(Tabular dollar and unit amounts, except per unit data, are in millions)
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The following discussion of our historical consolidated financial condition and results of operations should be read in conjunction with our historical consolidated financial statements and accompanying notes thereto included in "Item 8. Financial Statements and Supplementary Data" of this report. 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 "Item 1A. Risk Factors" of this report. Unless the context requires otherwise, references to "we," "us," "our," the "Partnership" and "ET" meanEnergy Transfer LP and its consolidated subsidiaries, which include ETO, ETP GP,ETP LLC ,Panhandle , Sunoco LP andLake Charles LNG . References to the "Parent Company" meanEnergy Transfer LP on a stand-alone basis. OVERVIEWEnergy Transfer LP directly and indirectly owns equity interests in ETO, Sunoco LP and USAC, all of which are limited partnerships engaged in diversified energy-related services. Sunoco LP and USAC have publicly traded common units.The Parent Company's principal sources of cash flow are derived from its direct and indirect investments in the limited partner and general partner interests in ETO. ETO's earnings and cash flows are generated by its subsidiaries, including ETO's investments in Sunoco LP and USAC. The amount of cash that ETO, Sunoco LP and USAC distribute to their respective partners, including the Parent Company, each quarter is based on earnings from their respective business activities and the amount of available cash, as discussed below. In order to fully understand the financial condition and results of operations of the Parent Company on a stand-alone basis, we have included discussions of Parent Company matters apart from those of our consolidated group. General Our primary objective is to increase the level of our distributable cash flow to our unitholders over time by pursuing a business strategy that is currently focused on growing our subsidiaries' natural gas and liquids businesses through, among other things, pursuing certain construction and expansion opportunities relating to our subsidiaries' existing infrastructure and acquiring certain strategic operations and businesses or assets. The actual amounts of cash that we will have available for distribution will primarily depend on the amount of cash our subsidiaries generate from their operations. Our reportable segments 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.
The general partner of ETO has separate operating management and boards of directors. We control ETO through our owner ship of its respective general partners. Recent Developments ETO Series F and Series G Preferred Units Issuance OnJanuary 22, 2020 , ETO issued 500,000 of its 6.750% Series F Preferred Units at a price of$1,000 per unit and 1,100,000 of its 7.125% Series G Preferred Units at a price of$1,000 per unit. The net proceeds were used to repay amounts outstanding under ETO's revolving credit facility and for general partnership purposes. ETOJanuary 2020 Senior Notes Offering and Redemption OnJanuary 22, 2020 , ETO completed a registered offering (the "January 2020 Senior Notes Offering") of$1.00 billion aggregate principal amount of ETO's 2.900% Senior Notes due 2025,$1.50 billion aggregate principal amount of ETO's 3.750% Senior Notes due 2030, and$2.00 billion aggregate principal amount of ETO's 5.000% Senior Notes due 2050, (collectively, the "Notes"). 76
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The Notes are fully and unconditionally guaranteed by the Partnership's wholly-owned subsidiary,Sunoco Logistics Partners Operations L.P. , on a senior unsecured basis. Utilizing proceeds from theJanuary 2020 Senior Notes Offering, ETO redeemed its$400 million aggregate principal amount of 5.75% Senior Notes dueSeptember 1, 2020 , its$1.05 billion aggregate principal amount of 4.15% Senior Notes dueOctober 1, 2020 , its$1.14 billion aggregate principal amount of 7.50% Senior Notes dueOctober 15, 2020 , its$250 million aggregate principal amount of 5.50% Senior Notes dueFebruary 15, 2020, ET 's$52 million aggregate principal amount of 7.50% Senior Notes dueOctober 15, 2020 and Transwestern's$175 million aggregate principal amount of 5.36% Senior Notes dueDecember 9, 2020 . ETO Term Loan OnOctober 17, 2019 , ETO entered into a term loan credit agreement (the "ETO Term Loan") providing for a$2.00 billion three-year term loan credit facility. Borrowings under the term loan agreement mature onOctober 17, 2022 and are available for working capital purposes and for general partnership purposes. The term loan agreement is unsecured and is guaranteed by our subsidiary,Sunoco Logistics Partners Operations L.P. As ofDecember 31, 2019 , the ETO Term Loan had$2.00 billion outstanding and was fully drawn. The weighted average interest rate on the total amount outstanding as ofDecember 31, 2019 was 2.78%. SemGroup Acquisition and ET Contribution of SemGroup Assets to ETO OnDecember 5, 2019, ET completed the acquisition ofSemGroup pursuant to the terms of the Agreement and Plan of Merger, dated as ofSeptember 15, 2019 (the "Merger Agreement"). Under the terms of the Merger Agreement, a wholly owned subsidiary of ET merged with and intoSemGroup (the "SemGroup Transaction"), withSemGroup surviving the Merger. At the effective time of theSemGroup Transaction onDecember 5, 2019 , each share of class A common stock, par value$0.01 per share, ofSemGroup issued and outstanding immediately prior to the effective time was converted into the right to receive (i)$6.80 in cash, without interest, and (ii) 0.7275 ET Common Units representing limited partner interests in ET. Each share of Series A Cumulative Perpetual Convertible Preferred Stock, par value$0.01 per share, ofSemGroup that was issued and outstanding as of immediately prior to the effective time was redeemed bySemGroup for cash at a price per share equal to 101% of the liquidation preference. During the first quarter of2020, ET contributed certainSemGroup assets to ETO through sale and contribution transactions. JC Nolan Pipeline OnJuly 1, 2019 , ETO and Sunoco LP entered into a joint venture on the JC Nolan diesel fuel pipeline toWest Texas and the JC Nolan terminal. ETO operates the pipeline for the joint venture, which transports diesel fuel from Hebert,Texas to a terminal in theMidland, Texas area. The diesel fuel pipeline has an initial capacity of 30,000 barrels per day and was successfully commissioned inAugust 2019 . Series E Preferred Units Issuance InApril 2019 , ETO issued 32 million of its 7.600% Series E Preferred Units at a price of$25 per unit, including 4 million Series E Preferred Units pursuant to the underwriters' exercise of their option to purchase additional preferred units. The total gross proceeds from the Series E Preferred Unit issuance were$800 million , including$100 million from the underwriters' exercise of their option to purchase additional preferred units. The net proceeds were used to repay amounts outstanding under ETO's revolving credit facility and for general partnership purposes. ET-ETO Senior Notes Exchange InMarch 2019 , ETO issued approximately$4.21 billion aggregate principal amount of senior notes to settle and exchange approximately 97% of ET's outstanding senior notes. In connection with this exchange, ETO issued$1.14 billion aggregate principal amount of 7.50% senior notes due 2020,$995 million aggregate principal amount of 4.25% senior notes due 2023,$1.13 billion aggregate principal amount of 5.875% senior notes due 2024 and$956 million aggregate principal amount of 5.50% senior notes due 2027. ETO 2019 Senior Notes Offering and Redemption InJanuary 2019 , ETO issued$750 million aggregate principal amount of 4.50% senior notes due 2024,$1.50 billion aggregate principal amount of 5.25% senior notes due 2029 and$1.75 billion aggregate principal amount of 6.25% senior notes due 2049. The$3.96 billion net proceeds from the offering were used to repay in full ET's outstanding senior secured term loan, to redeem outstanding senior notes, to repay a portion of the borrowings under the Partnership's revolving credit facility and for general partnership purposes. 77
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Panhandle Senior Notes Redemption InJune 2019 ,Panhandle 's$150 million aggregate principal amount of 8.125% senior notes matured and were repaid with borrowings under an affiliate loan agreement with ETO. Bakken Senior Notes Offering InMarch 2019 ,Midwest Connector Capital Company LLC , a wholly-owned subsidiary of Dakota Access, issued$650 million aggregate principal amount of 3.625% senior notes due 2022,$1.00 billion aggregate principal amount of 3.90% senior notes due 2024 and$850 million aggregate principal amount of 4.625% senior notes due 2029. The$2.48 billion in net proceeds from the offering were used to repay in full all amounts outstanding on the Bakken credit facility and the facility was terminated. Sunoco LP Senior Notes Offering InMarch 2019 , Sunoco LP issued$600 million aggregate principal amount of 6.00% senior notes due 2027 in a private placement to eligible purchasers. The net proceeds from this offering were used to repay a portion of Sunoco LP's existing borrowings under its credit facility. InJuly 2019 , Sunoco LP completed an exchange of these notes for registered notes with substantially identical terms. USAC Senior Notes Offering InMarch 2019 , USAC issued$750 million aggregate principal amount of 6.875% senior notes due 2027 in a private placement, and inDecember 2019 , USAC exchanged those notes for substantially identical senior notes registered under the Securities Act. The net proceeds from this offering were used to repay a portion of USAC's existing borrowings under its credit facility and for general partnership purposes. Regulatory Update Interstate Natural Gas Transportation Regulation Rate Regulation EffectiveJanuary 2018 , the 2017 Tax and Jobs Act (the "Tax Act") changed several provisions of the federal tax code, including a reduction in the maximum corporate tax rate. OnMarch 15, 2018 , in a set of related proposals, theFERC addressed treatment of federal income tax allowances in regulated entity rates. TheFERC 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. TheFERC issued the Revised Policy Statement in response to a remand from theUnited States Court of Appeals for the District of Columbia Circuit in United Airlines v.FERC , in which the court determined that theFERC 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. OnJuly 18, 2018 , theFERC issued an order denying requests for rehearing and clarification of its Revised Policy Statement. In the rehearing order, theFERC clarified that a pipeline organized as a master limited partnership will not be not be precluded in a future proceeding from arguing and providing evidentiary support that it is entitled to an income tax allowance and demonstrating that its recovery of an income tax allowance does not result in a double-recovery of investors' income tax costs. In light of the rehearing order, the impacts of theFERC's policy on the treatment of income taxes may have on the rates ETO can charge for theFERC -regulated transportation services are unknown at this time. TheFERC also issued a Notice of Inquiry ("2017 Tax Law NOI") onMarch 15, 2018 , requesting comments on the effect of the Tax Act onFERC jurisdictional rates. The 2017 Tax Law NOI states that of particular interest to theFERC is whether, and if so how, theFERC should address changes relating to accumulated deferred income taxes and bonus depreciation. Comments in response to the 2017 Tax Law NOI were due on or beforeMay 21, 2018 . InMarch 2019 , following the decision of the D.C. Circuit in Emera Maine v.Federal Energy Regulatory Commission , theFERC issued a Notice of Inquiry regarding its policy for determining return on equity ("ROE"). TheFERC specifically sought information and stakeholder views to help theFERC explore whether, and if so how, it should modify its policies concerning the determination of ROE to be used in designing jurisdictional rates charged by public utilities. TheFERC also expressly sought comment on whether any changes to its policies concerning public utility ROEs should be applied to interstate natural gas and oil pipelines. Initial comments were due inJune 2019 , and reply comments were due inJuly 2019 . TheFERC has not taken any further action with respect to the Notice of Inquiry as of this time, and therefore we cannot predict what effect, if any, such development could have on our cost-of-service rates in the future. 78
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Also included in theMarch 15, 2018 proposals is a Notice of Proposed Rulemaking ("NOPR") proposing rules for implementation of the Revised Policy Statement and the corporate income tax rate reduction with respect to natural gas pipeline rates. OnJuly 18, 2018 , theFERC issued a Final Rule adopting procedures that are generally the same as proposed in the NOPR with a few clarifications and modifications. With limited exceptions, the Final Rule requires allFERC -regulated natural gas pipelines that have cost-based rates for service to make a one-time Form No. 501-G filing providing certain financial information and to make an election on how to treat its existing rates. The Final Rule suggests that this information will allow theFERC and other stakeholders to evaluate the impacts of the Tax Act and the Revised Policy Statement on each individual pipeline's rates. The Final Rule also requires that eachFERC -regulated natural gas pipeline select one of four options to address changes to the pipeline's revenue requirements as a result of the tax reductions: file a limited Natural Gas Act ("NGA") Section 4 filing reducing its rates to reflect the reduced tax rates, commit to filing a general NGA Section 4 rate case in the near future, file a statement explaining why an adjustment to rates is not needed, or take no other action. For the limited NGA Section 4 option, theFERC clarified that, notwithstanding the Revised Policy Statement, a pipeline organized as a master limited partnership does not need to eliminate its income tax allowance but, instead, can reduce its rates to reflect the reduction in the maximum corporate tax rate. Trunkline,ETC Tiger Pipeline, LLC andPanhandle filed their respective FERC Form No. 501-Gs onOctober 11, 2018 . FEP,Lake Charles LNG and certain other operating subsidiaries filed their respective FERC Form No. 501-Gs on or aboutNovember 8, 2018 , and Rover, FGT, Transwestern and MEP filed their respective FERC Form No. 501-Gs on or aboutDecember 6, 2018 . By order issuedJanuary 16, 2019 , theFERC initiated a review ofPanhandle 's existing rates pursuant to Section 5 of the Natural Gas Act to determine whether the rates currently charged byPanhandle are just and reasonable and set the matter for hearing.Panhandle filed a cost and revenue study onApril 1, 2019 .Panhandle filed a NGA Section 4 rate case onAugust 30, 2019 . By order issuedOctober 1, 2019 , the Panhandle Section 5 and Section 4 cases were consolidated. An initial decision is expected to be issued in the first quarter of 2021. By order issuedFebruary 19, 2019 , theFERC initiated a review of Southwest Gas' existing rates pursuant to Section 5 of the Natural Gas Act to determine whether the rates currently charged by Southwest Gas are just and reasonable and set the matter for hearing. Southwest Gas filed a cost and revenue study onMay 6, 2019 . OnJuly 10, 2019 , Southwest filed an Offer of Settlement in this Section 5 proceeding, which settlement was supported or not opposed by Commission Trial Staff and all active parties. The settlement was approved onOctober 29, 2019 .Sea Robin Pipeline Company filed a Section 4 rate case onNovember 30, 2018 . A procedural schedule was ordered with a hearing date in the 4th quarter of 2019.Sea Robin Pipeline Company has reached a settlement of this proceeding, with a settlement filedJuly 22, 2019 . The settlement was approved by theFERC by order datedOctober 17, 2019 . Even without action on the 2017 Tax Law NOI or as contemplated in the Final Rule, theFERC or our shippers may challenge the cost of service rates we charge. TheFERC's establishment of a just and reasonable rate is based on many components, and tax-related changes will affect two such components, the allowance for income taxes and the amount for accumulated deferred income taxes, while other pipeline costs also will continue to affect theFERC's determination of just and reasonable cost of service rates. Although changes in these two tax related components may decrease, other components in the cost of service rate calculation may increase and result in a newly calculated cost of service rate that is the same as or greater than the prior cost of service rate. Moreover, we receive revenues from our pipelines based on a variety of rate structures, including cost of service rates, negotiated rates, discounted rates and market-based rates. Many of our interstate pipelines, such asETC Tiger Pipeline, LLC , MEP and FEP, have negotiated market rates that were agreed to by customers in connection with long-term contracts entered into to support the construction of the pipelines. Other systems, such as FGT, Transwestern andPanhandle , have a mix of tariff rate, discount rate, and negotiated rate agreements. We do not expect market-based rates, negotiated rates or discounted rates that are not tied to the cost of service rates to be affected by the Revised Policy Statement or any final regulations that may result from theMarch 15, 2018 proposals. The revenues we receive from natural gas transportation services we provide pursuant to cost of service based rates may decrease in the future as a result of the ultimate outcome of the NOI, the Final Rule, and the Revised Policy Statement, combined with the reduced corporate federal income tax rate established in the Tax Act. The extent of any revenue reduction related to our cost of service rates, if any, will depend on a detailed review of all of ETO's cost of service components and the outcomes of any challenges to our rates by theFERC or our shippers. Pipeline Certification TheFERC issued a Notice of Inquiry onApril 19, 2018 ("Pipeline Certification NOI"), thereby initiating a review of its policies on certification of natural gas pipelines, including an examination of its long-standing Policy Statement on Certification of New Interstate Natural Gas Pipeline Facilities, issued in 1999, that is used to determine whether to grant certificates for new pipeline projects. We are unable to predict what, if any, changes may be proposed as a result of the Pipeline Certification NOI that will affect our natural gas pipeline business or when such proposals, if any, might become effective. Comments in response to the Pipeline Certification NOI were due on or beforeJuly 25, 2018 . We do not expect that any change in this policy would affect us in a materially different manner than any other natural gas pipeline company operating inthe United States . 79
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Interstate Common Carrier Regulation TheFERC 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, or PPI. The indexing methodology is applicable to existing rates, with the exclusion of market-based rates. TheFERC's indexing methodology is subject to review every five years. During the five-year period commencingJuly 1, 2016 and endingJune 30, 2021 , common carriers charging indexed rates are permitted to adjust their indexed ceilings annually by PPI plus 1.23 percent. Many existing pipelines utilize theFERC liquids index to change transportation rates annually everyJuly 1 . With respect to liquids and refined products pipelines subject toFERC jurisdiction, the Revised Policy Statement requires the pipeline to reflect the impacts to its cost of service from the Revised Policy Statement and the Tax Act on Page 700 of FERC Form No. 6. This information will be used by theFERC in its next five year review of the liquids pipeline index to generate the index level to be effectiveJuly 1, 2021 , thereby including the effect of the Revised Policy Statement and the Tax Act in the determination of indexed rates prospectively, effectiveJuly 1, 2021 . TheFERC's establishment of a just and reasonable rate, including the determination of the appropriate liquids pipeline index, is based on many components, and tax related changes will affect two such components, the allowance for income taxes and the amount for accumulated deferred income taxes, while other pipeline costs also will continue to affect theFERC's determination of the appropriate pipeline index. Accordingly, depending on theFERC's application of its indexing rate methodology for the next five year term of index rates, the Revised Policy Statement and tax effects related to the Tax Act may impact our revenues associated with any transportation services we may provide pursuant to cost of service based rates in the future, including indexed rates. Trends and Outlook We continue to evaluate and execute strategies to enhance unitholder value through growth, as well as the integration and optimization of our diversified asset portfolio. We intend to target a minimum distribution coverage ratio of 1.50x, thereby promoting a prudent balance between distribution rates and enhanced financial flexibility and strength while maintaining our investment grade ratings. We anticipate continued earnings growth in 2020 from the recently completed projects, as well as our current project backlog. We also continue to seek asset optimization opportunities through strategic transactions among us and our subsidiaries and/or affiliates, and we expect to continue to evaluate and execute on such opportunities. As we have in the past, we will evaluate growth projects and acquisitions as such opportunities may be identified in the future, and we believe that the current capital markets are conducive to funding such future projects. With respect to commodity prices, natural gas prices have remained comparatively low in recent months as associated gas from shale oil resources has provided additional supply to the market, increasing domestic supply to highs above 100 Bcf/d. Global oil and natural gas demand growth is likely to continue into the foreseeable future and will supportU.S. production increases and, in turnU.S. natural gas export projects toMexico as well as LNG exports. For crude oil, new pipelines that came online during 2019 have resulted in Permian barrels now pricing closer to other regional hubs, which is a departure from the substantial discounts seen a year ago. These pipelines have enabled Permian producers to realize higher crude oil revenues, supporting continued growth in the region. Crude oil exports from theU.S. are continuing to increase as a result, providing additional opportunity forU.S. midstream sector growth. 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. 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 table below, 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 80
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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.
