10-Q 1 eto03-31x201910xq.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-31219
ENERGY TRANSFER OPERATING, L.P.
(Exact name of registrant as specified in its charter)
Delaware
 
73-1493906
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
8111 Westchester Drive, Suite 600, Dallas, Texas 75225
(Address of principal executive offices) (zip code)
Registrant’s telephone number, including area code: (214) 981-0700
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨
 
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
7.375% Series C Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units
 
ETPpC
 
New York Stock Exchange
7.625% Series D Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units
 
ETPpD
 
New York Stock Exchange
7.600% Series E Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units
 
ETPpE
 
New York Stock Exchange
7.500% Senior Notes due 2020
 
ETP 20
 
New York Stock Exchange
4.250% Senior Notes due 2023
 
ETP 23
 
New York Stock Exchange
5.875% Senior Notes due 2024
 
ETP 24
 
New York Stock Exchange
5.500% Senior Notes due 2027
 
ETP 27
 
New York Stock Exchange
 



FORM 10-Q
ENERGY TRANSFER OPERATING, L.P. AND SUBSIDIARIES
TABLE OF CONTENTS


i


Forward-Looking Statements
Certain matters discussed in this report, excluding historical information, as well as some statements by Energy Transfer Operating, L.P. (the “Partnership” or “ETO”) in periodic press releases and some oral statements of the Partnership’s officials during presentations about the Partnership, include forward-looking statements. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. Statements using words such as “anticipate,” “believe,” “intend,” “project,” “plan,” “expect,” “continue,” “estimate,” “goal,” “forecast,” “may,” “will” or similar expressions help identify forward-looking statements. Although the Partnership and its General Partner believe such forward-looking statements are based on reasonable assumptions and current expectations and projections about future events, no assurance can be given that such assumptions, expectations, or projections will prove to be correct. Forward-looking statements are subject to a variety of risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, the Partnership’s actual results may vary materially from those anticipated, projected or expected, forecasted, estimated or expressed in forward-looking statements since many of the factors that determine these results are subject to uncertainties and risks that are difficult to predict and beyond management’s control. For additional discussion of risks, uncertainties and assumptions, see “Part I – Item 1A. Risk Factors” in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission on February 22, 2019.
Definitions
The following is a list of certain acronyms and terms generally used in the energy industry and throughout this document:
 
/d
 
per day
 
 
 
 
 
AOCI
 
accumulated other comprehensive income (loss)
 
 
 
 
 
BBtu
 
billion British thermal units
 
 
 
 
 
Btu
 
British thermal unit, an energy measurement used by gas companies to convert the volume of gas used to its heat equivalent, and thus calculate the actual energy used
 
 
 
 
 
Capacity
 
capacity of a pipeline, processing plant or storage facility refers to the maximum capacity under normal operating conditions and, with respect to pipeline transportation capacity, is subject to multiple factors (including natural gas injections and withdrawals at various delivery points along the pipeline and the utilization of compression) which may reduce the throughput capacity from specified capacity levels
 
 
 
 
 
CDM
 
CDM Resource Management LLC and CDM Environmental & Technical Services LLC, collectively
 
 
 
 
 
Citrus
 
Citrus, LLC, which owns 100% of FGT
 
 
 
 
 
DOJ
 
United States Department of Justice
 
 
 
 
 
EPA
 
United States Environmental Protection Agency
 
 
 
 
 
ET
 
Energy Transfer LP
 
 
 
 
 
ETP GP
 
Energy Transfer Partners GP, L.P., the general partner of ETO
 
 
 
 
 
ETP LLC
 
Energy Transfer Partners, L.L.C., the general partner of ETP GP
 
 
 
 
Exchange Act
 
Securities Exchange Act of 1934
 
 
 
 
 
FEP
 
Fayetteville Express Pipeline LLC
 
 
 
 
 
FERC
 
Federal Energy Regulatory Commission
 
 
 
 
 
FGT
 
Florida Gas Transmission Company, LLC
 
 
 
 
 
GAAP
 
accounting principles generally accepted in the United States of America
 
 
 
 
 
IDRs
 
incentive distribution rights
 
 
 
 
 
Lake Charles LNG
 
Lake Charles LNG Company, LLC (previously named Trunkline LNG Company, LLC)
 
 
 
 
 
LIBOR
 
London Interbank Offered Rate
 
 
 
 
 
MBbls
 
thousand barrels
 
 
 
 
 
MEP
 
Midcontinent Express Pipeline LLC
 
 
 
 


ii


 
MTBE
 
methyl tertiary butyl ether
 
 
 
 
 
NGL
 
natural gas liquid, such as propane, butane and natural gasoline
 
 
 
 
 
NYMEX
 
New York Mercantile Exchange
 
 
 
 
 
OSHA
 
federal Occupational Safety and Health Act
 
 
 
 
 
OTC
 
over-the-counter
 
 
 
 
 
Panhandle
 
Panhandle Eastern Pipe Line Company, LP and its subsidiaries
 
 
 
 
 
PES
 
Philadelphia Energy Solutions Refining and Marketing LLC
 
 
 
 
 
Regency
 
Regency Energy Partners LP
 
 
 
 
 
Rover
 
Rover Pipeline LLC, a subsidiary of ETO
 
 
 
 
 
SEC
 
Securities and Exchange Commission
 
 
 
 
 
Series A Preferred Units
 
6.250% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units
 
 
 
 
 
Series B Preferred Units
 
6.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units
 
 
 
 
 
Series C Preferred Units
 
7.375% Series C Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units
 
 
 
 
 
Series D Preferred Units
 
7.625% Series D Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units
 
 
 
 
 
Series E Preferred Units
 
7.600% Series E Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units
 
 
 
 
 
Transwestern
 
Transwestern Pipeline Company, LLC
 
 
 
 
 
Trunkline
 
Trunkline Gas Company, LLC, a subsidiary of Panhandle
 
 
 
 
 
USAC
 
USA Compression Partners, LP
 
 
 
 
 
USAC Preferred Units
 
USAC Series A Preferred Units
Adjusted EBITDA is a term used throughout this document, which we define 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, non-cash impairment charges, losses on extinguishments of debt and other non-operating income or expense items. Unrealized gains and losses on commodity risk management activities include unrealized gains and losses on commodity derivatives and inventory valuation adjustments (excluding lower of cost or market adjustments). Adjusted EBITDA reflects amounts for less than wholly-owned subsidiaries based on 100% of the subsidiaries’ results of operations and for unconsolidated affiliates based on our proportionate ownership.


iii


PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENERGY TRANSFER OPERATING, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(unaudited)
 
March 31, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
516

 
$
418

Accounts receivable, net
4,312

 
4,009

Accounts receivable from related companies
174

 
176

Inventories
1,722

 
1,677

Income taxes receivable
48

 
73

Derivative assets
70

 
111

Other current assets
313

 
356

Current assets held for sale
28

 

Total current assets
7,183

 
6,820

 
 
 
 
Property, plant and equipment
80,295

 
79,280

Accumulated depreciation and depletion
(13,282
)
 
(12,625
)
 
67,013

 
66,655

 
 
 
 
Advances to and investments in unconsolidated affiliates
2,647

 
2,636

Lease right-of-use assets, net
872

 

Other non-current assets, net
1,007

 
1,006

Long-term receivables from related company
5,229

 
440

Intangible assets, net
5,912

 
6,000

Goodwill
4,885

 
4,885

Total assets
$
94,748

 
$
88,442


The accompanying notes are an integral part of these consolidated financial statements.
1


ENERGY TRANSFER OPERATING, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(unaudited)
 
March 31, 2019
 
December 31, 2018
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
3,965

 
$
3,491

Accounts payable to related companies
53

 
119

Derivative liabilities
85

 
185

Operating lease current liabilities
68

 

Accrued and other current liabilities
2,294

 
2,847

Current maturities of long-term debt
157

 
2,655

Total current liabilities
6,622

 
9,297

 
 
 
 
Long-term debt, less current maturities
46,241

 
37,853

Non-current derivative liabilities
150

 
104

Non-current operating lease liabilities
817

 

Deferred income taxes
2,982

 
2,884

Other non-current liabilities
1,154

 
1,184

 
 
 
 
Commitments and contingencies

 

Redeemable noncontrolling interests
499

 
499

 
 
 
 
Equity:
 
 
 
Limited Partners:
 
 
 
Series A Preferred Unitholders
943

 
958

Series B Preferred Unitholders
547

 
556

Series C Preferred Unitholders
440

 
440

Series D Preferred Unitholders
434

 
434

Common Unitholders
25,909

 
26,372

Accumulated other comprehensive loss
(34
)
 
(42
)
Total partners’ capital
28,239

 
28,718

Noncontrolling interest
8,044

 
7,903

Total equity
36,283

 
36,621

Total liabilities and equity
$
94,748

 
$
88,442


The accompanying notes are an integral part of these consolidated financial statements.
2


ENERGY TRANSFER OPERATING, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions)
(unaudited)
 
Three Months Ended
March 31,
 
2019
 
2018
REVENUES:
 
 
 
Refined product sales
$
3,726

 
$
3,603

Crude sales
3,525

 
3,256

NGL sales
2,402

 
2,235

Gathering, transportation and other fees
2,267

 
1,430

Natural gas sales
964

 
1,062

Other
237

 
296

Total revenues
13,121

 
11,882

COSTS AND EXPENSES:
 
 
 
Cost of products sold
9,415

 
9,245

Operating expenses
808

 
724

Depreciation, depletion and amortization
771

 
661

Selling, general and administrative
149

 
147

Impairment losses
50

 

Total costs and expenses
11,193

 
10,777

OPERATING INCOME
1,928

 
1,105

OTHER INCOME (EXPENSE):
 
 
 
Interest expense, net
(527
)
 
(380
)
Equity in earnings of unconsolidated affiliates
65

 
79

Losses on extinguishments of debt
(2
)
 
(109
)
Gains (losses) on interest rate derivatives
(74
)
 
52

Other, net
17

 
57

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE (BENEFIT)
1,407

 
804

Income tax expense (benefit)
126

 
(10
)
INCOME FROM CONTINUING OPERATIONS
1,281

 
814

Loss from discontinued operations

 
(237
)
NET INCOME
1,281

 
577

Less: Net income attributable to noncontrolling interest
256

 
164

Less: Net income attributable to redeemable noncontrolling interest
13

 

Less: Net loss attributable to predecessor equity

 
(302
)
NET INCOME ATTRIBUTABLE TO PARTNERS
$
1,012

 
$
715


The accompanying notes are an integral part of these consolidated financial statements.
3


ENERGY TRANSFER OPERATING, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
(unaudited)
 
Three Months Ended
March 31,
 
2019
 
2018
Net income
$
1,281

 
$
577

Other comprehensive income (loss), net of tax:
 
 
 
Change in value of available-for-sale securities
5

 
(2
)
Actuarial gain (loss) related to pension and other postretirement benefit plans
7

 
(2
)
Change in other comprehensive income from unconsolidated affiliates
(4
)
 
5

 
8

 
1

Comprehensive income
1,289

 
578

Less: Comprehensive income attributable to noncontrolling interest
256

 
164

Less: Comprehensive income attributable to redeemable noncontrolling interest
13

 

Less: Comprehensive loss attributable to predecessor equity

 
(302
)
Comprehensive income attributable to partners
$
1,020

 
$
716


The accompanying notes are an integral part of these consolidated financial statements.
4


ENERGY TRANSFER OPERATING, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(Dollars in millions)
(unaudited)
 
Three Months Ended March 31, 2019
 
Limited Partners
 
 
 
 
 
 
 
Series A Preferred Unitholders
 
Series B Preferred Unitholders
 
Series C Preferred Unitholders
 
Series D Preferred Unitholders
 
Common Unitholders
 
AOCI
 
Non-controlling Interest
 
Total
Balance, December 31, 2018
$
958

 
$
556

 
$
440

 
$
434

 
$
26,372

 
$
(42
)
 
$
7,903

 
$
36,621

Distributions to partners
(30
)
 
(18
)
 
(8
)
 
(8
)
 
(1,450
)
 

 

 
(1,514
)
Distributions to noncontrolling interest

 

 

 

 

 

 
(361
)
 
(361
)
Capital contributions from noncontrolling interest

 

 

 

 

 

 
140

 
140

Sale of noncontrolling interest in subsidiary

 

 

 

 

 

 
93

 
93

Other comprehensive income, net of tax

 

 

 

 

 
8

 

 
8

Other, net

 

 

 

 
15

 

 
13

 
28

Net income, excluding amounts attributable to redeemable noncontrolling interests
15

 
9

 
8

 
8

 
972

 

 
256

 
1,268

Balance, March 31, 2019
$
943

 
$
547

 
$
440

 
$
434

 
$
25,909

 
$
(34
)
 
$
8,044

 
$
36,283

 
Three Months Ended March 31, 2018
 
Limited Partners
 
 
 
 
 
 
 
 
 
 
 
Series A Preferred Unitholders
 
Series B Preferred Unitholders
 
Common Unitholders
 
General Partner
 
AOCI
 
Non-controlling Interest
 
Predecessor Equity
 
Total
Balance, December 31, 2017
$
944

 
$
547

 
$
26,531

 
$
244

 
$
3

 
$
5,882

 
$
2,816

 
$
36,967

Distributions to partners
(15
)
 
(9
)
 
(657
)
 
(264
)
 

 

 

 
(945
)
Distributions to noncontrolling interest

 

 

 

 

 
(183
)
 
(70
)
 
(253
)
Units issued for cash

 

 
20

 

 

 

 

 
20

Repurchases of common units

 

 
(24
)
 

 

 

 

 
(24
)
Subsidiary repurchases of common units

 

 

 

 

 

 
(300
)
 
(300
)
Capital contributions from noncontrolling interest

 

 

 

 

 
229

 

 
229

Cumulative effect adjustment due to change in accounting principle

 

 

 

 

 

 
(54
)
 
(54
)
Other comprehensive income, net of tax

 

 

 

 
1

 

 

 
1

Other, net
(1
)
 
(1
)
 
(16
)
 
(17
)
 
(2
)
 
(6
)
 
1

 
(42
)
Net income (loss)
15

 
9

 
289

 
402

 

 
164

 
(302
)
 
577

Balance, March 31, 2018
$
943

 
$
546

 
$
26,143

 
$
365

 
$
2

 
$
6,086

 
$
2,091

 
$
36,176


The accompanying notes are an integral part of these consolidated financial statements.
5


ENERGY TRANSFER OPERATING, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(unaudited)
 
Three Months Ended
March 31,
 
2019
 
2018
OPERATING ACTIVITIES
 
 
 
Net income
$
1,281

 
$
577

Reconciliation of net income to net cash provided by operating activities:
 
 
 
Loss from discontinued operations

 
237

Depreciation, depletion and amortization
771

 
661

Deferred income taxes
98

 
(11
)
Inventory valuation adjustments
(93
)
 
(25
)
Non-cash compensation expense
29

 
23

Impairment losses
50

 

Losses on extinguishments of debt
2

 
109

Distributions on unvested awards
(1
)
 
(16
)
Equity in earnings of unconsolidated affiliates
(65
)
 
(79
)
Distributions from unconsolidated affiliates
66

 
70

Other non-cash
107

 
(72
)
Net change in operating assets and liabilities, net of effects of acquisitions
(399
)
 
741

Net cash provided by operating activities
1,846

 
2,215

INVESTING ACTIVITIES
 
 
 
Cash proceeds from sale of noncontrolling interest in subsidiary
93

 

Cash paid for all other acquisitions
(5
)
 
(5
)
Capital expenditures, excluding allowance for equity funds used during construction
(1,150
)
 
(1,737
)
Contributions in aid of construction costs
15

 
20

Contributions to unconsolidated affiliates
(28
)
 
(8
)
Distributions from unconsolidated affiliates in excess of cumulative earnings
13

 
27

Proceeds from the sale of assets
4

 
3

Other
(40
)
 
(1
)
Net cash used in investing activities
(1,098
)
 
(1,701
)
FINANCING ACTIVITIES
 
 
 
Proceeds from borrowings
11,295

 
6,573

Repayments of debt
(9,513
)
 
(8,171
)
Cash paid for note receivable from related company
(613
)
 
(41
)
Common units issued for cash

 
20

Capital contributions from noncontrolling interest
140

 
229

Distributions to partners
(1,514
)
 
(945
)
Predecessor distributions to partners

 
(77
)
Distributions to noncontrolling interest
(361
)
 
(183
)
Repurchases of common units

 
(24
)
Subsidiary repurchases of common units

 
(300
)
Debt issuance costs
(84
)
 
(117
)
Other

 
(7
)
Net cash used in financing activities
(650
)
 
(3,043
)
DISCONTINUED OPERATIONS
 
 
 
Operating activities

 
(485
)
Investing activities

 
3,214

Changes in cash included in current assets held for sale

 
11

Net increase in cash and cash equivalents of discontinued operations

 
2,740

Increase in cash and cash equivalents
98

 
211

Cash and cash equivalents, beginning of period
418

 
335

Cash and cash equivalents, end of period
$
516

 
$
546


The accompanying notes are an integral part of these consolidated financial statements.
6


ENERGY TRANSFER OPERATING, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollar and unit amounts are in millions)
(unaudited)
1.
ORGANIZATION AND BASIS OF PRESENTATION
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 October 2018, we completed the merger of ETO with a wholly-owned subsidiary of ET in a unit-for-unit exchange (the “Energy Transfer Merger”). In connection with the transaction, ETO unitholders (other than ET and its subsidiaries) received 1.28 common units of ET for each common unit of ETO they owned. Following the closing of the Energy Transfer Merger, Energy Transfer Partners, L.P. was renamed Energy Transfer Operating, L.P. In addition, Energy Transfer Equity, L.P. was renamed Energy Transfer LP, and its common units began trading on the New York Stock Exchange under the “ET” ticker symbol on Friday, October 19, 2018.
Immediately prior to the closing of the Energy Transfer Merger, the following also occurred:
the IDRs in ETO were converted into 1,168,205,710 ETO common units;
the general partner interest in ETO was converted to a non-economic general partner interest and ETO issued 18,448,341 ETO common units to ETP GP;
ET contributed its 2,263,158 Sunoco LP common units to ETO in exchange for 2,874,275 ETO common units and 100 percent of the limited liability company interests in Sunoco GP LLC, the sole general partner of Sunoco LP, and all of the IDRs in Sunoco LP, to ETO in exchange for 42,812,389 ETO common units;
ET contributed its 12,466,912 common units representing limited partner interests in USAC and 100 percent of the limited liability company interests in USA Compression GP, LLC, the general partner of USAC, to ETO in exchange for 16,134,903 ETO common units; and
ET contributed its 100 percent limited liability company interest in Lake Charles LNG and a 60 percent limited liability company interest in each of Energy Transfer LNG Export, LLC, ET Crude Oil Terminals, LLC and ETC Illinois LLC (collectively, “Lake Charles LNG and Other”) to ETO in exchange for 37,557,815 ETO common units.
The Energy Transfer Merger was a combination of entities under common control; therefore, Sunoco LP, Lake Charles LNG and USAC’s assets and liabilities were not adjusted. The Partnership’s consolidated financial statements have been retrospectively adjusted to reflect consolidation beginning January 1, 2018 of Sunoco LP and Lake Charles LNG and Other and April 2, 2018 for USAC (the date ET acquired USAC). Predecessor equity included on the consolidated financial statements represents Sunoco LP, Lake Charles LNG and Other and USAC’s equity prior to the Energy Transfer Merger.
Our consolidated financial statements reflect the following reportable business 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, 2018, included in the Partnership’s Annual Report on Form 10-K filed with the SEC on February 22, 2019. In the opinion of the Partnership’s management,


7


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.
For periods presented herein, certain balances have been reclassified to assets and liabilities held for sale and certain revenues and expenses to discontinued operations. Certain other 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.
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.
Change in Accounting Policy
Adoption of Lease Accounting Standard
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which has amended the FASB Accounting Standards Codification (“ASC”) and introduced Topic 842, Leases. On January 1, 2019, the Partnership has adopted ASC Topic 842 (“Topic 842”), which is effective for interim and annual reporting periods beginning on or after December 15, 2018. Topic 842 requires entities to recognize lease assets and liabilities on the balance sheet for all leases with a term of more than one year, including operating leases, which historically were not recorded on the balance sheet in accordance with the prior standard.
To adopt Topic 842, the Partnership recognized a cumulative catch-up adjustment to the opening balance sheet as of January 1, 2019 related to certain leases that existed as of that date. As permitted, we have not retrospectively modified our consolidated financial statements for comparative purposes. The adoption of the standard had a material impact on our consolidated balance sheet, but did not have an impact on our consolidated statements of operations, comprehensive income or cash flows. As a result of adoption, we have recorded additional net right-of-use (“ROU”) lease assets and lease liabilities of approximately $888 million and $888 million, respectively, as of January 1, 2019. In addition, we have updated our business processes, systems, and internal controls to support the on-going reporting requirements under the new standard.
To adopt Topic 842, the Partnership elected the package of practical expedients permitted under the transition guidance within the standard. The expedient package allowed us not to reassess whether existing contracts contained a lease, the lease classification of existing leases and initial direct cost for existing leases. In addition to the package of practical expedients, the Partnership has elected not to capitalize amounts pertaining to leases with terms less than twelve months, to use the portfolio approach to determine discount rates, not to separate non-lease components from lease components and not to apply the use of hindsight to the active lease population.


