NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollar and unit amounts are in millions)
(unaudited)
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1.
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ORGANIZATION AND BASIS OF PRESENTATION
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Organization
The consolidated financial statements presented herein include Energy Transfer Operating, L.P. and its subsidiaries (the “Partnership,” “we,” “us,” “our” or “ETO”).
Energy Transfer Operating, L.P. is a consolidated subsidiary of Energy Transfer LP. In December 2019, ET completed the acquisition of SemGroup. During the first quarter of 2020, ET contributed certain former SemGroup subsidiaries to ETO through sale and contribution transactions. The contribution transactions were accounted for as reorganizations of entities under common control; therefore, the contributed entities’ assets and liabilities were not adjusted as of the contribution date. The Partnership’s consolidated financial statements have been retrospectively adjusted to reflect consolidation beginning December 5, 2019 for SemGroup assets contributed (the date ET acquired SemGroup). Predecessor equity included in the consolidated financial statements represents the equity of contributed entities prior to the contribution transactions.
Our consolidated financial statements reflect the following reportable segments:
•intrastate transportation and storage;
•interstate transportation and storage;
•midstream;
•NGL and refined products transportation and services;
•crude oil transportation and services;
•investment in Sunoco LP;
•investment in USAC; and
•all other.
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 of Energy Transfer Operating, L.P. for the year ended December 31, 2019, included in the Partnership’s Annual Report on Form 10-K filed with the SEC on February 21, 2020. 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.
The consolidated financial statements of the Partnership presented herein include the results of operations of our controlled subsidiaries, including Sunoco LP and USAC.
Certain prior period amounts have also been reclassified to conform to the current period presentation. These reclassifications had no impact on net income or total equity.
Change in Accounting Policy
Effective January 1, 2020, the Partnership elected to change its accounting policy related to certain barrels of crude oil that were previously accounted for as inventory. Under the revised accounting policy, certain amounts of crude oil that are not available for sale have been reclassified from inventory to non-current assets. These crude oil barrels, which are owned by the Partnership’s crude oil acquisition and marketing business, include pipeline linefill and tank bottoms and are not considered to be available for sale because the volumes must be maintained in order to continue normal operation of the related pipelines or tanks and because there is no expectation of liquidation or sale of these volumes in the near term.
Under the previous accounting policy, all crude oil barrels were recorded as inventory under the weighted-average cost method. Under the revised accounting policy, barrels related to pipeline linefill and tank bottoms are accounted for as long-lived assets and reflected as non-current assets on the consolidated balance sheet. These crude oil barrels will be tested for impairment
consistent with the Partnership’s existing accounting policy for impairments of long-lived assets. The Partnership’s management believes that the change in accounting policy is preferable as it more closely aligns the accounting policies across the consolidated entity, given that similar assets in the Partnership’s natural gas, NGLs and refined products businesses are accounted for as non-current assets. In addition, management believes that reflecting these crude oil barrels as non-current assets better represents the economic results of the Partnership’s crude oil acquisition and marketing business by reducing volatility resulting from market price adjustments to crude oil barrels that are not expected to be sold or liquidated in the near term.
The impact of this accounting policy change on the Partnership’s net income for three months ended March 31, 2020, was approximately $265 million. As a result of this change in accounting policy, the Partnership’s consolidated balance sheets for prior periods have been retrospectively adjusted as follows:
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December 31, 2019
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December 31, 2018
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As Originally Reported*
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Effect of Change
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As Adjusted
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As Originally Reported
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Effect of Change
|
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As Adjusted
|
|
Inventories
|
$
|
1,935
|
|
|
$
|
(403
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)
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|
$
|
1,532
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|
|
$
|
1,677
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|
|
$
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(305
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)
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|
$
|
1,372
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|
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Total current assets
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7,747
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(403
|
)
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7,344
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|
|
6,820
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(305
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)
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6,515
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Other non-current assets, net
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1,051
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|
496
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1,547
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|
1,006
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|
|
472
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|
|
1,478
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Total assets
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102,712
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|
|
93
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|
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102,805
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88,442
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|
|
167
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|
|
88,609
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Total partners' capital
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27,289
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|
|
93
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|
|
27,382
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|
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28,718
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|
|
167
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|
|
28,885
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* Amounts reflect the retrospective consolidation of the SemGroup entities discussed above.
In addition, the Partnership’s consolidated statements of operations, comprehensive income and cash flows for prior periods have been retrospectively adjusted as follows:
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Year Ended December 31,
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Three Months Ended March 31,
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2019
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2018
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2019
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As originally reported:
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Consolidated Statements of Operations and Comprehensive Income
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Cost of products sold
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$
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39,603
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$
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41,658
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|
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$
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9,415
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Operating income
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7,285
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|
5,402
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|
1,928
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Income from continuing operations before income tax expense (benefit)
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5,386
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4,044
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|
1,407
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Net income
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5,186
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|
3,774
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|
|
1,281
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Comprehensive income
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5,210
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|
3,731
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|
|
1,289
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Comprehensive income attributable to partners
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4,108
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|
2,982
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|
|
1,020
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Consolidated Statements of Cash Flows
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Net income
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5,186
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|
3,774
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1,281
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Net change in operating assets and liabilities
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(479
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)
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|
117
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(399
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)
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Effect of change:
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Consolidated Statements of Operations and Comprehensive Income
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Cost of products sold
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74
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(55
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)
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62
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Operating income
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(74
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)
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55
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(62
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)
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Income from continuing operations before income tax expense (benefit)
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(74
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)
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55
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(62
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)
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Net income
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(74
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)
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|
55
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(62
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)
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Comprehensive income
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(74
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)
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|
55
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(62
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)
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Comprehensive income attributable to partners
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(74
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)
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55
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(62
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)
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Consolidated Statements of Cash Flows
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Net income
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(74
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)
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|
55
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(62
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)
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Net change in operating assets and liabilities
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74
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(55
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)
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|
62
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|
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As adjusted:
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Consolidated Statements of Operations and Comprehensive Income
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Cost of products sold
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39,677
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41,603
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9,477
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Operating income
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7,211
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|
5,457
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|
1,866
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Income from continuing operations before income tax expense (benefit)
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5,312
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|
|
4,099
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|
|
1,345
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Net income
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5,112
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|
|
3,829
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|
|
1,219
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Comprehensive income
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5,136
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|
|
3,786
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|
|
1,227
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Comprehensive income attributable to partners
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4,034
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|
3,037
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|
|
958
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|
|
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Consolidated Statements of Cash Flows
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|
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Net income
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5,112
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|
3,829
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1,219
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Net change in operating assets and liabilities
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(405
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)
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62
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(337
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)
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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.
Recent Accounting Pronouncements
Effective January 1, 2020, the Partnership adopted Accounting Standards Update (“ASU”) 2016-13 "Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments." ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. The impact of adoption was immaterial to the Partnership. However, due in large part to the global economic impacts of COVID-19, the Partnership and its subsidiaries recorded an aggregate $16 million of current expected credit losses for the three months ended March 31, 2020.
Goodwill
During the first quarter of 2020, due to the impacts of the COVID-19 pandemic, the decline in commodity prices and the decreases in the Partnership’s market capitalization, we determined that interim impairment testing should be performed on certain reporting units. We performed the interim impairment tests consistent with our approach for annual impairment testing, including using similar models, inputs and assumptions. As a result of the interim impairment test, the Partnership recognized a goodwill impairment of $483 million related to our Arklatex and South Texas operations within the midstream segment, a goodwill impairment of $183 million related to our Lake Charles LNG regasification operations within the interstate transportation and storage segment due to a contractual reduction in payments for the remainder of the contract term, and a goodwill impairment of $40 million related to our all other operations primarily due to decreases in projected future revenues and cash flows as a result of the overall market demand decline. In addition, USAC recognized a goodwill impairment of $619 million during the three months ended March 31, 2020, which is included in the Partnership's consolidated results of operations. No other impairments of the Partnership’s goodwill were identified.
In connection with aforementioned impairments, the Partnership determined the fair value of our reporting units using the income approach. The income approach is based on the present value of future cash flows, which are derived from our long-term financial forecasts, and requires significant assumptions including, among others, revenue growth rates, operating margins, weighted average costs of capital and future market conditions, among others. The Partnership believes the estimates and assumptions used in our impairment assessments are reasonable and based on available market information, but variations in any of the assumptions could result in materially different calculations of fair value and determinations of whether or not an impairment is indicated. Cash flow projections are derived from one-year budgeted amounts and three-year operating forecasts plus an estimate of later period cash flows, all of which are evaluated by management. Subsequent period cash flows are developed for each reporting unit using growth rates that management believes are reasonably likely to occur.
