Energy Transfer LP - Quarter Report: 2023 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-32740
ENERGY TRANSFER LP
(Exact name of registrant as specified in its charter)
| Delaware | 30-0108820 | |||||||
| (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)
(214) 981-0700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Units | ET | New York Stock Exchange | ||||||||||||
| 7.375% Series C Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units | ETprC | New York Stock Exchange | ||||||||||||
| 7.625% Series D Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units | ETprD | New York Stock Exchange | ||||||||||||
| 7.600% Series E Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units | ETprE | New York Stock Exchange | ||||||||||||
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
At April 28, 2023, the registrant had 3,096,774,774 Common Units outstanding.
FORM 10-Q
ENERGY TRANSFER LP AND SUBSIDIARIES
TABLE OF CONTENTS
2
Definitions
References to the “Partnership” or “Energy Transfer” refer to Energy Transfer LP. In addition, the following is a list of certain acronyms and terms used throughout this document:
| /d | per day | ||||||||||
| AOCI | accumulated other comprehensive income | ||||||||||
| BBtu | billion British thermal units | ||||||||||
| Citrus | Citrus, LLC, a 50/50 joint venture which owns Florida Gas Transmission Company, LLC, which owns the Florida Gas Transmission Pipeline | ||||||||||
| Dakota Access | Dakota Access, LLC, a non-wholly-owned subsidiary of Energy Transfer and/or Dakota Access Pipeline | ||||||||||
| Energy Transfer Canada | Energy Transfer Canada ULC, a non-wholly-owned subsidiary of Energy Transfer until its sale in August 2022 | ||||||||||
| Energy Transfer Preferred Units | Collectively, the Series A Preferred Units, Series B Preferred Units, Series C Preferred Units, Series D Preferred Units, Series E Preferred Units, Series F Preferred Units, Series G Preferred Units and Series H Preferred Units | ||||||||||
| Energy Transfer R&M | Energy Transfer (R&M), LLC (formerly Sunoco (R&M), LLC) | ||||||||||
| ETC Sunoco | ETC Sunoco Holdings LLC (formerly Sunoco, Inc.), a wholly-owned subsidiary of Energy Transfer | ||||||||||
| ETO | Energy Transfer Operating, L.P., formerly a non-wholly-owned subsidiary of Energy Transfer until its merger into the Partnership in April 2021 | ||||||||||
| Exchange Act | Securities Exchange Act of 1934, as amended | ||||||||||
| Explorer | Explorer Pipeline Company | ||||||||||
| FERC | Federal Energy Regulatory Commission | ||||||||||
| GAAP | accounting principles generally accepted in the United States of America | ||||||||||
| General Partner | LE GP, LLC, the general partner of Energy Transfer | ||||||||||
| HFOTCO | HFOTCO LLC, a wholly-owned subsidiary of Energy Transfer which owns the Houston Terminal | ||||||||||
| IFERC | Inside FERC’s Gas Market Report | ||||||||||
| LIBOR | London Interbank Offered Rate | ||||||||||
| MBbls | thousand barrels | ||||||||||
| MEP | Midcontinent Express Pipeline LLC | ||||||||||
| NGL | natural gas liquid, such as propane, butane and natural gasoline | ||||||||||
| NYMEX | New York Mercantile Exchange | ||||||||||
| OTC | over-the-counter | ||||||||||
| Panhandle | Panhandle Eastern Pipe Line Company, LP, a wholly-owned subsidiary of Energy Transfer and/or Panhandle Eastern Pipe Line | ||||||||||
| Partnership Agreement | Energy Transfer’s Third Amended and Restated Agreement of Limited Partnership, as amended to date | ||||||||||
| PHMSA | Pipeline and Hazardous Materials Safety Administration | ||||||||||
| Rover | Rover Pipeline LLC, a non-wholly-owned subsidiary of Energy Transfer and/or Rover Pipeline | ||||||||||
| SEC | Securities and Exchange Commission | ||||||||||
| Series A Preferred Units | 6.250% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units | ||||||||||
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| 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 | ||||||||||
| Series F Preferred Units | 6.750% Series F Fixed-Rate Reset Cumulative Redeemable Perpetual Preferred Units | ||||||||||
| Series G Preferred Units | 7.125% Series G Fixed-Rate Reset Cumulative Redeemable Perpetual Preferred Units | ||||||||||
| Series H Preferred Units | 6.500% Series H Fixed-Rate Reset Cumulative Redeemable Perpetual Preferred Units | ||||||||||
| SOFR | Secured overnight financing rate | ||||||||||
| SPLP | Sunoco Pipeline L.P., a wholly-owned subsidiary of Energy Transfer | ||||||||||
| Transwestern | Transwestern Pipeline Company, LLC, a wholly-owned subsidiary of Energy Transfer and/or Transwestern Pipeline | ||||||||||
| USAC | USA Compression Partners, LP, a publicly traded partnership and consolidated subsidiary of Energy Transfer | ||||||||||
| White Cliffs | White Cliffs Pipeline, L.L.C. | ||||||||||
4
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENERGY TRANSFER LP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(unaudited)
| March 31, 2023 | December 31, 2022 | ||||||||||
| ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 330 | $ | 257 | |||||||
Accounts receivable, net | 8,269 | 8,466 | |||||||||
Accounts receivable from related companies | 108 | 93 | |||||||||
Inventories | 2,047 | 2,461 | |||||||||
Income taxes receivable | 64 | 68 | |||||||||
Derivative assets | 6 | 10 | |||||||||
Other current assets | 546 | 726 | |||||||||
Total current assets | 11,370 | 12,081 | |||||||||
Property, plant and equipment | 106,643 | 105,996 | |||||||||
Accumulated depreciation and depletion | (26,639) | (25,685) | |||||||||
| Property, plant and equipment, net | 80,004 | 80,311 | |||||||||
| Investments in unconsolidated affiliates | 2,861 | 2,893 | |||||||||
Lease right-of-use assets, net | 813 | 819 | |||||||||
Other non-current assets, net | 1,585 | 1,558 | |||||||||
Intangible assets, net | 5,322 | 5,415 | |||||||||
Goodwill | 2,566 | 2,566 | |||||||||
Total assets | $ | 104,521 | $ | 105,643 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
ENERGY TRANSFER LP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Dollars in million)
(unaudited)
| March 31, 2023 | December 31, 2022 | ||||||||||
| LIABILITIES AND EQUITY | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 6,934 | $ | 6,952 | |||||||
Accounts payable to related companies | 9 | 17 | |||||||||
Derivative liabilities | 4 | 23 | |||||||||
Operating lease current liabilities | 45 | 45 | |||||||||
Accrued and other current liabilities | 3,168 | 3,329 | |||||||||
Current maturities of long-term debt | 2 | 2 | |||||||||
Total current liabilities | 10,162 | 10,368 | |||||||||
Long-term debt, less current maturities | 47,229 | 48,260 | |||||||||
Non-current derivative liabilities | 43 | 23 | |||||||||
Non-current operating lease liabilities | 791 | 798 | |||||||||
Deferred income taxes | 3,759 | 3,701 | |||||||||
Other non-current liabilities | 1,374 | 1,341 | |||||||||
Commitments and contingencies | |||||||||||
Redeemable noncontrolling interests | 494 | 493 | |||||||||
Equity: | |||||||||||
Limited Partners: | |||||||||||
| Preferred Unitholders | 6,080 | 6,051 | |||||||||
| Common Unitholders | 27,057 | 26,960 | |||||||||
General Partner | (2) | (2) | |||||||||
| Accumulated other comprehensive income | 13 | 16 | |||||||||
Total partners’ capital | 33,148 | 33,025 | |||||||||
Noncontrolling interests | 7,521 | 7,634 | |||||||||
Total equity | 40,669 | 40,659 | |||||||||
Total liabilities and equity | $ | 104,521 | $ | 105,643 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
ENERGY TRANSFER LP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per unit data)
(unaudited)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
REVENUES: | |||||||||||
Refined product sales | $ | 5,454 | $ | 5,446 | |||||||
Crude sales | 5,478 | 5,302 | |||||||||
NGL sales | 4,160 | 5,109 | |||||||||
Gathering, transportation and other fees | 2,777 | 2,693 | |||||||||
Natural gas sales | 899 | 1,753 | |||||||||
Other | 227 | 188 | |||||||||
Total revenues | 18,995 | 20,491 | |||||||||
COSTS AND EXPENSES: | |||||||||||
Cost of products sold | 14,610 | 16,138 | |||||||||
Operating expenses | 1,025 | 949 | |||||||||
Depreciation, depletion and amortization | 1,059 | 1,028 | |||||||||
Selling, general and administrative | 238 | 230 | |||||||||
| Impairment losses | 1 | 300 | |||||||||
Total costs and expenses | 16,933 | 18,645 | |||||||||
OPERATING INCOME | 2,062 | 1,846 | |||||||||
OTHER INCOME (EXPENSE): | |||||||||||
Interest expense, net of interest capitalized | (619) | (559) | |||||||||
| Equity in earnings of unconsolidated affiliates | 88 | 56 | |||||||||
| Gains (losses) on interest rate derivatives | (20) | 114 | |||||||||
Other, net | 7 | 21 | |||||||||
| INCOME BEFORE INCOME TAX EXPENSE (BENEFIT) | 1,518 | 1,478 | |||||||||
| Income tax expense (benefit) | 71 | (9) | |||||||||
| NET INCOME | 1,447 | 1,487 | |||||||||
| Less: Net income attributable to noncontrolling interests | 321 | 205 | |||||||||
Less: Net income attributable to redeemable noncontrolling interests | 13 | 13 | |||||||||
| NET INCOME ATTRIBUTABLE TO PARTNERS | 1,113 | 1,269 | |||||||||
| General Partner’s interest in net income | 1 | 1 | |||||||||
| Preferred Unitholders’ interest in net income | 109 | 106 | |||||||||
| Common Unitholders’ interest in net income | $ | 1,003 | $ | 1,162 | |||||||
| NET INCOME PER COMMON UNIT: | |||||||||||
Basic | $ | 0.32 | $ | 0.38 | |||||||
Diluted | $ | 0.32 | $ | 0.37 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
7
ENERGY TRANSFER LP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
(unaudited)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net income | $ | 1,447 | $ | 1,487 | |||||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Change in value of available-for-sale securities | 1 | (5) | |||||||||
| Actuarial gain (loss) related to pension and other postretirement benefit plans | (5) | 7 | |||||||||
| Foreign currency translation adjustments | 1 | 11 | |||||||||
| Change in other comprehensive income from unconsolidated affiliates | — | 12 | |||||||||
| (3) | 25 | ||||||||||
| Comprehensive income | 1,444 | 1,512 | |||||||||
| Less: Comprehensive income attributable to noncontrolling interests | 321 | 210 | |||||||||
| Less: Comprehensive income attributable to redeemable noncontrolling interests | 13 | 13 | |||||||||
| Comprehensive income attributable to partners | $ | 1,110 | $ | 1,289 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
8
ENERGY TRANSFER LP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars in millions)
(unaudited)
| Common Unitholders | Preferred Unitholders | General Partner | AOCI | Noncontrolling Interests | Total | ||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | 26,960 | $ | 6,051 | $ | (2) | $ | 16 | $ | 7,634 | $ | 40,659 | |||||||||||||||||||||||
| Distributions to partners | (920) | (80) | (1) | — | — | (1,001) | |||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | (441) | (441) | |||||||||||||||||||||||||||||
| Capital contributions from noncontrolling interests | — | — | — | — | 3 | 3 | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | (3) | — | (3) | |||||||||||||||||||||||||||||
| Other, net | 14 | — | — | — | 4 | 18 | |||||||||||||||||||||||||||||
| Net income, excluding amounts attributable to redeemable noncontrolling interests | 1,003 | 109 | 1 | — | 321 | 1,434 | |||||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | 27,057 | $ | 6,080 | $ | (2) | $ | 13 | $ | 7,521 | $ | 40,669 | |||||||||||||||||||||||
| Common Unitholders | Preferred Unitholders | General Partner | AOCI | Noncontrolling Interests | Total | ||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | 25,230 | $ | 6,051 | $ | (4) | $ | 23 | $ | 8,045 | $ | 39,345 | |||||||||||||||||||||||
| Distributions to partners | (528) | (80) | — | — | — | (608) | |||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | (307) | (307) | |||||||||||||||||||||||||||||
| Capital contributions from noncontrolling interests | — | — | — | — | 373 | 373 | |||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | 20 | 5 | 25 | |||||||||||||||||||||||||||||
| Other, net | 17 | — | — | — | 10 | 27 | |||||||||||||||||||||||||||||
| Net income, excluding amounts attributable to redeemable noncontrolling interests | 1,162 | 106 | 1 | — | 205 | 1,474 | |||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | 25,881 | $ | 6,077 | $ | (3) | $ | 43 | $ | 8,331 | $ | 40,329 | |||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
9
ENERGY TRANSFER LP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(unaudited)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| OPERATING ACTIVITIES: | |||||||||||
| Net income | $ | 1,447 | $ | 1,487 | |||||||
| Reconciliation of net income to net cash provided by operating activities: | |||||||||||
| Depreciation, depletion and amortization | 1,059 | 1,028 | |||||||||
| Deferred income taxes | 53 | 32 | |||||||||
| Inventory valuation adjustments | (29) | (120) | |||||||||
| Non-cash compensation expense | 37 | 36 | |||||||||
| Impairment losses | 1 | 300 | |||||||||
| Distributions on unvested awards | (20) | (15) | |||||||||
| Equity in earnings of unconsolidated affiliates | (88) | (56) | |||||||||
| Distributions from unconsolidated affiliates | 87 | 44 | |||||||||
| Other non-cash | 2 | (46) | |||||||||
| Net change in operating assets and liabilities, net of effects of acquisitions | 801 | (320) | |||||||||
| Net cash provided by operating activities | 3,350 | 2,370 | |||||||||
| INVESTING ACTIVITIES: | |||||||||||
| Cash paid for acquisitions, net of cash received | — | (589) | |||||||||
| Capital expenditures, excluding allowance for equity funds used during construction | (853) | (752) | |||||||||
| Contributions in aid of construction costs | 16 | 20 | |||||||||
| Distributions from unconsolidated affiliates in excess of cumulative earnings | 30 | 46 | |||||||||
| Proceeds from sales of other assets | 4 | 4 | |||||||||
| Net cash used in investing activities | (803) | (1,271) | |||||||||
| FINANCING ACTIVITIES: | |||||||||||
| Proceeds from borrowings | 7,582 | 5,658 | |||||||||
| Repayments of debt | (8,605) | (5,428) | |||||||||
| Capital contributions from noncontrolling interests | 3 | 373 | |||||||||
| Distributions to partners | (1,001) | (608) | |||||||||
| Distributions to noncontrolling interests | (441) | (307) | |||||||||
| Distributions to redeemable noncontrolling interests | (12) | (12) | |||||||||
| Net cash used in financing activities | (2,474) | (324) | |||||||||
| Increase in cash and cash equivalents | 73 | 775 | |||||||||
| Cash and cash equivalents, beginning of period | 257 | 336 | |||||||||
| Cash and cash equivalents, end of period | $ | 330 | $ | 1,111 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
10
ENERGY TRANSFER LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollar and unit amounts, except per unit data, are in millions)
(unaudited)
1.ORGANIZATION AND BASIS OF PRESENTATION
Organization
The consolidated financial statements presented herein contain the results of Energy Transfer LP and its subsidiaries (the “Partnership,” “we,” “us,” “our” or “Energy Transfer”).
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 included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 17, 2023. In the opinion of the Partnership’s management, such financial information reflects all adjustments necessary for a fair presentation of the financial position and the results of operations for such interim periods in accordance with GAAP. All intercompany items and transactions have been eliminated in consolidation. Certain information and 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. The Partnership owns the general partner interest, incentive distribution rights and 28.5 million common units of Sunoco LP, and the general partner interests and 46.1 million common units of USAC.
Certain prior period amounts have 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 requires the use of estimates and assumptions made by management that affect the reported amounts of assets, liabilities, revenues, expenses and the accrual for 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.
2.ACQUISITIONS
Lotus Midstream Acquisition
On May 2, 2023, Energy Transfer acquired Lotus Midstream Operations, LLC (“Lotus Midstream”) for total consideration of $900 million in cash and approximately 44.5 million newly issued Energy Transfer common units. Lotus Midstream owns and operates Centurion Pipeline Company LLC, an integrated crude midstream platform located in the Permian Basin.
Sunoco LP Acquisition
On May 1, 2023, Sunoco LP completed the acquisition of 16 refined product terminals located across the East Coast and Midwest from Zenith Energy for $110 million.
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. The Partnership’s consolidated balance sheets did not include any material amounts of restricted cash as of March 31, 2023 or December 31, 2022.
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.
11
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, | |||||||||||
| 2023 | 2022 | ||||||||||
Accounts receivable | $ | 197 | $ | (2,412) | |||||||
Accounts receivable from related companies | (3) | (17) | |||||||||
Inventories | 429 | 153 | |||||||||
Other current assets | 188 | (119) | |||||||||
Other non-current assets, net | (4) | 45 | |||||||||
Accounts payable | (18) | 1,885 | |||||||||
Accounts payable to related companies | (11) | 7 | |||||||||
Accrued and other current liabilities | (13) | 230 | |||||||||
Other non-current liabilities | 31 | 61 | |||||||||
Derivative assets and liabilities, net | 5 | (153) | |||||||||
| Net change in operating assets and liabilities, net of effects of acquisitions | $ | 801 | $ | (320) | |||||||
Non-cash investing and financing activities were as follows:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
Accrued capital expenditures | $ | 436 | $ | 475 | |||||||
| Lease assets obtained in exchange for new lease liabilities | 1 | 56 | |||||||||
Distribution reinvestment | 23 | 12 | |||||||||
4.INVENTORIES
Inventories consisted of the following:
| March 31, 2023 | December 31, 2022 | ||||||||||
Natural gas, NGLs and refined products | $ | 1,419 | $ | 1,802 | |||||||
| Crude oil | 184 | 246 | |||||||||
| Spare parts and other | 444 | 413 | |||||||||
| Total inventories | $ | 2,047 | $ | 2,461 | |||||||
Sunoco LP’s fuel inventories are stated at the lower of cost or market using the last-in, first-out (“LIFO”) method. As of March 31, 2023 and December 31, 2022, the carrying value of Sunoco LP’s fuel inventory included lower of cost or market reserves of $87 million and $116 million, respectively. For the three months ended March 31, 2023 and 2022, the Partnership’s consolidated income statements did not include any material amounts of income from the liquidation of Sunoco LP’s LIFO fuel inventory. For the three months ended March 31, 2023 and 2022, the Partnership’s cost of products sold included favorable inventory adjustments of $29 million and $120 million, respectively, related to Sunoco LP’s LIFO inventory.