8


Cumulative-effect adjustments made to the opening balance sheet at January 1, 2019 were as follows:
 
Balance at December 31, 2018, as previously reported
 
Adjustments due to Topic 842 (Leases)
 
Balance at January 1, 2019
Assets:
 
 
 
 
 
Property, plant and equipment, net
$
66,655

 
$
(1
)
 
$
66,654

Lease right-of-use assets, net

 
889

 
889

Liabilities:
 
 
 
 
 
Operating lease current liabilities
$

 
$
71

 
$
71

Accrued and other current liabilities
2,847

 
(1
)
 
2,846

Current maturities of long-term debt
2,655

 
1

 
2,656

Long-term debt, less current maturities
37,853

 
6

 
37,859

Non-current operating lease liabilities

 
823

 
823

Other non-current liabilities
1,184

 
(12
)
 
1,172

Additional disclosures related to lease accounting are included in Note 12.
Recent Accounting Pronouncements
ASU 2017-12
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this update improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the amendments in this update make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The Partnership adopted the new rules in the first quarter of 2019, and the adoption of the new accounting rules did not have a material impact on the consolidated financial statements and related disclosures.
2.
ACQUISITIONS, DIVESTURES AND RELATED TRANSACTIONS
Assets Held for Sale
Assets held for sale are written down to the lower of cost or estimated net realizable value at the time we offer them for sale. When we have determined that an asset is more likely than not to be sold in the next twelve months, that asset is classified as assets held for sale and included in other current assets.
As of March 31, 2019, the Partnership had $28 million classified as assets held for sale related to the pending sale of Sunoco LP’s ethanol plant in Fulton, New York. Based on the sale price of the pending sale, Sunoco LP wrote down the assets held for sale and recorded a $47 million impairment charge during the three months ended March 31, 2019.
Sunoco LP Retail Store and Real Estate Sales
On January 23, 2018, Sunoco LP completed the disposition of assets pursuant to the purchase agreement with 7-Eleven, Inc. (the “7-Eleven Transaction”). As a result of the 7-Eleven Transaction, previously eliminated wholesale motor fuel sales to Sunoco LP’s retail locations are reported as wholesale motor fuel sales to third parties. Also, the related accounts receivable from such sales are no longer eliminated from the Partnership’s consolidated balance sheets and are reported as accounts receivable.
In connection with the 7-Eleven Transaction, Sunoco LP entered into a Distributor Motor Fuel Agreement dated as of January 23, 2018, as amended (“Supply Agreement”), with 7-Eleven and SEI Fuel (collectively, “Distributor”). The Supply Agreement consists of a 15-year take-or-pay fuel supply arrangement. For the period from January 1, 2018 through January 22, 2018, Sunoco LP recorded sales to the sites that were subsequently sold to 7-Eleven of $199 million which were eliminated in consolidation. Sunoco LP received payments on trade receivables from 7-Eleven of $782 million for the three months ended March 31, 2019 and $612 million for the first quarter of 2018 subsequent to the closing of the sale.


9


On January 18, 2017, with the assistance of a third-party brokerage firm, Sunoco LP launched a portfolio optimization plan to market and sell 97 real estate assets. Real estate assets included in this process are company-owned locations, undeveloped greenfield sites and other excess real estate. Properties are located in Florida, Louisiana, Massachusetts, Michigan, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Texas and Virginia. The properties are being sold through a sealed-bid. Of the 97 properties, 51 have been sold, one is under contract to be sold, and four continue to be marketed by the third-party brokerage firm. Additionally, 32 were sold to 7-Eleven and nine are part of the approximately 207 retail sites located in certain West Texas, Oklahoma and New Mexico markets which are operated by a commission agent.
The Partnership has concluded that it meets the accounting requirements for reporting the financial position, results of operations and cash flows of Sunoco LP’s retail divestment as discontinued operations.
There were no results of operations associated with discontinued operations for the period ended March 31, 2019. The results of operations associated with discontinued operations for the period ended March 31, 2018 were as follows:
 
Three Months Ended March 31, 2018
REVENUES
$
349

 
 
COSTS AND EXPENSES
 
Cost of products sold
305

Operating expenses
61

Selling, general and administrative
2

Total costs and expenses
368

OPERATING LOSS
(19
)
Interest expense, net
2

Loss on extinguishment of debt and other
20

Other, net
23

LOSS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAX EXPENSE
(64
)
Income tax expense
173

LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
$
(237
)
3.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash on hand, demand deposits, and investments with original maturities of three months or less. We consider cash equivalents to include short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value.
We place our cash deposits and temporary cash investments with high credit quality financial institutions. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limit.


10


The net change in operating assets and liabilities (net of effects of acquisitions) included in cash flows from operating activities is comprised as follows:
 
Three Months Ended
March 31,
 
2019
 
2018
Accounts receivable
$
(302
)
 
$
907

Accounts receivable from related companies
(28
)
 
103

Inventories
49

 
186

Other current assets
91

 
(46
)
Other non-current assets, net
(10
)
 
7

Accounts payable
323

 
(810
)
Accounts payable to related companies
(69
)
 
(125
)
Accrued and other current liabilities
(409
)
 
508

Other non-current liabilities
(31
)
 
20

Derivative assets and liabilities, net
(13
)
 
(9
)
Net change in operating assets and liabilities, net of effects of acquisitions
$
(399
)
 
$
741

Non-cash investing and financing activities are as follows:

Three Months Ended
March 31,

2019
 
2018
Accrued capital expenditures
$
630

 
$
1,011

Losses from subsidiary common unit transactions

 
(104
)
Lease assets obtained in exchange for new lease liabilities
8

 

4.
INVENTORIES
Inventories consisted of the following:
 
March 31, 2019
 
December 31, 2018
Natural gas, NGLs and refined products
$
760

 
$
833

Crude oil
589

 
506

Spare parts and other
373

 
338

Total inventories
$
1,722

 
$
1,677

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.
5.
FAIR VALUE MEASURES
Based on the estimated borrowing rates currently available to us and our subsidiaries for loans with similar terms and average maturities, the aggregate fair value and carrying amount of our consolidated debt obligations as of March 31, 2019 was $48.38 billion and $46.40 billion, respectively. As of December 31, 2018, the aggregate fair value and carrying amount of our consolidated debt obligations was $39.54 billion and $40.51 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


11


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, 2019, 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, 2019 and December 31, 2018 based on inputs used to derive their fair values:
 
 
 
Fair Value Measurements at
March 31, 2019
 
Fair Value Total
 
Level 1
 
Level 2
Assets:
 
 
 
 
 
Commodity derivatives:
 
 
 
 
 
Natural Gas:
 
 
 
 
 
Basis Swaps IFERC/NYMEX
$
40

 
$
40

 
$

Swing Swaps IFERC
3

 
1

 
2

Fixed Swaps/Futures
16

 
16

 

Forward Physical Contracts
10

 

 
10

Power:
 
 
 
 
 
Forwards
44

 

 
44

Futures
7

 
7

 

NGLs – Forwards/Swaps
162

 
162

 

Refined Products – Futures
5

 
5

 

Crude – Forwards/Swaps
51

 
51

 

Total commodity derivatives
338

 
282

 
56

Other non-current assets
28

 
18

 
10

Total assets
$
366

 
$
300

 
$
66

Liabilities:
 
 
 
 
 
Interest rate derivatives
$
(232
)
 
$

 
$
(232
)
Commodity derivatives:
 
 
 
 
 
Natural Gas:
 
 
 
 
 
Basis Swaps IFERC/NYMEX
(81
)
 
(81
)
 

Swing Swaps IFERC
(4
)
 
(2
)
 
(2
)
Fixed Swaps/Futures
(18
)
 
(18
)
 

Forward Physical Contracts
(5
)
 

 
(5
)
Power:
 
 
 
 
 
Forwards
(35
)
 

 
(35
)
Futures
(6
)
 
(6
)
 

NGLs – Forwards/Swaps
(155
)
 
(155
)
 

Refined Products – Futures
(4
)
 
(4
)
 

Crude – Forwards/Swaps
(1
)
 
(1
)
 

Total commodity derivatives
(309
)
 
(267
)
 
(42
)
Total liabilities
$
(541
)
 
$
(267
)
 
$
(274
)


12


 
 
 
Fair Value Measurements at
December 31, 2018
 
Fair Value Total
 
Level 1
 
Level 2
Assets:
 
 
 
 
 
Commodity derivatives:
 
 
 
 
 
Natural Gas:
 
 
 
 
 
Basis Swaps IFERC/NYMEX
$
42

 
$
42

 
$

Swing Swaps IFERC
52

 
8

 
44

Fixed Swaps/Futures
97

 
97

 

Forward Physical Contracts
20

 

 
20

Power:


 
 
 
 
Forwards
48

 

 
48

Futures
1

 
1

 

Options – Calls
1

 
1

 

NGLs – Forwards/Swaps
291

 
291

 

Refined Products – Futures
7

 
7

 

Crude – Forwards/Swaps
1

 
1

 

Total commodity derivatives
560

 
448

 
112

Other non-current assets
26

 
17

 
9

Total assets
$
586

 
$
465

 
$
121

Liabilities:
 
 
 
 
 
Interest rate derivatives
$
(163
)
 
$

 
$
(163
)
Commodity derivatives:
 
 
 
 
 
Natural Gas:
 
 
 
 
 
Basis Swaps IFERC/NYMEX
(91
)
 
(91
)
 

Swing Swaps IFERC
(40
)
 

 
(40
)
Fixed Swaps/Futures
(88
)
 
(88
)
 

Forward Physical Contracts
(21
)
 

 
(21
)
Power:


 
 
 
 
Forwards
(42
)
 

 
(42
)
Futures
(1
)
 
(1
)
 

NGLs – Forwards/Swaps
(224
)
 
(224
)
 

Refined Products – Futures
(15
)
 
(15
)
 

Crude – Forwards/Swaps
(61
)
 
(61
)
 

Total commodity derivatives
(583
)
 
(480
)
 
(103
)
Total liabilities
$
(746
)
 
$
(480
)
 
$
(266
)
6.
DEBT OBLIGATIONS
Notes and Debentures
ET-ETO Senior Notes Exchange
In February 2019, ETO commenced offers to exchange all of ET’s outstanding senior notes for senior notes issued by ETO (the “ET-ETO senior notes exchange”).  Approximately 97% of ET’s outstanding senior notes were tendered and accepted, and the exchanges settled on March 25, 2019. In connection with the exchange, ETO issued approximately $4.21 billion aggregate principal amount of the following senior notes:
$1.13 billion aggregate principal amount of 7.50% senior notes due 2020;
$993 million aggregate principal amount of 4.25% senior notes due 2023;


13


$1.13 billion aggregate principal amount of 5.875% senior notes due 2024; and
$956 million aggregate principal amount of 5.50% senior notes due 2027.
The senior notes were registered under the Securities Act of 1933 (as amended).  The Partnership may redeem some or all of the senior notes at any time, or from time to time, pursuant to the terms of the indenture and related indenture supplements related to the senior notes. The principal on the senior notes is payable upon maturity and interest is paid semi-annually.
The senior notes rank equally in right of payment with ETO’s existing and future senior debt, and senior in right of payment to any future subordinated debt ETO may incur.  The notes of each series will initially be fully and unconditionally guaranteed by our subsidiary, Sunoco Logistics Partners Operations L.P., on a senior unsecured basis so long as it guarantees any of our other long-term debt. The guarantee for each series of notes ranks equally in right of payment with all of the existing and future senior debt of Sunoco Logistics Partners Operations L.P., including its senior notes.
ETO Senior Notes Offering and Redemption
In January 2019, ETO issued the following senior notes:
$750 million aggregate principal amount of 4.50% senior notes due 2024;
$1.50 billion aggregate principal amount of 5.25% senior notes due 2029; and
$1.75 billion aggregate principal amount of 6.25% senior notes due 2049.
The senior notes were registered under the Securities Act of 1933 (as amended).  The Partnership may redeem some or all of the senior notes at any time, or from time to time, pursuant to the terms of the indenture and related indenture supplements related to the senior notes. The principal on the senior notes is payable upon maturity and interest is paid semi-annually.
The senior notes rank equally in right of payment with ETO’s existing and future senior debt, and senior in right of payment to any future subordinated debt ETO may incur.  The notes of each series will initially be fully and unconditionally guaranteed by our subsidiary, Sunoco Logistics Partners Operations L.P., on a senior unsecured basis so long as it guarantees any of our other long-term debt. The guarantee for each series of notes ranks equally in right of payment with all of the existing and future senior debt of Sunoco Logistics Partners Operations L.P., including its senior notes.
The $3.96 billion net proceeds from the offering were used to make an intercompany loan to ET (which ET used to repay its term loan in full), for general partnership purposes and to redeem at maturity all of the following:
ETO’s $400 million aggregate principal amount of 9.70% senior notes due March 15, 2019;
ETO’s $450 million aggregate principal amount of 9.00% senior notes due April 15, 2019; and
Panhandle’s $150 million aggregate principal amount of 8.125% senior notes due June 1, 2019.
Bakken Senior Notes Offering
In March 2019, Midwest Connector Capital Company LLC, a wholly-owned subsidiary of Dakota Access, LLC, issued the following senior notes related to the Bakken pipeline:
$650 million aggregate principal amount of 3.625% senior notes due 2022;
$1.00 billion aggregate principal amount of 3.90% senior notes due 2024; and
$850 million aggregate principal amount of 4.625% senior notes due 2029.
The $2.48 billion in net proceeds from the offering were used to repay in full all amounts outstanding on the Bakken credit facility and the facility was terminated.
Sunoco LP Senior Notes Offering
In March 2019, Sunoco LP issued $600 million aggregate principal amount of 6.00% senior notes due 2027 in a private placement to eligible purchasers. The net proceeds from this offering were used to repay a portion of Sunoco LP’s existing borrowings under its credit facility.
USAC Senior Notes Offering
In March 2019, USAC issued $750 million aggregate principal amount of 6.875% senior unsecured notes due 2027 in a private placement to eligible purchasers. The net proceeds from this offering were used to repay a portion of USAC’s existing


14


borrowings under its credit facility and for general partnership purposes.
Credit Facilities and Commercial Paper
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, 2019, the ETO Five-Year Credit Facility had $1.76 billion of outstanding borrowings, all of which was commercial paper. The amount available for future borrowings was $3.15 billion after taking into account letters of credit of $89 million. The weighted average interest rate on the total amount outstanding as of March 31, 2019 was 3.17%.
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 29, 2019. As of March 31, 2019, 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, 2019, the Sunoco LP Credit Facility had $150 million of outstanding borrowings and $8 million in standby letters of credit. As of March 31, 2019, Sunoco LP had $1.34 billion of availability under the Sunoco LP Credit Facility. The weighted average interest rate on the total amount outstanding as of March 31, 2019 was 4.49%.
USAC Credit Facility
USAC maintains a $1.60 billion revolving credit facility (the “USAC Credit Facility”), which matures in April 2023. As of March 31, 2019, the USAC Credit Facility had $361 million of outstanding borrowings and no outstanding letters of credit. As of March 31, 2019, USAC had $1.24 billion of borrowing base availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of $493 million under the USAC Credit Facility. The weighted average interest rate on the total amount outstanding as of March 31, 2019 was 5.17%.
Compliance with Our Covenants
We were in compliance with all requirements, tests, limitations, and covenants related to our credit agreements as of March 31, 2019.
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, 2019 included (i) $477 million related to the USAC Preferred Units described below and (ii) $22 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
In 2018, USAC issued 500,000 USAC Preferred Units at a price of $1,000 per USAC Preferred Unit, for total gross proceeds of $500 million in a private placement.
The USAC Preferred Units 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.
8.
EQUITY
As of March 31, 2019, all of our outstanding common units are owned by ET.


15


Preferred Units
As of each of March 31, 2019 and December 31, 2018, ETO’s preferred units outstanding were as follows:
 
Series A
 
Series B
 
Series C
 
Series D
Number of units outstanding
950,000

 
550,000

 
18,000,000

 
17,800,000

Series E Preferred Units Issuance
In April 2019, ETO issued 32 million of its 7.600% Series E Preferred Units at a price of $25 per unit, including 4 million Series E Preferred Units pursuant to the underwriters’ exercise of their option to purchase additional preferred units. The total gross proceeds from the Series E Preferred Unit issuance were $800 million, including $100 million from the underwriters’ exercise of their option. The net proceeds were used to repay amounts outstanding under ETO’s revolving credit facility and for general partnership purposes.
Distributions on the Series E Preferred Units will accrue and be cumulative from and including the date of original issue to, but excluding, May 15, 2024, at a rate of 7.600% per annum of the stated liquidation preference of $25. On and after May 15, 2024, distributions on the Series E Preferred Units will accumulate at a percentage of the $25 liquidation preference equal to an annual floating rate of the three-month LIBOR, determined quarterly, plus a spread of 5.161% per annum. The Series E Preferred Units are redeemable at ETO’s option on or after May 15, 2024 at a redemption price of $25 per Series E 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, 2019, Sunoco LP issued no additional units under its at-the-market equity distribution program. As of March 31, 2019, $295 million of Sunoco LP common units remained available to be issued under the currently effective equity distribution agreement.
USAC Distribution Reinvestment Program
During the three months ended March 31, 2019, distributions of $0.3 million were reinvested under the USAC distribution reinvestment program resulting in the issuance of approximately 16,714 USAC common units.
Cash Distributions
Distributions on ETO’s preferred units declared and paid by the Partnership subsequent to December 31, 2018 were as follows:
Period Ended
 
Record Date
 
Payment Date
 
Series A (1)
 
Series B (1)
 
Series C
 
Series D
December 31, 2018
 
February 1, 2019
 
February 15, 2019
 
$
31.25

 
$
33.125

 
$
0.4609

 
$
0.4766

March 31, 2019
 
May 1, 2019
 
May 15, 2019
 

 

 
0.4609

 
0.4766

(1)    Series A and Series B preferred unit distributions are paid on a semi-annual basis.
Sunoco LP Cash Distributions
The following are distributions declared and paid by Sunoco LP subsequent to December 31, 2018:
Quarter Ended
 
Record Date
 
Payment Date
 
Rate
December 31, 2018
 
February 6, 2019
 
February 14, 2019
 
$
0.8255

March 31, 2019
 
May 7, 2019
 
May 15, 2019
 
0.8255



16


USAC Cash Distributions
The following are distributions declared and paid by USAC subsequent to December 31, 2018:
Quarter Ended
 
Record Date
 
Payment Date
 
Rate
December 31, 2018
 
January 28, 2019
 
February 8, 2019
 
$
0.5250

March 31, 2019
 
April 29, 2019
 
May 10, 2019
 
0.5250

Accumulated Other Comprehensive Income (Loss)
The following table presents the components of AOCI, net of tax:
 
March 31, 2019
 
December 31, 2018
Available-for-sale securities
$
7

 
$
2

Foreign currency translation adjustment
(5
)
 
(5
)
Actuarial loss related to pensions and other postretirement benefits
(41
)
 
(48
)
Investments in unconsolidated affiliates, net
5

 
9

Total AOCI, net of tax
$
(34
)
 
$
(42
)
9.
INCOME TAXES
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. For the three months ended March 31, 2019, the Partnership’s effective tax rate was primarily driven by an increase in income before tax expense (benefit) at our corporate subsidiaries.
ETC Sunoco Holdings LLC (“Sunoco, Inc.”) historically included certain government incentive payments as taxable income on its federal and state income tax returns.  In connection with Sunoco, Inc.'s 2004 through 2011 years, Sunoco, Inc. filed amended returns with the IRS excluding these government incentive payments from federal taxable income.  The IRS denied the amended returns, and Sunoco, Inc. petitioned the Court of Federal Claims ("CFC") in June 2015 on this issue for the 2004 through 2009 tax years.  Sunoco, Inc.'s 2010 and 2011 years are extended for this issue with the Internal Revenue Service ("IRS"). In November 2016, the CFC ruled against Sunoco, Inc., and the United States Court of Appeals for the Federal Circuit (the "Federal Circuit") affirmed the CFC's ruling on November 1, 2018.  Sunoco, Inc. subsequently filed a petition for rehearing with the Federal Circuit, and this was denied on January 24, 2019.  Sunoco, Inc. has until May 24, 2019 to file a petition for writ of certiorari to review the Federal Circuit's affirmation of the CFC's ruling.  If Sunoco, Inc. is ultimately fully successful in this litigation, it will receive tax refunds of approximately $530 million. However, due to the uncertainty surrounding the litigation, a reserve of $530 million was established for the full amount of the litigation. Due to the timing of the litigation and the related reserve, the receivable and the reserve for this issue have been netted in the balance sheets as of March 31, 2019 and December 31, 2018.
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.  Panhandle filed a cost and revenue study on April 1, 2019.  An initial decision is expected to be issued in the first quarter of 2020. In addition, on November 30, 2018, Sea Robin filed a rate case pursuant to Section 4 of the Natural Gas Act.  A hearing date is scheduled for October 23, 2019 and an initial decision is expected to be issued in the first quarter of 2020.
By order issued February 19, 2019, the FERC initiated a review of Southwest Gas Storage Company’s existing rates pursuant to Section 5 of the Natural Gas Act to determine whether the rates currently charged by Southwest Gas Storage Company are just and reasonable and set the matter for hearing.  Southwest Gas Storage Company filed a cost and revenue study on May 6, 2019.  An initial decision is expected to be issued in the first quarter of 2020.


