying statements of operations, which include contingent rentals, and rental expense recovered through related sublease rental income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Rental expense
|
$
|
42
|
|
|
$
|
31
|
|
|
$
|
106
|
|
|
$
|
94
|
|
|
Less: Sublease rental income
|
(6
|
)
|
|
(6
|
)
|
|
(19
|
)
|
|
(18
|
)
|
|
Rental expense, net
|
$
|
36
|
|
|
$
|
25
|
|
|
$
|
87
|
|
|
$
|
76
|
|
Certain of our subsidiaries’ joint venture agreements require that they fund their proportionate shares of capital contributions to their unconsolidated affiliates. Such contributions will depend upon their unconsolidated affiliates’ capital requirements, such as for funding capital projects or repayment of long-term obligations.
Litigation and Contingencies
We may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business. Natural gas and crude oil are flammable and combustible. Serious personal injury and significant property damage can arise in connection with their transportation, storage or use. In the ordinary course of business, we are sometimes threatened with or named as a defendant in various lawsuits seeking actual and punitive damages for product liability, personal injury and property damage. We maintain liability insurance with insurers in amounts and with coverage and deductibles management believes are reasonable and prudent, and which are generally accepted in the industry. However, there can be no assurance that the levels of insurance protection currently in effect will continue to be available at reasonable prices or that such levels will remain adequate to protect us from material expenses related to product liability, personal injury or property damage in the future.
Dakota Access Pipeline
On July 25, 2016, the U.S. Army Corps of Engineers (“USACE”) issued permits to Dakota Access consistent with environmental and historic preservation statutes for the pipeline to make two crossings of the Missouri River in North Dakota, including a crossing of the Missouri River at Lake Oahe. After significant delay, the USACE also issued easements to allow the pipeline to cross land owned by the USACE adjacent to the Missouri River in two locations. Also in July, the Standing Rock Sioux Tribe (“SRST”) filed a lawsuit in the U.S. District Court for the District of Columbia against the USACE that challenged the legality of the permits issued for the construction of the Dakota Access pipeline across those waterways and claimed violations of the National Historic Preservation Act (“NHPA”). The SRST also sought a preliminary injunction to rescind the USACE permits while the case is pending. Dakota Access intervened in the case. The SRST soon added a request for an emergency TRO to stop construction on the pipeline project. On September 9, 2016, the Court denied SRST’s motion for a preliminary injunction, rendering the temporary restraining order (“TRO”) request moot.
After the September 9, 2016 ruling, the Department of the Army, the DOJ, and the Department of the Interior released a joint statement that the USACE would not grant the easement for the land adjacent to Lake Oahe until the Army completed a review to determine whether it was necessary to reconsider the USACE’s decision under various federal statutes relevant to the pipeline approval.
The SRST appealed the denial of the preliminary injunction to the U.S. Court of Appeals for the D.C. Circuit and filed an emergency motion in the U.S. District Court for an injunction pending the appeal, which was denied. The D.C. Circuit then denied the SRST’s application for an injunction pending appeal and later dismissed SRST’s appeal of the order denying the preliminary injunction motion. The SRST filed an amended complaint and added claims based on treaties between the tribes and the United States and statutes governing the use of government property.
In December 2016, the Department of the Army announced that, although its prior actions complied with the law, it intended to conduct further environmental review of the crossing at Lake Oahe. In February 2017, in response to a presidential memorandum, the Department of the Army decided that no further environmental review was necessary and delivered an easement to Dakota Access allowing the pipeline to cross Lake Oahe. Almost immediately, the Cheyenne River Sioux Tribe (“CRST”), which had intervened in the lawsuit in August 2016, moved for a preliminary injunction and TRO to block operation of the pipeline. These motions raised, for the first time, claims based on the religious rights of the Tribe. The district court denied the TRO and preliminary injunction, and the CRST appealed and requested an injunction pending appeal in the district court and the D.C. Circuit. Both courts denied the CRST’s request for an injunction pending appeal. Shortly thereafter, at CRST’s request, the D.C. Circuit dismissed CRST’s appeal.
The SRST and the CRST amended their complaints to incorporate religious freedom and other claims. In addition, the Oglala and Yankton Sioux tribes have filed related lawsuits to prevent construction of the Dakota Access pipeline project. These lawsuits have been consolidated into the action initiated by the SRST. Several individual members of the Tribes have also intervened in the lawsuit asserting claims that overlap with those brought by the four tribes.
On June 14, 2017, the Court ruled on SRST’s and CRST’s motions for partial summary judgment and the USACE’s cross-motions for partial summary judgment. The Court rejected the majority of the Tribes’ assertions and granted summary judgment on most claims in favor of the USACE and Dakota Access. In particular, the Court concluded that the USACE had not violated any trust duties owed to the Tribes and had generally complied with its obligations under the Clean Water Act, the Rivers and Harbors Act, the Mineral Leasing Act, the National Environmental Policy Act (“NEPA”) and other related statutes; however, the Court remanded to the USACE three discrete issues for further analysis and explanation of its prior determination under certain of these statutes. The Court ordered briefing to determine whether the pipeline should remain in operation during the pendency of the USACE’s review process or whether to vacate the existing permits. The USACE and Dakota Access opposed any shutdown of operations of the pipeline during this review process. On October 11, 2017, the Court issued an order allowing the pipeline to remain in operation during the pendency of the USACE’s review process. In early October 2017, USACE advised the Court that it expects to complete this additional work by April 2018. The Court has stayed consideration of any other claims until it fully resolves the remaining issues relating to its remand order.
While we believe that the pending lawsuits are unlikely to block operation of the pipeline, we cannot assure this outcome. We cannot determine when or how these lawsuits will be resolved or the impact they may have on the Dakota Access project.
Mont Belvieu Incident
On June 26, 2016, a hydrocarbon storage well located on another operator’s facility adjacent to Lone Star NGL Mont Belvieu’s (“Lone Star”) facilities in Mont Belvieu, Texas experienced an over-pressurization resulting in a subsurface release. The subsurface release caused a fire at Lone Star’s South Terminal (CMB) and damage to Lone Star’s storage well operations at its South and North Terminals. Normal operations have resumed at the facilities with the exception of one of Lone Star’s storage wells. Lone Star is still quantifying the extent of its incurred and ongoing damages and has or will be seeking reimbursement for these losses.
MTBE Litigation
Sunoco, Inc. and/or Sunoco, Inc. (R&M), along with other refiners, manufacturers and sellers of gasoline, are defendants in lawsuits alleging MTBE contamination of groundwater. The plaintiffs, typically governmental authorities, assert product liability claims and additional claims including nuisance, trespass, negligence, violation of environmental laws, and/or deceptive business practices. The plaintiffs seek to recover compensatory damages, and in some cases also seek natural resource damages, injunctive relief, punitive damages, and attorneys’ fees.
As of
September 30, 2017
,
Sunoco, Inc. is a defendant in
six
cases, including cases initiated by the States of New Jersey, Vermont, Pennsylvania, Rhode Island, and two others by the Commonwealth of Puerto Rico with the more recent Puerto Rico action being a companion case alleging damages for additional sites beyond those at issue in the initial Puerto Rico action.
Four
of these cases are venued in a multidistrict litigation proceeding in a New York federal court.
Sunoco, Inc. and Sunoco, Inc. (R&M) have reached a settlement with the State of New Jersey. The court approved the Judicial Consent Order on October 10, 2017.
It is reasonably possible that a loss may be realized in the remaining cases; however, we are unable to estimate the possible loss or range of loss in excess of amounts accrued. An adverse determination with respect to one or more of the MTBE cases could have a significant impact on results of operations during the period in which any such adverse determination occurs, but such an adverse determination likely would not have a material adverse effect on the Partnership’s consolidated financial position.