Year Ended
Years Ended December 31, 2019 2018 Change Segment Adjusted EBITDA: Intrastate transportation and storage$ 999 $ 927 $ 72 Interstate transportation and storage 1,792 1,680 112 Midstream 1,602 1,627 (25 ) NGL and refined products transportation and services 2,666 1,979 687 Crude oil transportation and services 2,972 2,330 642 Investment in Sunoco LP 665 638 27 Investment in USAC 420 289 131 All other 98 40 58 Total Segment Adjusted EBITDA 11,214 9,510 1,704 Depreciation, depletion and amortization (3,147 ) (2,859 ) (288 ) Interest expense, net of interest capitalized (2,331 ) (2,055 ) (276 ) Impairment losses (74 ) (431 ) 357 Gains (losses) on interest rate derivatives (241 ) 47 (288 ) Non-cash compensation expense (113 ) (105 ) (8 ) Unrealized losses on commodity risk management activities (5 ) (11 ) 6 Inventory valuation adjustments 79 (85 ) 164 Losses on extinguishments of debt (18 ) (112 ) 94 Adjusted EBITDA related to unconsolidated affiliates (626 ) (655 ) 29 Equity in earnings of unconsolidated affiliates 302 344 (42 ) Adjusted EBITDA related to discontinued operations - 25 (25 ) Other, net 54 21 33 Income from continuing operations before income tax expense 5,094 3,634 1,460 Income tax expense from continuing operations (195 ) (4 ) (191 ) Income from continuing operations 4,899 3,630 1,269 Loss from discontinued operations, net of income taxes - (265 ) 265 Net income$ 4,899 $ 3,365 $ 1,534 Adjusted EBITDA (consolidated). For the year endedDecember 31, 2019 compared to the prior year, Adjusted EBITDA increased approximately$1.7 billion , or 18%. The increase was primarily due to the impact of multiple revenue-generating assets being placed in service and recent acquisitions, as well as increased demand for services on existing assets. The impact of new assets and acquisitions was approximately$784 million , of which the largest increases were from increased volumes to ourMariner East pipeline and terminal assets due to the addition of pipeline capacity in the fourth quarter of 2018 (a$274 million impact to the NGL and refined products transportation and services segment), the commissioning of our fifth and sixth fractionators (a$131 million impact to the NGL and refined products transportation and services segment), the ramp up of volumes on ourBayou Bridge system due to placing phase II in service in the second quarter of 2019 (a$60 million impact to our crude oil transportation and services segment), the Rover pipeline (a$78 million impact to the interstate transportation and storage segment), the addition of gas processing capacity to our Arrowhead gas plant (a$31 million impact to our midstream segment), placing our Permian Express 4 pipeline in service inOctober 2019 (a$26 million impact to our crude oil transportation and services segment) and the acquisition of USAC (a net impact of$131 million among the investment in USAC and all other segments). The remainder of the increase in Adjusted EBITDA was primarily due to stronger demand on existing assets, particularly due to increased throughput on our Bakken Pipeline system as well as increased production in the Permian, which impacted multiple segments. Additional discussion of these 81
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and other factors affecting Adjusted EBITDA is included in the analysis of Segment Adjusted EBITDA in the "Segment Operating Results" section below. Depreciation, Depletion and Amortization. Depreciation, depletion and amortization expense increased primarily due to additional depreciation from assets recently placed in service and recent acquisitions. Interest Expense, Net of Interest Capitalized. Interest expense, net of interest capitalized, increased primarily due to the following: • an increase of$198 million recognized by the Partnership (excluding Sunoco
LP and USAC, which are discussed below) primarily due to increases in ETO's
long-term debt;
• an increase of
higher overall debt balances and higher interest rates on borrowings under
the credit agreement. These increases were partially offset by the decrease
in borrowings under the credit agreement; and
• an increase of
total long-term debt; offset by
Impairment Losses. During the year endedDecember 31, 2019 , the Partnership recognized goodwill impairments of$12 million related to the Southwest Gas operations within the interstate transportation and storage segment and$9 million related to our North Central operations within the midstream segment, both of which were primarily due to changes in assumptions related to projected future revenues and cash flows. Also during the year endedDecember 31, 2019 , Sunoco LP recognized a$47 million write-down on assets held for sale related to its ethanol plant inFulton, New York , and USAC recognized a$6 million fixed asset impairment related to certain idle compressor assets. During the year endedDecember 31, 2018 , the Partnership recognized goodwill impairments of$378 million and asset impairments of$4 million related to our midstream operations and asset impairments of$9 million related to idle leased assets in our crude operations. Sunoco LP recognized a$30 million indefinite-lived intangible asset impairment related to contractual rights. USAC recognized a$9 million fixed asset impairment related to certain idle compressor assets. Additional discussion on these impairments is included in "Estimates and Critical Accounting Policies" below. Gains (Losses) on Interest Rate Derivatives. Our interest rate derivatives are not designated as hedges for accounting purposes; therefore, changes in fair value are recorded in earnings each period. Losses on interest rate derivatives during the year endedDecember 31, 2019 resulted from a decrease in forward interest rates and gains in 2018 resulted from an increase in forward interest rates. Unrealized Gains (Losses) on Commodity Risk Management Activities. The unrealized gains and 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" below, and additional information on the commodity-related derivatives, including notional volumes, maturities and fair values, is available in "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" and in Note 13 to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data." Inventory Valuation Adjustments. Inventory valuation reserve adjustments were recorded for the inventory associated with Sunoco LP primarily driven by changes in fuel prices between periods. Losses on Extinguishments of Debt. Amounts were related to Sunoco LP's senior note and term loan redemption inJanuary 2018 . Adjusted EBITDA Related to Unconsolidated Affiliates and Equity in Earnings of Unconsolidated Affiliates. See additional information in "Supplemental Information on Unconsolidated Affiliates" and "Segment Operation Results" below. Adjusted EBITDA Related to Discontinued Operations. Amounts were related to the operations of Sunoco LP's retail business that were disposed of inJanuary 2018 . Other, net. Other, net primarily includes amortization of regulatory assets and other income and expense amounts. Income Tax Expense. For the year endedDecember 31, 2019 compared to the same period in the prior year, income tax expense increased due to an increase in income before tax expense at our corporate subsidiaries and the recognition of a favorable state tax rate change in the prior period. 82
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Supplemental Information on Unconsolidated Affiliates The following table presents financial information related to unconsolidated affiliates: Years Ended December 31, 2019 2018 Change Equity in earnings of unconsolidated affiliates: Citrus$ 148 $ 141 $ 7 FEP 59 55 4 MEP 15 31 (16 ) Other 80 117 (37 ) Total equity in earnings of unconsolidated affiliates$ 302
Adjusted EBITDA related to unconsolidated affiliates(1): Citrus$ 342 $ 337 $ 5 FEP 75 74 1 MEP 60 81 (21 ) Other 149 163 (14 ) Total Adjusted EBITDA related to unconsolidated affiliates$ 626
Distributions received from unconsolidated affiliates: Citrus$ 178 $ 171 $ 7 FEP 73 68 5 MEP 36 48 (12 ) Other 101 110 (9 ) Total distributions received from unconsolidated affiliates$ 388
(1) These amounts represent our proportionate share of the Adjusted EBITDA of
our unconsolidated affiliates and are based on our equity in earnings or
losses of our unconsolidated affiliates adjusted for our proportionate share
of the unconsolidated affiliates' interest, depreciation, depletion,
amortization, non-cash items and taxes.
Segment Operating Results We evaluate segment performance based on Segment Adjusted EBITDA, which we believe is an important performance measure of the core profitability of our operations. This measure represents the basis of our internal financial reporting and is one of the performance measures used by senior management in deciding how to allocate capital resources among business segments. The tables below identify the components of Segment Adjusted EBITDA, which is calculated as follows: • Segment margin, operating expenses, and selling, general and administrative
expenses. These amounts represent the amounts included in our consolidated
financial statements that are attributable to each segment.
• Unrealized gains or losses on commodity risk management activities and
inventory valuation adjustments. These are the unrealized amounts that are
included in cost of products sold to calculate segment margin. These amounts
are not included in Segment Adjusted EBITDA; therefore, the unrealized losses
are added back and the unrealized gains are subtracted to calculate the
segment measure.
• Non-cash compensation expense. These amounts represent the total non-cash
compensation recorded in operating expenses and selling, general and
administrative expenses. This expense is not included in Segment Adjusted
EBITDA and therefore is added back to calculate the segment measure.
• Adjusted EBITDA related to unconsolidated affiliates. 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 83
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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. In the following analysis of segment operating results, a measure of segment margin is reported for segments with sales revenues. Segment margin is a non-GAAP financial measure and is presented herein to assist in the analysis of segment operating results and particularly to facilitate an understanding of the impacts that changes in sales revenues have on the segment performance measure of Segment Adjusted EBITDA. Segment margin is similar to the GAAP measure of gross margin, except that segment margin excludes charges for depreciation, depletion and amortization. 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 sections below include information on the components of segment margin by sales type, which components are included in order to provide additional disaggregated information to facilitate the analysis of segment margin and Segment Adjusted EBITDA. For example, these components include transportation margin, storage margin, and other margin. These components of segment margin are calculated consistent with the calculation of segment margin; therefore, these components also exclude charges for depreciation, depletion and amortization. For additional information regarding our business segments, see "Item 1. Business" and Notes 1 and 16 to our consolidated financial statements in "Item 8. Financial Statements and Supplementary Data." Segment Operating Results Intrastate Transportation and Storage Years EndedDecember 31, 2019 2018
Change
Natural gas transported (BBtu/d) 12,442 10,873 1,569 Revenues$ 3,099 $ 3,737 $ (638 ) Cost of products sold 1,909 2,665 (756 ) Segment margin 1,190 1,072 118 Unrealized losses on commodity risk management activities 2 38 (36 ) Operating expenses, excluding non-cash compensation expense (190 ) (189 ) (1 ) Selling, general and administrative expenses, excluding non-cash compensation expense (29 ) (27 ) (2 ) Adjusted EBITDA related to unconsolidated affiliates 25 32 (7 ) Other 1 1 - Segment Adjusted EBITDA$ 999 $ 927 $ 72 Volumes. For the year endedDecember 31, 2019 compared to the prior year, transported volumes increased primarily due to the impact of reflecting RIGS as a consolidated subsidiary beginningApril 2018 and the impact of theRed Bluff Express pipeline coming online inMay 2018 , as well as the impact of favorable market pricing spreads. Segment Margin. The components of our intrastate transportation and storage segment margin were as follows: Years Ended December 31, 2019 2018 Change Transportation fees$ 614 $ 525 $ 89 Natural gas sales and other (excluding unrealized gains and losses) 505 510 (5 ) Retained fuel revenues (excluding unrealized gains and losses) 50 59 (9 ) Storage margin, including fees (excluding unrealized gains and losses) 23 16 7 Unrealized losses on commodity risk management activities (2 ) (38 ) 36 Total segment margin$ 1,190 $ 1,072 $ 118 84
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Segment Adjusted EBITDA. For the year endedDecember 31, 2019 compared to the prior year, Segment Adjusted EBITDA related to our intrastate transportation and storage segment increased due to the net impacts of the following: • an increase of$64 million in transportation fees, excluding the impact of
consolidating RIGS beginning
the Red Bluff Express pipeline coming online in
contracts;
• a net increase of
beginning
fuel revenues and operating expenses of
million, respectively, partially offset by a decrease in Adjusted EBITDA
related to unconsolidated affiliates of
• an increase of
realized adjustment to the
and higher storage fees, partially offset by a
lower physical withdrawals; partially offset by
• a decrease of
prices; and
• a decrease of
realized gains from pipeline optimization activity.