17


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 right-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,
 
2019
 
2018
ROW expense
$
6

 
$
6

Litigation and Contingencies
We may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business. Natural gas and crude oil are flammable and combustible. Serious personal injury and significant property damage can arise in connection with their transportation, storage or use. In the ordinary course of business, we are sometimes threatened with or named as a defendant in various lawsuits seeking actual and punitive damages for product liability, personal injury and property damage. We maintain liability insurance with insurers in amounts and with coverage and deductibles management believes are reasonable and prudent, and which are generally accepted in the industry. However, there can be no assurance that the levels of insurance protection currently in effect will continue to be available at reasonable prices or that such levels will remain adequate to protect us from material expenses related to product liability, personal injury or property damage in the future.
Dakota Access Pipeline
On July 25, 2016, the United States Army Corps of Engineers (“USACE”) issued permits to Dakota Access, LLC (“Dakota Access”) to make two crossings of the Missouri River in North Dakota. The USACE also issued easements to allow the pipeline to cross land owned by the USACE adjacent to the Missouri River. On July 27, 2016, the Standing Rock Sioux Tribe (“SRST”) filed a lawsuit in the United States District Court for the District of Columbia (“the Court”) against the USACE and challenged the legality of these permits and claimed violations of the National Historic Preservation Act (“NHPA”). SRST also sought a preliminary injunction to rescind the USACE permits while the case was pending, which the court denied on September 9, 2016. Dakota Access intervened in the case. The Cheyenne River Sioux Tribe (“CRST”) also intervened. SRST filed an amended complaint and added claims based on treaties between SRST and CRST and the United States and statutes governing the use of government property.
In February 2017, in response to a Presidential memorandum, the Department of the Army delivered an easement to Dakota Access allowing the pipeline to cross Lake Oahe. CRST moved for a preliminary injunction and temporary restraining order (“TRO”) to block operation of the pipeline, which motion was denied, and raised claims based on the religious rights of CRST.
In June 2017, SRST and CRST amended their complaints to incorporate religious freedom and other claims. In addition, the Oglala Sioux and Yankton Sioux tribes (collectively, “Tribes”) have filed related lawsuits to prevent construction of the Dakota Access pipeline project. These lawsuits have been consolidated into the action initiated by SRST. Several individual members of the Tribes have also intervened in the lawsuit asserting claims that overlap with those brought by the four Tribes.
On June 14, 2017, the Court ruled on SRST’s and CRST’s motions for partial summary judgment and the USACE’s cross-motions for partial summary judgment. The Court concluded that the USACE had not violated trust duties owed to the Tribes and had generally complied with its obligations under the Clean Water Act, the Rivers and Harbors Act, the Mineral Leasing Act, the National Environmental Policy Act (“NEPA”) and other related statutes; however, the Court remanded to the USACE three discrete issues for further analysis and explanation of its prior determinations under certain of these statutes.


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In November 2017, the Yankton Sioux Tribe (“YST”), moved for partial summary judgment asserting claims similar to those already litigated and decided by the Court in its June 14, 2017 decision on similar motions by CRST and SRST. YST argues that the USACE and Fish and Wildlife Service violated NEPA, the Mineral Leasing Act, the Rivers and Harbors Act, and YST’s treaty and trust rights when the government granted the permits and easements necessary for the pipeline.
On December 4, 2017, the Court imposed three conditions on continued operation of the pipeline during the remand process. First, Dakota Access must retain an independent third party to review its compliance with the conditions and regulations governing its easements and to assess integrity threats to the pipeline. The assessment report was filed with the Court. Second, the Court directed Dakota Access to continue its work with the Tribes and the USACE to revise and finalize its emergency spill response planning for the section of the pipeline crossing Lake Oahe. Dakota Access filed the revised plan with the Court. And third, the Court directed Dakota Access to submit bi-monthly reports during the remand period disclosing certain inspection and maintenance information related to the segment of the pipeline running between the valves on either side of the Lake Oahe crossing. The first and second reports were filed with the court on December 29, 2017 and February 28, 2018, respectfully.
On February 8, 2018, the Court docketed a motion by CRST to “compel meaningful consultation on remand.” SRST then made a similar motion for “clarification re remand process and remand conditions.” The motions sought an order from the Court directing the USACE as to how it should conduct its additional review on remand. Dakota Access and the USACE opposed both motions. On April 16, 2018, the Court denied both motions.
On March 19, 2018, the District Court denied YST’s motion for partial summary judgment and instead granted judgment in favor of Dakota Access pipeline and the USACE on the claims raised in YST’s motion. The Court concluded that YST’s NHPA claims are moot because construction of the pipeline is complete and that the government’s review process did not violate NEPA or the various treaties cited by the YST.
On May 3, 2018, the District Court ordered the USACE to file a status report by June 8, 2018 informing the Court when the USACE expects the remand process to be complete. On June 8, 2018, the USACE filed a status report stating that they would conclude the remand process by August 10, 2018. On August 7, 2018, the USACE informed the Court that they would need until August 31, 2018 to finish the remand process. On August 31, 2018, the USACE informed the Court that it had completed the remand process and that it had determined that the three issues remanded by the Court had been correctly decided. On October 1, 2018, the USACE produced a detailed remand analysis document supporting that determination. The Tribes and certain of the individuals sought leave of the Court to amend their complaints to challenge the remand process and the USACE’s decision on remand.
On January 3, 2019, the Court granted the Tribes’ requests to supplement their respective complaints challenging the remand process, subject to defendants’ right to argue later that such supplementation may be overbroad and not permitted by law. On January 10, 2019, the Court denied the Oglala Sioux Tribe’s motion to amend its complaint to expand one of its pre-remand claims.
On January 17, 2019, the DOJ, on behalf of the USACE, moved to stay the litigation in light of the lapse in appropriations for the DOJ. The Tribes and individual plaintiffs opposed that request. On January 28, 2019, the USACE moved to withdraw this motion because appropriations for the DOJ had been restored. The Court granted this motion the next day.
On January 31, 2019, the USACE notified the Court that it had provided the administrative record for the remand to all parties. On February 27, 2019, the four Tribes filed a joint motion challenging the completeness of the record. The USACE opposed this motion in part, and Dakota Access opposed in full. The Tribes filed their reply brief on March 18, 2019 and the motion is now fully briefed and before the Court.
On May 8, 2019, the Court issued an order on Plaintiffs’ motion to complete the administrative record, requiring the parties to submit additional information so that the Court can determine what documents, if any, should be added to the record. The Court’s previous orders require that the parties must file a joint proposed schedule for the final round of summary judgment briefing within seven days of a final order on the challenges to the record.
While Energy Transfer believes that the pending lawsuits are unlikely to halt or suspend operation of the pipeline, we cannot assure this outcome. 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


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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. 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
Sunoco, Inc. and Sunoco, Inc. (R&M) (now known as 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, 2019, 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 Energy Transfer Partners, L.P., 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
Purported Regency unitholders filed lawsuits in state and federal courts in Dallas and Delaware asserting claims relating to the Regency-ETO merger (the “Regency Merger”). All but one Regency Merger-related lawsuits have been dismissed. On June 10, 2015, Adrian Dieckman (“Dieckman”), a purported Regency unitholder, filed a class action complaint 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 (“Defendants”).
The Regency Merger Litigation alleges that the Regency Merger breached the Regency partnership agreement because Regency’s conflicts committee was not properly formed, and the Regency Merger was not approved in good faith. On March 29, 2016, the Delaware Court of Chancery granted Defendants’ motion to dismiss the lawsuit in its entirety. Dieckman appealed. On January 20, 2017, the Delaware Supreme Court reversed the judgment of the Court of Chancery. On May 5, 2017, Plaintiff filed an Amended Verified Class Action Complaint. Defendants then filed Motions to Dismiss the Amended Complaint and a Motion to Stay Discovery on May 19, 2017. On February 20, 2018, the Court of Chancery issued an Order granting in part and denying in part the motions to dismiss, dismissing the claims against all defendants other than Regency GP, LP and Regency GP LLC (the “Regency Defendants”). On March 6, 2018, the Regency Defendants filed their Answer to Plaintiff’s Verified Amended Class Action Complaint. Trial is currently set for September 23-27, 2019.
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 and any others that may be filed in connection with the Regency Merger.
Enterprise Products Partners, L.P. and Enterprise Products Operating LLC Litigation
On January 27, 2014, a trial commenced between ETO against Enterprise Products Partners, L.P. and Enterprise Products Operating LLC (collectively, “Enterprise”) and Enbridge (US) Inc.  Trial resulted in a verdict in favor of ETO against Enterprise that consisted of $319 million in compensatory damages and $595 million in disgorgement to ETO.  The jury also found that ETO owed Enterprise $1 million under a reimbursement agreement.  On July 29, 2014, the trial court entered a final judgment in favor of ETO and awarded ETO $536 million, consisting of compensatory damages, disgorgement, and pre-judgment interest.  The trial court also ordered that ETO shall be entitled to recover post-judgment interest and costs of court and that Enterprise is not entitled to any net recovery on its counterclaims.  Enterprise filed a notice of appeal with the Court of Appeals. On July 18, 2017, the Court of Appeals issued its opinion and reversed the trial court’s judgment. ETO’s motion for rehearing to the Court of Appeals was denied. On June 8, 2018, the Texas Supreme Court ordered briefing on the merits. ETO’s petition for review remains under consideration by the Texas Supreme Court.


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Rover
On November 3, 2017, the State of Ohio and the Ohio Environmental Protection Agency (“Ohio EPA”) filed suit against Rover and Pretec Directional Drilling, LLC (“Pretec”) seeking to recover approximately $2.6 million in civil penalties allegedly owed and certain injunctive relief related to permit compliance. Laney Directional Drilling Co., Atlas Trenchless, LLC, Mears Group, Inc., D&G Directional Drilling, Inc. d/b/a D&G Directional Drilling, LLC, and B&T Directional Drilling, Inc. (collectively, with Rover and Pretec, “Defendants”) were added as defendants on April 17, 2018 and July 18, 2018.
Ohio EPA alleges that the Defendants illegally discharged millions of gallons of drilling fluids into Ohio’s waters that caused pollution and degraded water quality, and that the Defendants harmed pristine wetlands in Stark County. Ohio EPA further alleges that the Defendants caused the degradation of Ohio’s waters by discharging pollution in the form of sediment-laden storm water into Ohio’s waters and that Rover violated its hydrostatic permits by discharging effluent with greater levels of pollutants than those permits allowed and by not properly sampling or monitoring effluent for required parameters or reporting those alleged violations. Rover and other Defendants filed several motions to dismiss and Ohio EPA filed a motion in opposition. The State’s opposition to those motions was filed on October 12, 2018. Rover and other Defendants filed their replies on November 2, 2018. On March 13, 2019, the court granted Rover and the other Defendants’ motion to dismiss on all counts. On April 10, 2019, the Ohio EPA filed a notice of appeal.
In January 2018, Ohio EPA sent a letter to the FERC to express concern regarding drilling fluids lost down a hole during horizontal directional drilling (“HDD”) operations as part of the Rover Pipeline construction. Rover sent a January 24, 2018 response to the FERC and stated, among other things, that as Ohio EPA conceded, Rover was conducting its drilling operations in accordance with specified procedures that had been approved by the FERC and reviewed by the Ohio EPA. In addition, although the HDD operations were crossing the same resource as that which led to an inadvertent release of drilling fluids in April 2017, the drill in 2018 had been redesigned since the original crossing. Ohio EPA expressed concern that the drilling fluids could deprive organisms in the wetland of oxygen. Rover, however, has now fully remediated the site, a fact with which Ohio EPA concurs. Construction of Rover is now complete and the pipeline is fully operational.
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. On March 27, 2018, Bayou Bridge filed an answer to the complaint.
On January 29, 2018, Plaintiffs filed motions for a preliminary injunction and TRO. United States District Court Judge Shelly Dick denied the TRO on January 30, 2018, but subsequently granted the preliminary injunction on February 23, 2018. On February 26, 2018, Bayou Bridge filed a notice of appeal and a motion to stay the February 23, 2018 preliminary injunction order. On February 27, 2018, Judge Dick issued an opinion that clarified her February 23, 2018 preliminary injunction order and denied Bayou Bridge’s February 26, 2018 motion to stay as moot. On March 1, 2018, Bayou Bridge filed a new notice of appeal and motion to stay the February 27, 2018 preliminary injunction order in the district court. On March 5, 2018, the district court denied the March 1, 2018 motion to stay the February 27, 2018 order.
On March 2, 2018, Bayou Bridge filed a motion to stay the preliminary injunction in the Fifth Circuit. On March 15, 2018, the Fifth Circuit granted a stay of injunction pending appeal and found that Bayou Bridge “is likely to succeed on the merits of its claim that the district court abused its discretion in granting a preliminary injunction.” Oral arguments were heard on the merits of the appeal, that is, whether the district court erred in granting the preliminary injunction in the Fifth Circuit on April 30, 2018. The district court has stayed the merits case pending decision of the Fifth Circuit. On May 10, 2018, the District Court stayed the litigation pending a decision from the Fifth Circuit. On July 6, 2018, the Fifth Circuit vacated the Preliminary Injunction and remanded the case back to the District Court. Construction is ongoing.
On August 14, 2018, Plaintiffs sought leave of court to amend their complaint to add an “as applied” challenge to the USACE’s application of the Louisiana Rapid Assessment Method to Bayou Bridge’s permits. Defendants’ filed motions in opposition on September 18, 2018. On September 18, 2018, Plaintiffs filed a motion for partial summary judgment on the issue of the USACE’s analysis of the risks of an oil spill once the pipeline is in operation. On November 6, 2018 the court struck plaintiffs’ motion as premature.
At an October 2, 2018 scheduling conference, the USACE agreed to lodge the administrative record for Plaintiffs’ original complaint, which it has done. Challenges to the completeness of the record have been briefed and are currently pending


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before the Court. At the October 18 conference, the Court also scheduled summary judgment briefing on Plaintiffs’ original complaint; briefing is scheduled to conclude by the Spring of 2019.
On December 28, 2018, Judge Dick issued a General Order for the Middle District of Louisiana holding in abeyance all civil matters where the United States is a party. Notwithstanding the General Order, on January 11, 2019, Plaintiffs filed a Motion for Summary Judgment on their National Environmental Policy Act and Clean Waters Act claims.
On January 11, 2019, Plaintiffs attempted to file a Motion for Summary Judgment on its National Environmental Policy Act and Coastal Water Authority claims. On January 23, 2019, Plaintiffs filed a Second Motion for Preliminary Injunction based on alleged permit violations, which the Court later denied. On February 11, 2019, the Court denied Plaintiffs’ August 14, 2018 motion for leave to amend their complaint.
On February 14, 2019, Judge Dick ordered that all summary judgment briefing is stayed until the Court rules on the motions challenging the completeness of the administrative record. Judge Dick further ordered that once those motions are decided, the parties will be allowed to update any summary judgment briefs they have already filed, if necessary, and that the Court will set new briefing deadlines.
On April 26, 2019, Plaintiffs filed a motion seeking reconsideration of Judge Dick’s February 14, 2019 order staying summary judgment briefing. Defendants filed their oppositions on May 6, 2019.
Revolution
On September 10, 2018, a pipeline release and fire (the “Incident”) occurred on the Revolution pipeline, a natural gas gathering line, in the vicinity of Ivy Lane located in Center Township, Beaver County, Pennsylvania. There were no injuries, but there were evacuations of local residents as a precautionary measure. The Pennsylvania Department of Environmental Protection (“PADEP”) and the Pennsylvania Public Utility Commission (“PUC”) are investigating the incident. On October 29, 2018, PADEP issued a Compliance Order requiring our subsidiary, ETC Northeast Pipeline, LLC (“ETC Northeast”), to cease all earth disturbance activities at the site (except as necessary to repair and maintain existing Best Management Practices (“BMPs”) and temporarily stabilize disturbed areas), implement and/or maintain the Erosion and Sediment BMPs at the site, stake the limit of disturbance, identify and report all areas of non-compliance, and submit an updated Erosion and Sediment Control Plan, a Temporary Stabilization Plan, and an updated Post Construction Stormwater Management Plan. The scope of the Compliance Order has been expanded to include the disclosure to PADEP of alleged violations of environmental permits with respect to various construction and post-construction activities and restoration obligations along the 42-mile route of the Revolution line. ETC Northeast filed an appeal of the Compliance Order with the Pennsylvania Environmental Hearing Board.
On February 8, 2019, PADEP filed a Petition to Enforce the Compliance Order with Pennsylvania’s Commonwealth Court. The Court issued an Order on February 14, 2019 requiring the submission of an answer to the Petition on or before March 12, 2019, and scheduled a hearing on the Petition for March 26, 2019.  On March 12, 2019, ETC Northeast answered the Petition.  ETC Northeast and PADEP have since agreed to a Stipulated Order regarding the issues raised in the Compliance Order, which obviated the need for a hearing. The Commonwealth Court approved the Stipulated Order on March 26, 2019.  On February 8, 2019, PADEP also issued a Permit Hold on any requests for approvals/permits or permit amendments made by us or any of our subsidiaries for any projects 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 March 11, 2019. The Partnership continues to work through these issues with PADEP.
Chester County, Pennsylvania Investigation
In December 2018, the Chester County District Attorney (“Chester County D.A.”) sent a letter to the Partnership stating that it was investigating the Partnership and related entities for “potential crimes” related to the Mariner East pipelines.
On April 11, 2019, the Partnership was served with twenty-two grand jury subpoenas seeking a variety of documents and records sought by the Chester County Investigation Grand Jury. While the Partnership intends to cooperate with the investigation, we intend to vigorously defend ourselves against these allegations.
Delaware County, Pennsylvania Investigation
On March 11, 2019, the Delaware County District Attorney’s Office (“Delaware County D.A.”) announced that the Delaware County D.A. and the Pennsylvania Attorney General’s Office (“Pennsylvania A.G.”), at the request of the Delaware County D.A., are conducting an investigation of alleged criminal misconduct involving the construction and related activities of the Mariner East pipelines in Delaware County. There are neither specifics with regard to who has made the allegations of criminal


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misconduct nor specifics of any such conduct. While the Partnership intends to cooperate with the investigation, we intend to vigorously defend ourselves against these allegations.
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, 2019 and December 31, 2018, accruals of approximately $42 million and $53 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.
On April 25, 2018, and as amended on April 30, 2018, State Senator Andrew Dinniman filed a Formal Complaint and Petition for Interim Emergency Relief (“Complaint”) against Sunoco Pipeline L.P. (“SPLP”) before the PUC. Specifically, the Complaint alleges that (i) the services and facilities provided by the Mariner East Pipeline (“ME1,” “ME2” or “ME2x”) in West Whiteland Township (“the Township”) are unreasonable, unsafe, inadequate, and insufficient for, among other reasons, selecting an improper and unsafe route through densely populated portions of the Township with homes, schools, and infrastructure and causing inadvertent returns and sinkholes during construction because of unstable geology in the Township; (ii) SPLP failed to warn the public of the dangers of the pipeline; (iii) the construction of ME2 and ME2x increases the risk of damage to the existing co-located ME1 pipeline; and (iv) ME1, ME2 and ME2x are not public utility facilities. Based on these allegations, Senator Dinniman’s Complaint seeks emergency relief by way of an order (i) prohibiting construction of ME2 and ME2x in the Township; (ii) prohibiting operation of ME1; (iii) in the alternative to (i) and (ii) prohibiting the construction of ME2 and ME2x and the operation of ME1 until SPLP fully assesses and the PUC approves the condition, adequacy, efficiency, safety, and reasonableness of those pipelines and the geology in which they sit; (iv) requiring SPLP to release to the public its written integrity management plan and risk analysis for these pipelines; and (v) finding that these pipelines are not public utility facilities. In short, the relief, if granted, would continue the suspension of operation of ME1 and suspend further construction of ME2 and ME2x in the Township.
Following a hearing on May 7, 2018 and 10, 2018, Administrative Law Judge Elizabeth H. Barnes (“ALJ”) issued an Order on May 24, 2018 that granted Senator Dinniman’s petition for interim emergency relief and required SPLP to shut down ME1, to discontinue construction of ME2 and ME2x within the Township, and required SPLP to provide various types of information and perform various geotechnical and geophysical studies within the Township. The ALJ’s Order was immediately effective, and SPLP complied by shutting down service on ME1 and discontinuing all construction in the Township on ME2 and ME2x. The ALJ’s Order was automatically certified as a material question to the PUC, which issued an Opinion and Order on June 15, 2018 (following a public meeting on June 14, 2018) that reversed in part and affirmed in part the ALJ’s Order. PUC’s Opinion and Order permitted SPLP to resume service on ME1, but continued the shutdown of construction on ME2 and ME2x pending the submission of the following three types of information to PUC: (i) inspection and testing protocols; (ii) comprehensive emergency response plan; and (iii) safety training curriculum for employees and contractors. SPLP submitted the required information on June 22, 2018. On July 2, 2018, Senator Dinniman and intervenors responded to the submission. SPLP is also required to provide an affidavit that the PADEP has issued appropriate approvals for construction of ME2 and ME2x in the Township before recommencing construction of ME2 and ME2x locations within the Township. SPLP submitted all necessary affidavits. On August 2, 2018 the PUC entered an Order lifting the stay of construction on ME2 and ME2x in the Township with respect to four of the eight areas within the Township where the necessary environmental permits had been issued. Subsequently, after PADEP’s issuance of permit modifications for two of the four remaining construction sites, the PUC lifted the construction stay on those two sites as well. Also on August 2, 2018, the PUC ratified its prior action by notational voting of certifying for interlocutory appeal to the Pennsylvania Commonwealth Court the legal issue of whether Senator Dinniman has standing to pursue this matter. Sunoco submitted a petition for permission to appeal on this issue of standing. Senator Dinniman and intervenors opposed that petition. On September 27, 2018, the Commonwealth Court issued an Order that certified for appeal the issue of Senator Dinniman’s standing. The Order stays all proceedings in the PUC.
On September 27, 2018, the Commonwealth Court issued an Order that certified for appeal the issue of Senator Dinniman’s standing. The Order stays all proceedings in the PUC. Briefing in the Commonwealth Court has been completed and oral argument has been scheduled for June 3, 2019.