Regency Merger Litigation
Following the January 26, 2015 announcement of the Regency-ETP merger (the “Regency Merger”), purported Regency unitholders filed lawsuits in state and federal courts in Dallas and Delaware asserting claims relating to the Regency Merger. All but one Regency Merger-related lawsuits have been dismissed. On June 10, 2015, Adrian Dieckman (“Dieckman”), a purported Regency unitholder, filed a class action complaint, Dieckman v. Regency GP LP, et al., C.A. No. 11130-CB, in the Court of Chancery of the State of Delaware (the “Regency Merger Litigation”), on behalf of Regency’s common unitholders against Regency GP, LP; Regency GP LLC; ETE, ETP, ETP GP, and the members of Regency’s board of directors (the “Regency Litigation Defendants”).
The Regency Merger litigation alleges that the Regency Merger breached the Regency partnership agreement because Regency’s conflicts committee was not properly formed, and the Regency Merger was not approved in good faith. On March 29, 2016, the Delaware Court of Chancery granted defendants’ motion to dismiss the lawsuit in its entirety. Dieckman appealed. On January 20, 2017, the Delaware Supreme Court reversed the judgment of the Court of Chancery. On May 5, 2017, Plaintiff filed an Amended Verified Class Action Complaint. The Regency Merger Litigation Defendants then filed Motions to Dismiss the Amended Complaint and a Motion to Stay Discovery on May 19, 2017. A hearing on these motions is currently set for January 9, 2018.
The Regency Merger Litigation Defendants cannot predict the outcome of the Regency Merger Litigation or any lawsuits that might be filed subsequent to the date of this filing; nor can the Regency Merger Litigation Defendants predict the amount of time and expense that will be required to resolve the Regency Merger Litigation. The Regency Litigation Defendants believe the Regency Merger Litigation is without merit and intend to vigorously defend against it and any others that may be filed in connection with the Regency Merger.
Enterprise Products Partners, L.P. and Enterprise Products Operating LLC Litigation
On January 27, 2014, a trial commenced between ETP against Enterprise Products Partners, L.P. and Enterprise Products Operating LLC (collectively, “Enterprise”) and Enbridge (US) Inc. Trial resulted in a verdict in favor of ETP against Enterprise that consisted of
$319 million
in compensatory damages and
$595 million
in disgorgement to ETP. The jury also found that ETP owed Enterprise approximately
$1 million
under a reimbursement agreement. On July 29, 2014, the trial court entered a final judgment in favor of ETP and awarded ETP
$536 million
,
consisting of compensatory damages, disgorgement, and pre-judgment interest. The trial court also ordered that ETP shall be entitled to recover post-judgment interest and costs of court and that Enterprise is not entitled to any net recovery on its counterclaims. Enterprise filed a notice of appeal with the Court of Appeals. On July 18, 2017, the Court of Appeals issued its opinion and reversed the trial court’s judgment. ETP’s motion for rehearing to the Court of Appeals was denied. ETP intends to file a petition for review with the Texas Supreme Court.
Sunoco Logistics Merger Litigation
Seven purported Energy Transfer Partners, L.P. common unitholders (the “ETP Unitholder Plaintiffs”) separately filed seven putative unitholder class action lawsuits against ETP, ETP GP, ETP LLC, the members of the ETP Board, and ETE (the “ETP-SXL Defendants”) in connection with the announcement of the Sunoco Logistics Merger. Two of these lawsuits have been voluntarily dismissed. The five remaining lawsuits have been consolidated as In re Energy Transfer Partners, L.P. Shareholder Litig., C.A. No. 1:17-cv-00044-CCC, in the United States District Court for the District of Delaware (the “Sunoco Logistics Merger Litigation”).
The ETP Unitholder Plaintiffs allege causes of action challenging the merger and the proxy statement/prospectus filed in connection with the Sunoco Logistics Merger (the “ETP-SXL Merger Proxy”).
The ETP Unitholder Plaintiffs seek rescission of the Sunoco Logistics Merger or rescissory damages for ETP unitholders, as well as an award of costs and attorneys’ fees.
The ETP-SXL Defendants cannot predict the outcome of the Sunoco Logistics Merger Litigation or any lawsuits that might be filed subsequent to the date of this filing, nor can the ETP-SXL Defendants predict the amount of time and expense that will be required to resolve the Sunoco Logistics Merger Litigation. The ETP-SXL Defendants believe the Sunoco Logistics Merger Litigation is without merit and intend to defend vigorously against it and any other actions challenging the Sunoco Logistics Merger.
Litigation Filed By or Against Williams
On April 6, 2016, Williams filed a complaint, The Williams Companies, Inc. v. Energy Transfer Equity, L.P., C.A. No. 12168-VCG, against ETE and LE GP in the Delaware Court of Chancery (the “First Delaware Williams Litigation”). Williams sought, among other things, to (a) rescind the Issuance and (b) invalidate an amendment to ETE’s partnership agreement that was adopted on March 8, 2016 as part of the Issuance.
On May 3, 2016, ETE and LE GP filed an answer and counterclaim in the First Delaware Williams Litigation. The counterclaim asserts in general that Williams materially breached its obligations under the Merger Agreement by (a) blocking ETE’s attempts to complete a public offering of the Convertible Units, including, among other things, by declining to allow Williams’ independent registered public accounting firm to provide the auditor consent required to be included in the registration statement for a public offering and (b) bringing a lawsuit concerning the Issuance against Mr. Warren in the District Court of Dallas County, Texas, which the Texas state court later dismissed based on the Merger Agreement’s forum-selection clause.
On May 13, 2016, Williams filed a second lawsuit in the Delaware Court of Chancery (the “Court”) against ETE and LE GP and added Energy Transfer Corp LP, ETE Corp GP, LLC, and Energy Transfer Equity GP, LLC as additional defendants (collectively, “Defendants”). This lawsuit is styled The Williams Companies, Inc. v. Energy Transfer Equity, L.P., et al., C.A. No. 12337-VCG (the “Second Delaware Williams Litigation”). In general, Williams alleged that Defendants breached the Merger Agreement by (a) failing to use commercially reasonable efforts to obtain from Latham & Watkins LLP (“Latham”) the delivery of a tax opinion concerning Section 721 of the Internal Revenue Code (“721 Opinion”), (b) breaching a representation and warranty in the Merger Agreement concerning Section 721 of the Internal Revenue Code, and (c) taking actions that allegedly delayed the SEC in declaring the Form S-4 filed in connection with the merger (the “Form S-4”) effective. Williams asked the Court, in general, to (a) issue a declaratory judgment that ETE breached the Merger Agreement, (b) enjoin ETE from terminating the Merger Agreement on the basis that it failed to obtain a 721 Opinion, (c) enjoin ETE from terminating the Merger Agreement on the basis that the transaction failed to close by the outside date, and (d) force ETE to close the merger or take various other affirmative actions.
ETE filed an answer and counterclaim in the Second Delaware Williams Litigation. In addition to the counterclaims previously asserted, ETE asserted that Williams materially breached the Merger Agreement by, among other things, (a) modifying or qualifying the Williams board of directors’ recommendation to its stockholders regarding the merger, (b) failing to provide material information to ETE for inclusion in the Form S-4 related to the merger, (c) failing to facilitate the financing of the merger, (d) failing to use its reasonable best efforts to consummate the merger, and (e) breaching the Merger Agreement’s forum-selection clause. ETE sought, among other things, a declaration that it could validly terminate the Merger Agreement after June 28, 2016 in the event that Latham was unable to deliver the 721 Opinion on or prior to June 28, 2016.
After a two-day trial on June 20 and 21, 2016, the Court ruled in favor of ETE on Williams’ claims in the Second Delaware WMB Litigation and issued a declaratory judgment that ETE could terminate the merger after June 28, 2016 because of Latham’s inability to provide the required 721 Opinion. The Court also denied Williams’ requests for injunctive relief. The Court did not reach Williams’ claims related to the Issuance or ETE’s counterclaims. Williams filed a notice of appeal to the Supreme Court of Delaware on June 27, 2016, styled
The Williams Companies, Inc. v. Energy Transfer Equity, L.P.