5.FAIR VALUE MEASURES
We have commodity derivatives and interest rate derivatives that are accounted for as assets and liabilities at fair value in our consolidated balance sheets. We determine the fair value of our assets and liabilities subject to fair value measurement by using the highest possible “level” of inputs. Level 1 inputs are observable quotes in an active market for identical assets and liabilities. We consider the valuation of marketable securities and commodity derivatives transacted through a clearing broker with a published price from the appropriate exchange as a Level 1 valuation. Level 2 inputs are inputs observable for similar assets and liabilities. We consider OTC commodity derivatives entered into directly with third parties as a Level 2 valuation since the values of these derivatives are quoted on an exchange for similar transactions. Additionally, we
12
consider options transacted through a clearing broker as having Level 2 inputs due to the level of activity of these contracts on the exchange in which they trade. The valuation methodologies employed for our interest rate derivatives do not necessitate material judgment, and the inputs are observed from actively quoted public markets and therefore are categorized in Level 2. Level 3 inputs are unobservable. During the three months ended March 31, 2023, 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, 2023 and December 31, 2022 based on inputs used to derive their fair values:
| Fair Value Measurements at March 31, 2023 | |||||||||||||||||
| Fair Value Total | Level 1 | Level 2 | |||||||||||||||
Assets: | |||||||||||||||||
Commodity derivatives: | |||||||||||||||||
Natural Gas: | |||||||||||||||||
Basis Swaps IFERC/NYMEX | $ | 3 | $ | 3 | $ | — | |||||||||||
Swing Swaps IFERC | 4 | 4 | — | ||||||||||||||
Fixed Swaps/Futures | 31 | 31 | — | ||||||||||||||
Forward Physical Contracts | 6 | — | 6 | ||||||||||||||
Power: | |||||||||||||||||
Forwards | 45 | — | 45 | ||||||||||||||
Futures | 9 | 9 | — | ||||||||||||||
Options – Calls | 2 | 2 | — | ||||||||||||||
NGLs – Forwards/Swaps | 219 | 219 | — | ||||||||||||||
Refined Products – Futures | 1 | 1 | — | ||||||||||||||
Crude – Forwards/Swaps | 41 | 41 | — | ||||||||||||||
Total commodity derivatives | 361 | 310 | 51 | ||||||||||||||
Other non-current assets | 28 | 18 | 10 | ||||||||||||||
Total assets | $ | 389 | $ | 328 | $ | 61 | |||||||||||
Liabilities: | |||||||||||||||||
Interest rate derivatives | $ | (43) | $ | — | $ | (43) | |||||||||||
Commodity derivatives: | |||||||||||||||||
Natural Gas: | |||||||||||||||||
Basis Swaps IFERC/NYMEX | (11) | (11) | — | ||||||||||||||
Swing Swaps IFERC | (2) | (2) | — | ||||||||||||||
Fixed Swaps/Futures | (2) | (2) | — | ||||||||||||||
Forward Physical Contracts | (1) | — | (1) | ||||||||||||||
Power: | |||||||||||||||||
Forwards | (45) | — | (45) | ||||||||||||||
Futures | (7) | (7) | — | ||||||||||||||
Options – Calls | (1) | (1) | — | ||||||||||||||
NGLs – Forwards/Swaps | (205) | (205) | — | ||||||||||||||
Refined Products – Futures | (16) | (16) | — | ||||||||||||||
Crude – Forwards/Swaps | (19) | (19) | — | ||||||||||||||
Total commodity derivatives | (309) | (263) | (46) | ||||||||||||||
Total liabilities | $ | (352) | $ | (263) | $ | (89) | |||||||||||
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| Fair Value Measurements at December 31, 2022 | |||||||||||||||||
| Fair Value Total | Level 1 | Level 2 | |||||||||||||||
Assets: | |||||||||||||||||
Commodity derivatives: | |||||||||||||||||
Natural Gas: | |||||||||||||||||
Basis Swaps IFERC/NYMEX | $ | 60 | $ | 60 | $ | — | |||||||||||
Swing Swaps IFERC | 75 | 75 | — | ||||||||||||||
Fixed Swaps/Futures | 113 | 113 | — | ||||||||||||||
Forward Physical Contracts | 10 | — | 10 | ||||||||||||||
Power: | |||||||||||||||||
Forwards | 52 | — | 52 | ||||||||||||||
Futures | 3 | 3 | — | ||||||||||||||
NGLs – Forwards/Swaps | 317 | 317 | — | ||||||||||||||
Refined Products – Futures | 20 | 20 | — | ||||||||||||||
Crude – Forwards/Swaps | 38 | 38 | — | ||||||||||||||
Total commodity derivatives | 688 | 626 | 62 | ||||||||||||||
Other non-current assets | 27 | 18 | 9 | ||||||||||||||
Total assets | $ | 715 | $ | 644 | $ | 71 | |||||||||||
Liabilities: | |||||||||||||||||
Interest rate derivatives | $ | (23) | $ | — | $ | (23) | |||||||||||
Commodity derivatives: | |||||||||||||||||
Natural Gas: | |||||||||||||||||
Basis Swaps IFERC/NYMEX | (25) | (25) | — | ||||||||||||||
Swing Swaps IFERC | (12) | (12) | — | ||||||||||||||
Fixed Swaps/Futures | (4) | (4) | — | ||||||||||||||
Forward Physical Contracts | (2) | — | (2) | ||||||||||||||
Power: | |||||||||||||||||
Forwards | (51) | — | (51) | ||||||||||||||
Futures | (3) | (3) | — | ||||||||||||||
NGLs – Forwards/Swaps | (358) | (358) | — | ||||||||||||||
Refined Products – Futures | (59) | (59) | — | ||||||||||||||
Crude – Forwards/Swaps | (12) | (12) | — | ||||||||||||||
Total commodity derivatives | (526) | (473) | (53) | ||||||||||||||
Total liabilities | $ | (549) | $ | (473) | $ | (76) | |||||||||||
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, 2023 were $44.43 billion and $47.23 billion, respectively. As of December 31, 2022, the aggregate fair value and carrying amount of our consolidated debt obligations were $45.42 billion and $48.26 billion, respectively. The fair value of our consolidated debt obligations is a Level 2 valuation based on the respective debt obligations’ observable inputs for similar liabilities.
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6.NET INCOME PER COMMON UNIT
A reconciliation of income or loss and weighted average units used in computing basic and diluted income per common unit is as follows:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net income | $ | 1,447 | $ | 1,487 | |||||||
| Less: Net income attributable to noncontrolling interests | 321 | 205 | |||||||||
Less: Net income attributable to redeemable noncontrolling interests | 13 | 13 | |||||||||
| Net income, net of noncontrolling interests | 1,113 | 1,269 | |||||||||
| Less: General Partner’s interest in net income | 1 | 1 | |||||||||
| Less: Preferred Unitholders’ interest in net income | 109 | 106 | |||||||||
| Common Unitholders’ interest in net income | $ | 1,003 | $ | 1,162 | |||||||
| Basic Income per Common Unit: | |||||||||||
| Weighted average common units | 3,095.5 | 3,083.5 | |||||||||
| Basic income per common unit | $ | 0.32 | $ | 0.38 | |||||||
| Diluted Income per Common Unit: | |||||||||||
| Common Unitholders’ interest in net income | $ | 1,003 | $ | 1,162 | |||||||
Dilutive effect of equity-based compensation of subsidiaries (1) | — | 1 | |||||||||
| Diluted income attributable to Common Unitholders | $ | 1,003 | $ | 1,161 | |||||||
| Weighted average common units | 3,095.5 | 3,083.5 | |||||||||
Dilutive effect of unvested restricted unit awards (1) | 19.9 | 17.0 | |||||||||
| Weighted average common units, assuming dilutive effect of unvested restricted unit awards | 3,115.4 | 3,100.5 | |||||||||
| Diluted income per common unit | $ | 0.32 | $ | 0.37 | |||||||
(1)Dilutive effects are excluded from the calculation for periods where the impact would have been antidilutive.
7.DEBT OBLIGATIONS
Senior Notes
In the first quarter of 2023, the Partnership redeemed $350 million aggregate principal amount of its 3.45% Senior Notes due January 2023, $800 million aggregate principal amount of its 3.60% Senior Notes due February 2023 and $1.00 billion aggregate principal amount of its 4.25% Senior Notes due March 2023 using proceeds from its Five-Year Credit Facility (defined below).
Credit Facilities and Commercial Paper
Five-Year Credit Facility
The Partnership’s revolving credit facility (the “Five-Year Credit Facility”) allows for unsecured borrowings up to $5.00 billion and matures in April 2027. The Five-Year Credit Facility contains an accordion feature, under which the total aggregate commitment may be increased up to $7.00 billion under certain conditions.
As of March 31, 2023, the Five-Year Credit Facility had $1.96 billion of outstanding borrowings, of which $757 million consisted of commercial paper. The amount available for future borrowings was $3.01 billion, after accounting for outstanding letters of credit in the amount of $32 million. The weighted average interest rate on the total amount outstanding as of March 31, 2023 was 6.05%.
Sunoco LP Credit Facility
As of March 31, 2023, Sunoco LP’s credit facility had $800 million of outstanding borrowings and $7 million in standby letters of credit and matures in April 2027. The amount available for future borrowings at March 31, 2023 was $693 million. The weighted average interest rate on the total amount outstanding as of March 31, 2023 was 6.61%.
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USAC Credit Facility
As of March 31, 2023, USAC’s credit facility, which matures in December 2026, had $709 million of outstanding borrowings and no outstanding letters of credit. As of March 31, 2023, USAC had $891 million of availability under its credit facility, and subject to compliance with applicable financial covenants, available borrowing capacity of $375 million. The weighted average interest rate on the total amount outstanding as of March 31, 2023 was 7.38%.
Compliance with our Covenants
We and our subsidiaries were in compliance with all requirements, tests, limitations and covenants related to our debt agreements as of March 31, 2023. For the quarter ended March 31, 2023, our leverage ratio, as calculated pursuant to the covenant related to our revolving credit facility, was 3.26x.
8.REDEEMABLE NONCONTROLLING INTERESTS
Certain redeemable noncontrolling interests in the Partnership’s subsidiaries were reflected as mezzanine equity on the consolidated balance sheets. Redeemable noncontrolling interests as of March 31, 2023 and December 31, 2022 included a balance of $477 million related to the USAC Series A preferred units. Redeemable noncontrolling interests also included a balance of $17 million as of March 31, 2023 and $16 million as of December 31, 2022 related to noncontrolling interest holders in one of the Partnership’s consolidated subsidiaries that have the option to sell their interests to the Partnership.
9.EQUITY
Energy Transfer Common Units
Changes in Energy Transfer common units during the three months ended March 31, 2023 were as follows:
| Number of Units | |||||
| Number of common units at December 31, 2022 | 3,094.4 | ||||
| Common units issued under the distribution reinvestment plan | 1.8 | ||||
| Common units vested under equity incentive plans and other | 0.5 | ||||
| Number of common units at March 31, 2023 | 3,096.7 | ||||
Energy Transfer Repurchase Program
During the three months ended March 31, 2023, Energy Transfer did not repurchase any of its common units under its current buyback program. As of March 31, 2023, $880 million remained available to repurchase under the current program.
Energy Transfer Distribution Reinvestment Program
During the three months ended March 31, 2023, distributions of $23 million were reinvested under the distribution reinvestment program. As of March 31, 2023, a total of 10 million Energy Transfer common units remained available to be issued under the existing registration statement in connection with the distribution reinvestment program.
Cash Distributions on Energy Transfer Common Units
Distributions declared and/or paid with respect to Energy Transfer common units subsequent to December 31, 2022 were as follows:
| Quarter Ended | Record Date | Payment Date | Rate | |||||||||||||||||
| December 31, 2022 | February 7, 2023 | February 21, 2023 | $ | 0.3050 | ||||||||||||||||
| March 31, 2023 | May 8, 2023 | May 22, 2023 | 0.3075 | |||||||||||||||||
Energy Transfer Preferred Units
As of March 31, 2023 and December 31, 2022, Energy Transfer’s outstanding preferred units included 950,000 Series A Preferred Units, 550,000 Series B Preferred Units, 18,000,000 Series C Preferred Units, 17,800,000 Series D Preferred Units, 32,000,000 Series E Preferred Units, 500,000 Series F Preferred Units, 1,484,780 Series G Preferred Units and 900,000 Series H Preferred Units.
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The following table summarizes changes in the Energy Transfer Preferred Units:
| Preferred Unitholders | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A | Series B | Series C | Series D | Series E | Series F | Series G | Series H | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | 958 | $ | 556 | $ | 440 | $ | 434 | $ | 786 | $ | 496 | $ | 1,488 | $ | 893 | $ | 6,051 | |||||||||||||||||||||||||||||||||||
| Distributions to partners | (30) | (18) | (8) | (9) | (15) | — | — | — | (80) | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | 18 | 9 | 8 | 9 | 15 | 8 | 27 | 15 | 109 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | 946 | $ | 547 | $ | 440 | $ | 434 | $ | 786 | $ | 504 | $ | 1,515 | $ | 908 | $ | 6,080 | |||||||||||||||||||||||||||||||||||
| Preferred Unitholders | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A | Series B | Series C | Series D | Series E | Series F | Series G | Series H | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | 958 | $ | 556 | $ | 440 | $ | 434 | $ | 786 | $ | 496 | $ | 1,488 | $ | 893 | $ | 6,051 | |||||||||||||||||||||||||||||||||||
| Distributions to partners | (30) | (18) | (8) | (9) | (15) | — | — | — | (80) | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | 15 | 9 | 8 | 9 | 15 | 8 | 27 | 15 | 106 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | 943 | $ | 547 | $ | 440 | $ | 434 | $ | 786 | $ | 504 | $ | 1,515 | $ | 908 | $ | 6,077 | |||||||||||||||||||||||||||||||||||
Cash Distributions on Energy Transfer Preferred Units
Distributions declared on the Energy Transfer Preferred Units were as follows:
| Period Ended | Record Date | Payment Date | Series A(1) | Series B (1) | Series C | Series D | Series E | Series F (1) | Series G (1) | Series H (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | February 1, 2023 | February 15, 2023 | $ | 31.250 | $ | 33.125 | $ | 0.4609 | $ | 0.4766 | $ | 0.475 | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2023 | May 1, 2023 | May 15, 2023 | 21.982 | — | 0.4609 | 0.4766 | 0.475 | 33.750 | 35.625 | 32.500 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
(1)Series B, Series F, Series G and Series H distributions are paid on a semi-annual basis. See additional information on Series A distributions below.
Distributions on the Series A Preferred Units previously accrued at a fixed rate of 6.250% per annum of the liquidation preference of $1,000. Beginning February 15, 2023, the Series A Preferred Units have a floating distribution rate set each quarterly distribution period at a percentage of the $1,000 liquidation preference equal to the then-current three-month LIBOR plus a spread of 4.028% per annum. Distributions on Series A Preferred Units were previously payable semi-annually in arrears until February 15, 2023, and, after February 15, 2023, quarterly in arrears, when, as, and if declared by our General Partner out of legally available funds for such purpose.
Noncontrolling Interests
The Partnership’s consolidated financial statements also include noncontrolling interests in Sunoco LP and USAC, both of which are master limited partnerships, as well as other non-wholly-owned consolidated joint ventures. The following sections describe cash distributions made by our publicly traded subsidiaries, Sunoco LP and USAC, both of which are required by their respective partnership agreements to distribute all cash on hand (less appropriate reserves determined by the boards of directors of their respective general partners) subsequent to the end of each quarter.
Sunoco LP Cash Distributions
Distributions on Sunoco LP’s common units declared and/or paid by Sunoco LP subsequent to December 31, 2022 were as follows:
| Quarter Ended | Record Date | Payment Date | Rate | |||||||||||||||||
| December 31, 2022 | February 7, 2023 | February 21, 2023 | $ | 0.8255 | ||||||||||||||||
| March 31, 2023 | May 8, 2023 | May 22, 2023 | 0.8420 | |||||||||||||||||
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USAC Cash Distributions
Distributions on USAC’s common units declared and/or paid by USAC subsequent to December 31, 2022 were as follows:
| Quarter Ended | Record Date | Payment Date | Rate | |||||||||||||||||
| December 31, 2022 | January 23, 2023 | February 3, 2023 | $ | 0.525 | ||||||||||||||||
| March 31, 2023 | April 24, 2023 | May 5, 2023 | 0.525 | |||||||||||||||||
USAC’s Warrants
As of March 31, 2023 and December 31, 2022, USAC warrants with the right to purchase 10,000,000 USAC common units at a strike price of $19.59 per unit were outstanding and may be exercised by the holders at any time before April 2, 2028.
Accumulated Other Comprehensive Income
The following table presents the components of AOCI, net of tax:
| March 31, 2023 | December 31, 2022 | ||||||||||
Available-for-sale securities | $ | 10 | $ | 9 | |||||||
Foreign currency translation adjustment | (4) | 1 | |||||||||
| Actuarial loss related to pensions and other postretirement benefits | (6) | (7) | |||||||||
| Investments in unconsolidated affiliates, net | 13 | 13 | |||||||||
Total AOCI included in partners’ capital, net of tax | $ | 13 | $ | 16 | |||||||
10.REGULATORY MATTERS, COMMITMENTS, CONTINGENCIES AND ENVIRONMENTAL LIABILITIES
FERC Proceedings
Rover – FERC - Stoneman House
In late 2016, FERC Enforcement Staff began a non-public investigation related to Rover’s purchase and removal of a potentially historic home (known as the Stoneman House) while Rover’s application for permission to construct the new 711-mile interstate natural gas pipeline and related facilities was pending. On March 18, 2021, FERC issued an Order to Show Cause and Notice of Proposed Penalty (Docket No. IN19-4-000), ordering Rover to explain why it should not pay a $20 million civil penalty for alleged violations of FERC regulations requiring certificate holders to be forthright in their submissions of information to the FERC. Rover filed its answer and denial to the order on June 21, 2021 and a surreply on September 15, 2021. FERC issued an order on January 20, 2022 setting the matter for hearing before an administrative law judge. The hearing was set to commence on March 6, 2023; as explained below, this FERC proceeding has been stayed.
