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EX-32.2 - EXHIBIT 32.2 - Energy Transfer, LPetlp06-30x2017ex322.htm
EX-32.1 - EXHIBIT 32.1 - Energy Transfer, LPetlp06-30x2017ex321.htm
EX-31.2 - EXHIBIT 31.2 - Energy Transfer, LPetlp06-30x2017ex312.htm
EX-31.1 - EXHIBIT 31.1 - Energy Transfer, LPetlp06-30x2017ex311.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11727
ENERGY TRANSFER, LP
(Exact name of registrant as specified in its charter)
Delaware
 
73-1493906
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
8111 Westchester Drive, Suite 600, Dallas, Texas 75225
(Address of principal executive offices) (zip code)
(214) 981-0700
(Registrant’s telephone number, including area code)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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
 
¨  (Do not check if a smaller reporting company)
 
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
Energy Transfer, LP meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.
 



FORM 10-Q
ENERGY TRANSFER, LP AND SUBSIDIARIES
TABLE OF CONTENTS


i


Forward-Looking Statements
Certain matters discussed in this report, excluding historical information, as well as some statements by Energy Transfer, LP (the “Partnership” or “ETLP”) in periodic press releases and some oral statements of the Partnership’s officials during presentations about the Partnership, include forward-looking statements. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. Statements using words such as “anticipate,” “believe,” “intend,” “project,” “plan,” “expect,” “continue,” “estimate,” “goal,” “forecast,” “may,” “will” or similar expressions help identify forward-looking statements. Although the Partnership and its general partner believe such forward-looking statements are based on reasonable assumptions and current expectations and projections about future events, no assurance can be given that such assumptions, expectations, or projections will prove to be correct. Forward-looking statements are subject to a variety of risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, the Partnership’s actual results may vary materially from those anticipated, projected or expected, forecasted, estimated or expressed in forward-looking statements since many of the factors that determine these results are subject to uncertainties and risks that are difficult to predict and beyond management’s control. For additional discussion of risks, uncertainties and assumptions, see “Part I – Item 1A. Risk Factors” in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission on February 24, 2017.
Definitions
The following is a list of certain acronyms and terms generally used in the energy industry and throughout this document:
 
/d
 
per day
 
 
 
 
AmeriGas
 
AmeriGas Partners, L.P.
 
 
 
 
 
AOCI
 
accumulated other comprehensive income (loss)
 
 
 
 
 
AROs
 
asset retirement obligations
 
 
 
 
 
Bbls
 
barrels
 
 
 
 
Btu
 
British thermal unit, an energy measurement used by gas companies to convert the volume of gas used to its heat equivalent, and thus calculate the actual energy used
 
 
 
 
Capacity
 
capacity of a pipeline, processing plant or storage facility refers to the maximum capacity under normal operating conditions and, with respect to pipeline transportation capacity, is subject to multiple factors (including natural gas injections and withdrawals at various delivery points along the pipeline and the utilization of compression) which may reduce the throughput capacity from specified capacity levels
 
 
 
 
 
Citrus
 
Citrus, LLC
 
 
 
 
 
CrossCountry
 
CrossCountry Energy, LLC
 
 
 
 
 
DOJ
 
U.S. Department of Justice
 
 
 
 
 
ETC Compression
 
ETC Compression, LLC
 
 
 
 
 
EPA
 
Environmental Protection Agency
 
 
 
 
 
ETC FEP
 
ETC Fayetteville Express Pipeline, LLC
 
 
 
 
 
ETC MEP
 
ETC Midcontinent Express Pipeline, L.L.C.
 
 
 
 
 
ETC OLP
 
La Grange Acquisition, L.P., which conducts business under the assumed name of Energy Transfer Company
 
 
 
 
 
ETC Tiger
 
ETC Tiger Pipeline, LLC
 
 
 
 
 
ETE
 
Energy Transfer Equity, L.P., a publicly traded partnership and the owner of ETP LLC for the periods presented herein
 
 
 
 
 
ET Interstate
 
Energy Transfer Interstate Holdings, LLC
 
 
 
 
 
ET Rover
 
ET Rover Pipeline LLC
 
 
 
 
 
ETLP Credit Facility
 
The Partnership’s $3.75 billion revolving credit facility
 
 
 
 
 
ETP
 
Energy Transfer Partners, L.P. subsequent to the close of the merger of Sunoco Logistics Partners L.P. and Energy Transfer Partners, L.P.
 
 
 
 


ii


 
ETP GP
 
Energy Transfer Partners GP, L.P., the general partner of ETP
 
 
 
 
 
ETP Holdco
 
ETP Holdco Corporation
 
 
 
 
 
ETP LLC
 
Energy Transfer Partners, L.L.C., the general partner of ETP GP
 
 
 
 
Exchange Act
 
Securities Exchange Act of 1934
 
 
 
 
 
FEP
 
Fayetteville Express Pipeline LLC
 
 
 
 
 
FERC
 
Federal Energy Regulatory Commission
 
 
 
 
 
FGT
 
Florida Gas Transmission Company, LLC
 
 
 
 
 
GAAP
 
accounting principles generally accepted in the United States of America
 
 
 
 
 
HPC
 
RIGS Haynesville Partnership Co. and its wholly-owned subsidiary, Regency Intrastate Gas LP
 
 
 
 
 
IDRs
 
incentive distribution rights
 
 
 
 
 
Lake Charles LNG
 
Lake Charles LNG Company, LLC (previously named Trunkline LNG Company, LLC), a subsidiary of ETE
 
 
 
 
 
LIBOR
 
London Interbank Offered Rate
 
 
 
 
 
MEP
 
Midcontinent Express Pipeline LLC
 
 
 
 
 
MMBtu
 
million British thermal units
 
 
 
 
 
MMcf
 
million cubic feet
 
 
 
 
 
MTBE
 
methyl tertiary butyl ether
 
 
 
 
 
NGL
 
natural gas liquid, such as propane, butane and natural gasoline
 
 
 
 
 
NYMEX
 
New York Mercantile Exchange
 
 
 
 
OSHA
 
federal Occupational Safety and Health Act
 
 
 
 
 
OTC
 
over-the-counter
 
 
 
 
 
Panhandle
 
Panhandle Eastern Pipe Line Company, LP and its subsidiaries
 
 
 
 
 
PCBs
 
polychlorinated biphenyls
 
 
 
 
 
PennTex
 
PennTex Midstream Partners, LP
 
 
 
 
 
PES
 
Philadelphia Energy Solutions, a refining joint venture
 
 
 
 
 
Preferred Units
 
ETP Series A cumulative convertible preferred units
 
 
 
 
 
Regency
 
Regency Energy Partners LP
 
 
 
 
 
Retail Holdings
 
ETP Retail Holdings, LLC, a wholly-owned subsidiary of Sunoco, Inc.
 
 
 
 
 
Sea Robin
 
Sea Robin Pipeline Company, LLC, a subsidiary of Panhandle
 
 
 
 
 
SEC
 
Securities and Exchange Commission
 
 
 
 
 
Sunoco Logistics
 
Sunoco Logistics Partners L.P.
 
 
 
 
 
Transwestern
 
Transwestern Pipeline Company, LLC
 
 
 
 
 
Trunkline
 
Trunkline Gas Company, LLC, a subsidiary of Panhandle
Adjusted EBITDA is a term used throughout this document, which we define as earnings before interest, taxes, depreciation, depletion, amortization and other non-cash items, such as non-cash compensation expense, gains and losses on disposals of assets, the allowance for equity funds used during construction, unrealized gains and losses on commodity risk management activities, non-cash impairment charges, losses on extinguishments of debt and other non-operating income or expense items. Unrealized gains and losses on commodity risk management activities include unrealized gains and losses on commodity derivatives and inventory fair value adjustments (excluding lower of cost or market adjustments). Adjusted EBITDA reflects amounts for less than wholly-owned subsidiaries based on 100% of the subsidiaries’ results of operations and for unconsolidated affiliates based on the Partnership’s proportionate ownership.


iii


PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENERGY TRANSFER, LP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(unaudited)
 
June 30, 2017
 
December 31, 2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
209

 
$
360

Accounts receivable, net
1,203

 
3,002

Accounts receivable from related companies
1,116

 
209

Inventories
653

 
1,712

Income taxes receivable
148

 
128

Derivative assets
5

 
20

Other current assets
142

 
298

Total current assets
3,476

 
5,729

 
 
 
 
Property, plant and equipment
47,256

 
58,220

Accumulated depreciation and depletion
(6,809
)
 
(7,303
)
 
40,447

 
50,917

 
 
 
 
Advances to and investments in unconsolidated affiliates
11,585

 
4,280

Other non-current assets, net
628

 
672

Intangible assets, net
3,962

 
4,696

Goodwill
2,294

 
3,897

Total assets
$
62,392

 
$
70,191


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


ENERGY TRANSFER, LP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(unaudited)
 
June 30, 2017
 
December 31, 2016
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
956

 
$
2,900

Accounts payable to related companies
229

 
43

Derivative liabilities
2

 
166

Accrued and other current liabilities
2,111

 
1,905

Current maturities of long-term debt
1,365

 
1,189

Total current liabilities
4,663

 
6,203

 
 
 
 
Long-term debt, less current maturities
24,968

 
31,741

Long-term notes payable – related company

 
250

Non-current derivative liabilities
201

 
76

Deferred income taxes
4,243

 
4,394

Other non-current liabilities
934

 
952

 
 