, No. 330, 2016.
Williams filed an amended complaint on September 16, 2016 and sought a
$410 million
termination fee and additional damages of up to
$10 billion
based on the purported lost value of the merger consideration. These damages claims are based on the alleged breaches of the Merger Agreement detailed above, as well as new allegations that Defendants breached an additional representation and warranty in the Merger Agreement.
Defendants filed amended counterclaims and affirmative defenses on September 23, 2016 and sought a
$1.48 billion
termination fee under the Merger Agreement and additional damages caused by Williams’ misconduct. These damages claims are based on the alleged breaches of the Merger Agreement detailed above, as well as new allegations that Williams breached the Merger Agreement by failing to disclose material information that was required to be disclosed in the Form S-4. On September 29, 2016, Williams filed a motion to dismiss Defendants’ amended counterclaims and to strike certain of Defendants’ affirmative defenses. Following briefing by the parties on Williams’ motion, the Delaware Court of Chancery held oral arguments on November 30, 2016. The parties are awaiting the Court’s decision.
On March 23, 2017, the Delaware Supreme Court affirmed the Court of Chancery’s Opinion and Order on the June 2016 trial and denied Williams’ motion for reargument on April 5, 2017. As a result of the Delaware Supreme Court’s affirmance, Williams has conceded that its
$10 billion
damages claim is foreclosed, although its
$410 million
termination fee claim remains pending.
Defendants cannot predict the outcome of the First Delaware Williams Litigation, the Second Delaware Williams Litigation, or any lawsuits that might be filed subsequent to the date of this filing; nor can Defendants predict the amount of time and expense that will be required to resolve these lawsuits. Defendants believe that Williams’ claims are without merit and intend to defend vigorously against them.
Unitholder Litigation Relating to the Issuance
In April 2016, two purported ETE unitholders (the “Issuance Plaintiffs”) filed putative class action lawsuits against ETE, LE GP, Kelcy Warren, John McReynolds, Marshall McCrea, Matthew Ramsey, Ted Collins, K. Rick Turner, William Williams, Ray Davis, and Richard Brannon (collectively, the “Issuance Defendants”) in the Delaware Court of Chancery. These lawsuits have been consolidated as
In re Energy Transfer Equity, L.P. Unitholder Litigation
, Consolidated C.A. No. 12197-VCG, in the Court of Chancery of the State of Delaware (the “Issuance Litigation”). Another purported ETE unitholder, Chester County Employees’ Retirement Fund, joined the consolidated action as an additional plaintiff of April 25, 2016.
The Issuance Plaintiffs allege that the Issuance breached various provisions of ETE’s limited partnership agreement. The Issuance Plaintiffs seek, among other things, preliminary and permanent injunctive relief that (a) prevents ETE from making distributions to the Convertible Units and (b) invalidates an amendment to ETE’s partnership agreement that was adopted on March 8, 2016 as part of the Issuance.
On August 29, 2016, the Issuance Plaintiffs filed a consolidated amended complaint, and in addition to the injunctive relief described above, seek class-wide damages allegedly resulting from the Issuance.
The Issuance Defendants and the Issuance Plaintiffs filed cross-motions for partial summary judgment. On February 28, 2017, the Court denied both motions for partial summary judgment. A trial in the Issuance Litigation is currently set for February 19-21, 2018.
The Issuance Defendants cannot predict the outcome of the Issuance Litigation or any lawsuits that might be filed subsequent to the date of this filing; nor can the Issuance Defendants predict the amount of time and expense that will be required to resolve the Issuance Litigation. The Issuance Defendants believe the Issuance Litigation is without merit and intend to defend vigorously against it and any other actions challenging the Issuance.
Litigation filed by BP Products
On April 30, 2015, BP Products North America Inc. (“BP”) filed a complaint with the FERC,
BP Products North America Inc. v. Sunoco Pipeline L.P.,
FERC Docket No. OR15-25
-
000, alleging that Sunoco Pipeline L.P. (“SPLP”), a wholly-owned subsidiary of ETP, entered into certain throughput and deficiency (“T&D”) agreements with shippers other than BP regarding SPLP’s crude oil pipeline between Marysville, Michigan and Toledo, Ohio, and revised its proration policy relating to that pipeline in an unduly discriminatory manner in violation of the Interstate Commerce Act (“ICA”). The complaint asked FERC to (1) terminate the agreements with the other shippers, (2) revise the proration policy, (3) order SPLP to restore BP’s volume history to the level that existed prior to the execution of the agreements with the other shippers, and (4) order damages to BP of approximately
$62 million
,
a figure that BP reduced in subsequent filings to approximately
$41 million
.
SPLP denied the allegations in the complaint and asserted that neither its contracts nor proration policy were unlawful and that BP’s complaint was barred by the ICA’s two-year statute of limitations provision. Interventions were filed by the two companies with which SPLP entered into T&D agreements, Marathon Petroleum Company (“Marathon”) and PBF Holding Company and Toledo Refining Company (collectively, “PBF”). A hearing on the matter was held in November 2016.
On May 26, 2017, the Administrative Law Judge Patricia E. Hurt (“ALJ”) issued her initial decision (“Initial Decision”) and found that SPLP had acted discriminatorily by entering into T&D agreements with the two shippers other than BP and recommended that the FERC (1) adopt the FERC Trial Staff’s
$13 million
alternative damages proposal, (2) void the T&D agreements with Marathon and PBF, (3) re-set each shipper’s volume history to the level prior to the effective date of the proration policy, and (4) investigate the proration policy. The ALJ held that BP’s claim for damages was not time-barred in its entirety, but that it was not entitled to damages more than two years prior to the filing of the complaint.
On July 26, 2017, each of the parties filed with the FERC a brief on exceptions to the Initial Decision. SPLP challenged all of the Initial Decision’s primary findings (except for the adjustment to the individual shipper volume histories). BP and FERC Trial Staff challenged various aspects of the Initial Decision related to remedies and the statute of limitations issue. On September 18 and 19, 2017, all parties filed briefs opposing the exceptions of the other parties. The matter is now awaiting a decision by FERC.
Other Litigation and Contingencies
We or our subsidiaries are a party to various legal proceedings and/or regulatory proceedings incidental to our businesses. For each of these matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies, the likelihood of an unfavorable outcome and the availability of insurance coverage. If we determine that an unfavorable outcome of a particular matter is probable and can be estimated, we accrue the contingent obligation, as well as any expected insurance recoverable amounts related to the contingency. As of
September 30, 2017
and
December 31, 2016
, accruals of approximately
$68 million
and
$77 million
, respectively, were reflected on our consolidated balance sheets related to these contingent obligations. As new information becomes available, our estimates may change. The impact of these changes may have a significant effect on our results of operations in a single period.
The outcome of these matters cannot be predicted with certainty and there can be no assurance that the outcome of a particular matter will not result in the payment of amounts that have not been accrued for the matter. Furthermore, we may revise accrual amounts prior to resolution of a particular contingency based on changes in facts and circumstances or changes in the expected outcome. Currently, we are not able to estimate possible losses or a range of possible losses in excess of amounts accrued.
In December 2016, Sunoco Logistics received multiple Notice of Violations (“NOVs”) from the Delaware County Regional Water Quality Control Authority (“DELCORA”) in connection with a discharge at its Marcus Hook Industrial Complex (“MHIC”) in July 2016. Sunoco Logistics also entered in a Consent Order and Agreement from the Pennsylvania Department of Environmental Protection (“PADEP”) related to its tank inspection plan at MHIC. These actions propose penalties in excess of
$0.1 million
, and ETP is currently in discussions with the PADEP and DELCORA to resolve these matters. The timing or outcome of these matters cannot be reasonably determined at this time, however, the Partnership does not expect there to be a material impact to its results of operations, cash flows, or financial position.