On February 1, 2022, Energy Transfer and Rover filed a Complaint for Declaratory Relief in the United States District Court for the Northern District of Texas seeking an order declaring that FERC must bring its enforcement action in federal district court (instead of before an administrative law judge). Also on February 1, 2022, Energy Transfer and Rover filed an expedited request to stay the proceedings before the FERC administrative law judge pending the outcome of the federal district court case. On May 24, 2022, the District Court ordered a stay of the FERC’s enforcement case and the District Court case pending the resolution of two cases pending before the United States Supreme Court. Arguments were heard in those cases on November 7, 2022. On April 14, 2023, the United States Supreme Court held against the government in both cases, finding that the district courts had jurisdiction to hear those suits and to resolve the parties’ constitutional challenges. The cases were remanded to the district courts for further proceedings. Energy Transfer and Rover intend to vigorously defend this claim.
Rover – FERC - Tuscarawas
In mid-2017, FERC Enforcement Staff began a non-public investigation regarding allegations that diesel fuel may have been included in the drilling mud at the Tuscarawas River horizontal directional drilling (“HDD”) operations. Rover and the Partnership are cooperating with the investigation. In 2019, Enforcement Staff provided Rover with a notice pursuant to Section 1b.19 of the FERC regulations that Enforcement Staff intended to recommend that the FERC pursue an enforcement action against Rover and the Partnership. On December 16, 2021, FERC issued an Order to Show Cause and Notice of Proposed Penalty (Docket No. IN17-4-000), ordering Rover and Energy Transfer to show cause why they should
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not be found to have violated Section 7(e) of the Natural Gas Act, Section 157.20 of FERC’s regulations, and the Rover Pipeline Certificate Order, and assessed civil penalties of $40 million.
Rover and Energy Transfer filed their answer to this order on March 21, 2022, and Enforcement Staff filed a reply on April 20, 2022. Rover and Energy Transfer filed their surreply to this order on May 13, 2022. The primary contractor (and one of the subcontractors) responsible for the HDD operations of the Tuscarawas River site have agreed to indemnify Rover and the Partnership for any and all losses, including any fines and penalties from government agencies, resulting from their actions in conducting such HDD operations. Given the stage of the proceedings, the Partnership is unable at this time to provide an assessment of the potential outcome or range of potential liability, if any; however, the Partnership believes the indemnity described above will be applicable to the penalty proposed by Enforcement Staff and intends to vigorously defend itself against the subject claims.
Other FERC Proceedings
By an order issued January 16, 2019, the FERC initiated a review of Panhandle’s existing rates pursuant to Section 5 of the Natural Gas Act to determine whether the rates currently charged by Panhandle are just and reasonable and set the matter for hearing. On August 30, 2019, Panhandle filed a general rate proceeding under Section 4 of the Natural Gas Act. The Natural Gas Act Section 5 and Section 4 proceedings were consolidated by order of the Chief Judge on October 1, 2019. The initial decision by the administrative law judge was issued on March 26, 2021. On April 26, 2021, Panhandle filed its brief on exceptions to the initial decision. On May 17, 2021, Panhandle filed its brief opposing exceptions in this proceeding, which was denied by operation of law as of February 17, 2023. Panhandle submitted requisite compliance filings with FERC, but on December 16, 2022, the FERC issued its order on Panhandle’s rate case. On January 17, 2023, Panhandle filed its request for rehearing in the proceeding, which was denied by operation of law as of February 17, 2023. On March 23, 2023, Panhandle appealed the initial decision (and the February 17, 2023 Notice of Denial of Rehearing by Operation of Law and Providing for Further Consideration) to the United States Court of Appeals for the District of Columbia (“Court of Appeals”). On April 25, 2023, the Court of Appeals stayed the appeal while FERC further considers its December 16, 2022 order.
On July 1, 2022, Transwestern filed a rate case pursuant to Section 4 of the Natural Gas Act. By order dated September 9, 2022, a procedural schedule was adopted in this proceeding, setting the commencement of the hearing for June 22, 2023 with an initial decision anticipated by November 15, 2023. By a subsequent order dated February 14, 2023, the procedural schedule was suspended based on representations that the participants have reached an agreement in principle to resolve all issues in this proceeding and a Stipulation and Agreement was filed at FERC on April 5, 2023.
On December 1, 2022, Sea Robin filed a rate case pursuant to Section 4 of the Natural Gas Act. By order dated February 22, 2023, a procedural schedule was adopted in this proceeding setting the commencement of the hearing for October 24, 2023, with an initial decision anticipated by March 19, 2024.
In May 2021, the FERC commenced an audit of SPLP for the period from January 1, 2018 to present to evaluate SPLP’s compliance with its FERC oil tariffs, the accounting requirements of the Uniform System of Accounts as prescribed by the FERC, and the FERC’s Form No. 6 reporting requirements. The audit is ongoing.
Internal Revenue Service Audit
The Partnership’s 2020 U.S. Federal income tax return is currently under examination by the Internal Revenue Service (“IRS”). In general, Energy Transfer and its subsidiaries are no longer subject to examination by the IRS and most state jurisdictions for 2017 and prior tax years.
Commitments
In the normal course of business, Energy Transfer 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. Energy Transfer believes that the terms of these agreements are commercially reasonable and will not have a material adverse effect on the Partnership’s 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 the unconsolidated affiliates’ capital requirements, such as for funding capital projects or repayment of long-term obligations.
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We have certain non-cancelable rights-of-way (“ROW”) commitments, which require fixed payments and either expire upon our chosen abandonment or at various dates in the future. The following table reflects ROW expense included in operating expenses in the accompanying consolidated statements of operations:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
ROW expense | $ | 13 | $ | 14 | |||||||
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. Due to the flammable and combustible nature of natural gas and crude oil, the potential exists for personal injury and/or property damage to occur 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.
We or our subsidiaries are parties to various legal proceedings, arbitrations 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 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.
As of March 31, 2023 and December 31, 2022, accruals of approximately $217 million and $200 million, respectively, were reflected on our consolidated balance sheets related to contingent obligations that met both the probable and reasonably estimable criteria. In addition, we may recognize additional contingent losses in the future related to (i) contingent matters for which a loss is currently considered reasonably possible but not probable and/or (ii) losses in excess of amounts that have already been accrued for such contingent matters. In some of these cases, we are not able to estimate possible losses or a range of possible losses in excess of amounts accrued. For such matters where additional contingent losses can be reasonably estimated, the range of additional losses is estimated to be up to approximately $800 million.
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 or our estimates of reasonably possible losses prior to resolution of a particular contingency based on changes in facts and circumstances or changes in the expected outcome.
The following sections include descriptions of certain matters that could impact the Partnership’s financial position, results of operations and/or cash flows in future periods. The following sections also include updates to certain matters that have previously been disclosed, even if those matters are not anticipated to have a potentially significant impact on future periods. In addition to the matters disclosed in the following sections, the Partnership is also involved in multiple other matters that could impact future periods, including other lawsuits and arbitration related to the Partnership’s commercial agreements. With respect to such matters, contingencies that met both the probable and reasonably estimable criteria have been included in the accruals disclosed above, and the range of additional losses disclosed above also reflects any relevant amounts for such matters.
Dakota Access Pipeline
On July 27, 2016, the Standing Rock Sioux Tribe (“SRST”) filed a lawsuit in the United States District Court for the District of Columbia (“District Court”) challenging permits issued by the United States Army Corps of Engineers (“USACE”) that allowed Dakota Access to cross the Missouri River at Lake Oahe in North Dakota. The case was subsequently amended to challenge an easement issued by the USACE that allowed the pipeline to cross land owned by the USACE adjacent to the Missouri River. Dakota Access and the Cheyenne River Sioux Tribe (“CRST”) intervened. Separate lawsuits filed by the Oglala Sioux Tribe (“OST”) and the Yankton Sioux Tribe (“YST”) were consolidated with this action and several individual tribal members intervened (collectively, with SRST and CRST, the “Tribes”). On March
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25, 2020, the District Court remanded the case back to the USACE for preparation of an Environment Impact Statement (“EIS”). On July 6, 2020, the District Court vacated the easement and ordered the Dakota Access Pipeline to be shut down and emptied of oil by August 5, 2020. Dakota Access and the USACE appealed to the Court of Appeals which granted an administrative stay of the District Court’s July 6 order and ordered further briefing on whether to fully stay the July 6 order. On August 5, 2020, the Court of Appeals 1) granted a stay of the portion of the District Court order that required Dakota Access to shut the pipeline down and empty it of oil, 2) denied a motion to stay the March 25 order pending a decision on the merits by the Court of Appeals as to whether the USACE would be required to prepare an EIS, and 3) denied a motion to stay the District Court’s order to vacate the easement during this appeal process. The August 5 order also states that the Court of Appeals expected the USACE to clarify its position with respect to whether USACE intended to allow the continued operation of the pipeline notwithstanding the vacatur of the easement and that the District Court may consider additional relief, if necessary.
On August 10, 2020, the District Court ordered the USACE to submit a status report by August 31, 2020, clarifying its position with regard to its decision-making process with respect to the continued operation of the pipeline. On August 31, 2020, the USACE submitted a status report that indicated that it considered the presence of the pipeline at the Lake Oahe crossing without an easement to constitute an encroachment on federal land, and that it was still considering whether to exercise its enforcement discretion regarding this encroachment. The Tribes subsequently filed a motion seeking an injunction to stop the operation of the pipeline and both USACE and Dakota Access filed briefs in opposition of the motion for injunction. The motion for injunction was fully briefed as of January 8, 2021.
On January 26, 2021, the Court of Appeals affirmed the District Court’s March 25, 2020 order requiring an EIS and its July 6, 2020 order vacating the easement. In this same January 26 order, the Court of Appeals also overturned the District Court’s July 6, 2020 order that the pipeline shut down and be emptied of oil. Dakota Access filed for rehearing en banc on April 12, 2021, which the Court of Appeals denied. On September 20, 2021, Dakota Access filed a petition with the U.S. Supreme Court to hear the case. Oppositions were filed by the Solicitor General (December 17, 2021) and the Tribes (December 16, 2021). Dakota Access filed their reply on January 4, 2022. On February 22, 2022, the U.S. Supreme Court declined to hear the case.
The District Court scheduled a status conference for February 10, 2021 to discuss the effects of the Court of Appeals’ January 26, 2021 order on the pending motion for injunctive relief, as well as USACE’s expectations as to how it will proceed regarding its enforcement discretion regarding the easement. On May 3, 2021, USACE advised the District Court that it had not changed its position with respect to its opposition to the Tribes’ motion for injunction. On May 21, 2021, the District Court denied the plaintiffs’ request for an injunction. On June 22, 2021, the District Court terminated the consolidated lawsuits and dismissed all remaining outstanding counts without prejudice.
The pipeline continues to operate pending completion of the EIS. Energy Transfer anticipates the draft EIS will be completed and published by the USACE in June of 2023, subject to additional delays by the USACE. Energy Transfer cannot determine when or how future lawsuits will be resolved or the impact they may have on the Bakken Pipeline, which consists of both Dakota Access and the Energy Transfer Crude Oil Pipeline; however, Energy Transfer expects after the law and complete record are fully considered, any such proceeding will be resolved in a manner that will allow the pipeline to continue to operate.
In addition, lawsuits and/or regulatory proceedings or actions of this or a similar nature could result in interruptions to construction or operations of current or future projects, delays in completing those projects and/or increased project costs, all of which could have an adverse effect on our business and results of operations.
Mont Belvieu Incident
On June 26, 2016, a hydrocarbon storage well located on another operator’s facility adjacent to Lone Star NGL Mont Belvieu LP’s (“Lone Star”), now known as Energy Transfer Mont Belvieu NGLs LP, facilities in Mont Belvieu, Texas experienced an over-pressurization resulting in a subsurface release. The subsurface release caused a fire at Lone Star’s South Terminal and damage to Lone Star’s storage well operations at its South and North Terminals. Normal operations resumed at the facilities in the fall of 2016, with the exception of one of Lone Star’s storage wells at the North Terminal that has not been returned to service. Lone Star has obtained payment for most of the losses it has submitted to the adjacent operator. Lone Star continues to quantify and seek reimbursement for outstanding losses.
MTBE Litigation
ETC Sunoco and Energy Transfer R&M (collectively, “Sunoco Defendants”) are defendants in lawsuits alleging methyl tertiary butyl ether (“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
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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, 2023, Sunoco Defendants are defendants in two cases, one case initiated by the State of Maryland and one by the Commonwealth of Pennsylvania. The actions brought also named as defendants ETO, ETP Holdco, and Sunoco Partners Marketing & Terminals L.P., now known as Energy Transfer Marketing & Terminals L.P.
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.
Litigation Filed By or Against Williams
In April and May 2016, The Williams Companies, Inc. (“Williams”) filed two lawsuits (the “Williams Litigation”) against Energy Transfer, LE GP, LLC, and, in one of the lawsuits, Energy Transfer Corp LP, ETE Corp GP, LLC, and Energy Transfer Equity GP, LLC (collectively, “Energy Transfer Defendants”), alleging that Energy Transfer Defendants breached their obligations under the Energy Transfer-Williams merger agreement (the “Merger Agreement”). In general, Williams alleges that Energy Transfer Defendants breached the Merger Agreement by (a) failing to use commercially reasonable efforts to obtain from Latham & Watkins LLP (“Latham”) the delivery of a tax opinion concerning Section 721 of the Internal Revenue Code (“721 Opinion”), (b) issuing the Partnership’s Series A convertible preferred units (the “Issuance”), and (c) making allegedly untrue representations and warranties in the Merger Agreement. Williams asked the Court to compel the Energy Transfer Defendants to close the merger or take various other affirmative actions.
After a two-day trial on June 20 and 21, 2016, the Court ruled in favor of Energy Transfer Defendants and issued a declaratory judgment that Energy Transfer could terminate the merger after June 28, 2016 because of Latham’s inability to provide the required 721 Opinion. The Court did not reach a decision regarding Williams’ claims related to the Issuance nor certain of the alleged untrue representations and warranties. On March 23, 2017, the Delaware Supreme Court affirmed the Court’s ruling on the June 2016 trial. In September 2016, the parties filed amended pleadings. Williams filed an amended complaint seeking a $410 million termination fee (the “Termination Fee”) based on the alleged breaches of the Merger Agreement listed above. Energy Transfer Defendants filed amended counterclaims and affirmative defenses, asserting that Williams materially breached the Merger Agreement by, among other things, (a) failing to use its reasonable best efforts to consummate the merger, (b) failing to provide material information to Energy Transfer for inclusion in the Form S-4 related to the merger, (c) failing to facilitate the financing of the merger, and (d) breaching the Merger Agreement’s forum-selection clause. The Energy Transfer Defendants sought a $1.48 billion termination fee under the Merger Agreement and additional damages caused by Williams’ misconduct.
On September 29, 2016, Williams filed a motion to dismiss the Energy Defendants’ amended counterclaims and to strike certain of the Energy Transfer Defendants’ affirmative defenses. On December 1, 2017, the Court issued a Memorandum Opinion granting in part and denying in part Williams’ motion to dismiss. The Court dismissed, among other things, the Energy Transfer Defendants’ claim for a $1.48 billion termination fee.
Trial was held on all remaining claims on May 10-17, 2021, and on December 29, 2021, the Court ruled in favor of Williams and awarded it the Termination Fee plus certain fees and expenses, holding that the Issuance breached the Merger Agreement and that Williams had not materially breached the Merger Agreement, though the Court awarded sanctions against Williams due to its CEO’s intentional spoliation of evidence. The Court subsequently awarded Williams approximately $190 million in attorneys’ fees, expenses and pre-judgment interest.
On September 21, 2022, the Court entered a final judgment against the Energy Transfer Defendants in the amount of approximately $601 million plus post-judgment interest at a rate of 3.5% per year. The Energy Transfer Defendants filed the notice of appeal of this matter on October 21, 2022 and filed their opening brief in support of their appeal on December 30, 2022. Williams filed their answering brief on January 20, 2023, and the Energy Transfer Defendants filed their reply brief on February 6, 2023.
Rover - State of Ohio
On November 3, 2017, the State of Ohio and the Ohio Environmental Protection Agency (together “the Ohio EPA”) filed suit against Rover and five other defendants seeking to recover civil penalties allegedly owed and certain injunctive relief related to permit compliance. The defendants filed several motions to dismiss, which were granted on all counts. The Ohio EPA appealed, and on December 9, 2019, the Fifth District Court of Appeals entered a unanimous judgment affirming the
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trial court. The Ohio EPA sought review from the Ohio Supreme Court, which the defendants opposed in briefs filed in February 2020. On April 22, 2020, the Ohio Supreme Court granted the Ohio EPA’s request for review. On March 17, 2022, the Ohio Supreme Court reversed in part and remanded to the Ohio trial court. The Ohio Supreme Court agreed with Rover that the State of Ohio had waived its rights under Section 401 of the Clean Water Act but remanded to the trial court to determine whether any of the allegations fell outside the scope of the waiver.
On remand, the Ohio EPA voluntarily dismissed four of the other five defendants and dismissed one of its counts against Rover. In its Fourth Amended Complaint, the Ohio EPA removed all paragraphs that alleged violations by the four dismissed defendants, including those where the dismissed defendants were alleged to have acted jointly with Rover or others. At a June 2, 2022, status conference, the trial judge set a schedule for Rover and the other remaining defendant to file motions to dismiss the Fourth Amended Complaint. Briefing on those motions was completed on November 4, 2022. The motions remain pending before the court.