 
 
Commitments and contingencies

 

Preferred Units

 
33

Redeemable noncontrolling interests

 
15

 
 
 
 
Equity:
 
 
 
Partner’s capital
24,429

 
18,634

Accumulated other comprehensive income
7

 
8

Total partner’s capital
24,436

 
18,642

Noncontrolling interest
2,947

 
7,885

Total equity
27,383

 
26,527

Total liabilities and equity
$
62,392

 
$
70,191


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


ENERGY TRANSFER, LP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions)
(unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
REVENUES:
 
 
 
 
 
 
 
Natural gas sales
$
1,022

 
$
695

 
$
2,034

 
$
1,533

NGL sales
1,478

 
1,150

 
3,025

 
2,090

Crude sales
724

 
1,713

 
3,071

 
2,923

Gathering, transportation and other fees
982

 
1,045

 
2,006

 
2,005

Refined product sales
155

 
234

 
626

 
479

Other
377

 
452

 
871

 
740

Total revenues
4,738

 
5,289

 
11,633

 
9,770

COSTS AND EXPENSES:
 
 
 
 
 
 
 
Cost of products sold
3,130

 
3,630

 
8,322

 
6,598

Operating expenses
373

 
374

 
752

 
722

Depreciation, depletion and amortization
473

 
496

 
1,033

 
966

Selling, general and administrative
86

 
74

 
196

 
155

Total costs and expenses
4,062

 
4,574

 
10,303

 
8,441

OPERATING INCOME
676

 
715

 
1,330

 
1,329

OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Interest expense, net
(320
)
 
(317
)
 
(659
)
 
(636
)
Equity in earnings of unconsolidated affiliates
23

 
119

 
96

 
195

Losses on interest rate derivatives
(25
)
 
(81
)
 
(20
)
 
(151
)
Other, net
67

 
27

 
93

 
44

INCOME BEFORE INCOME TAX EXPENSE (BENEFIT)
421

 
463

 
840

 
781

Income tax expense (benefit)
71

 
(9
)
 
126

 
(67
)
NET INCOME
350

 
472

 
714

 
848

Less: Net income attributable to noncontrolling interest
89

 
102

 
129

 
167

NET INCOME ATTRIBUTABLE TO PARTNERS
$
261

 
$
370

 
$
585

 
$
681


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


ENERGY TRANSFER, LP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
(unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
350

 
$
472

 
$
714

 
$
848

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in value of available-for-sale securities
1

 
3

 
3

 
5

Actuarial gain (loss) relating to pension and other postretirement benefit plans
(1
)
 
6

 
(3
)
 
(3
)
Foreign currency translation adjustments

 

 

 
(1
)
Change in other comprehensive income from unconsolidated affiliates
(1
)
 
(5
)
 
(1
)
 
(11
)
 
(1
)
 
4

 
(1
)
 
(10
)
Comprehensive income
349

 
476

 
713

 
838

Less: Comprehensive income attributable to noncontrolling interest
89

 
102

 
129

 
167

Comprehensive income attributable to partners
$
260

 
$
374

 
$
584

 
$
671


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


ENERGY TRANSFER, LP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2017
(Dollars in millions)
(unaudited)
 
Partner’s Capital
 
Accumulated Other Comprehensive Income
 
Noncontrolling Interest
 
Total
Balance, December 31, 2016
$
18,634

 
$
8

 
$
7,885

 
$
26,527

Distributions to partners
(889
)
 

 

 
(889
)
Distributions to noncontrolling interest

 

 
(167
)
 
(167
)
Units issued for cash
885

 

 

 
885

Capital contributions from noncontrolling interest

 

 
1,432

 
1,432

PennTex unit acquisition
(49
)
 

 
(231
)
 
(280
)
Sunoco Logistics Merger
4,033

 

 
(6,802
)
 
(2,769
)
Sale of Bakken Pipeline interest
1,260

 

 
740

 
2,000

Other comprehensive income, net of tax

 
(1
)
 

 
(1
)
Other, net
(30
)
 

 
(39
)
 
(69
)
Net income
585

 

 
129

 
714

Balance, June 30, 2017
$
24,429

 
$
7

 
$
2,947

 
$
27,383


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


ENERGY TRANSFER, LP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(unaudited)
 
Six Months Ended
June 30,
 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
Net income
$
714

 
$
848

Reconciliation of net income to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
1,033

 
966

Deferred income taxes
122

 
(79
)
Amortization included in interest expense
(1
)
 
(12
)
Inventory valuation adjustments
2

 
(106
)
Unit-based compensation expense
37

 
38

Distributions on unvested awards
(15
)
 
(13
)
Equity in earnings of unconsolidated affiliates
(96
)
 
(195
)
Distributions from unconsolidated affiliates
353

 
199

Other non-cash
(135
)
 
(124
)
Net change in operating assets and liabilities, net of effects of acquisition
(942
)
 
(96
)
Net cash provided by operating activities
1,072

 
1,426

INVESTING ACTIVITIES
 
 
 
Proceeds from Bakken Pipeline Transaction
2,000

 

Proceeds from the Sunoco, Inc. retail business to Sunoco LP transaction

 
2,200

Cash paid for acquisition of PennTex noncontrolling interest
(280
)
 

Cash paid for all other acquisitions
(251
)
 

Deconsolidation of Sunoco Logistics
(75
)
 

Capital expenditures, excluding allowance for equity funds used during construction
(2,844
)
 
(3,479
)
Contributions in aid of construction costs
10

 
25

Contributions to unconsolidated affiliates
(225
)
 
(31
)
Distributions from unconsolidated affiliates in excess of cumulative earnings
95

 
56

Proceeds from the sale of assets
23

 
7

Change in restricted cash

 
(2
)
Other
(2
)
 
(1
)
Net cash used in investing activities
(1,549
)
 
(1,225
)
FINANCING ACTIVITIES
 
 
 
Proceeds from borrowings
11,330

 
7,811

Repayments of long-term debt
(10,953
)
 
(7,514
)
Cash (paid) received from affiliate notes
(255
)
 
147

Units issued for cash
885

 
408

Subsidiary units issued for cash

 
667

Capital contributions from noncontrolling interest
444

 
161

Distributions to partners
(889
)
 
(1,813
)
Distributions to noncontrolling interest
(167
)
 
(209
)
Redemption of Series A Preferred Units
(53
)
 

Debt issuance costs
(20
)
 

Other
4

 

Net cash provided by (used in) financing activities
326

 
(342
)
Decrease in cash and cash equivalents
(151
)
 
(141
)
Cash and cash equivalents, beginning of period
360

 
527

Cash and cash equivalents, end of period
$
209

 
$
386


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


ENERGY TRANSFER, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollar amounts are in millions)
(unaudited)
1.
ORGANIZATION AND BASIS OF PRESENTATION
Organization
Energy Transfer, LP is a wholly-owned subsidiary of Energy Transfer Partners, L.P. Energy Transfer, LP and its subsidiaries are collectively referred to herein as the “Partnership,” “we,” “us,” “our” or “ETLP.”
In April 2017, Energy Transfer Partners, L.P. merged with a subsidiary of Sunoco Logistics Partners L.P. (the “Sunoco Logistics Merger”), at which time it changed its name from “Energy Transfer Partners, L.P.” to “Energy Transfer, LP” and Sunoco Logistics Partners L.P. changed its name to “Energy Transfer Partners, L.P.” Following the completion of the Sunoco Logistics Merger, ETLP has no remaining publicly traded units outstanding. Additionally, subsequent to the Sunoco Logistics Merger, ETLP deconsolidated Sunoco Logistics Partners L.P. For purposes of maintaining clarity, the following references are used herein:
References to “ETLP” refer to Energy Transfer, LP subsequent to the close of the merger;
References to “Sunoco Logistics” refer to the entity named Sunoco Logistics Partners L.P. prior to the close of the merger; and
References to “ETP” refer to the consolidated entity named Energy Transfer Partners, L.P. subsequent to the close of the merger.
The consolidated financial statements of the Partnership presented herein include our operating subsidiaries (collectively, the “Operating Companies”), through which our activities are primarily conducted, as follows:
ETC OLP, Regency and PennTex, which are primarily engaged in midstream and intrastate transportation and storage natural gas operations. ETC OLP and Regency own and operate, through their wholly and majority-owned subsidiaries, natural gas gathering systems, intrastate natural gas pipeline systems and gas processing plants and are engaged in the business of purchasing, gathering, transporting, processing, and marketing natural gas and NGLs in the states of Texas, Louisiana, New Mexico, West Virginia, Denver and Ohio.
ET Interstate, with revenues consisting primarily of fees earned from natural gas transportation services and operational gas sales. ET Interstate is the parent company of:
Transwestern, engaged in interstate transportation of natural gas. Transwestern’s revenues consist primarily of fees earned from natural gas transportation services and operational gas sales.
ETC FEP, which directly owns a 50% interest in FEP, which owns 100% of the Fayetteville Express interstate natural gas pipeline.
ETC Tiger, engaged in interstate transportation of natural gas.
CrossCountry, which indirectly owns a 50% interest in Citrus, which owns 100% of the FGT interstate natural gas pipeline.
ETC MEP, which directly owns a 50% interest in MEP.
ET Rover, which owns a 65% interest in Rover pipeline.
ETC Compression, LLC, engaged in natural gas compression services and related equipment sales.
ETP Holdco, which indirectly owns Panhandle and Sunoco, Inc. Panhandle owns and operates assets in the regulated and unregulated natural gas industry and is primarily engaged in the transportation and storage of natural gas in the United States. Sunoco, Inc. owned and operated retail marketing assets, which were contributed to Sunoco LP in March 2016. Subsequent to this transaction, Sunoco Inc.’s assets primarily consist of its ownership in Retail Holdings, which owns noncontrolling interests in Sunoco LP and PES. Subsequent to the Sunoco Logistics Merger, ETLP holds an equity method investment in ETP through ETP Holdco’s ownership of ETP Class E, Class G, and Class K units.
Our financial statements reflect the following reportable business segments:
intrastate transportation and storage;
interstate transportation and storage;