Interstate Transportation and Storage
Years EndedDecember 31, 2019 2018
Change
Natural gas transported (BBtu/d) 11,346 9,542 1,804 Natural gas sold (BBtu/d) 17 17 - Revenues$ 1,963 $ 1,682 $ 281 Operating expenses, excluding non-cash compensation, amortization and accretion expenses (569 ) (431 ) (138 ) Selling, general and administrative expenses, excluding non-cash compensation, amortization and accretion expenses (72 ) (63 ) (9 ) Adjusted EBITDA related to unconsolidated affiliates 477 492 (15 ) Other (7 ) - (7 ) Segment Adjusted EBITDA$ 1,792 $ 1,680 $ 112 Volumes. For the year endedDecember 31, 2019 compared to the prior year, transported volumes increased as a result of the addition of new contracted volumes for delivery out of theHaynesville Shale , higher volumes on our Rover pipeline as a result of the full year availability of new supply connections, and higher throughput on Trunkline andPanhandle due to increased utilization of higher contracted capacity. Segment Adjusted EBITDA. For the year endedDecember 31, 2019 compared to the prior year, Segment Adjusted EBITDA related to our interstate transportation and storage segment increased due to the net impacts of the following: • an increase in margin of$231 million from the Rover pipeline due to higher
reservation and usage resulting from additional connections and utilization
of additional compression;
• an increase of
market conditions allowing us to successfully bring new volumes to the system
at improved rates, primarily on our Transwestern, Tiger and Panhandle Eastern
systems; and
• an increase of
resulting from the rate case filed in
supply interruptions on the Sea Robin system; partially offset by
• an increase of
in ad valorem taxes of
from placing the final portions of this asset into service in
an increase of
increase in transportation volumes, an increase of
overhead costs and additional operating expense of
acquired in
activity of
Eastern system of
• an increase of
primarily due to an increase in insurance expense of
in employee cost of
of
and 85
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• a decrease of
affiliates primarily resulting from a
earnings from MEP as a result of lower capacity being re-contracted at lower
rates on expiring contracts, partially offset by a
our Citrus joint venture as we brought new volumes to the system in 2019. Midstream Years Ended December 31, 2019 2018 Change Gathered volumes (BBtu/d) 13,460 12,126 1,334 NGLs produced (MBbls/d) 571 540 31 Equity NGLs (MBbls/d) 31 29 2 Revenues$ 6,031 $ 7,522 $ (1,491 ) Cost of products sold 3,577 5,145 (1,568 ) Segment margin 2,454 2,377 77 Operating expenses, excluding non-cash compensation expense (791 ) (705 ) (86 ) Selling, general and administrative expenses, excluding non-cash compensation expense (90 ) (81 ) (9 ) Adjusted EBITDA related to unconsolidated affiliates 27 33 (6 ) Other 2 3 (1 ) Segment Adjusted EBITDA$ 1,602 $ 1,627 $ (25 ) Volumes. For the year endedDecember 31, 2019 compared to the prior year, gathered volumes increased primarily due to increases in the Northeast, Permian,Ark-La-Tex ,South Texas andNorth Texas regions. NGL production increased due to increases in the Permian andNorth Texas regions partially offset by ethane rejection in theSouth Texas region. Segment Margin. The table below presents the components of our midstream segment margin. For the year endedDecember 31, 2018 , the amounts previously reported for fee-based and non-fee-based margin have been adjusted to reflect reclassification of certain contractual minimum fees from fee-based margin to non-fee-based margin in order to conform to the current period classification. Years Ended December 31, 2019 2018 Change Gathering and processing fee-based revenues$ 2,002 $ 1,788 $ 214 Non-fee based contracts and processing 452 589 (137 ) Total segment margin$ 2,454 $ 2,377 $ 77 Segment Adjusted EBITDA. For the year endedDecember 31, 2019 compared to the prior year, Segment Adjusted EBITDA related to our midstream segment decreased due to the net impacts of the following: • a decrease of$137 million in non fee-based margin due to lower NGL prices of
• an increase of
million in outside services,
million in employee costs and
and
• an increase of
primarily due to a decrease of
increase of
• an increase of
Northeast, Permian,Ark-La-Tex ,North Texas andSouth Texas regions. 86
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NGL and Refined Products Transportation and Services
Years Ended December
31,
2019 2018
Change
NGL transportation volumes (MBbls/d) 1,289 1,027 262 Refined products transportation volumes (MBbls/d) 583 621 (38 ) NGL and refined products terminal volumes (MBbls/d) 944 812 132 NGL fractionation volumes (MBbls/d) 706 527 179 Revenues$ 11,641 $ 11,123 $ 518 Cost of products sold 8,393 8,462 (69 ) Segment margin 3,248 2,661 587 Unrealized (gains) losses on commodity risk management activities 81 (86 ) 167 Operating expenses, excluding non-cash compensation expense (656 ) (604 ) (52 ) Selling, general and administrative expenses, excluding non-cash compensation expense (93 ) (74 ) (19 ) Adjusted EBITDA related to unconsolidated affiliates 86 82 4 Segment Adjusted EBITDA$ 2,666 $ 1,979 $ 687 Volumes. For the year endedDecember 31, 2019 compared to the prior year, throughput barrels on our Texas NGL pipeline system increased due to higher receipt of liquids production from both wholly-owned and third-party gas plants primarily in the Permian andNorth Texas regions. In addition, NGL transportation volumes on our Northeast assets increased due to the initiation of service on the Mariner East 2 pipeline system. Refined products transportation volumes decreased for the year endedDecember 31, 2019 compared to prior year due to the closure of a third party refinery during the third quarter of 2019, negatively impacting supply to our refined products transportation system. These decreases in volumes are partially offset by the initiation of service on the JC Nolan Pipeline in the third quarter of 2019. NGL and refined products terminal volumes increased for the year endedDecember 31, 2019 compared to the prior year primarily due to the initiation of service on ourMariner East 2 pipeline system which commenced operations in the fourth quarter of 2018. Average volumes fractionated at ourMont Belvieu, Texas fractionation facility increased for the year endedDecember 31, 2019 compared to the prior year primarily due to the commissioning of our fifth and sixth fractionators inJuly 2018 andFebruary 2019 , respectively. Segment Margin. The components of our NGL and refined products transportation and services segment margin were as follows: Years Ended December
31,
2019 2018 Change Fractionators and refinery services margin$ 664 $ 511 $ 153 Transportation margin 1,716 1,233 483 Storage margin 223 211 12 Terminal Services margin 630 494 136 Marketing margin 96 126 (30 ) Unrealized gains (losses) on commodity risk management activities (81 ) 86 (167 ) Total segment margin$ 3,248 $ 2,661 $ 587 Segment Adjusted EBITDA. For the year endedDecember 31, 2019 compared to the prior 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$483 million in transportation margin primarily due to a$265
million increase resulting from the initiation of service on our
2 pipeline in the fourth quarter of 2018, a
from higher throughput volumes received from the Permian region on our
NGL pipelines, a
the Barnett region, a
$9 million increase due to the 87
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initiation of service on the JC Nolan Pipeline. These increases were partially offset by a$21 million decrease resulting fromMariner East 1 pipeline downtime, a$13 million decrease due to the closure of a third-party refinery during the third quarter of 2019, negatively impacting refined product supply to our system, and a$5 million decrease due to the timing of deficiency fees onMariner West ; • an increase of$153 million in fractionation and refinery services margin
primarily due to a
our fifth and sixth fractionators in
respectively, and higher NGL volumes from the Permian region feeding our Mont
Belvieu fractionation facility. This increase was partially offset by a
reclassification between our fractionation and storage margins;
• an increase of
pipeline which commenced operations in the fourth quarter of 2018 and a
million increase due to increased tank lease revenue from third-party
customers. These increases were partially offset by a
volumes and expense reimbursements from third parties on
and rail deliveries into our
to fewer vessels exported out of our
decrease due to the closure of a third party refinery during the third
quarter of 2019; and
• an increase of
reclassification between our storage and fractionation margins; partially
offset by
• a decrease of
fees incurred by our marketing affiliate on our
offset by increased gains from our butane blending business due to more favorable market conditions and increased volumes, as well as increased optimization gains from the sale of NGL component products at ourMont Belvieu facility;
• an increase of
million increase in employee and ad valorem tax expenses on our terminals,
fractionation, and transportation operations, a
utility costs to operate our pipelines and our fifth and sixth fractionators
which commenced
increase in maintenance project costs due to the timing of multiple projects
on our transportation assets; and
• an increase of
due to a
increase in insurance expenses, a
million increase in employee costs.
Crude Oil Transportation and Services
Years Ended December
31,
2019 2018
Change
Crude transportation volumes (MBbls/d) 4,662 4,172 490 Crude terminals volumes (MBbls/d) 2,068 2,096 (28 ) Revenue$ 18,447 $ 17,332 $ 1,115 Cost of products sold 14,758 14,439 319 Segment margin 3,689 2,893 796 Unrealized (gains) losses on commodity risk management activities (69 ) 55 (124 ) Operating expenses, excluding non-cash compensation expense (570 ) (547 ) (23 ) Selling, general and administrative expenses, excluding non-cash compensation expense (85 ) (86 ) 1 Adjusted EBITDA related to unconsolidated affiliates 8 15 (7 ) Other (1 ) - (1 ) Segment Adjusted EBITDA$ 2,972 $ 2,330 $ 642 Segment Adjusted EBITDA. For the year endedDecember 31, 2019 compared to the prior year, Segment Adjusted EBITDA related to our crude oil transportation and services segment increased due to the net impacts of the following: • an increase of$672 million in segment margin (excluding unrealized gains and
losses on commodity risk management activities) primarily due to a
million increase resulting from higher throughput on our
system primarily due to increased production from the Permian region and
contributions from capacity expansion projects placed into service, a
million increase in throughput on our Bakken pipeline, a favorable inventory valuation adjustment of 88
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$111 million for the 2019 year as compared to an unfavorable inventory adjustment of$54 million for the 2018 year, partially offset by a$50 million reduction due to lower pipeline basis spreads net of hedges. We also realized a$66 million increase from higher volumes on our Bayou Bridge Pipeline, a$31 million increase due to the inclusion of assets acquired in 2019, and a$26 million increase primarily from higher throughput, ship loading and tank rental fees at ourNederland terminal; partially offset by a$54 million decrease from ourOklahoma assets resulting from lower volumes to the system as well as from the timing of a deficiency payment made in the prior year,$12 million decrease due to the closure of a third party refinery which was the primary customer utilizing one of our northeast crude terminals. The remainder of the offsetting decrease was primarily attributable to a change in the presentation of certain intrasegment transactions, which were eliminated in the current period presentation but were shown on a gross basis in revenues and operating expenses in the prior period; partially offset by • an increase of$23 million in operating expenses primarily due to a$30
million increase in throughput-related costs on existing assets and a
million increase due to the inclusion of expenses acquired in 2019, partially
offset by a
certain intrasegment transactions discussed above;
• a decrease of
affiliates due to lower margin from jet fuel sales by our joint ventures. Investment in Sunoco LP Years Ended December 31, 2019 2018 Change Revenues$ 16,596 $ 16,994 $ (398 ) Cost of products sold 15,380 15,872 (492 ) Segment margin 1,216 1,122 94 Unrealized (gains) losses on commodity risk management activities (5 ) 6 (11 ) Operating expenses, excluding non-cash compensation expense (365 ) (435 ) 70 Selling, general and administrative, excluding non-cash compensation expense (123 ) (129 ) 6 Adjusted EBITDA related to unconsolidated affiliates 4 - 4 Inventory valuation adjustments (79 ) 85 (164 ) Adjusted EBITDA from discontinued operations - (25 ) 25 Other, net 17 14 3 Segment Adjusted EBITDA$ 665 $ 638 $ 27 The Investment in Sunoco LP segment reflects the consolidated results of Sunoco LP. Segment Adjusted EBITDA. For the year endedDecember 31, 2019 compared to the prior year, Segment Adjusted EBITDA related to the Investment in Sunoco LP segment increased due to the net impacts of the following: • a decrease in operating costs of$76 million , primarily as a result of the
conversion of 207 retail sites to commission agent sites during
These expenses include other operating expense, general and administrative
expense and lease expense; and
• an increase of
operations related to the divestment of 1,030 company-operated fuel sites to
7-Eleven in
• an increase of
affiliates due to Sunoco LP's investment in the JC Nolan joint venture;
partially offset by
• a decrease in the gross profit on motor fuel sales of
the change in inventory fair value adjustments and unrealized gains and
losses on commodity risk management activities) primarily due to lower fuel
margins, a one-time benefit of approximately
settlement with a fuel supplier recorded in 2018 and an
charge related to a reserve for an open contractual dispute recorded in 2019,
partially offset by an increase in gallons sold. 89
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Table of Contents Investment in USAC Years Ended December 31, 2019 2018 Change Revenues$ 698 $ 508 $ 190 Cost of products sold 91 67 24 Segment margin 607 441 166 Operating expenses, excluding non-cash compensation expense (134 ) (110 ) (24 ) Selling, general and administrative, excluding non-cash compensation expense (53 ) (50 ) (3 ) Other, net - 8 (8 ) Segment Adjusted EBITDA$ 420 $ 289 $ 131 Amounts reflected above for the year endedDecember 31, 2019 represents the results of operations for USAC fromApril 2, 2018 , the date ET obtained control of USAC, throughDecember 31, 2019 . Changes between periods are due to the consolidation of USAC beginningApril 2, 2018 . All Other Years Ended December 31, 2019 2018 Change Revenue$ 1,689 $ 2,228 $ (539 ) Cost of products sold 1,504 2,006 (502 ) Segment margin 185 222 (37 ) Unrealized gains on commodity risk management activities (4 ) (2 ) (2 ) Operating expenses, excluding non-cash compensation expense (77 ) (56 ) (21 ) Selling, general and administrative expenses, excluding non-cash compensation expense (66 ) (124 ) 58 Adjusted EBITDA related to unconsolidated affiliates 2 1 1 Other and eliminations 58 (1 ) 59 Segment Adjusted EBITDA$ 98 $ 40 $ 58
Amounts reflected in our all other segment primarily include: • our natural gas marketing operations;
• our wholly-owned natural gas compression operations;
• a non-controlling interest in PES. Prior to PES's reorganization in August
2018, ETO's 33% interest in PES was reflected as an unconsolidated affiliate;
subsequent the
interest in PES and no longer reflects PES as an affiliate;
• our investment in coal handling facilities; and
• our Canadian operations, which were acquired in the
Segment Adjusted EBITDA. For the year endedDecember 31, 2019 compared to the prior year, Segment Adjusted EBITDA increased due to the net impact of the following: • an increase of$8 million in gains from park and loan and storage activity;
• an increase of
• an increase of
• an increase of
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• an increase of
• an increase of
a bankruptcy;
• an increase of
• an increase of
subsequent to our acquisition of
increase in
• a decrease of
offset by
• a decrease of
2018, subsequent to which CDM is reflected in the Investment in USAC segment;
• a decrease of
and
• a decrease of
business.
Year EndedDecember 31, 2018 Compared to the Year EndedDecember 31, 2017 Consolidated Results Years Ended December 31, 2018 2017 Change Segment Adjusted EBITDA: Intrastate transportation and storage$ 927 $ 626 $ 301 Interstate transportation and storage 1,680 1,274 406 Midstream 1,627 1,481 146 NGL and refined products transportation and services 1,979 1,641 338 Crude oil transportation and services 2,330 1,379 951 Investment in Sunoco LP 638 732 (94 ) Investment in USAC 289 - 289 All other 40 187 (147 ) Total 9,510 7,320 2,190 Depreciation, depletion and amortization (2,859 ) (2,554 ) (305 )
Interest expense, net of interest capitalized (2,055 ) (1,922 )
(133 ) Impairment losses (431 ) (1,039 ) 608 Gains (losses) on interest rate derivatives 47 (37 ) 84 Non-cash compensation expense (105 ) (99 ) (6 ) Unrealized gains (losses) on commodity risk management activities (11 ) 59 (70 ) Inventory valuation adjustments (85 ) 24 (109 ) Losses on extinguishments of debt (112 ) (89 ) (23 ) Adjusted EBITDA related to unconsolidated affiliates (655 ) (716 ) 61 Equity in earnings of unconsolidated affiliates 344 144 200 Impairment of investments in unconsolidated affiliates - (313 ) 313 Adjusted EBITDA related to discontinued operations 25 (223 ) 248 Other, net 21 155 (134 ) Income from continuing operations before income tax (expense) benefit 3,634 710 2,924 Income tax (expense) benefit from continuing operations (4 ) 1,833 (1,837 ) Income from continuing operations 3,630 2,543 1,087 Loss from discontinued operations, net of income taxes (265 ) (177 ) (88 ) Net income$ 3,365 $ 2,366 $ 999 Adjusted EBITDA (consolidated). For the year endedDecember 31, 2018 compared to the prior year, Adjusted EBITDA increased approximately$2.2 billion , or 30%. The increase was primarily due to the impact of multiple revenue-generating assets being 91
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placed in service and recent acquisitions, as well as increased demand for services on existing assets. The impact of new assets and acquisitions was approximately$1.2 billion , of which the largest increases were from the Bakken pipeline (a$546 million impact to the crude oil transportation and services segment), the Rover pipeline (a$359 million impact to the interstate transportation and storage segment) and the acquisition of USAC (a net impact of$191 million among the investment in USAC and all other segments). The remainder of the increase in Adjusted EBITDA was primarily due to stronger demand on existing assets, particularly due to increased production in the Permian, which impacted multiple segments. Additional discussion of these and other factors affecting Adjusted EBITDA is included in the analysis of Segment Adjusted EBITDA in the "Segment Operating Results" section below. Depreciation, Depletion and Amortization. Depreciation, depletion and amortization increased primarily due to additional depreciation and amortization from assets recently placed in service. Interest Expense, Net of Interest Capitalized. Interest expense, net of interest capitalized, increased primarily due to the following: • an increase of$121 million recognized by ETO primarily related to an
increase in long-term debt, including additional senior note issuances and
borrowings under our revolving credit facilities; and
• an increase of
partially offset by
• a decrease of
repayment in full of its term loan and refinancing of its senior notes at
lower rates.
Impairment Losses. During the year endedDecember 31, 2018 , the Partnership recognized goodwill impairments of$378 million and asset impairments of$4 million related to our midstream operations and asset impairments of$9 million related to our crude operations idle leased assets. Sunoco LP recognized a$30 million indefinite-lived intangible impairment related to its contractual rights. USAC recognized a$9 million fixed asset impairment related to certain idle compressor assets. During the year endedDecember 31, 2017 , the Partnership recorded goodwill impairments of$223 million related to the compression business,$229 million related toPanhandle ,$262 million related to the interstate transportation and storage segment and$79 million related to the NGL and refined products transportation and services segment. Sunoco LP recognized goodwill impairments of$387 million in 2017, of which$102 million was allocated to continuing operations. In addition, during the year endedDecember 31, 2017 , the Partnership recorded an impairment to the property, plant and equipment of Sea Robin of$127 million . Additional discussion on these impairments is included in "Estimates and Critical Accounting Policies" below. Gains (Losses) on Interest Rate Derivatives. Our interest rate derivatives are not designated as hedges for accounting purposes; therefore, changes in fair value are recorded in earnings each period. Gains (losses) on interest rate derivatives during the years endedDecember 31, 2018 and 2017 resulted from an increase in forward interest rates in 2018 and a decrease in forward interest rates in 2017, which caused our forward-starting swaps to change in value. Unrealized Gains (Losses) on Commodity Risk Management Activities. See discussion of the unrealized gains (losses) on commodity risk management activities included in the discussion of segment results below. Inventory Valuation Adjustments. Inventory valuation reserve adjustments were recorded for the inventory associated with Sunoco LP as a result of commodity price changes in between periods. Losses on Extinguishments of Debt. Amounts were related to Sunoco LP's senior note and term loan redemption inJanuary 2018 . Adjusted EBITDA Related to Unconsolidated Affiliates and Equity in Earnings of Unconsolidated Affiliates. See additional information in "Supplemental Information on Unconsolidated Affiliates" and "Segment Operation Results" below. Impairment of Investments in Unconsolidated Affiliates. During the year endedDecember 31, 2017 , the Partnership recorded impairments to its investments in FEP of$141 million and HPC of$172 million . Additional discussion on these impairments is included in "Estimates and Critical Accounting Policies" below. Adjusted EBITDA Related to Discontinued Operations. Amounts were related to the operations of Sunoco LP's retail business that were disposed of inJanuary 2018 . Other, net. Other, net primarily includes amortization of regulatory assets and other income and expense amounts. Income Tax (Expense) Benefit. OnDecember 22, 2017 , the Tax Cuts and Jobs Act was signed into law. Among other provisions, the highest corporate federal income tax rate was reduced from 35% to 21% for taxable years beginning afterDecember 31, 2017 . As a result, the Partnership recognized a deferred tax benefit of 1.81 billion inDecember 2017 . For the year ended December 92
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2018, the Partnership recorded an income tax expense due to pre-tax income at its corporate subsidiaries, partially offset by a statutory rate reduction. Supplemental Information on Unconsolidated Affiliates The following table presents financial information related to unconsolidated affiliates: Years Ended December 31, 2018 2017 Change Equity in earnings (losses) of unconsolidated affiliates: Citrus$ 141 $ 144 $ (3 ) FEP 55 53 2 MEP 31 38 (7 ) HPC (1)(2) 3 (168 ) 171 Other 114 77 37 Total equity in earnings of unconsolidated affiliates$ 344
Adjusted EBITDA related to unconsolidated affiliates(3): Citrus$ 337 $ 336 $ 1 FEP 74 74 - MEP 81 88 (7 ) HPC (2) 9 46 (37 ) Other 154 172 (18 ) Total Adjusted EBITDA related to unconsolidated affiliates$ 655
Distributions received from unconsolidated affiliates: Citrus$ 171 $ 156 $ 15 FEP 68 47 21 MEP 48 114 (66 ) HPC (2) - 35 (35 ) Other 110 80 30 Total distributions received from unconsolidated affiliates$ 397
(1) The partnership previously owned a 49.99% interest in HPC, which owns RIGS.