The Ohio Environmental Protection Agency (“Ohio EPA”) has alleged that various environmental violations have occurred during construction of the Rover pipeline project. The alleged violations include inadvertent returns of drilling muds and fluids at horizontal directional drilling (“HDD”) locations in Ohio that affected waters of the State, storm water control violations, improper disposal of spent drilling mud containing diesel fuel residuals, and open burning. The alleged violations occurred from April to July, 2017. The Ohio EPA has proposed penalties of approximately
$2.3 million
in connection with the alleged violations and is seeking certain corrective actions. ETP is working with Ohio EPA to resolve the matter. The timing or outcome of this matter cannot be reasonably determined at this time; however, we do not expect there to be a material impact to our results of operations, cash flows or financial position.
In addition, on May 10, 2017, the FERC prohibited Rover from conducting HDD activities at
27
sites in Ohio. On July 31, 2017, the FERC issued an independent third party assessment of what led to the release at the Tuscarawas River site and what Rover can do to prevent reoccurrence once the HDD suspension is lifted. Rover has notified the FERC of its intention to implement the suggestions in the assessment and to implement additional voluntary protocols. On September 18, 2017, the FERC authorized Rover to resume HDD activities at the Tuscarawas River site and nine other river crossing sites. On October 20, 2017, the FERC authorized Rover to resume HDD activities at two additional sites.
On July 17, 2017, the West Virginia Department of Environmental Protection (“WVDEP”) issued a Cease and Desist order requiring Rover, among other things, to cease any land development activity in Doddridge and Tyler Counties. Under the order, Rover had 20 days to submit a corrective action plan and schedule for agency review. The order followed several notices of violation WVDEP issued to Rover alleging stormwater non-compliance. Rover is complying with the order and has already addressed many of the stormwater control issues. On August 9, 2017, WVDEP lifted the Cease and Desist requirement.
On July 25, 2017, the Pennsylvania Environmental Hearing Board (“EHB”) issued an order to SPLP to cease HDD activities in Pennsylvania related to the Mariner East 2 project. On August 1, 2017 the EHB lifted the order as to two drill locations. On August 3, 2017, the EHB lifted the order as to 14 additional locations. The EHB issued the order in response to a complaint filed by environmental groups against SPLP and the Pennsylvania Department of Environmental Protection (“PADEP”). The EHB Judge encouraged the parties to pursue a settlement with respect to the remaining HDD locations and facilitated a settlement meeting. On August 7, 2017 a final settlement was reached. A stipulated order has been submitted to the EHB Judge with respect to the settlement. The settlement agreement requires that SPLP reevaluate the design parameters of approximately 26 drills on the Mariner East 2 project and approximately 43 drills on the Mariner East 2X project. The settlement agreement also provides a defined framework for approval by PADEP for these drills to proceed after reevaluation. Additionally, the settlement agreement requires modifications to several of the HDD plans that are part of the PADEP permits. Those modifications have been completed and agreed to by the parties and the reevaluation of the drills has been initiated by the company.
In addition, on June 27, 2017 and July 25, 2017, the PADEP entered into a Consent Order and Agreement with SPLP regarding inadvertent returns of drilling fluids at three HDD locations in Pennsylvania related to the Mariner East 2 project. Those
agreements require SPLP to cease HDD activities at those three locations until PADEP reauthorizes such activities and to submit a corrective action plan for agency review and approval. SPLP is working to fulfill the requirements of those agreements and has been authorized by PADEP to resume drilling at one of the three locations.
No
amounts have been recorded in our
September 30, 2017
or
December 31, 2016
consolidated balance sheets for contingencies and current litigation, other than amounts disclosed herein.
Environmental Matters
Our operations are subject to extensive federal, tribal, state and local environmental and safety laws and regulations that require expenditures to ensure compliance, including related to air emissions and wastewater discharges, at operating facilities and for remediation at current and former facilities as well as waste disposal sites. Historically, our environmental compliance costs have not had a material adverse effect on our results of operations but there can be no assurance that such costs will not be material in the future or that such future compliance with existing, amended or new legal requirements will not have a material adverse effect on our business and operating results. Costs of planning, designing, constructing and operating pipelines, plants and other facilities must incorporate compliance with environmental laws and regulations and safety standards. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of investigatory, remedial and corrective action obligations, the issuance of injunctions in affected areas and the filing of federally authorized citizen suits. Contingent losses related to all significant known environmental matters have been accrued and/or separately disclosed. However, we may revise accrual amounts prior to resolution of a particular contingency based on changes in facts and circumstances or changes in the expected outcome.
Environmental exposures and liabilities are difficult to assess and estimate due to unknown factors such as the magnitude of possible contamination, the timing and extent of remediation, the determination of our liability in proportion to other parties, improvements in cleanup technologies and the extent to which environmental laws and regulations may change in the future. Although environmental costs may have a significant impact on the results of operations for any single period, we believe that such costs will not have a material adverse effect on our financial position.
Based on information available at this time and reviews undertaken to identify potential exposure, we believe the amount reserved for environmental matters is adequate to cover the potential exposure for cleanup costs.
In February 2017, we received letters from the DOJ and Louisiana Department of Environmental Quality notifying Sunoco Pipeline L.P. (“SPLP”) and Mid-Valley Pipeline Company (“Mid-Valley”) that enforcement actions were being pursued for three crude oil releases: (a) an estimated 550 barrels released from the Colmesneil-to-Chester pipeline in Tyler County, Texas (“Colmesneil”) operated and owned by SPLP in February of 2013; (b) an estimated 4,509 barrels released from the Longview-to-Mayersville pipeline in Caddo Parish, Louisiana (a/k/a Milepost 51.5) operated by SPLP and owned by Mid-Valley in October of 2014; and (c) an estimated 40 barrels released from the Wakita 4-inch gathering line in Oklahoma operated and owned by SPLP in January of 2015. In May of this year, we presented to the DOJ, EPA and Louisiana Department of Environmental Quality a summary of the emergency response and remedial efforts taken by SPLP after the releases occurred as well as operational changes instituted by SPLP to reduce the likelihood of future releases. In July, we had a follow-up meeting with the DOJ, EPA and Louisiana Department of Environmental Quality during which the agencies presented their initial demand for civil penalties and injunctive relief.
In short, the DOJ and EPA proposed federal penalties totaling
$7 million
for the three releases along with a demand for injunctive relief, and Louisiana Department of Environmental Quality proposed a state penalty of approximately
$1 million
to resolve the Caddo Parish release. Neither Texas nor Oklahoma state agencies have joined the penalty discussions at this point. We are currently working on a counteroffer to the Louisiana Department of Environmental Quality.
Environmental Remediation
Our subsidiaries are responsible for environmental remediation at certain sites, including the following:
|
|
|
|
•
|
Certain of our interstate pipelines conduct soil and groundwater remediation related to contamination from past uses of PCBs. PCB assessments are ongoing and, in some cases, our subsidiaries could potentially be held responsible for contamination caused by other parties.
|
|
|
|
|
•
|
Certain gathering and processing systems are responsible for soil and groundwater remediation related to releases of hydrocarbons.
|
|
|
|
|
•
|
Currently operating Sunoco, Inc. retail sites previously contributed to Sunoco LP in January 2016.
|
|
|
|
|
•
|
Legacy sites related to Sunoco, Inc. that are subject to environmental assessments, including formerly owned terminals and other logistics assets, retail sites that Sunoco, Inc. no longer operates, closed and/or sold refineries and other formerly owned sites.
|
|
|
|
|
•
|
Sunoco, Inc. is potentially subject to joint and several liability for the costs of remediation at sites at which it has been identified as a potentially responsible party (“PRP”). As of
September 30, 2017
,
Sunoco, Inc. had been named as a PRP at approximately
44
identified or potentially identifiable “Superfund” sites under federal and/or comparable state law. Sunoco, Inc. is usually one of a number of companies identified as a PRP at a site. Sunoco, Inc. has reviewed the nature and extent of its involvement at each site and other relevant circumstances and, based upon Sunoco, Inc.’s purported nexus to the sites, believes that its potential liability associated with such sites will not be significant.
|
To the extent estimable, expected remediation costs are included in the amounts recorded for environmental matters in our consolidated balance sheets. In some circumstances, future costs cannot be reasonably estimated because remediation activities are undertaken as claims are made by customers and former customers. To the extent that an environmental remediation obligation is recorded by a subsidiary that applies regulatory accounting policies, amounts that are expected to be recoverable through tariffs or rates are recorded as regulatory assets on our consolidated balance sheets.