7


midstream;
liquids transportation and services;
investment in ETP; and
all other.
Basis of Presentation
The unaudited financial information included in this Form 10-Q has been prepared on the same basis as the audited consolidated financial statements included in Energy Transfer Partners, L.P.’s Annual Report on Form 10-K for the year ended December 31, 2016. In the opinion of the Partnership’s management, such financial information reflects all adjustments necessary for a fair presentation of the financial position and the results of operations for such interim periods in accordance with GAAP. All intercompany items and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been omitted pursuant to the rules and regulations of the SEC.
Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications had no impact on net income or total equity.
Use of Estimates
The unaudited consolidated financial statements have been prepared in conformity with GAAP, which includes the use of estimates and assumptions made by management that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities that exist at the date of the consolidated financial statements. Although these estimates are based on management’s available knowledge of current and expected future events, actual results could be different from those estimates.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which clarifies the principles for recognizing revenue based on the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
In August 2015, the FASB deferred the effective date of ASU 2014-09, which is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catchup transition method). The Partnership expects to adopt ASU 2014-09 in the first quarter of 2018 and will apply the cumulative catchup transition method.
We are in the process of evaluating our revenue contracts by segment and fee type to determine the potential impact of adopting the new standards. At this point in our evaluation process, we have determined that the timing and/or amount of revenue that we recognize on certain contracts may be impacted by the adoption of the new standard; however, we are still in the process of quantifying these impacts and cannot say whether or not they would be material to our financial statements. In addition, we are in the process of implementing appropriate changes to our business processes, systems and controls to support recognition and disclosure under the new standard. We continue to monitor additional authoritative or interpretive guidance related to the new standard as it becomes available, as well as comparing our conclusions on specific interpretative issues to other peers in our industry, to the extent that such information is available to us.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which establishes the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Partnership is currently evaluating the impact that adopting this new standard will have on the consolidated financial statements and related disclosures.
On January 1, 2017, the Partnership adopted Accounting Standards Update No. 2016-09, Stock Compensation (Topic 718) (“ASU 2016-09”). The objective of the update is to reduce complexity in accounting standards. The areas for simplification in this update involve several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The


8


adoption of this standard did not have a material impact on the Partnership’s consolidated financial statements and related disclosures.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which requires that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this update do not change GAAP for the pre-tax effects of an intra-entity asset transfer under Topic 810, Consolidation, or for an intra-entity transfer of inventory. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. The Partnership is currently evaluating the impact that adoption of this standard will have on the consolidated financial statements and related disclosures.
On January 1, 2017, the Partnership adopted Accounting Standards Update No. 2016-17, Consolidation (Topic 810): Interests Held Through Related Parties That Are Under Common Control (“ASU 2016-17”), which amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (“VIE”) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. Under the amendments, a single decision maker is required to include indirect interests on a proportionate basis consistent with indirect interests held through other related parties. The adoption of this standard did not have an impact on the Partnership’s consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04 “Intangibles-Goodwill and other (Topic 350): Simplifying the test for goodwill impairment.” The amendments in this update remove the second step of the two-step test currently required by Topic 350. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. This ASU is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Partnership expects that the adoption of this standard will change its approach for measuring goodwill impairment; however, this standard requires prospective application and therefore will only impact periods subsequent to adoption. The Partnership plans to apply this ASU for its annual goodwill impairment test in the fourth quarter of 2017.
2.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash on hand, demand deposits, and investments with original maturities of three months or less. We consider cash equivalents to include short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value.
We place our cash deposits and temporary cash investments with high credit quality financial institutions. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limit.


9


The net change in operating assets and liabilities (net of effects of acquisitions and deconsolidations) included in cash flows from operating activities is comprised as follows:
 
Six Months Ended
June 30,
 
2017
 
2016
Accounts receivable
$
136

 
$
(471
)
Accounts receivable from related companies
(888
)
 
(129
)
Inventories
132

 
(157
)
Other current assets
86

 
(53
)
Other non-current assets, net
(147
)
 
8

Accounts payable
(49
)
 
509

Accounts payable to related companies
187

 
21

Accrued and other current liabilities
(408
)
 
(22
)
Other non-current liabilities
40

 
20

Derivative assets and liabilities, net
(31
)
 
178

Net change in operating assets and liabilities, net of effects of acquisitions and deconsolidations
$
(942
)
 
$
(96
)
Non-cash investing and financing activities are as follows:

Six Months Ended
June 30,

2017
 
2016
NON-CASH INVESTING ACTIVITIES:
 
 
 
Accrued capital expenditures
$
1,230

 
$
861

Sunoco LP limited partner interest received in exchange for contribution of the Sunoco, Inc. retail business to Sunoco LP

 
194

Net gains from subsidiary common unit issuances

 
14

NON-CASH FINANCING ACTIVITIES:
 
 
 
Contribution of property, plant and equipment from noncontrolling interest
$
988

 
$

3.
INVENTORIES
Inventories consisted of the following:
 
June 30, 2017
 
December 31, 2016
Natural gas and NGLs
$
449

 
$
699

Crude oil

 
683

Refined products

 
113

Spare parts and other
204

 
217

Total inventories
$
653

 
$
1,712

We utilize commodity derivatives to manage price volatility associated with our natural gas inventory. Changes in fair value of designated hedged inventory are recorded in inventory on our consolidated balance sheets and cost of products sold in our consolidated statements of operations.
4.
ADVANCES TO AND INVESTMENTS IN UNCONSOLIDATED AFFILIATES
Upon the completion of the Sunoco Logistics Merger, the Partnership deconsolidated ETP (formerly Sunoco Logistics). The Partnership holds an equity method investment in ETP due to its ownership of ETP Class E, Class G and Class K units.


10


The Partnership previously had outstanding 8.9 million Class E Units, 90.7 million Class G Units and 101.5 million Class K Units, all of which were held by wholly-owned subsidiaries of the Partnership and were therefore eliminated in the Partnership’s consolidated financial statements. In connection with the Sunoco Logistics Merger, all of the Partnership’s outstanding Class E, Class G and Class K units were cancelled and converted into an equal number of newly created Class E, Class G and Class K units representing limited partner interests in ETP, with the same rights, preferences, privileges, duties and obligations as such classes had immediately prior to the Sunoco Logistics Merger, as described below. Consequently, the ETP Class E, Class G and Class K units are reflected as an equity method investment in ETP by the Partnership subsequent to the Sunoco Logistics Merger. The Partnership’s equity in earnings and cash distributions related to the Class E, Class G and Class K units is as follows: (i) the Class E Units are entitled to aggregate earnings allocation and cash distributions equal to 11.1% of the total amount of cash distributed to all Unitholders, including the Class E Unitholders, up to $1.41 per unit per year, (ii) the Class G Units are entitled to earnings allocation equal to ETPs income or loss excluding any income or loss generated by ETP Holdco or its consolidated subsidiaries and aggregate cash distributions equal to 26% of the total amount of cash generated by ETP and its subsidiaries, other than ETP Holdco, and available for distribution, up to a maximum of $3.75 per Class G Unit per year, and (iii) the Class K Units are entitled to aggregate earnings allocation and cash distribution of $0.67275 per Class K Unit prior to ETP making distributions of available cash to any class of units, excluding any cash available distributions or dividends or capital stock sales proceeds received by ETP from ETP Holdco. The investment in ETP has been recorded in the Partnership’s balance sheet at the historical carrying value as of the date of the Sunoco Logistics Merger.
The following table presents aggregated selected income statement data for ETP and Citrus (on a 100% basis for all periods presented):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
ETP
 
 
 
 
 
 
 
Revenue
$
6,576

 
$
5,289

 
$
13,471

 
$
9,770

Operating income
732

 
715

 
1,386

 
1,329

Net income
292

 
472

 
656

 
848

Citrus
 
 
 
 
 
 
 
Revenue
$
219

 
$
214

 
$
409

 
$
405

Operating income
135

 
132

 
240

 
241

Net income
59

 
56

 
101

 
98

The Partnership has other equity method investments which were not, individually or in the aggregate, significant to our consolidated financial statements.
5.
FAIR VALUE MEASURES
Based on the estimated borrowing rates currently available to us and our subsidiaries for loans with similar terms and average maturities, the aggregate fair value and carrying amount of our consolidated debt obligations as of June 30, 2017 was $27.55 billion and $26.37 billion, respectively. As of December 31, 2016, the aggregate fair value and carrying amount of our consolidated debt obligations was $33.85 billion and $32.93 billion, respectively. The fair value of our consolidated debt obligations is a Level 2 valuation based on the observable inputs used for similar liabilities.
We have commodity derivatives and interest rate derivatives that are accounted for as assets and liabilities at fair value in our consolidated balance sheets. We determine the fair value of our assets and liabilities subject to fair value measurement by using the highest possible “level” of inputs. Level 1 inputs are observable quotes in an active market for identical assets and liabilities. We consider the valuation of marketable securities and commodity derivatives transacted through a clearing broker with a published price from the appropriate exchange as a Level 1 valuation. Level 2 inputs are inputs observable for similar assets and liabilities. We consider OTC commodity derivatives entered into directly with third parties as a Level 2 valuation since the values of these derivatives are quoted on an exchange for similar transactions. Additionally, we consider our options transacted through our clearing broker as having Level 2 inputs due to the level of activity of these contracts on the exchange in which they trade. We consider the valuation of our interest rate derivatives as Level 2 as the primary input, the LIBOR curve, is based on quotes from an active exchange of Eurodollar futures for the same period as the future interest swap settlements. Level 3 inputs are unobservable. During the six months ended June 30, 2017, no transfers were made between any levels within the fair value hierarchy.


