The following is a discussion of our historical consolidated financial condition
and results of operations, and should be read in conjunction with (i) our
historical consolidated financial statements and accompanying notes thereto
included elsewhere in this Quarterly Report on Form 10-Q; and (ii) the
consolidated financial statements and management's discussion and analysis of
financial condition and results of operations included in the Partnership's
Annual Report on Form 10-K for the year ended December 31, 2022 filed with the
SEC on February 17, 2023. This discussion includes forward-looking statements
that are subject to risk and uncertainties. Actual results may differ
substantially from the statements we make in this section due to a number of
factors that are discussed in "Part I - Item 1A. Risk Factors" of our Annual
Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on
February 17, 2023. Additional information on forward-looking statements is
discussed in "Forward-Looking Statements."
Unless the context requires otherwise, references to "we," "us," "our," the
"Partnership" and "Energy Transfer" mean Energy Transfer LP and its consolidated
subsidiaries.
RECENT DEVELOPMENTS
Lotus Midstream Acquisition
On May 2, 2023, Energy Transfer acquired Lotus Midstream Operations, LLC ("Lotus
Midstream") for total consideration of $900 million in cash and approximately
44.5 million newly issued Energy Transfer common units. Lotus Midstream owns and
operates Centurion Pipeline Company LLC, an integrated crude midstream platform
located in the Permian Basin.
Sunoco LP Acquisition
On May 1, 2023, Sunoco LP completed the acquisition of 16 refined product
terminals located across the East Coast and Midwest from Zenith Energy for
$110 million. Sunoco LP expects the acquisition to be accretive to its
unitholders in the first year of ownership.
Quarterly Cash Distribution
In April 2023, Energy Transfer announced a quarterly distribution of $0.3075 per
unit ($1.23 annualized) on Energy Transfer common units for the quarter ended
March 31, 2023.
Regulatory Update
Interstate Natural Gas Transportation Regulation
Rate Regulation
Effective January 2018, the 2017 Tax Cuts and Jobs Act (the "Tax Act") changed
several provisions of the federal tax code, including a reduction in the maximum
corporate tax rate. On March 15, 2018, in a set of related proposals, the FERC
addressed treatment of federal income tax allowances in regulated entity rates.
The FERC issued a Revised Policy Statement on Treatment of Income Taxes
("Revised Policy Statement") stating that it will no longer permit master
limited partnerships to recover an income tax allowance in their cost-of-service
rates. The FERC issued the Revised Policy Statement in response to a remand from
the United States Court of Appeals for the District of Columbia Circuit in
United Airlines v. FERC, in which the court determined that the FERC had not
justified its conclusion that a pipeline organized as a master limited
partnership would not "double recover" its taxes under the current policy by
both including an income-tax allowance in its cost of service and earning a
return on equity calculated using the discounted cash flow methodology. On July
18, 2018, the FERC clarified that a pipeline organized as a master limited
partnership will not be precluded in a future proceeding from arguing and
providing evidentiary support that it is entitled to an income tax allowance and
demonstrating that its recovery of an income tax allowance does not result in a
double-recovery of investors' income tax costs. On July 31, 2020, the United
States Court of Appeals for the District of Columbia Circuit issued an opinion
upholding the FERC's decision denying a separate master limited partnership
recovery of an income tax allowance and its decision not to require the master
limited partnership to refund accumulated deferred income tax balances. In light
of the rehearing order's clarification regarding an individual entity's ability
to argue in support of recovery of an income tax allowance and the court's
subsequent opinion upholding denial of an income tax allowance to a master
limited partnership, the impact of the FERC's policy on the treatment of income
taxes on the rates we can charge for FERC-regulated transportation services is
unknown at this time.
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Even without application of the FERC's recent rate making-related policy
statements and rulemakings, the FERC or our shippers may challenge the
cost-of-service rates we charge. The FERC's establishment of a just and
reasonable rate is based on many components, including ROE and tax-related
components, but also other pipeline costs that will continue to affect FERC's
determination of just and reasonable cost of service rates. Moreover, we receive
revenues from our pipelines based on a variety of rate structures, including
cost-of-service rates, negotiated rates, discounted rates and market-based
rates. Many of our interstate pipelines, such as Tiger Pipeline, Midcontinent
Express Pipeline and Fayetteville Express Pipeline, have negotiated market rates
that were agreed to by customers in connection with long-term contracts entered
into to support the construction of the pipelines. Other systems, such as
Florida Gas Transmission Pipeline, Transwestern and Panhandle, have a mix of
tariff rate, discount rate and negotiated rate agreements. The revenues we
receive from natural gas transportation services we provide pursuant to
cost-of-service based rates may decrease in the future as a result of changes to
FERC policies, combined with the reduced corporate federal income tax rate
established in the Tax Act. The extent of any revenue reduction related to our
cost-of-service rates, if any, will depend on a detailed review of all of our
cost-of-service components and the outcomes of any challenges to our rates by
the FERC or our shippers.
On July 18, 2018, the FERC issued a final rule establishing procedures to
evaluate rates charged by the FERC-jurisdictional gas pipelines in light of the
Tax Act and the FERC's Revised Policy Statement. By an order issued January 16,
2019, the FERC initiated a review of Panhandle's existing rates pursuant to
Section 5 of the Natural Gas Act to determine whether the rates currently
charged by Panhandle are just and reasonable and set the matter for hearing. On
August 30, 2019, Panhandle filed a general rate proceeding under Section 4 of
the Natural Gas Act. The Natural Gas Act Section 5 and Section 4 proceedings
were consolidated by order of the Chief Judge on October 1, 2019. The initial
decision by the administrative law judge was issued on March 26, 2021. On April
26, 2021, Panhandle filed its brief on exceptions to the initial decision. On
May 17, 2021, Panhandle filed its brief opposing exceptions in this proceeding,
which was denied by operation of law as of February 17, 2023. Panhandle
submitted requisite compliance filings with FERC, but on December 16, 2022, the
FERC issued its order on Panhandle's rate case. On January 17, 2023, Panhandle
filed its request for rehearing in the proceeding, which was denied by operation
of law as of February 17, 2023. On March 23, 2023, Panhandle appealed the
initial decision (and the February 17, 2023 Notice of Denial of Rehearing by
Operation of Law and Providing for Further Consideration) to the United States
Court of Appeals for the District of Columbia ("Court of Appeals"). On April 25,
2023, the Court of Appeals stayed the appeal while FERC further considers its
December 16, 2022 order.
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