Of the $3.81 billion of goodwill on the Partnership’s consolidated balance sheet as of March 31, 2020, approximately $1.2 billion is recorded in reporting units for which the estimated fair value exceeded the carrying value by less than 20% in the most recent quantitative test. Management believes that all of the $1.2 billion is at significant risk of impairment, if commodity prices and/or overall market demand remains low. In addition, as of March 31, 2020, the Partnership's goodwill balance includes approximately $230 million of goodwill related to the SemGroup assets that were contributed from ET, as discussed above; these goodwill balances are subject to change as the purchase price allocation has not been finalized. Future goodwill impairment could be impacted by the finalization of the SemGroup purchase accounting.
Changes in the carrying amounts of goodwill were as follows:
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Intrastate
Transportation
and Storage
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Interstate
Transportation and Storage
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Midstream
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NGL and Refined Products Transportation and Services
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Crude Oil Transportation and Services
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Investment in Sunoco LP
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Investment in USAC
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All Other
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Total
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Balance, December 31, 2019
|
$
|
10
|
|
|
$
|
226
|
|
|
$
|
483
|
|
|
$
|
693
|
|
|
$
|
1,397
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|
|
$
|
1,555
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|
|
$
|
619
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|
|
$
|
149
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|
|
$
|
5,132
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|
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Impaired
|
—
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|
|
(183
|
)
|
|
(483
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)
|
|
—
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|
|
—
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|
|
—
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|
|
(619
|
)
|
|
(40
|
)
|
|
(1,325
|
)
|
|
Balance, March 31, 2020
|
$
|
10
|
|
|
$
|
43
|
|
|
$
|
—
|
|
|
$
|
693
|
|
|
$
|
1,397
|
|
|
$
|
1,555
|
|
|
$
|
—
|
|
|
$
|
109
|
|
|
$
|
3,807
|
|
|
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|
|
2.
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ACQUISITIONS AND RELATED TRANSACTIONS
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ET Contribution of SemGroup Assets to ETO
As discussed in Note 1, certain former SemGroup subsidiaries were transferred from ET to ETO during the three months ended March 31, 2020. The following table represents the preliminary fair value, as of December 5, 2019, of the SemGroup assets and liabilities transferred from ET to ETO:
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At December 5, 2019
|
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Total current assets
|
$
|
548
|
|
|
Property, plant and equipment
|
2,544
|
|
|
Other non-current assets
|
574
|
|
|
Goodwill
|
230
|
|
|
Intangible assets
|
280
|
|
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Total assets
|
4,176
|
|
|
|
|
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Total current liabilities
|
480
|
|
|
Long-term debt, less current maturities (1)
|
812
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|
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Other non-current liabilities
|
109
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|
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Total liabilities
|
1,401
|
|
|
|
|
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Noncontrolling interest
|
335
|
|
|
|
|
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Partners’ capital
|
2,440
|
|
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Total liabilities and partners’ capital
|
$
|
4,176
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|
(1) Long-term debt at December 5, 2019 includes SemGroup subsidiary debt of $593 million, which was redeemed in December 2019, subsequent to the closing of ET’s acquisition of SemGroup, using proceeds from an intercompany promissory note from ETO.
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3.
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CASH AND CASH EQUIVALENTS
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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. The Partnership’s balance sheets did not include any material amounts of restricted cash as of March 31, 2020 or December 31, 2019.
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.
The net change in operating assets and liabilities (net of effects of acquisitions) included in cash flows from operating activities is comprised as follows:
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|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2020
|
|
2019
|
|
Accounts receivable
|
$
|
1,653
|
|
|
$
|
(302
|
)
|
|
Accounts receivable from related companies
|
(12
|
)
|
|
(28
|
)
|
|
Inventories
|
281
|
|
|
135
|
|
|
Other current assets
|
75
|
|
|
91
|
|
|
Other non-current assets, net
|
(94
|
)
|
|
(34
|
)
|
|
Accounts payable
|
(1,705
|
)
|
|
323
|
|
|
Accounts payable to related companies
|
(73
|
)
|
|
(69
|
)
|
|
Accrued and other current liabilities
|
(185
|
)
|
|
(409
|
)
|
|
Other non-current liabilities
|
13
|
|
|
(31
|
)
|
|
Derivative assets and liabilities, net
|
160
|
|
|
(13
|
)
|
|
Net change in operating assets and liabilities, net of effects of acquisitions
|
$
|
113
|
|
|
$
|
(337
|
)
|
Non-cash activities are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2020
|
|
2019
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
Accrued capital expenditures
|
$
|
992
|
|
|
$
|
630
|
|
|
Accrued distributions to partners
|
1,100
|
|
|
—
|
|
|
Lease assets obtained in exchange for new lease liabilities
|
17
|
|
|
8
|
|
As further discussed in Note 1, the Partnership elected to change its accounting policy related to certain barrels of crude oil that were previously accounted for as inventory. As a result of this change in accounting policy, the Partnership’s inventory balance for the prior period has been retrospectively adjusted. Inventories consisted of the following:
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|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Natural gas, NGLs and refined products
|
$
|
463
|
|
|
$
|
833
|
|
|
Crude oil
|
105
|
|
|
251
|
|
|
Spare parts and other
|
456
|
|
|
448
|
|
|
Total inventories
|
$
|
1,024
|
|
|
$
|
1,532
|
|
We utilize commodity derivatives to manage price volatility associated with our natural gas inventory. 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.
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 March 31, 2020 was $43.52 billion and $49.93 billion, respectively. As of December 31, 2019, the aggregate fair value and carrying amount of our consolidated debt obligations was $54.30 billion and $50.57 billion, respectively. The fair value of our consolidated debt obligations is a Level 2 valuation based on the 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 three months ended March 31, 2020, 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 March 31, 2020 and December 31, 2019 based on inputs used to derive their fair values:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
March 31, 2020
|
|
|
Fair Value Total
|
|
Level 1
|
|
Level 2
|
|
Assets:
|
|
|
|
|
|
|
Commodity derivatives:
|
|
|
|
|
|
|
Natural Gas:
|
|
|
|
|
|
|
Basis Swaps IFERC/NYMEX
|
$
|
108
|
|
|
$
|
108
|
|
|
$
|
—
|
|
|
Swing Swaps IFERC
|
2
|
|
|
—
|
|
|
2
|
|
|
Fixed Swaps/Futures
|
31
|
|
|
31
|
|
|
—
|
|
|
Forward Physical Contracts
|
6
|
|
|
—
|
|
|
6
|
|
|
Power:
|
|
|
|
|
|
|
Forwards
|
15
|
|
|
—
|
|
|
15
|
|
|
Futures
|
5
|
|
|
5
|
|
|
—
|
|
|
Options – Puts
|
2
|
|
|
2
|
|
|
—
|
|
|
Options – Calls
|
1
|
|
|
1
|
|
|
—
|
|
|
NGLs – Forwards/Swaps
|
527
|
|
|
527
|
|
|
—
|
|
|
Crude – Forwards/Swaps
|
3
|
|
|
3
|
|
|
—
|
|
|
Total commodity derivatives
|
700
|
|
|
677
|
|
|
23
|
|
|
Other non-current assets
|
26
|
|
|
17
|
|
|
9
|
|
|
Total assets
|
$
|
726
|
|
|
$
|
694
|
|
|
$
|
32
|
|
|
Liabilities:
|
|
|
|
|
|
|
Interest rate derivatives
|
$
|
(573
|
)
|
|
$
|
—
|
|
|
$
|
(573
|
)
|
|
Commodity derivatives:
|
|
|
|
|
|
|
Natural Gas:
|
|
|
|
|
|
|
Basis Swaps IFERC/NYMEX
|
(85
|
)
|
|
(85
|
)
|
|
—
|
|
|
Swing Swaps IFERC
|
(2
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