11


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 June 30, 2017 and December 31, 2016 based on inputs used to derive their fair values:
 
 
 
Fair Value Measurements at
June 30, 2017
 
Fair Value Total
 
Level 1
 
Level 2
Assets:
 
 
 
 
 
Commodity derivatives:
 
 
 
 
 
Natural Gas:
 
 
 
 
 
Basis Swaps IFERC/NYMEX
$
9

 
$
9

 
$

Swing Swaps IFERC
3

 
1

 
2

Fixed Swaps/Futures
38

 
38

 

Forward Physical Swaps
4

 

 
4

Power:
 
 
 
 
 
Forwards
13

 

 
13

Futures
1

 
1

 

Natural Gas Liquids – Forwards/Swaps
74

 
74

 

Crude – Futures
9

 
9

 

Total commodity derivatives
151

 
132

 
19

Total assets
$
151

 
$
132

 
$
19

Liabilities:
 
 
 
 
 
Interest rate derivatives
$
(201
)
 
$

 
$
(201
)
Commodity derivatives:
 
 
 
 
 
Natural Gas:
 
 
 
 
 
Basis Swaps IFERC/NYMEX
(9
)
 
(9
)
 

Swing Swaps IFERC
(2
)
 

 
(2
)
Fixed Swaps/Futures
(25
)
 
(25
)
 

Forward Physical Swaps
(1
)
 

 
(1
)
Power:
 
 
 
 
 
Forwards
(12
)
 

 
(12
)
Futures
(1
)
 
(1
)
 

Natural Gas Liquids – Forwards/Swaps
(68
)
 
(68
)
 

Crude – Futures
(5
)
 
(5
)
 

Total commodity derivatives
(123
)
 
(108
)
 
(15
)
Total liabilities
$
(324
)
 
$
(108
)
 
$
(216
)


12


 
 
 
Fair Value Measurements at
December 31, 2016
 
Fair Value Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Commodity derivatives:
 
 
 
 
 
 
 
Natural Gas:
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
$
14

 
$
14

 
$

 
$

Swing Swaps IFERC
2

 

 
2

 

Fixed Swaps/Futures
96

 
96

 

 

Forward Physical Swaps
1

 

 
1

 

Power:


 
 
 
 
 
 
Forwards
4

 

 
4

 

Futures
1

 
1

 

 

Options – Calls
1

 
1

 

 

Natural Gas Liquids – Forwards/Swaps
233

 
233

 

 

Refined Products – Futures
1

 
1

 

 

Crude – Futures
9

 
9

 

 

Total commodity derivatives
362

 
355

 
7

 

Total assets
$
362

 
$
355

 
$
7

 
$

Liabilities:
 
 
 
 
 
 
 
Interest rate derivatives
$
(193
)
 
$

 
$
(193
)
 
$

Embedded derivatives in Preferred Units
(1
)
 

 

 
(1
)
Commodity derivatives:
 
 
 
 
 
 
 
Natural Gas:
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
(11
)
 
(11
)
 

 

Swing Swaps IFERC
(3
)
 

 
(3
)
 

Fixed Swaps/Futures
(149
)
 
(149
)
 

 

Power:


 
 
 
 
 
 
Forwards
(5
)
 

 
(5
)
 

Futures
(1
)
 
(1
)
 

 

Natural Gas Liquids – Forwards/Swaps
(273
)
 
(273
)
 

 

Refined Products – Futures
(17
)
 
(17
)
 

 

Crude – Futures
(13
)
 
(13
)
 

 

Total commodity derivatives
(472
)
 
(464
)
 
(8
)
 

Total liabilities
$
(666
)
 
$
(464
)
 
$
(201
)
 
$
(1
)
6.
DEBT OBLIGATIONS
Credit Facilities and Commercial Paper
ETLP Credit Facility
The ETLP Credit Facility allows for borrowings of up to $3.75 billion and matures in November 2019. The indebtedness under the ETLP Credit Facility is unsecured, is not guaranteed by any of the Partnership’s subsidiaries and has equal rights to holders of our current and future unsecured debt. In September 2016, ETLP initiated a commercial paper program under the borrowing limits established by the $3.75 billion ETLP Credit Facility. As of June 30, 2017, the ETLP Credit Facility had $1.54 billion of outstanding borrowings, all of which was commercial paper.


13


Bakken Credit Facility
In August 2016, Energy Transfer Partners, L.P., Sunoco Logistics and Phillips 66 completed project-level financing of the Bakken Pipeline. The $2.50 billion credit facility provides substantially all of the remaining capital necessary to complete the projects. As of June 30, 2017, $2.50 billion was outstanding under this credit facility.
PennTex Revolving Credit Facility
PennTex previously maintained a $275 million revolving credit commitment (the “PennTex Revolving Credit Facility”). As of June 30, 2017, the PennTex Revolving Credit Facility had $148 million of outstanding borrowings. In August 2017, the PennTex Revolving Credit Facility was repaid and terminated.
Compliance with Our Covenants
We were in compliance with all requirements, tests, limitations, and covenants related to our credit agreements as of June 30, 2017.
7.
PREFERRED UNITS
In January 2017, Energy Transfer Partners, L.P. repurchased all of its 1.9 million outstanding Preferred Units for cash in the aggregate amount of $53 million.
8.
EQUITY
In connection with the Sunoco Logistics Merger, the Energy Transfer Partners, L.P. Class H units were cancelled. The outstanding Energy Transfer Partners, L.P. Class E units, Class G units, Class I units and Class K units at the effective time of the merger were converted into an equal number of newly created classes of Sunoco Logistics units, with the same rights, preferences, privileges, duties and obligations as such classes of Energy Transfer Partners, L.P. units had immediately prior to the closing of the merger. Additionally, the outstanding Sunoco Logistics common units and Sunoco Logistics Class B units owned by Energy Transfer Partners, L.P. at the effective time of the merger were cancelled.
Common Units
Upon the completion of the Sunoco Logistics Merger, the Partnership’s equity distribution program, distribution reinvestment program and equity incentive plans have been terminated.
Bakken Equity Sale
In February 2017, Bakken Holdings Company LLC, an entity in which ETLP indirectly owns a 60% membership interest and ETP indirectly owns a 40% membership interest, sold a 49% interest in its wholly-owned subsidiary, Bakken Pipeline Investments LLC, to MarEn Bakken Company LLC, an entity jointly owned by Marathon Petroleum Corporation and Enbridge Energy Partners, L.P. for $2.00 billion in cash. Bakken Pipeline Investments LLC indirectly owns a 75% interest in each of Dakota Access, LLC (“Dakota Access”) and Energy Transfer Crude Oil Company, LLC (“ETCO”). The remaining 25% of each of Dakota Access and ETCO is owned by wholly-owned subsidiaries of Phillips 66. ETLP continues to consolidate Dakota Access and ETCO subsequent to this transaction. Upon closing, ETLP and ETP collectively own a 38.25% interest in the Dakota Access Pipeline and Energy Transfer Crude Oil Pipeline projects (collectively, the “Bakken Pipeline”), and MarEn Bakken Company owns 36.75% and Phillips 66 owns 25.00% in the Bakken Pipeline.
PennTex Tender Offer and Limited Call Right Exercise
In June 2017, Energy Transfer Partners, L.P. purchased all of the outstanding PennTex common units not previously owned by Energy Transfer Partners, L.P. for $20.00 per common unit in cash. ETP now owns all of the economic interests of PennTex, and PennTex common units are no longer publicly traded or listed on the NASDAQ.


