The following is a discussion of our historical consolidated financial condition
and results of operations, and should be read in conjunction with (i) our
historical consolidated financial statements and accompanying notes thereto
included elsewhere in this Quarterly Report on Form 10-Q; and (ii) the
consolidated financial statements and management's discussion and analysis of
financial condition and results of operations included in the Partnership's
Annual Report on Form 10-K for the year ended December 31, 2021 filed with the
SEC on February 18, 2022. This discussion includes forward-looking statements
that are subject to risk and uncertainties. Actual results may differ
substantially from the statements we make in this section due to a number of
factors that are discussed in "Part I - Item 1A. Risk Factors" of our Annual
Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on
February 18, 2022. Additional information on forward-looking statements is
discussed below in "Forward-Looking Statements."
Unless the context requires otherwise, references to "we," "us," "our," the
"Partnership" and "Energy Transfer" mean Energy Transfer LP and its consolidated
subsidiaries.
RECENT DEVELOPMENTS
Woodford Express Acquisition
In August 2022, Energy Transfer entered into an agreement to acquire 100% of the
membership interests in Woodford Express, LLC, a Mid-Continent gas gathering and
processing system, for approximately $485 million in cash consideration. The
system, which is located in the heart of the SCOOP play, has 450 MMcf/d of
cryogenic gas processing and treating capacity and over 200 miles of gathering
lines, which are connected to Energy Transfer's pipeline network. The
transaction is expected to close by the end of the third quarter, subject to
customary closing conditions including Hart-Scott-Rodino Act clearance.
Energy Transfer Canada Sale
In March 2022, the Partnership announced a definitive agreement to sell its 51%
interest in Energy Transfer Canada. The sale is expected to result in cash
proceeds to Energy Transfer of approximately C$340 million (US$264 million at
the June 30, 2022 exchange rate), subject to certain purchase price adjustments.
The transaction is expected to close by the third quarter of 2022.
Spindletop Assets Purchase
In March 2022, the Partnership purchased the membership interests in Caliche
Coastal Holdings, LLC (subsequently renamed Energy Transfer Spindletop LLC),
which owns an underground storage facility near Mont Belvieu, Texas, for
approximately $325 million.
Sunoco LP Acquisition
On April 1, 2022, Sunoco LP completed the acquisition of a transmix processing
and terminal facility in Huntington, Indiana for $264 million.
Quarterly Cash Distribution
In July 2022, Energy Transfer announced its quarterly distribution of $0.23 per
unit ($0.92 annualized) on Energy Transfer common units for the quarter ended
June 30, 2022.
Regulatory Update
Interstate Natural Gas Transportation Regulation
Rate Regulation
Effective January 2018, the 2017 Tax Cuts and Jobs Act (the "Tax Act") changed
several provisions of the federal tax code, including a reduction in the maximum
corporate tax rate. On March 15, 2018, in a set of related proposals, the FERC
addressed treatment of federal income tax allowances in regulated entity rates.
The FERC issued a Revised Policy Statement on Treatment of Income Taxes
("Revised Policy Statement") stating that it will no longer permit master
limited partnerships to recover an income tax allowance in their cost-of-service
rates. The FERC issued the Revised Policy Statement in response to a remand from
the United States Court of Appeals for the District of Columbia Circuit in
United Airlines v. FERC, in which the court determined that the FERC had not
justified its conclusion that a pipeline organized as a master limited
partnership would not "double recover" its taxes under the current policy by
both including an income-tax allowance in its cost of service and earning
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a return on equity calculated using the discounted cash flow methodology. On
July 18, 2018, the FERC clarified that a pipeline organized as a master limited
partnership will not be precluded in a future proceeding from arguing and
providing evidentiary support that it is entitled to an income tax allowance and
demonstrating that its recovery of an income tax allowance does not result in a
double-recovery of investors' income tax costs. On July 31, 2020, the United
States Court of Appeals for the District of Columbia Circuit issued an opinion
upholding the FERC's decision denying a separate master limited partnership
recovery of an income tax allowance and its decision not to require the master
limited partnership to refund accumulated deferred income tax balances. In light
of the rehearing order's clarification regarding an individual entity's ability
to argue in support of recovery of an income tax allowance and the court's
subsequent opinion upholding denial of an income tax allowance to a master
limited partnership, the impact of the FERC's policy on the treatment of income
taxes on the rates we can charge for FERC-regulated transportation services is
unknown at this time.
Even without application of the FERC's recent rate making-related policy
statements and rulemakings, the FERC or our shippers may challenge the
cost-of-service rates we charge. The FERC's establishment of a just and
reasonable rate is based on many components, including ROE and tax-related
components, but also other pipeline costs that will continue to affect FERC's
determination of just and reasonable cost of service rates. Moreover, we receive
revenues from our pipelines based on a variety of rate structures, including
cost-of-service rates, negotiated rates, discounted rates and market-based
rates. Many of our interstate pipelines, such as ETC Tiger, Midcontinent Express
and Fayetteville Express, have negotiated market rates that were agreed to by
customers in connection with long-term contracts entered into to support the
construction of the pipelines. Other systems, such as FGT, Transwestern and
Panhandle, have a mix of tariff rate, discount rate, and negotiated rate
agreements. The revenues we receive from natural gas transportation services we
provide pursuant to cost-of-service based rates may decrease in the future as a
result of changes to FERC policies, combined with the reduced corporate federal
income tax rate established in the Tax Act. The extent of any revenue reduction
related to our cost-of-service rates, if any, will depend on a detailed review
of all of our cost-of-service components and the outcomes of any challenges to
our rates by the FERC or our shippers.
On July 18, 2018, the FERC issued a final rule establishing procedures to
evaluate rates charged by the FERC-jurisdictional gas pipelines in light of the
Tax Act and the FERC's Revised Policy Statement. By an order issued January 16,
2019, the FERC initiated a review of Panhandle's existing rates pursuant to
Section 5 of the NGA to determine whether the rates currently charged by
Panhandle are just and reasonable and set the matter for hearing. On August 30,
2019, Panhandle filed a general rate proceeding under Section 4 of the NGA. The
Natural Gas Act Section 5 and Section 4 proceedings were consolidated by order
of the Chief Judge on October 1, 2019. A hearing in the combined proceedings
commenced on August 25, 2020 and adjourned on September 15, 2020. The initial
decision by the administrative law judge was issued on March 26, 2021. On April
26, 2021, Panhandle filed its brief on exceptions to the initial decision. On
May 17, 2021, Panhandle filed its brief opposing exceptions in this proceeding.
This matter remains pending before the FERC.
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