InApril 2018 , we acquired the remaining 50.01% interest in HPC. Prior toApril 2018 , HPC was reflected as an unconsolidated affiliate in our financial statements; beginning inApril 2018 , RIGS is reflected as a wholly-owned subsidiary in our financial statements.
(2) For the year ended
affiliates includes the impact of non-cash impairments recorded by HPC,
which reduced the Partnership's equity in earnings by
(3) 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. 93
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Segment Operating Results Intrastate Transportation and Storage Years EndedDecember 31, 2018 2017
Change
Natural gas transported (BBtu/d) 10,873 8,427 2,446 Revenues$ 3,737 $ 3,083 $ 654 Cost of products sold 2,665 2,327 338 Segment margin 1,072 756 316 Unrealized (gains) losses on commodity risk management activities 38 (5 ) 43 Operating expenses, excluding non-cash compensation expense (189 ) (168 ) (21 ) Selling, general and administrative, excluding non-cash compensation expense (27 ) (22 ) (5 ) Adjusted EBITDA related to unconsolidated affiliates 32 64 (32 ) Other 1 1 - Segment Adjusted EBITDA$ 927 $ 626 $ 301 Volumes. For the year endedDecember 31, 2018 compared to the prior year, transported volumes increased primarily due to favorable market pricing spreads, as well as the impact of reflecting RIGS assets as a consolidated subsidiary beginning inApril 2018 . Segment Margin. The components of our intrastate transportation and storage segment margin were as follows: Years Ended December 31, 2018 2017 Change Transportation fees $ 525$ 448 $ 77 Natural gas sales and other (excluding unrealized gains and losses) 510 196 314 Retained fuel revenues (excluding unrealized gains and losses) 59 58 1 Storage margin, including fees (excluding unrealized gains and losses) 16 49 (33 ) Unrealized gains (losses) on commodity risk management activities (38 ) 5 (43 ) Total segment margin$ 1,072 $ 756 $ 316 Segment Adjusted EBITDA. For the year endedDecember 31, 2018 compared to the prior year, Segment Adjusted EBITDA related to our intrastate transportation and storage segment increased due to the net impacts of the following: • an increase of$314 million in realized natural gas sales and other due to
higher realized gains from pipeline optimization activity;
• a net increase of
expenses, and selling, general and administrative expenses of
Adjusted EBITDA related to unconsolidated affiliates; and
• an increase of
consolidating RIGS as discussed above, primarily due to new contracts and the
impact of the Red Bluff Express pipeline coming online in
offset by
• a decrease of
adjustment to the
realized derivative gains. 94
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Interstate Transportation and Storage
Years EndedDecember 31, 2018 2017
Change
Natural gas transported (BBtu/d) 9,542 6,058 3,484 Natural gas sold (BBtu/d) 17 18 (1 ) Revenues$ 1,682 $ 1,131 $ 551 Operating expenses, excluding non-cash compensation, amortization and accretion expenses (431 ) (315 ) (116 ) Selling, general and administrative, excluding non-cash compensation, amortization and accretion expenses (63 ) (41 ) (22 ) Adjusted EBITDA related to unconsolidated affiliates 492 498 (6 ) Other - 1 (1 ) Segment Adjusted EBITDA$ 1,680 $ 1,274 $ 406 Volumes. For the year endedDecember 31, 2018 compared to the prior year, transported volumes reflected increases of 1,919 BBtu/d as a result of the initiation of service on the Rover pipeline; increases of 572 BBtu/d and 439 BBtu/d on thePanhandle and Trunkline pipelines, respectively, due to higher demand resulting from colder weather and increased utilization by the Rover pipeline; 375 BBtu/d on the Tiger pipeline as a result of production increases in theHaynesville Shale , and 145 BBtu/d on the Transwestern pipeline resulting from favorable market opportunities in the West, midcontinent and Waha areas from the Permian supply basin. Segment Adjusted EBITDA. For the year endedDecember 31, 2018 compared to the prior year, Segment Adjusted EBITDA related to our interstate transportation and storage segment increased due to the net impacts of the following: • an increase of$359 million associated with the Rover pipeline with increases
of
million in selling, general and administrative expenses and other; and
• an aggregate increase of
revenue related to the Rover pipeline discussed above, primarily due to
capacity sold at higher rates on the Transwestern and
partially offset by
• an increase of
expenses related to the Rover pipeline discussed above, primarily due to
increases in maintenance project costs due to scope and level of activity;
and
• a decrease of
affiliates primarily due to lower margins on MEP due to lower rates on
renewals of expiring long term contracts.
Midstream Years Ended December 31, 2018 2017 Change Gathered volumes (BBtu/d): 12,126 9,814 2,312 NGLs produced (MBbls/d): 540 438 102 Equity NGLs (MBbls/d): 29 31 (2 ) Revenues$ 7,522 $ 6,943 $ 579 Cost of products sold 5,145 4,761 384 Segment margin 2,377 2,182 195 Unrealized gains on commodity risk management activities - (15 ) 15 Operating expenses, excluding non-cash compensation expense (705 ) (638 ) (67 ) Selling, general and administrative, excluding non-cash compensation expense (81 ) (78 ) (3 ) Adjusted EBITDA related to unconsolidated affiliates 33 28 5 Other 3 2 1 Segment Adjusted EBITDA$ 1,627 $ 1,481 $ 146 95
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Volumes. Gathered volumes and NGL production increased during the year endedDecember 31, 2018 compared to the prior year primarily due to increases in theNorth Texas , Permian and Northeast regions, partially offset by smaller declines in other regions. Segment Margin. The table below presents the components of our midstream segment margin. For the years endedDecember 31, 2018 and 2017, the amounts previously reported for fee-based and non-fee-based margin have been adjusted to reflect reclassification of certain contractual minimum fees from fee-based margin to non-fee-based margin in order to conform to the current period classification. Years Ended December 31, 2018 2017 Change Gathering and processing fee-based revenues$ 1,788 $ 1,690 $ 98 Non-fee based contracts and processing (excluding unrealized gains and losses) 589 477 112 Unrealized gains on commodity risk management activities - 15 (15 ) Total segment margin$ 2,377 $ 2,182 $ 195 Segment Adjusted EBITDA. For the year endedDecember 31, 2018 compared to the prior year, Segment Adjusted EBITDA related to our midstream segment increased due to the net impacts of the following: • an increase of$98 million in fee-based margin due to growth in the North
and midcontinent/
• an increase of
throughput volume in the
• an increase of
and NGL prices; and
• an increase of
affiliates due to higher earnings from our Aqua,
ventures; partially offset by
• an increase of
of
maintenance project costs,
employee costs and
• an increase of
to higher professional fees.
NGL and Refined Products Transportation and Services
Years Ended December
31,
2018 2017
Change
NGL transportation volumes (MBbls/d) 1,027 754 273 Refined products transportation volumes (MBbls/d) 621 599 22 NGL and refined products terminal volumes (MBbls/d) 812 791 21 NGL fractionation volumes (MBbls/d) 527 361 166 Revenues$ 11,123 $ 8,648 $ 2,475 Cost of products sold 8,462 6,508 1,954 Segment margin 2,661 2,140 521 Unrealized gains on commodity risk management activities (86 ) (26 ) (60 ) Operating expenses, excluding non-cash compensation expense (604 ) (478 ) (126 ) Selling, general and administrative expenses, excluding non-cash compensation expense (74 ) (64 ) (10 ) Adjusted EBITDA related to unconsolidated affiliates 82 68 14 Other - 1 (1 ) Segment Adjusted EBITDA$ 1,979 $ 1,641 $ 338 96
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Volumes. For the year endedDecember 31, 2018 compared to the prior year, NGL transportation volumes increased primarily due to increased volumes from the Permian region resulting from a ramp up in production from existing customers, higher throughput volumes onMariner West driven by end-user facility constraints in the prior year and higher throughput from Mariner South resulting from increased export volumes. Refined products transportation volumes decreased for the year endedDecember 31, 2018 compared to prior year, primarily due to timing of turnarounds at third-party refineries in the Midwest and Northeast regions. NGL and Refined products terminal volumes increased for the year endedDecember 31, 2018 compared to prior year, primarily due to more volumes loaded at ourNederland terminal as propane export demand increased and higher throughput volumes at our refined products terminals in the Northeast. Average volumes fractionated at ourMont Belvieu, Texas fractionation facility increased for the year endedDecember 31, 2018 compared to the prior year primarily due to increased volumes from the Permian region, as well as an increase in fractionation capacity as our fifth fractionator atMont Belvieu came online inJuly 2018 . Segment Margin. The components of our NGL and refined products transportation and services segment margin were as follows: Years Ended
2018 2017 Change Fractionators and refinery services margin $ 511$ 415 $ 96 Transportation margin 1,233 990 243 Storage margin 211 214 (3 ) Terminal Services margin 494 424 70 Marketing margin 126 71 55 Unrealized gains on commodity risk management activities 86 26 60 Total segment margin$ 2,661 $ 2,140 $ 521 Segment Adjusted EBITDA. For the year endedDecember 31, 2018 compared to the prior 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 in transportation margin of$243 million primarily due to a$216
million increase resulting from increased producer volumes from the Permian
region on our Texas NGL pipelines, a
throughput volumes on
the prior period, a
between our transportation and fractionation margins, a
due to higher throughput volumes from the Barnett region, a
increase due to higher throughput volumes on Mariner South due to system
downtime in the prior period and a
customer credits. These increases were partially offset by a
decrease resulting from lower throughput volumes on
system downtime in 2018, a
volumes from the
from the timing of deficiency fee revenue recognition;
• an increase in fractionation and refinery services margin of
primarily due to a
our fifth fractionator in
gains as a result of improved market pricing. These increases were partially
offset by a
our transportation and fractionation margins and a
higher affiliate storage fees paid;
• an increase in terminal services margin of
increase resulting from a change in the classification of certain customer
reimbursements previously recorded in operating expenses, a
increase at our
million increase due to higher throughput at our
Complex. These increases were partially offset by lower terminal throughput
fees in part due to the sale of one of our terminals in
• an increase in marketing margin of
from our butane blending operations and a
NGLs and other products at our
favorable market prices. These increases were partially offset by a
million decrease from the timing of optimization gains from our
fractionators; and
• an increase of
affiliates due to improved contributions from our unconsolidated refined
products joint venture interests; partially offset by 97
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• an increase of
million increase in costs to operate our fractionators and a
increase in operating costs on our NGL pipelines as a result of higher
throughput and the commissioning of our fifth fractionator in
customer reimbursements previously recorded as a reduction to operating
expenses that are now classified as revenue following the adoption of ASC 606
on
costs at our Marcus Hook and
of significantly higher volumes through both terminals in 2018, an
increase to environmental reserves and a
allocations and maintenance repairs performed on our refinery services
assets; and
• an increase of
primarily due to a
segment, a
management fees previously recorded in operating expenses and a
increase in employee costs.
Crude Oil Transportation and Services
Years Ended December
31,
2018 2017
Change
Crude Transportation Volumes (MBbls/d) 4,172 3,538 634 Crude Terminals Volumes (MBbls/d) 2,096 1,928 168 Revenue$ 17,332 $ 11,703 $ 5,629 Cost of products sold 14,439 9,826 4,613 Segment margin 2,893 1,877 1,016 Unrealized losses on commodity risk management activities 55 1 54 Operating expenses, excluding non-cash compensation expense (547 ) (430 ) (117 ) Selling, general and administrative expenses, excluding non-cash compensation expense (86 ) (82 ) (4 ) Adjusted EBITDA related to unconsolidated affiliates 15 13 2 Segment Adjusted EBITDA$ 2,330 $ 1,379 $ 951 Segment Adjusted EBITDA. For the year endedDecember 31, 2018 compared to the prior year, Segment Adjusted EBITDA related to our crude oil transportation and services segment increased due to the net impacts of the following: • an increase of$1.07 billion in segment margin (excluding unrealized losses
on commodity risk management activities) primarily due to the following: a
in the second quarter of 2017, a
throughput on our
production from Permian producers; and gains of
favorable basis spreads; partially offset by an unfavorable inventory
valuation adjustment of
favorable inventory valuation adjustment of
and
• an increase of
affiliates due to increased jet fuel sales from our joint ventures; partially
offset by
• an increase of
million increase to throughput related costs on existing assets; a
million increase resulting from placing the Bakken pipeline in service in the
second quarter of 2017; a
certain joint venture transportation assets in the second quarter of 2017;
and a
million decrease in insurance and environmental related expenses; and
• an increase of
primarily due to increases associated with placing our Bakken Pipeline in service in the second quarter of 2017. 98
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Table of Contents Investment in Sunoco LP Years Ended December 31, 2018 2017 Change Revenues$ 16,994 $ 11,723 $ 5,271 Cost of products sold 15,872 10,615 5,257 Segment margin 1,122 1,108 14 Unrealized (gains) losses on commodity risk management activities 6 (3 ) 9 Operating expenses, excluding non-cash compensation expense (435 ) (456 ) 21 Selling, general and administrative, excluding non-cash compensation expense (129 ) (116 ) (13 ) Inventory valuation adjustments 85 (24 ) 109 Adjusted EBITDA from discontinued operations (25 ) 223 (248 ) Other, net 14 - 14 Segment Adjusted EBITDA$ 638 $ 732 $ (94 ) The Investment in Sunoco LP segment reflects the consolidated results of Sunoco LP. Segment Adjusted EBITDA. For the year endedDecember 31, 2018 compared to the prior year, Segment Adjusted EBITDA related to the Investment in Sunoco LP segment decreased due to the net impacts of the following: • a decrease of$248 million in Adjusted EBITDA from discontinued operations
primarily due to Sunoco LP's retail divestment in
offset by
• an increase of
changes in fuel prices between periods;
• an increase of
income as a result of the increase in commission agent sites in the current
year, offset by decreases in the gross profit on motor fuel sales; and
• a net decrease of
administrative expenses primarily due to decreased rent expense.
Investment in USAC Years Ended December 31, 2018 2017 Change Revenues $ 508 $ -$ 508 Cost of products sold 67 - 67 Segment margin 441 - 441 Operating expenses, excluding non-cash compensation expense (110 ) - (110 ) Selling, general and administrative, excluding non-cash compensation expense (50 ) - (50 ) Other, net 8 - 8 Segment Adjusted EBITDA $ 289 $ -$ 289 The investment in USAC segment reflects the consolidated results of USAC fromApril 2, 2018 , the date ET obtained control of USAC, throughDecember 31, 2018 . Changes between periods are due to the consolidation of USAC beginningApril 2, 2018 . 99
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Table of Contents All Other Years Ended December 31, 2018 2017 Change Revenue$ 2,228 $ 2,901 $ (673 ) Cost of products sold 2,006 2,509 (503 ) Segment margin 222 392 (170 ) Unrealized gains on commodity risk management activities (2 ) (11 ) 9 Operating expenses, excluding non-cash compensation expense (56 ) (117 ) 61 Selling, general and administrative expenses, excluding non-cash compensation expense (124 ) (135 ) 11 Adjusted EBITDA related to unconsolidated affiliates 1 45 (44 ) Other and eliminations (1 ) 13 (14 ) Segment Adjusted EBITDA$ 40 $ 187 $ (147 ) Amounts reflected in our all other segment during the periods presented above primarily include: • our natural gas marketing operations;
• our wholly-owned natural gas compression operations;
• a non-controlling interest in PES. Prior to PES's reorganization in August
2018, ETO's 33% interest in PES was reflected as an unconsolidated affiliate;
subsequent the
interest in PES and no longer reflects PES as an affiliate; and
• our investment in coal handling facilities.
Segment Adjusted EBITDA. For the year endedDecember 31, 2018 compared to the prior year, Segment Adjusted EBITDA decreased due to the net impacts of the following: • a decrease of$98 million due to the contribution of CDM to USAC in April
2018, subsequent to which CDM is reflected in the Investment in USAC segment;
• a decrease of
affiliates from our investment in PES primarily due to our lower ownership in
PES subsequent to its reorganization, which resulted in PES no longer being
reflected as an affiliate beginning in the third quarter of 2018;
• a decrease of
the Energy Transfer Merger in 2018; and
• a decrease of
affiliate in 2017; partially offset by
• an increase of
expiration of a capacity commitment on Trunkline pipeline;
• an increase of
physical system gas; and
• an increase of
equipment business.