14


Accumulated Other Comprehensive Income
The following table presents the components of AOCI, net of tax:
 
June 30, 2017
 
December 31, 2016
Available-for-sale securities
$
5

 
$
2

Foreign currency translation adjustment
(5
)
 
(5
)
Actuarial gain related to pensions and other postretirement benefits
4

 
7

Investments in unconsolidated affiliates, net
3

 
4

Total AOCI, net of tax
$
7

 
$
8


9.
INCOME TAXES
For the three and six months ended June 30, 2017, the Partnership’s income tax expense included the impact of a one-time adjustment to deferred tax balances as a result of a change in apportionment and corresponding state tax rates resulting from the Sunoco Logistics Merger in April 2017, which resulted in incremental income tax expense of approximately $77 million during the periods presented. For the three and six months ended June 30, 2016, the Partnership’s income tax benefit primarily resulted from losses among the Partnership’s consolidated corporate subsidiaries.
10.
REGULATORY MATTERS, COMMITMENTS, CONTINGENCIES AND ENVIRONMENTAL LIABILITIES
Contingent Residual Support Agreement – AmeriGas
In connection with the closing of the contribution of its propane operations in January 2012, ETLP (formerly Energy Transfer Partners, L.P.) agreed to provide contingent residual support of $1.55 billion of intercompany borrowings made by AmeriGas and certain of its affiliates with maturities through 2022 from a finance subsidiary of AmeriGas that have maturity dates and repayment terms that mirror those of an equal principal amount of senior notes issued by this finance company subsidiary to third-party purchasers. In 2016, AmeriGas repurchased certain of its senior notes, which caused a reduction in the amount supported by ETLP under the contingent residual support agreement. In February 2017, AmeriGas repurchased a portion of its 7.00% senior notes. The remaining outstanding 7.00% senior notes were repurchased in May 2017, and ETLP no longer guarantees any AmeriGas notes.
Guarantee of Sunoco LP Notes
In connection with previous transactions whereby Retail Holdings contributed assets to Sunoco LP, Retail Holdings provided a limited contingent guarantee of collection, but not of payment, to Sunoco LP with respect to (i) $800 million principal amount of 6.375% senior notes due 2023 issued by Sunoco LP, (ii) $800 million principal amount of 6.25% senior notes due 2021 issued by Sunoco LP and (iii) $2.035 billion aggregate principal for Sunoco LP’s term loan due 2019. In December 2016, Retail Holdings contributed its interests in Sunoco LP, along with the assignment of the guarantee of Sunoco LP’s senior notes, to its subsidiary, ETC M-A Acquisition LLC.
FERC Audit
In March 2016, the FERC commenced an audit of Trunkline for the period from January 1, 2013 to present to evaluate Trunkline’s compliance with the requirements of its FERC gas tariff, the accounting regulations of the Uniform System of Accounts as prescribed by the FERC, and the FERC’s annual reporting requirements. The audit is ongoing.    
Commitments
In the normal course of our business, we purchase, process and sell natural gas pursuant to long-term contracts and we enter into long-term transportation and storage agreements. Such contracts contain terms that are customary in the industry. We believe that the terms of these agreements are commercially reasonable and will not have a material adverse effect on our financial position or results of operations.


15


We have certain non-cancelable leases for property and equipment, which require fixed monthly rental payments and expire at various dates through 2034. The table below reflects rental expense under these operating leases included in operating expenses in the accompanying statements of operations, which include contingent rentals, and rental expense recovered through related sublease rental income:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Rental expense
$
14

 
$
21

 
$
34

 
$
39

Our joint venture agreements require that we fund our proportionate share of capital contributions to our unconsolidated affiliates. Such contributions will depend upon our unconsolidated affiliates’ capital requirements, such as for funding capital projects or repayment of long-term obligations.
Litigation and Contingencies
We may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business. Natural gas and crude oil are flammable and combustible. Serious personal injury and significant property damage can arise in connection with their transportation, storage or use. In the ordinary course of business, we are sometimes threatened with or named as a defendant in various lawsuits seeking actual and punitive damages for product liability, personal injury and property damage. We maintain liability insurance with insurers in amounts and with coverage and deductibles management believes are reasonable and prudent, and which are generally accepted in the industry. However, there can be no assurance that the levels of insurance protection currently in effect will continue to be available at reasonable prices or that such levels will remain adequate to protect us from material expenses related to product liability, personal injury or property damage in the future.
Dakota Access Pipeline
During the summer of 2016, individuals affiliated with or sympathetic to the Standing Rock Sioux Tribe (the “SRST”) began to protest the development of the pipeline project. Protesters trespassed on to the construction site, tampered with equipment, and disrupted construction activity at the site.  In response to the protests, Dakota Access filed a lawsuit in federal court in North Dakota to restrain protestors from disrupting construction and also requested a temporary restraining order (“TRO”) against the Chairman of the SRST and the protestors. The U.S. District Court granted and later dissolved a TRO enjoining protest activity. The protestors moved to dismiss the lawsuit and the Court granted their motion in May 2017.
On July 25, 2016, the U.S. Army Corps of Engineers (“USACE”) issued permits to Dakota Access consistent with environmental and historic preservation statutes for the pipeline to make two crossings of the Missouri River in North Dakota, including a crossing of the Missouri River at Lake Oahe. After significant delay, the USACE also issued easements to allow the pipeline to cross land owned by the USACE adjacent to the Missouri River in two locations. Also in July, the SRST filed a lawsuit in the U.S. District Court for the District of Columbia against the USACE that challenged the legality of the permits issued for the construction of the Dakota Access pipeline across those waterways and claimed violations of the National Historic Preservation Act (“NHPA”). The SRST also sought a preliminary injunction to rescind the USACE permits while the case is pending. Dakota Access intervened in the case. The SRST soon added a request for an emergency TRO to stop construction on the pipeline project. On September 9, 2016, the Court denied SRST’s motion for a preliminary injunction, rendering the TRO request moot.
After the September 9 ruling, the Department of the Army, the DOJ, and the Department of the Interior released a joint statement that the USACE would not grant the easement for the land adjacent to Lake Oahe until the Army completed a review to determine whether it was necessary to reconsider the USACE’s decision under various federal statutes relevant to the pipeline approval.
The SRST appealed the denial of the preliminary injunction to the U.S. Court of Appeals for the D.C. Circuit and filed an emergency motion in the U.S. District Court for an injunction pending the appeal, which was denied. The D.C. Circuit then denied the SRST’s application for an injunction pending appeal and later dismissed SRST’s appeal of the order denying the preliminary injunction motion. The SRST filed an amended complaint and added claims based on treaties between the tribes and the United States and statutes governing the use of government property.
In December 2016, the Department of the Army announced that, although its prior actions complied with the law, it intended to conduct further environmental review of the crossing at Lake Oahe. In February 2017, in response to a presidential memorandum, the Department of the Army decided that no further environmental review was necessary and delivered an


16


easement to Dakota Access allowing the pipeline to cross Lake Oahe. Almost immediately, the Cheyenne River Sioux Tribe (“CRST”), which had intervened in the lawsuit in August 2016, moved for a preliminary injunction and TRO to block operation of the pipeline. These motions raised, for the first time, claims based on the religious rights of the tribe. The district court denied the TRO and preliminary injunction, and the CRST appealed and requested an injunction pending appeal in the district court and the D.C. Circuit. Both courts denied the CRST’s request for an injunction pending appeal. Shortly thereafter, at CRST’s request, the D.C. Circuit dismissed CRST’s appeal.
The SRST and the CRST amended their complaints to incorporate religious freedom and other claims. In addition, the Oglala and Yankton Sioux tribes have filed related lawsuits to prevent construction of the Dakota Access pipeline project. These lawsuits have been consolidated into the action initiated by the SRST. Several individual members of the Tribes have also intervened in the lawsuit asserting claims that overlap with those brought by the four tribes.
On June 14, 2017, the Court ruled on SRST’s and CRST’s motions for partial summary judgment and the USACE’s cross-motions for partial summary judgment. The Court rejected the majority of the Tribes’ assertions and granted summary judgment on most claims in favor of the USACE and Dakota Access. In particular, the Court concluded that the USACE had not violated any trust duties owed to the Tribes and had generally complied with its obligations under the Clean Water Act, the Rivers and Harbors Act, the Mineral Leasing Act, the National Environmental Policy Act (“NEPA”) and other related statutes; however, the Court remanded to the USACE three discrete issues for further analysis and explanation of its prior determination under certain of these statutes. The USACE has advised the Court that it expects to have completed this additional work by the end of 2017. The Court ordered briefing that will conclude at the end of August 2017 to determine whether the pipeline should remain in operation during the pendency of the USACE’s review process and the Court is expected to rule on this issue during September 2017. The USACE and Dakota Access have each filed a brief with the Court to oppose any shutdown of operations of the pipeline during this review process. The Court has stayed consideration of any other claims until it fully resolves the remaining issues relating to its remand order.
While we believe that the pending lawsuits are unlikely to block operation of the pipeline, we cannot assure this outcome. We cannot determine when or how these lawsuits will be resolved or the impact they may have on the Dakota Access project.
Mont Belvieu Incident
On June 26, 2016, a hydrocarbon storage well located on another operator’s facility adjacent to Lone Star NGL Mont Belvieu’s (“Lone Star”) facilities in Mont Belvieu, Texas experienced an over-pressurization resulting in a subsurface release. The subsurface release caused a fire at Lone Star’s South Terminal (CMB) and damage to Lone Star’s storage well operations at its South and North Terminals. Normal operations have resumed at the facilities with the exception of one of Lone Star’s storage wells. Lone Star is still quantifying the extent of its incurred and ongoing damages and has or will be seeking reimbursement for these losses.
MTBE Litigation
Sunoco, Inc. and/or Sunoco, Inc. (R&M), along with other refiners, manufacturers and sellers of gasoline, are defendants in lawsuits alleging MTBE contamination of groundwater. The plaintiffs, typically governmental authorities, assert product liability claims and additional claims including nuisance, trespass, negligence, violation of environmental laws, and deceptive business practices. The plaintiffs seek to recover compensatory damages, and in some cases also seek natural resource damages, injunctive relief, punitive damages, and attorneys’ fees.
As of June 30, 2017, Sunoco, Inc. is a defendant in six cases, including cases initiated by the States of New Jersey, Vermont, Pennsylvania, Rhode Island, and two others by the Commonwealth of Puerto Rico with the more recent Puerto Rico action being a companion case alleging damages for additional sites beyond those at issue in the initial Puerto Rico action. Four of these cases are venued in a multidistrict litigation proceeding in a New York federal court. The New Jersey, Puerto Rico, Vermont, and Pennsylvania plaintiffs assert natural resource damage claims.
Fact discovery has concluded with respect to an initial set of 9 sites each that will be the subject of the first trial phase in the New Jersey case and the initial Puerto Rico case. The initial set of 9 New Jersey trial sites are now pending before the United States District Judge for the District of New Jersey, the Hon. Freda L. Wolfson for the pre-trial and trial phases. The remaining portion of the New Jersey case remains in the multidistrict litigation. In early 2017, Sunoco, Inc. and Sunoco, Inc. (R&M) and two other co-defendants reached a settlement in principle with the State of New Jersey, subject to the parties agreeing on the terms and conditions of a Settlement and Release agreement, among other things. 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 said adverse determination occurs, but such an adverse determination likely would not have a material adverse effect on the Partnership’s consolidated financial position.