Shareholder Litigation Regarding Pipeline Construction
Various purported unitholders of Energy Transfer have filed derivative actions against various past and current members of Energy Transfer’s Board of Directors, LE GP, LLC, and Energy Transfer, as a nominal defendant that assert claims for breach of fiduciary duties, unjust enrichment, waste of corporate assets, breach of Energy Transfer’s Partnership Agreement, tortious interference, abuse of control, and gross mismanagement related primarily to matters involving the construction of pipelines in Pennsylvania and Ohio. They also seek damages and changes to Energy Transfer’s corporate governance structure. See Bettiol v. LE GP, Case No. 3:19-cv-02890-X (N.D. Tex.); Davidson v. Kelcy L. Warren, Cause No. DC-20-02322 (44th Judicial District of Dallas County, Texas); Harris v. Kelcy L. Warren, Case No. 2:20-cv-00364-GAM (E.D. Pa.); Barry King v. LE GP, Case No. 3:20-cv-00719-X (N.D. Tex.); Inter-Marketing Group USA, Inc. v. LE GP, et at., Case No. 2022-0139-SG (Del. Ch.); Elliot v. LE GP LLC, Case No. 3:22-cv-01527-B (N.D. Tex.); Chapa v. Kelcy L. Warren, et al., Index No. 611307/2022 (N.Y. Sup. Ct.); Elliott v. LE GP et al, Cause No. DC-22-14194 (Dallas County, Tex.); and Charles King v. LE GP, LLC et al, Cause No. DC-22-14159 (Dallas County, Texas). The Barry King action that was filed in the United States District Court for the Northern District of Texas (Case No. 3:20-cv-00719-X) has been consolidated with the Bettiol action. On August 9, 2022, the Elliot action that was filed in the United States District Court for the Northern District of Texas (Case No. 3:22-cv-01527-B) was voluntarily dismissed.
Another purported unitholder of Energy Transfer, Allegheny County Employees’ Retirement System (“ACERS”), individually and on behalf of all others similarly situated, filed a suit under the federal securities laws purportedly on behalf of a class, against Energy Transfer and three of Energy Transfer’s directors, Kelcy L. Warren, John W. McReynolds, and Thomas E. Long. See Allegheny County Emps.’ Ret. Sys. v. Energy Transfer LP, Case No. 2:20-00200-GAM (E.D. Pa.). On June 15, 2020, ACERS filed an amended complaint and added as additional defendants Energy Transfer directors Marshall McCrea and Matthew Ramsey, as well as Michael J. Hennigan and Joseph McGinn. The amended complaint asserts claims for violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder related primarily to matters involving the construction of pipelines in Pennsylvania. On August 14, 2020, the defendants filed a motion to dismiss ACERS’ amended complaint. On April 6, 2021, the court granted in part and denied in part the defendants’ motion to dismiss. The court held that ACERS could proceed with its claims regarding certain statements put at issue by the amended complaint while also dismissing claims based on other statements. The court also dismissed without prejudice the claims against defendants McReynolds, McGinn, and Hennigan. Fact discovery is ongoing. On August 23, 2022, the Court granted in part and denied in part ACERS’ motion for class certification. The Court certified a class consisting of those who purchased or otherwise acquired common units of Energy Transfer between February 25, 2017 and November 11, 2019.
On June 3, 2022, another purported unitholder of Energy Transfer, Mike Vega, filed suit, purportedly on behalf of a class, against Energy Transfer and Messrs. Warren, Long, McCrea, and Whitehurst. See Vega v. Energy Transfer LP et al., Case No. 1:22-cv-4614 (S.D.N.Y.). The action asserts claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder related primarily to statements made in connection with the construction of Rover.
On August 10, 2022, the Court appointed the New Mexico State Investment Council and Public Employees Retirement Association of New Mexico (the “New Mexico Funds”) as lead plaintiffs. New Mexico Funds filed an amended complaint on September 30, 2022 and added as additional defendants Energy Transfer directors John W. McReynolds and Matthew S. Ramsey. On November 7, 2022, the court granted the defendants’ motion to transfer and transferred this action to the United States District Court for the Northern District of Texas. On January 27, 2023, the defendants filed their motion to dismiss the New Mexico Funds’ amended complaint.
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The defendants cannot predict the outcome of these lawsuits or any lawsuits that might be filed subsequent to the date of this filing; nor can the defendants predict the amount of time and expense that will be required to resolve these lawsuits. However, the defendants believe that the claims are without merit and intend to vigorously contest them.
Cline Class Action
On July 7, 2017, Perry Cline filed a class action complaint in the Eastern District of Oklahoma against Sunoco, Inc. (R&M), LLC (now known as Energy Transfer R&M) and Energy Transfer Marketing & Terminals L.P. (collectively, “ETMT”) that alleged ETMT failed to make timely payments of oil and gas proceeds from Oklahoma wells and to pay statutory interest for those untimely payments. On October 3, 2019, the Court certified a class to include all persons who received untimely payments from Oklahoma wells on or after July 7, 2012, and who have not already been paid statutory interest on the untimely payments (the “Class”). Excluded from the Class are those entitled to payments of proceeds that qualify as “minimum pay,” prior period adjustments, and pass through payments, as well as governmental agencies and publicly traded oil and gas companies.
After a bench trial, on August 17, 2020, Judge John Gibney (sitting from the Eastern District of Virginia) issued an opinion that awarded the Class actual damages of $74.8 million for late payment interest for identified and unidentified royalty owners and interest-on-interest. This amount was later amended to $80.7 million to account for interest accrued from trial (the “Order”). Judge Gibney also awarded punitive damages in the amount of $75 million. The Class is also seeking attorneys’ fees.
On August 27, 2020, ETMT filed its Notice of Appeal with the 10th Circuit and appealed the entirety of the Order. The matter was fully briefed, and oral argument was set for November 15, 2021. However, on November 1, 2021, the 10th Circuit dismissed the appeal due to jurisdictional concerns with finality of the Order. En banc rehearing of this decision was denied on November 29, 2021. On December 1, 2021, ETMT filed a Petition for Writ of Mandamus to the 10th Circuit to correct the jurisdictional problems and secure final judgment. On February 2, 2022, the 10th Circuit denied the Petition for Writ of Mandamus, citing that there are other avenues for ETMT to obtain adequate relief. On February 10, 2022, ETMT filed a Motion to Modify the Plan of Allocation Order and Issue a Rule 58 Judgment with the trial court, requesting the district court to enter a final judgment in compliance with the Rules. ETMT also filed an injunction with the trial court to enjoin all efforts by plaintiffs to execute on any non-final judgment. On March 31, 2022, Judge Gibney denied the Motion to Modify the Plan of Allocation, reiterating his thoughts that the order constitutes a final judgment. Judge Gibney granted the injunction in part (placing a hold on enforcement efforts for 60 days) and denied the injunction in part. The injunction has since been lifted.
Despite the fact that ETMT has taken the position that the judgment is not final and not subject to execution, the Class engaged in asset discovery and actively tried to collect on the judgment through garnishment proceedings from ETMT’s customers. ETMT unsuccessfully tried to deposit the funds into the Court’s Registry. Accordingly, to stop the garnishment proceedings, on December 2, 2022, ETMT wired approximately $161 million to the Plaintiff’s approved Plan Administrator, which represents the full amount of the judgment with attorney’s fees and post-judgment interest. ETMT did so without waiving its ability to pursue its pending appeal or its right to appeal the merits of the judgment. Plaintiff has since dismissed the garnishment actions.
ETMT cannot predict the outcome of the case, nor can ETMT predict the amount of time and expense that will be required to resolve the appeal. A Petition for Writ of Certiorari was filed with the United States Supreme Court on April 28, 2022, seeking review of the 10th Circuit’s dismissal of ETMT’s appeal. The Supreme Court denied ETMT’s Petition on October 3, 2022. Despite the denial of its Petition for Writ of Certiorari, ETMT is still vigorously appealing the finality issues underlying the Order and has appealed the denial of the Motion to Modify to the 10th Circuit in an attempt to get a decision on finality. The appeal to the 10th Circuit has been fully briefed and oral argument was held on March 21, 2023.
Energy Transfer LP and ETC Texas Pipeline, Ltd. v. Culberson Midstream LLC, et al.
On April 8, 2022, Energy Transfer and ETC Texas Pipeline, Ltd. (“ETC,” and together with Energy Transfer, “Plaintiffs”) filed suit against Culberson Midstream LLC (“Culberson”), Culberson Midstream Equity, LLC (“Culberson Equity”), and Moontower Resources Gathering, LLC (“Moontower,”). On October 1, 2018, ETC and Culberson entered into a Gas Gathering and Processing Agreement (the “Bypass GGPA”) under which Culberson was to gather gas from its dedicated acreage and deliver all committed gas exclusively to ETC. In connection with the Bypass GGPA, on October 18, 2018, Energy Transfer and Culberson Equity also entered into an Option Agreement. Under the Option Agreement, Culberson Equity and Moontower had the right (but not the obligation) to require Energy Transfer to purchase their respective interests in Culberson by way of a put option. Notably, the Option Agreement is only enforceable so long as the parties comply with the Bypass GGPA. In late March 2022, Culberson Equity and Moontower submitted a put notice to Energy Transfer seeking to require Energy Transfer to purchase their respective interests in Culberson for approximately
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$93 million. On April 8, 2022, Plaintiffs filed suit against Culberson, Culberson Equity and Moontower asserting claims for declaratory judgment and breach of contract, contending that they materially breached the Bypass GGPA by sending some committed gas to third parties and also by failing to send any gas to Plaintiffs since March 2020, and thus that Culberson Equity’s and Moontower’s put notice is void. Culberson, Culberson Equity, and Moontower have answered the lawsuit. Additionally, Culberson filed a counterclaim against ETC for breach of the Bypass GGPA, seeking the recovery of damages and attorneys’ fees. Culberson Equity and Moontower also filed a counterclaim against Energy Transfer for (1) breach of the Option Agreement, and (2) a declaratory judgment concerning Energy Transfer’s alleged obligation to purchase the Culberson interests. The lawsuit is pending in the 193rd Judicial District Court in Dallas County, Texas. On April 27, 2022, Culberson filed an application for a temporary restraining order, temporary injunction, and permanent injunction, and Culberson Equity and Moontower joined in that request. The Court held a hearing on the application on April 28 and denied the injunction. In early May, Culberson filed a motion to enforce the appraisal process and confirm the validity of their put price calculation, to which Plaintiffs objected. On July 11, 2022, the Court held a hearing on the motion, and on July 19, 2022, the Court ordered the parties to engage in an appraisal process regarding the put price. An independent appraiser was appointed and issued his decision on October 15, 2022, concluding that the put price totals $93 million. Plaintiffs have consistently reiterated their objection to the appraisal process and conclusion. Culberson, Culberson Equity and Moontower filed a motion for summary judgment, but the Court has postponed considering it until the spring of 2023, after further document discovery and depositions. On December 7, 2022, Plaintiffs amended their petition to add Moontower Resources Operating, LLC and Moontower Resources WI, LLC as Defendants, and to assert a claim against all Defendants for fraudulent inducement. Trial is currently set for the two-week docket beginning September 26, 2023. Plaintiffs cannot predict the ultimate outcome of this litigation or the amount of time and expense that will be required to resolve it.
Massachusetts Attorney General v. New England Gas Company
On July 7, 2011, the Massachusetts Attorney General (the “MA AG”) filed a regulatory complaint with the Massachusetts Department of Public Utilities (“DPU”) against New England Gas Company (“NEG”) with respect to certain environmental cost recoveries. NEG was an operating division of Southern Union Company (“SUG”), and the NEG assets were acquired in connection with the merger transaction with Energy Transfer in March 2012. Subsequent to the merger, in 2013, SUG sold the NEG assets to Liberty Utilities (“Liberty,” and together with NEG and SUG, “Respondents”) and retained certain potential liabilities, including the environmental cost recoveries with respect to the pending complaint before the DPU. Specifically, the MA AG seeks a refund to NEG’s ratepayers for approximately $18 million in legal fees associated with SUG environmental response activities. The MA AG requests that the DPU initiate an investigation into NEG’s collection and reconciliation of recoverable environmental costs, namely: (1) the legal fees charged by the Kasowitz, Benson, Torres & Friedman firm and passed through the recovery mechanism since 2005; (2) the legal fees charged by the Bishop, London & Dodds firm and passed through the recovery mechanisms since 2005; and (3) the legal fees passed through the recovery mechanism that the MA AG contends only qualify for a lesser (i.e., 50 percent) level of recovery. Respondents maintain that, by tariff, these costs are recoverable through rates charged to NEG customers pursuant to the environmental remediation adjustment clause program. After the Respondents answered the complaint and filed a motion to dismiss in 2011, the Hearing Officer deferred decision on the motion to dismiss and issued a stay of discovery pending resolution of a discovery dispute, which it later lifted on June 24, 2013, permitting the case to resume. However, the MA AG failed to take any further steps to prosecute its claims for nearly seven years. The case remained largely dormant until February 2022, when the Hearing Officer denied the motion to dismiss. After receiving input from the parties, the Hearing Officer entered a procedural schedule on March 16, 2022 (which was amended slightly on August 22, 2022). The parties engaged in discovery and the preparation of pre-filed testimony. Respondents submitted their pre-filed testimony on July 11, 2022. The MA AG served three sets of discovery requests on Respondents on September 9, September 12, and September 20, respectively, to which Respondents timely responded. On October 5, 2022, the MA AG requested that the DPU issue a ruling on whether the information that Respondents redacted in their attorneys’ fees invoices is protected by the attorney-client privilege. On the same day, the MA AG also filed a Motion to Stay the Procedural Schedule pending a ruling on the privilege issue. On October 6, 2022, without even affording Respondents the opportunity to respond, the DPU granted the MA AG’s request to stay the procedural schedule. Accordingly, all previous deadlines (including the MA AG’s October 7, 2022, deadline to submit direct pre-filed testimony) are presently stayed. Respondents cannot predict the ultimate outcome of this regulatory proceeding, nor can they predict the amount of time and expense that will be required to resolve these claims; however, Respondents will vigorously defend themselves against the MA AG’s claims.
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
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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 our 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.
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 be contractually 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 the Partnership no longer operates, closed and/or sold refineries and other formerly owned sites.
•the Partnership 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, 2023, the Partnership had been named as a PRP at approximately 31 identified or potentially identifiable “Superfund” sites under federal and/or comparable state law. The Partnership is usually one of a number of companies identified as a PRP at a site. The Partnership has reviewed the nature and extent of its involvement at each site and other relevant circumstances and, based upon the Partnership’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 following table 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, 2023 | December 31, 2022 | ||||||||||
| Current | $ | 49 | $ | 54 | |||||||
| Non-current | 227 | 228 | |||||||||
Total environmental liabilities | $ | 276 | $ | 282 | |||||||
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We have established a wholly-owned captive insurance company to bear certain risks associated with environmental obligations related to certain sites that are no longer operating. The premiums paid to the captive insurance company include estimates for environmental claims that have been incurred but not reported, based on an actuarially determined fully developed claims expense estimate. In such cases, we accrue losses attributable to unasserted claims based on the discounted estimates that are used to develop the premiums paid to the captive insurance company.
During the three months ended March 31, 2023 and 2022, the Partnership recorded $8 million and $4 million, respectively, of expenditures related to environmental cleanup programs.
Our pipeline operations are subject to regulation by the United States Department of Transportation under PHMSA, pursuant to which PHMSA has established requirements relating to the design, installation, testing, construction, operation, replacement and management of pipeline facilities. Moreover, PHMSA, through the Office of Pipeline Safety, has promulgated a rule requiring pipeline operators to develop integrity management programs to comprehensively evaluate their pipelines, and take measures to protect pipeline segments located in what the rule refers to as “high consequence areas.” Activities under these integrity management programs involve the performance of internal pipeline inspections, pressure testing or other effective means to assess the integrity of these regulated pipeline segments, and the regulations require prompt action to address integrity issues raised by the assessment and analysis. Integrity testing and assessment of all of these assets will continue, and the potential exists that results of such testing and assessment could cause us to incur future capital and operating expenditures for repairs or upgrades deemed necessary to ensure the continued safe and reliable operation of our pipelines; however, no estimate can be made at this time of the likely range of such expenditures.
Our operations are also subject to the requirements of the Federal Occupational Safety and Health Act (“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 eight reportable segments, which also represent the level at which the Partnership aggregates revenue for disclosure purposes. Note 13 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 minimum fee, but allow 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.
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The following table summarizes the consolidated activity of our contract liabilities:
| Contract Liabilities | |||||
| Balance, December 31, 2022 | $ | 615 | |||
| Additions | 278 | ||||
| Revenue recognized | (301) | ||||
| Balance, March 31, 2023 | $ | 592 | |||
| Balance, December 31, 2021 | $ | 459 | |||
| Additions | 266 | ||||
| Revenue recognized | (209) | ||||
| Other | (10) | ||||
| Balance, March 31, 2022 | $ | 506 | |||
The balances of Sunoco LP’s contract assets were as follows:
| March 31, 2023 | December 31, 2022 | ||||||||||
| Contract balances: | |||||||||||
Contract assets | $ | 222 | $ | 200 | |||||||
Accounts receivable from contracts with customers | 528 | 834 | |||||||||
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 components of the contracts are included in the following table.
As of March 31, 2023, the aggregate amount of transaction price allocated to unsatisfied (or partially satisfied) performance obligations was $39.06 billion. The Partnership expects to recognize this amount as revenue within the time bands illustrated in the following table:
| Years Ending December 31, | ||||||||||||||||||||||||||||||||
| 2023 | ||||||||||||||||||||||||||||||||
| (remainder) | 2024 | 2025 | Thereafter | Total | ||||||||||||||||||||||||||||
| Revenue expected to be recognized on contracts with customers existing as of March 31, 2023 | $ | 5,495 | $ | 6,360 | $ | 5,429 | $ | 21,775 | $ | 39,059 | ||||||||||||||||||||||
12.DERIVATIVE ASSETS AND LIABILITIES
Commodity Price Risk
We are exposed to market risks related to the volatility of commodity prices. To manage the impact of volatility from these prices, 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
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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 natural gas, 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 intrastate 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 intrastate transportation and storage segment, the degree of earnings volatility that can occur may be significant, favorably or unfavorably, from period to period. We attempt to manage this volatility through the use of daily position and profit and loss reports provided to our risk oversight committee, which includes members of senior management, and the limits and authorizations set forth in our commodity risk management policy.