The table below reflects the amounts of accrued liabilities recorded in our consolidated balance sheets related to environmental matters that are considered to be probable and reasonably estimable. Currently, we are not able to estimate possible losses or a range of possible losses in excess of amounts accrued. Except for matters discussed above, we do not have any material environmental matters assessed as reasonably possible that would require disclosure in our consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
Current
|
$
|
42
|
|
|
$
|
31
|
|
|
Non-current
|
302
|
|
|
318
|
|
|
Total environmental liabilities
|
$
|
344
|
|
|
$
|
349
|
|
In 2013, we established a wholly-owned captive insurance company to bear certain risks associated with environmental obligations related to certain sites that are no longer operating. The premiums paid to the captive insurance company include estimates for environmental claims that have been incurred but not reported, based on an actuarially determined fully developed claims expense estimate. In such cases, we accrue losses attributable to unasserted claims based on the discounted estimates that are used to develop the premiums paid to the captive insurance company.
During the
three months ended September 30,
2017
and
2016
, the Partnership recorded
$7 million
and
$12 million
, respectively, of expenditures related to environmental cleanup programs. During the
nine months ended September 30,
2017 and 2016, the Partnership recorded
$22 million
and
$31 million
, respectively.
On December 2, 2010, Sunoco, Inc. entered an Asset Sale and Purchase Agreement to sell the Toledo Refinery to Toledo Refining Company LLC (“TRC”) wherein Sunoco, Inc. retained certain liabilities associated with the pre-closing time period. On January 2, 2013, USEPA issued a Finding of Violation (“FOV”) to TRC and, on September 30, 2013, EPA issued a Notice of Violation (“NOV”)/ FOV to TRC alleging Clean Air Act violations. To date, EPA has not issued an FOV or NOV/FOV to Sunoco, Inc. directly but some of EPA’s claims relate to the time period that Sunoco, Inc. operated the refinery. Specifically, EPA has claimed that the refinery flares were not operated in a manner consistent with good air pollution control practice for minimizing emissions and/or in conformance with their design, and that Sunoco, Inc. submitted semi-annual compliance reports in 2010 and 2011 to the EPA that failed to include all of the information required by the regulations. EPA has proposed penalties in excess of
$200,000
to resolve the allegations and discussions continue between the parties. The timing or outcome of this matter cannot be reasonably determined at this time, however, we do not expect there to be a material impact to our results of operations, cash flows or financial position.
Our operations are also subject to the requirements of OSHA, and comparable state laws that regulate the protection of the health and safety of employees. In addition, OSHA’s hazardous communication standard requires that information be maintained about hazardous materials used or produced in our operations and that this information be provided to employees, state and local government authorities and citizens. We believe that our past costs for OSHA required activities, including general industry standards, record keeping requirements, and monitoring of occupational exposure to regulated substances have not had a material adverse effect on our results of operations but there is no assurance that such costs will not be material in the future.
12.
DERIVATIVE ASSETS AND LIABILITIES
Commodity Price Risk
We are exposed to market risks related to the volatility of commodity prices. To manage the impact of volatility from these prices, our subsidiaries utilize various exchange-traded and OTC commodity financial instrument contracts. These contracts consist primarily of futures, swaps and options and are recorded at fair value in our consolidated balance sheets.
We use futures and basis swaps, designated as fair value hedges, to hedge our natural gas inventory stored in our Bammel storage facility. At hedge inception, we lock in a margin by purchasing gas in the spot market or off peak season and entering into a financial contract. Changes in the spreads between the forward natural gas prices and the physical inventory spot price result in unrealized gains or losses until the underlying physical gas is withdrawn and the related designated derivatives are settled. Once the gas is withdrawn and the designated derivatives are settled, the previously unrealized gains or losses associated with these positions are realized.
We use futures, swaps and options to hedge the sales price of natural gas we retain for fees in ETP’s intrastate transportation and storage segment and operational gas sales on ETP’s interstate transportation and storage segment. These contracts are not designated as hedges for accounting purposes.
We use NGL and crude derivative swap contracts to hedge forecasted sales of NGL and condensate equity volumes we retain for fees in ETP’s midstream segment whereby its subsidiaries generally gather and process natural gas on behalf of producers, sell the resulting residue gas and NGL volumes at market prices and remit to producers an agreed upon percentage of the proceeds based on an index price for the residue gas and NGL. These contracts are not designated as hedges for accounting purposes.
We use derivatives in ETP’s
NGL and refined products transportation and services
segment to manage our storage facilities and the purchase and sale of purity NGL. These contracts are not designated as hedges for accounting purposes.
We utilize swaps, futures and other derivative instruments to mitigate the risk associated with market movements in the price of refined products and NGLs. These contracts are not designated as hedges for accounting purposes.
We use futures and swaps to achieve ratable pricing of crude oil purchases, to convert certain expected refined product sales to fixed or floating prices, to lock in margins for certain refined products and to lock in the price of a portion of natural gas purchases or sales and transportation costs in our retail marketing segment. These contracts are not designated as hedges for accounting purposes.
We use financial commodity derivatives to take advantage of market opportunities in our trading activities which complement ETP’s transportation and storage segment’s operations and are netted in cost of products sold in our consolidated statements of operations. We also have trading and marketing activities related to power and natural gas in ETP’s all other segment which are also netted in cost of products sold. As a result of our trading activities and the use of derivative financial instruments in ETP’s transportation and storage segment, the degree of earnings volatility that can occur may be significant, favorably or unfavorably, from period to period. We attempt to manage this volatility through the use of daily position and profit and loss reports provided to our risk oversight committee, which includes members of senior management, and the limits and authorizations set forth in our commodity risk management policy.