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On March 29, 2019, SPLP filed a supplemental affidavit with the PUC in accordance with the established procedure to request the PUC lift the stay of construction of ME2 for one of the remaining work locations in the Township Shoen Road. That same day, Senator Dinniman filed a letter objecting to SPLP’s request, arguing the Commonwealth Court’s order staying all proceedings barred the PUC from issuing an approval to lift the stay of construction of ME2 at Shoen Road. SPLP filed a reply to Senator Dinniman’s letter on April 4, 2019 explaining that the Commonwealth Court’s order did not prevent the PUC from lifting the stay of construction of ME2 at Shoen Road. On April 25, 2019, the PUC issued an Opinion and Order that it lacked jurisdiction to lift the stay of construction of ME2 at Shoen Road in light of the Commonwealth Court’s order staying proceedings in the PUC. That same day, SPLP filed an Application for Expedited Clarification to the Commonwealth Court, which seeks to clarify that the Commonwealth Court’s stay of proceedings does not prevent the PUC from issuing an approval to lift the stay of construction of ME2 at Shoen Road, or any of the other remaining work locations in the Township. Senator Dinniman’s response to SPLP’s application was filed on May 8, 2019, and oral argument is set for May 15, 2019.
No amounts have been recorded in our March 31, 2019 or December 31, 2018 consolidated balance sheets for contingencies and current litigation, other than amounts disclosed herein.
Environmental Matters
Our operations are subject to extensive federal, tribal, state and local environmental and safety laws and regulations that require expenditures to ensure compliance, including related to air emissions and wastewater discharges, at operating facilities and for remediation at current and former facilities as well as waste disposal sites. Historically, our environmental compliance costs have not had a material adverse effect on our results of operations but there can be no assurance that such costs will not be material in the future or that such future compliance with existing, amended or new legal requirements will not have a material adverse effect on our business and operating results. Costs of planning, designing, constructing and operating pipelines, plants and other facilities must incorporate compliance with environmental laws and regulations and safety standards. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of investigatory, remedial and corrective action obligations, 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 of 2013; (b) an estimated 4,509 barrels released from the Longview-to-Mayersville pipeline in Caddo Parish, Louisiana (a/k/a Milepost 51.5) which allegedly occurred in October of 2014; and (c) an estimated 40 barrels released from the Wakita 4-inch gathering line in Oklahoma which allegedly occurred in January of 2015. In January of 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. 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.
On January 3, 2018, PADEP issued an Administrative Order to SPLP directing that work on the Mariner East 2 and 2X pipelines be stopped.  The Administrative Order detailed alleged violations of the permits issued by PADEP in February 2017, during the construction of the project.  SPLP began working with PADEP representatives immediately after the Administrative Order was issued to resolve the compliance issues.  Those compliance issues could not be fully resolved by the deadline to appeal the Administrative Order, so SPLP took an appeal of the Administrative Order to the Pennsylvania Environmental Hearing Board on February 2, 2018.  On February 8, 2018, SPLP entered into a Consent Order and Agreement with PADEP that (i) withdraws the Administrative Order; (ii) establishes requirements for compliance with permits on a going forward basis; (iii) resolves the non-compliance alleged in the Administrative Order; and (iv) conditions restart of work on an agreement


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by SPLP to pay a $12.6 million civil penalty to the Commonwealth of Pennsylvania.  In the Consent Order and agreement, SPLP admits to the factual allegations, but does not admit to the conclusions of law that were made by PADEP.  PADEP also found in the Consent Order and Agreement that SPLP had adequately addressed the issues raised in the Administrative Order and demonstrated an ability to comply with the permits. SPLP concurrently filed a request to the Pennsylvania Environmental Hearing Board to discontinue the appeal of the Administrative Order.  That request was granted on February 8, 2018.
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 ET. 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.
Environmental Remediation
Our subsidiaries are responsible for environmental remediation at certain sites, including the following:
certain of our interstate pipelines conduct soil and groundwater remediation related to contamination from past uses of polychlorinated biphenyls (“PCBs”). PCB assessments are ongoing and, in some cases, our subsidiaries could potentially be held responsible for contamination caused by other parties.
certain gathering and processing systems are responsible for soil and groundwater remediation related to releases of hydrocarbons.
legacy sites related to Sunoco, Inc. that are subject to environmental assessments, including formerly owned terminals and other logistics assets, retail sites that Sunoco, Inc. no longer operates, closed and/or sold refineries and other formerly owned sites.
Sunoco, Inc. is potentially subject to joint and several liability for the costs of remediation at sites at which it has been identified as a potentially responsible party (“PRP”). As of March 31, 2019, Sunoco, Inc. had been named as a PRP at approximately 38 identified or potentially identifiable “Superfund” sites under federal and/or comparable state law. Sunoco, Inc. is usually one of a number of companies identified as a PRP at a site. Sunoco, Inc. has reviewed the nature and extent of its involvement at each site and other relevant circumstances and, based upon Sunoco, Inc.’s purported nexus to the sites, believes that its potential liability associated with such sites will not be significant.
To the extent estimable, expected remediation costs are included in the amounts recorded for environmental matters in our consolidated balance sheets. In some circumstances, future costs cannot be reasonably estimated because remediation activities are undertaken as claims are made by customers and former customers. To the extent that an environmental remediation obligation is recorded by a subsidiary that applies regulatory accounting policies, amounts that are expected to be recoverable through tariffs or rates are recorded as regulatory assets on our consolidated balance sheets.
The table below reflects the amounts of accrued liabilities recorded in our consolidated balance sheets related to environmental matters that are considered to be probable and reasonably estimable. Currently, we are not able to estimate possible losses or a range of possible losses in excess of amounts accrued. Except for matters discussed above, we do not have any material environmental matters assessed as reasonably possible that would require disclosure in our consolidated financial statements.
 
March 31, 2019
 
December 31, 2018
Current
$
48

 
$
42

Non-current
289

 
295

Total environmental liabilities
$
337

 
$
337

In 2013, we established a wholly-owned captive insurance company to bear certain risks associated with environmental obligations related to certain sites that are no longer operating. The premiums paid to the captive insurance company include estimates for environmental claims that have been incurred but not reported, based on an actuarially determined fully developed claims expense estimate. In such cases, we accrue losses attributable to unasserted claims based on the discounted estimates that are used to develop the premiums paid to the captive insurance company.
During the three months ended March 31, 2019 and 2018, the Partnership recorded $6 million and $6 million, respectively, of expenditures related to environmental cleanup programs.


25


Our pipeline operations are subject to regulation by the United States Department of Transportation under the PHMSA, pursuant to which the PHMSA has established requirements relating to the design, installation, testing, construction, operation, replacement and management of pipeline facilities. Moreover, the 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.
11.
REVENUE
Disaggregation of revenue
The Partnership’s consolidated financial statements reflect the eight reportable segments, which also represent the level at which the Partnership aggregates revenue for disclosure purposes. Note 15 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. As of March 31, 2019, the Partnership had $378 million in deferred revenues representing the current value of our future performance obligations.
The amount of revenue recognized for the three months ended March 31, 2019 and 2018 that was included in the deferred revenue liability balance as of December 31, 2018 and January 1, 2018 was $76 million and $35 million, respectively.
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.


26


The balances of Sunoco LP’s contract assets and contract liabilities as of March 31, 2019 and December 31, 2018 were as follows:
 
March 31, 2019
 
December 31, 2018
Contract Balances
 
 
 
Contract asset
$
84

 
$
75

Accounts receivable from contracts with customers
467

 
348

Contract liability
1

 
1

Performance Obligations
At contract inception, the Partnership assesses the goods and services promised in its contracts with customers and identifies a performance obligation for each promise to transfer a good or service (or bundle of goods or services) that is distinct. To identify the performance obligations, the Partnership considers all the goods or services promised in the contract, whether explicitly stated or implied based on customary business practices. For a contract that has more than one performance obligation, the Partnership allocates the total contract consideration it expects to be entitled to, to each distinct performance obligation based on a standalone-selling price basis. Revenue is recognized when (or as) the performance obligations are satisfied, that is, when the customer obtains control of the good or service. Certain of our contracts contain variable components, which, when combined with the fixed component are considered a single performance obligation. For these types of contacts, only the fixed component of the contracts are included in the table below.
As of March 31, 2019, the aggregate amount of transaction price allocated to unsatisfied (or partially satisfied) performance obligations is $41.91 billion and the Partnership expects to recognize this amount as revenue within the time bands illustrated below:
 
 
Years Ending December 31,
 
 
 
 
 
 
2019 (remainder)
 
2020
 
2021
 
Thereafter
 
Total
Revenue expected to be recognized on contracts with customers existing as of March 31, 2019
 
$
4,454

 
$
5,048

 
$
4,503

 
$
27,906

 
$
41,911

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 future and are expected to be recovered. These capitalized costs are recorded as a part of Other 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 the Sunoco LP recognized for the three months ended March 31, 2019 and 2018 was $4 million and $3 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.
12.
LEASE ACCOUNTING
Lessee Accounting
The Partnership leases terminal facilities, tank cars, office space, land and equipment under non-cancelable operating leases whose initial terms are typically five to 15 years, with some real estate leases having terms of 40 years or more, along with options that permit renewals for additional periods. At the inception of each, we determine if the arrangement is a lease or contains an embedded lease and review the facts and circumstances of the arrangement to classify lease assets as operating or finance leases under Topic 842. The Partnership has elected not to record any leases with terms of 12 months or less on the balance sheet.
At present, the majority of the Partnership’s active leases are classified as operating in accordance with Topic 842. Balances related to operating leases are included in operating lease ROU assets, accrued and other current liabilities, operating lease current liabilities and non-current operating lease liabilities in our consolidated balance sheets. Finance leases represent a small portion of the active lease agreements and are included in finance lease ROU assets, current maturities of long-term


27


debt and long-term debt, less current maturities in our consolidated balance sheets. The ROU assets represent the Partnership’s right to use an underlying asset for the lease term and lease liabilities represent the obligation of the Partnership to make minimum lease payments arising from the lease for the duration of the lease term.
Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 20 years or greater. The exercise of lease renewal options is typically at the sole discretion of the Partnership and lease extensions are evaluated on a lease-by-lease basis. Leases containing early termination clauses typically require the agreement of both parties to the lease. At the inception of a lease, all renewal options reasonably certain to be exercised are considered when determining the lease term. Presently, the Partnership does not have leases that include options to purchase or automatic transfer of ownership of the leased property to the Partnership. The depreciable life of lease assets and leasehold improvements are limited by the expected lease term.
To determine the present value of future minimum lease payments, we use the implicit rate when readily determinable. Presently, because many of our leases do not provide an implicit rate, the Partnership applies its incremental borrowing rate based on the information available at the lease commencement date to determine the present value of minimum lease payments. The operating and finance lease ROU assets include any lease payments made and exclude lease incentives.
Minimum rent payments are expensed on a straight-line basis over the term of the lease. In addition, some leases require additional contingent or variable lease payments, which are based on the factors specific to the individual agreement. Variable lease payments the Partnership is typically responsible for include payment of real estate taxes, maintenance expenses and insurance.
For short-term leases (leases that have term of twelve months or less upon commencement), lease payments are recognized on a straight-line basis and no ROU assets are recorded.
The Partnership maintains a small number of active related party leases.
The components of operating and finance lease amounts recognized in the accompanying consolidated balance sheet as of March 31, 2019 were as follows:
 
March 31, 2019
Operating leases:
 
Lease right-of-use assets, net
$
868

Operating lease current liabilities
68

Accrued and other current liabilities
1

Non-current operating lease liabilities
817

Finance leases:
 
Property, plant and equipment, net
$
2

Lease right-of-use assets, net
4

Accrued and other current liabilities
1

Long-term debt, less current maturities
7

Other non-current liabilities
2



28


The components of lease expense for the three months ended March 31, 2019 were as follows:
 
 
Income Statement Location
 
Three Months Ended March 31, 2019
Operating lease costs:
 
 
Operating lease cost
 
Cost of goods sold
 
$
8

Operating lease cost
 
Operating expenses
 
17

Operating lease cost
 
Selling, general and administrative
 
3

Total operating lease costs
 
28

Finance lease costs:
 
 
Amortization of lease assets
 
Depreciation, depletion and amortization
 
1

Short-term lease cost
 
Operating expenses
 
11

Variable lease cost
 
Operating expenses
 
3

Lease costs, gross
 
43

Less: Sublease income
 
Other revenue
 
11

Lease costs, net
 
$
32

The weighted average remaining lease terms and weighted average discount rates as of March 31, 2019 were as follows:
 
March 31, 2019
Weighted-average remaining lease term (years):
 
Operating leases
21

Finance leases
10

Weighted-average discount rate (%):
 
Operating leases
5
%
Finance leases
8
%
Cash flows and non-cash activity related to leases for the three months ended March 31, 2019 were as follows:
 
Three Months Ended March 31, 2019
Operating cash flows from operating leases
$
(34
)
Lease assets obtained in exchange for new operating lease liabilities
8

Maturities of lease liabilities as of March 31, 2019 are as follows:
 
Operating leases
 
Finance leases
 
Total
2019 (remainder)
$
85

 
$
2

 
$
87

2020
96

 
2

 
98

2021
84

 
2

 
86

2022
71

 
1

 
72

2023
67

 
1

 
68

Thereafter
1,148

 
7

 
1,155

Total lease payments
1,551

 
15

 
1,566

Less: present value discount
665

 
5

 
670

Present value of lease liabilities
$
886

 
$
10

 
$
896



29


Lessor Accounting
The Partnership leases or subleases a portion of its real estate portfolio to third-party companies as a stable source of long-term revenue. Our lessor and sublease portfolio consists mainly of operating leases with convenience store operators. At this time, most lessor agreements contain five-year terms with renewal options to extend and early termination options based on established terms specific to the individual agreement.
Rental income included in other revenue in our consolidated income statement for the three months ended March 31, 2019 was $36 million.
Future minimum operating lease payments receivable as of March 31, 2019 are as follows:
 
Lease Payments
2019 (remainder)
$
68

2020
72

2021
59

2022
53

2023
3

Thereafter
5

Total undiscounted cash flows
$
260

13.
DERIVATIVE ASSETS AND LIABILITIES
Commodity Price Risk
We are exposed to market risks related to the volatility of commodity prices. To manage the impact of volatility from these prices, 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,


30


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:
 
March 31, 2019
 
December 31, 2018
 
Notional Volume
 
Maturity
 
Notional Volume
 
Maturity
Mark-to-Market Derivatives
 
 
 
 
 
 
 
(Trading)
 
 
 
 
 
 
 
Natural Gas (BBtu):
 
 
 
 
 
 
 
Fixed Swaps/Futures
610

 
2019-2021
 
468

 
2019
Basis Swaps IFERC/NYMEX (1)
2,595

 
2019-2020
 
16,845

 
2019-2020
Options – Puts
10,000

 
2019
 
10,000

 
2019
Power (Megawatt):
 
 
 
 
 
 
 
Forwards
2,554,800

 
2019-2020
 
3,141,520

 
2019
Futures
14,776

 
2019-2021
 
56,656

 
2019-2021
Options – Puts
(144,611
)
 
2019-2021
 
18,400

 
2019
Options – Calls
391,740

 
2019
 
284,800

 
2019
(Non-Trading)
 
 
 
 
 
 
 
Natural Gas (BBtu):
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
(18,250
)
 
2019-2022
 
(30,228
)
 
2019-2021
Swing Swaps IFERC
39,685

 
2019-2020
 
54,158

 
2019-2020
Fixed Swaps/Futures
80

 
2019-2021
 
(1,068
)
 
2019-2021
Forward Physical Contracts
(27,096
)
 
2019-2021
 
(123,254
)
 
2019-2020
NGL (MBbls) – Forwards/Swaps
(857
)
 
2019-2021
 
(2,135
)
 
2019
Crude (MBbls) – Forwards/Swaps
13,832

 
2019
 
20,888

 
2019
Refined Products (MBbls) – Futures
(592
)
 
2019-2021
 
(1,403
)
 
2019
Corn (thousand bushels)
(2,070
)
 
2019
 
(1,920
)
 
2019
Fair Value Hedging Derivatives
 
 
 
 
 
 
 
(Non-Trading)
 
 
 
 
 
 
 
Natural Gas (BBtu):
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
(30,958
)
 
2019-2020
 
(17,445
)
 
2019
Fixed Swaps/Futures
(30,958
)
 
2019-2020
 
(17,445
)
 
2019
Hedged Item – Inventory
30,958

 
2019-2020
 
17,445

 
2019
(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.


31


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, 2019
 
December 31, 2018
July 2019(2)
 
Forward-starting to pay a fixed rate of 3.56% and receive a floating rate
 
$
400

 
$
400

July 2020(2)
 
Forward-starting to pay a fixed rate of 3.52% and receive a floating rate
 
400

 
400

July 2021(2)
 
Forward-starting to pay a fixed rate of 3.55% and receive a floating rate
 
400

 
400

March 2019
 
Pay a floating rate and receive a fixed rate of 1.42%
 

 
300

(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.  
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.


32


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, 2019
 
December 31, 2018
 
March 31, 2019
 
December 31, 2018
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Commodity derivatives (margin deposits)
 
$
2

 
$

 
$
(1
)
 
$
(13
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Commodity derivatives (margin deposits)
 
209

 
402

 
(248
)
 
(397
)
Commodity derivatives
 
127

 
158

 
(60
)
 
(173
)
Interest rate derivatives
 

 

 
(232
)
 
(163
)
 
 
336

 
560

 
(540
)
 
(733
)
Total derivatives
 
$
338

 
$
560

 
$
(541
)
 
$
(746
)
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, 2019
 
December 31, 2018
 
March 31, 2019
 
December 31, 2018
Derivatives without offsetting agreements
 
Derivative liabilities
 
$

 
$

 
$
(232
)
 
$
(163
)
Derivatives in offsetting agreements:
 
 
 
 
 
 
 
 
OTC contracts
 
Derivative assets (liabilities)
 
127

 
158

 
(60
)
 
(173
)
Broker cleared derivative contracts
 
Other current assets (liabilities)
 
211

 
402

 
(249
)
 
(410
)
Total gross derivatives
 
338

 
560

 
(541
)
 
(746
)
Offsetting agreements:
 
 
 
 
 
 
 
 
Counterparty netting
 
Derivative assets (liabilities)
 
(57
)
 
(47
)
 
57

 
47

Counterparty netting
 
Other current assets (liabilities)
 
(207
)
 
(397
)
 
207

 
397

Total net derivatives
 
$
74

 
$
116

 
$
(277
)
 
$
(302
)
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 long-term depending on the anticipated settlement date.