LIQUIDITY AND CAPITAL RESOURCES Overview Parent Company Only Subsequent to the Merger with ETO, substantially all of the Partnership's cash flows are derived from distributions related to its investment in ETO, whose cash flows are derived from its subsidiaries, including ETO's investments in Sunoco LP and USAC.The Parent Company's primary cash requirements are for general and administrative expenses, debt service requirements and distributions to its partners.The Parent Company currently expects to fund its short-term needs for such items with cash flows from its direct and indirect investments in ETO.The Parent Company distributes its available cash remaining after satisfaction of the aforementioned cash requirements to its Unitholders on a quarterly basis. 100
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The Parent Company expects ETO and its respective subsidiaries and investments in Sunoco LP and USAC to utilize their resources, along with cash from their operations, to fund their announced growth capital expenditures and working capital needs; however, the Parent Company may issue debt or equity securities from time to time, as it deems prudent to provide liquidity for new capital projects of its subsidiaries or for other partnership purposes.ETO ETO's ability to satisfy its obligations and pay distributions to the Parent Company will depend on its future performance, which will be subject to prevailing economic, financial, business and weather conditions, and other factors, many of which are beyond the control of ETO's management. ETO currently expects capital expenditures in 2020 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$ 20 $ 30 $ 40 $ 45 Interstate transportation and storage (1) 100 125 140 145 Midstream 625 650 125 130 NGL and refined products transportation and services (1) 2,550 2,650 100 110 Crude oil transportation and services (1) 500 525 165 175 All other (including eliminations) 125 150 75 80 Total capital expenditures$ 3,920 $ 4,130 $ 645 $ 685 (1) Includes capital expenditures related to ETO's proportionate ownership of
the Bakken, Rover, and
ownership of the Orbit Gulf Coast NGL export project.
The assets used in our natural gas and liquids operations, including pipelines, gathering systems and related facilities, are generally long-lived assets and do not require significant maintenance capital expenditures. Accordingly, we do not have any significant financial commitments for maintenance capital expenditures in our businesses. From time to time we experience increases in pipe costs due to a number of reasons, including but not limited to, delays from steel mills, limited selection of mills capable of producing large diameter pipe timely, higher steel prices and other factors beyond our control. However, we include these factors in our anticipated growth capital expenditures for each year. ETO generally funds maintenance capital expenditures and distributions with cash flows from operating activities. ETO generally expects to funds growth capital expenditures with proceeds of borrowings under ETO credit facilities, along with cash from operations. As ofDecember 31, 2019 , in addition to$253 million of cash on hand, ETO had available capacity under the ETO Credit Facilities of$1.71 billion . Based on ETO's current estimates, ETO expects to utilize capacity under the ETO Credit Facilities, along with cash from operations, to fund ETO's announced growth capital expenditures and working capital needs through the end of 2020; however, ETO may issue debt or equity securities prior to that time as ETO deems prudent to provide liquidity for new capital projects, to maintain investment grade credit metrics or other partnership purposes. Sunoco LP Sunoco LP's primary sources of liquidity consist of cash generated from operating activities, borrowings under its$1.50 billion credit facility and the issuance of additional long-term debt or partnership units as appropriate given market conditions. AtDecember 31, 2019 , Sunoco LP had available borrowing capacity of$1.33 billion under its revolving credit facility and$21 million of cash and cash equivalents on hand. In 2020, Sunoco LP expects to invest approximately$130 million in growth capital expenditures and approximately$45 million on maintenance capital expenditures. Sunoco LP may revise the timing of these expenditures as necessary to adapt to economic conditions. 101
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USAC
The compression services business is capital intensive, requiring significant investment to maintain, expand and upgrade existing operations. USAC's capital requirements have consisted primarily of, and it anticipates that its capital requirements will continue to consist primarily of, the following: • maintenance capital expenditures, which are capital expenditures made to
maintain the operating capacity of its assets and extend their useful lives,
to replace partially or fully depreciated assets, or other capital expenditures that are incurred in maintaining its existing business and related operating income; and
• expansion capital expenditures, which are capital expenditures made to expand
the operating capacity or operating income capacity of assets, including by
acquisition of compression units or through modification of existing
compression units to increase their capacity, or to replace certain partially
or fully depreciated assets that were not currently generating operating
income.
USAC classifies capital expenditures as maintenance or expansion on an individual asset basis. Over the long-term, USAC expects that its maintenance capital expenditure requirements will continue to increase as the overall size and age of its fleet increase. USAC currently plans to spend approximately$32 million in maintenance capital expenditures during 2020, including parts consumed from inventory. Without giving effect to any equipment USAC may acquire pursuant to any future acquisitions, it currently has budgeted between$110 million and$120 million in expansion capital expenditures during 2020. As ofDecember 31, 2019 , USAC has binding commitments to purchase$49 million of additional compression units, all of which USAC expects to be delivered in 2020. 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 of our products and services, the demand for such products and services, margin requirements resulting from significant changes in commodity prices, operational risks, the successful integration of our acquisitions, and other factors. Operating Activities Changes in cash flows from operating activities between periods primarily result from changes in earnings (as discussed in "Results of Operations" above), excluding the impacts of non-cash items and 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 acquisitions 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 ETO has a significant amount of interstate pipeline construction in progress. Changes in operating assets and liabilities between periods result from factors such as the changes in the value of derivative assets and liabilities, timing of accounts receivable collection, payments on accounts payable, the timing of purchases and sales of inventories, and the timing of advances and deposits received from customers. Following is a summary of operating activities by period: Year EndedDecember 31, 2019 Cash provided by operating activities in 2019 was$8.00 billion and income from continuing operations was$4.90 billion . The difference between net income and cash provided by operating activities in 2019 primarily consisted of non-cash items totaling$3.37 billion offset by net changes in operating assets and liabilities of$518 million . The non-cash activity in 2019 consisted primarily of depreciation, depletion and amortization of$3.15 billion , impairment losses of$74 million , non-cash compensation expense of$113 million , equity in earnings of unconsolidated affiliates of$302 million , inventory valuation adjustments of$79 million , losses on extinguishment of debt of$18 million , and deferred income tax expense of$217 million . The Partnership also received distributions of$290 million from unconsolidated affiliates. Year EndedDecember 31, 2018 Cash provided by operating activities in 2018 was$7.51 billion and income from continuing operations was$3.63 billion . The difference between net income and cash provided by operating activities in 2018 primarily consisted of non-cash items totaling$3.30 billion offset by net changes in operating assets and liabilities of$289 million . The non-cash activity in 2018 consisted primarily of depreciation, depletion and amortization of$2.86 billion , impairment losses of$431 million , non-cash compensation expense of$105 million , equity in earnings of unconsolidated affiliates of$344 million , inventory valuation adjustments of 102
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$85 million , losses on extinguishment of debt of$112 million , and deferred income tax benefit of$7 million . The Partnership also received distributions of$328 million from unconsolidated affiliates. Year EndedDecember 31, 2017 Cash provided by operating activities in 2017 was$4.43 billion and income from continuing operations was$2.54 billion . The difference between net income and cash provided by operating activities in 2017 primarily consisted of non-cash items totaling$1.82 billion offset by net changes in operating assets and liabilities of$192 million . The non-cash activity in 2017 consisted primarily of depreciation, depletion and amortization of$2.55 billion , impairment losses of$1.04 billion , impairment in unconsolidated affiliates of$313 million , non-cash compensation expense of$99 million , equity in earnings of unconsolidated affiliates of$144 million , inventory valuation adjustments of$24 million , losses on extinguishment of debt of$89 million , and deferred income tax benefit of$1.87 billion . The Partnership also received distributions of$297 million from unconsolidated affiliates. Investing Activities Cash flows from investing activities primarily consist of cash amounts paid for acquisitions, capital expenditures, cash distributions from our joint ventures, and cash proceeds from sales or contributions of assets or businesses. Changes in capital expenditures between periods primarily result from increases or decreases in our growth capital expenditures to fund our construction and expansion projects. Following is a summary of investing activities by period: Year EndedDecember 31, 2019 Cash used in investing activities in 2019 was$6.93 billion . Total capital expenditures (excluding the allowance for equity funds used during construction and net of contributions in aid of construction costs) were$5.88 billion . Additional detail related to our capital expenditures is provided in the table below. During 2019, we received$93 million of cash proceeds from the sale of a noncontrolling interest in a subsidiary, paid$787 million in net cash for theSemGroup acquisition, and paid$7 million in cash for all other acquisitions. We received$54 million of cash proceeds from the sale of assets. The Partnership also received distributions of$98 million from unconsolidated affiliates. Year EndedDecember 31, 2018 Cash used in investing activities in 2018 was$7.08 billion . Total capital expenditures (excluding the allowance for equity funds used during construction and net of contributions in aid of construction costs) were$7.30 billion . Additional detail related to our capital expenditures is provided in the table below. We recorded a net increase in cash of$461 million related to the USAC acquisition and paid$429 million in cash for all other acquisitions. We received$87 million of cash proceeds from the sale of assets. The Partnership also received distributions of$69 million from unconsolidated affiliates. Year EndedDecember 31, 2017 Cash used in investing activities in 2017 was$5.61 billion . Total capital expenditures (excluding the allowance for equity funds used during construction and net of contributions in aid of construction costs) were$8.41 billion . Additional detail related to our capital expenditures is provided in the table below. We paid$280 million in cash related to the acquisition of PennTex's remaining noncontrolling interest and$303 million in cash for all other acquisitions. We received$2.00 billion in cash related to the Bakken equity sale toMarEn Bakken Company LLC ,$1.48 billion in cash related to the Rover equity sale toBlackstone Capital Partners . We received$48 million of cash proceeds from the sale of assets. The Partnership also received distributions of$135 million from unconsolidated affiliates. 103
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The following is a summary of the Partnership's capital expenditures (including only our proportionate share of the Bakken, Rover, andBayou Bridge pipeline projects, our proportionate share of the Orbit Gulf Coast NGL export project, and net of contributions in aid of construction costs) by period: Capital
Expenditures Recorded During Period
Growth Maintenance Total Year EndedDecember 31, 2019 : Intrastate transportation and storage $ 87 $ 37$ 124 Interstate transportation and storage 239 136 375 Midstream 670 157 827 NGL and refined products transportation and services 2,854 122 2,976 Crude oil transportation and services 317 86 403 Investment in Sunoco LP 108 40 148 Investment in USAC 170 30 200 All other (including eliminations) 165 50 215 Total capital expenditures $ 4,610 $
658
Year EndedDecember 31, 2018 : Intrastate transportation and storage $ 311 $ 33$ 344 Interstate transportation and storage 695 117 812 Midstream 1,026 135 1,161 NGL and refined products transportation and services 2,303 78 2,381 Crude oil transportation and services 414 60 474 Investment in Sunoco LP (1) 72 31 103 Investment in USAC 182 23 205 All other (including eliminations) 117 33 150 Total capital expenditures $ 5,120 $
510
Year EndedDecember 31, 2017 : Intrastate transportation and storage $ 155 $ 20$ 175 Interstate transportation and storage 645 83 728 Midstream 1,185 123 1,308 NGL and refined products transportation and services 2,899 72 2,971 Crude oil transportation and services 392 61 453 Investment in Sunoco LP (1) 129 48 177 All other (including eliminations) 196 72 268 Total capital expenditures $ 5,601 $ 479$ 6,080 (1) Amounts related to Sunoco LP's capital expenditures include capital expenditures related to discontinued operations. 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 to partners increased between the periods as a result of increases in the number of common units outstanding or increases in the distribution rate. 104
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Following is a summary of financing activities by period: Year EndedDecember 31, 2019 Cash used in financing activities was$1.20 billion in 2019. In 2019, our subsidiaries received$780 million in proceeds from the issuance of preferred units. In 2019, we had a consolidated increase in our debt level of$2.48 billion , primarily due to the issuance of subsidiary senior notes. During 2019, we paid distributions of$3.05 billion to our partners and we paid distributions of$1.60 billion to noncontrolling interests. In addition, we received capital contributions of$348 million in cash from noncontrolling interests. During 2019, we incurred debt issuance costs of$117 million . Year EndedDecember 31, 2018 Cash used in financing activities was$3.08 billion in 2018. Our subsidiaries received$1.40 billion in proceeds from the issuance of common units, including$58 million from the issuance of ETO Common Units and$1.34 billion from the issuance of other subsidiary common units. In 2018, we had a consolidated increase in our debt level of$53 million , primarily due to the issuance of Parent Company and subsidiary senior notes. During 2018, we paid distributions of$1.68 billion to our partners and we paid distributions of$3.12 billion to noncontrolling interests. In addition, we received capital contributions of$649 million in cash from noncontrolling interests. During 2018, we incurred debt issuance costs of$171 million . Year EndedDecember 31, 2017 Cash provided by financing activities was$953 million in 2017. In 2017, we received$568 million in cash from the issuance of common units and our subsidiaries received$3.24 billion in proceeds from the issuance of common units, including$2.28 billion from the issuance of ETO Common Units and$952 million from the issuance of other subsidiary common units. In 2017, we had a consolidated increase in our debt level of$340 million , primarily due to the issuance of Parent Company and subsidiary senior notes. During 2017, we paid distributions of$1.01 billion to our partners and we paid distributions of$2.96 billion to noncontrolling interests. In addition, we received capital contributions of$1.21 billion in cash from noncontrolling interests. During 2017, we incurred debt issuance costs of$131 million . Discontinued Operations Following is a summary of activities related to discontinued operations by period: Year EndedDecember 31, 2018 Cash provided by discontinued operations was$2.73 billion for the year endedDecember 31, 2018 resulting from cash used in operating activities of$484 million , cash provided by investing activities of$3.21 billion , and changes in cash included in current assets held for sale of$11 million . Year EndedDecember 31, 2017 Cash provided by discontinued operations was$93 million for the year endedDecember 31, 2017 resulting from cash provided by operating activities of$136 million , cash used in investing activities of$38 million and changes in cash included in current assets held for sale of$5 million . 105
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Description of Indebtedness Our outstanding consolidated indebtedness was as follows: December 31, 2019 2018 Parent Company Indebtedness: ET Senior Notes due October 2020 $ 52 $
1,187
ET Senior Notes dueMarch 2023 5
1,000
ET Senior Notes due January 2024 23 1,150 ET Senior Notes due June 2027 44 1,000 ET Senior Secured Term Loan - 1,220 Subsidiary Indebtedness: ETO Senior Notes 36,118 28,755 Transwestern Senior Notes 575 575 Panhandle Senior Notes 235 385 Bakken Senior Notes 2,500 -
Sunoco LP Senior Notes, Term Loan and lease-related obligations
2,935
2,307
USAC Senior Notes 1,475
725
Credit Facilities and Commercial Paper: ETO$2.00 billion Term Loan facility dueOctober 2022 2,000
-
ETO$5.00 billion Revolving Credit Facility dueDecember 2023 4,214
3,694
Sunoco LP
162
700
USAC
403
1,050
Bakken$2.50 billion Credit Facility dueAugust 2019 -
2,500
HFOTCO Tax Exempt Notes due 2050 225
-
SemCAMS Revolver dueFebruary 2024 92
-
SemCAMS Term Loan A dueFebruary 2024 269
-
Other long-term debt 2
7
Unamortized premiums, net of discounts and fair value adjustments 4 21 Deferred debt issuance costs (279 ) (248 ) Total debt 51,054 46,028 Less: current maturities of long-term debt 26
2,655
Long-term debt, less current maturities$ 51,028 $
43,373
The terms of our consolidated indebtedness and that of our subsidiaries are described in more detail below and in Note 6 to our consolidated financial statements, included in "Item 8. Financial Statements and Supplementary Data." Recent Transactions ETOJanuary 2020 Senior Notes Offering and Redemption OnJanuary 22, 2020 , ETO completed a registered offering (the "January 2020 Senior Notes Offering") of$1.00 billion aggregate principal amount of ETO's 2.900% Senior Notes due 2025,$1.50 billion aggregate principal amount of ETO's 3.750% Senior Notes due 2030, and$2.00 billion aggregate principal amount of ETO's 5.000% Senior Notes due 2050, (collectively, the "Notes"). The Notes are fully and unconditionally guaranteed by the Partnership's wholly-owned subsidiary,Sunoco Logistics Partners Operations L.P. , on a senior unsecured basis. Utilizing proceeds from theJanuary 2020 Senior Notes Offering, ETO redeemed its$400 million aggregate principal amount of 5.75% Senior Notes dueSeptember 1, 2020 , its$1.05 billion aggregate principal amount of 4.15% Senior Notes dueOctober 1, 2020 , its$1.14 billion aggregate principal amount of 7.50% Senior Notes dueOctober 15, 2020 , its$250 million aggregate principal 106