The following table details our outstanding commodity-related derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
Notional Volume
|
|
Maturity
|
|
Notional Volume
|
|
Maturity
|
|
Mark-to-Market Derivatives
|
|
|
|
|
|
|
|
|
(Trading)
|
|
|
|
|
|
|
|
|
Natural Gas (MMBtu):
|
|
|
|
|
|
|
|
|
Fixed Swaps/Futures
|
1,297,500
|
|
|
2017-2018
|
|
(682,500
|
)
|
|
2017
|
|
Basis Swaps IFERC/NYMEX
(1)
|
(15,810,000
|
)
|
|
2017-2019
|
|
2,242,500
|
|
|
2017
|
|
Options – Puts
|
13,000,000
|
|
|
2018
|
|
—
|
|
|
—
|
|
Power (Megawatt):
|
|
|
|
|
|
|
|
|
Forwards
|
665,040
|
|
|
2017-2018
|
|
391,880
|
|
|
2017-2018
|
|
Futures
|
(213,840
|
)
|
|
2017-2018
|
|
109,564
|
|
|
2017-2018
|
|
Options — Puts
|
(280,800
|
)
|
|
2017-2018
|
|
(50,400
|
)
|
|
2017
|
|
Options — Calls
|
545,600
|
|
|
2017-2018
|
|
186,400
|
|
|
2017
|
|
Crude (Bbls):
|
|
|
|
|
|
|
|
|
Futures
|
(160,000
|
)
|
|
2017
|
|
(617,000
|
)
|
|
2017
|
|
(Non-Trading)
|
|
|
|
|
|
|
|
|
Natural Gas (MMBtu):
|
|
|
|
|
|
|
|
|
Basis Swaps IFERC/NYMEX
|
67,500
|
|
|
2017-2020
|
|
10,750,000
|
|
|
2017-2018
|
|
Swing Swaps IFERC
|
91,897,500
|
|
|
2017-2019
|
|
(5,662,500
|
)
|
|
2017
|
|
Fixed Swaps/Futures
|
(20,220,000
|
)
|
|
2017-2019
|
|
(52,652,500
|
)
|
|
2017-2019
|
|
Forward Physical Contracts
|
(140,937,993
|
)
|
|
2017-2018
|
|
(22,492,489
|
)
|
|
2017
|
|
Natural Gas Liquid and Crude (Bbls) — Forwards/Swaps
|
(8,744,200
|
)
|
|
2017-2019
|
|
(5,786,627
|
)
|
|
2017
|
|
Refined Products (Bbls) — Futures
|
(1,947,000
|
)
|
|
2017-2018
|
|
(3,144,000
|
)
|
|
2017
|
|
Corn (Bushels) — Futures
|
650,000
|
|
|
2017-2018
|
|
1,580,000
|
|
|
2017
|
|
Fair Value Hedging Derivatives
|
|
|
|
|
|
|
|
|
(Non-Trading)
|
|
|
|
|
|
|
|
|
Natural Gas (MMBtu):
|
|
|
|
|
|
|
|
|
Basis Swaps IFERC/NYMEX
|
(41,102,500
|
)
|
|
2017
|
|
(36,370,000
|
)
|
|
2017
|
|
Fixed Swaps/Futures
|
(41,102,500
|
)
|
|
2017
|
|
(36,370,000
|
)
|
|
2017
|
|
Hedged Item — Inventory
|
41,102,500
|
|
|
2017
|
|
36,370,000
|
|
|
2017
|
|
|
|
|
(1)
|
Includes aggregate amounts for open positions related to Houston Ship Channel, Waha Hub, NGPL TexOk, West Louisiana Zone and Henry Hub locations.
|
Interest Rate Risk
We are exposed to market risk for changes in interest rates. To maintain a cost effective capital structure, we borrow funds using a mix of fixed rate debt and variable rate debt. We also manage our interest rate exposure by utilizing interest rate swaps to achieve a desired mix of fixed and variable rate debt. We also utilize forward starting interest rate swaps to lock in the rate on a portion of anticipated debt issuances.
The following table summarizes our interest rate swaps outstanding none of which were designated as hedges for accounting purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount Outstanding
|
|
Term
|
|
Type
(1)
|
|
September 30, 2017
|
|
December 31, 2016
|
|
July 2017
(2)
|
|
Forward-starting to pay a fixed rate of 3.90% and receive a floating rate
|
|
$
|
—
|
|
|
$
|
500
|
|
|
July 2018
(2)
|
|
Forward-starting to pay a fixed rate of 3.76% and receive a floating rate
|
|
300
|
|
|
200
|
|
|
July 2019
(2)
|
|
Forward-starting to pay a fixed rate of 3.64% and receive a floating rate
|
|
300
|
|
|
200
|
|
|
July 2020
(2)
|
|
Forward-starting to pay a fixed rate of 3.52% and receive a floating rate
|
|
400
|
|
|
—
|
|
|
December 2018
|
|
Pay a floating rate based on a 3-month LIBOR and receive a fixed rate of 1.53%
|
|
1,200
|
|
|
1,200
|
|
|
March 2019
|
|
Pay a floating rate based on a 3-month LIBOR and receive a fixed rate of 1.42%
|
|
300
|
|
|
300
|
|
|
|
|
|
(1)
|
Floating rates are based on 3-month LIBOR.
|
|
|
|
|
(2)
|
Represents the effective date. These forward-starting swaps have a term of 30 years with a mandatory termination date the same as the effective date.
|
Credit Risk
Credit risk refers to the risk that a counterparty may default on its contractual obligations resulting in a loss to the Partnership. Credit policies have been approved and implemented to govern ETP’s portfolio of counterparties with the objective of mitigating credit losses. These policies establish guidelines, controls and limits to manage credit risk within approved tolerances by mandating an appropriate evaluation of the financial condition of existing and potential counterparties, monitoring agency credit ratings, and by implementing credit practices that limit exposure according to the risk profiles of the counterparties. Furthermore, ETP may at times require collateral under certain circumstances to mitigate credit risk as necessary. ETP also implements the use of industry standard commercial agreements which allow for the netting of positive and negative exposures associated with transactions executed under a single commercial agreement. Additionally, ETP utilizes master netting agreements to offset credit exposure across multiple commercial agreements with a single counterparty or affiliated group of counterparties.
ETP’s counterparties consist of a diverse portfolio of customers across the energy industry, including petrochemical companies, commercial and industrials, oil and gas producers, motor fuel distributors, municipalities, utilities and midstream companies. ETP’s overall exposure may be affected positively or negatively by macroeconomic factors or regulatory changes that could impact its counterparties to one extent or another. Currently, management does not anticipate a material adverse effect in our financial position or results of operations as a consequence of counterparty non-performance.
ETP has maintenance margin deposits with certain counterparties in the OTC market, primarily independent system operators, and with clearing brokers. Payments on margin deposits are required when the value of a derivative exceeds our pre-established credit limit with the counterparty. Margin deposits are returned to ETP on or about the settlement date for non-exchange traded derivatives, and ETP exchanges margin calls on a daily basis for exchange traded transactions. Since the margin calls are made daily with the exchange brokers, the fair value of the financial derivative instruments are deemed current and netted in deposits paid to vendors within other current assets in the consolidated balance sheets.
For financial instruments, failure of a counterparty to perform on a contract could result in our inability to realize amounts that have been recorded on our consolidated balance sheets and recognized in net income or other comprehensive income.
Derivative Summary
The following table provides a summary of our derivative assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Derivative Instruments
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
September 30, 2017
|
|
December 31, 2016
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Commodity derivatives (margin deposits)
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(4
|
)
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Commodity derivatives (margin deposits)
|
$
|
222
|
|
|
$
|
338
|
|
|
$
|
(262
|
)
|
|
$
|
(416
|
)
|
|
Commodity derivatives
|
52
|
|
|
25
|
|
|
(61
|
)
|
|
(58
|
)
|
|
Interest rate derivatives
|
—
|
|
|
—
|
|
|
(210
|
)
|
|
(193
|
)
|
|
Embedded derivatives in the ETP Preferred Units
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
|
274
|
|
|
363
|
|
|
(533
|
)
|
|
(668
|
)
|
|
Total derivatives
|
$
|
281
|
|
|
$
|
363
|
|
|
$
|
(533
|
)
|
|
$
|
(672
|
)
|
The following table presents the fair value of our recognized derivative assets and liabilities on a gross basis and amounts offset on the consolidated balance sheets that are subject to enforceable master netting arrangements or similar arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
|
Balance Sheet Location
|
|
September 30, 2017
|
|
December 31, 2016
|
|
September 30, 2017
|
|
December 31, 2016
|
|
Derivatives without offsetting agreements
|
|
Derivative assets (liabilities)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(210
|
)
|
|
$
|
(194
|
)
|
|
Derivatives in offsetting agreements:
|
|
|
|
|
|
|
|
|
|
OTC contracts
|
|
Derivative assets (liabilities)
|
|
52
|
|
|
25
|
|
|
(61
|
)
|
|
(58
|
)
|
|
Broker cleared derivative contracts
|
|
Other current assets
|
|
229
|
|
|
338
|
|
|
(262
|
)
|
|
(420
|
)
|
|
Total gross derivatives
|
|
281
|
|
|
363
|
|
|
(533
|
)
|
|
(672
|
)
|
|
Less offsetting agreements:
|
|
|
|
|
|
|
|
|
|
Counterparty netting
|
|
Derivative assets (liabilities)
|
|
(10
|
)
|
|
(4
|
)
|
|
10
|
|
|
4
|
|
|
Payments on margin deposit
|
|
Other current assets
|
|
(220
|
)
|
|
(338
|
)
|
|
220
|
|
|
338
|
|
|
Total net derivatives
|
|
$
|
51
|
|
|
$
|
21
|
|
|
$
|
(303
|
)
|
|
$
|
(330
|
)
|
We disclose the non-exchange traded financial derivative instruments as price risk management assets and liabilities on our consolidated balance sheets at fair value with amounts classified as either current or long-term depending on the anticipated settlement date.