33


The following tables summarize the amounts recognized in income with respect to our derivative financial instruments:
 
Location of Gain Recognized in Income on Derivatives
 
Amount of Gain Recognized in Income Representing Hedge Ineffectiveness and Amount Excluded from the Assessment of Effectiveness
 
 
 
Three Months Ended
March 31,
 
 
 
2019
 
2018
Derivatives in fair value hedging relationships (including hedged item):
 
 
 
 
 
Commodity derivatives
Cost of products sold
 
$

 
$
3

 
Location of Gain (Loss) Recognized in Income on Derivatives
 
Amount of Gain (Loss) Recognized in Income on Derivatives
 
 
 
Three Months Ended
March 31,
 
 
 
2019
 
2018
Derivatives not designated as hedging instruments:
 
 
 
 
 
Commodity derivatives – Trading
Cost of products sold
 
$
5

 
$
17

Commodity derivatives – Non-trading
Cost of products sold
 
(12
)
 
(71
)
Interest rate derivatives
Gains (losses) on interest rate derivatives
 
(74
)
 
52

Total
 
 
$
(81
)
 
$
(2
)
14.
RELATED PARTY TRANSACTIONS
In October 2018, in connection with the Energy Transfer Merger, ET and ETO entered into an intercompany promissory note (“ET-ETO Promissory Note A”) for an aggregate amount up to $2.20 billion that accrues interest at a weighted average rate based on interest payable by ETO on its outstanding indebtedness. The ET-ETO Promissory Note A matures on October 18, 2019. As of March 31, 2019 and December 31, 2018, the ET-ETO Promissory Note A had outstanding balances of $1.07 billion and $440 million, respectively. Amount outstanding was classified as long-term as of March 31, 2019 as management anticipates refinancing the borrowing on a long-term basis.
In March 2019, in connection with the ET-ETO senior notes exchange, ET and ETO entered into an intercompany promissory note (“ET-ETO Promissory Note B”) for an aggregate amount up to $4.25 billion that accrues interest at a weighted average rate based on interest payable by ETO on its outstanding indebtedness. The ET-ETO Promissory Note B matures on December 31, 2024. As of March 31, 2019 the ET-ETO Promissory Note B had an outstanding balance of $4.21 billion.
As of March 31, 2019, ETO has a long-term intercompany payable due to ET of $41 million, which has been netted against the outstanding promissory notes receivable in our consolidated balance sheet.
The Partnership also has related party transactions with several of its equity method investees. 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,
 
2019
 
2018
Revenues from related companies
$
109

 
$
102



34


The following table summarizes the related company balances on our consolidated balance sheets:
 
March 31, 2019
 
December 31, 2018
Accounts receivable from related companies:
 
 
 
ET
$
55

 
$
65

FGT
32

 
25

Phillips 66
33

 
42

Other
54

 
44

Total accounts receivable from related companies
$
174

 
$
176

 
 
 
 
Accounts payable to related companies:
 
 
 
ET
$

 
$
59

Other
53

 
60

Total accounts payable to related companies
$
53

 
$
119

15.
REPORTABLE SEGMENTS
As a result of the Energy Transfer Merger in October 2018, our reportable segments were reevaluated and currently reflect the following 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.
The investment in USAC segment reflects the results of USAC beginning April 2018, the date that the Partnership obtained control of USAC.
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, terminalling 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 as a measure of segment performance. We define Segment 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, non-cash impairment charges, losses on extinguishments of debt and other non-operating income or expense items. Unrealized gains and losses on commodity risk management activities include unrealized gains and losses on commodity derivatives and inventory valuation adjustments (excluding lower of cost or market adjustments). Segment Adjusted EBITDA reflects amounts for unconsolidated affiliates based on our proportionate ownership.


35


The following tables present financial information by segment:
 
Three Months Ended
March 31,
 
2019
 
2018
Revenues:
 
 
 
Intrastate transportation and storage:
 
 
 
Revenues from external customers
$
769

 
$
817

Intersegment revenues
87

 
58

 
856

 
875

Interstate transportation and storage:
 
 
 
Revenues from external customers
492

 
362

Intersegment revenues
6

 
3

 
498

 
365

Midstream:
 
 
 
Revenues from external customers
663

 
440

Intersegment revenues
1,055

 
1,174

 
1,718

 
1,614

NGL and refined products transportation and services:
 
 
 
Revenues from external customers
2,713

 
2,263

Intersegment revenues
318

 
283

 
3,031

 
2,546

Crude oil transportation and services:
 
 
 
Revenues from external customers
4,167

 
3,731

Intersegment revenues
19

 
14

 
4,186

 
3,745

Investment in Sunoco LP:
 
 
 
Revenues from external customers
3,692

 
3,748

Intersegment revenues

 
1

 
3,692

 
3,749

Investment in USAC:
 
 
 
Revenues from external customers
167

 

Intersegment revenues
4

 

 
171

 

All other:
 
 
 
Revenues from external customers
458

 
521

Intersegment revenues
39

 
50

 
497

 
571

Eliminations
(1,528
)
 
(1,583
)
Total revenues
$
13,121

 
$
11,882



36


 
Three Months Ended
March 31,
 
2019
 
2018
Segment Adjusted EBITDA:
 
 
 
Intrastate transportation and storage
$
252

 
$
192

Interstate transportation and storage
456

 
366

Midstream
382

 
377

NGL and refined products transportation and services
612

 
451

Crude oil transportation and services
806

 
464

Investment in Sunoco LP
153

 
109

Investment in USAC
101

 

All other
33

 
45

Total
2,795

 
2,004

Depreciation, depletion and amortization
(771
)
 
(661
)
Interest expense, net
(527
)
 
(380
)
Impairment losses
(50
)
 

Gains (losses) on interest rate derivatives
(74
)
 
52

Non-cash compensation expense
(29
)
 
(23
)
Unrealized gains (losses) on commodity risk management activities
49

 
(87
)
Losses on extinguishments of debt
(2
)
 
(109
)
Inventory valuation adjustments
93

 
25

Adjusted EBITDA related to unconsolidated affiliates
(146
)
 
(156
)
Equity in earnings of unconsolidated affiliates
65

 
79

Adjusted EBITDA related to discontinued operations

 
20

Other, net
4

 
40

Income from continuing operations before income tax (expense) benefit
1,407

 
804

Income tax (expense) benefit
(126
)
 
10

Income from continuing operations
1,281

 
814

Loss from discontinued operations

 
(237
)
Net income
$
1,281

 
$
577

 
March 31, 2019
 
December 31, 2018
Assets:
 
 
 
Intrastate transportation and storage
$
6,601

 
$
6,365

Interstate transportation and storage
15,161

 
15,081

Midstream
19,759

 
19,745

NGL and refined products transportation and services
19,185

 
18,267

Crude oil transportation and services
18,363

 
18,022

Investment in Sunoco LP
5,423

 
4,879

Investment in USAC
3,758

 
3,775

All other and eliminations
6,498

 
2,308

Total assets
$
94,748

 
$
88,442

16.
CONSOLIDATING GUARANTOR FINANCIAL INFORMATION
Sunoco Logistics Partners Operations L.P., a subsidiary of ETO, is the issuer of multiple series of senior notes that are guaranteed by ETO. These guarantees are full and unconditional. For the purposes of this footnote, Energy Transfer Operating,


37


L.P. is referred to as “Parent Guarantor” and Sunoco Logistics Partners Operations L.P. is referred to as “Subsidiary Issuer.” All other consolidated subsidiaries of the Partnership are collectively referred to as “Non-Guarantor Subsidiaries.”
The following supplemental condensed consolidating financial information reflects the Parent Guarantor’s separate accounts, the Subsidiary Issuer’s separate accounts, the combined accounts of the Non-Guarantor Subsidiaries, the combined consolidating adjustments and eliminations, and the Parent Guarantor’s consolidated accounts for the dates and periods indicated. For purposes of the following condensed consolidating information, the Parent Guarantor’s investments in its subsidiaries and the Subsidiary Issuer’s investments in its subsidiaries are accounted for under the equity method of accounting.
The consolidating financial information for the Parent Guarantor, Subsidiary Issuer and Non-Guarantor Subsidiaries are as follows:
 
March 31, 2019
 
Parent Guarantor
 
Subsidiary Issuer
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated Partnership
Cash and cash equivalents
$

 
$

 
$
516

 
$

 
$
516

All other current assets
22

 
57

 
7,056

 
(468
)
 
6,667

Property, plant and equipment, net

 

 
67,013

 

 
67,013

Investments in unconsolidated affiliates
52,099

 
13,723

 
2,647

 
(65,822
)
 
2,647

All other assets
5,240

 
75

 
12,590

 

 
17,905

Total assets
$
57,361

 
$
13,855

 
$
89,822

 
$
(66,290
)
 
$
94,748

 
 
 
 
 
 
 
 
 
 
Current liabilities
$
(674
)
 
$
(3,222
)
 
$
11,410

 
$
(892
)
 
$
6,622

Non-current liabilities
30,644

 
7,604

 
13,595

 

 
51,843

Noncontrolling interest

 

 
8,044

 

 
8,044

Total partners’ capital
27,391

 
9,473

 
56,773

 
(65,398
)
 
28,239

Total liabilities and equity
$
57,361

 
$
13,855

 
$
89,822

 
$
(66,290
)
 
$
94,748

 
December 31, 2018
 
Parent Guarantor
 
Subsidiary Issuer
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated Partnership
Cash and cash equivalents
$

 
$

 
$
418

 
$

 
$
418

All other current assets
5

 
57

 
7,074

 
(734
)
 
6,402

Property, plant and equipment, net

 

 
66,655

 

 
66,655

Investments in unconsolidated affiliates
51,876

 
13,090

 
2,636

 
(64,966
)
 
2,636

All other assets
12

 
75

 
12,244

 

 
12,331

Total assets
$
51,893

 
$
13,222

 
$
89,027

 
$
(65,700
)
 
$
88,442

 
 
 
 
 
 
 
 
 
 
Current liabilities
$
(635
)
 
$
(3,315
)
 
$
14,469

 
$
(1,222
)
 
$
9,297

Non-current liabilities
24,787

 
7,605

 
10,132

 

 
42,524

Noncontrolling interest

 

 
7,903

 

 
7,903

Total partners’ capital
27,741

 
8,932

 
56,523

 
(64,478
)
 
28,718

Total liabilities and equity
$
51,893

 
$
13,222

 
$
89,027

 
$
(65,700
)
 
$
88,442



38


 
Three Months Ended March 31, 2019
 
Parent Guarantor
 
Subsidiary Issuer
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated Partnership
Revenues
$

 
$

 
$
13,121

 
$

 
$
13,121

Operating costs, expenses, and other

 

 
11,193

 

 
11,193

Operating income

 

 
1,928

 

 
1,928

Interest expense, net
(362
)
 
(66
)
 
(99
)
 

 
(527
)
Equity in earnings of unconsolidated affiliates
1,427

 
611

 
65

 
(2,038
)
 
65

Losses on extinguishments of debt

 

 
(2
)
 

 
(2
)
Gains on interest rate derivatives
(74
)
 

 

 

 
(74
)
Other, net
21

 

 
(4
)
 

 
17

Income before income tax expense
1,012

 
545

 
1,888

 
(2,038
)
 
1,407

Income tax expense

 

 
126

 

 
126

Net income
1,012

 
545

 
1,762

 
(2,038
)
 
1,281

Less: Net income attributable to noncontrolling interest

 

 
256

 

 
256

Less: Net income attributable to redeemable noncontrolling interest

 

 
13

 

 
13

Net income attributable to partners
$
1,012

 
$
545

 
$
1,493

 
$
(2,038
)
 
$
1,012

 
 
 
 
 
 
 
 
 
 
Other comprehensive income
$

 
$

 
$
8

 
$

 
$
8

Comprehensive income
1,012

 
545

 
1,770

 
(2,038
)
 
1,289

Comprehensive income attributable to noncontrolling interest

 

 
256

 

 
256

Comprehensive income attributable to redeemable noncontrolling interest

 

 
13

 

 
13

Comprehensive income attributable to partners
$
1,012

 
$
545

 
$
1,501

 
$
(2,038
)
 
$
1,020



39


 
Three Months Ended March 31, 2018
 
Parent Guarantor
 
Subsidiary Issuer
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated Partnership
Revenues
$

 
$

 
$
11,882

 
$

 
$
11,882

Operating costs, expenses, and other

 

 
10,777

 

 
10,777

Operating income

 

 
1,105

 

 
1,105

Interest expense, net
(278
)
 
(40
)
 
(62
)
 

 
(380
)
Equity in earnings of unconsolidated affiliates
941

 
260

 
79

 
(1,201
)
 
79

Losses on extinguishments of debt

 

 
(109
)
 

 
(109
)
Gains on interest rate derivatives
52

 

 

 

 
52

Other, net

 

 
57

 

 
57

Income from continuing operations before income tax benefit
715

 
220

 
1,070

 
(1,201
)
 
804

Income tax benefit

 

 
(10
)
 

 
(10
)
Net income from continuing operations
715

 
220

 
1,080

 
(1,201
)
 
814

Loss from discontinued operations

 

 
(237
)
 

 
(237
)
Net income
715

 
220

 
843

 
(1,201
)
 
577

Less: Net income attributable to noncontrolling interest

 

 
164

 

 
164

Less: Net loss attributable to predecessor equity

 

 
(302
)
 

 
(302
)
Net income attributable to partners
$
715

 
$
220

 
$
981

 
$
(1,201
)
 
$
715

 
 
 
 
 
 
 
 
 
 
Other comprehensive income
$

 
$

 
$
1

 
$

 
$
1

Comprehensive income
715

 
220

 
844

 
(1,201
)
 
578

Comprehensive income attributable to noncontrolling interest

 

 
164

 

 
164

Comprehensive loss attributable to predecessor equity

 

 
(302
)
 

 
(302
)
Comprehensive income attributable to partners
$
715

 
$
220

 
$
982

 
$
(1,201
)
 
$
716

 
 
 
Three Months Ended March 31, 2019
 
Parent Guarantor
 
Subsidiary Issuer
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated Partnership
Cash flows provided by operating activities
$
1,026

 
$
314

 
$
1,184

 
$
(678
)
 
$
1,846

Cash flows provided by (used in) investing activities
(123
)
 
(314
)
 
(1,339
)
 
678

 
(1,098
)
Cash flows provided by (used in) financing activities
(903
)
 

 
253

 

 
(650
)
Change in cash

 

 
98

 

 
98

Cash at beginning of period

 

 
418

 

 
418

Cash at end of period
$

 
$

 
$
516

 
$

 
$
516



40


 
Three Months Ended March 31, 2018
 
Parent Guarantor
 
Subsidiary Issuer
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated Partnership
Cash flows provided by operating activities
$
1,147

 
$
434

 
$
2,475

 
$
(1,841
)
 
$
2,215

Cash flows used in investing activities
(1,554
)
 
(431
)
 
(1,557
)
 
1,841

 
(1,701
)
Cash flows provided by (used in) financing activities
407

 

 
(3,450
)
 

 
(3,043
)
Net increase in cash and cash equivalents of discontinued operations

 

 
2,740

 

 
2,740

Change in cash

 
3

 
208

 

 
211

Cash at beginning of period

 
(2
)
 
337

 

 
335

Cash at end of period
$

 
$
1

 
$
545

 
$

 
$
546



41


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Tabular dollar and unit amounts are in millions)
The following is a discussion of our historical consolidated financial condition and results of operations, and should be read in conjunction with (i) our historical consolidated financial statements and accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q; and (ii) the consolidated financial statements and management’s discussion and analysis of financial condition and results of operations included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 22, 2019. This discussion includes forward-looking statements that are subject to risk and uncertainties. Actual results may differ substantially from the statements we make in this section due to a number of factors that are discussed in “Part I – Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 22, 2019.
References to “we,” “us,” “our,” the “Partnership” and “ETO” shall mean Energy Transfer Operating, L.P. and its subsidiaries.
OVERVIEW
The primary activities and operating subsidiaries through which we conduct those activities are as follows:
natural gas operations, including the following:
natural gas midstream and intrastate transportation and storage;
interstate natural gas transportation and storage; and
crude oil, NGL and refined products transportation, terminalling services and acquisition and marketing activities, as well as NGL storage and fractionation services.
In addition, we own investments in other businesses, including Sunoco LP and USAC, both of which are publicly traded master limited partnerships.
RECENT DEVELOPMENTS
Series E Preferred Units Issuance
In April 2019, ETO issued 32 million of its 7.600% Series E Preferred Units at a price of $25 per unit, including 4 million Series E Preferred Units pursuant to the underwriters’ exercise of their option to purchase additional preferred units. The total gross proceeds from the Series E Preferred Unit issuance were $800 million, including $100 million from the underwriters’ exercise of their option. The net proceeds were used to repay amounts outstanding under ETO’s revolving credit facility and for general partnership purposes.
ET-ETO Senior Notes Exchange
In March 2019, ETO issued approximately $4.21 billion aggregate principal amount of senior notes to settle and exchange approximately 97% ET’s outstanding senior notes. In connection with this exchange, ETO issued $1.13 billion aggregate principal amount of 7.50% senior notes due 2020, $993 million aggregate principal amount of 4.25% senior notes due 2023, $1.13 billion aggregate principal amount of 5.875% senior notes due 2024 and $956 million aggregate principal amount of 5.50% senior notes due 2027.
ETO Senior Notes Offering and Redemption
In January 2019, ETO issued $750 million aggregate principal amount of 4.50% senior notes due 2024, $1.50 billion aggregate principal amount of 5.25% senior notes due 2029 and $1.75 billion aggregate principal amount of 6.25% senior notes due 2049. The $3.96 billion net proceeds from the offering were used to repay in full ET’s outstanding senior secured term loan, to redeem outstanding senior notes at maturity, to repay a portion of the borrowings under the Partnership’s revolving credit facility and for general partnership purposes.
Bakken Senior Notes Offering
In March 2019, Midwest Connector Capital Company LLC, a wholly-owned subsidiary of Dakota Access, LLC, issued $650 million aggregate principal amount of 3.625% senior notes due 2022, $1.00 billion aggregate principal amount of 3.90% senior notes due 2024 and $850 million aggregate principal amount of 4.625% senior notes due 2029. The $2.48 billion in net proceeds from the offering were used to repay in full all amounts outstanding on the Bakken credit facility and the facility was terminated.


42


Sunoco LP Senior Notes Offering
In March 2019, Sunoco LP issued $600 million aggregate principal amount of 6.00% senior notes due 2027 in a private placement to eligible purchasers. The net proceeds from this offering were used to repay a portion of Sunoco LP’s existing borrowings under its credit facility.
USAC Senior Notes Offering
In March 2019, USAC issued $750 million aggregate principal amount of 6.875% senior unsecured notes due 2027 in a private placement to eligible purchasers. The net proceeds from this offering were used to repay a portion of USAC’s existing borrowings under its credit facility and for general partnership purposes.
Regulatory Update
Interstate Natural Gas Transportation Regulation
Rate Regulation
Effective January 2018, the 2017 Tax and Jobs Act (the “Tax Act”) changed several provisions of the federal tax code, including a reduction in the maximum corporate tax rate. On March 15, 2018, in a set of related proposals, the FERC addressed treatment of federal income tax allowances in regulated entity rates. The FERC issued a Revised Policy Statement on Treatment of Income Taxes (“Revised Policy Statement”) stating that it will no longer permit master limited partnerships to recover an income tax allowance in their cost of service rates. The FERC issued the Revised Policy Statement in response to a remand from the United States Court of Appeals for the District of Columbia Circuit in United Airlines v. FERC, in which the court determined that the FERC had not justified its conclusion that a pipeline organized as a master limited partnership would not “double recover” its taxes under the current policy by both including an income-tax allowance in its cost of service and earning a return on equity calculated using the discounted cash flow methodology. On July 18, 2018, the FERC issued an order denying requests for rehearing and clarification of its Revised Policy Statement. In the rehearing order, the FERC clarified that a pipeline organized as a master limited partnership will not be not be precluded in a future proceeding from arguing and providing evidentiary support that it is entitled to an income tax allowance and demonstrating that its recovery of an income tax allowance does not result in a double-recovery of investors’ income tax costs. In light of the rehearing order, the impacts of the FERC’s policy on the treatment of income taxes may have on the rates ETO can charge for the FERC regulated transportation services are unknown at this time.
The FERC also issued a Notice of Inquiry (“2017 Tax Law NOI”) on March 15, 2018, requesting comments on the effect of the Tax Act on FERC jurisdictional rates. The 2017 Tax Law NOI states that of particular interest to the FERC is whether, and if so how, the FERC should address changes relating to accumulated deferred income taxes and bonus depreciation. Comments in response to the 2017 Tax Law NOI were due on or before May 21, 2018. It is unknown at this time what actions that the FERC will take, if any, following receipt of responses to the 2017 Tax Law NOI and any potential impacts from final rules or policy statements issued following the 2017 Tax Law NOI on the rates ETO can charge for FERC regulated transportation services.
Also included in the March 15, 2018 proposals is a Notice of Proposed Rulemaking (“NOPR”) proposing rules for implementation of the Revised Policy Statement and the corporate income tax rate reduction with respect to natural gas pipeline rates. On July 18, 2018, the FERC issued a Final Rule adopting procedures that are generally the same as proposed in the NOPR with a few clarifications and modifications. With limited exceptions, the Final Rule requires all FERC regulated natural gas pipelines that have cost-based rates for service to make a one-time Form No. 501-G filing providing certain financial information and to make an election on how to treat its existing rates. The Final Rule suggests that this information will allow the FERC and other stakeholders to evaluate the impacts of the Tax Act and the Revised Policy Statement on each individual pipeline’s rates. The Final Rule also requires that each FERC regulated natural gas pipeline select one of four options to address changes to the pipeline’s revenue requirements as a result of the tax reductions: file a limited Natural Gas Act (“NGA”) Section 4 filing reducing its rates to reflect the reduced tax rates, commit to filing a general NGA Section 4 rate case in the near future, file a statement explaining why an adjustment to rates is not needed, or take no other action. For the limited NGA Section 4 option, the FERC clarified that, notwithstanding the Revised Policy Statement, a pipeline organized as a master limited partnership does not need to eliminate its income tax allowance but, instead, can reduce its rates to reflect the reduction in the maximum corporate tax rate. Trunkline, ETC Tiger Pipeline, LLC and Panhandle filed their respective FERC Form No. 501-Gs on October 11, 2018. FEP, Lake Charles LNG and certain other operating subsidiaries filed their respective FERC Form No. 501-Gs on or about November 8, 2018, and Rover, FGT, Transwestern and MEP filed their respective FERC Form No. 501-Gs on or about December 6, 2018. 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.  Panhandle must file a cost and revenue study on or before April 1, 2019.  An initial decision is expected to be issued in the first quarter of 2020. By order issued February 19, 2019, the FERC initiated a review of Southwest Gas Storage Company’s existing rates pursuant to Section 5 of the Natural Gas Act to determine whether the rates currently charged by Southwest Gas Storage Company are just