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The following table details our outstanding commodity-related derivatives:
| March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Notional Volume | Maturity | Notional Volume | Maturity | ||||||||||||||||||||
Mark-to-Market Derivatives | |||||||||||||||||||||||
| (Trading) | |||||||||||||||||||||||
Natural Gas (BBtu): | |||||||||||||||||||||||
Fixed Swaps/Futures | 215 | 2023-2024 | 145 | 2023 | |||||||||||||||||||
Basis Swaps IFERC/NYMEX (1) | (49,423) | 2023 | (39,563) | 2023 | |||||||||||||||||||
| Power (Megawatt): | |||||||||||||||||||||||
| Forwards | 85,400 | 2023-2029 | — | 2023-2029 | |||||||||||||||||||
| Futures | (289,918) | 2023-2024 | (21,384) | 2023 | |||||||||||||||||||
| Options – Puts | 8,000 | 2023-2024 | 119,200 | 2023 | |||||||||||||||||||
| Options – Calls | (119,200) | 2023-2024 | — | — | |||||||||||||||||||
| (Non-Trading) | |||||||||||||||||||||||
| Natural Gas (BBtu): | |||||||||||||||||||||||
| Basis Swaps IFERC/NYMEX | 40,533 | 2023-2024 | 42,440 | 2023-2024 | |||||||||||||||||||
| Swing Swaps IFERC | (58,778) | 2023-2024 | (202,815) | 2023-2024 | |||||||||||||||||||
| Fixed Swaps/Futures | (10,225) | 2023-2025 | (15,758) | 2023-2025 | |||||||||||||||||||
| Forward Physical Contracts | 532 | 2023-2025 | 2,423 | 2023-2024 | |||||||||||||||||||
| NGLs (MBbls) – Forwards/Swaps | 10,341 | 2023-2025 | 6,934 | 2023-2025 | |||||||||||||||||||
Crude (MBbls) – Forwards/Swaps | (4,257) | 2023-2025 | 795 | 2023-2024 | |||||||||||||||||||
| Refined Products (MBbls) – Futures | (2,401) | 2023-2024 | (3,547) | 2023-2024 | |||||||||||||||||||
| Fair Value Hedging Derivatives | |||||||||||||||||||||||
| (Non-Trading) | |||||||||||||||||||||||
| Natural Gas (BBtu): | |||||||||||||||||||||||
| Basis Swaps IFERC/NYMEX | (45,535) | 2023 | (37,448) | 2023 | |||||||||||||||||||
| Fixed Swaps/Futures | (45,535) | 2023 | (37,448) | 2023 | |||||||||||||||||||
| Hedged Item – Inventory | 45,535 | 2023 | 37,448 | 2023 | |||||||||||||||||||
(1)Includes aggregate amounts for open positions related to Houston Ship Channel, Waha Hub, NGPL TexOk, West Louisiana Zone and Henry Hub locations.
Interest Rate Risk
We are exposed to market risk for changes in interest rates. To maintain a cost effective capital structure, we borrow funds using a mix of fixed rate debt and variable rate debt. We also manage our interest rate exposure by utilizing interest rate swaps to achieve a desired mix of fixed and variable rate debt. We also utilize forward starting interest rate swaps to lock in the rate on a portion of our anticipated debt issuances.
The following table summarizes our interest rate swaps outstanding, none of which were designated as hedges for accounting purposes:
| Term | Type(1) | Notional Amount Outstanding | ||||||||||||||||||
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||
July 2024(2) | Forward-starting to pay an average fixed rate of 3.512% and receive a floating rate | $ | 400 | $ | 400 | |||||||||||||||
(1)Floating rates are based on SOFR.
(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.
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In April 2023, USAC entered into an interest rate swap to manage interest rate risk associated with its floating-rate credit facility. The interest rate swap has a notional amount of $700 million and a mandatory termination in April 2025. Under the interest rate swap, USAC is to pay a fixed interest rate of 3.785% and receive floating interest rate payments that are indexed to SOFR.
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.
Our natural gas transportation and midstream revenues are derived significantly from companies that engage in exploration and production activities. In addition to oil and gas producers, the Partnership’s counterparties consist of a diverse portfolio of customers across the energy industry, including petrochemical companies, commercial and industrial end-users, municipalities, gas and electric utilities, midstream companies and independent power generators. Our overall exposure may be affected positively or negatively by macroeconomic or regulatory changes that impact our counterparties to one extent or another. Currently, management does not anticipate a material adverse effect in our financial position or results of operations as a consequence of counterparty non-performance.
The Partnership has maintenance margin deposits with certain counterparties in the OTC market, primarily with independent system operators and with clearing brokers. Payments on margin deposits are required when the value of a derivative exceeds our pre-established credit limit with the counterparty. Margin deposits are returned to us on or about the settlement date for non-exchange traded derivatives, and we exchange margin calls on a daily basis for exchange traded transactions. Since the margin calls are made daily with the exchange brokers, the fair value of the financial derivative instruments are deemed current and netted in deposits paid to vendors within other current assets in the consolidated balance sheets.
For financial instruments, failure of a counterparty to perform on a contract could result in our inability to realize amounts that have been recorded on our consolidated balance sheets and recognized in net income or other comprehensive income.
Derivative Summary
The following table provides a summary of our derivative assets and liabilities:
| Fair Value of Derivative Instruments | ||||||||||||||||||||||||||
| Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||||
| March 31, 2023 | December 31, 2022 | March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||
Derivatives designated as hedging instruments: | ||||||||||||||||||||||||||
Commodity derivatives (margin deposits) | $ | 47 | $ | 87 | $ | (21) | $ | (7) | ||||||||||||||||||
| 47 | 87 | (21) | (7) | |||||||||||||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||
Commodity derivatives (margin deposits) | 255 | 506 | (231) | (411) | ||||||||||||||||||||||
Commodity derivatives | 59 | 95 | (57) | (108) | ||||||||||||||||||||||
Interest rate derivatives | — | — | (43) | (23) | ||||||||||||||||||||||
| 314 | 601 | (331) | (542) | |||||||||||||||||||||||
Total derivatives | $ | 361 | $ | 688 | $ | (352) | $ | (549) | ||||||||||||||||||
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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, 2023 | December 31, 2022 | March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||
Derivatives without offsetting agreements | Derivative liabilities | $ | — | $ | — | $ | (43) | $ | (23) | |||||||||||||||||||||||
Derivatives in offsetting agreements: | ||||||||||||||||||||||||||||||||
OTC contracts | Derivative assets (liabilities) | 59 | 95 | (57) | (108) | |||||||||||||||||||||||||||
Broker cleared derivative contracts | Other current assets (liabilities) | 302 | 593 | (252) | (418) | |||||||||||||||||||||||||||
Total gross derivatives | 361 | 688 | (352) | (549) | ||||||||||||||||||||||||||||
Offsetting agreements: | ||||||||||||||||||||||||||||||||
Counterparty netting | Derivative assets (liabilities) | (53) | (85) | 53 | 85 | |||||||||||||||||||||||||||
Counterparty netting | Other current assets (liabilities) | (208) | (359) | 208 | 359 | |||||||||||||||||||||||||||
Total net derivatives | $ | 100 | $ | 244 | $ | (91) | $ | (105) | ||||||||||||||||||||||||
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.
The following table summarizes the location and amounts recognized in our consolidated statements of operations with respect to our derivative financial instruments:
| Location | Amount of Gain (Loss) Recognized in Income on Derivatives | ||||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | ||||||||||||||||
Derivatives not designated as hedging instruments: | |||||||||||||||||
Commodity derivatives – Trading | Cost of products sold | $ | (12) | $ | 17 | ||||||||||||
Commodity derivatives – Non-trading | Cost of products sold | 68 | (17) | ||||||||||||||
Interest rate derivatives | Gains (losses) on interest rate derivatives | (20) | 114 | ||||||||||||||
Total | $ | 36 | $ | 114 | |||||||||||||
13.REPORTABLE SEGMENTS
Our reportable segments, which conduct their business primarily in the United States, are as follows:
•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.
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Consolidated revenues and expenses reflect the elimination of all material intercompany transactions.
Revenues from our intrastate transportation and storage segment are primarily reflected in natural gas sales and gathering, transportation and other fees. Revenues from our interstate transportation and storage segment are primarily reflected in gathering, transportation and other fees. Revenues from our midstream segment are primarily reflected in natural gas sales, NGL sales and gathering, transportation and other fees. Revenues from our NGL and refined products transportation and services segment are primarily reflected in NGL sales and gathering, transportation and other fees. Revenues from our crude oil transportation and services segment are primarily reflected in crude sales. Revenues from our investment in Sunoco LP segment are primarily reflected in refined product sales. Revenues from our investment in USAC segment are primarily reflected in gathering, transportation and other fees. Revenues from our all other segment are primarily reflected in natural gas sales and gathering, transportation and other fees.
We report Segment Adjusted EBITDA and consolidated Adjusted EBITDA as measures of segment performance. We define Segment Adjusted EBITDA and consolidated Adjusted EBITDA as total partnership earnings before interest, taxes, depreciation, depletion, amortization and other non-cash items, such as non-cash compensation expense, gains and losses on disposals of assets, the allowance for equity funds used during construction, unrealized gains and losses on commodity risk management activities, inventory valuation adjustments, non-cash impairment charges, losses on extinguishments of debt and other non-operating income or expense items. Inventory adjustments that are excluded from the calculation of Adjusted EBITDA represent only the changes in lower of cost or market reserves on inventory that is carried at LIFO. These amounts are unrealized valuation adjustments applied to Sunoco LP’s fuel volumes remaining in inventory at the end of the period.
Segment Adjusted EBITDA and consolidated Adjusted EBITDA reflect amounts for unconsolidated affiliates based on the same recognition and measurement methods used to record equity in earnings of unconsolidated affiliates. Adjusted EBITDA related to unconsolidated affiliates excludes the same items with respect to the unconsolidated affiliate as those excluded from the calculation of Segment Adjusted EBITDA and consolidated Adjusted EBITDA, such as interest, taxes, depreciation, depletion, amortization and other non-cash items. Although these amounts are excluded from Adjusted EBITDA related to unconsolidated affiliates, such exclusion should not be understood to imply that we have control over the operations and resulting revenues and expenses of such affiliates. We do not control our unconsolidated affiliates; therefore, we do not control the earnings or cash flows of such affiliates. The use of Segment Adjusted EBITDA or Adjusted EBITDA related to unconsolidated affiliates as an analytical tool should be limited accordingly.
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The following tables present financial information by segment:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Revenues: | |||||||||||
| Intrastate transportation and storage: | |||||||||||
| Revenues from external customers | $ | 814 | $ | 1,475 | |||||||
| Intersegment revenues | 476 | 157 | |||||||||
| 1,290 | 1,632 | ||||||||||
| Interstate transportation and storage: | |||||||||||
| Revenues from external customers | 622 | 547 | |||||||||
| Intersegment revenues | 12 | 19 | |||||||||
| 634 | 566 | ||||||||||
| Midstream: | |||||||||||
| Revenues from external customers | 809 | 1,131 | |||||||||
| Intersegment revenues | 1,945 | 2,794 | |||||||||
| 2,754 | 3,925 | ||||||||||
| NGL and refined products transportation and services: | |||||||||||
| Revenues from external customers | 4,737 | 5,245 | |||||||||
| Intersegment revenues | 866 | 1,032 | |||||||||
| 5,603 | 6,277 | ||||||||||
| Crude oil transportation and services: | |||||||||||
| Revenues from external customers | 6,079 | 5,926 | |||||||||
| Intersegment revenues | 1 | — | |||||||||
| 6,080 | 5,926 | ||||||||||
| Investment in Sunoco LP: | |||||||||||
| Revenues from external customers | 5,349 | 5,397 | |||||||||
| Intersegment revenues | 13 | 5 | |||||||||
| 5,362 | 5,402 | ||||||||||
| Investment in USAC: | |||||||||||
| Revenues from external customers | 192 | 159 | |||||||||
| Intersegment revenues | 5 | 4 | |||||||||
| 197 | 163 | ||||||||||
| All other: | |||||||||||
| Revenues from external customers | 393 | 611 | |||||||||
| Intersegment revenues | 151 | 104 | |||||||||
| 544 | 715 | ||||||||||
| Eliminations | (3,469) | (4,115) | |||||||||
| Total revenues | $ | 18,995 | $ | 20,491 | |||||||
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| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Segment Adjusted EBITDA: | |||||||||||
| Intrastate transportation and storage | $ | 409 | $ | 444 | |||||||
| Interstate transportation and storage | 536 | 453 | |||||||||
| Midstream | 641 | 807 | |||||||||
| NGL and refined products transportation and services | 939 | 700 | |||||||||
| Crude oil transportation and services | 526 | 593 | |||||||||
| Investment in Sunoco LP | 221 | 191 | |||||||||
| Investment in USAC | 118 | 98 | |||||||||
| All other | 43 | 54 | |||||||||
| Adjusted EBITDA (consolidated) | $ | 3,433 | $ | 3,340 | |||||||
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Reconciliation of net income to Adjusted EBITDA: | |||||||||||
| Net income | $ | 1,447 | $ | 1,487 | |||||||
| Depreciation, depletion and amortization | 1,059 | 1,028 | |||||||||
| Interest expense, net of interest capitalized | 619 | 559 | |||||||||
| Income tax expense (benefit) | 71 | (9) | |||||||||
| Impairment losses | 1 | 300 | |||||||||
| (Gains) losses on interest rate derivatives | 20 | (114) | |||||||||
| Non-cash compensation expense | 37 | 36 | |||||||||
| Unrealized losses on commodity risk management activities | 130 | 45 | |||||||||
| Inventory valuation adjustments (Sunoco LP) | (29) | (120) | |||||||||
| Adjusted EBITDA related to unconsolidated affiliates | 161 | 125 | |||||||||
| Equity in earnings of unconsolidated affiliates | (88) | (56) | |||||||||
| Other, net | 5 | 59 | |||||||||
| Adjusted EBITDA (consolidated) | $ | 3,433 | $ | 3,340 | |||||||
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Tabular dollar and unit amounts, except per unit data, 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, 2022 filed with the SEC on February 17, 2023. 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, 2022 filed with the SEC on February 17, 2023. Additional information on forward-looking statements is discussed in “Forward-Looking Statements.”
Unless the context requires otherwise, references to “we,” “us,” “our,” the “Partnership” and “Energy Transfer” mean Energy Transfer LP and its consolidated subsidiaries.
RECENT DEVELOPMENTS
Lotus Midstream Acquisition
On May 2, 2023, Energy Transfer acquired Lotus Midstream Operations, LLC (“Lotus Midstream”) for total consideration of $900 million in cash and approximately 44.5 million newly issued Energy Transfer common units. Lotus Midstream owns and operates Centurion Pipeline Company LLC, an integrated crude midstream platform located in the Permian Basin.
Sunoco LP Acquisition
On May 1, 2023, Sunoco LP completed the acquisition of 16 refined product terminals located across the East Coast and Midwest from Zenith Energy for $110 million. Sunoco LP expects the acquisition to be accretive to its unitholders in the first year of ownership.
Quarterly Cash Distribution
In April 2023, Energy Transfer announced a quarterly distribution of $0.3075 per unit ($1.23 annualized) on Energy Transfer common units for the quarter ended March 31, 2023.
Regulatory Update
Interstate Natural Gas Transportation Regulation
Rate Regulation
Effective January 2018, the 2017 Tax Cuts 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 clarified that a pipeline organized as a master limited partnership will 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. On July 31, 2020, the United States Court of Appeals for the District of Columbia Circuit issued an opinion upholding the FERC’s decision denying a separate master limited partnership recovery of an income tax allowance and its decision not to require the master limited partnership to refund accumulated deferred income tax balances. In light of the rehearing order’s clarification regarding an individual entity’s ability to argue in support of recovery of an income tax allowance and the court’s subsequent opinion upholding denial of an income tax allowance to a master limited partnership, the impact of the FERC’s policy on the treatment of income taxes on the rates we can charge for FERC-regulated transportation services is unknown at this time.
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Even without application of the FERC’s recent rate making-related policy statements and rulemakings, 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, including ROE and tax-related components, but also other pipeline costs that will continue to affect FERC’s determination of just and reasonable cost of service rates. 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 Tiger Pipeline, Midcontinent Express Pipeline and Fayetteville Express Pipeline, 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 Florida Gas Transmission Pipeline, Transwestern and Panhandle, have a mix of tariff rate, discount rate and negotiated rate agreements. 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 changes to FERC policies, 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 our cost-of-service components and the outcomes of any challenges to our rates by the FERC or our shippers.
On July 18, 2018, the FERC issued a final rule establishing procedures to evaluate rates charged by the FERC-jurisdictional gas pipelines in light of the Tax Act and the FERC’s Revised Policy Statement. By an order issued January 16, 2019, the FERC initiated a review of Panhandle’s existing rates pursuant to Section 5 of the Natural Gas Act to determine whether the rates currently charged by Panhandle are just and reasonable and set the matter for hearing. On August 30, 2019, Panhandle filed a general rate proceeding under Section 4 of the Natural Gas Act. The Natural Gas Act Section 5 and Section 4 proceedings were consolidated by order of the Chief Judge on October 1, 2019. The initial decision by the administrative law judge was issued on March 26, 2021. On April 26, 2021, Panhandle filed its brief on exceptions to the initial decision. On May 17, 2021, Panhandle filed its brief opposing exceptions in this proceeding, which was denied by operation of law as of February 17, 2023. Panhandle submitted requisite compliance filings with FERC, but on December 16, 2022, the FERC issued its order on Panhandle’s rate case. On January 17, 2023, Panhandle filed its request for rehearing in the proceeding, which was denied by operation of law as of February 17, 2023. On March 23, 2023, Panhandle appealed the initial decision (and the February 17, 2023 Notice of Denial of Rehearing by Operation of Law and Providing for Further Consideration) to the United States Court of Appeals for the District of Columbia (“Court of Appeals”). On April 25, 2023, the Court of Appeals stayed the appeal while FERC further considers its December 16, 2022 order.
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. On February 18, 2021, the FERC issued another NOI (“2021 NOI”), reopening its review of the 1999 Policy Statement. Comments on the 2021 NOI were due on May 26, 2021; we filed comments in the FERC proceeding. In September 2021, FERC issued a Notice of Technical Conference on Greenhouse Gas Mitigation related to natural gas infrastructure projects authorized under Sections 3 and 7 of the Natural Gas Act. A technical conference was held on November 19, 2021, and post-technical conference comments were submitted to the FERC on January 7, 2022.