17


Regency Merger Litigation
Following the January 26, 2015 announcement of the Regency merger, purported Regency unitholders filed lawsuits in state and federal courts in Dallas and Delaware asserting claims relating to the Regency Merger. All but one Regency merger-related lawsuits have been dismissed. On June 10, 2015, Adrian Dieckman (“Dieckman”), a purported Regency unitholder, filed a class action complaint on behalf of Regency’s common unitholders in the Court of Chancery of the State of Delaware. The lawsuit alleges that the Regency Merger breached the Regency partnership agreement because Regency’s conflicts committee was not properly formed, and the Regency Merger was not approved in good faith. On March 29, 2016, the Delaware Court of Chancery granted defendants’ motion to dismiss the lawsuit. Dieckman appealed. On January 20, 2017, the Delaware Supreme Court issued an order reversing the judgment of the Court of Chancery that dismissed Counts I and II of Dieckman’s Complaint. On February 21, 2017, Regency and the other defendants filed their respective Motions to Dismiss the Chancery Court matter. On May 5, 2017, Plaintiff filed an Amended Verified Class Action Complaint. Defendants then filed Motions to Dismiss the Amended Complaint and a Motion to Stay Discovery on May 19, 2017. Briefing on both of these motions is ongoing.
Enterprise Products Partners, L.P. and Enterprise Products Operating LLC Litigation
On January 27, 2014, a trial commenced between ETLP against Enterprise Products Partners, L.P. and Enterprise Products Operating LLC (collectively, “Enterprise”) and Enbridge (US) Inc.  Trial resulted in a verdict in favor of ETLP against Enterprise that consisted of $319 million in compensatory damages and $595 million in disgorgement to ETLP.  The jury also found that ETLP owed Enterprise approximately $1 million under a reimbursement agreement.  On July 29, 2014, the trial court entered a final judgment in favor of ETLP and awarded ETLP $536 million, consisting of compensatory damages, disgorgement, and pre-judgment interest.  The trial court also ordered that ETP shall be entitled to recover post-judgment interest and costs of court and that Enterprise is not entitled to any net recovery on its counterclaims.  Enterprise filed a notice of appeal with the Court of Appeals. On July 18, 2017, the Court of Appeals issued its opinion and reversed the trial court’s judgment. ETP intends to file a petition for review with the Texas Supreme Court.
Sunoco Logistics Merger Litigation
Five purported Energy Transfer Partners, L.P. common unitholders (“Plaintiffs”) separately filed seven putative unitholder class action lawsuits challenging the merger and the disclosures made in connection with the merger. The lawsuits are styled (a) Shure v. Energy Transfer Partners, L.P. et al., Case No. 1:17-cv-00044-UNA, in the United States District Court for the District of Delaware (the “Shure Lawsuit”); (b) Verlin v. Energy Transfer Partners, L.P. et al., Case No. 1:17-cv-00045-UNA, in the United States District Court for the District of Delaware (the “Verlin Lawsuit”); (c) Duany v. Energy Transfer Partners, L.P. et al., Case No. 1:17-cv-00058-UNA, in the United States District Court for the District of Delaware (the “Duany Lawsuit”); (d) Epstein v. Energy Transfer Partners, L.P. et. al., Case No, 1:17-cv-00069, in the United States District Court for the District of Delaware (the “Epstein Lawsuit”) and (e) Sgnilek v. Energy Transfer Partners, L.P. et al., Case No. 1:17-cv-00141, in the United States District Court for the District of Delaware (the “Sgnilek Lawsuit” and collectively with the Shure Lawsuit, Verlin Lawsuit, Duany Lawsuit, and Epstein Lawsuit, the “Lawsuits”).
Plaintiffs allege causes of action challenging the merger and the preliminary joint proxy statement/prospectus filed in connection with the merger. Plaintiffs allege that (i) defendants have violated Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder and (ii) the members of the ETP Board have violated Section 20(a) of the Exchange Act. Plaintiffs in the Shure Lawsuit and Verlin Lawsuit also allege that Sunoco Logistics has violated Section 20(a) of the Exchange Act. Plaintiffs also assert, in general, that the terms of the merger (including, among other terms, the merger consideration) are unfair to ETP common unitholders and resulted from an unfair and conflicted process. Based on these allegations, the Sgnilek Lawsuit alleges that (a) the ETP Board, ETP GP, ETP LLC, ETP, and ETE have breached the covenant of good faith and/or fiduciary duties, and (b) Sunoco Logistics and Sunoco Partners LLC have aided and abetted those alleged breaches.
Based on these allegations, Plaintiffs seek to enjoin defendants from proceeding with or consummating the merger unless and until defendants disclose the allegedly omitted information summarized above. The Sgnilek Lawsuit also seeks to enjoin defendants from proceeding with or consummating the merger unless and until the ETP Board adopts and implements processes to obtain the best possible terms for ETP common unitholders. To the extent that the merger is consummated before injunctive relief is granted, Plaintiffs seek to have the merger rescinded. Plaintiffs also seek damages and reimbursement of attorneys’ fees.
On May 31, 2017, a Joint Stipulation and Order was filed (1) setting deadlines for Plaintiffs’ Amended Complaint and Defendants’ Answer; (2) dismissing Sunoco Logistics and Sunoco Partners LLC from the lawsuits; and (3) consolidating the remaining five lawsuits under the Shure Lawsuit.


18


Defendants believe the Lawsuits are without merit and intend to defend vigorously against the Lawsuits and any other actions challenging the merger.
Other Litigation and Contingencies
We or our subsidiaries are a party to various legal proceedings and/or regulatory proceedings incidental to our businesses. For each of these matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies, the likelihood of an unfavorable outcome and the availability of insurance coverage. If we determine that an unfavorable outcome of a particular matter is probable and can be estimated, we accrue the contingent obligation, as well as any expected insurance recoverable amounts related to the contingency. As of June 30, 2017 and December 31, 2016, accruals of approximately $71 million and $77 million, respectively, were reflected on our consolidated balance sheets related to these contingent obligations. As new information becomes available, our estimates may change. The impact of these changes may have a significant effect on our results of operations in a single period.
The outcome of these matters cannot be predicted with certainty and there can be no assurance that the outcome of a particular matter will not result in the payment of amounts that have not been accrued for the matter. Furthermore, we may revise accrual amounts prior to resolution of a particular contingency based on changes in facts and circumstances or changes in the expected outcome. Currently, we are not able to estimate possible losses or a range of possible losses in excess of amounts accrued.
The Ohio Environmental Protection Agency (“Ohio EPA”) has alleged that various environmental violations have occurred during construction of ETP subsidiary Rover Pipeline LLC’s (“Rover”) pipeline project. The alleged violations include inadvertent returns of drilling muds and fluids at horizontal directional drilling (“HDD”) locations in Ohio that affected waters of the State, storm water control violations, improper disposal of spent drilling mud containing diesel fuel residuals, and open burning. The alleged violations occurred from April to July, 2017. The Ohio EPA has proposed penalties of more than $900,000 in connection with the alleged violations and is seeking certain corrective actions. ETP is working with Ohio EPA to resolve the matter. The timing or outcome of this matter cannot be reasonably determined at this time; however, we do not expect there to be a material impact to our results of operations, cash flows or financial position.
In addition, on May 10, 2017, the FERC prohibited Rover from conducting HDD activities at 27 sites in Ohio. On July 31, 2017, the FERC issued an independent third party assessment of what led to the release at the Tuscarawas River site and what Rover can do to prevent reoccurrence once the HDD suspension is lifted. Rover has notified the FERC of its intention to implement the suggestions in the assessment and to implement additional voluntary protocols. The timing or outcome of this matter cannot be reasonably determined at this time; however, Rover anticipates resuming HDD activities before their suspension results in a material delay of pipeline construction.
On July 17, 2017, the West Virginia Department of Environmental Protection (“WVDEP”) issued a Cease and Desist order requiring Rover to cease any land development activity in Doddridge and Tyler Counties. Under the order, Rover has 20 days to submit a corrective action plan and schedule for agency review. The order follows several notices of violation WVDEP issued to Rover alleging stormwater non-compliance. Rover is complying with the order, has already addressed many of the stormwater control issues, and anticipates having the corrective action plan and schedule in place before the order results in a material delay of pipeline construction.
No amounts have been recorded in our June 30, 2017 or December 31, 2016 consolidated balance sheets for contingencies and current litigation, other than amounts disclosed herein.
Environmental Matters
Our operations are subject to extensive federal, tribal, state and local environmental and safety laws and regulations that require expenditures to ensure compliance, including related to air emissions and wastewater discharges, at operating facilities and for remediation at current and former facilities as well as waste disposal sites. Historically, our environmental compliance costs have not had a material adverse effect on our results of operations but there can be no assurance that such costs will not be material in the future or that such future compliance with existing, amended or new legal requirements will not have a material adverse effect on our business and operating results. Costs of planning, designing, constructing and operating pipelines, plants and other facilities must incorporate compliance with environmental laws and regulations and safety standards. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of investigatory, remedial and corrective action obligations, the issuance of injunctions in affected areas and the filing of federally authorized citizen suits. Contingent losses related to all significant known environmental matters have been accrued and/or separately disclosed. However, we may revise accrual amounts prior to resolution of a particular contingency based on changes in facts and circumstances or changes in the expected outcome.