43


and reasonable and set the matter for hearing.  Southwest Gas Storage Company filed a cost and revenue study on May 6, 2019.  An initial decision is expected to be issued in the first quarter of 2020.
Even without action on the 2017 Tax Law NOI or as contemplated in the Final Rule, the FERC or our shippers may challenge the cost of service rates we charge. The FERC’s establishment of a just and reasonable rate is based on many components, and tax-related changes will affect two such components, the allowance for income taxes and the amount for accumulated deferred income taxes, while other pipeline costs also will continue to affect the FERC’s determination of just and reasonable cost of service rates. Although changes in these two tax related components may decrease, other components in the cost of service rate calculation may increase and result in a newly calculated cost of service rate that is the same as or greater than the prior cost of service rate. Moreover, we receive revenues from our pipelines based on a variety of rate structures, including cost of service rates, negotiated rates, discounted rates and market-based rates. Many of our interstate pipelines, such as ETC Tiger Pipeline, LLC, MEP and FEP, have negotiated market rates that were agreed to by customers in connection with long-term contracts entered into to support the construction of the pipelines. Other systems, such as FGT, Transwestern and Panhandle, have a mix of tariff rate, discount rate, and negotiated rate agreements. We do not expect market-based rates, negotiated rates or discounted rates that are not tied to the cost of service rates to be affected by the Revised Policy Statement or any final regulations that may result from the March 15, 2018 proposals. The revenues we receive from natural gas transportation services we provide pursuant to cost of service based rates may decrease in the future as a result of the ultimate outcome of the NOI, the Final Rule, and the Revised Policy Statement, combined with the reduced corporate federal income tax rate established in the Tax Act. The extent of any revenue reduction related to our cost of service rates, if any, will depend on a detailed review of all of ETO’s cost of service components and the outcomes of any challenges to our rates by the FERC or our shippers.
Pipeline Certification
The FERC issued a Notice of Inquiry on April 19, 2018 (“Pipeline Certification NOI”), thereby initiating a review of its policies on certification of natural gas pipelines, including an examination of its long-standing Policy Statement on Certification of New Interstate Natural Gas Pipeline Facilities, issued in 1999, that is used to determine whether to grant certificates for new pipeline projects. We are unable to predict what, if any, changes may be proposed as a result of the Pipeline Certification NOI that may affect our natural gas pipeline business or when such proposals, if any, might become effective. Comments in response to the Pipeline Certification NOI were due on or before July 25, 2018. We do not expect that any change in this policy would affect us in a materially different manner than any other natural gas pipeline company operating in the United States.
Interstate Liquids Transportation Regulation
The FERC utilizes an indexing rate methodology which allows common carriers to change their rates within prescribed ceiling levels that are tied to changes in the Producer Price Index, or PPI. The indexing methodology is applicable to existing rates, with the exclusion of market-based rates. The FERC’s indexing methodology is subject to review every five years. During the five-year period commencing July 1, 2016 and ending June 30, 2021, common carriers charging indexed rates are permitted to adjust their indexed ceilings annually by PPI plus 1.23 percent. Many existing pipelines utilize the FERC liquids index to change transportation rates annually every July 1. With respect to liquids and refined products pipelines subject to FERC jurisdiction, the Revised Policy Statement requires the pipeline to reflect the impacts to its cost of service from the Revised Policy Statement and the Tax Act on Page 700 of FERC Form No. 6. This information will be used by the FERC in its next five year review of the liquids pipeline index to generate the index level to be effective July 1, 2021, thereby including the effect of the Revised Policy Statement and the Tax Act in the determination of indexed rates prospectively, effective July 1, 2021. The FERC’s establishment of a just and reasonable rate, including the determination of the appropriate liquids pipeline index, is based on many components, and tax related changes will affect two such components, the allowance for income taxes and the amount for accumulated deferred income taxes, while other pipeline costs also will continue to affect the FERC’s determination of the appropriate pipeline index. Accordingly, depending on the FERC’s application of its indexing rate methodology for the next five year term of index rates, the Revised Policy Statement and tax effects related to the Tax Act may impact our revenues associated with any transportation services we may provide pursuant to cost of service based rates in the future, including indexed rates.
Results of Operations
We report Segment Adjusted EBITDA as a measure of segment performance. We define Segment 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, non-cash impairment charges, losses on extinguishments of debt and other non-operating income or expense items. Unrealized gains and losses on commodity risk management activities include unrealized gains and losses on commodity derivatives and inventory valuation adjustments (excluding lower of cost or market adjustments). Segment Adjusted EBITDA reflects amounts for unconsolidated affiliates based on our proportionate ownership.


44


Segment Adjusted EBITDA, as reported for each segment in the table below, is analyzed for each segment in the section below titled “Segment Operating Results.” Total Segment Adjusted EBITDA, as presented below, is equal to the consolidated measure of Adjusted EBITDA, which is a non-GAAP measure used by industry analysts, investors, lenders and rating agencies to assess the financial performance and the operating results of the Partnership’s fundamental business activities and should not be considered in isolation or as a substitution for net income, income from operations, cash flows from operating activities or other GAAP measures. Our definition of total or consolidated Adjusted EBITDA is consistent with the definition of Segment Adjusted EBITDA above.
As discussed in Note 1 of the Partnership’s consolidated financial statements included in “Item 1. Financial Statements,” the Energy Transfer Merger in October 2018 resulted in the retrospective adjustment of the Partnership’s consolidated financial statements to reflect consolidation beginning January 1, 2018 of Sunoco LP and Lake Charles LNG and April 2, 2018 for USAC.
Consolidated Results
 
Three Months Ended
March 31,
 
 
 
2019
 
2018
 
Change
Segment Adjusted EBITDA:
 
 
 
 
 
Intrastate transportation and storage
$
252

 
$
192

 
$
60

Interstate transportation and storage
456

 
366

 
90

Midstream
382

 
377

 
5

NGL and refined products transportation and services
612

 
451

 
161

Crude oil transportation and services
806

 
464

 
342

Investment in Sunoco LP
153

 
109

 
44

Investment in USAC
101

 

 
101

All other
33

 
45

 
(12
)
Total
2,795

 
2,004

 
791

Depreciation, depletion and amortization
(771
)
 
(661
)
 
(110
)
Interest expense, net
(527
)
 
(380
)
 
(147
)
Impairment losses
(50
)
 

 
(50
)
Gains (losses) on interest rate derivatives
(74
)
 
52

 
(126
)
Non-cash compensation expense
(29
)
 
(23
)
 
(6
)
Unrealized gains (losses) on commodity risk management activities
49

 
(87
)
 
136

Losses on extinguishments of debt
(2
)
 
(109
)
 
107

Inventory valuation adjustments
93

 
25

 
68

Adjusted EBITDA related to unconsolidated affiliates
(146
)
 
(156
)
 
10

Equity in earnings of unconsolidated affiliates
65

 
79

 
(14
)
Adjusted EBITDA related to discontinued operations

 
20

 
(20
)
Other, net
4

 
40

 
(36
)
Income from continuing operations before income tax (expense) benefit
1,407

 
804


603

Income tax (expense) benefit
(126
)
 
10

 
(136
)
Income from continuing operations
1,281

 
814

 
467

Loss from discontinued operations

 
(237
)
 
237

Net income
$
1,281

 
$
577

 
$
704

See the detailed discussion of Segment Adjusted EBITDA in “Segment Operating Results” below.
Depreciation, Depletion and Amortization. Depreciation, depletion and amortization increased for the three months ended March 31, 2019 compared to the same period last year primarily due to additional depreciation and amortization from assets recently placed in service and the acquisition of USAC on April 2, 2018.


45


Interest Expense, Net. Interest expense, net of capitalized interest, increased for the three months ended March 31, 2019 compared to the same period last year primarily due to the following:
an increase of $110 million recognized by the Partnership primarily related to increases in long-term debt from ETO senior note issuances including the ET-ETO senior notes exchange in March 2019, higher interest rates on floating rate borrowings and a decrease of $36 million in capitalized interest due to the completion of major projects in 2018;
an increase of $29 million due to the consolidation of USAC beginning April 2, 2018, the date ET obtained control of USAC; and
an increase of $8 million recognized by Sunoco LP primarily related to an increase in Sunoco LP’s senior note borrowings partially offset by lower credit facility borrowings.
Impairment Losses. For the three months ended March 31, 2019, Sunoco LP recognized an asset impairment of $47 million on assets held for sale related to its Fulton, New York ethanol plant, and USAC recognized an asset impairment of $3 million related to certain compression equipment.
Gains (Losses) on Interest Rate Derivatives. Gains (losses) on interest rate derivatives during the three months ended March 31, 2019 resulted from decreases in forward interest rates, which caused our forward-starting swaps to decrease in value.
Unrealized Gains (Losses) on Commodity Risk Management Activities. See additional information on the unrealized gains (losses) on commodity risk management activities included in “Segment Operating Results” below.
Losses on Extinguishments of Debt. Losses on extinguishments of debt decreased due to Sunoco LP’s senior note and term loan redemption in January 2018.
Inventory Valuation Adjustments. Inventory valuation adjustments were recorded for the inventory associated with Sunoco LP due to changes in fuel prices between periods.
Adjusted EBITDA Related to Unconsolidated Affiliates and Equity in Earnings of Unconsolidated Affiliates. See additional information in “Supplemental Information on Unconsolidated Affiliates” and “Segment Operating Results” below.
Adjusted EBITDA Related to Discontinued Operations. Amounts were related to the operations of Sunoco LP’s retail business that were disposed of in January 2018.
Other, net. Includes amortization of regulatory assets and other income and expense amounts.
Income Tax (Expense) Benefit. For the three months ended March 31, 2019 compared to the same period last year, income tax expense increased primarily due to an increase in income before tax expense (benefit) at our corporate subsidiaries.


46


Supplemental Information on Unconsolidated Affiliates
The following table presents financial information related to unconsolidated affiliates:
 
Three Months Ended
March 31,
 
 
 
2019
 
2018
 
Change
Equity in earnings of unconsolidated affiliates:
 
 
 
 
 
Citrus
$
32

 
$
27

 
$
5

FEP
14

 
14

 

MEP
7

 
9

 
(2
)
Other
12

 
29

 
(17
)
Total equity in earnings of unconsolidated affiliates
$
65

 
$
79

 
$
(14
)
 
 
 
 
 
 
Adjusted EBITDA related to unconsolidated affiliates (1):
 
 
 
 
 
Citrus
$
81

 
$
75

 
$
6

FEP
19

 
19

 

MEP
19

 
22

 
(3
)
Other
27

 
40

 
(13
)
Total Adjusted EBITDA related to unconsolidated affiliates
$
146

 
$
156

 
$
(10
)
 
 
 
 
 
 
Distributions received from unconsolidated affiliates:
 
 
 
 
 
Citrus
$
35

 
$
46

 
$
(11
)
FEP
17

 
17

 

MEP
11

 
13

 
(2
)
Other
16

 
21

 
(5
)
Total distributions received from unconsolidated affiliates
$
79

 
$
97

 
$
(18
)
(1) 
These amounts represent our proportionate share of the Adjusted EBITDA of our unconsolidated affiliates and are based on our equity in earnings or losses of our unconsolidated affiliates adjusted for our proportionate share of the unconsolidated affiliates’ interest, depreciation, depletion, amortization, non-cash items and taxes.  
Segment Operating Results
We evaluate segment performance based on Segment Adjusted EBITDA, which we believe is an important performance measure of the core profitability of our operations. This measure represents the basis of our internal financial reporting and is one of the performance measures used by senior management in deciding how to allocate capital resources among business segments.
The tables below identify the components of Segment Adjusted EBITDA, which is calculated as follows:
Segment margin, operating expenses, and selling, general and administrative expenses. These amounts represent the amounts included in our consolidated financial statements that are attributable to each segment.
Unrealized gains or losses on commodity risk management activities and inventory valuation adjustments. These are the unrealized amounts that are included in cost of products sold to calculate segment margin. These amounts are not included in Segment Adjusted EBITDA; therefore, the unrealized losses are added back and the unrealized gains are subtracted to calculate the segment measure.
Non-cash compensation expense. These amounts represent the total non-cash compensation recorded in operating expenses and selling, general and administrative expenses. This expense is not included in Segment Adjusted EBITDA and therefore is added back to calculate the segment measure.
Adjusted EBITDA related to unconsolidated affiliates. These amounts represent our proportionate share of the Adjusted EBITDA of our unconsolidated affiliates. Amounts reflected are calculated consistently with our definition of Adjusted EBITDA.


47


In the following analysis of segment operating results, a measure of segment margin is reported for segments with sales revenues. Segment margin is a non-GAAP financial measure and is presented herein to assist in the analysis of segment operating results and particularly to facilitate an understanding of the impacts that changes in sales revenues have on the segment performance measure of Segment Adjusted EBITDA. Segment margin is similar to the GAAP measure of gross margin, except that segment margin excludes charges for depreciation, depletion and amortization.
In addition, for certain segments, the sections below include information on the components of segment margin by sales type, which components are included in order to provide additional disaggregated information to facilitate the analysis of segment margin and Segment Adjusted EBITDA. For example, these components include transportation margin, storage margin and other margin. These components of segment margin are calculated consistent with the calculation of segment margin; therefore, these components also exclude charges for depreciation, depletion and amortization.
Following is a reconciliation of our segment margin to operating income, as reported in the Partnership’s consolidated statements of operations:
 
Three Months Ended
March 31,
 
2019
 
2018
Segment Margin:
 
 
 
Intrastate transportation and storage
$
284

 
$
171

Interstate transportation and storage
498

 
365

Midstream
577

 
553

NGL and refined products transportation and services
705

 
600

Crude oil transportation and services
1,086

 
568

Investment in Sunoco LP
370

 
296

Investment in USAC
149

 

All other
42

 
95

Intersegment eliminations
(5
)
 
(11
)
Total segment margin
3,706

 
2,637

 
 
 
 
Less:
 
 
 
Operating expenses
808

 
724

Depreciation, depletion and amortization
771

 
661

Selling, general and administrative
149

 
147

Impairment losses
50

 

Operating income
$
1,928

 
$
1,105



48


Intrastate Transportation and Storage
 
Three Months Ended
March 31,
 
 
 
2019
 
2018
 
Change
Natural gas transported (BBtu/d)
11,982

 
9,271

 
2,711

Withdrawals from storage natural gas inventory (BBtu)

 
17,703

 
(17,703
)
Revenues
$
856

 
$
875

 
$
(19
)
Cost of products sold
572

 
704

 
(132
)
Segment margin
284

 
171

 
113

Unrealized losses on commodity risk management activities
10

 
53

 
(43
)
Operating expenses, excluding non-cash compensation expense
(42
)
 
(39
)
 
(3
)
Selling, general and administrative expenses, excluding non-cash compensation expense
(6
)
 
(6
)
 

Adjusted EBITDA related to unconsolidated affiliates
6

 
13

 
(7
)
Segment Adjusted EBITDA
$
252

 
$
192

 
$
60

Volumes. For the three months ended March 31, 2019 compared to the same period last year, transported volumes increased primarily due to the impact of reflecting RIGS as a consolidated subsidiary beginning in April 2018 and the impact of the Red Bluff Express pipeline coming online in May 2018, as well as the impact of favorable market pricing spreads.
Segment Margin. The components of our intrastate transportation and storage segment margin were as follows:
 
Three Months Ended
March 31,
 
 
 
2019
 
2018
 
Change
Transportation fees
$
154

 
$
117

 
$
37

Natural gas sales and other (excluding unrealized gains and losses)
120

 
91

 
29

Retained fuel revenues (excluding unrealized gains and losses)
11

 
13

 
(2
)
Storage margin (excluding unrealized gains and losses)
9

 
3

 
6

Unrealized losses on commodity risk management activities
(10
)
 
(53
)
 
43

Total segment margin
$
284

 
$
171

 
$
113

Segment Adjusted EBITDA. For the three months ended March 31, 2019 compared to the same period last year, Segment Adjusted EBITDA related to our intrastate transportation and storage segment increased due to the net impacts of the following:
an increase of $29 million in realized natural gas sales and other due to higher realized gains from pipeline optimization activity;
an increase of $13 million in transportation fees, excluding the impact of consolidating RIGS as discussed below, primarily due to new contracts, as well as the impact of the Red Bluff Express pipeline coming online in May 2018;
a net increase of $11 million due to the consolidation of RIGS beginning in April 2018, resulting in increases in transportation fees, retained fuel revenues and operating expenses of $24 million, $2 million and $6 million, respectively, and a decrease of $9 million in Adjusted EBITDA related to unconsolidated affiliates; and
an increase of $6 million in realized storage margin primarily due to a negative adjustment to the Bammel storage inventory of $25 million in 2018, partially offset by a $13 million decrease due to lower physical withdrawals and a $6 million decrease in realized derivative gains.


49


Interstate Transportation and Storage
 
Three Months Ended
March 31,
 
 
 
2019
 
2018
 
Change
Natural gas transported (BBtu/d)
11,532

 
8,204

 
3,328

Natural gas sold (BBtu/d)
19

 
17

 
2

Revenues
$
498

 
$
365

 
$
133

Operating expenses, excluding non-cash compensation, amortization and accretion expenses
(146
)
 
(99
)
 
(47
)
Selling, general and administrative expenses, excluding non-cash compensation, amortization and accretion expenses
(14
)
 
(18
)
 
4

Adjusted EBITDA related to unconsolidated affiliates
119

 
116

 
3

Other
(1
)
 
2

 
(3
)
Segment Adjusted EBITDA
$
456

 
$
366

 
$
90

Volumes. For the three months ended March 31, 2019 compared to the same period last year, transported volumes reflected an increase of 1,645 BBtu/d as a result of the initiation of full service on the Rover pipeline; an increase of 517 BBtu/d on the Tiger pipeline as a result of production increases in the Haynesville Shale; increases of 418 BBtu/d each on the Panhandle and Trunkline pipelines due to increased utilization of higher contracted capacity; and an increase of 197 BBtu/d on the Transwestern pipeline as a result of favorable market opportunities in the West.
Segment Adjusted EBITDA. For the three months ended March 31, 2019 compared to the same period last year, Segment Adjusted EBITDA related to our interstate transportation and storage segment increased due to the net impacts of the following:
an increase of $133 million in revenues primarily due to an increase of $106 million on contracted capacity from additional connections and compression on the Rover pipeline and an increase of $21 million due to higher reservation and usage revenues from capacity sold at higher rates on the Transwestern, Panhandle and Trunkline pipelines;
a decrease of $4 million in selling, general and administrative expenses due to lower excise taxes and lower employee costs; and
an increase of $3 million in Adjusted EBITDA related to unconsolidated affiliates primarily due to sales of additional capacity on Citrus; partially offset by
an increase of $47 million in operating expenses primarily due to a $31 million increase in ad valorem taxes and a $16 million increase in third-party transportation expense due to the initiation of full service on the Rover pipeline.
Midstream
 
Three Months Ended
March 31,
 
 
 
2019
 
2018
 
Change
Gathered volumes (BBtu/d)
12,718

 
11,306

 
1,412

NGLs produced (MBbls/d)
563

 
503

 
60

Equity NGLs (MBbls/d)
35

 
28

 
7

Revenues
$
1,718

 
$
1,614

 
$
104

Cost of products sold
1,141

 
1,061

 
80

Segment margin
577

 
553

 
24

Operating expenses, excluding non-cash compensation expense
(183
)
 
(164
)
 
(19
)
Selling, general and administrative expenses, excluding non-cash compensation expense
(19
)
 
(20
)
 
1

Adjusted EBITDA related to unconsolidated affiliates
6

 
7

 
(1
)
Other
1

 
1

 

Segment Adjusted EBITDA
$
382

 
$
377

 
$
5



50


Volumes. For the three months ended March 31, 2019 compared to the same period last year, gathered volumes and NGL production increased primarily due to increases in the North Texas, Permian and Northeast regions, partially offset by smaller declines in other regions.
Segment Margin. The components of our midstream segment margin were as follows:
 
Three Months Ended
March 31,
 
 
 
2019
 
2018
 
Change
Gathering and processing fee-based revenues
$
484

 
$
421

 
$
63

Non-fee-based contracts and processing
93

 
132

 
(39
)
Total segment margin
$
577

 
$
553

 
$
24

Segment Adjusted EBITDA. For the three months ended March 31, 2019 compared to the same period last year, Segment Adjusted EBITDA related to our midstream segment increased due to the net impacts of the following:
an increase of $63 million in fee-based margin due to volume growth in the North Texas, Permian and Northeast regions, offset by declines in the South Texas and midcontinent/Panhandle regions;
an increase of $6 million in non-fee-based margin due to higher throughput in the North Texas and Permian regions; and
a decrease of $1 million in selling, general and administrative expenses due to lower allocated overhead; partially offset by
a decrease of $45 million in non-fee-based margin due to a $37 million decrease from lower NGL prices and an $8 million decrease from lower gas prices; and
an increase of $19 million in operating expenses due to increases of $10 million in outside services, $4 million in employee costs, $3 million in materials and $2 million in office expenses.
NGL and Refined Products Transportation and Services
 
Three Months Ended
March 31,
 
 
 
2019
 
2018
 
Change
NGL transportation volumes (MBbls/d)
1,178

 
936

 
242

Refined products transportation volumes (MBbls/d)
617

 
620

 
(3
)
NGL and refined products terminal volumes (MBbls/d)
879

 
702

 
177

NGL fractionation volumes (MBbls/d)
678

 
472

 
206

Revenues
$
3,031

 
$
2,546

 
$
485

Cost of products sold
2,326

 
1,946

 
380

Segment margin
705

 
600

 
105

Unrealized (gains) losses on commodity risk management activities
57

 
(13
)
 
70

Operating expenses, excluding non-cash compensation expense
(149
)
 
(139
)
 
(10
)
Selling, general and administrative expenses, excluding non-cash compensation expense
(19
)
 
(18
)
 
(1
)
Adjusted EBITDA related to unconsolidated affiliates
18

 
21

 
(3
)
Segment Adjusted EBITDA
$
612

 
$
451

 
$
161

Volumes. For the three months ended March 31, 2019 compared to the same period last year, NGL transportation volumes increased due to higher receipt of liquids production from both wholly-owned and third-party gas plants primarily in the Permian and North Texas regions. In addition, NGL transportation volumes on our Northeast assets increased due to the initiation of service on the Mariner East 2 pipeline system in the fourth quarter of 2018.
Refined products transportation volumes decreased slightly for the three months ended March 31, 2019 compared to the same period last year primarily due to turnarounds at third-party refineries in the Northeast region.