Fixed Swaps/Futures
|
(33
|
)
|
|
(33
|
)
|
|
—
|
|
|
Forward Physical Contracts
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
Power:
|
|
|
|
|
|
|
Forwards
|
(9
|
)
|
|
—
|
|
|
(9
|
)
|
|
Futures
|
(5
|
)
|
|
(5
|
)
|
|
—
|
|
|
NGLs – Forwards/Swaps
|
(489
|
)
|
|
(489
|
)
|
|
—
|
|
|
Refined Products – Futures
|
(7
|
)
|
|
(7
|
)
|
|
—
|
|
|
Total commodity derivatives
|
(631
|
)
|
|
(620
|
)
|
|
(11
|
)
|
|
Total liabilities
|
$
|
(1,204
|
)
|
|
$
|
(620
|
)
|
|
$
|
(584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
December 31, 2019
|
|
|
Fair Value Total
|
|
Level 1
|
|
Level 2
|
|
Assets:
|
|
|
|
|
|
|
Commodity derivatives:
|
|
|
|
|
|
|
Natural Gas:
|
|
|
|
|
|
|
Basis Swaps IFERC/NYMEX
|
$
|
17
|
|
|
$
|
17
|
|
|
$
|
—
|
|
|
Swing Swaps IFERC
|
1
|
|
|
—
|
|
|
1
|
|
|
Fixed Swaps/Futures
|
65
|
|
|
65
|
|
|
—
|
|
|
Forward Physical Contracts
|
3
|
|
|
—
|
|
|
3
|
|
|
Power:
|
|
|
|
|
|
|
|
Forwards
|
11
|
|
|
—
|
|
|
11
|
|
|
Futures
|
4
|
|
|
4
|
|
|
—
|
|
|
Options – Puts
|
1
|
|
|
1
|
|
|
—
|
|
|
Options – Calls
|
1
|
|
|
1
|
|
|
—
|
|
|
NGLs – Forwards/Swaps
|
260
|
|
|
260
|
|
|
—
|
|
|
Refined Products – Futures
|
8
|
|
|
8
|
|
|
—
|
|
|
Crude – Forwards/Swaps
|
13
|
|
|
13
|
|
|
—
|
|
|
Total commodity derivatives
|
384
|
|
|
369
|
|
|
15
|
|
|
Other non-current assets
|
31
|
|
|
20
|
|
|
11
|
|
|
Total assets
|
$
|
415
|
|
|
$
|
389
|
|
|
$
|
26
|
|
|
Liabilities:
|
|
|
|
|
|
|
Interest rate derivatives
|
$
|
(399
|
)
|
|
$
|
—
|
|
|
$
|
(399
|
)
|
|
Commodity derivatives:
|
|
|
|
|
|
|
Natural Gas:
|
|
|
|
|
|
|
Basis Swaps IFERC/NYMEX
|
(49
|
)
|
|
(49
|
)
|
|
—
|
|
|
Swing Swaps IFERC
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
Fixed Swaps/Futures
|
(43
|
)
|
|
(43
|
)
|
|
—
|
|
|
Power:
|
|
|
|
|
|
|
|
Forwards
|
(5
|
)
|
|
—
|
|
|
(5
|
)
|
|
Futures
|
(3
|
)
|
|
(3
|
)
|
|
—
|
|
|
NGLs – Forwards/Swaps
|
(278
|
)
|
|
(278
|
)
|
|
—
|
|
|
Refined Products – Futures
|
(10
|
)
|
|
(10
|
)
|
|
—
|
|
|
Total commodity derivatives
|
(389
|
)
|
|
(383
|
)
|
|
(6
|
)
|
|
Total liabilities
|
$
|
(788
|
)
|
|
$
|
(383
|
)
|
|
$
|
(405
|
)
|
Notes and Debentures
ETO January 2020 Senior Notes Offering and Redemption
On January 22, 2020, ETO completed a registered offering (the “January 2020 Senior Notes Offering”) of $1.00 billion aggregate principal amount of the Partnership’s 2.900% Senior Notes due 2025, $1.50 billion aggregate principal amount of the Partnership’s 3.750% Senior Notes due 2030 and $2.00 billion aggregate principal amount of the Partnership’s 5.000% Senior Notes due 2050 (collectively, the “Notes”). The Notes are fully and unconditionally guaranteed by the Partnership’s wholly-owned subsidiary, Sunoco Logistics Operations, on a senior unsecured basis.
Using proceeds from the January 2020 Senior Notes Offering, ETO redeemed its $400 million aggregate principal amount of 5.75% Senior Notes due September 1, 2020, its $1.05 billion aggregate principal amount of 4.15% Senior Notes due October
1, 2020, its $1.14 billion aggregate principal amount of 7.50% Senior Notes due October 15, 2020, its $250 million aggregate principal amount of 5.50% Senior Notes due February 15, 2020, ET’s $52 million aggregate principal amount of 7.50% Senior Notes due October 15, 2020 and Transwestern’s $175 million aggregate principal amount of 5.36% Senior Notes due December 9, 2020.
HFOTCO Long-Term Debt
In connection with the contribution transactions discussed in Note 2, HFOTCO became a wholly-owned subsidiary of ETO. As of March 31, 2020, HFOTCO had $225 million outstanding of tax exempt notes due 2050 (the "IKE Bonds"). The IKE Bonds are fully and unconditionally guaranteed by the Partnership, on a senior unsecured basis. The indentures under which the IKE Bonds were issued are subject to customary representations and warranties and affirmative and negative covenants, the majority of which are substantially similar to those found in ETO’s revolving credit facility, as further discussed below.
Credit Facilities and Commercial Paper
ETO Term Loan
ETO’s term loan credit agreement provides for a $2 billion three-year term loan credit facility (the “ETO Term Loan”). Borrowings under the term loan agreement mature on October 17, 2022 and are available for working capital purposes and for general partnership purposes. The term loan agreement is unsecured and is guaranteed by our subsidiary, Sunoco Logistics Operations.
As of March 31, 2020, the ETO Term Loan had $2 billion outstanding and was fully drawn. The weighted average interest rate on the total amount outstanding as of March 31, 2020 was 1.92%.
ETO Five-Year Credit Facility
ETO’s revolving credit facility (the “ETO Five-Year Credit Facility”) allows for unsecured borrowings up to $5.00 billion and matures on December 1, 2023. The ETO Five-Year Credit Facility contains an accordion feature, under which the total aggregate commitment may be increased up to $6.00 billion under certain conditions.
As of March 31, 2020, the ETO Five-Year Credit Facility had $1.96 billion of outstanding borrowings, $113 million of which was commercial paper. The amount available for future borrowings was $2.97 billion after taking into account letters of credit of $72 million. The weighted average interest rate on the total amount outstanding as of March 31, 2020 was 2.24%.
ETO 364-Day Facility
ETO’s 364-day revolving credit facility (the “ETO 364-Day Facility”) allows for unsecured borrowings up to $1.00 billion and matures on November 27, 2020. As of March 31, 2020, the ETO 364-Day Facility had no outstanding borrowings.
Sunoco LP Credit Facility
Sunoco LP maintains a $1.50 billion revolving credit facility (the “Sunoco LP Credit Facility”), which matures in July 2023. As of March 31, 2020, the Sunoco LP Credit Facility had $265 million of outstanding borrowings and $8 million in standby letters of credit. As of March 31, 2020, Sunoco LP had $1.23 billion of availability under the Sunoco LP Credit Facility. The weighted average interest rate on the total amount outstanding as of March 31, 2020 was 2.63%.
USAC Credit Facility
USAC maintains a $1.60 billion revolving credit facility (the “USAC Credit Facility”), with a further potential increase of $400 million, which matures in April 2023. As of March 31, 2020, the USAC Credit Facility had $459 million of outstanding borrowings and no outstanding letters of credit. As of March 31, 2020, USAC had $1.14 billion of borrowing base availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of $186 million under the USAC Credit Facility. The weighted average interest rate on the total amount outstanding as of March 31, 2020 was 3.67%.
Compliance with Our Covenants
We and our subsidiaries were in compliance with all requirements, tests, limitations, and covenants related to our debt agreements as of March 31, 2020.
|
|
|
|
7.
|
REDEEMABLE NONCONTROLLING INTERESTS
|
Certain redeemable noncontrolling interests in the Partnership’s subsidiaries are reflected as mezzanine equity on the consolidated balance sheets. Redeemable noncontrolling interests as of March 31, 2020 included a balance of $477 million related to the USAC Preferred Units described below and a balance of $15 million related to noncontrolling interest holders in one of the Partnership’s consolidated subsidiaries that have the option to sell their interests to the Partnership.
USAC Preferred Units
As of March 31, 2020, USAC had 500,000 USAC Preferred Units issued and outstanding, which are entitled to receive cumulative quarterly distributions equal to $24.375 per USAC Preferred Unit, subject to increase in certain limited circumstances. The USAC Preferred Units will have a perpetual term, unless converted or redeemed. Certain portions of the USAC Preferred Units will be convertible into USAC common units at the election of the holders beginning in 2021. To the extent the holders of the USAC Preferred Units have not elected to convert their preferred units by April 2, 2023, USAC will have the option to redeem all or any portion of the USAC Preferred Units for cash. In addition, at any time on or after the tenth anniversary of the issue date, the holders of the USAC Preferred Units will have the right to require USAC to redeem all or any portion of the USAC Preferred Units, and the Partnership may elect to pay up to 50% of such redemption amount in USAC common units.
All of our common units are owned by ET.
Preferred Units
As of March 31, 2020 and December 31, 2019, our outstanding preferred units included 950,000 Series A Preferred Units, 550,000 Series B Preferred Units, 18,000,000 Series C Preferred Units, 17,800,000 Series D Preferred Units and 32,000,000 Series E Preferred Units. As of March 31, 2020, our outstanding preferred units also included 500,000 Series F Preferred Units and 1,100,000 Series G Preferred Units.