On February 18, 2022, the FERC issued two new policy statements: (1) an Updated Policy Statement on the Certification of New Interstate Natural Gas Facilities and (2) a Policy Statement on the Consideration of Greenhouse Gas Emissions in Natural Gas Infrastructure Project Reviews (“2022 Policy Statements”), to be effective that same day. On March 24, 2022, the FERC issued an order designating the 2022 Policy Statements as draft policy statements, and requested further comments. The FERC will not apply the now draft 2022 Policy Statements to pending applications or applications to be filed at FERC until it issues any final guidance on these topics. Comments on the 2022 Policy Statements were due on April 25, 2022, and reply comments were due on May 25, 2022. We are unable to predict what, if any, changes may be proposed as a result of the 2022 Policy Statements that might affect our natural gas pipeline or LNG facility projects, or when such new policies, if any, might become effective. We do not expect that any change in these policy statements would affect us in a materially different manner than any other natural gas pipeline company operating in the United States.
Interstate Common Carrier Regulation
The FERC utilizes an indexing rate methodology which, as currently in effect, allows common carriers to change their rates within prescribed ceiling levels that are tied to changes in the Producer Price Index for Finished Goods, or PPI-FG. Many existing pipelines utilize the FERC liquids index to change transportation rates annually. 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.
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On December 17, 2020, FERC issued an order establishing a new index of PPI-FG plus 0.78%. The FERC received requests for rehearing of its December 17, 2020 order and on January 20, 2022, granted rehearing and modified the oil index. Specifically, for the five-year period commencing July 1, 2021 and ending June 30, 2026, FERC-regulated liquids pipelines charging indexed rates are permitted to adjust their indexed ceilings annually by PPI-FG minus 0.21%. FERC directed liquids pipelines to recompute their ceiling levels for July 1, 2021 through June 30, 2022, as well as the ceiling levels for the period July 1, 2022 to June 30, 2023, based on the new index level. Where an oil pipeline’s filed rates exceed its ceiling levels, FERC ordered such oil pipelines to reduce the rate to bring it into compliance with the recomputed ceiling level to be effective March 1, 2022. Some parties sought rehearing of the January 20 order with FERC, which was denied by FERC on May 6, 2022. Certain parties have appealed the January 20 and May 6 orders. Such appeals remain pending at the D.C. Circuit.
On October 20, 2022, the FERC issued a policy statement on the Standard Applied to Complaints Against Oil Pipeline Index Rate Changes to establish guidelines regarding how the FERC will evaluate shipper complaints against oil pipeline index rate increases. Specifically, the policy statement adopted the proposal in the FERC’s earlier Notice of Inquiry issued on March 25, 2020 to eliminate the “Substantially Exacerbate Test” as the preliminary screen applied to complaints against index rate increases and instead adopt the proposal to apply the “Percentage Comparison Test” as the preliminary screen for both protests and complaints against index rate increases. At this time, we cannot determine the effect of a change in the FERC’s preliminary screen for complaints against index rates changes, however, a revised screen would result in a threshold aligned with the existing threshold for protests against index rate increases. Any complaint or protest raised by a shipper could materially and adversely affect our financial condition, results of operations or cash flows.
RESULTS OF OPERATIONS
We report Segment Adjusted EBITDA and consolidated Adjusted EBITDA as measures of segment performance. We define Segment Adjusted EBITDA and consolidated Adjusted EBITDA as total partnership earnings before interest, taxes, depreciation, depletion, amortization and other non-cash items, such as non-cash compensation expense, gains and losses on disposals of assets, the allowance for equity funds used during construction, unrealized gains and losses on commodity risk management activities, inventory valuation adjustments, non-cash impairment charges, losses on extinguishments of debt and other non-operating income or expense items. Inventory adjustments that are excluded from the calculation of Adjusted EBITDA represent only the changes in lower of cost or market reserves on inventory that is carried at LIFO. These amounts are unrealized valuation adjustments applied to Sunoco LP’s fuel volumes remaining in inventory at the end of the period.
Segment Adjusted EBITDA and consolidated Adjusted EBITDA reflect amounts for unconsolidated affiliates based on the same recognition and measurement methods used to record equity in earnings of unconsolidated affiliates. Adjusted EBITDA related to unconsolidated affiliates excludes the same items with respect to the unconsolidated affiliate as those excluded from the calculation of Segment Adjusted EBITDA and consolidated Adjusted EBITDA, such as interest, taxes, depreciation, depletion, amortization and other non-cash items. Although these amounts are excluded from Adjusted EBITDA related to unconsolidated affiliates, such exclusion should not be understood to imply that we have control over the operations and resulting revenues and expenses of such affiliates. We do not control our unconsolidated affiliates; therefore, we do not control the earnings or cash flows of such affiliates. The use of Segment Adjusted EBITDA or Adjusted EBITDA related to unconsolidated affiliates as an analytical tool should be limited accordingly.
Segment Adjusted EBITDA, as reported for each segment in the following table, is analyzed for each segment in the section titled “Segment Operating Results.” Adjusted EBITDA 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.
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Consolidated Results
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||
| Segment Adjusted EBITDA: | |||||||||||||||||
| Intrastate transportation and storage | $ | 409 | $ | 444 | $ | (35) | |||||||||||
| Interstate transportation and storage | 536 | 453 | 83 | ||||||||||||||
| Midstream | 641 | 807 | (166) | ||||||||||||||
| NGL and refined products transportation and services | 939 | 700 | 239 | ||||||||||||||
| Crude oil transportation and services | 526 | 593 | (67) | ||||||||||||||
| Investment in Sunoco LP | 221 | 191 | 30 | ||||||||||||||
| Investment in USAC | 118 | 98 | 20 | ||||||||||||||
| All other | 43 | 54 | (11) | ||||||||||||||
| Adjusted EBITDA (consolidated) | $ | 3,433 | $ | 3,340 | $ | 93 | |||||||||||
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||
| Reconciliation of net income to Adjusted EBITDA: | |||||||||||||||||
| Net income | $ | 1,447 | $ | 1,487 | $ | (40) | |||||||||||
| Depreciation, depletion and amortization | 1,059 | 1,028 | 31 | ||||||||||||||
| Interest expense, net of interest capitalized | 619 | 559 | 60 | ||||||||||||||
| Income tax expense (benefit) | 71 | (9) | 80 | ||||||||||||||
| Impairment losses | 1 | 300 | (299) | ||||||||||||||
| (Gains) losses on interest rate derivatives | 20 | (114) | 134 | ||||||||||||||
| Non-cash compensation expense | 37 | 36 | 1 | ||||||||||||||
| Unrealized losses on commodity risk management activities | 130 | 45 | 85 | ||||||||||||||
| Inventory valuation adjustments (Sunoco LP) | (29) | (120) | 91 | ||||||||||||||
| Adjusted EBITDA related to unconsolidated affiliates | 161 | 125 | 36 | ||||||||||||||
| Equity in earnings of unconsolidated affiliates | (88) | (56) | (32) | ||||||||||||||
| Other, net | 5 | 59 | (54) | ||||||||||||||
| Adjusted EBITDA (consolidated) | $ | 3,433 | $ | 3,340 | $ | 93 | |||||||||||
Net Income. For the three months ended March 31, 2023 compared to the same period last year, net income decreased $40 million, or approximately 3%. Operating income increased $216 million primarily due to the recognition of a $300 million impairment loss in the prior period, partially offset by increases in operating expenses. In addition, equity in earnings of unconsolidated affiliates increased $32 million. These increases to net income were offset by higher interest expense and losses on interest rate derivatives, as well as an increase in income tax expense. Additional discussion on these items affecting net income is available below and in “Segment Operating Results.”
Adjusted EBITDA (consolidated). For the three months ended March 31, 2023 compared to the same period last year, Adjusted EBITDA increased $93 million, or approximately 3%. This increase included a $239 million increase from the NGL and refined products transportation and services segment, primarily driven by higher volumes, higher rates and optimization activities. The increase in consolidated Adjusted EBITDA also included an $83 million increase from the interstate transportation and storage segment, primarily due to higher contracted volumes, higher rates and new assets placed in service. These increases in Adjusted EBITDA were partially offset by a $166 million decrease from the midstream segment primarily driven by unfavorable natural gas and NGL prices, as well as a $67 million decrease from the crude oil transportation and services segment primarily driven by lower results from our crude oil acquisition and marketing business.
Additional information on changes impacting Adjusted EBITDA for the three months ended March 31, 2023 compared to the same period last year is available in “Segment Operating Results.”
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Depreciation, Depletion and Amortization. Depreciation, depletion and amortization increased for the three months ended March 31, 2023 compared to the same period last year primarily due to additional depreciation and amortization from assets recently placed in service and recent acquisitions.
Interest Expense, net of interest capitalized. Interest expense, net of interest capitalized, increased for the three months ended March 31, 2023 compared to the same period last year, primarily due to the following:
•the Partnership’s (excluding Sunoco LP and USAC) interest expense increased by $40 million due to higher interest rates on floating rate debt and lower capitalized interest, partially offset by a lower aggregate debt balance;
•Sunoco LP’s interest expense increased by $12 million primarily due to higher interest rates on floating rate debt; and
•USAC’s interest expense increased by $8 million primarily due to higher weighted average interest rates and increased borrowings under its credit agreement.
Income Tax Expense (Benefit). For the three months ended March 31, 2023 compared to the same period last year, income tax expense increased due to higher earnings from the Partnership's consolidated corporate subsidiaries.
Impairment Losses. The $300 million impairment loss during the three months ended March 31, 2022 was related to the impairment of Energy Transfer Canada’s assets recorded in March 2022, based on the anticipated proceeds from the expected sale of those assets. The sale was completed in August 2022.
For the three months ended March 31, 2023, impairment losses included a total of $1 million recognized by USAC related to its compression equipment.
(Gains) Losses on Interest Rate Derivatives. Gains and losses on interest rate derivatives resulted from changes in forward interest rates, which caused our forward-starting swaps to change in value. The magnitude of the gains and losses during the respective periods also reflected higher aggregate notional amount of interest rate swaps outstanding in the prior period.
Unrealized Losses on Commodity Risk Management Activities. The unrealized losses on our commodity risk management activities include changes in fair value of commodity derivatives and the hedged inventory included in designated fair value hedging relationships. Information on the unrealized gains and losses within each segment are included in “Segment Operating Results,” and additional information on the commodity-related derivatives, including notional volumes, maturities and fair values, is available in “Item 3. Quantitative and Qualitative Disclosures About Market Risk” and in Note 12 to our consolidated financial statements included in “Item 1. Financial Statements.”
Inventory Valuation Adjustments. Inventory valuation adjustments represent changes in lower of cost or market reserves using the last-in, first-out method on Sunoco LP’s inventory. These amounts are unrealized valuation adjustments applied to fuel volumes remaining in inventory at the end of the period. For the three months ended March 31, 2023 and 2022, increases in fuel prices reduced lower of cost or market reserve requirements by $29 million and $120 million, respectively, resulting in favorable impacts to net income.
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.”
Other, net. Other, net primarily includes the amortization of regulatory assets and other income and expense amounts.
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Supplemental Information on Unconsolidated Affiliates
The following table presents financial information related to unconsolidated affiliates:
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||
| Equity in earnings (losses) of unconsolidated affiliates: | |||||||||||||||||
| Citrus | $ | 34 | $ | 34 | $ | — | |||||||||||
| MEP | 25 | (4) | 29 | ||||||||||||||
| White Cliffs | 1 | — | 1 | ||||||||||||||
| Explorer | 8 | 4 | 4 | ||||||||||||||
| Other | 20 | 22 | (2) | ||||||||||||||
| Total equity in earnings of unconsolidated affiliates | $ | 88 | $ | 56 | $ | 32 | |||||||||||
Adjusted EBITDA related to unconsolidated affiliates(1): | |||||||||||||||||
| Citrus | $ | 79 | $ | 77 | $ | 2 | |||||||||||
| MEP | 34 | 5 | 29 | ||||||||||||||
| White Cliffs | 6 | 5 | 1 | ||||||||||||||
| Explorer | 13 | 7 | 6 | ||||||||||||||
| Other | 29 | 31 | (2) | ||||||||||||||
| Total Adjusted EBITDA related to unconsolidated affiliates | $ | 161 | $ | 125 | $ | 36 | |||||||||||
| Distributions received from unconsolidated affiliates: | |||||||||||||||||
| Citrus | $ | 48 | $ | 60 | $ | (12) | |||||||||||
| MEP | 33 | 4 | 29 | ||||||||||||||
| White Cliffs | 5 | 5 | — | ||||||||||||||
| Explorer | 8 | 5 | 3 | ||||||||||||||
| Other | 23 | 16 | 7 | ||||||||||||||
| Total distributions received from unconsolidated affiliates | $ | 117 | $ | 90 | $ | 27 | |||||||||||
(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 following tables 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.
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•Adjusted EBITDA related to unconsolidated affiliates. Adjusted EBITDA related to unconsolidated affiliates excludes the same items with respect to the unconsolidated affiliate as those excluded from the calculation of Segment Adjusted EBITDA, such as interest, taxes, depreciation, depletion, amortization and other non-cash items. Although these amounts are excluded from Adjusted EBITDA related to unconsolidated affiliates, such exclusion should not be understood to imply that we have control over the operations and resulting revenues and expenses of such affiliates. We do not control our unconsolidated affiliates; therefore, we do not control the earnings or cash flows of such affiliates.
The following analysis of segment operating results includes a measure of segment margin. 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. Among the GAAP measures reported by the Partnership, the most directly comparable measure to segment margin is Segment Adjusted EBITDA; a reconciliation of segment margin to Segment Adjusted EBITDA is included in the following tables for each segment where segment margin is presented.
In addition, for certain segments, the following sections 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.
Intrastate Transportation and Storage
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||
Natural gas transported (BBtu/d) | 14,697 | 13,973 | 724 | ||||||||||||||
| Withdrawals from storage natural gas inventory (BBtu) | 6,000 | 21,858 | (15,858) | ||||||||||||||
Revenues | $ | 1,290 | $ | 1,632 | $ | (342) | |||||||||||
Cost of products sold | 985 | 1,171 | (186) | ||||||||||||||
Segment margin | 305 | 461 | (156) | ||||||||||||||
| Unrealized losses on commodity risk management activities | 174 | 46 | 128 | ||||||||||||||
Operating expenses, excluding non-cash compensation expense | (62) | (63) | 1 | ||||||||||||||
Selling, general and administrative expenses, excluding non-cash compensation expense | (14) | (12) | (2) | ||||||||||||||
Adjusted EBITDA related to unconsolidated affiliates | 6 | 6 | — | ||||||||||||||
Other | — | 6 | (6) | ||||||||||||||
Segment Adjusted EBITDA | $ | 409 | $ | 444 | $ | (35) | |||||||||||
Volumes. For the three months ended March 31, 2023 compared to the same period last year, transported volumes increased primarily due to increased utilization on our Enable Oklahoma Intrastate Transmission system and higher production in the Haynesville Shale.
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Segment Margin. The components of our intrastate transportation and storage segment margin were as follows:
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||
Transportation fees | $ | 216 | $ | 215 | $ | 1 | |||||||||||
Natural gas sales and other (excluding unrealized gains and losses) | 176 | 209 | (33) | ||||||||||||||
Retained fuel revenues (excluding unrealized gains and losses) | 15 | 32 | (17) | ||||||||||||||
| Storage margin (excluding unrealized gains and losses and fair value inventory adjustments) | 72 | 51 | 21 | ||||||||||||||
| Unrealized losses on commodity risk management activities and fair value inventory adjustments | (174) | (46) | (128) | ||||||||||||||
Total segment margin | $ | 305 | $ | 461 | $ | (156) | |||||||||||
Segment Adjusted EBITDA. For the three months ended March 31, 2023 compared to the same period last year, Segment Adjusted EBITDA related to our intrastate transportation and storage segment decreased due to the net impacts of the following:
•a decrease of $33 million in realized natural gas sales and other primarily due to lower pipeline optimization;
•a decrease of $17 million in retained fuel revenues related to lower natural gas prices; and
•an increase of $2 million in selling, general and administrative expenses primarily due to higher legal fees and insurance expenses; partially offset by
•an increase of $21 million in storage margin primarily due to higher storage optimization;
•an increase of $1 million in transportation fees primarily due to higher fees on our Haynesville and Oklahoma assets; and
•a decrease of $1 million in operating expenses related to a $9 million decrease in cost of fuel consumption, offset by increases in ad valorem taxes, outside services, utilities and materials expenses.
Interstate Transportation and Storage
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||
| Natural gas transported (BBtu/d) | 16,818 | 15,098 | 1,720 | ||||||||||||||
| Natural gas sold (BBtu/d) | 22 | 41 | (19) | ||||||||||||||
| Revenues | $ | 634 | $ | 566 | $ | 68 | |||||||||||
| Cost of products sold | 2 | 19 | (17) | ||||||||||||||
| Segment margin | 632 | 547 | 85 | ||||||||||||||
| Operating expenses, excluding non-cash compensation, amortization and accretion expenses | (186) | (171) | (15) | ||||||||||||||
| Selling, general and administrative expenses, excluding non-cash compensation, amortization and accretion expenses | (31) | (31) | — | ||||||||||||||
| Adjusted EBITDA related to unconsolidated affiliates | 121 | 88 | 33 | ||||||||||||||
| Other | — | 20 | (20) | ||||||||||||||
| Segment Adjusted EBITDA | $ | 536 | $ | 453 | $ | 83 | |||||||||||
Volumes. For the three months ended March 31, 2023 compared to the same period last year, transported volumes increased primarily due to our Gulf Run Pipeline being placed in service in December 2022, as well as more capacity sold and higher utilization on our Transwestern, Panhandle and Trunkline systems due to increased demand.
Segment Adjusted EBITDA. For the three months ended March 31, 2023 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 $85 million in segment margin primarily due to a $28 million increase in transportation revenue from several of our interstate pipeline systems due to higher contracted volumes and higher rates, a $28 million increase resulting from
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our Gulf Run Pipeline being placed in service in December 2022, an $18 million increase due to the realization in the current period of certain amounts related to a shipper bankruptcy, a $16 million increase from sales of operational gas and a $7 million increase in parking revenue. These increases were partially offset by a $12 million decrease in reservation fees primarily due to slightly lower volumes on our Rover system; and
•an increase of $33 million in Adjusted EBITDA related to unconsolidated affiliates primarily due to a $29 million increase from our MEP joint venture as a result of higher revenue due to capacity sold at higher rates, and a $3 million increase from our Southeast Supply Header joint venture resulting from higher revenue due to higher contracted volumes and higher rates; partially offset by
•an increase of $15 million in operating expenses primarily due to an $8 million increase resulting from our Gulf Run Pipeline being placed in service in December 2022 and an aggregate $7 million increase in right-of-way expense, materials, outside services and other direct expenses; and
•a decrease of $20 million in other primarily due to the realization in the prior period of certain amounts related to a shipper bankruptcy.