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amount of 5.50% Senior Notes dueFebruary 15, 2020, ET 's$52 million aggregate principal amount of 7.50% Senior Notes dueOctober 15, 2020 and Transwestern's$175 million aggregate principal amount of 5.36% Senior Notes dueDecember 9, 2020 . ETO Term Loan OnOctober 17, 2019 , ETO entered into a term loan credit agreement (the "ETO Term Loan") providing for a$2.00 billion three-year term loan credit facility. Borrowings under the term loan agreement mature onOctober 17, 2022 and are available for working capital purposes and for general partnership purposes. The term loan agreement is unsecured and is guaranteed by our subsidiary,Sunoco Logistics Partners Operations L.P. ET-ETO Senior Notes Exchange InFebruary 2019 , ETO commenced offers to exchange all of ET's outstanding senior notes for senior notes issued by ETO (the "ET-ETO senior notes exchange"). Approximately 97% of ET's outstanding senior notes were tendered and accepted, and substantially all the exchanges settled onMarch 25, 2019 . In connection with the exchange, ETO issued approximately$4.21 billion aggregate principal amount of the following senior notes: •$1.14 billion aggregate principal amount of 7.50% senior notes due 2020;
•
•
•
ETO 2019 Senior Notes Offering and Redemption
In
•
•
The
15, 2019;
• ETO's
15, 2019; and
•
due
Panhandle Senior Notes Redemption InJune 2019 ,Panhandle 's$150 million aggregate principal amount of 8.125% senior notes matured and were repaid with borrowings under an affiliate loan agreement with ETO. Bakken Senior Notes Offering InMarch 2019 ,Midwest Connector Capital Company LLC , a wholly-owned subsidiary of Dakota Access, issued the following senior notes related to the Bakken pipeline: •$650 million aggregate principal amount of 3.625% senior notes due 2022;
•
•
The$2.48 billion in net proceeds from the offering were used to repay in full all amounts outstanding on the Bakken credit facility and the facility was terminated. Sunoco LP Senior Notes Offering InMarch 2019 , Sunoco LP issued$600 million aggregate principal amount of 6.00% senior notes due 2027 in a private placement to eligible purchasers. The net proceeds from this offering were used to repay a portion of Sunoco LP's existing borrowings under its credit facility. InJuly 2019 , Sunoco LP completed an exchange of these notes for registered notes with substantially identical terms. 107
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USAC Senior Notes Offering InMarch 2019 , USAC issued$750 million aggregate principal amount of 6.875% senior notes due 2027 in a private placement, and inDecember 2019 , USAC exchanged those notes for substantially identical senior notes registered under the Securities Act. The net proceeds from this offering were used to repay a portion of USAC's existing borrowings under its credit facility and for general partnership purposes. Credit Facilities and Commercial Paper Parent Company Credit Facility In connection with the closing of the Energy Transfer Merger, onOctober 19, 2018 , the Partnership repaid in full all outstanding borrowings under the facility and the facility was terminated. ETO Credit Facilities Borrowings under the ETO Credit Facilities are unsecured and initially guaranteed bySunoco Logistics Partners Operations L.P. Borrowings under the ETO Credit Facilities will bear interest at a eurodollar rate or a base rate, at our option, plus an applicable margin. In addition, we will be required to pay a quarterly commitment fee to each lender equal to the product of the applicable rate and such lender's applicable percentage of the unused portion of the aggregate commitments under the ETO Credit Facilities. We typically repay amounts outstanding under the ETO Credit Facilities with proceeds from unit offerings or long-term notes offerings. The timing of borrowings depends on the Partnership's activities and the cash available to fund those activities. The repayments of amounts outstanding under the ETO Credit Facilities depend on multiple factors, including market conditions and expectations of future working capital needs, and ultimately are a financing decision made by management. Therefore, the balance outstanding under the ETO Credit Facilities may vary significantly between periods. We do not believe that such fluctuations indicate a significant change in our liquidity position, because we expect to continue to be able to repay amounts outstanding under the ETO Credit Facilities with proceeds from unit offerings or long-term note offerings. ETO Term Loan OnOctober 17, 2019 , ETO entered into a term loan credit agreement (the "ETO Term Loan") providing for a$2.00 billion three-year term loan credit facility. Borrowings under the term loan agreement mature onOctober 17, 2022 and are available for working capital purposes and for general partnership purposes. The term loan agreement is unsecured and is guaranteed by our subsidiary,Sunoco Logistics Partners Operations L.P. As ofDecember 31, 2019 , the ETO Term Loan had$2.00 billion outstanding and was fully drawn. The weighted average interest rate on the total amount outstanding as ofDecember 31, 2019 was 2.78%. ETO Five-Year Credit Facility ETO's revolving credit facility (the "ETO Five-Year Credit Facility") allows for unsecured borrowings up to$5.00 billion and matures onDecember 1, 2023 . The ETO Five-Year Credit Facility contains an accordion feature, under which the total aggregate commitment may be increased up to$6.00 billion under certain conditions. As ofDecember 31, 2019 , the ETO Five-Year Credit Facility had$4.21 billion outstanding, of which$1.64 billion was commercial paper. The amount available for future borrowings was$709 million after taking into account letters of credit of$77 million . The weighted average interest rate on the total amount outstanding as ofDecember 31, 2019 was 2.88%. ETO 364-Day Facility ETO's 364-day revolving credit facility (the "ETO 364-Day Facility") allows for unsecured borrowings up to$1.00 billion and matures onNovember 27, 2020 . As ofDecember 31, 2019 , the ETO 364-Day Facility had no outstanding borrowings. Sunoco LP Credit Facility As ofDecember 31, 2019 , the Sunoco LP Credit Facility had$162 million outstanding borrowings and$8 million in standby letters of credit. The amount available for future borrowings was atDecember 31, 2019 was$1.33 billion . The weighted average interest rate on the total amount outstanding as ofDecember 31, 2019 was 3.75%. 108
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USAC Credit Facility As ofDecember 31, 2019 , USAC had$403 million of outstanding borrowings and no outstanding letters of credit under the credit agreement. As ofDecember 31, 2019 , USAC had$1.20 billion of availability under its credit facility. The weighted average interest rate on the total amount outstanding as ofDecember 31, 2019 was 4.31%. SemCAMS Credit Facilities SemCAMS is party to a credit agreement providing for aC$350 million (US$270 million at theDecember 31, 2019 exchange rate) senior secured term loan facility, a C$$525 million (US$404 million at theDecember 31, 2019 exchange rate) senior secured revolving credit facility, and aC$300 million (US$231 million at theDecember 31, 2019 exchange rate) senior secured construction loan facility (the "KAPS Facility"). The term loan facility and the revolving credit facility mature onFebruary 25, 2024 . The KAPS Facility matures onJune 13, 2024 . SemCAMS may incur additional term loans and revolving commitments in an aggregate amount not to exceedC$250 million (US$193 million at theDecember 31, 2019 exchange rate), subject to receiving commitments for such additional term loans or revolving commitments from either new lenders or increased commitments from existing lenders. Covenants Related to Our Credit Agreements Covenants Related to the Parent Company The Term Loan Facility and ET Revolving Credit Facility previously contained customary representations, warranties, covenants, and events of default, including a change of control event of default and limitations on incurrence of liens, new lines of business, merger, transactions with affiliates and restrictive agreements. Both facilities have been paid off and terminated. Covenants Related to ETO The agreements relating to the ETO senior notes contain restrictive covenants customary for an issuer with an investment-grade rating from the rating agencies, which covenants include limitations on liens and a restriction on sale-leaseback transactions. The ETO Credit Facilities contain covenants that limit (subject to certain exceptions) the Partnership's and certain of the Partnership's subsidiaries' ability to, among other things: • incur indebtedness; • grant liens; • enter into mergers; • dispose of assets; • make certain investments;
• make Distributions (as defined in the ETO Credit Facilities) during certain
Defaults (as defined in the ETO Credit Facilities) and during any Event of
Default (as defined in the ETO Credit Facilities);
• engage in business substantially different in nature than the business
currently conducted by the Partnership and its subsidiaries;
• engage in transactions with affiliates; and
• enter into restrictive agreements.
The ETO Credit Facilities applicable margin and rate used in connection with the interest rates and commitment fees, respectively, are based on the credit ratings assigned to our senior, unsecured, non-credit enhanced long-term debt. The applicable margin for eurodollar rate loans under the ETO Five-Year Facility ranges from 1.125% to 2.000% and the applicable margin for base rate loans ranges from 0.125% to 1.000%. The applicable rate for commitment fees under the ETO Five-Year Facility ranges from 0.125% to 0.300%. The applicable margin for eurodollar rate loans under the ETO 364-Day Facility ranges from 1.250% to 1.750% and the applicable margin for base rate loans ranges from 0.250% to 0.750%. The applicable rate for commitment fees under the ETO 364-Day Facility ranges from 0.125% to 0.225%. The ETO Credit Facilities contain various covenants including limitations on the creation of indebtedness and liens, and related to the operation and conduct of our business. The ETO Credit Facilities also limit us, on a rolling four quarter basis, to a maximum Consolidated Funded Indebtedness to Consolidated EBITDA ratio, as defined in the underlying credit agreements, of 5.0 to 1, which can generally be increased to 5.5 to 1 during a Specified Acquisition Period. Our Leverage Ratio was 4.04 to 1 atDecember 31, 2019 , as calculated in accordance with the credit agreements. 109
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The agreements relating to the Transwestern senior notes contain certain restrictions that, among other things, limit the incurrence of additional debt, the sale of assets and the payment of dividends and specify a maximum debt to capitalization ratio. Failure to comply with the various restrictive and affirmative covenants of our revolving credit facilities could require us to pay debt balances prior to scheduled maturity and could negatively impact the Partnership's or our subsidiaries' ability to incur additional debt and/or our ability to pay distributions to Unitholders. Covenants Related toPanhandle Panhandle is not party to any lending agreement that would accelerate the maturity date of any obligation due to a failure to maintain any specific credit rating, nor would a reduction in any credit rating, by itself, cause an event of default under any ofPanhandle 's lending agreements.Panhandle 's restrictive covenants include restrictions on liens securing debt and guarantees and restrictions on mergers and on the sales of assets. A breach of any of these covenants could result in acceleration ofPanhandle 's debt. Covenants Related to Sunoco LP The Sunoco LP Credit Facility contains various customary representations, warranties, covenants and events of default, including a change of control event of default, as defined therein. Sunoco LP's Credit Facility requires Sunoco LP to maintain a Net Leverage Ratio of not more than 5.5 to 1. The maximum Net Leverage Ratio is subject to upwards adjustment of not more than 6.0 to 1 for a period not to exceed three fiscal quarters in the event Sunoco LP engages in certain specified acquisitions of not less than$50 million (as permitted under Sunoco LP's Credit Facility agreement). The Sunoco LP Credit Facility also requires Sunoco LP to maintain an Interest Coverage Ratio (as defined in the Sunoco LP's Credit Facility agreement) of not less than 2.25 to 1. Covenants Related to USAC The USAC Credit Facility contains covenants that limit (subject to certain exceptions) USAC's ability to, among other things: • grant liens;
• make certain loans or investments;
• incur additional indebtedness or guarantee other indebtedness;
• merge or consolidate; • sell our assets; or
• make certain acquisitions.
The credit facility is also subject to the following financial covenants, including covenants requiring us to maintain: • a minimum EBITDA to interest coverage ratio of 2.5 to 1.0, determined as of
the last day of each fiscal quarter; and
• a maximum funded debt to EBITDA ratio, determined as of the last day of each
fiscal quarter, for the annualized trailing three months of (i) 5.5 to 1
through the end of the fiscal quarter ending
to 1.0 thereafter, in each case subject to a provision for increases to such
thresholds by 0.50 in connection with certain future acquisitions for the six
consecutive month period following the period in which any such acquisition
occurs.
Covenants Related to the HFOTCO Tax Exempt Notes The indentures coveringHFOTCO's tax exempt notes due 2050 ("IKE Bonds") include customary representations and warranties and affirmative and negative covenants. Such covenants include limitations on the creation of new liens, indebtedness, making of certain restricted payments and payments on indebtedness, making certain dispositions, making material changes in business activities, making fundamental changes including liquidations, mergers or consolidations, making certain investments, entering into certain transactions with affiliates, making amendments to certain credit or organizational agreements, modifying the fiscal year, creating or dealing with hazardous materials in certain ways, entering into certain hedging arrangements, entering into certain restrictive agreements, funding or engaging in sanctioned activities, taking actions or causing the trustee to take actions that materially adversely affect the rights, interests, remedies or security of the bondholders, taking actions to remove the trustee, making certain amendments to the bond documents, and taking actions or omitting to take actions that adversely impact the tax exempt status of the IKE Bonds. 110
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Compliance with our Covenants We and our subsidiaries were in compliance with all requirements, tests, limitations, and covenants related to our debt agreements as ofDecember 31, 2019 . Contractual Obligations The following table summarizes our long-term debt and other contractual obligations as ofDecember 31, 2019 : Payments Due by Period Less Than 1 More Than 5 Contractual Obligations Total Year 1-3 Years 3-5 Years Years Long-term debt$ 51,329 $ 3,086 $ 7,204 $ 13,673 $ 27,366 Interest on long-term debt(1) 41,196 2,545 4,958 4,306 29,387 Payments on derivatives 401 150 251 - - Purchase commitments(2) 2,133 2,053 57 7 16 Transportation, natural gas storage and fractionation contracts 16 5 6 5 - Operating lease obligations 1,548 98 166 140 1,144 Service concession arrangement(3) 379 15 30 32 302 Other(4) 190 25 48 40 77 Total(5)$ 97,192 $ 7,977 $ 12,720 $ 18,203 $ 58,292
(1) Interest payments on long-term debt are based on the principal amount of
debt obligations as of
debt, the interest payments were estimated using the interest rate as of
obligations for interest payments will change. See "Item 7A. Quantitative
and Qualitative Disclosures About Market Risk" for further discussion.
(2) We define a purchase commitment as an agreement to purchase goods or
services that is enforceable and legally binding (unconditional) on us that
specifies all significant terms, including: fixed or minimum quantities to
be purchased; fixed, minimum or variable price provisions; and the
approximate timing of the transactions. We have long and short-term product
purchase obligations for refined product and energy commodities with
third-party suppliers. These purchase obligations are entered into at either
variable or fixed prices. The purchase prices that we are obligated to pay
under variable price contracts approximate market prices at the time we take
delivery of the volumes. Our estimated future variable price contract
payment obligations are based on the
applicable commodity applied to future volume commitments. Actual future
payment obligations may vary depending on market prices at the time of
delivery. The purchase prices that we are obligated to pay under fixed price
contracts are established at the inception of the contract. Our estimated
future fixed price contract payment obligations are based on the contracted
fixed price under each commodity contract. Obligations shown in the table
represent estimated payment obligations under these contracts for the periods indicated.
(3) Includes minimum guaranteed payments under service concession arrangements
with
(4) Expected contributions to fund our pension and postretirement benefit plans
were included in "Other" above. Environmental liabilities, AROs,
unrecognized tax benefits, contingency accruals and deferred revenue, which
were included in "Other non-current liabilities" in our consolidated balance
sheets were excluded from the table above as the amounts do not represent
contractual obligations or, in some cases, the amount and/or timing of the
cash payments is uncertain.
(5) Excludes net non-current deferred tax liabilities of
uncertainty of the timing of future cash flows for such liabilities.
Cash Distributions Cash Distributions Paid by the Parent Company Under the Parent Company Partnership Agreement, the Parent Company will distribute all of its Available Cash, as defined, 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 the General Partner that is necessary or appropriate to provide for future cash requirements. 111
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Distributions declared and paid are as follows:
Quarter Ended Record Date Payment Date Rate
August 7, 2017 August 21, 2017 0.2850
August 6, 2018 August 20, 2018 0.3050
August 6, 2019 August 19, 2019 0.3050
(1) Certain common unitholders elected to participate in a plan pursuant to
which those unitholders elected to forego their cash distributions on all or
a portion of their common units for a period of up to nine quarters
commencing with the distribution for the quarter ended
in lieu of receiving cash distributions on these common units for each such
quarter, each said unitholder received ET Series A Convertible Preferred
Units (on a one-for-one basis for each common unit as to which the
participating unitholder elected be subject to this plan) that entitled them
to receive a cash distribution of up to
Partnership's consolidated financial statements included in "Item 8.
Financial Statements and Supplementary Data."
Our distributions declared and paid with respect to ET Series A Convertible
Preferred Unit were as follows:
Quarter Ended Record Date Payment Date Rate
The total amounts of distributions declared and paid during the periods presented (all from Available Cash from the Parent Company's operating surplus and are shown in the period to which they relate) are as follows:
Years Ended December 31, 2019 2018 (1) 2017 Limited Partners$ 3,221 $ 2,215 $ 1,022 General Partner interest 4 3 3
(1) Include distributions declared by
to the Energy Transfer Merger. 112
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The total amounts of distributions declared and paid during the periods presented prior to the closing of the Energy Transfer Merger as discussed in Note 1 (all from Available Cash from ETO's operating surplus and are shown in the period to which they relate) are as follows: Years Ended December 31, 2018 2017 Common Units held by public$ 1,286 $ 2,435 Common Units held by ET 31 61 General Partner interest and IDRs 9001,654 IDR relinquishments (1) (84 ) (656 ) Series A Preferred Units 59 15 Series B Preferred Units 36 9 Series C Preferred Units (2) 23 - Series D Preferred Units (2) 15 -
Total distributions declared to partners
(1) Net of Class I unit distributions
(2) Distributions reflect prorated distributions for the year ended
2018.