19


Environmental exposures and liabilities are difficult to assess and estimate due to unknown factors such as the magnitude of possible contamination, the timing and extent of remediation, the determination of our liability in proportion to other parties, improvements in cleanup technologies and the extent to which environmental laws and regulations may change in the future. Although environmental costs may have a significant impact on the results of operations for any single period, we believe that such costs will not have a material adverse effect on our financial position.
Based on information available at this time and reviews undertaken to identify potential exposure, we believe the amount reserved for environmental matters is adequate to cover the potential exposure for cleanup costs.
In February 2017, we received letters from the DOJ and Louisiana Department of Environmental Quality notifying Sunoco Pipeline L.P. (“SPLP”) and Mid-Valley Pipeline Company (“Mid-Valley”) that enforcement actions were being pursued for three crude oil releases: (a) an estimated 550 barrels released from the Colmesneil-to-Chester pipeline in Tyler County, Texas (“Colmesneil”) operated and owned by SPLP in February of 2013; (b) an estimated 4,509 barrels released from the Longview-to-Mayersville pipeline in Caddo Parish, Louisiana (a/k/a Milepost 51.5) operated by SPLP and owned by Mid-Valley in October of 2014; and (c) an estimated 40 barrels released from the Wakita 4-inch gathering line in Oklahoma operated and owned by SPLP in January of 2015. In May of this year, we presented to the DOJ, EPA and Louisiana Department of Environmental Quality a summary of the emergency response and remedial efforts taken by SPLP after the releases occurred as well as operational changes instituted by SPLP to reduce the likelihood of future releases. In July, we had a follow-up meeting with the DOJ, EPA and Louisiana Department of Environmental Quality during which the agencies presented their initial demand for civil penalties and injunctive relief. In short, the DOJ and EPA proposed federal penalties totaling $7 million for the three releases along with a demand for injunctive relief, and Louisiana Department of Environmental Quality proposed a state penalty of approximately $1 million to resolve the Caddo Parish release. Neither Texas nor Oklahoma state agencies have joined the penalty discussions at this point. We are currently working on a counteroffer to the Louisiana Department of Environmental Quality.
Environmental Remediation
Our subsidiaries are responsible for environmental remediation at certain sites, including the following:
Certain of our interstate pipelines conduct soil and groundwater remediation related to contamination from past uses of PCBs. PCB assessments are ongoing and, in some cases, our subsidiaries could potentially be held responsible for contamination caused by other parties.
Certain gathering and processing systems are responsible for soil and groundwater remediation related to releases of hydrocarbons.
Currently operating Sunoco, Inc. retail sites previously contributed to Sunoco LP in January 2016.
Legacy sites related to Sunoco, Inc. that are subject to environmental assessments, including formerly owned terminals and other logistics assets, retail sites that Sunoco, Inc. no longer operates, closed and/or sold refineries and other formerly owned sites.
Sunoco, Inc. is potentially subject to joint and several liability for the costs of remediation at sites at which it has been identified as a potentially responsible party (“PRP”). As of June 30, 2017, Sunoco, Inc. had been named as a PRP at approximately 49 identified or potentially identifiable “Superfund” sites under federal and/or comparable state law. Sunoco, Inc. is usually one of a number of companies identified as a PRP at a site. Sunoco, Inc. has reviewed the nature and extent of its involvement at each site and other relevant circumstances and, based upon Sunoco, Inc.’s purported nexus to the sites, believes that its potential liability associated with such sites will not be significant.
To the extent estimable, expected remediation costs are included in the amounts recorded for environmental matters in our consolidated balance sheets. In some circumstances, future costs cannot be reasonably estimated because remediation activities are undertaken as claims are made by customers and former customers. To the extent that an environmental remediation obligation is recorded by a subsidiary that applies regulatory accounting policies, amounts that are expected to be recoverable through tariffs or rates are recorded as regulatory assets on our consolidated balance sheets.


20


The table below reflects the amounts of accrued liabilities recorded in our consolidated balance sheets related to environmental matters that are considered to be probable and reasonably estimable. Currently, we are not able to estimate possible losses or a range of possible losses in excess of amounts accrued. Except for matters discussed above, we do not have any material environmental matters assessed as reasonably possible that would require disclosure in our consolidated financial statements.
 
June 30, 2017
 
December 31, 2016
Current
$
30

 
$
26

Non-current
275

 
283

Total environmental liabilities
$
305

 
$
309

In 2013, we established a wholly-owned captive insurance company to bear certain risks associated with environmental obligations related to certain sites that are no longer operating. The premiums paid to the captive insurance company include estimates for environmental claims that have been incurred but not reported, based on an actuarially determined fully developed claims expense estimate. In such cases, we accrue losses attributable to unasserted claims based on the discounted estimates that are used to develop the premiums paid to the captive insurance company.
During the three months ended June 30, 2017 and 2016, Sunoco, Inc. recorded $8 million and $8 million, respectively, of expenditures related to environmental cleanup programs. During the six months ended June 30, 2017 and 2016, Sunoco, Inc. recorded $10 million and $14 million, respectively, of expenditures related to environmental cleanup programs.
On December 2, 2010, Sunoco, Inc. entered an Asset Sale and Purchase Agreement to sell the Toledo Refinery to Toledo Refining Company LLC (“TRC”) wherein Sunoco, Inc. retained certain liabilities associated with the pre-closing time period. On January 2, 2013, USEPA issued a Finding of Violation (“FOV”) to TRC and, on September 30, 2013, EPA issued a Notice of Violation (“NOV”)/ FOV to TRC alleging Clean Air Act violations. To date, EPA has not issued an FOV or NOV/FOV to Sunoco, Inc. directly but some of EPA’s claims relate to the time period that Sunoco, Inc. operated the refinery. Specifically, EPA has claimed that the refinery flares were not operated in a manner consistent with good air pollution control practice for minimizing emissions and/or in conformance with their design, and that Sunoco, Inc. submitted semi-annual compliance reports in 2010 and 2011 to the EPA that failed to include all of the information required by the regulations. EPA has proposed penalties in excess of $200,000 to resolve the allegations and discussions continue between the parties. The timing or outcome of this matter cannot be reasonably determined at this time, however, we do not expect there to be a material impact to our results of operations, cash flows or financial position.
Our operations are also subject to the requirements of OSHA, and comparable state laws that regulate the protection of the health and safety of employees. In addition, OSHA’s hazardous communication standard requires that information be maintained about hazardous materials used or produced in our operations and that this information be provided to employees, state and local government authorities and citizens. We believe that our past costs for OSHA required activities, including general industry standards, record keeping requirements, and monitoring of occupational exposure to regulated substances have not had a material adverse effect on our results of operations but there is no assurance that such costs will not be material in the future.
11.
DERIVATIVE ASSETS AND LIABILITIES
Commodity Price Risk
We are exposed to market risks related to the volatility of commodity prices. To manage the impact of volatility from these prices, we utilize various exchange-traded and OTC commodity financial instrument contracts. These contracts consist primarily of futures, swaps and options and are recorded at fair value in our consolidated balance sheets.
We use futures and basis swaps, designated as fair value hedges, to hedge our natural gas inventory stored in our Bammel storage facility. At hedge inception, we lock in a margin by purchasing gas in the spot market or off peak season and entering into a financial contract. Changes in the spreads between the forward natural gas prices and the physical inventory spot price result in unrealized gains or losses until the underlying physical gas is withdrawn and the related designated derivatives are settled. Once the gas is withdrawn and the designated derivatives are settled, the previously unrealized gains or losses associated with these positions are realized.
We use futures, swaps and options to hedge the sales price of natural gas we retain for fees in our intrastate transportation and storage segment and operational gas sales on our interstate transportation and storage segment. These contracts are not designated as hedges for accounting purposes.


21


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 use derivatives in our liquids transportation and services segment to manage our storage facilities and the purchase and sale of purity NGL. These contracts are not designated as hedges for accounting purposes.
We utilize swaps, futures and other derivative instruments to mitigate the risk associated with market movements in the price of refined products and NGLs. These contracts are not designated as hedges for accounting purposes.
We use financial commodity derivatives to take advantage of market opportunities in our trading activities which complement our transportation and storage segment's operations and are netted in cost of products sold in our consolidated statements of operations. We also have trading and marketing activities related to power and natural gas in our all other segment which are also netted in cost of products sold. As a result of our trading activities and the use of derivative financial instruments in our transportation and storage segment, the degree of earnings volatility that can occur may be significant, favorably or unfavorably, from period to period. We attempt to manage this volatility through the use of daily position and profit and loss reports provided to our risk oversight committee, which includes members of senior management, and the limits and authorizations set forth in our commodity risk management policy.