51


NGL and refined products terminal volumes increased for the three months ended March 31, 2019 compared to the same period last year primarily due to the ramp-up of our Mariner East 2 project which commenced operations in late 2018, more volumes loaded at our Nederland terminal due to increased export demand and higher throughput volumes at our refined products terminals in the Northeast.
Average fractionated volumes at our Mont Belvieu, Texas fractionation facility increased for the three months ended March 31, 2019 compared to the same period last year primarily due to the commissioning of our fifth and sixth fractionators in July 2018 and February 2019, respectively.
Segment Margin. The components of our NGL and refined products transportation and services segment margin were as follows:
 
Three Months Ended
March 31,
 
 
 
2019
 
2018
 
Change
Transportation margin
$
363

 
$
266

 
$
97

Fractionators and refinery services margin
186

 
134

 
52

Terminal services margin
117

 
94

 
23

Storage margin
56

 
56

 

Marketing margin
40

 
37

 
3

Unrealized gains (losses) on commodity risk management activities
(57
)
 
13

 
(70
)
Total segment margin
$
705

 
$
600

 
$
105

Segment Adjusted EBITDA. For the three months ended March 31, 2019 compared to the same period last year, Segment Adjusted EBITDA related to our NGL and refined products transportation and services segment increased due to the net impacts of the following:
an increase of $97 million in transportation margin primarily due to a $68 million increase resulting from higher volumes received from the Permian region on our Texas NGL pipelines, a $28 million increase due to the ramp-up of our Mariner East 2 project which commenced operations in late 2018 and a $7 million increase due to higher throughput volumes from the Barnett region. These increases were partially offset by an $8 million decrease resulting from Mariner East 1 system downtime;
an increase of $52 million in fractionation and refinery services margin primarily due to a $59 million increase resulting from the commissioning of our fifth and sixth fractionators in July 2018 and February 2019, respectively, and higher NGL volumes from the Permian region feeding our Mont Belvieu fractionation facility. This increase was partially offset by a $4 million decrease resulting from a reclassification between our fractionation and storage margins and a $3 million decrease from unplanned downtime at a vendor facility which reduced the supply to our o-grade processing facility;
an increase of $23 million in terminal services margin primarily due to a $32 million increase from the ramp-up of our Mariner East 2 project which commenced operations in late 2018 and a $2 million increase due to higher throughput at our refined products terminals in the Northeast. These increases were partially offset by a $11 million decrease related to Mariner East 1 system downtime, which resulted in lower volumes delivered to our Marcus Hook terminal facility; and
an increase of $3 million in marketing margin due to a $6 million increase from the timing of optimization gains from our Mont Belvieu marketing operations, partially offset by a $3 million decrease from our gasoline optimization and NGL marketing operations in the Northeast; partially offset by
an increase of $10 million in operating expenses primarily due to increases of $4 million in employee costs, $2 million in materials costs, $2 million in management fees and $2 million in utilities costs.


52


Crude Oil Transportation and Services
 
Three Months Ended
March 31,
 
 
 
2019
 
2018
 
Change
Crude transportation volumes (MBbls/d)
4,522

 
3,827

 
695

Crude terminals volumes (MBbls/d)
2,086

 
1,940

 
146

Revenues
$
4,186

 
$
3,745

 
$
441

Cost of products sold
3,100

 
3,177

 
(77
)
Segment margin
1,086

 
568

 
518

Unrealized (gains) losses on commodity risk management activities
(109
)
 
43

 
(152
)
Operating expenses, excluding non-cash compensation expense
(150
)
 
(127
)
 
(23
)
Selling, general and administrative expenses, excluding non-cash compensation expense
(20
)
 
(22
)
 
2

Adjusted EBITDA related to unconsolidated affiliates
(2
)
 
2

 
(4
)
Other
1

 

 
1

Segment Adjusted EBITDA
$
806

 
$
464

 
$
342

Volumes. For the three months ended March 31, 2019 compared to the same period last year, crude transportation and terminal volumes benefited from an increase in barrels through our existing Texas pipelines and our Bakken pipeline.
Segment Adjusted EBITDA. For the three months ended March 31, 2019 compared to the same period last year, Segment Adjusted EBITDA related to our crude oil transportation and services segment increased due to the net impacts of the following:
an increase of $366 million in segment margin (excluding unrealized gains and losses on commodity risk management activities) primarily due to a $142 million increase resulting from higher throughput on our Texas crude pipeline system primarily due to increased production from Permian producers, a $91 million favorable variance resulting from increased throughput on the Bakken Pipeline, a $124 million increase (excluding a net change of $152 million in unrealized gains and losses on commodity risk management activities) from our crude oil acquisition and marketing business primarily resulting from improved basis differentials between the Permian and Bakken producing regions to our Nederland terminal on the Texas Gulf Coast, as well as a $9 million increase primarily from higher throughput, ship loading and tank rental fees at our Nederland terminal; and
a decrease of $2 million in selling, general and administrative expenses primarily due to a $2 million decrease in overhead allocations and a $1 million decrease in management fees, partially offset by a $1 million increase in insurance costs; partially offset by
an increase of $23 million in operating expenses primarily due to a $30 million increase in throughput related costs on existing assets, partially offset by a $7 million decrease in ad valorem taxes and management fees; and
a decrease of $4 million in Adjusted EBITDA related to unconsolidated affiliates due to lower margin from jet fuel sales by our joint ventures.


53


Investment in Sunoco LP
 
Three Months Ended
March 31,
 
 
 
2019
 
2018
 
Change
Revenues
$
3,692

 
$
3,749

 
$
(57
)
Cost of products sold
3,322

 
3,453

 
$
(131
)
Segment margin
370

 
296

 
74

Unrealized gains on commodity risk management activities
(6
)
 

 
(6
)
Operating expenses, excluding non-cash compensation expense
(98
)
 
(113
)
 
15

Selling, general and administrative expenses, excluding non-cash compensation expense
(24
)
 
(32
)
 
8

Inventory valuation adjustments
(93
)
 
(25
)
 
(68
)
Adjusted EBITDA related to discontinued operations

 
(20
)
 
20

Other
4

 
3

 
1

Segment Adjusted EBITDA
$
153

 
$
109

 
$
44

The Investment in Sunoco LP segment reflects the consolidated results of Sunoco LP.
Segment Adjusted EBITDA. For the three months ended March 31, 2019 compared to the same period last year, Segment Adjusted EBITDA related to our investment in Sunoco LP segment increased due to the net impacts of the following:
an aggregate decrease of $23 million in expenses primarily due to the conversion of 207 retail sites to commission agent sites in April 2018; and
an increase of $20 million in Adjusted EBITDA from discontinued operations due to Sunoco LP’s retail divestment in January 2018.
Investment in USAC
 
Three Months Ended
March 31,
 
 
 
2019
 
2018
 
Change
Revenues
$
171

 
$

 
$
171

Cost of products sold
22

 

 
22

Segment margin
149

 

 
149

Operating expenses, excluding non-cash compensation expense
(35
)
 

 
(35
)
Selling, general and administrative expenses, excluding non-cash compensation expense
(13
)
 

 
(13
)
Segment Adjusted EBITDA
$
101

 
$

 
$
101

Amounts reflected above for three months ended March 31, 2019 reflects the consolidated results of USAC. Changes between periods are due to the consolidation of USAC beginning April 2, 2018, the date ET obtained control of USAC.


54


All Other
 
Three Months Ended
March 31,
 
 
 
2019
 
2018
 
Change
Revenues
$
497

 
$
571

 
$
(74
)
Cost of products sold
455

 
476

 
(21
)
Segment margin
42

 
95

 
(53
)
Unrealized (gains) losses on commodity risk management activities
(1
)
 
4

 
(5
)
Operating expenses, excluding non-cash compensation expense
(7
)
 
(31
)
 
24

Selling, general and administrative expenses, excluding non-cash compensation expense
(13
)
 
(18
)
 
5

Adjusted EBITDA related to unconsolidated affiliates
(1
)
 
(3
)
 
2

Other and eliminations
13

 
(2
)
 
15

Segment Adjusted EBITDA
$
33

 
$
45

 
$
(12
)
Amounts reflected in our all other segment primarily include:
our natural gas marketing operations;
our wholly-owned natural gas compression operations;
a non-controlling interest in PES. Prior to PES’s reorganization in August 2018, ETO’s 33% interest in PES was reflected as an unconsolidated affiliate; subsequent the August 2018 reorganization, ETO holds an approximately 8% interest in PES and no longer reflects PES as an affiliate; and
our investment in coal handling facilities.
Segment Adjusted EBITDA. For the three months ended March 31, 2019 compared to the same period last year, Segment Adjusted EBITDA related to our all other segment decreased due to the net impacts of the following:
a decrease of $36 million due to the contribution of CDM to USAC in April 2018, subsequent to which CDM is reflected in the Investment in USAC segment; partially offset by
an increase of $11 million due to our investment in PES;
an increase of $7 million due to an increase in power trading gains; and
an increase of $3 million from residue gas sales.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our ability to satisfy its obligations and pay distributions to its unitholders will depend on its future performance, which will be subject to prevailing economic, financial, business and weather conditions, and other factors, many of which are beyond management’s control.


55


We currently expect capital expenditures in 2019 to be within the following ranges (excluding capital expenditures related to our investments in Sunoco LP and USAC):
 
Growth
 
Maintenance
 
Low
 
High
 
Low
 
High
Intrastate transportation and storage
$
150

 
$
200

 
$
35

 
$
40

Interstate transportation and storage (1)
400

 
425

 
135

 
140

Midstream
800

 
900

 
115

 
120

NGL and refined products transportation and services
3,000

 
3,100

 
90

 
100

Crude oil transportation and services (1)
350

 
425

 
100

 
110

All other (including eliminations)
125

 
150

 
50

 
55

Total capital expenditures
$
4,825

 
$
5,200

 
$
525

 
$
565

(1) 
Includes capital expenditures related to our proportionate ownership of the Bakken, Rover and Bayou Bridge pipeline projects.
The assets used in our natural gas and liquids operations, including pipelines, gathering systems and related facilities, are generally long-lived assets and do not require significant maintenance capital expenditures. Accordingly, we do not have any significant financial commitments for maintenance capital expenditures in our businesses. From time to time we experience increases in pipe costs due to a number of reasons, including but not limited to, delays from steel mills, limited selection of mills capable of producing large diameter pipe timely, higher steel prices and other factors beyond our control. However, we include these factors in our anticipated growth capital expenditures for each year.
We generally fund maintenance capital expenditures and distributions with cash flows from operating activities. We generally fund growth capital expenditures with proceeds of borrowings under credit facilities, long-term debt, the issuance of additional preferred units or a combination thereof.
Sunoco LP
Sunoco LP’s ability to satisfy its obligations and pay distributions to its unitholders will depend on its future performance, which will be subject to prevailing economic, financial, business and weather conditions, and other factors, many of which are beyond the control of Sunoco LP’s management.
Excluding acquisitions, Sunoco LP currently expects to spend approximately $90 million on growth capital and $45 million on maintenance capital for the full year 2019.
USAC
USAC currently plans to spend approximately $25 million in maintenance capital expenditures during 2019, including parts consumed from inventory.
Without giving effect to any equipment USAC may acquire pursuant to any future acquisitions, it currently has budgeted between $140 million and $150 million in expansion capital expenditures during 2019. As of March 31, 2019, USAC has binding commitments to purchase $85 million of additional compression units and serialized parts, all of which USAC expects to be delivered throughout 2019.
Cash Flows
Our internally generated cash flows may change in the future due to a number of factors, some of which we cannot control. These include regulatory changes, the price for our products and services, the demand for such products and services, margin requirements resulting from significant changes in commodity prices, operational risks, the successful integration of our acquisitions, and other factors.
Operating Activities
Changes in cash flows from operating activities between periods primarily result from changes in earnings (as discussed in “Results of Operations” above), excluding the impacts of non-cash items and net changes in operating assets and liabilities (net of effects of acquisitions). Non-cash items include recurring non-cash expenses, such as depreciation, depletion and amortization expense and non-cash compensation expense. The increase in depreciation, depletion and amortization expense during the periods presented primarily resulted from construction of assets, while changes in non-cash compensation expense resulted from changes in the


56


number of units granted and changes in the grant date fair value estimated for such grants. Cash flows from operating activities also differ from earnings as a result of non-cash charges that may not be recurring such as impairment charges and allowance for equity funds used during construction. The allowance for equity funds used during construction increases in periods when we have a significant amount of interstate pipeline construction in progress. Changes in operating assets and liabilities between periods result from factors such as the changes in the value of derivative assets and liabilities, the timing of accounts receivable collection, the timing of payments on accounts payable, the timing of purchase and sales of inventories and the timing of advances and deposits received from customers.
Three months ended March 31, 2019 compared to three months ended March 31, 2018. Cash provided by operating activities during 2019 was $1.85 billion compared to $2.22 billion for 2018 and income from continuing operations was $1.28 billion and $814 million for 2019 and 2018, respectively. The difference between net income and cash provided by operating activities for the three months ended March 31, 2019 primarily consisted of net changes in operating assets and liabilities (net of effects of acquisitions) of $399 million and other non-cash items totaling $899 million.
The non-cash activity in 2019 and 2018 consisted primarily of depreciation, depletion and amortization of $771 million and $661 million, respectively, and non-cash compensation expense of $29 million and $23 million, respectively. Unconsolidated affiliate activity in 2019 and 2018 consisted of equity in earnings of $65 million and $79 million, respectively, and distributions received of $66 million and $70 million, respectively. Non-cash activity also included losses on extinguishments of debt in 2019 and 2018 of $2 million and $109 million, respectively, and impairment losses of $50 million in 2019.
Cash paid for interest, net of interest capitalized, was $581 million and $343 million for the three months ended March 31, 2019 and 2018, respectively.
Capitalized interest was $43 million and $81 million for the three months ended March 31, 2019 and 2018, respectively.
Investing Activities
Cash flows from investing activities primarily consist of cash amounts paid for acquisitions, capital expenditures, cash distributions from our joint ventures and cash proceeds from sales or contributions of assets or businesses. Changes in capital expenditures between periods primarily result from increases or decreases in our growth capital expenditures to fund our construction and expansion projects.
Three months ended March 31, 2019 compared to three months ended March 31, 2018. Cash used in investing activities during 2019 was $1.10 billion compared to $1.70 billion in 2018. Total capital expenditures (excluding the allowance for equity funds used during construction and net of contributions in aid of construction costs) for 2019 were $1.14 billion compared to $1.72 billion for 2018. Additional detail related to our capital expenditures is provided in the table below. During 2019, we also received $93 million in cash from the sale of a noncontrolling interest in a subsidiary.
The following is a summary of capital expenditures (including only our proportionate share of the Bakken, Rover and Bayou Bridge pipeline projects and net of contributions in aid of construction costs) for the three months ended March 31, 2019:
 
Capital Expenditures Recorded During Period
 
Growth
 
Maintenance
 
Total
Intrastate transportation and storage (1)
$
(72
)
 
$
13

 
$
(59
)
Interstate transportation and storage
35

 
14

 
49

Midstream
171

 
19

 
190

NGL and refined products transportation and services
421

 
9

 
430

Crude oil transportation and services
53

 
20

 
73

Investment in Sunoco LP
22

 
4

 
26

Investment in USAC
33

 
7

 
40

All other (including eliminations)
45

 
6

 
51

Total capital expenditures
$
708

 
$
92

 
$
800

(1) 
For the three months ended March 31, 2019, growth capital expenditures for the intrastate transportation and storage segment reflect the proceeds received from the sale of a noncontrolling interest in the Red Bluff Express pipeline, which was based on capital expenditures from prior periods.


57


Financing Activities
Changes in cash flows from financing activities between periods primarily result from changes in the levels of borrowings and equity issuances, which are primarily used to fund our acquisitions and growth capital expenditures.
Three months ended March 31, 2019 compared to three months ended March 31, 2018. Cash used in financing activities during 2019 was $650 million compared to $3.04 billion for 2018. During 2019, we had a net increase in our debt level of $1.17 billion compared to a net decrease of $1.64 billion for 2018. In 2019 and 2018, we incurred debt issuance costs of $84 million and $117 million, respectively.
In 2019, we paid distributions of $1.51 billion to our partners and we paid distributions of $361 million to noncontrolling interests. In 2018, we paid distributions of $945 million to our partners and we paid distributions of $260 million to noncontrolling interests, including predecessor distributions. In addition, we received capital contributions of $140 million in cash from noncontrolling interests in 2019 compared to $229 million in 2018. During 2018, our subsidiaries also purchased $300 million of common units in cash.
Discontinued Operations
Cash flows from discontinued operations reflect cash flows related to Sunoco LP’s retail divestment.
Three months ended March 31, 2019 compared to three months ended March 31, 2018
There were no cash flows related to discontinued operations during 2019. Cash provided by discontinued operations during 2018 was $2.74 billion, resulting from cash used in operating activities of $485 million, cash provided by investing activities of $3.21 billion and changes in cash included in current assets held for sale of $11 million.