The following tables summarize the amounts recognized with respect to our derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain/(Loss)
Recognized in Income
on Derivatives
|
|
Amount of Gain/(Loss) Recognized in Income Representing Hedge Ineffectiveness and Amount Excluded from the Assessment of Effectiveness
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Derivatives in fair value hedging relationships (including hedged item):
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
Cost of products sold
|
|
$
|
2
|
|
|
$
|
(9
|
)
|
|
$
|
4
|
|
|
$
|
8
|
|
|
Total
|
|
|
|
$
|
2
|
|
|
$
|
(9
|
)
|
|
$
|
4
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain/(Loss)
Recognized in Income
on Derivatives
|
|
Amount of Gain/(Loss) Recognized in Income on Derivatives
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Commodity derivatives —Trading
|
|
Cost of products sold
|
|
$
|
(5
|
)
|
|
$
|
(7
|
)
|
|
$
|
21
|
|
|
$
|
(24
|
)
|
|
Commodity derivatives —Non-trading
|
|
Cost of products sold
|
|
(25
|
)
|
|
(16
|
)
|
|
(6
|
)
|
|
(61
|
)
|
|
Interest rate derivatives
|
|
Losses on interest rate derivatives
|
|
(8
|
)
|
|
(28
|
)
|
|
(28
|
)
|
|
(179
|
)
|
|
Embedded derivatives
|
|
Other, net
|
|
—
|
|
|
8
|
|
|
1
|
|
|
4
|
|
|
Total
|
|
|
|
$
|
(38
|
)
|
|
$
|
(43
|
)
|
|
$
|
(12
|
)
|
|
$
|
(260
|
)
|
13.
RELATED PARTY TRANSACTIONS
In June 2017, ETP acquired all of the publicly held PennTex common units through a tender offer and exercise of a limited call right, as further discussed in
Note 9
.
ETP previously had agreements with the Parent Company to provide services on its behalf and the behalf of other subsidiaries of the Parent Company, which included the reimbursement of various general and administrative services for expenses incurred by ETP on behalf of those subsidiaries. These agreements expired in 2016.
In addition, ETE recorded sales with affiliates of
$105 million
and
$49 million
during the
three months ended
September 30, 2017
and
2016
, respectively, and
$201 million
and
$175 million
during the
nine months ended
September 30, 2017
and
2016
, respectively.
14.
REPORTABLE SEGMENTS
Our financial statements reflect the following reportable business segments:
|
|
|
|
•
|
Investment in ETP, including the consolidated operations of ETP;
|
|
|
|
|
•
|
Investment in Sunoco LP, including the consolidated operations of Sunoco LP;
|
|
|
|
|
•
|
Investment in Lake Charles LNG, including the operations of Lake Charles LNG; and
|
|
|
|
|
•
|
Corporate and Other, including the following:
|
|
|
|
|
•
|
activities of the Parent Company; and
|
|
|
|
|
•
|
the goodwill and property, plant and equipment fair value adjustments recorded as a result of the 2004 reverse acquisition of Heritage Propane Partners, L.P.
|
The Investment in Sunoco LP segment reflects the results of Sunoco LP and the legacy Sunoco, Inc. retail business for the periods presented.
We define Segment Adjusted EBITDA as earnings before interest, taxes, depreciation, depletion, amortization and other non-cash items, such as non-cash compensation expense, gains and losses on disposals of assets, the allowance for equity funds used during construction, unrealized gains and losses on commodity risk management activities, non-cash impairment charges, losses on extinguishments of debt, gain on deconsolidation and other non-operating income or expense items. Unrealized gains and losses on commodity risk management activities include unrealized gains and losses on commodity derivatives and inventory fair value adjustments (excluding lower of cost or market adjustments). Segment Adjusted EBITDA reflects amounts for unconsolidated affiliates based on the Partnership’s proportionate ownership and amounts for less than wholly owned subsidiaries based on 100% of the subsidiaries’ results of operations.
The following tables present financial information by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Segment Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
Investment in ETP
|
$
|
1,744
|
|
|
$
|
1,390
|
|
|
$
|
4,757
|
|
|
$
|
4,172
|
|
|
Investment in Sunoco LP
|
199
|
|
|
189
|
|
|
574
|
|
|
512
|
|
|
Investment in Lake Charles LNG
|
43
|
|
|
45
|
|
|
131
|
|
|
133
|
|
|
Corporate and Other
|
(3
|
)
|
|
(37
|
)
|
|
(25
|
)
|
|
(142
|
)
|
|
Adjustments and Eliminations
|
(74
|
)
|
|
(83
|
)
|
|
(211
|
)
|
|
(208
|
)
|
|
Total
|
1,909
|
|
|
1,504
|
|
|
5,226
|
|
|
4,467
|
|
|
Depreciation, depletion and amortization
|
(632
|
)
|
|
(548
|
)
|
|
(1,840
|
)
|
|
(1,596
|
)
|
|
Interest expense, net
|
(505
|
)
|
|
(474
|
)
|
|
(1,471
|
)
|
|
(1,336
|
)
|
|
Losses on interest rate derivatives
|
(8
|
)
|
|
(28
|
)
|
|
(28
|
)
|
|
(179
|
)
|
|
Non-cash unit-based compensation expense
|
(29
|
)
|
|
(23
|
)
|
|
(76
|
)
|
|
(46
|
)
|
|
Unrealized gains (losses) on commodity risk management activities
|
(76
|
)
|
|
(21
|
)
|
|
22
|
|
|
(105
|
)
|
|
Losses on extinguishments of debt
|
—
|
|
|
—
|
|
|
(25
|
)
|
|
—
|
|
|
Inventory valuation adjustments
|
141
|
|
|
35
|
|
|
38
|
|
|
203
|
|
|
Equity in earnings of unconsolidated affiliates
|
92
|
|
|
49
|
|
|
228
|
|
|
205
|
|
|
Adjusted EBITDA related to unconsolidated affiliates
|
(205
|
)
|
|
(157
|
)
|
|
(554
|
)
|
|
(503
|
)
|
|
Adjusted EBITDA related to discontinued operations
|
(92
|
)
|
|
(93
|
)
|
|
(253
|
)
|
|
(220
|
)
|
|
Impairment of investment in an unconsolidated affiliate
|
—
|
|
|
(308
|
)
|
|
—
|
|
|
(308
|
)
|
|
Other, net
|
46
|
|
|
4
|
|
|
111
|
|
|
44
|
|
|
Income (loss) before income tax benefit
|
$
|
641
|
|
|
$
|
(60
|
)
|
|
$
|
1,378
|
|
|
$
|
626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
Assets:
|
|
|
|
|
Investment in ETP
|
$
|
77,011
|
|
|
$
|
70,191
|
|
|
Investment in Sunoco LP
|
8,307
|
|
|
8,701
|
|
|
Investment in Lake Charles LNG
|
1,611
|
|
|
1,508
|
|
|
Corporate and Other
|
620
|
|
|
711
|
|
|
Adjustments and Eliminations
|
(2,169
|
)
|
|
(2,100
|
)
|
|
Total assets
|
$
|
85,380
|
|
|
$
|
79,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Investment in ETP:
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
$
|
6,876
|
|
|
$
|
5,488
|
|
|
$
|
20,168
|
|
|
$
|
15,167
|
|
|
Intersegment revenues
|
97
|
|
|
43
|
|
|
276
|
|
|
134
|
|
|
|
6,973
|
|
|
5,531
|
|
|
20,444
|
|
|
15,301
|
|
|
Investment in Sunoco LP:
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
2,549
|
|
|
2,167
|
|
|
7,321
|
|
|
5,912
|
|
|
Intersegment revenues
|
6
|
|
|
—
|
|
|
9
|
|
|
6
|
|
|
|
2,555
|
|
|
2,167
|
|
|
7,330
|
|
|
5,918
|
|
|
Investment in Lake Charles LNG:
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
49
|
|
|
50
|
|
|
148
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments and Eliminations
|
(103
|
)
|
|
(43
|
)
|
|
(285
|
)
|
|
(140
|
)
|
|
Total revenues
|
$
|
9,474
|
|
|
$
|
7,705
|
|
|
$
|
27,637
|
|
|
$
|
21,227
|
|
The following tables provide revenues, grouped by similar products and services, for our reportable segments. These amounts include intersegment revenues for transactions between ETP, Sunoco LP and Lake Charles LNG.