The following table summarizes changes in the amounts of our Series A, Series B, Series C, Series D, Series E, Series F and Series G preferred units for the three months ended March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Unitholders
|
|
|
|
|
Series A
|
|
Series B
|
|
Series C
|
|
Series D
|
|
Series E
|
|
Series F
|
|
Series G
|
|
Total
|
|
Balance, December 31, 2019
|
$
|
958
|
|
|
$
|
556
|
|
|
$
|
440
|
|
|
$
|
434
|
|
|
$
|
786
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,174
|
|
|
Distributions to partners
|
(30
|
)
|
|
(18
|
)
|
|
(8
|
)
|
|
(9
|
)
|
|
(15
|
)
|
|
—
|
|
|
—
|
|
|
(80
|
)
|
|
Units issued for cash
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
494
|
|
|
1,086
|
|
|
1,580
|
|
|
Other, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(2
|
)
|
|
(3
|
)
|
|
Net income
|
15
|
|
|
9
|
|
|
8
|
|
|
9
|
|
|
15
|
|
|
6
|
|
|
15
|
|
|
77
|
|
|
Balance, March 31, 2020
|
$
|
943
|
|
|
$
|
547
|
|
|
$
|
440
|
|
|
$
|
434
|
|
|
$
|
786
|
|
|
$
|
499
|
|
|
$
|
1,099
|
|
|
$
|
4,748
|
|
The following table summarizes changes in the amounts of our Series A, Series B, Series C and Series D preferred units for the three months ended March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Unitholders
|
|
|
|
|
Series A
|
|
Series B
|
|
Series C
|
|
Series D
|
|
Total
|
|
Balance, December 31, 2018
|
$
|
958
|
|
|
$
|
556
|
|
|
$
|
440
|
|
|
$
|
434
|
|
|
$
|
2,388
|
|
|
Distributions to partners
|
(30
|
)
|
|
(18
|
)
|
|
(8
|
)
|
|
(8
|
)
|
|
(64
|
)
|
|
Net income
|
15
|
|
|
9
|
|
|
8
|
|
|
8
|
|
|
40
|
|
|
Balance, March 31, 2019
|
$
|
943
|
|
|
$
|
547
|
|
|
$
|
440
|
|
|
$
|
434
|
|
|
$
|
2,364
|
|
Series F Preferred Units
On January 22, 2020, the Partnership issued 500,000 of its Series F Preferred Units representing limited partner interest in the Partnership, at a price to the public of $1,000 per unit. Distributions on the Series F Preferred Units are cumulative from and including the original issue date and will be payable semi-annually in arrears on the 15th day of May and November of
each year, commencing on May 15, 2020 to, but excluding, May 15, 2025, at a rate equal to 6.750% per annum of the $1,000 liquidation preference. On and after May 15, 2025, the distribution rate on the Series F Preferred Units will equal a percentage of the $1,000 liquidation preference equal to the five-year U.S. treasury rate plus a spread of 5.134% per annum. The Series F Preferred Units are redeemable at ETO’s option on or after May 15, 2025 at a redemption price of $1,000 per Series F Preferred Unit, plus an amount equal to all accumulated and unpaid distributions thereon to, but excluding, the date of redemption.
Series G Preferred Units
On January 22, 2020, the Partnership issued 1,100,000 of its Series G Preferred Units representing limited partner interest in the Partnership, at a price to the public of $1,000 per unit. Distributions on the Series G Preferred Units are cumulative from and including the original issue date and will be payable semi-annually in arrears on the 15th day of May and November of each year, commencing on May 15, 2020 to, but excluding, May 15, 2030, at a rate equal to 7.125% per annum of the $1,000 liquidation preference. On and after May 15, 2030, the distribution rate on the Series G Preferred Units will equal a percentage of the $1,000 liquidation preference equal to the five-year U.S. treasury rate plus a spread of 5.306% per annum. The Series G Preferred Units are redeemable at ETO’s option on or after May 15, 2030 at a redemption price of $1,000 per Series G Preferred Unit, plus an amount equal to all accumulated and unpaid distributions thereon to, but excluding, the date of redemption.
Subsidiary Equity Transactions
Sunoco LP Equity Distribution Program
For the three months ended March 31, 2020, Sunoco LP issued no additional units under its at-the-market equity distribution program. As of March 31, 2020, $295 million of Sunoco LP common units remained available to be issued under the currently effective equity distribution agreement.
USAC Class B Conversion
On July 30, 2019, the 6,397,965 USAC Class B units held by the Partnership converted into 6,397,965 common units representing limited partner interests in USAC. These common units will participate in any future distributions declared by USAC.
USAC Distribution Reinvestment Program
During the three months ended March 31, 2020, distributions of $0.3 million were reinvested under the USAC distribution reinvestment program resulting in the issuance of approximately 18,883 USAC common units.
Cash Distributions
Distributions on ETO’s preferred units declared and/or paid by the Partnership subsequent to December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended
|
|
Record Date
|
|
Payment Date
|
|
Series A (1)
|
|
Series B (1)
|
|
Series C
|
|
Series D
|
|
Series E
|
|
Series F (2)
|
|
Series G (2)
|
|
December 31, 2019
|
|
February 3, 2020
|
|
February 18, 2020
|
|
$
|
31.25
|
|
|
$
|
33.125
|
|
|
$
|
0.4609
|
|
|
$
|
0.4766
|
|
|
0.4750
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
March 31, 2020
|
|
May 1, 2020
|
|
May 15, 2020
|
|
—
|
|
|
—
|
|
|
0.4609
|
|
|
0.4766
|
|
|
0.4750
|
|
|
21.19
|
|
|
22.36
|
|
(1) Series A Preferred Unit and Series B Preferred Unit distributions are paid on a semi-annual basis.
|
|
|
|
(2)
|
Series F Preferred Unit and Series G Preferred Unit distributions related to the period ended March 31, 2020 represent a prorated initial distribution. Distributions are paid on a semi-annual basis.
|
Sunoco LP Cash Distributions
Distributions declared and/or paid by Sunoco LP subsequent to its common unitholders December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Record Date
|
|
Payment Date
|
|
Rate
|
|
December 31, 2019
|
|
February 7, 2020
|
|
February 19, 2020
|
|
$
|
0.8255
|
|
|
March 31, 2020
|
|
May 7, 2020
|
|
May 19, 2020
|
|
0.8255
|
|
USAC Cash Distributions
Distributions declared and/or paid by USAC to its common unitholders subsequent to December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Record Date
|
|
Payment Date
|
|
Rate
|
|
December 31, 2019
|
|
January 27, 2020
|
|
February 7, 2020
|
|
$
|
0.5250
|
|
|
March 31, 2020
|
|
April 27, 2020
|
|
May 8, 2020
|
|
0.5250
|
|
Accumulated Other Comprehensive Income (Loss)
The following table presents the components of AOCI, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Available-for-sale securities
|
$
|
4
|
|
|
$
|
13
|
|
|
Foreign currency translation adjustment
|
(5
|
)
|
|
(5
|
)
|
|
Actuarial loss related to pensions and other postretirement benefits
|
(19
|
)
|
|
(25
|
)
|
|
Investments in unconsolidated affiliates, net
|
(17
|
)
|
|
(1
|
)
|
|
Total AOCI, net of tax
|
$
|
(37
|
)
|
|
$
|
(18
|
)
|
The Partnership’s effective tax rate differs from the statutory rate primarily due to partnership earnings that are not subject to United States federal and most state income taxes at the partnership level.
|
|
|
|
10.
|
REGULATORY MATTERS, COMMITMENTS, CONTINGENCIES AND ENVIRONMENTAL LIABILITIES
|
FERC Proceedings
By Order issued January 16, 2019, the FERC initiated a review of Panhandle’s existing rates pursuant to Section 5 of the Natural Gas Act to determine whether the rates currently charged by Panhandle are just and reasonable and set the matter for hearing. On August 30, 2019, Panhandle filed a general rate proceeding under Section 4 of the Natural Gas Act. The Natural Gas Act Section 5 and Section 4 proceedings were consolidated by the Order dated October 1, 2019. A hearing in the combined proceedings is scheduled for August, 2020, with an initial decision expected in early 2021.
Commitments
In the normal course of business, ETO purchases, processes and sells natural gas pursuant to long-term contracts and enters into long-term transportation and storage agreements. Such contracts contain terms that are customary in the industry. ETO believes that the terms of these agreements are commercially reasonable and will not have a material adverse effect on its financial position or results of operations.
Our joint venture agreements require that we fund our proportionate share of capital contributions to our unconsolidated affiliates. Such contributions will depend upon our unconsolidated affiliates’ capital requirements, such as for funding capital projects or repayment of long-term obligations.
We have certain non-cancelable rights-of-way (“ROW”) commitments, which require fixed payments and either expire upon our chosen abandonment or at various dates in the future. The table below reflects ROW expense included in operating expenses in the accompanying statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2020
|
|
2019
|
|
ROW expense
|
$
|
9
|
|
|
$
|
6
|
|
PES Refinery Fire and Bankruptcy
We own an approximately 7.4% non-operating interest in PES, which owns a refinery in Philadelphia. In addition, the Partnership provides logistics services to PES under commercial contracts and Sunoco LP has historically purchased refined products from PES. In June 2019, an explosion and fire occurred at the refinery complex.