58


Description of Indebtedness
Our outstanding consolidated indebtedness was as follows:
 
March 31, 2019
 
December 31, 2018
ETO Senior Notes (1)
$
36,560

 
$
28,755

Transwestern Senior Notes
575

 
575

Panhandle Senior Notes
385

 
385

Bakken Senior Notes
2,500

 

Sunoco LP Senior Notes and lease-related obligations
2,913

 
2,307

USAC Senior Notes
1,475

 
725

Credit facilities and commercial paper:
 
 
 
ETO $5.00 billion Revolving Credit Facility due December 2023 (2)
1,760

 
3,694

Bakken Project $2.50 billion Credit Facility due August 2019

 
2,500

Sunoco LP $1.50 billion Revolving Credit Facility due July 2023
150

 
700

USAC $1.60 billion Revolving Credit Facility due April 2023
361

 
1,050

Other long-term debt
5

 
7

Unamortized premiums, net of discounts and fair value adjustments
11

 
31

Deferred debt issuance costs
(297
)
 
(221
)
Total debt
46,398

 
40,508

Less: current maturities of long-term debt
157

 
2,655

Long-term debt, less current maturities
$
46,241

 
$
37,853

(1) 
The increase in ETO Senior Notes during three months ended March 31, 2019 includes $4.21 billion issued in connection with the ET-ETO senior notes exchange and $4.00 billion issued in the January 2019 senior notes offering, both of which are discussed below. The March 31, 2019 balance also includes $250 million aggregate principal amount of 5.50% senior notes due February 15, 2020 that was classified as long-term as of March 31, 2019 as management has the intent and ability to refinance the borrowing on a long-term basis.
(2) 
Includes $1.76 billion and $2.34 billion of commercial paper outstanding at March 31, 2019 and December 31, 2018, respectively.
Recent Transactions
ET-ETO Senior Notes Exchange
In February 2019, ETO commenced offers to exchange all of ET’s outstanding senior notes for senior notes issued by ETO.  Approximately 97% of ET’s outstanding senior notes were tendered and accepted, and the exchanges settled on March 25, 2019. In connection with the exchange, ETO issued approximately $4.21 billion aggregate principal amount of the following senior notes:
$1.13 billion aggregate principal amount of 7.50% senior notes due 2020;
$993 million aggregate principal amount of 4.25% senior notes due 2023;
$1.13 billion aggregate principal amount of 5.875% senior notes due 2024; and
$956 million aggregate principal amount of 5.50% senior notes due 2027.
The senior notes were registered under the Securities Act of 1933 (as amended).  The Partnership may redeem some or all of the senior notes at any time, or from time to time, pursuant to the terms of the indenture and related indenture supplements related to the senior notes. The principal on the senior notes is payable upon maturity and interest is paid semi-annually.
The senior notes rank equally in right of payment with ETO’s existing and future senior debt, and senior in right of payment to any future subordinated debt ETO may incur.  The notes of each series will initially be fully and unconditionally guaranteed by our subsidiary, Sunoco Logistics Partners Operations L.P., on a senior unsecured basis so long as it guarantees any of our other


59


long-term debt. The guarantee for each series of notes ranks equally in right of payment with all of the existing and future senior debt of Sunoco Logistics Partners Operations L.P., including its senior notes.
ETO Senior Notes Offering and Redemption
In January 2019, ETO issued the following senior notes:
$750 million aggregate principal amount of 4.50% senior notes due 2024;
$1.50 billion aggregate principal amount of 5.25% senior notes due 2029; and
$1.75 billion aggregate principal amount of 6.25% senior notes due 2049.
The senior notes were registered under the Securities Act of 1933 (as amended).  The Partnership may redeem some or all of the senior notes at any time, or from time to time, pursuant to the terms of the indenture and related indenture supplements related to the senior notes. The principal on the senior notes is payable upon maturity and interest is paid semi-annually.
The senior notes rank equally in right of payment with ETO’s existing and future senior debt, and senior in right of payment to any future subordinated debt ETO may incur.  The notes of each series will initially be fully and unconditionally guaranteed by our subsidiary, Sunoco Logistics Partners Operations L.P., on a senior unsecured basis so long as it guarantees any of our other long-term debt. The guarantee for each series of notes ranks equally in right of payment with all of the existing and future senior debt of Sunoco Logistics Partners Operations L.P., including its senior notes.
The $3.96 billion net proceeds from the offering were used to make an intercompany loan to ET (which ET used to repay its term loan in full), for general partnership purposes and to redeem at maturity all of the following:
ETO’s $400 million aggregate principal amount of 9.70% senior notes due March 15, 2019;
ETO’s $450 million aggregate principal amount of 9.00% senior notes due April 15, 2019; and
Panhandle’s $150 million aggregate principal amount of 8.125% senior notes due June 1, 2019.
Bakken Senior Notes Offering
In March 2019, Midwest Connector Capital Company LLC, a wholly-owned subsidiary of Dakota Access, LLC, issued the following senior notes related to the Bakken pipeline:
$650 million aggregate principal amount of 3.625% senior notes due 2022;
$1.00 billion aggregate principal amount of 3.90% senior notes due 2024; and
$850 million aggregate principal amount of 4.625% senior notes due 2029.
The $2.48 billion in net proceeds from the offering were used to repay in full all amounts outstanding on the Bakken credit facility and the facility was terminated.
Sunoco LP Senior Notes Offering
In March 2019, Sunoco LP issued $600 million aggregate principal amount of 6.00% senior notes due 2027 in a private placement to eligible purchasers. The net proceeds from this offering were used to repay a portion of Sunoco LP’s existing borrowings under its credit facility.
USAC Senior Notes Offering
In March 2019, USAC issued $750 million aggregate principal amount of 6.875% senior unsecured notes due 2027 in a private placement to eligible purchasers. The net proceeds from this offering were used to repay a portion of USAC’s existing borrowings under its credit facility and for general partnership purposes.
Credit Facilities and Commercial Paper
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.


60


As of March 31, 2019, the ETO Five-Year Credit Facility had $1.76 billion of outstanding borrowings, all of which was commercial paper. The amount available for future borrowings was $3.15 billion after taking into account letters of credit of $89 million. The weighted average interest rate on the total amount outstanding as of March 31, 2019 was 3.17%.
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 29, 2019. As of March 31, 2019, 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, 2019, the Sunoco LP Credit Facility had $150 million of outstanding borrowings and $8 million in standby letters of credit. As of March 31, 2019 Sunoco LP had $1.34 billion of availability under the Sunoco LP Credit Facility. The weighted average interest rate on the total amount outstanding as of March 31, 2019 was 4.49%.
USAC Credit Facility
USAC maintains a $1.60 billion revolving credit facility (the “USAC Credit Facility”), which matures in April 2023. As of March 31, 2019, the USAC Credit Facility had $361 million of outstanding borrowings and no outstanding letters of credit. As of March 31, 2019, USAC had $1.24 billion of borrowing base availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of $493 million under the USAC Credit Facility. The weighted average interest rate on the total amount outstanding as of March 31, 2019 was 5.17%.
Covenants Related to Our Credit Agreements
We were in compliance with all requirements, tests, limitations, and covenants related to our credit agreements as of March 31, 2019.
CASH DISTRIBUTIONS
Distributions on ETO’s preferred units declared and paid by the Partnership subsequent to December 31, 2018 were as follows:
Period Ended
 
Record Date
 
Payment Date
 
Series A (1)
 
Series B (1)
 
Series C
 
Series D
December 31, 2018
 
February 1, 2019
 
February 15, 2019
 
$
31.2500

 
$
33.1250

 
$
0.4609

 
$
0.4766

March 31, 2019
 
May 1, 2019
 
May 15, 2019
 

 

 
0.4609

 
0.4766

(1)    Series A and Series B preferred unit distributions are paid on a semi-annual basis.
Sunoco LP Cash Distributions
The following are distributions declared and paid by Sunoco LP subsequent to December 31, 2018:
Quarter Ended
 
Record Date
 
Payment Date
 
Rate
December 31, 2018
 
February 6, 2019
 
February 14, 2019
 
$
0.8255

March 31, 2019
 
May 7, 2019
 
May 15, 2019
 
0.8255

USAC Cash Distributions
The following are distributions declared and paid by USAC subsequent to December 31, 2018:
Quarter Ended
 
Record Date
 
Payment Date
 
Rate
December 31, 2018
 
January 28, 2019
 
February 8, 2019
 
$
0.5250

March 31, 2019
 
April 29, 2019
 
May 10, 2019
 
0.5250

ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The selection and application of accounting policies is an important process that has developed as our business activities have evolved and as the accounting rules have developed. Accounting rules generally do not involve a selection among alternatives,


61


but involve an implementation and interpretation of existing rules, and the use of judgment applied to the specific set of circumstances existing in our business. We make every effort to properly comply with all applicable rules, and we believe the proper implementation and consistent application of the accounting rules are critical. We describe our significant accounting policies in Note 2 to our consolidated financial statements in the Partnership’s Annual Report on Form 10-K filed with the SEC on February 22, 2019. See Note 1 in “Item 1. Financial Statements” for information regarding recent changes to the Partnership’s critical accounting policies related to lease accounting.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 in “Item 1. Financial Statements” included in this Quarterly Report for information regarding recent accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in Item 3 updates, and should be read in conjunction with, information set forth in Part II, Item 7A included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 22, 2019, in addition to the accompanying notes and management’s discussion and analysis of financial condition and results of operations presented in Items 1 and 2 of this Quarterly Report on Form 10-Q. Our quantitative and qualitative disclosures about market risk are consistent with those discussed for the year ended December 31, 2018. Since December 31, 2018, there have been no material changes to our primary market risk exposures or how those exposures are managed.


62


Commodity Price Risk
The table below summarizes our commodity-related financial derivative instruments and fair values, including derivatives related to our consolidated subsidiaries, as well as the effect of an assumed hypothetical 10% change in the underlying price of the commodity. Dollar amounts are presented in millions.
 
March 31, 2019
 
December 31, 2018
 
Notional Volume
 
Fair Value Asset (Liability)
 
Effect of Hypothetical 10% Change
 
Notional Volume
 
Fair Value Asset (Liability)
 
Effect of Hypothetical 10% Change
Mark-to-Market Derivatives
 
 
 
 
 
 
 
 
 
 
 
(Trading)
 
 
 
 
 
 
 
 
 
 
 
Natural Gas (BBtu):
 
 
 
 
 
 
 
 
 
 
 
Fixed Swaps/Futures
610

 
$

 
$

 
468

 
$

 
$

Basis Swaps IFERC/NYMEX (1)
2,595

 
2

 

 
16,845

 
7

 
1

Options – Puts
10,000

 

 

 
10,000

 

 

Power (Megawatt):
 
 
 
 
 
 
 
 
 
 
 
Forwards
2,554,800

 
9

 
6

 
3,141,520

 
6

 
8

Futures
14,776

 
1

 

 
56,656

 

 

Options – Puts
(144,611
)
 

 

 
18,400

 

 

Options – Calls
391,740

 

 

 
284,800

 
1

 

(Non-Trading)
 
 
 
 
 
 
 
 
 
 
 
Natural Gas (BBtu):
 
 
 
 
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
(18,250
)
 
(45
)
 
10

 
(30,228
)
 
(52
)
 
13

Swing Swaps IFERC
39,685

 
(1
)
 
1

 
54,158

 
12

 

Fixed Swaps/Futures
80

 
(2
)
 

 
(1,068
)
 
19

 
1

Forward Physical Contracts
(27,096
)
 
5

 
7

 
(123,254
)
 
(1
)
 
32

NGL (MBbls) – Forwards/Swaps
(857
)
 
7

 
14

 
(2,135
)
 
67

 
67

Crude (MBbls) – Forwards/Swaps
13,832

 
50

 
14

 
20,888

 
(60
)
 
29

Refined Products (MBbls) – Futures
(592
)
 
1

 
4

 
(1,403
)
 
(8
)
 
6

Corn (thousand bushels)
(2,070
)
 

 

 
(1,920
)
 

 
1

Fair Value Hedging Derivatives
 
 
 
 
 
 
 
 
 
 
 
(Non-Trading)
 
 
 
 
 
 
 
 
 
 
 
Natural Gas (BBtu):
 
 
 
 
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
(30,958
)
 
2

 

 
(17,445
)
 
(4
)
 

Fixed Swaps/Futures
(30,958
)
 

 
9

 
(17,445
)
 
(10
)
 
6

(1) 
Includes aggregate amounts for open positions related to Houston Ship Channel, Waha Hub, NGPL TexOk, West Louisiana Zone and Henry Hub locations.
The fair values of the commodity-related financial positions have been determined using independent third-party prices, readily available market information and appropriate valuation techniques. Non-trading positions offset physical exposures to the cash market; none of these offsetting physical exposures are included in the above tables. Price-risk sensitivities were calculated by assuming a theoretical 10% change (increase or decrease) in price regardless of term or historical relationships between the contractual price of the instruments and the underlying commodity price. Results are presented in absolute terms and represent a potential gain or loss in net income or in other comprehensive income. In the event of an actual 10% change in prompt month natural gas prices, the fair value of our total derivative portfolio may not change by 10% due to factors such as when the financial instrument settles and the location to which the financial instrument is tied (i.e., basis swaps) and the relationship between prompt month and forward months.
Interest Rate Risk
As of March 31, 2019, we had $2.87 billion of floating rate debt outstanding. A hypothetical change of 100 basis points would result in a maximum potential change to interest expense of $29 million annually; however, our actual change in interest expense


63


may be less in a given period due to interest rate floors included in our variable rate debt instruments. We manage a portion of our interest rate exposure by utilizing interest rate swaps, including forward-starting interest rate swaps to lock-in the rate on a portion of anticipated debt issuances.
The following table summarizes our interest rate swaps outstanding (dollars in millions), none of which are designated as hedges for accounting purposes:
Term
 
Type(1)
 
Notional Amount Outstanding
March 31, 2019
 
December 31, 2018
July 2019(2)
 
Forward-starting to pay a fixed rate of 3.56% and receive a floating rate
 
$
400

 
$
400

July 2020(2)
 
Forward-starting to pay a fixed rate of 3.52% and receive a floating rate
 
400

 
400

July 2021(2)
 
Forward-starting to pay a fixed rate of 3.55% and receive a floating rate
 
400

 
400

March 2019
 
Pay a floating rate and receive a fixed rate of 1.42%
 

 
300

(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.  
A hypothetical change of 100 basis points in interest rates for these interest rate swaps would result in a net change in the fair value of interest rate derivatives and earnings (recognized in gains and losses on interest rate derivatives) of $280 million as of March 31, 2019. For the forward-starting interest rate swaps, a hypothetical change of 100 basis points in interest rates would not affect cash flows until the swaps are settled.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that information required to be disclosed by us, including our consolidated entities, in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Under the supervision and with the participation of senior management, including the Chief Executive Officer (“Principal Executive Officer”) and the Chief Financial Officer (“Principal Financial Officer”) of our General Partner, we evaluated our disclosure controls and procedures, as such term is defined under Rule 13a–15(e) promulgated under the Exchange Act. Based on this evaluation, the Principal Executive Officer and the Principal Financial Officer of our General Partner concluded that our disclosure controls and procedures were effective as of March 31, 2019 to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) is accumulated and communicated to management, including the Principal Executive Officer and Principal Financial Officer of our General Partner, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
In connection with the Partnership’s adoption of Topic 842 effective January 1, 2019, we have made appropriate design and implementation updates to our business processes, systems and internal controls to support recognition and disclosure under the new standard.  The Partnership’s adoption and implementation of Topic 842 is discussed in Note 1 and Note 12 to the consolidated financial statements included in “Item 1. Financial Statements.”
There have been no changes, other than those discussed above, in our internal controls over financial reporting (as defined in Rule 13(a)-15(f) or Rule 15d-15(f) of the Exchange Act) during the three months ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.



64


PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information regarding legal proceedings, see our Annual Report on Form 10-K filed with the SEC on February 22, 2019 and Note 10 – Regulatory Matters, Commitments, Contingencies and Environmental Liabilities of the Notes to Consolidated Financial Statements of Energy Transfer Operating, L.P. and Subsidiaries included in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.
Additionally, we have received notices of violations and potential fines under various federal, state and local provisions relating to the discharge of materials into the environment or protection of the environment. While we believe that even if any one or more of the environmental proceedings listed below were decided against us, it would not be material to our financial position, results of operations or cash flows, we are required to report governmental proceedings if we reasonably believe that such proceedings will result in monetary sanctions in excess of $100,000.
Pursuant to the instructions to Form 10-Q, matters disclosed in this Part II, Item 1 include any reportable legal proceeding (i) that has been terminated during the period covered by this report, (ii) that became a reportable event during the period covered by this report, or (iii) for which there has been a material development during the period covered by this report.
On September 10, 2018, a pipeline release and fire (the “Incident”) occurred on the Revolution pipeline, a natural gas gathering line, in the vicinity of Ivy Lane located in Center Township, Beaver County, Pennsylvania. There were no injuries, but there were evacuations of local residents as a precautionary measure. The Pennsylvania Department of Environmental Protection (“PADEP”) and the Pennsylvania Public Utility Commission (“PUC”) are investigating the incident. On October 29, 2018, PADEP issued a Compliance Order requiring our subsidiary, ETC Northeast Pipeline, LLC (“ETC Northeast”), to cease all earth disturbance activities at the site (except as necessary to repair and maintain existing Best Management Practices (“BMPs”) and temporarily stabilize disturbed areas), implement and/or maintain the Erosion and Sediment BMPs at the site, stake the limit of disturbance, identify and report all areas of non-compliance, and submit an updated Erosion and Sediment Control Plan, a Temporary Stabilization Plan, and an updated Post Construction Stormwater Management Plan. The scope of the Compliance Order has been expanded to include the disclosure to PADEP of alleged violations of environmental permits with respect to various construction and post-construction activities and restoration obligations along the 42-mile route of the Revolution line. ETC Northeast filed an appeal of the Compliance Order with the Pennsylvania Environmental Hearing Board.
On February 8, 2019, PADEP filed a Petition to Enforce the Compliance Order with Pennsylvania’s Commonwealth Court. The Court issued an Order on February 14, 2019 requiring the submission of an answer to the Petition on or before March 12, 2019, and scheduled a hearing on the Petition for March 26, 2019.  On March 12, 2019, ETC Northeast answered the Petition.  ETC Northeast and PADEP have since agreed to a Stipulated Order regarding the issues raised in the Compliance Order, which obviated the need for a hearing. The Commonwealth Court approved the Stipulated Order on March 26, 2019.  On February 8, 2019, PADEP also issued a Permit Hold on any requests for approvals/permits or permit amendments made by us or any of our subsidiaries for any projects 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 March 11, 2019. The Partnership continues to work through these issues with PADEP.
In January 2019, we received notice from the DOJ on behalf of the EPA that an enforcement action was being pursued under the Clean Water Act for an estimated 450 barrel crude oil release from the pipeline operated by SPLP and owned by Mid-Valley. The release purportedly occurred in October 2014 on a nature preserve located in Hamilton County, Ohio, near Cincinnati, Ohio.  After discovery and notification of the release, SPLP conducted substantial emergency response and remedial efforts in three phases and that work is substantially complete. DOJ, on behalf of United States Department of Interior Fish and Wildlife, and the Ohio Attorney General, on behalf of Ohio EPA, along with technical representatives from those agencies have also been discussing natural resource damage assessment claims.  The timing and outcome of this matter cannot be reasonably determined at this time. However, we do not expect there to be a material impact to our results of operations, cash flows or financial position.
On June 29, 2018, Luminant Energy Company, LLC (“Luminant”) filed informal and formal complaints against Energy Transfer Fuel, LP (“ETF”), with the Railroad Commission of Texas (“TRRC”). Luminant’s complaints allege that absent an agreement between Luminant and ETF regarding the rate to be charged for bundled transportation and storage service, ETF must file a statement of intent with the TRRC to change the rate charged to Luminant for this service. ETF filed a response to Luminant’s informal complaint on July 16, 2018. ETF filed a response and motion to dismiss Luminant’s formal complaint on July 23, 2018. On August 16, 2018, a Commission Administrative Law Judge (“ALJ”) granted ETF’s motion to dismiss Luminant’s claims relating to unlawful abandonment and discrimination. The ALJ denied ETF’s motion to dismiss Luminant’s claims regarding the rate charged for service and the procedural process applicable to rate changes. Luminant appealed the decision. The appeal was denied by operation of law on October 1, 2018. A mediation of the informal complaint filed by Luminant was held on September 17, 2018 and no decision was reached. The parties executed new agreements for transportation and storage services effective


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December 1, 2018. Luminant has withdrawn its formal and informal complaints against ETF, (unopposed by ETF), as of January 2, 2019.
The Ohio Environmental Protection Agency (“Ohio EPA”) has alleged that various environmental violations have occurred during construction of the Rover pipeline project. The alleged violations include inadvertent returns of drilling muds and fluids at horizontal directional drilling (“HDD”) locations in Ohio that affected waters of the State, storm water control violations, hydrostatic permit violations involving the alleged discharge of effluent with greater levels of pollutants than the permits allowed and allegedly not properly sampling or monitoring effluent for required parameters or reporting those alleged violations, and engaging in construction activities without an effective water quality certification. Although Rover has successfully completed clean-up mitigation for the alleged violations to Ohio EPA’s satisfaction, the Ohio EPA has proposed penalties and restitution of approximately $2.6 million in connection with the alleged violations and is seeking certain injunctive relief. The Ohio Attorney General filed a complaint in the Court of Common Pleas of Stark County, Ohio to obtain these remedies and that case remains pending and is in the early stages. Rover and other defendants filed several motions to dismiss and Ohio EPA filed a motion in opposition. The State’s opposition to those motions was filed on October 12, 2018. Rover and other defendants filed their replies on November 2, 2018. On March 13, 2019, the court granted Rover and the other Defendants’ motion to dismiss on all counts. On April 10, 2019, the Ohio EPA filed a notice of appeal. The timing or outcome of this matter cannot be reasonably determined at this time; however, we do not expect there to be a material impact to our results of operations, cash flows or financial position.
In addition, on May 10, 2017, the FERC prohibited Rover from conducting HDD activities at 27 sites in Ohio. On July 31, 2017, the FERC issued an independent third party assessment of what led to the release at the Tuscarawas River site and what Rover can do to prevent reoccurrence once the HDD suspension is lifted. Rover has implemented the suggestions in the assessment and additional voluntary protocols. The FERC authorized Rover to resume HDD activities at all sites and all Rover HDD activities are now complete.
In late 2016, FERC Enforcement Staff began a non-public investigation of Rover’s demolition of the Stoneman House, a potential historic structure, in connection with Rover’s application for permission to construct a new interstate natural gas pipeline and related facilities. Rover and ETO are cooperating with the investigation. In March and April 2017, and again in April 2018, Enforcement Staff provided Rover its non-public preliminary findings regarding its investigation. The company disagrees with those findings and intends to vigorously defend against any potential penalty. Given the stage of the proceeding, and the non-public nature of the investigation, ETO is unable at this time to provide an assessment of the potential outcome or range of potential liability, if any.
For a description of other legal proceedings, see Note 10 to our consolidated financial statements included in “Item 1. Financial Statements.”
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors described in Part I, Item 1A in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 22, 2019.


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ITEM 6. EXHIBITS
The exhibits listed below are filed or furnished, as indicated, as part of this report:
Exhibit Number
 
Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.INS*
 
XBRL Instance Document
101.SCH*
 
XBRL Taxonomy Extension Schema Document
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document
*
 
Filed herewith.
**
 
Furnished herewith.


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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
ENERGY TRANSFER OPERATING, L.P.
 
 
 
 
 
 
By:
Energy Transfer Partners GP, L.P.,
 
 
 
its general partner
 
 
 
 
 
 
By:
Energy Transfer Partners, L.L.C.,
 
 
 
its general partner
 
 
 
 
Date:
May 9, 2019
By:
/s/ A. Troy Sturrock
 
 
 
A. Troy Sturrock
 
 
 
Senior Vice President, Controller and Principal Accounting Officer
(duly authorized to sign on behalf of the registrant)


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