Midstream
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||
Gathered volumes (BBtu/d) | 19,750 | 17,333 | 2,417 | ||||||||||||||
NGLs produced (MBbls/d) | 811 | 757 | 54 | ||||||||||||||
Equity NGLs (MBbls/d) | 40 | 42 | (2) | ||||||||||||||
Revenues | $ | 2,754 | $ | 3,925 | $ | (1,171) | |||||||||||
Cost of products sold | 1,781 | 2,885 | (1,104) | ||||||||||||||
Segment margin | 973 | 1,040 | (67) | ||||||||||||||
| Unrealized gains on commodity risk management activities | — | (2) | 2 | ||||||||||||||
Operating expenses, excluding non-cash compensation expense | (288) | (234) | (54) | ||||||||||||||
Selling, general and administrative expenses, excluding non-cash compensation expense | (50) | (44) | (6) | ||||||||||||||
Adjusted EBITDA related to unconsolidated affiliates | 5 | 9 | (4) | ||||||||||||||
Other | 1 | 38 | (37) | ||||||||||||||
Segment Adjusted EBITDA | $ | 641 | $ | 807 | $ | (166) | |||||||||||
Volumes. For the three months ended March 31, 2023 compared to the same period last year, gathered volumes and NGL production increased primarily due to increased producer activity in all regions.
Segment Margin. The components of our midstream segment gross margin were as follows:
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||
| Gathering and processing fee-based revenues | $ | 763 | $ | 697 | $ | 66 | |||||||||||
| Non-fee-based contracts and processing | 210 | 341 | (131) | ||||||||||||||
| Unrealized gains on commodity risk management activities | — | 2 | (2) | ||||||||||||||
| Total segment margin | $ | 973 | $ | 1,040 | $ | (67) | |||||||||||
Segment Adjusted EBITDA. For the three months ended March 31, 2023 compared to the same period last year, Segment Adjusted EBITDA related to our midstream segment decreased due to the net impacts of the following:
•a decrease of $138 million in non-fee-based margin due to unfavorable natural gas prices of $70 million and NGL prices of $68 million;
•an increase of $54 million in operating expenses due to a $22 million increase in repairs, material and equipment rental costs, a $14 million increase in employee costs, a $9 million increase in maintenance project costs, a $6 million increase
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from the Woodford Express acquisition and the Grey Wolf processing plant coming online in late 2022 and a $2 million increase in ad valorem taxes;
•an increase of $6 million in selling, general and administrative expenses due to a $3 million increase in legal and insurance expenses, a $2 million increase in employee and IT costs and a $1 million increase in corporate allocations;
•a decrease of $4 million in Adjusted EBITDA related to unconsolidated affiliates due to the sale of the Partnership’s membership interest in Ranch Westex JV LLC in 2022; and
•a decrease of $37 million in other primarily due to the realization in the prior period of certain amounts related to a shipper bankruptcy; partially offset by
•an increase of $66 million in fee-based margin due to increased throughput across all regions; and
•an increase of $7 million in non-fee-based margin due to increased producer activity in the Mid-continent/Panhandle and Permian regions.
NGL and Refined Products Transportation and Services
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||
| NGL transportation volumes (MBbls/d) | 1,984 | 1,752 | 232 | ||||||||||||||
| Refined products transportation volumes (MBbls/d) | 501 | 496 | 5 | ||||||||||||||
| NGL and refined products terminal volumes (MBbls/d) | 1,344 | 1,180 | 164 | ||||||||||||||
| NGL fractionation volumes (MBbls/d) | 949 | 804 | 145 | ||||||||||||||
| Revenues | $ | 5,603 | $ | 6,277 | $ | (674) | |||||||||||
| Cost of products sold | 4,402 | 5,356 | (954) | ||||||||||||||
| Segment margin | 1,201 | 921 | 280 | ||||||||||||||
| Unrealized gains on commodity risk management activities | (31) | (5) | (26) | ||||||||||||||
| Operating expenses, excluding non-cash compensation expense | (221) | (202) | (19) | ||||||||||||||
| Selling, general and administrative expenses, excluding non-cash compensation expense | (38) | (35) | (3) | ||||||||||||||
| Adjusted EBITDA related to unconsolidated affiliates | 28 | 21 | 7 | ||||||||||||||
| Segment Adjusted EBITDA | $ | 939 | $ | 700 | $ | 239 | |||||||||||
Volumes. For the three months ended March 31, 2023 compared to the same period last year, NGL transportation volumes increased primarily due to higher volumes from the Permian region, higher volumes on our Mariner East pipeline system and higher volumes on our export pipelines into our Nederland Terminal.
NGL and refined products terminal volumes increased for the three months ended March 31, 2023 compared to the same period last year primarily due to higher volumes on our export pipelines into our Nederland Terminal, higher volumes on our Mariner East pipelines into our Marcus Hook Terminal and higher volumes through our Texas marketing terminals.
The aforementioned increase in transportation volumes also led to higher fractionated volumes at our Mont Belvieu, Texas fractionation facility for the three months ended March 31, 2023 compared to the same period last year.
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Segment Margin. The components of our NGL and refined products transportation and services segment margin were as follows:
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||
| Transportation margin | $ | 562 | $ | 479 | $ | 83 | |||||||||||
| Fractionators and refinery services margin | 210 | 185 | 25 | ||||||||||||||
| Terminal services margin | 200 | 151 | 49 | ||||||||||||||
| Storage margin | 79 | 72 | 7 | ||||||||||||||
| Marketing margin | 119 | 29 | 90 | ||||||||||||||
| Unrealized gains on commodity risk management activities | 31 | 5 | 26 | ||||||||||||||
| Total segment margin | $ | 1,201 | $ | 921 | $ | 280 | |||||||||||
Segment Adjusted EBITDA. For the three months ended March 31, 2023 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 $90 million in marketing margin primarily due to higher gains of $52 million from the optimization of NGL and refined product inventories and a $30 million increase in northeast blending and optimization;
•an increase of $83 million in transportation margin primarily due to a $52 million increase resulting from higher y-grade throughput and higher rates driven by contractual rate escalations on our Texas pipeline system, a $17 million increase resulting from higher throughput on our Mariner East pipelines and a $12 million increase from higher exported volumes feeding into our Nederland Terminal;
•an increase of $49 million in terminal services margin primarily due to a $25 million increase from higher throughput at our Marcus Hook Terminal and a $23 million increase from higher export volumes loaded at our Nederland Terminal;
•an increase of $25 million in fractionators and refinery services margin primarily due to a $29 million increase from higher volumes and higher rates driven by contractual rate escalations. This increase was partially offset by a $5 million decrease from a less favorable pricing environment impacting our refinery services business;
•an increase of $7 million in Adjusted EBITDA related to unconsolidated affiliates primarily due to higher volumes on the Explorer and Wolverine pipelines; and
•an increase of $7 million in storage margin primarily due to fees generated from exported volumes; partially offset by
•an increase of $19 million in operating expenses primarily due to a $6 million increase in employee costs, a $5 million increase in maintenance project costs and a $7 million increase in materials costs; and
•an increase of $3 million in selling, general and administrative expenses primarily due to increases in overhead expenses and insurance costs.
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Crude Oil Transportation and Services
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||
| Crude transportation volumes (MBbls/d) | 4,238 | 4,216 | 22 | ||||||||||||||
| Crude terminal volumes (MBbls/d) | 2,940 | 2,765 | 175 | ||||||||||||||
| Revenues | $ | 6,080 | $ | 5,926 | $ | 154 | |||||||||||
| Cost of products sold | 5,374 | 5,179 | 195 | ||||||||||||||
| Segment margin | 706 | 747 | (41) | ||||||||||||||
| Unrealized losses on commodity risk management activities | 2 | 11 | (9) | ||||||||||||||
| Operating expenses, excluding non-cash compensation expense | (153) | (137) | (16) | ||||||||||||||
| Selling, general and administrative expenses, excluding non-cash compensation expense | (31) | (30) | (1) | ||||||||||||||
| Adjusted EBITDA related to unconsolidated affiliates | 1 | 1 | — | ||||||||||||||
Other | 1 | 1 | — | ||||||||||||||
| Segment Adjusted EBITDA | $ | 526 | $ | 593 | $ | (67) | |||||||||||
Volumes. For the three months ended March 31, 2023 compared to the same period last year, crude transportation volumes were higher on our Texas pipeline systems due to higher Permian Basin crude production and the Ted Collins Link going in service in the second quarter of 2022. Volumes on our Bayou Bridge Pipeline were also higher, partly offset by lower volumes on our Bakken Pipeline due to production impacts from Winter Storm Elliot in the fourth quarter of 2022 which also impacted January 2023 production. Crude terminal volumes were higher due to stronger export demand and refinery utilization.
Segment Adjusted EBITDA. For the three months ended March 31, 2023 compared to the same period last year, Segment Adjusted EBITDA related to our crude oil transportation and services segment decreased primarily due to the net impacts of the following:
•a decrease of $50 million in segment margin (excluding unrealized gains and losses on commodity risk management activities) primarily due a $48 million decrease from our crude oil acquisition and marketing business due to the timing of optimization gains; and
•an increase of $16 million in operating expenses primarily due to an $8 million increase in volume-driven expenses, a $5 million increase primarily from maintenance project expenses and a $4 million increase in employee costs.
Investment in Sunoco LP
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||
Revenues | $ | 5,362 | $ | 5,402 | $ | (40) | |||||||||||
Cost of products sold | 4,987 | 4,972 | 15 | ||||||||||||||
Segment margin | 375 | 430 | (55) | ||||||||||||||
| Unrealized gains on commodity risk management activities | (11) | (9) | (2) | ||||||||||||||
Operating expenses, excluding non-cash compensation expense | (97) | (97) | — | ||||||||||||||
Selling, general and administrative expenses, excluding non-cash compensation expense | (25) | (22) | (3) | ||||||||||||||
Adjusted EBITDA related to unconsolidated affiliates | 3 | 2 | 1 | ||||||||||||||
| Inventory valuation adjustments | (29) | (120) | 91 | ||||||||||||||
| Other | 5 | 7 | (2) | ||||||||||||||
Segment Adjusted EBITDA | $ | 221 | $ | 191 | $ | 30 | |||||||||||
The Investment in Sunoco LP segment reflects the consolidated results of Sunoco LP.
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Segment Adjusted EBITDA. For the three months ended March 31, 2023 compared to the same period last year, Segment Adjusted EBITDA related to our investment in Sunoco LP segment reflected an increase in the profit on motor fuel sales of $26 million, primarily due to a 4% increase in profit per gallon sold and a 9% increase in gallons sold.
Investment in USAC
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||
Revenues | $ | 197 | $ | 163 | $ | 34 | |||||||||||
Cost of products sold | 34 | 25 | 9 | ||||||||||||||
Segment margin | 163 | 138 | 25 | ||||||||||||||
Operating expenses, excluding non-cash compensation expense | (32) | (29) | (3) | ||||||||||||||
Selling, general and administrative expenses, excluding non-cash compensation expense | (13) | (11) | (2) | ||||||||||||||
Segment Adjusted EBITDA | $ | 118 | $ | 98 | $ | 20 | |||||||||||
The Investment in USAC segment reflects the consolidated results of USAC.
Segment Adjusted EBITDA. For the three months ended March 31, 2023 compared to the same period last year, Segment Adjusted EBITDA related to our investment in USAC segment increased primarily due to higher average rates across USAC’s fleet and higher revenue-generating horsepower.
All Other
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||
| Revenues | $ | 544 | $ | 715 | $ | (171) | |||||||||||
| Cost of products sold | 502 | 614 | (112) | ||||||||||||||
| Segment margin | 42 | 101 | (59) | ||||||||||||||
| Unrealized (gains) losses on commodity risk management activities | (4) | 4 | (8) | ||||||||||||||
| Operating expenses, excluding non-cash compensation expense | (6) | (34) | 28 | ||||||||||||||
| Selling, general and administrative expenses, excluding non-cash compensation expense | (9) | (17) | 8 | ||||||||||||||
| Other and eliminations | 20 | — | 20 | ||||||||||||||
| Segment Adjusted EBITDA | $ | 43 | $ | 54 | $ | (11) | |||||||||||
Amounts reflected in our all other segment primarily include:
•our natural gas marketing operations;
•our wholly-owned natural gas compression operations;
•our investment in coal handling facilities; and
•our Canadian operations, until those assets were divested in August 2022.
Segment Adjusted EBITDA. For the three months ended March 31, 2023 compared to the same period last year, Segment Adjusted EBITDA related to our all other segment increased primarily due to the net impacts of the following:
•a decrease of $30 million due to the sale of Energy Transfer Canada in 2022; and
•a decrease of $5 million due to an unfavorable environment for our power trading activities; partially offset by
•a decrease of $9 million in mergers and acquisition expense; and
•an increase of $17 million from our natural gas marketing subsidiary.
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LIQUIDITY AND CAPITAL RESOURCES
Overview
Our ability to satisfy obligations and pay distributions to unitholders will depend on our 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.
We currently expect capital expenditures in 2023 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 | $ | 25 | $ | 50 | $ | 50 | $ | 60 | |||||||||||||||
Interstate transportation and storage (1) | 275 | 325 | 175 | 185 | |||||||||||||||||||
| Midstream | 850 | 900 | 190 | 200 | |||||||||||||||||||
| NGL and refined products transportation and services | 550 | 575 | 120 | 130 | |||||||||||||||||||
Crude oil transportation and services (1) | 175 | 200 | 140 | 145 | |||||||||||||||||||
| All other (including eliminations) | 25 | 50 | 65 | 70 | |||||||||||||||||||
Total capital expenditures | $ | 1,900 | $ | 2,100 | $ | 740 | $ | 790 | |||||||||||||||
(1)Includes capital expenditures related to our proportionate share of the Bakken, Rover and Bayou Bridge pipeline joint ventures, and the Orbit Gulf Coast NGL Exports joint venture.
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 have included 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 expect to fund growth capital expenditures with proceeds of borrowings under our credit facilities, along with cash from operations.
Sunoco LP currently expects to invest at least $150 million in growth capital expenditures and approximately $65 million in maintenance capital expenditures for the full year 2023.
USAC currently plans to spend approximately $26 million in maintenance capital expenditures and spend between $260 million and $270 million in expansion capital expenditures for the full year 2023.
Cash Flows
Our 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”), excluding the impacts of non-cash items and changes in operating assets and liabilities. 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 and acquisition of assets, while changes in non-cash compensation expense resulted from changes in the 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 price risk management assets and liabilities,
49
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, 2023 compared to three months ended March 31, 2022. Cash provided by operating activities during 2023 was $3.35 billion compared to $2.37 billion for 2022, and net income was $1.45 billion for 2023 and $1.49 billion for 2022. The difference between net income and net cash provided by operating activities for the three months ended March 31, 2023 primarily consisted of net changes in operating assets and liabilities (net of effects of acquisitions) of $801 million and other non-cash items totaling $1.04 billion.
The non-cash activity in 2023 and 2022 consisted primarily of depreciation, depletion and amortization of $1.06 billion and $1.03 billion, respectively, non-cash compensation expense of $37 million and $36 million, respectively, favorable inventory valuation adjustments of $29 million and $120 million, respectively, deferred income taxes of $53 million and $32 million, respectively, and impairment losses of $1 million and $300 million, respectively. Non-cash activity also included equity in earnings of unconsolidated affiliates of $88 million and $56 million in 2023 and 2022, respectively.
Cash provided by operating activities includes cash distributions received from unconsolidated affiliates that are deemed to be paid from cumulative earnings, which distributions were $87 million in 2023 and $44 million in 2022.
Cash paid for interest, net of interest capitalized, was $406 million and $366 million for the three months ended March 31, 2023 and 2022, respectively. Interest capitalized was $15 million and $33 million for the three months ended March 31, 2023 and 2022, respectively.
Investing Activities
Cash flows from investing activities primarily consist of cash amounts paid for acquisitions, capital expenditures, cash contributions to our joint ventures and cash proceeds from sales or contributions of assets or businesses. In addition, distributions from equity investees are included in cash flows from investing activities if the distributions are deemed to be a return of the Partnership’s investment. 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, 2023 compared to three months ended March 31, 2022. Cash used in investing activities during 2023 was $803 million compared to $1.27 billion for 2022. Total capital expenditures (excluding the allowance for equity funds used during construction and net of contributions in aid of construction costs) for 2023 were $837 million compared to $732 million for 2022. Additional detail related to our capital expenditures is provided in the following table. In 2022, we paid $325 million in cash for the acquisition of Caliche Coastal Holdings, LLC (subsequently renamed Energy Transfer Spindletop LLC) and Sunoco LP paid a cash deposit of $264 million related to its acquisition of a transmix processing and terminal facility.
The following is a summary of capital expenditures (including only our proportionate share of the Bakken, Rover and Bayou Bridge pipeline joint ventures, and the Orbit Gulf Coast NGL Exports joint venture, net of contributions in aid of construction costs) on an accrual basis for the three months ended March 31, 2023:
| Capital Expenditures Recorded During Period | |||||||||||||||||
| Growth | Maintenance | Total | |||||||||||||||
| Intrastate transportation and storage | $ | 22 | $ | 13 | $ | 35 | |||||||||||
| Interstate transportation and storage | 58 | 24 | 82 | ||||||||||||||
| Midstream | 191 | 44 | 235 | ||||||||||||||
| NGL and refined products transportation and services | 116 | 30 | 146 | ||||||||||||||
| Crude oil transportation and services | 13 | 25 | 38 | ||||||||||||||
Investment in Sunoco LP | 29 | 8 | 37 | ||||||||||||||
| Investment in USAC | 51 | 5 | 56 | ||||||||||||||
| All other (including eliminations) | 7 | 13 | 20 | ||||||||||||||
| Total capital expenditures | $ | 487 | $ | 162 | $ | 649 | |||||||||||
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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. Distributions increase between the periods based on increases in the number of common units outstanding or increases in the distribution rate.
Three months ended March 31, 2023 compared to three months ended March 31, 2022. Cash used in financing activities during 2023 was $2.47 billion compared to $324 million for 2022. During 2023, we had a net decrease in our debt level of $1.02 billion compared to a net increase of $230 million for 2022.