On July 21, 2019, PES Holdings, LLC and seven of its subsidiaries (collectively, the "Debtors") filed voluntary petitions in the United States Bankruptcy Court for the District of Delaware seeking relief under the provisions of Chapter 11 of the United States Bankruptcy Code, as a result of the explosion and fire at the Philadelphia refinery complex. The Debtors have also defaulted on a $75 million note payable to a subsidiary of the Partnership. The Partnership has not recorded a valuation allowance related to the note receivable as of March 31, 2020, because management is not yet able to determine the collectability of the note in bankruptcy.
In addition, the Partnership’s subsidiaries retained certain environmental remediation liabilities when the refinery was sold to PES. As of March 31, 2020, the Partnership has funded these environmental remediation liabilities through its wholly-owned captive insurance company, based upon actuarially determined estimates for such costs, and these liabilities are included in the total environmental liabilities discussed below under “Environmental Remediation.” In the event that PES property is sold in connection with the bankruptcy proceeding, it may be necessary for the Partnership to record additional environmental remediation liabilities in the future depending upon the proposed use of such property by the buyer of the property; however, management is not currently able to estimate such additional liabilities.
PES has rejected certain of the Partnership’s commercial contracts pursuant to Section 365 of the Bankruptcy Code; however, the impact of the bankruptcy on the Partnership’s commercial contracts and related revenue loss (temporary or permanent) is unknown at this time. In addition, Sunoco LP has been successful at acquiring alternative supplies to replace fuel volume lost from PES and does not anticipate any material impact to its business going forward.
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 27, 2016, the Standing Rock Sioux Tribe (“SRST”) filed a lawsuit in the United States District Court for the District of Columbia challenging permits issued by the United States Army Corps of Engineers (“USACE”) permitting Dakota Access, LLC (“Dakota Access”) to cross the Missouri River at Lake Oahe in North Dakota. The case was subsequently amended to challenge an easement issued by the USACE allowing the pipeline to cross land owned by the USACE adjacent to the Missouri River. Dakota Access and the Cheyenne River Sioux Tribe (“CRST”) intervened. Separate lawsuits filed by the Oglala Sioux Tribe (“OST”) and the Yankton Sioux Tribe (“YST”) were consolidated with this action and several individual tribal members intervened (collectively with SRST and CRST, the “Tribes”). Plaintiffs and Defendants filed cross motions for summary judgment. On March 25, 2020, the Court remanded the case back to the USACE for preparation of an Environment Impact Statement. The Court has requested briefing on whether to suspend operation of the pipeline during the time the USACE conducts any additional environmental analysis. Briefing will conclude on May 27, 2020.
Energy Transfer 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 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,
however, Lone Star is still quantifying the extent of its incurred and ongoing damages and has obtained, and will continue to seek, reimbursement for these losses.
MTBE Litigation
ETC Sunoco Holdings LLC and Sunoco (R&M), LLC (collectively, “Sunoco”) are defendants in lawsuits alleging MTBE contamination of groundwater. The plaintiffs, state-level governmental entities, assert product liability, nuisance, trespass, negligence, violation of environmental laws, and/or deceptive business practices claims. 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 March 31, 2020, Sunoco is a defendant in five cases, including one case each initiated by the States of Maryland and Rhode Island, one by the Commonwealth of Pennsylvania and two by the Commonwealth of Puerto Rico. The more recent Puerto Rico action is a companion case alleging damages for additional sites beyond those at issue in the initial Puerto Rico action. The actions brought by the State of Maryland and Commonwealth of Pennsylvania have also named as defendants ETO, ETP Holdco Corporation, and Sunoco Partners Marketing & Terminals L.P. (“SPMT”).
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
On June 10, 2015, Adrian Dieckman (“Dieckman”), a purported Regency unitholder, filed a class action complaint related to the Regency-ETO merger (the “Regency Merger”) 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, ET, ETO, ETP GP, and the members of Regency’s board of directors.
The Regency Merger Litigation alleges that the Regency Merger breached the Regency partnership agreement. On March 29, 2016, the Delaware Court of Chancery granted the defendants’ motion to dismiss the lawsuit in its entirety. Plaintiff appealed, and the Delaware Supreme Court reversed the judgment of the Court of Chancery. Plaintiff then filed an Amended Verified Class Action Complaint, which defendants moved to dismiss. The Court of Chancery granted in part and denied in part the motions to dismiss, dismissing the claims against all defendants other than Regency GP, LP and Regency GP LLC (the “Regency Defendants”). The Court of Chancery later granted Plaintiff’s unopposed motion for class certification. Trial was held on December 10-16, 2019, and a post-trial hearing was held on May 6, 2020.
The Regency 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 Defendants predict the amount of time and expense that will be required to resolve the Regency Merger Litigation. The Regency Defendants believe the Regency Merger Litigation is without merit and intend to vigorously defend against it.
Rover
On November 3, 2017, the State of Ohio and the Ohio Environmental Protection Agency (“Ohio EPA”) filed suit against Rover and other defendants (collectively, the Defendants”) seeking to recover civil penalties allegedly owed and certain injunctive relief related to permit compliance. The Defendants filed several motions to dismiss, which were granted on all counts. The Ohio EPA appealed, and on December 9, 2019, the Fifth District Court of Appeals entered a unanimous judgment affirming the trial court. The Ohio EPA sought review from the Ohio Supreme Court, which Defendants opposed in briefs filed in February 2020. On April 22, 2020, the Ohio Supreme Court granted the Ohio EPA’s request for review. The briefing schedule for the Ohio Supreme Court’s review has not yet been set.
Bayou Bridge
On January 11, 2018, environmental groups and a trade association filed suit against the USACE in the United States District Court for the Middle District of Louisiana. Plaintiffs allege that the USACE’s issuance of permits authorizing the construction of the Bayou Bridge Pipeline through the Atchafalaya Basin (“Basin”) violated the National Environmental Policy Act, the Clean Water Act, and the Rivers and Harbors Act. They asked the district court to vacate these permits and to enjoin construction of the project through the Basin until the USACE corrects alleged deficiencies in its decision-making process. ETO, through its subsidiary Bayou Bridge Pipeline, LLC (“Bayou Bridge”), intervened on January 26, 2018.
In February 2018, the District Court initially granted Plaintiffs’ motion for a preliminary injunction, but the Fifth Circuit Court of Appeals subsequently vacated that decision. The Fifth Circuit’s ruling allowed construction to continue and be completed during the pendency of the case. Plaintiffs filed a second motion for preliminary injunction in January 2019, which was denied. Plaintiffs and Defendants filed cross motions for summary judgment. On March 25, 2020, the Court granted summary judgment in favor of the USACE. Plaintiffs have until May 26, 2020 to file a notice of appeal.
Revolution
On September 10, 2018, a pipeline release and fire (the “Incident”) occurred on the Revolution pipeline, a natural gas gathering line located in Center Township, Beaver County, Pennsylvania. There were no injuries. On February 8, 2019, the Pennsylvania Department of Environmental Protection (“PADEP”) issued a Permit Hold on any requests for approvals/permits or permit amendments for any project in Pennsylvania pursuant to the state’s water laws. The Partnership filed an appeal of the Permit Hold with the Pennsylvania Environmental Hearing Board. On January 3, 2020, the Partnership entered into a Consent Order and Agreement with the Department in which, among other things, the Permit Hold was lifted, the Partnership agreed to pay a $28.6 million civil penalty and fund a $2 million community environmental project, and all related appeals were withdrawn.
The Pennsylvania Office of Attorney General has commenced an investigation regarding the Incident, and the United States Attorney for the Western District of Pennsylvania has issued a federal grand jury subpoena for documents relevant to the Incident. The scope of these investigations is not further known at this time.
Chester County, Pennsylvania Investigation
In December 2018, the former Chester County District Attorney (“DA”) sent a letter to the Partnership stating that his office was investigating the Partnership and related entities for “potential crimes” related to the Mariner East pipelines.
Subsequently, the matter was submitted to an Investigating Grand Jury in Chester County, Pennsylvania, which has issued subpoenas seeking documents and testimony. On September 24, 2019, the former DA sent a Notice of Intent to the Partnership of its intent to pursue an abatement action if certain conditions were not remediated. The Partnership responded to the Notice of Intent within the proscribed time period. To date, the Partnership is not aware of any further action with regard to this Notice.
In December 2019, the former DA announced charges against a current employee related to the provision of security services. The Partnership has secured independent counsel for the employee. While the Partnership will continue to cooperate with the investigation, it intends to vigorously defend itself.
Delaware County, Pennsylvania Investigation
On March 11, 2019, the Delaware County District Attorney’s Office (“DA”) announced that the DA and the Pennsylvania Attorney General’s Office, at the request of the DA, are conducting an investigation of alleged criminal misconduct involving the construction and related activities of the Mariner East pipelines in Delaware County. The Partnership has not been appraised of the specific conduct under investigation. While the Partnership will cooperate with the investigation, it intends to vigorously defend itself.