Cash Distributions Paid by Subsidiaries Certain of our subsidiaries are required by their respective partnership agreements to distribute all cash on hand at the end of each quarter, less appropriate reserves determined by the board of directors of their respective general partners. ETO Preferred Unit Distributions Distributions on the ETO's Series A, Series B, Series C, Series D and Series E preferred units declared and/or paid by ETO were as follows: Period Ended Record Date Payment Date Series A (1) Series B (1) Series C Series D Series E December 31, 2017 February 1, 2018 February 15, 2018$ 15.4510 *$ 16.3780 * $ - $ - $ - June 30, 2018 August 1, 2018 August 15, 2018 31.2500 33.1250 0.5634 * - - September 30, 2018 November 1, 2018 November 15, 2018 - - 0.4609 0.5931 * - December 31, 2018 February 1, 2019 February 15, 2019 31.2500 33.1250 0.4609 0.4766 - March 31, 2019 May 1, 2019 May 15, 2019 - - 0.4609 0.4766 - June 30, 2019 August 1, 2019 August 15, 2019 31.2500 33.1250 0.4609 0.4766 0.5806 * September 30, 2019 November 1, 2019 November 15, 2019 - - 0.4609 0.4766 0.4750 December 31, 2019 February 3, 2020 February 18, 2020 31.2500 33.1250 0.4609 0.4766 0.4750
* Represent prorated initial distributions. Prorated initial distributions on
the recently issued ETO Series F Preferred Units and ETO Series G Preferred
Units will be payable in
(1) ETO Series A Preferred Units and ETO Series B Preferred Unit distributions are paid on a semi-annual basis.
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Sunoco LP Cash Distributions The following table illustrates the percentage allocations of available cash from operating surplus between Sunoco LP's common unitholders and the holder of its IDRs based on the specified target distribution levels, after the payment of distributions to Class C unitholders. The amounts set forth under "marginal percentage interest in distributions" are the percentage interests of the IDR holder and the common unitholders in any available cash from operating surplus which Sunoco LP distributes up to and including the corresponding amount in the column "total quarterly distribution per unit target amount." The percentage interests shown for common unitholders and IDR holder for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. Marginal Percentage Interest in Distributions Total Quarterly Distribution Common Holder of Target Amount Unitholders IDRs Minimum Quarterly Distribution$0.4375 100% -% First Target Distribution$0.4375 to$0.503125 100% -% Second Target Distribution$0.503125 to$0.546875 85% 15% Third Target Distribution$0.546875 to$0.656250 75% 25% Thereafter Above$0.656250 50% 50%
Distributions on Sunoco LP's units declared and/or paid by Sunoco LP were as follows:
Quarter Ended Record Date Payment Date Rate
The total amount of distributions to the Partnership from Sunoco LP for the periods presented below is as follows:
Years Ended December 31, 2019 2018 2017 Distributions from Sunoco LP Limited Partner interests$ 94 $ 94 $ 150 General Partner interest and IDRs 70 70 85 Series A Preferred - 2 23 Total distributions from Sunoco LP$ 164 $ 166 $ 258 USAC Cash Distributions Subsequent to the Energy Transfer Merger and USAC Transactions described in Note 1 and Note 3, respectively, ETO owned approximately 39.7 million USAC common units and 6.4 million USAC Class B units. Subsequent to the conversion of the USAC 114
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ClassB Units to USAC common units onJuly 30, 2019 , ETO owns approximately 46.1 million USAC common units. As ofDecember 31, 2019 , USAC had approximately 96.6 million common units outstanding. USAC currently has a non-economic general partner interest and no outstanding IDRs. Distributions on USAC's units declared and/or paid by USAC subsequent to the USAC transaction onApril 2, 2018 were as follows:
Quarter Ended Record Date Payment Date Rate
The total amount of distributions to the Partnership from USAC for the periods presented below is as follows:
Years Ended December 31, 2019 2018 2017 Distributions from USAC Limited Partner interests$ 90 $ 73 $ - Total distributions from USAC$ 90 $ 73 $ - Estimates and Critical Accounting Policies The selection and application of accounting policies is an important process that has developed as our business activities have evolved and as the accounting rules have developed. Accounting rules generally do not involve a selection among alternatives, but involve an implementation and interpretation of existing rules, and the use of judgment applied to the specific set of circumstances existing in our business. We make every effort to properly comply with all applicable rules, and we believe the proper implementation and consistent application of the accounting rules are critical. Our critical accounting policies are discussed below. For further details on our accounting policies see Note 2 to our consolidated financial statements. Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the accrual for and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The natural gas industry conducts its business by processing actual transactions at the end of the month following the month of delivery. Consequently, the most current month's financial results for the midstream, NGL and intrastate transportation and storage segments are estimated using volume estimates and market prices. Any differences between estimated results and actual results are recognized in the following month's financial statements. Management believes that the operating results estimated for the year endedDecember 31, 2019 represent the actual results in all material respects. Some of the other significant estimates made by management include, but are not limited to, the timing of certain forecasted transactions that are hedged, the fair value of derivative instruments, useful lives for depreciation, depletion and amortization, purchase accounting allocations and subsequent realizability of intangible assets, fair value measurements used in the goodwill impairment test, market value of inventory, assets and liabilities resulting from the regulated ratemaking process, contingency reserves and environmental reserves. Actual results could differ from those estimates. Revenue Recognition. Revenues for sales of natural gas and NGLs are recognized at the later of the time of delivery of the product to the customer or the time of sale. Revenues from service labor, transportation, treating, compression and gas processing, are recognized upon completion of the service. Transportation capacity payments are recognized when earned in the period the capacity is made available. Our intrastate transportation and storage and interstate transportation and storage segments' results are determined primarily by the amount of capacity our customers reserve as well as the actual volume of natural gas that flows through the transportation 115
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pipelines. Under transportation contracts, our customers are charged (i) a demand fee, which is a fixed fee for the reservation of an agreed amount of capacity on the transportation pipeline for a specified period of time and which obligates the customer to pay even if the customer does not transport natural gas on the respective pipeline, (ii) a transportation fee, which is based on the actual throughput of natural gas by the customer, (iii) fuel retention based on a percentage of gas transported on the pipeline, or (iv) a combination of the three, generally payable monthly. Excess fuel retained after consumption is typically valued at market prices. Our intrastate transportation and storage segment also generates revenues and margin from the sale of natural gas to electric utilities, independent power plants, local distribution companies, industrial end-users and other marketing companies on the HPL System. Generally, we purchase natural gas from the market, including purchases from our marketing operations, and from producers at the wellhead. In addition, our intrastate transportation and storage segment generates revenues and margin from fees charged for storing customers' working natural gas in our storage facilities. We also engage in natural gas storage transactions in which we seek to find and profit from pricing differences that occur over time utilizing theBammel storage reservoir. We purchase physical natural gas and then sell financial contracts at a price sufficient to cover our carrying costs and provide for a gross profit margin. We expect margins from natural gas storage transactions to be higher during the periods from November to March of each year and lower during the period from April through October of each year due to the increased demand for natural gas during colder weather. However, we cannot assure that management's expectations will be fully realized in the future and in what time period, due to various factors including weather, availability of natural gas in regions in which we operate, competitive factors in the energy industry, and other issues.Lake Charles LNG's revenues from storage and re-gasification of natural gas are based on capacity reservation charges and, to a lesser extent, commodity usage charges. Reservation revenues are based on contracted rates and capacity reserved by the customers and recognized monthly. Revenues from commodity usage charges are also recognized monthly and represent the recovery of electric power charges atLake Charles LNG's terminal. Results from the midstream segment are determined primarily by the volumes of natural gas gathered, compressed, treated, processed, purchased and sold through our pipeline and gathering systems and the level of natural gas and NGL prices. We generate midstream revenues and segment margins principally under fee-based or other arrangements in which we receive a fee for natural gas gathering, compressing, treating or processing services. The revenue earned from these arrangements is directly related to the volume of natural gas that flows through our systems and is not directly dependent on commodity prices. Our midstream segment also generates revenues from the sale of residue gas and NGLs at the tailgate of our processing facilities primarily to affiliates and some third-party customers. We also utilize other types of arrangements in our midstream segment, including (i) discount-to-index price arrangements, which involve purchases of natural gas at either (1) a percentage discount to a specified index price, (2) a specified index price less a fixed amount or (3) a percentage discount to a specified index price less an additional fixed amount, (ii) percentage-of-proceeds arrangements under which we 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, and (iii) keep-whole arrangements where we gather natural gas from the producer, process the natural gas and sell the resulting NGLs to third parties at market prices. In many cases, we provide services under contracts that contain a combination of more than one of the arrangements described above. The terms of our contracts vary based on gas quality conditions, the competitive environment at the time the contracts are signed and customer requirements. Our contract mix may change as a result of changes in producer preferences, expansion in regions where some types of contracts are more common and other market factors. We conduct marketing activities in which we market the natural gas that flows through our assets, referred to as on-system gas. We also attract other customers by marketing volumes of natural gas that do not move through our assets, referred to as off-system gas. For both on-system and off-system gas, we purchase natural gas from natural gas producers and other supply points and sell that natural gas to utilities, industrial consumers, other marketers and pipeline companies, thereby generating gross margins based upon the difference between the purchase and resale prices. We have a risk management policy that provides for oversight over our marketing activities. These activities are monitored independently by our risk management function and must take place within predefined limits and authorizations. As a result of our use of derivative financial instruments that may not qualify for hedge accounting, 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 senior management and predefined limits and authorizations set forth in our risk management policy. We inject and hold natural gas in ourBammel storage facility to take advantage of contango markets, when the price of natural gas is higher in the future than the current spot price. We use financial derivatives to hedge the natural gas held in connection with these arbitrage opportunities. At the inception of the hedge, we lock in a margin by purchasing gas in the spot market or off peak 116
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season and entering a financial contract to lock in the sale price. If we designate the related financial contract as a fair value hedge for accounting purposes, we value the hedged natural gas inventory at current spot market prices along with the financial derivative we use to hedge it. Changes in the spread between the forward natural gas prices designated as fair value hedges and the physical inventory spot prices 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. Unrealized margins represent the unrealized gains or losses from our derivative instruments using mark-to-market accounting, with changes in the fair value of our derivatives being recorded directly in earnings. These margins fluctuate based upon changes in the spreads between the physical spot prices and forward natural gas prices. If the spread narrows between the physical and financial prices, we will record unrealized gains or lower unrealized losses. If the spread widens, we will record unrealized losses or lower unrealized gains. Typically, as we enter the winter months, the spread converges so that we recognize in earnings the original locked in spread, either through mark-to-market or the physical withdrawal of natural gas. NGL storage and pipeline transportation revenues are recognized when services are performed or products are delivered, respectively. Fractionation and processing revenues are recognized when product is either loaded into a truck or injected into a third-party pipeline, which is when title and risk of loss pass to the customer. In our natural gas compression business, revenue is recognized for compressor packages and technical service jobs using the completed contract method which recognizes revenue upon completion of the job. Costs incurred on a job are deducted at the time revenue is recognized. Terminalling and storage revenues are recognized at the time the services are provided. Pipeline revenues are recognized upon delivery of the barrels to the location designated by the shipper. Crude oil acquisition and marketing revenues, as well as refined product marketing revenues, are recognized when title to the product is transferred to the customer. Revenues are not recognized for crude oil exchange transactions, which are entered into primarily to acquire crude oil of a desired quality or to reduce transportation costs by taking delivery closer to end markets. Any net differential for exchange transactions is recorded as an adjustment of inventory costs in the purchases component of cost of products sold and operating expenses in the statements of operations. Investment in Sunoco LP Sunoco LP's revenues from motor fuel are recognized either at the time fuel is delivered to the customer or at the time of sale. Shipment and delivery of motor fuel generally occurs on the same day. Sunoco LP charges wholesale customers for third-party transportation costs, which are recorded net in cost of sales. Through PropCo, Sunoco LP's wholly-owned corporate subsidiary, Sunoco LP may sell motor fuel to customers on a commission agent basis, in which Sunoco LP retains title to inventory, controls access to and sale of fuel inventory, and recognizes revenue at the time the fuel is sold to the ultimate customer. In Sunoco LP's fuel distribution and marketing operations, Sunoco LP derives other income from rental income, propane and lubricating oils, and other ancillary product and service offerings. In Sunoco LP's other operations, Sunoco LP derives other income from merchandise, lottery ticket sales, money orders, prepaid phone cards and wireless services, ATM transactions, car washes, movie rentals, and other ancillary product and service offerings. Sunoco LP records revenue from other retail transactions on a net commission basis when a product is sold and/or services are rendered. Investment in USAC USAC's revenue from contracted compression, station, gas treating and maintenance services is recognized ratably under its fixed-fee contracts over the term of the contract as services are provided to its customers. Initial contract terms typically range from six months to five years. However, USAC usually continues to provide compression services at a specific location beyond the initial contract term, either through contract renewal or on a month-to-month or longer basis. USAC primarily enters into fixed-fee contracts whereby its customers are required to pay its monthly fee even during periods of limited or disrupted throughput. Services are generally billed monthly, one month in advance of the commencement of the service month, except for certain customers who are billed at the beginning of the service month, and payment is generally due 30 days after receipt of the invoice. Amounts invoiced in advance are recorded as deferred revenue until earned, at which time they are recognized as revenue. The amount of consideration USAC receives and revenue it recognizes is based upon the fixed fee rate stated in each service contract. USAC's retail parts and services revenue is earned primarily on freight and crane charges that are directly reimbursable by its customers and maintenance work on units at its customers' locations that are outside the scope of USAC's core maintenance activities. Revenue from retail parts and services is recognized at the point in time the part is transferred or service is provided and control is transferred to the customer. At such time, the customer has the ability to direct the use of the benefits of such part or service after USAC has performed its services. USAC bills upon completion of the service or transfer of the parts, and payment is generally due 30 days after receipt of the invoice. The amount of consideration USAC receives and revenue it recognizes is based upon the invoice amount. 117
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Lease Accounting. At the inception of each lease arrangement, we determine if the arrangement is a lease or contains an embedded lease and review the facts and circumstances of the arrangement to classify lease assets as operating or finance leases under Topic 842. The Partnership has elected not to record any leases with terms of 12 months or less on the balance sheet. Balances related to operating leases are included in operating lease ROU assets, accrued and other current liabilities, operating lease current liabilities and non-current operating lease liabilities in our consolidated balance sheets. Finance leases represent a small portion of the active lease agreements and are included in finance lease ROU assets, current maturities of long-term debt and long-term debt, less current maturities in our consolidated balance sheets. The ROU assets represent the Partnership's right to use an underlying asset for the lease term and lease liabilities represent the obligation of the Partnership to make minimum lease payments arising from the lease for the duration of the lease term. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 20 years or greater. The exercise of lease renewal options is typically at the sole discretion of the Partnership and lease extensions are evaluated on a lease-by-lease basis. Leases containing early termination clauses typically require the agreement of both parties to the lease. At the inception of a lease, all renewal options reasonably certain to be exercised are considered when determining the lease term. The depreciable life of lease assets and leasehold improvements are limited by the expected lease term. To determine the present value of future minimum lease payments, we use the implicit rate when readily determinable. Presently, because many of our leases do not provide an implicit rate, the Partnership applies its incremental borrowing rate based on the information available at the lease commencement date to determine the present value of minimum lease payments. The operating and finance lease ROU assets include any lease payments made and exclude lease incentives. Minimum rent payments are expensed on a straight-line basis over the term of the lease. In addition, some leases require additional contingent or variable lease payments, which are based on the factors specific to the individual agreement. Variable lease payments the Partnership is typically responsible for include payment of real estate taxes, maintenance expenses and insurance. For short-term leases (leases that have term of twelve months or less upon commencement), lease payments are recognized on a straight-line basis and no ROU assets are recorded. Accounting for Derivative Instruments and Hedging Activities. We utilize various exchange-traded and OTC commodity financial instrument contracts to limit our exposure to margin fluctuations in natural gas, NGL, crude oil and refined products. These contracts consist primarily of futures and swaps. If we designate a derivative financial instrument as a cash flow hedge and it qualifies for hedge accounting, the change in the fair value is deferred in AOCI until the underlying hedged transaction occurs. Any ineffective portion of a cash flow hedge's change in fair value is recognized each period in earnings. Gains and losses deferred in AOCI related to cash flow hedges remain in AOCI until the underlying physical transaction occurs, unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter. For financial derivative instruments that do not qualify for hedge accounting, the change in fair value is recorded in cost of products sold in the consolidated statements of operations. If we designate a hedging relationship as a fair value hedge, we record the changes in fair value of the hedged asset or liability in cost of products sold in our consolidated statement of operations. This amount is offset by the changes in fair value of the related hedging instrument. Any ineffective portion or amount excluded from the assessment of hedge ineffectiveness is also included in the cost of products sold in the consolidated statement of operations. We utilize published settlement prices for exchange-traded contracts, quotes provided by brokers, and estimates of market prices based on daily contract activity to estimate the fair value of these contracts. Changes in the methods used to determine the fair value of these contracts could have a material effect on our results of operations. We do not anticipate future changes in the methods used to determine the fair value of these derivative contracts. See "Item 7A. Quantitative and Qualitative Disclosures about Market Risk" for further discussion regarding our derivative activities. Fair Value of Financial Instruments. We have commodity derivatives, interest rate derivatives and embedded derivatives in our preferred units 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 118
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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. Derivatives related to the embedded derivatives in our preferred units are valued using a binomial lattice model. The market inputs utilized in the model include credit spread, probabilities of the occurrence of certain events, common unit price, dividend yield, and expected value, and are considered level 3. See further information on our fair value assets and liabilities in Note 2 of our consolidated financial statements. Impairment of Long-Lived Assets,Goodwill , Intangible Assets and Investments in Unconsolidated Affiliates. Long-lived assets are required to be tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.Goodwill and intangibles with indefinite lives must be tested for impairment annually or more frequently if events or changes in circumstances indicate that the related asset might be impaired. An impairment of an investment in an unconsolidated affiliate is recognized when circumstances indicate that a decline in the investment value is other than temporary. An impairment loss should be recognized only if the carrying amount of the asset/goodwill is not recoverable and exceeds its fair value. In order to test for recoverability when performing a quantitative impairment test, we must make estimates of projected cash flows related to the asset, which include, but are not limited to, assumptions about the use or disposition of the asset, estimated remaining life of the asset, and future expenditures necessary to maintain the asset's existing service potential. In order to determine fair value, we make certain estimates and assumptions, including, among other things, changes in general economic conditions in regions in which our markets are located, the availability and prices of natural gas, our ability to negotiate favorable sales agreements, the risks that natural gas exploration and production activities will not occur or be successful, our dependence on certain significant customers and producers of natural gas, and competition from other companies, including major energy producers. While we believe we have made reasonable assumptions to calculate the fair value, if future results are not consistent with our estimates, we could be exposed to future impairment losses that could be material to our results of operations. The Partnership determined the fair value of its reporting units using a weighted combination of the discounted cash flow method and the guideline company method. Determining the fair value of a reporting unit requires judgment and the use of significant estimates and assumptions. Such estimates and assumptions include revenue growth rates, operating margins, weighted average costs of capital and future market conditions, among others. The Partnership believes the estimates and assumptions used in our impairment assessments are reasonable and based on available market information, but variations in any of the assumptions could result in materially different calculations of fair value and determinations of whether or not an impairment is indicated. Under the discounted cash flow method, the Partnership determined fair value based on estimated future cash flows of each reporting unit including estimates for capital expenditures, discounted to present value using the risk-adjusted industry rate, which reflect the overall level of inherent risk of the reporting unit. Cash flow projections are derived from one year budgeted amounts and five year operating forecasts plus an estimate of later period cash flows, all of which are evaluated by management. Subsequent period cash flows are developed for each reporting unit using growth rates that management believes are reasonably likely to occur. Under the guideline company method, the Partnership determined the estimated fair value of each of our reporting units by applying valuation multiples of comparable publicly-traded companies to each reporting unit's projected EBITDA and then averaging that estimate with similar historical calculations using a three year average. In addition, the Partnership estimated a reasonable control premium representing the incremental value that accrues to the majority owner from the opportunity to dictate the strategic and operational actions of the business. One key assumption for the measurement of an impairment is management's estimate of future cash flows and EBITDA. These estimates are based on the annual budget for the upcoming year and forecasted amounts for multiple subsequent years. The annual budget process is typically completed near the annual goodwill impairment testing date, and management uses the most recent information for the annual impairment tests. The forecast is also subjected to a comprehensive update annually in conjunction with the annual budget process and is revised periodically to reflect new information and/or revised expectations. The estimates of future cash flows and EBITDA are subjective in nature and are subject to impacts from the business risks described in "Item 1A. Risk Factors." Therefore, the actual results could differ significantly from the amounts used for goodwill impairment testing, and significant changes in fair value estimates could occur in a given period. Such changes in fair value estimates could result in additional impairments in future periods; therefore, the actual results could differ significantly from the amounts used for goodwill impairment testing, and significant changes in fair value estimates could occur in a given period, resulting in additional impairments. Management does not believe that any of the goodwill balances in its reporting units is currently at significant risk of impairment; however, of the$5.2 billion of goodwill on the Partnership's consolidated balance sheet as ofDecember 31, 2019 , approximately$380 million is recorded in reporting units for which the estimated fair value exceeded the carrying value by less than 20% in the most recent quantitative test. 119
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During the year endedDecember 31, 2019 , the Partnership recorded the following impairments: • A$12 million impairment was recorded related to the goodwill associated with
the
primarily due to decreases in projected future revenues and cash flows.