22


The following table details our outstanding commodity-related derivatives:
 
June 30, 2017
 
December 31, 2016
 
Notional Volume
 
Maturity
 
Notional Volume
 
Maturity
Mark-to-Market Derivatives
 
 
 
 
 
 
 
(Trading)
 
 
 
 
 
 
 
Natural Gas (MMBtu):
 
 
 
 
 
 
 
Fixed Swaps/Futures
465,000

 
2017
 
(682,500
)
 
2017
Basis Swaps IFERC/NYMEX(1)
33,112,500

 
2017
 
2,242,500

 
2017
Options – Puts
11,500,000

 
2018
 

 
Power (Megawatt):
 
 
 
 
 
 
 
Forwards
497,530

 
2017-2018
 
391,880

 
2017-2018
Futures
(212,880
)
 
2017-2018
 
109,564

 
2017-2018
Options – Puts
(364,000
)
 
2017
 
(50,400
)
 
2017
Options – Calls
607,200

 
2017
 
186,400

 
2017
Crude (Bbls) – Futures
(1,569,000
)
 
2017
 
(617,000
)
 
2017
(Non-Trading)
 
 
 
 
 
 
 
Natural Gas (MMBtu):
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
(3,630,000
)
 
2017-2018
 
10,750,000

 
2017-2018
Swing Swaps IFERC
39,900,000

 
2017
 
(5,662,500
)
 
2017
Fixed Swaps/Futures
(39,250,000
)
 
2017-2019
 
(52,652,500
)
 
2017-2019
Forward Physical Contracts
(9,302,540
)
 
2017
 
(22,492,489
)
 
2017
Natural Gas Liquid (Bbls) – Forwards/Swaps
(4,562,000
)
 
2017-2019
 
(5,786,627
)
 
2017
Refined Products (Bbls) – Futures

 
 
(2,240,000
)
 
2017
Fair Value Hedging Derivatives
 
 
 
 
 
 
 
(Non-Trading)
 
 
 
 
 
 
 
Natural Gas (MMBtu):
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
(32,440,000
)
 
2017
 
(36,370,000
)
 
2017
Fixed Swaps/Futures
(32,440,000
)
 
2017
 
(36,370,000
)
 
2017
Hedged Item – Inventory
32,440,000

 
2017
 
36,370,000

 
2017
(1) 
Includes aggregate amounts for open positions related to Houston Ship Channel, Waha Hub, NGPL TexOk, West Louisiana Zone and Henry Hub locations.
Interest Rate Risk
We are exposed to market risk for changes in interest rates. To maintain a cost effective capital structure, we borrow funds using a mix of fixed rate debt and variable rate debt. We also manage our interest rate exposure by utilizing interest rate swaps to achieve a desired mix of fixed and variable rate debt. We also utilize forward starting interest rate swaps to lock in the rate on a portion of our anticipated debt issuances.


23


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
June 30, 2017
 
December 31, 2016
July 2017(2)
 
Forward-starting to pay a fixed rate of 3.90% and receive a floating rate
 
$

 
$
500

July 2018(2)
 
Forward-starting to pay a fixed rate of 3.76% and receive a floating rate
 
300

 
200

July 2019(2)
 
Forward-starting to pay a fixed rate of 3.64% and receive a floating rate
 
300

 
200

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

 

December 2018
 
Pay a floating rate based on a 3-month LIBOR and receive a fixed rate of 1.53%
 
1,200

 
1,200

March 2019
 
Pay a floating rate based on a 3-month LIBOR and receive a fixed rate of 1.42%
 
300

 
300

(1) 
Floating rates are based on 3-month LIBOR.  
(2) 
Represents the effective date. These forward-starting swaps have terms of 30 years with a mandatory termination date the same as the effective date.  
Credit Risk
Credit risk refers to the risk that a counterparty may default on its contractual obligations resulting in a loss to the Partnership. Credit policies have been approved and implemented to govern the Partnership’s portfolio of counterparties with the objective of mitigating credit losses. These policies establish guidelines, controls and limits to manage credit risk within approved tolerances by mandating an appropriate evaluation of the financial condition of existing and potential counterparties, monitoring agency credit ratings, and by implementing credit practices that limit exposure according to the risk profiles of the counterparties. Furthermore, the Partnership may, at times, require collateral under certain circumstances to mitigate credit risk as necessary. The Partnership also uses industry standard commercial agreements which allow for the netting of exposures associated with transactions executed under a single commercial agreement. Additionally, we utilize master netting agreements to offset credit exposure across multiple commercial agreements with a single counterparty or affiliated group of counterparties.
The Partnership’s counterparties consist of a diverse portfolio of customers across the energy industry, including petrochemical companies, commercial and industrials, oil and gas producers, municipalities, gas and electric utilities, midstream companies and independent power generators. Our overall exposure may be affected positively or negatively by macroeconomic or regulatory changes that impact our counterparties to one extent or another. Currently, management does not anticipate a material adverse effect in our financial position or results of operations as a consequence of counterparty non-performance.
The Partnership has maintenance margin deposits with certain counterparties in the OTC market, primarily 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.


24


Derivative Summary
The following table provides a summary of our derivative assets and liabilities:
 
 
Fair Value of Derivative Instruments
 
 
Asset Derivatives
 
Liability Derivatives
 
 
June 30, 2017
 
December 31, 2016
 
June 30, 2017
 
December 31, 2016
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Commodity derivatives (margin deposits)
 
$
8

 
$

 
$
(1
)
 
$
(4
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Commodity derivatives (margin deposits)
 
127

 
338

 
(109
)
 
(416
)
Commodity derivatives
 
16

 
24

 
(13
)
 
(52
)
Interest rate derivatives
 

 

 
(201
)
 
(193
)
Embedded derivatives in Preferred Units
 

 

 

 
(1
)
 
 
143

 
362

 
(323
)
 
(662
)
Total derivatives
 
$
151

 
$
362

 
$
(324
)
 
$
(666
)
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
 
June 30, 2017
 
December 31, 2016
 
June 30, 2017
 
December 31, 2016
Derivatives without offsetting agreements
 
Derivative assets (liabilities)
 
$

 
$

 
$
(201
)
 
$
(194
)
Derivatives in offsetting agreements:
 
 
 
 
 
 
 
 
OTC contracts
 
Derivative assets (liabilities)
 
16

 
24

 
(13
)
 
(52
)
Broker cleared derivative contracts
 
Other current assets
 
135

 
338

 
(110
)
 
(420
)
Total gross derivatives
 
151

 
362

 
(324
)
 
(666
)
Offsetting agreements:
 
 
 
 
 
 
 
 
Counterparty netting
 
Derivative assets (liabilities)
 
(11
)
 
(4
)
 
11

 
4

Payments on margin deposit
 
Other current assets
 
(110
)
 
(338
)
 
110

 
338

Total net derivatives
 
$
30

 
$
20

 
$
(203
)
 
$
(324
)
We disclose the non-exchange traded financial derivative instruments as price risk management assets and liabilities on our consolidated balance sheets at fair value with amounts classified as either current or long-term depending on the anticipated settlement date.


25


The following tables summarize the amounts recognized with respect to our derivative financial instruments:
 
Location of Gain/(Loss) Recognized in Income on Derivatives
 
Amount of Gain/(Loss) Recognized in Income Representing Hedge Ineffectiveness and Amount Excluded from the Assessment of Effectiveness
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
 
2017
 
2016
 
2017
 
2016
Derivatives in fair value hedging relationships (including hedged item):
 
 
 
 
 
 
 
 
 
Commodity derivatives
Cost of products sold
 
$
6

 
$
21

 
$
2

 
$
17

Total
 
 
$
6

 
$
21

 
$
2

 
$
17

 
Location of Gain/(Loss) Recognized in Income on Derivatives
 
Amount of Gain/(Loss) Recognized in Income on Derivatives
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
 
2017
 
2016
 
2017
 
2016
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Commodity derivatives – Trading
Cost of products sold
 
$
15

 
$
(7
)
 
$
26

 
$
(16
)
Commodity derivatives – Non-trading
Cost of products sold
 
8

 
(48
)
 
(2
)
 
(43
)
Interest rate derivatives
Losses on interest rate derivatives
 
(25
)
 
(81
)
 
(20
)
 
(151
)
Embedded derivatives
Other, net
 

 
(4
)
 
1

 
(4
)
Total
 
 
$
(2
)
 
$
(140
)
 
$
5

 
$
(214
)
12.
RELATED PARTY TRANSACTIONS
In June 2017, the Partnership acquired all of the publicly held PennTex common units through a tender offer and exercise of a limited call right, as further discussed in Note 8.
We previously had agreements with ETE to provide services on its behalf and on behalf of other subsidiaries of ETE, which included the reimbursement of various operating and general and administrative expenses incurred by us on behalf of ETE and its subsidiaries. These agreements expired in 2016.
The Partnership also has related party transactions with several of its equity method investees. In addition to commercial transactions, these transactions include the provision of certain management services and leases of certain assets.
The following table summarizes the affiliate revenues on our consolidated statements of operations:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Affiliated revenues
$
42

 
$
133

 
$
160

 
$
207



26


The following table summarizes the related company balances on our consolidated balance sheets:
 
June 30, 2017
 
December 31, 2016
Accounts receivable from related companies:
 
 
 
ETE
$

 
$
22

ETP
762

 

Sunoco LP
179

 
96

PES
1

 
6

FGT
9

 
15

Lake Charles LNG
1