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 March 31, 2020 and December 31, 2019, accruals of approximately $94 million and $98 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 addition, other legal proceedings exist that are considered reasonably possible to result in unfavorable outcomes. For those where possible losses can be estimated, the range of possible losses related to these contingent obligations is estimated to be up to $80 million; however, no accruals have been recorded as of March 31, 2020 or December 31, 2019.
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, natural resource damages, 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 on behalf of EPA and Louisiana Department of Environmental Quality (“LDEQ”) notifying SPLP and Mid-Valley Pipeline Company (“Mid-Valley”) that enforcement actions were being pursued for three separate crude oil releases: (a) an estimated 550 barrels released from the Colmesneil-to-Chester pipeline in Tyler County, Texas (“Colmesneil”) which allegedly occurred in February 2013; (b) an estimated 4,509 barrels released from the Longview-to-Mayersville pipeline in Caddo Parish, Louisiana (a/k/a Milepost 51.5) which allegedly occurred in October 2014; and (c) an estimated 40 barrels released from the Wakita 4-inch gathering line in Oklahoma which allegedly occurred in January 2015. In January 2019, a Consent Decree approved by all parties as well as an accompanying Complaint was filed in the United States District Court for the Western District of Louisiana seeking public comment and final court approval to resolve all penalties with DOJ and LDEQ for the three releases. Subsequently, the court approved the Consent Decree and the penalty payment of $5.4 million was satisfied. The Consent Decree requires certain injunctive relief to be completed on the Longview-to-Mayersville pipeline within three years but the injunctive relief is not expected to have any material impact on operations. In addition to resolution of the civil penalty and injunctive relief, we continue to discuss natural resource damages with the Louisiana trustees related to the Caddo Parish, Louisiana release.
In October 2018, Pipeline Hazardous Materials Safety Administration (“PHMSA”) issued a notice of proposed safety order (the “Notice”) to SPMT, a wholly-owned subsidiary of ETO. The Notice alleged that conditions exist on certain pipeline facilities owned and operated by SPMT in Nederland, Texas that pose a pipeline integrity risk to public safety, property or the environment. The Notice also made preliminary findings of fact and proposed corrective measures. SPMT responded to the Notice by submitting a timely written response on November 2, 2018, attended an informal consultation held on January 30, 2019 and entered into a consent agreement with PHMSA resolving the issues in the Notice as of March 2019. SPMT is currently awaiting response from PHMSA regarding the approval status of the submitted Remedial Work Plan.
On June 4, 2019, the Oklahoma Corporation Commission’s (“OCC”) Transportation Division filed a complaint against SPLP seeking a penalty of up to $1 million related to a May 2018 rupture near Edmond, Oklahoma. The release occurred on the Noble to Douglas 8” pipeline in an area of external corrosion and caused the release of approximately fifteen barrels of crude oil. SPLP responded immediately to the release and remediated the surrounding environment and pipeline in cooperation with the OCC. The OCC filed the complaint alleging that SPLP failed to provide adequate cathodic protection to the pipeline causing the failure. SPLP is negotiating a settlement agreement with the OCC for a lesser penalty. The OCC has accepted our counter offer in conjunction with a proposed consent order. The Consent Order will be presented to the OCC at a final hearing, the date of which is to be determined.
Environmental Remediation
Our subsidiaries are responsible for environmental remediation at certain sites, including the following:
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•
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certain of our interstate pipelines conduct soil and groundwater remediation related to contamination from past uses of polychlorinated biphenyls (“PCBs”). PCB assessments are ongoing and, in some cases, our subsidiaries could be contractually responsible for contamination caused by other parties.
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•
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certain gathering and processing systems are responsible for soil and groundwater remediation related to releases of hydrocarbons.
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•
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legacy sites related to Sunoco that are subject to environmental assessments, including formerly owned terminals and other logistics assets, retail sites that Sunoco no longer operates, closed and/or sold refineries and other formerly owned sites.
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•
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Sunoco 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 March 31, 2020, Sunoco had been named as a PRP at approximately 29 identified or potentially identifiable “Superfund” sites under federal and/or comparable state law. Sunoco is usually one of a number of companies identified as a PRP at a site. Sunoco has reviewed the nature and extent of its involvement at each site and other relevant circumstances and, based upon Sunoco’s purported nexus to the sites, believes that its potential liability associated with such sites will not be significant.
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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.
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March 31, 2020
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December 31, 2019
|
|
Current
|
$
|
42
|
|
|
$
|
46
|
|
|
Non-current
|
271
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|
|
274
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|
|
Total environmental liabilities
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$
|
313
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|
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$
|
320
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|
We have 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 March 31, 2020 and 2019, the Partnership recorded $8 million and $6 million, respectively, of expenditures related to environmental cleanup programs.
Our pipeline operations are subject to regulation by the United States Department of Transportation under PHMSA, pursuant to which PHMSA has established requirements relating to the design, installation, testing, construction, operation, replacement and management of pipeline facilities. Moreover, PHMSA, through the Office of Pipeline Safety, has promulgated a rule requiring pipeline operators to develop integrity management programs to comprehensively evaluate their pipelines, and take measures to protect pipeline segments located in what the rule refers to as “high consequence areas.” Activities under these integrity management programs involve the performance of internal pipeline inspections, pressure testing or other effective means to assess the integrity of these regulated pipeline segments, and the regulations require prompt action to address integrity issues raised by the assessment and analysis. Integrity testing and assessment of all of these assets will continue, and the potential exists that results of such testing and assessment could cause us to incur future capital and operating expenditures for repairs or upgrades deemed necessary to ensure the continued safe and reliable operation of our pipelines; however, no estimate can be made at this time of the likely range of such expenditures.
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, the Occupational Safety and Health Administration’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.
Disaggregation of Revenue
The Partnership’s consolidated financial statements reflect eight reportable segments, which also represent the level at which the Partnership aggregates revenue for disclosure purposes. Note 14 depicts the disaggregation of revenue by segment.
Contract Balances with Customers
The Partnership satisfies its obligations by transferring goods or services in exchange for consideration from customers. The timing of performance may differ from the timing the associated consideration is paid to or received from the customer, thus resulting in the recognition of a contract asset or a contract liability.
The Partnership recognizes a contract asset when making upfront consideration payments to certain customers or when providing services to customers prior to the time at which the Partnership is contractually allowed to bill for such services.
The Partnership recognizes a contract liability if the customer's payment of consideration precedes the Partnership’s fulfillment of the performance obligations. Certain contracts contain provisions requiring customers to pay a fixed fee for a right to use our assets, but allows customers to apply such fees against services to be provided at a future point in time. These amounts are reflected as deferred revenue until the customer applies the deficiency fees to services provided or becomes unable to use the fees as payment for future services due to expiration of the contractual period the fees can be applied or physical inability of the customer to utilize the fees due to capacity constraints. Additionally, Sunoco LP maintains some franchise agreements requiring dealers to make one-time upfront payments for long term license agreements. Sunoco LP recognizes a contract liability when the upfront payment is received and recognizes revenue over the term of the license.
The following table summarizes the consolidated activity of our contract liabilities:
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Contract Liabilities
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Balance, December 31, 2019
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$
|
375
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|
|
Additions
|
178
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|
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Revenue recognized
|
(205
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)
|
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Balance, March 31, 2020
|
$
|
348
|
|
|
|
|
|
Balance, December 31, 2018
|
$
|
394
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|
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Additions
|
148
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|
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Revenue recognized
|
(162
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)
|
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Balance, March 31, 2019
|
$
|
380
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The balances of receivables from contracts with customers listed in the table below include both current trade receivables and long-term receivables, net of allowance for doubtful accounts. The allowance for receivables represents Sunoco LP’s best estimate of the probable losses associated with potential customer defaults. Sunoco LP determines the allowance based on historical experience and on a specific identification basis.
The balances of Sunoco LP’s contract assets as of March 31, 2020 and December 31, 2019 were as follows:
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March 31, 2020
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December 31, 2019
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Contract asset balances:
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Contract asset
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$
|
128
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|
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$
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117
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|
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Accounts receivable from contracts with customers
|
140
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|
|
366
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Costs to Obtain or Fulfill a Contract
Sunoco LP recognizes an asset from the costs incurred to obtain a contract (e.g. sales commissions) only if it expects to recover those costs. On the other hand, the costs to fulfill a contract are capitalized if the costs are specifically identifiable to a contract, would result in enhancing resources that will be used in satisfying performance obligations in the future, and are expected to be recovered. These capitalized costs are recorded as a part of other current assets and other non-current assets and are amortized on a systematic basis consistent with the pattern of transfer of the goods or services to which such costs relate. The amount of amortization expense that Sunoco LP recognized for the three months ended March 31, 2020 and 2019 was $5 million and $4 million, respectively. Sunoco LP has also made a policy election of expensing the costs to obtain a contract, as and when they are incurred, in cases where the expected amortization period is one year or less.