Additionally, the Partnership recorded a
goodwill associated with the Partnership's North Central operations within
the midstream segment primarily due to changes in assumptions related to
projected future revenues and cash flows.
• Sunoco LP recognized a
to its ethanol plant in
• USAC also recognized a
idle compressor assets.
During the year endedDecember 31, 2018 , the Partnership recorded the following impairments: • a$378 million impairment was recorded related to the goodwill associated
with the Partnership's Northeast operations within the midstream segment
primarily due to changes in assumptions related to projected future revenues
and cash flows from the dates the goodwill was originally recorded. These
changes in assumptions reflect delays in the construction of third-party
takeaway capacity in the Northeast. Additionally, the Partnership recorded
asset impairments of
impairments
• Sunoco LP also recognized a
rights primarily due to decreases in projected future revenues and cash flows
from the date the intangible assets were originally recorded.
• USAC also recognized a
idle compressor assets.
During the year endedDecember 31, 2017 , the Partnership recorded the following impairments: • a$223 million impairment was recorded related to the goodwill associated
with CDM. In
to USAC. Based on the Partnership's anticipated proceeds in the contribution
transaction, the implied fair value of the CDM reporting unit was less than
the Partnership's carrying value. As the Partnership believes that the
contribution consideration also represented an appropriate estimate of fair
value as of the 2017 annual impairment test date, the Partnership recorded an
impairment for the difference between the carrying value and the fair value
of the reporting unit.
• a
with the Partnership's interstate transportation and storage reporting units,
and a
with the general partner of
impairments were due to a reduction in management's forecasted future cash
flows from the related reporting units, which reduction reflected the impacts
discussed in "Results of Operations" above, along with the impacts of
re-contracting assumptions related to future periods.
• a
Partnership's refined products transportation and services reporting unit.
Subsequent to the Sunoco Logistics Merger, the Partnership restructured the
internal reporting of legacy Sunoco Logistics' business to be consistent with
the internal reporting of legacy ETO. Subsequent to this reallocation the
carrying value of certain refined products reporting units was less than the
estimated fair value due to a reduction in management's forecasted future
cash flows from the related reporting units, and the goodwill associated with
those reporting units was fully impaired. No goodwill remained in the
respective reporting units subsequent to the impairment.
• a
Robin primarily due to a reduction in expected future cash flows due to an
increase during 2017 in insurance costs related to offshore assets.
• a
FEP. The Partnership concluded that the carrying value of its investment in
FEP was other than temporarily impaired based on an anticipated decrease in
production in theFayetteville basin and a customer re-contracting with a competitor during 2017.
• a
HPC primarily due to a decrease in projected future revenues and cash flows
driven be the bankruptcy of one of HPC's major customers in 2017 and an
expectation that contracts expiring in the next few years will be renewed at
lower tariff rates and lower volumes.
• For 2017, Sunoco LP also recognized impairments of
below.
Except for the 2017 impairment of the goodwill associated with CDM, as discussed above, the goodwill impairments recorded by the Partnership during the years endedDecember 31, 2019 , 2018 and 2017 represented all of the goodwill within the respective reporting units. During 2017, Sunoco LP announced the sale of a majority of the assets in its retail and Stripes reporting units. These reporting units include the retail operations in the continentalUnited States but excludes the retail convenience store operations inHawaii 120
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that comprise the Aloha reporting unit. Upon the classification of assets and related liabilities as held for sale, Sunoco LP's management applied the measurement guidance in ASC 360, Property, Plant and Equipment, to calculate the fair value less cost to sell of the disposal group. In accordance with ASC 360-10-35-39, Sunoco LP's management first tested the goodwill included within the disposal group for impairment prior to measuring the disposal group's fair value less the cost to sell. In the determination of the classification of assets held for sale and the related liabilities, Sunoco LP's management allocated a portion of the goodwill balance previously included in the Sunoco LP retail and Stripes reporting units to assets held for sale based on the relative fair values of the business to be disposed of and the portion of the respective reporting unit that will be retained in accordance with ASC 350-20-40-3. Sunoco LP recognized goodwill impairments of$387 million in 2017, of which$102 million was allocated to continuing operations, primarily due to changes in assumptions related to projected future revenues and cash flows from the dates the goodwill was originally recorded. Additionally, Sunoco LP performed impairment tests on its indefinite-lived intangible assets during the fourth quarter of 2017 and recognized a total of$17 million in impairment charges on their contractual rights and liquor licenses primarily due to decreases in projected future revenues and cash flows from the date the intangible assets were originally recorded. Property, Plant and Equipment. Expenditures for maintenance and repairs that do not add capacity or extend the useful life are expensed as incurred. Expenditures to refurbish assets that either extend the useful lives of the asset or prevent environmental contamination are capitalized and depreciated over the remaining useful life of the asset. Additionally, we capitalize certain costs directly related to the construction of assets including internal labor costs, interest and engineering costs. Upon disposition or retirement of pipeline components or natural gas plant components, any gain or loss is recorded to accumulated depreciation. When entire pipeline systems, gas plants or other property and equipment are retired or sold, any gain or loss is included in the consolidated statement of operations. Depreciation of property, plant and equipment is provided using the straight-line method based on their estimated useful lives ranging from 1 to 99 years. Changes in the estimated useful lives of the assets could have a material effect on our results of operation. We do not anticipate future changes in the estimated useful lives of our property, plant and equipment. Asset Retirement Obligations. We have determined that we are obligated by contractual or regulatory requirements to remove facilities or perform other remediation upon retirement of certain assets. The fair value of any ARO is determined based on estimates and assumptions related to retirement costs, which the Partnership bases on historical retirement costs, future inflation rates and credit-adjusted risk-free interest rates. These fair value assessments are considered to be Level 3 measurements, as they are based on both observable and unobservable inputs. Changes in the liability are recorded for the passage of time (accretion) or for revisions to cash flows originally estimated to settle the ARO. An ARO is required to be recorded when a legal obligation to retire an asset exists and such obligation can be reasonably estimated. We will record an ARO in the periods in which management can reasonably estimate the settlement dates. Except for certain amounts discussed below, management was not able to reasonably measure the fair value of AROs as ofDecember 31, 2019 and 2018, in most cases because the settlement dates were indeterminable. Although a number of other onshore assets inPanhandle 's system are subject to agreements or regulations that give rise to an ARO uponPanhandle 's discontinued use of these assets, AROs were not recorded because these assets have an indeterminate removal or abandonment date given the expected continued use of the assets with proper maintenance or replacement. ETC Sunoco has legal AROs for several other assets at its previously owned refineries, pipelines and terminals, for which it is not possible to estimate when the obligations will be settled. Consequently, the retirement obligations for these assets cannot be measured at this time. At the end of the useful life of these underlying assets, ETC Sunoco is legally or contractually required to abandon in place or remove the asset. We believe we may have additional AROs related to ETC Sunoco's pipeline assets and storage tanks, for which it is not possible to estimate whether or when the AROs will be settled. Consequently, these AROs cannot be measured at this time. Sunoco LP has AROs related to the estimated future cost to remove underground storage tanks. Individual component assets have been and will continue to be replaced, but the pipeline and the natural gas gathering and processing systems will continue in operation as long as supply and demand for natural gas exists. Based on the widespread use of natural gas in industrial and power generation activities, management expects supply and demand to exist for the foreseeable future. We have in place a rigorous repair and maintenance program that keeps the pipelines and the natural gas gathering and processing systems in good working order. Therefore, although some of the individual assets may be replaced, the pipelines and the natural gas gathering and processing systems themselves will remain intact indefinitely. Other non-current assets on the Partnership's consolidated balance sheet included$31 million and$26 million of legally restricted funds for the purpose of settling AROs as ofDecember 31, 2019 and 2018, respectively. 121
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Legal Matters. We are subject to litigation and regulatory proceedings as a result of our business operations and transactions. We utilize both internal and external counsel in evaluating our potential exposure to adverse outcomes from claims, orders, judgments or settlements. To the extent that actual outcomes differ from our estimates, or additional facts and circumstances cause us to revise our estimates, our earnings will be affected. We expense legal costs as incurred, and all recorded legal liabilities are revised as required as better information becomes available to us. The factors we consider when recording an accrual for contingencies include, among others: (i) the opinions and views of our legal counsel; (ii) our previous experience; and (iii) the decision of our management as to how we intend to respond to the complaints. For more information on our litigation and contingencies, see Note 11 to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" in this report. Environmental Remediation Activities. The Partnership's accrual for environmental remediation activities reflects anticipated work at identified sites where an assessment has indicated that cleanup costs are probable and reasonably estimable. The accrual for known claims is undiscounted and is based on currently available information, estimated timing of remedial actions and related inflation assumptions, existing technology and presently enacted laws and regulations. It is often extremely difficult to develop reasonable estimates of future site remediation costs due to changing regulations, changing technologies and their associated costs, and changes in the economic environment. Engineering studies, historical experience and other factors are used to identify and evaluate remediation alternatives and their related costs in determining the estimated accruals for environmental remediation activities. Losses attributable to unasserted claims are generally reflected in the accruals on an undiscounted basis, to the extent they are probable of occurrence and reasonably estimable. ETO has 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, ETO accrues losses attributable to unasserted claims based on the discounted estimates that are used to develop the premiums paid to the captive insurance company. In general, each remediation site/issue is evaluated individually based upon information available for the site/issue and no pooling or statistical analysis is used to evaluate an aggregate risk for a group of similar items (e.g., service station sites) in determining the amount of probable loss accrual to be recorded. ETO's estimates of environmental remediation costs also frequently involve evaluation of a range of estimates. In many cases, it is difficult to determine that one point in the range of loss estimates is more likely than any other. In these situations, existing accounting guidance requires that the minimum of the range be accrued. Accordingly, the low end of the range often represents the amount of loss which has been recorded. The Partnership's consolidated balance sheet reflected$320 million in environmental accruals as ofDecember 31, 2019 . Total future costs for environmental remediation activities will depend upon, among other things, the identification of any additional sites, the determination of the extent of the contamination at each site, the timing and nature of required remedial actions, the nature of operations at each site, the technology available and needed to meet the various existing legal requirements, the nature and terms of cost-sharing arrangements with other potentially responsible parties, the availability of insurance coverage, the nature and extent of future environmental laws and regulations, inflation rates, terms of consent agreements or remediation permits with regulatory agencies and the determination of the Partnership's liability at the sites, if any, in light of the number, participation level and financial viability of the other parties. The recognition of additional losses, if and when they were to occur, would likely extend over many years. Management believes that the Partnership's exposure to adverse developments with respect to any individual site is not expected to be material. However, if changes in environmental laws or regulations occur or the assumptions used to estimate losses at multiple sites are adjusted, such changes could impact multiple facilities, formerly owned facilities and third-party sites at the same time. As a result, from time to time, significant charges against income for environmental remediation may occur; however, management does not believe that any such charges would have a material adverse impact on the Partnership's consolidated financial position. Deferred Income Taxes. ET recognizes benefits in earnings and related deferred tax assets for net operating loss carryforwards ("NOLs") and tax credit carryforwards. If necessary, a charge to earnings and a related valuation allowance are recorded to reduce deferred tax assets to an amount that is more likely than not to be realized by the Partnership in the future. Deferred income tax assets attributable to state and federal NOLs and federal tax alternative minimum tax credit carryforwards totaling$936 million have been included in ET's consolidated balance sheet as ofDecember 31, 2019 . The state NOL carryforward benefits of$149 million ($118 million net of federal benefit) begin to expire in 2020 with a substantial portion expiring between 2033 and2039. ET 's corporate subsidiaries have federal NOLs of$3.42 billion ($718 million in benefits) of which$1.3 billion will expire between 2031 and 2037. Any federal NOL generated in 2018 and future years can be carried forward indefinitely. Federal alternative minimum tax credit carryforwards of$15 million remained atDecember 31, 2019 . We have determined that a valuation allowance totaling$62 million ($49 million net of federal income tax effects) is required for state NOLs as ofDecember 31, 2019 primarily due to significant restrictions on their use in theCommonwealth of Pennsylvania . A separate valuation allowance of$46 million 122
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is attributable to foreign tax credits. In making the assessment of the future realization of the deferred tax assets, we rely on future reversals of existing taxable temporary differences, tax planning strategies and forecasted taxable income based on historical and projected future operating results. The potential need for valuation allowances is regularly reviewed by management. If it is more likely than not that the recorded asset will not be realized, additional valuation allowances which increase income tax expense may be recognized in the period such determination is made. Likewise, if it is more likely than not that additional deferred tax assets will be realized, an adjustment to the deferred tax asset will increase income in the period such determination is made. Forward-Looking Statements This annual report contains various forward-looking statements and information that are based on our beliefs and those of ourGeneral 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 annual 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 ourGeneral Partner believe that the expectations on which such forward-looking statements are based are reasonable, neither we nor ourGeneral 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;
• 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;
• 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; 123
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• 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 less than a controlling 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;
• 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 "Item 1A. Risk Factors" in this annual report. Any forward-looking statement made by us in this Annual Report on Form 10-K 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. Inflation Interest rates on existing and future credit facilities and future debt offerings could be significantly higher than current levels, causing our financing costs to increase accordingly. Although increased financing costs could limit our ability to raise funds in the capital markets, we expect to remain competitive with respect to acquisitions and capital projects since our competitors would face similar circumstances. Inflation inthe United States has been relatively low in recent years and has not had a material effect on our results of operations. It may in the future, however, increase the cost to acquire or replace property, plant and equipment and may increase the costs of labor and supplies. Our operating revenues and costs are influenced to a greater extent by commodity price changes. To the extent permitted by competition, regulation and our existing agreements, we have and will continue to pass along a portion of increased costs to our customers in the form of higher fees.
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