In 2023 and 2022, we paid distributions of $1.00 billion and $608 million, respectively, to our partners. In 2023 and 2022, we paid distributions of $441 million and $307 million, respectively, to noncontrolling interests. In 2023 and 2022, we paid distributions of $12 million in both periods to our redeemable noncontrolling interests.
In 2023 and 2022, we received capital contributions of $3 million and $373 million, respectively, in cash from noncontrolling interests.
Description of Indebtedness
Our outstanding consolidated indebtedness was as follows:
| March 31, 2023 | December 31, 2022 | ||||||||||
| Energy Transfer Indebtedness: | |||||||||||
Notes and Debentures (1) | $ | 37,318 | $ | 39,468 | |||||||
Five-Year Credit Facility | 1,957 | 793 | |||||||||
| Subsidiary Indebtedness: | |||||||||||
| Transwestern Senior Notes | 250 | 250 | |||||||||
| Bakken Senior Notes | 1,850 | 1,850 | |||||||||
| Sunoco LP Senior Notes and lease-related obligations | 2,694 | 2,694 | |||||||||
| USAC Senior Notes | 1,475 | 1,475 | |||||||||
| HFOTCO Tax Exempt Notes | 225 | 225 | |||||||||
| Revolving credit facilities: | |||||||||||
| Sunoco LP Credit Facility | 800 | 900 | |||||||||
| USAC Credit Facility | 709 | 646 | |||||||||
| Other long-term debt | 3 | 3 | |||||||||
| Net unamortized premiums, discounts, and fair value adjustments | 171 | 183 | |||||||||
| Deferred debt issuance costs | (221) | (225) | |||||||||
| Total debt | 47,231 | 48,262 | |||||||||
| Less: current maturities of long-term debt | 2 | 2 | |||||||||
| Long-term debt, less current maturities | $ | 47,229 | $ | 48,260 | |||||||
(1)As of March 31, 2023, this balance included a total of $2.96 billion aggregate principal amount of senior notes due on or before March 31, 2024, which were classified as long-term as management has the intent and ability to refinance the borrowings on a long-term basis.
Senior Notes - Recent Transactions
In the first quarter of 2023, the Partnership redeemed $350 million aggregate principal amount of its 3.45% Senior Notes due January 2023, $800 million aggregate principal amount of its 3.60% Senior Notes due February 2023 and $1.00 billion aggregate principal amount of its 4.25% Senior Notes due March 2023 using proceeds from its Five-Year Credit Facility (defined below).
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Credit Facilities and Commercial Paper
Five-Year Credit Facility
The Partnership’s revolving credit facility (the “Five-Year Credit Facility”) allows for unsecured borrowings up to $5.00 billion and matures in April 2027. The Five-Year Credit Facility contains an accordion feature, under which the total aggregate commitment may be increased up to $7.00 billion under certain conditions.
As of March 31, 2023, the Five-Year Credit Facility had $1.96 billion of outstanding borrowings, of which $757 million consisted of commercial paper. The amount available for future borrowings was $3.01 billion, after accounting for outstanding letters of credit in the amount of $32 million. The weighted average interest rate on the total amount outstanding as of March 31, 2023 was 6.05%.
Sunoco LP Credit Facility
As of March 31, 2023, Sunoco LP’s credit facility had $800 million of outstanding borrowings and $7 million in standby letters of credit and matures in April 2027. The amount available for future borrowings at March 31, 2023 was $693 million. The weighted average interest rate on the total amount outstanding as of March 31, 2023 was 6.61%.
USAC Credit Facility
As of March 31, 2023, USAC’s credit facility, which matures in December 2026, had $709 million of outstanding borrowings and no outstanding letters of credit. As of March 31, 2023, USAC had $891 million of availability under its credit facility, and subject to compliance with applicable financial covenants, available borrowing capacity of $375 million. The weighted average interest rate on the total amount outstanding as of March 31, 2023 was 7.38%.
Compliance with our Covenants
We and our subsidiaries were in compliance with all requirements, tests, limitations and covenants related to our debt agreements as of March 31, 2023.
CASH DISTRIBUTIONS
Cash Distributions Paid by Energy Transfer
Under its Partnership Agreement, Energy Transfer will distribute all of its Available Cash, as defined in the Partnership Agreement, within 50 days following the end of each fiscal quarter. Available Cash generally means, with respect to any quarter, all cash on hand at the end of such quarter less the amount of cash reserves that are necessary or appropriate in the reasonable discretion of our General Partner to provide for future cash requirements.
Cash Distributions on Energy Transfer Common Units
Distributions declared and/or paid with respect to Energy Transfer common units subsequent to December 31, 2022 were as follows:
| Quarter Ended | Record Date | Payment Date | Rate | |||||||||||||||||
| December 31, 2022 | February 7, 2023 | February 21, 2023 | $ | 0.3050 | ||||||||||||||||
| March 31, 2023 | May 8, 2023 | May 22, 2023 | $ | 0.3075 | ||||||||||||||||
Cash Distributions on Energy Transfer Preferred Units
Distributions declared on the Energy Transfer Preferred Units were as follows:
| Period Ended | Record Date | Payment Date | Series A (1) | Series B (1) | Series C | Series D | Series E | Series F (1) | Series G (1) | Series H (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2022 | February 1, 2023 | February 15, 2023 | $ | 31.250 | $ | 33.125 | $ | 0.4609 | $ | 0.4766 | $ | 0.475 | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2023 | May 1, 2023 | May 15, 2023 | 21.982 | — | 0.4609 | 0.4766 | 0.475 | 33.750 | 35.625 | 32.500 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
(1)Series B, Series F, Series G and Series H distributions are paid on a semi-annual basis. See additional information on Series A distributions below.
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Distributions on the Series A Preferred Units previously accrued at a fixed rate of 6.250% per annum of the liquidation preference of $1,000. Beginning February 15, 2023, the Series A Preferred Units have a floating distribution rate set each quarterly distribution period at a percentage of the $1,000 liquidation preference equal to the then-current three-month LIBOR plus a spread of 4.028% per annum. Distributions on Series A Preferred Units were previously payable semi-annually in arrears until February 15, 2023, and, after February 15, 2023, quarterly in arrears, when, as, and if declared by our General Partner out of legally available funds for such purpose.
Description of Energy Transfer Preferred Units
A summary of the distribution and redemption rights associated with the Energy Transfer Preferred Units is included in Note 9 in “Item 1. Financial Statements.”
Cash Distributions Paid by Subsidiaries
The Partnership’s consolidated financial statements include Sunoco LP and USAC, both of which are master limited partnerships, as well as other non-wholly-owned consolidated joint ventures. The following sections describe cash distributions made by our publicly traded subsidiaries, Sunoco LP and USAC, both of which are required by their respective partnership agreements to distribute all cash on hand (less appropriate reserves determined by the boards of directors of their respective general partners) subsequent to the end of each quarter.
Cash Distributions Paid by Sunoco LP
Distributions on Sunoco LP’s common units declared and/or paid by Sunoco LP subsequent to December 31, 2022 were as follows:
| Quarter Ended | Record Date | Payment Date | Rate | |||||||||||||||||
| December 31, 2022 | February 7, 2023 | February 21, 2023 | $ | 0.8255 | ||||||||||||||||
| March 31, 2023 | May 8, 2023 | May 22, 2023 | 0.8420 | |||||||||||||||||
Cash Distributions Paid by USAC
Distributions on USAC’s common units declared and/or paid by USAC subsequent to December 31, 2022 were as follows:
| Quarter Ended | Record Date | Payment Date | Rate | |||||||||||||||||
| December 31, 2022 | January 23, 2023 | February 3, 2023 | $ | 0.525 | ||||||||||||||||
| March 31, 2023 | April 24, 2023 | May 5, 2023 | 0.525 | |||||||||||||||||
CRITICAL ACCOUNTING ESTIMATES
The Partnership’s critical accounting estimates are described in its Annual Report on Form 10-K filed with the SEC on February 17, 2023. No significant changes have occurred subsequent to the Form 10-K filing.
FORWARD-LOOKING STATEMENTS
This quarterly report contains various forward-looking statements and information that are based on our beliefs and those of our General Partner, as well as assumptions made by and information currently available to us. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. When used in this quarterly report, words such as “anticipate,” “project,” “expect,” “plan,” “goal,” “forecast,” “estimate,” “intend,” “could,” “believe,” “may,” “will” and similar expressions and statements regarding our plans and objectives for future operations, are intended to identify forward-looking statements. Although we and our General Partner believe that the expectations on which such forward-looking statements are based are reasonable, neither we nor our General Partner can give assurances that such expectations 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, our actual results may vary materially from those anticipated, estimated, projected or expected. Among the key risk factors that may have a direct bearing on our results of operations and financial condition are:
•the ability of our subsidiaries to make cash distributions to us, which is dependent on their results of operations, cash flows and financial condition;
•the actual amount of cash distributions by our subsidiaries to us;
53
•the volumes transported on our subsidiaries’ pipelines and gathering systems;
•the level of throughput in our subsidiaries’ processing and treating facilities;
•the fees our subsidiaries charge and the margins they realize for their gathering, treating, processing, storage and transportation services;
•the prices and market demand for, and the relationship between, natural gas and NGLs;
•energy prices generally;
•impacts of world health events;
•the prices of natural gas and NGLs compared to the price of alternative and competing fuels;
•the general level of petroleum product demand and the availability and price of NGL supplies;
•the level of domestic oil, natural gas and NGL production;
•the availability of imported oil, natural gas and NGLs;
•actions taken by foreign oil and gas producing nations;
•the political and economic stability of petroleum producing nations;
•the effect of weather conditions on demand for oil, natural gas and NGLs;
•availability of local, intrastate and interstate transportation systems;
•the continued ability to find and contract for new sources of natural gas supply;
•availability and marketing of competitive fuels;
•the impact of energy conservation efforts;
•energy efficiencies and technological trends;
•governmental regulation and taxation;
•changes to, and the application of, regulation of tariff rates and operational requirements related to our subsidiaries’ interstate and intrastate pipelines;
•hazards or operating risks incidental to the gathering, treating, processing and transporting of natural gas and NGLs;
•competition from other midstream companies and interstate pipeline companies;
•loss of key personnel;
•loss of key natural gas producers or the providers of fractionation services;
•reductions in the capacity or allocations of third-party pipelines that connect with our subsidiaries pipelines and facilities;
•the effectiveness of risk-management policies and procedures and the ability of our subsidiaries liquids marketing counterparties to satisfy their financial commitments;
•the nonpayment or nonperformance by our subsidiaries’ customers;
•regulatory, environmental, political and legal uncertainties that may affect the timing and cost of our subsidiaries’ internal growth projects, such as our subsidiaries’ construction of additional pipeline systems;
•risks associated with the construction of new pipelines and treating and processing facilities or additions to our subsidiaries’ existing pipelines and facilities, including difficulties in obtaining permits and rights-of-way or other regulatory approvals and the performance by third-party contractors;
•the availability and cost of capital and our subsidiaries’ ability to access certain capital sources;
•a deterioration of the credit and capital markets;
•risks associated with the assets and operations of entities in which our subsidiaries own a noncontrolling interests, including risks related to management actions at such entities that our subsidiaries may not be able to control or exert influence;
•the ability to successfully identify and consummate strategic acquisitions at purchase prices that are accretive to our financial results and to successfully integrate acquired businesses;
54
•changes in laws and regulations to which we are subject, including tax, environmental, transportation and employment regulations or new interpretations by regulatory agencies concerning such laws and regulations; and
•the costs and effects of legal and administrative proceedings.
You should not put undue reliance on any forward-looking statements. When considering forward-looking statements, please review the risks described under “Part I - Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 17, 2023. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.
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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, 2022 filed with the SEC on February 17, 2023, 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 in our Annual Report on Form 10-K for the year ended December 31, 2022. Since December 31, 2022, there have been no material changes to our primary market risk exposures or how those exposures are managed.
Commodity Price Risk
The following table 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, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| 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 | 215 | $ | — | $ | — | 145 | $ | — | $ | — | |||||||||||||||||||||||||
Basis Swaps IFERC/NYMEX (1) | (49,423) | (9) | 1 | (39,563) | 54 | 3 | |||||||||||||||||||||||||||||
Power (Megawatt): | |||||||||||||||||||||||||||||||||||
Forwards | 85,400 | — | — | — | 1 | — | |||||||||||||||||||||||||||||
Futures | (289,918) | 2 | 1 | (21,384) | — | — | |||||||||||||||||||||||||||||
Options – Puts | 8,000 | — | — | 119,200 | — | — | |||||||||||||||||||||||||||||
Options – Calls | (119,200) | 1 | — | — | — | — | |||||||||||||||||||||||||||||
(Non-Trading) | |||||||||||||||||||||||||||||||||||
Natural Gas (BBtu): | |||||||||||||||||||||||||||||||||||
Basis Swaps IFERC/NYMEX | 40,533 | 2 | 1 | 42,440 | (41) | 4 | |||||||||||||||||||||||||||||
Swing Swaps IFERC | (58,778) | 2 | 1 | (202,815) | 63 | 7 | |||||||||||||||||||||||||||||
Fixed Swaps/Futures | (10,225) | 2 | 4 | (15,758) | 51 | 7 | |||||||||||||||||||||||||||||
Forward Physical Contracts | 532 | 5 | 1 | 2,423 | 8 | 1 | |||||||||||||||||||||||||||||
NGLs (MBbls) – Forwards/Swaps | 10,341 | 14 | 35 | 6,934 | (41) | 63 | |||||||||||||||||||||||||||||
Crude (MBbls) – Forwards/Swaps | (4,257) | 22 | 26 | 795 | 26 | 22 | |||||||||||||||||||||||||||||
Refined Products (MBbls) – Futures | (2,401) | (15) | 27 | (3,547) | (39) | 37 | |||||||||||||||||||||||||||||
Fair Value Hedging Derivatives | |||||||||||||||||||||||||||||||||||
(Non-Trading) | |||||||||||||||||||||||||||||||||||
Natural Gas (BBtu): | |||||||||||||||||||||||||||||||||||
Basis Swaps IFERC/NYMEX | (45,535) | (1) | 1 | (37,448) | 22 | 2 | |||||||||||||||||||||||||||||
Fixed Swaps/Futures | (45,535) | 27 | 13 | (37,448) | 58 | 17 | |||||||||||||||||||||||||||||
(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
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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, 2023, we and our subsidiaries had $4.29 billion of floating rate debt outstanding. A hypothetical change of 100 basis points would result in a maximum potential change to interest expense of $43 million annually; however, our actual change in interest expense 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, none of which are designated as hedges for accounting purposes (dollar amounts presented in millions):
| Term | Type(1) | Notional Amount Outstanding | ||||||||||||||||||
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||
July 2024(2) | Forward-starting to pay an average fixed rate of 3.512% and receive a floating rate | $ | 400 | $ | 400 | |||||||||||||||
(1)Floating rates are based on SOFR.
(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 $80 million as of March 31, 2023. 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.
The Partnership also has outstanding Series A Preferred Units with aggregate liquidation preference of $950 million, for which distributions are based on a floating rate beginning February 15, 2023. A hypothetical change of 100 basis points in interest rates for the Series A Preferred Units would result in a net change in preferred unit distributions of $10 million annually.
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 Co-Chief Executive Officers (Co-Principal Executive Officers) 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 Co-Principal Executive Officers and the Principal Financial Officer of our General Partner concluded that our disclosure controls and procedures were effective as of March 31, 2023 to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to management, including the Co-Principal Executive Officers and Principal Financial Officer of our General Partner, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control 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, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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 17, 2023 and Note 10 in “Item 1. Financial Statements” in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2023.
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 following environmental proceedings 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 reasonably could result in monetary sanctions in excess of $0.3 million.
On June 29, 2022, near Henderson, Tennessee, a Mid Valley Pipeline Company LLC (“Mid Valley”) mowing contractor struck an exposed section of the 22-inch diameter Hornsby to Denver line segment while mowing. The brush cutter mowing implement cut open the pipeline and released an estimated 4,345 barrels of crude oil into the surrounding area. Approximately 3,343 barrels of crude oil were recovered during initial remediation activities with the remaining volume contained within the materials removed and disposed of in accordance with applicable environmental laws and regulations. Corrective action is being completed pursuant to the Tennessee DEC’s Division of Remediation - Voluntary Action Program (“VAP”). No injuries resulted from the incident. Mid Valley received a Notice of Federal Interest regarding the incident and has also supplied PHMSA with information as requested. No other government agency action has occurred at this time. Mid Valley has submitted a draft closure report to the TDEC and received comments from the agency. The comments were addressed and submitted in the final report on April 28, 2023, for closure under the VAP. We are awaiting final invoicing from the federal agencies (United States Environmental Protection Agency and United States Fish and Wildlife Service) and their consultants related to the incident.
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.
For additional information required in this Item, see disclosure under the headings “Litigation and Contingencies” and “Environmental Matters” in Note 10 to our consolidated financial statements in “Item 1. Financial Statements”, which information is incorporated by reference into this Item.
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 Form10-K for the year ended December 31, 2022 filed with the SEC on February 17, 2023.
ITEM 6. EXHIBITS
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The exhibits listed on the following exhibit index are filed or furnished, as indicated, as part of this report:
Exhibit Number | Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 3.3 | ||||||||
| 3.4 | ||||||||
| 3.5 | ||||||||
| 3.6 | ||||||||
| 3.7 | ||||||||
| 3.8 | ||||||||
| 3.9 | ||||||||
| 3.10 | ||||||||
| 3.11 | ||||||||
| 3.12 | ||||||||
| 22.1 | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 31.3* | ||||||||
| 32.1** | ||||||||
| 32.2** | ||||||||
| 32.3** | ||||||||
| 101* | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) our Consolidated Balance Sheets; (ii) our Consolidated Statements of Operations; (iii) our Consolidated Statements of Comprehensive Income; (iv) our Consolidated Statements of Equity; (v) our Consolidated Statements of Cash Flows; and (vi) the notes to our Consolidated Financial Statements | |||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | |||||||
| * | 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 LP | ||||||||||||||
| By: | LE GP, LLC, its general partner | |||||||||||||
| Date: | May 4, 2023 | By: | /s/ A. Troy Sturrock | |||||||||||
| A. Troy Sturrock | ||||||||||||||
| Group Senior Vice President, Controller and Principal Accounting Officer | ||||||||||||||
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