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12.
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DERIVATIVE ASSETS AND LIABILITIES
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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, we 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 our intrastate transportation and storage segment and operational gas sales in our 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 our midstream segment whereby our 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 utilize swaps, futures and other derivative instruments to mitigate the risk associated with market movements in the price of refined products and NGLs to manage our storage facilities and the purchase and sale of purity NGL. 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. 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 our 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 our 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 our 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:
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March 31, 2020
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December 31, 2019
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Notional Volume
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Maturity
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Notional Volume
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Maturity
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Mark-to-Market Derivatives
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(Trading)
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Natural Gas (BBtu):
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|
|
|
|
|
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|
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Basis Swaps IFERC/NYMEX (1)
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(19,673
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)
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2020-2024
|
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(35,208
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)
|
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2020-2024
|
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Fixed Swaps/Futures
|
1,688
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|
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2020-2021
|
|
1,483
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|
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2020
|
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Power (Megawatt):
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|
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Forwards
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2,125,200
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2020-2029
|
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3,213,450
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2020-2029
|
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Futures
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329,896
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|
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2020-2021
|
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(353,527
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)
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2020
|
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Options – Puts
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621,860
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|
|
2020
|
|
51,615
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|
|
2020
|
|
Options – Calls
|
4,035,972
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|
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2020-2021
|
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(2,704,330
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)
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|
2020-2021
|
|
(Non-Trading)
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|
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|
|
|
|
|
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Natural Gas (BBtu):
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|
|
|
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|
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Basis Swaps IFERC/NYMEX
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(15,860
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)
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2020-2022
|
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(18,923
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)
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2020-2022
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Swing Swaps IFERC
|
31,505
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|
|
2020-2021
|
|
(9,265
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)
|
|
2020
|
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Fixed Swaps/Futures
|
(1,425
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)
|
|
2020-2022
|
|
(3,085
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)
|
|
2020-2021
|
|
Forward Physical Contracts
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(36,691
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)
|
|
2020-2021
|
|
(13,364
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)
|
|
2020-2021
|
|
NGLs (MBbls) – Forwards/Swaps
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(2,235
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)
|
|
2020-2022
|
|
(1,300
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)
|
|
2020-2021
|
|
Refined Products (MBbls) – Futures
|
(1,779
|
)
|
|
2020-2022
|
|
(2,473
|
)
|
|
2020-2021
|
|
Crude (MBbls) – Forwards/Swaps
|
5,260
|
|
|
2020
|
|
4,465
|
|
|
2020
|
|
Corn (thousand bushels)
|
(140
|
)
|
|
2020
|
|
(1,210
|
)
|
|
2020
|
|
Fair Value Hedging Derivatives
|
|
|
|
|
|
|
|
|
(Non-Trading)
|
|
|
|
|
|
|
|
|
Natural Gas (BBtu):
|
|
|
|
|
|
|
|
|
Basis Swaps IFERC/NYMEX
|
(32,695
|
)
|
|
2020-2021
|
|
(31,780
|
)
|
|
2020
|
|
Fixed Swaps/Futures
|
(32,695
|
)
|
|
2020-2021
|
|
(31,780
|
)
|
|
2020
|
|
Hedged Item – Inventory
|
32,695
|
|
|
2020-2021
|
|
31,780
|
|
|
2020
|
|
|
|
|
(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 our anticipated debt issuances.
The following table summarizes our interest rate swaps outstanding, none of which were designated as hedges for accounting purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
|
|
Type(1)
|
|
Notional Amount Outstanding
|
|
March 31, 2020
|
|
December 31, 2019
|
|
July 2020(2)(3)
|
|
Forward-starting to pay a fixed rate of 3.52% and receive a floating rate
|
|
$
|
—
|
|
|
$
|
400
|
|
|
July 2021(2)
|
|
Forward-starting to pay a fixed rate of 3.55% and receive a floating rate
|
|
400
|
|
|
400
|
|
|
July 2022(2)
|
|
Forward-starting to pay a fixed rate of 3.80% and receive a floating rate
|
|
400
|
|
|
400
|
|
|
|
|
|
(1)
|
Floating rates are based on 3-month LIBOR.
|
|
|
|
|
(2)
|
Represents the effective date. These forward-starting swaps have terms of 30 years with a mandatory termination date the same as the effective date.
|
|
|
|
|
(3)
|
The July 2020 interest rate swaps were terminated in January 2020.
|
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 the Partnership’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, the Partnership may, at times, require collateral under certain circumstances to mitigate credit risk as necessary. The Partnership also uses industry standard commercial agreements which allow for the netting of exposures associated with transactions executed under a single commercial agreement. Additionally, we utilize master netting agreements to offset credit exposure across multiple commercial agreements with a single counterparty or affiliated group of counterparties.
The Partnership’s counterparties consist of a diverse portfolio of customers across the energy industry, including petrochemical companies, commercial and industrial end-users, oil and gas producers, municipalities, gas and electric utilities, midstream companies and independent power generators. Our overall exposure may be affected positively or negatively by macroeconomic or regulatory changes that impact our 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.
The Partnership has maintenance margin deposits with certain counterparties in the OTC market, primarily with 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 us on or about the settlement date for non-exchange traded derivatives, and we exchange 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
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Commodity derivatives (margin deposits)
|
|
$
|
11
|
|
|
$
|
24
|
|
|
$
|
(12
|
)
|
|
$
|
—
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Commodity derivatives (margin deposits)
|
|
615
|
|
|
319
|
|
|
(561
|
)
|
|
(350
|
)
|
|
Commodity derivatives
|
|
74
|
|
|
41
|
|
|
(58
|
)
|
|
(39
|
)
|
|
Interest rate derivatives
|
|
—
|
|
|
—
|
|
|
(573
|
)
|
|
(399
|
)
|
|
|
|
689
|
|
|
360
|
|
|
(1,192
|
)
|
|
(788
|
)
|
|
Total derivatives
|
|
$
|
700
|
|
|
$
|
384
|
|
|
$
|
(1,204
|
)
|
|
$
|
(788
|
)
|
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
|
|
March 31, 2020
|
|
December 31, 2019
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Derivatives without offsetting agreements
|
|
Derivative liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(573
|
)
|
|
$
|
(399
|
)
|
|
Derivatives in offsetting agreements:
|
|
|
|
|
|
|
|
|
|
OTC contracts
|
|
Derivative assets (liabilities)
|
|
74
|
|
|
41
|
|
|
(58
|
)
|
|
(39
|
)
|
|
Broker cleared derivative contracts
|
|
Other current assets (liabilities)
|
|
626
|
|
|
343
|
|
|
(573
|
)
|
|
(350
|
)
|
|
Total gross derivatives
|
|
700
|
|
|
384
|
|
|
(1,204
|
)
|
|
(788
|
)
|
|
Offsetting agreements:
|
|
|
|
|
|
|
|
|
|
Counterparty netting
|
|
Derivative assets (liabilities)
|
|
(49
|
)
|
|
(18
|
)
|
|
49
|
|
|
18
|
|
|
Counterparty netting
|
|
Other current assets (liabilities)
|
|
(551
|
)
|
|
(318
|
)
|
|
551
|
|
|
318
|
|
|
Total net derivatives
|
|
$
|
100
|
|
|
$
|
48
|
|
|
$
|
(604
|
)
|
|
$
|
(452
|
)
|
We disclose the non-exchange traded financial derivative instruments as derivative assets and liabilities on our consolidated balance sheets at fair value with amounts classified as either current or non-current depending on the anticipated settlement date.
The following tables summarize the amounts recognized in income with respect to our derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain (Loss) Recognized in Income on Derivatives
|
|
Amount of Gain (Loss) Recognized in Income on Derivatives
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
2020
|
|
2019
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Commodity derivatives – Trading
|
Cost of products sold
|
|
$
|
5
|
|
|
$
|
5
|
|
|
Commodity derivatives – Non-trading
|
Cost of products sold
|
|
112
|
|
|
(12
|
)
|
|
Interest rate derivatives
|
Losses on interest rate derivatives
|
|
(329
|
)
|
|
(74
|
)
|
|
Total
|
|
|
$
|
(212
|
)
|
|
$
|
(81
|
)
|
|
|
|
|
13.
|
RELATED PARTY TRANSACTIONS
|
ET-ETO Promissory Note
As of March 31, 2020 and December 31, 2019, ETO’s promissory note receivable from ET had an outstanding balance of $3.23 billion and $3.71 billion, respectively, and ETO’s long-term intercompany payable to ET had an outstanding balance of $120 million and $104 million, respectively. The outstanding promissory note receivable and intercompany payable are reflected on a net basis in the Partnership’s consolidated balance sheets.
Interest income attributable to promissory notes from ET included in other income, net in our consolidated statements of operations for the three months ended March 31, 2020 and 2019 was $44 million and $21 million. respectively.