Investment in ETP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Intrastate Transportation and Storage
|
$
|
729
|
|
|
$
|
583
|
|
|
$
|
2,196
|
|
|
$
|
1,457
|
|
|
Interstate Transportation and Storage
|
220
|
|
|
231
|
|
|
652
|
|
|
714
|
|
|
Midstream
|
665
|
|
|
582
|
|
|
1,863
|
|
|
1,799
|
|
|
NGL and refined products transportation and services
|
1,989
|
|
|
1,397
|
|
|
5,874
|
|
|
4,014
|
|
|
Crude oil transportation and services
|
2,714
|
|
|
1,856
|
|
|
7,749
|
|
|
5,146
|
|
|
All Other
|
656
|
|
|
882
|
|
|
2,110
|
|
|
2,171
|
|
|
Total revenues
|
6,973
|
|
|
5,531
|
|
|
20,444
|
|
|
15,301
|
|
|
Less: Intersegment revenues
|
97
|
|
|
43
|
|
|
276
|
|
|
134
|
|
|
Revenues from external customers
|
$
|
6,876
|
|
|
$
|
5,488
|
|
|
$
|
20,168
|
|
|
$
|
15,167
|
|
The amounts included in ETP’s NGL and refined products transportation and services operation and the crude oil transportation and services operation have been retrospectively adjusted as a result of the Sunoco Logistics Merger.
Investment in Sunoco LP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Retail operations
|
$
|
88
|
|
|
$
|
80
|
|
|
$
|
247
|
|
|
$
|
241
|
|
|
Wholesale operations
|
2,467
|
|
|
2,087
|
|
|
7,083
|
|
|
5,677
|
|
|
Total revenues
|
2,555
|
|
|
2,167
|
|
|
7,330
|
|
|
5,918
|
|
|
Less: Intersegment revenues
|
6
|
|
|
—
|
|
|
9
|
|
|
6
|
|
|
Revenues from external customers
|
$
|
2,549
|
|
|
$
|
2,167
|
|
|
$
|
7,321
|
|
|
$
|
5,912
|
|
Investment in Lake Charles LNG
Lake Charles LNG’s revenues for all periods presented were related to LNG terminalling.
15.
SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Following are the financial statements of the Parent Company, which are included to provide additional information with respect to the Parent Company’s financial position, results of operations and cash flows on a stand-alone basis:
BALANCE SHEETS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
|
$
|
2
|
|
|
Accounts receivable from related companies
|
64
|
|
|
55
|
|
|
Other current assets
|
2
|
|
|
—
|
|
|
Total current assets
|
66
|
|
|
57
|
|
|
Property, plant and equipment, net
|
27
|
|
|
36
|
|
|
Advances to and investments in unconsolidated affiliates
|
6,031
|
|
|
5,088
|
|
|
Intangible assets, net
|
—
|
|
|
1
|
|
|
Goodwill
|
9
|
|
|
9
|
|
|
Other non-current assets, net
|
17
|
|
|
10
|
|
|
Total assets
|
$
|
6,150
|
|
|
$
|
5,201
|
|
|
LIABILITIES AND PARTNERS’ CAPITAL
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
$
|
—
|
|
|
$
|
1
|
|
|
Accounts payable to related companies
|
—
|
|
|
22
|
|
|
Interest payable
|
79
|
|
|
66
|
|
|
Accrued and other current liabilities
|
3
|
|
|
3
|
|
|
Total current liabilities
|
82
|
|
|
92
|
|
|
Long-term debt, less current maturities
|
6,684
|
|
|
6,358
|
|
|
Long-term notes payable – related companies
|
574
|
|
|
443
|
|
|
Other non-current liabilities
|
2
|
|
|
2
|
|
|
Commitments and contingencies
|
|
|
|
|
Partners’ capital:
|
|
|
|
|
General Partner
|
(3
|
)
|
|
(3
|
)
|
|
Limited Partners:
|
|
|
|
|
Common Unitholders
|
(1,566
|
)
|
|
(1,871
|
)
|
|
Series A Convertible Preferred Units
|
377
|
|
|
180
|
|
|
Total partners’ deficit
|
(1,192
|
)
|
|
(1,694
|
)
|
|
Total liabilities and equity
|
$
|
6,150
|
|
|
$
|
5,201
|
|
STATEMENTS OF OPERATIONS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(1)
|
$
|
(3
|
)
|
|
$
|
(75
|
)
|
|
$
|
(25
|
)
|
|
$
|
(156
|
)
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Interest expense, net
|
(88
|
)
|
|
(81
|
)
|
|
(257
|
)
|
|
(244
|
)
|
|
Equity in earnings of unconsolidated affiliates
|
343
|
|
|
367
|
|
|
1,012
|
|
|
1,166
|
|
|
Losses on extinguishments of debt
|
—
|
|
|
—
|
|
|
(25
|
)
|
|
—
|
|
|
Other, net
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
|
(4
|
)
|
|
NET INCOME
|
252
|
|
|
209
|
|
|
703
|
|
|
762
|
|
|
General Partner’s interest in net income
|
1
|
|
|
—
|
|
|
2
|
|
|
2
|
|
|
Convertible Unitholders’ interest in income
|
11
|
|
|
2
|
|
|
25
|
|
|
3
|
|
|
Limited Partners’ interest in net income
|
$
|
240
|
|
|
$
|
207
|
|
|
$
|
676
|
|
|
$
|
757
|
|
|
|
|
|
(1)
|
Prior periods include management fees paid by ETE to ETP, which management fees will no longer be paid subsequent to March 31, 2017.
|
STATEMENTS OF CASH FLOWS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
|
$
|
620
|
|
|
$
|
718
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
Contributions to unconsolidated affiliate
|
(861
|
)
|
|
(70
|
)
|
|
Capital expenditures
|
(1
|
)
|
|
(15
|
)
|
|
Contributions in aid of construction costs
|
7
|
|
|
—
|
|
|
Net cash used in investing activities
|
(855
|
)
|
|
(85
|
)
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
Proceeds from borrowings
|
2,116
|
|
|
180
|
|
|
Principal payments on debt
|
(1,795
|
)
|
|
(155
|
)
|
|
Proceeds from affiliate
|
131
|
|
|
129
|
|
|
Distributions to partners
|
(752
|
)
|
|
(780
|
)
|
|
Units issued for cash
|
568
|
|
|
—
|
|
|
Debt issuance costs
|
(35
|
)
|
|
—
|
|
|
Net cash provided by (used in) financing activities
|
233
|
|
|
(626
|
)
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
(2
|
)
|
|
7
|
|
|
CASH AND CASH EQUIVALENTS, beginning of period
|
2
|
|
|
1
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
$
|
—
|
|
|
$
|
8
|
|