ETO-SemGroup Long-Term Notes
In December 2019, in connection with the SemGroup acquisition, ETO and SemGroup entered into an intercompany promissory note for an aggregate amount up to $2.5 billion that accrues interest at 5.20% per annum. The ETO-SemGroup promissory note matures on December 31, 2029. As of March 31, 2020 and December 31, 2019, the ETO-SemGroup promissory note had an outstanding balance of $2.19 billion and $2.32 billion, respectively.
The Partnership also has related party transactions with several of its unconsolidated affiliates. In addition to commercial transactions, these transactions include the provision of certain management services and leases of certain assets.
The following table summarizes the revenues from related companies on our consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2020
|
|
2019
|
|
Revenues from related companies
|
$
|
133
|
|
|
$
|
109
|
|
The following table summarizes the accounts receivable from and accounts payable to related companies on our consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Accounts receivable from related companies:
|
|
|
|
|
ET
|
$
|
7
|
|
|
$
|
8
|
|
|
FGT
|
20
|
|
|
50
|
|
|
Phillips 66
|
11
|
|
|
36
|
|
|
Traverse
|
54
|
|
|
42
|
|
|
Other
|
46
|
|
|
39
|
|
|
Total accounts receivable from related companies
|
$
|
138
|
|
|
$
|
175
|
|
|
|
|
|
|
|
Accounts payable to related companies:
|
|
|
|
|
ET
|
$
|
1,029
|
|
|
$
|
1,085
|
|
|
Other
|
8
|
|
|
27
|
|
|
Total accounts payable to related companies
|
$
|
1,037
|
|
|
$
|
1,112
|
|
Our financial statements currently reflect the following reportable segments, which conduct their business primarily in the United States:
•intrastate transportation and storage;
•interstate transportation and storage;
•midstream;
•NGL and refined products transportation and services;
•crude oil transportation and services;
•investment in Sunoco LP;
•investment in USAC; and
•all other.
Consolidated revenues and expenses reflect the elimination of all material intercompany transactions.
Revenues from our intrastate transportation and storage segment are primarily reflected in natural gas sales and gathering, transportation and other fees. Revenues from our interstate transportation and storage segment are primarily reflected in gathering, transportation and other fees. Revenues from our midstream segment are primarily reflected in natural gas sales, NGL sales and gathering, transportation and other fees. Revenues from our NGL and refined products transportation and services segment are primarily reflected in NGL sales and gathering, transportation and other fees. Revenues from our crude oil transportation and services segment are primarily reflected in crude sales. Revenues from our investment in Sunoco LP segment are primarily reflected in refined product sales. Revenues from our investment in USAC segment are primarily reflected in gathering, transportation and other fees. Revenues from our all other segment are primarily reflected in natural gas sales.
We report Segment Adjusted EBITDA and consolidated Adjusted EBITDA as measures of segment performance. We define Segment Adjusted EBITDA and consolidated Adjusted EBITDA as total partnership 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, inventory valuation adjustments, non-cash impairment charges, losses on extinguishments of debt and other non-operating income or expense items. Segment Adjusted EBITDA and consolidated Adjusted EBITDA reflect amounts for unconsolidated affiliates based on the same recognition and measurement methods used to record equity in earnings of unconsolidated affiliates. Adjusted EBITDA related to unconsolidated affiliates excludes the same items with respect to the unconsolidated affiliate as those excluded from the calculation of Segment Adjusted EBITDA and consolidated Adjusted
EBITDA, such as interest, taxes, depreciation, depletion, amortization and other non-cash items. Although these amounts are excluded from Adjusted EBITDA related to unconsolidated affiliates, such exclusion should not be understood to imply that we have control over the operations and resulting revenues and expenses of such affiliates. We do not control our unconsolidated affiliates; therefore, we do not control the earnings or cash flows of such affiliates. The use of Segment Adjusted EBITDA or Adjusted EBITDA related to unconsolidated affiliates as an analytical tool should be limited accordingly.
The following tables present financial information by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2020
|
|
2019*
|
|
Revenues:
|
|
|
|
|
Intrastate transportation and storage:
|
|
|
|
|
Revenues from external customers
|
$
|
536
|
|
|
$
|
769
|
|
|
Intersegment revenues
|
57
|
|
|
87
|
|
|
|
593
|
|
|
856
|
|
|
Interstate transportation and storage:
|
|
|
|
|
Revenues from external customers
|
459
|
|
|
492
|
|
|
Intersegment revenues
|
5
|
|
|
6
|
|
|
|
464
|
|
|
498
|
|
|
Midstream:
|
|
|
|
|
Revenues from external customers
|
501
|
|
|
663
|
|
|
Intersegment revenues
|
669
|
|
|
1,055
|
|
|
|
1,170
|
|
|
1,718
|
|
|
NGL and refined products transportation and services:
|
|
|
|
|
Revenues from external customers
|
2,118
|
|
|
2,713
|
|
|
Intersegment revenues
|
597
|
|
|
318
|
|
|
|
2,715
|
|
|
3,031
|
|
|
Crude oil transportation and services:
|
|
|
|
|
Revenues from external customers
|
4,213
|
|
|
4,167
|
|
|
Intersegment revenues
|
—
|
|
|
19
|
|
|
|
4,213
|
|
|
4,186
|
|
|
Investment in Sunoco LP:
|
|
|
|
|
Revenues from external customers
|
3,260
|
|
|
3,692
|
|
|
Intersegment revenues
|
12
|
|
|
—
|
|
|
|
3,272
|
|
|
3,692
|
|
|
Investment in USAC:
|
|
|
|
|
Revenues from external customers
|
176
|
|
|
167
|
|
|
Intersegment revenues
|
3
|
|
|
4
|
|
|
|
179
|
|
|
171
|
|
|
All other:
|
|
|
|
|
Revenues from external customers
|
305
|
|
|
458
|
|
|
Intersegment revenues
|
149
|
|
|
39
|
|
|
|
454
|
|
|
497
|
|
|
Eliminations
|
(1,492
|
)
|
|
(1,528
|
)
|
|
Total revenues
|
$
|
11,568
|
|
|
$
|
13,121
|
|
*As adjusted. See Note 1.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2020
|
|
2019*
|
|
Segment Adjusted EBITDA:
|
|
|
|
|
Intrastate transportation and storage
|
$
|
240
|
|
|
$
|
252
|
|
|
Interstate transportation and storage
|
404
|
|
|
456
|
|
|
Midstream
|
383
|
|
|
382
|
|
|
NGL and refined products transportation and services
|
663
|
|
|
612
|
|
|
Crude oil transportation and services
|
591
|
|
|
744
|
|
|
Investment in Sunoco LP
|
209
|
|
|
153
|
|
|
Investment in USAC
|
106
|
|
|
101
|
|
|
All other
|
19
|
|
|
33
|
|
|
Total
|
2,615
|
|
|
2,733
|
|
|
Depreciation, depletion and amortization
|
(851
|
)
|
|
(771
|
)
|
|
Interest expense, net of interest capitalized
|
(595
|
)
|
|
(527
|
)
|
|
Impairment losses
|
(1,325
|
)
|
|
(50
|
)
|
|
Losses on interest rate derivatives
|
(329
|
)
|
|
(74
|
)
|
|
Non-cash compensation expense
|
(18
|
)
|
|
(29
|
)
|
|
Unrealized gains on commodity risk management activities
|
51
|
|
|
49
|
|
|
Losses on extinguishments of debt
|
(59
|
)
|
|
(2
|
)
|
|
Inventory valuation adjustments
|
(227
|
)
|
|
93
|
|
|
Adjusted EBITDA related to unconsolidated affiliates
|
(154
|
)
|
|
(146
|
)
|
|
Equity in earnings (losses) of unconsolidated affiliates
|
(7
|
)
|
|
65
|
|
|
Other, net
|
45
|
|
|
4
|
|
|
Income (loss) before income tax expense
|
(854
|
)
|
|
1,345
|
|
|
Income tax expense
|
(53
|
)
|
|
(126
|
)
|
|
Net income (loss)
|
$
|
(907
|
)
|
|
$
|
1,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019*
|
|
Segment assets:
|
|
|
|
|
Intrastate transportation and storage
|
$
|
6,851
|
|
|
$
|
6,648
|
|
|
Interstate transportation and storage
|
17,263
|
|
|
18,111
|
|
|
Midstream
|
18,969
|
|
|
20,332
|
|
|
NGL and refined products transportation and services
|
17,082
|
|
|
19,145
|
|
|
Crude oil transportation and services
|
24,832
|
|
|
22,933
|
|
|
Investment in Sunoco LP
|
4,895
|
|
|
5,438
|
|
|
Investment in USAC
|
3,103
|
|
|
3,730
|
|
|
All other
|
5,918
|
|
|
6,468
|
|
|
Total segment assets
|
$
|
98,913
|
|
|
$
|
102,805
|
|
*As adjusted. See Note 1.