Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-31219
ENERGY TRANSFER PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware
 
73-1493906
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
8111 Westchester Drive, Suite 600, Dallas, Texas 75225
(Address of principal executive offices) (zip code)
(214) 981-0700
(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨   (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes    ¨      No    ý
At August 3, 2018 , the registrant had 1,166,403,685  Common Units outstanding.
 


Table of Contents

FORM 10-Q
ENERGY TRANSFER PARTNERS, L.P. AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


i

Table of Contents

Forward-Looking Statements
Certain matters discussed in this report, excluding historical information, as well as some statements by Energy Transfer Partners, L.P. (the “Partnership” or “ETP”) in periodic press releases and some oral statements of the Partnership’s officials during presentations about the Partnership, include forward-looking statements. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. Statements using words such as “anticipate,” “believe,” “intend,” “project,” “plan,” “expect,” “continue,” “estimate,” “goal,” “forecast,” “may,” “will” or similar expressions help identify forward-looking statements. Although the Partnership and its General Partner believe such forward-looking statements are based on reasonable assumptions and current expectations and projections about future events, no assurance can be given that such assumptions, expectations, or projections will prove to be correct. Forward-looking statements are subject to a variety of risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, the Partnership’s actual results may vary materially from those anticipated, projected or expected, forecasted, estimated or expressed in forward-looking statements since many of the factors that determine these results are subject to uncertainties and risks that are difficult to predict and beyond management’s control. For additional discussion of risks, uncertainties and assumptions, see “Part I – Item 1A. Risk Factors” in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission on February 23, 2018 and “Part II – Item 1A. Risk Factors,” in the Partnership’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 filed on May 10, 2018.
Definitions
The following is a list of certain acronyms and terms generally used in the energy industry and throughout this document:
 
/d
 
per day
 
 
 
 
 
AOCI
 
accumulated other comprehensive income (loss)
 
 
 
 
 
BBtu
 
billion British thermal units
 
 
 
 
 
Btu
 
British thermal unit, an energy measurement used by gas companies to convert the volume of gas used to its heat equivalent, and thus calculate the actual energy used
 
 
 
 
 
Capacity
 
capacity of a pipeline, processing plant or storage facility refers to the maximum capacity under normal operating conditions and, with respect to pipeline transportation capacity, is subject to multiple factors (including natural gas injections and withdrawals at various delivery points along the pipeline and the utilization of compression) which may reduce the throughput capacity from specified capacity levels
 
 
 
 
 
CDM
 
CDM Resource Management LLC and CDM Environmental & Technical Services LLC, collectively
 
 
 
 
 
Citrus
 
Citrus, LLC
 
 
 
 
 
DOJ
 
United States Department of Justice
 
 
 
 
 
EPA
 
United States Environmental Protection Agency
 
 
 
 
 
ETC OLP
 
La Grange Acquisition, L.P., which conducts business under the assumed name of Energy Transfer Company
 
 
 
 
 
ETE
 
Energy Transfer Equity, L.P., a publicly traded partnership and the owner of ETP LLC for the periods presented herein
 
 
 
 
 
ETP GP
 
Energy Transfer Partners GP, L.P., the general partner of ETP
 
 
 
 
 
ETP Holdco
 
ETP Holdco Corporation
 
 
 
 
 
ETP LLC
 
Energy Transfer Partners, L.L.C., the general partner of ETP GP
 
 
 
 
Exchange Act
 
Securities Exchange Act of 1934
 
 
 
 
 
FEP
 
Fayetteville Express Pipeline LLC
 
 
 
 
 
FERC
 
Federal Energy Regulatory Commission
 
 
 
 
 
FGT
 
Florida Gas Transmission Company, LLC
 
 
 
 
 
GAAP
 
accounting principles generally accepted in the United States of America
 
 
 
 
 
HPC
 
RIGS Haynesville Partnership Co.
 
 
 
 


ii

Table of Contents

 
IDRs
 
incentive distribution rights
 
 
 
 
 
Legacy ETP Preferred Units
 
legacy ETP Series A cumulative convertible preferred units
 
 
 
 
 
LIBOR
 
London Interbank Offered Rate
 
 
 
 
 
MBbls
 
thousand barrels
 
 
 
 
 
MEP
 
Midcontinent Express Pipeline LLC
 
 
 
 
 
MTBE
 
methyl tertiary butyl ether
 
 
 
 
 
NGL
 
natural gas liquid, such as propane, butane and natural gasoline
 
 
 
 
 
NYMEX
 
New York Mercantile Exchange
 
 
 
 
 
OSHA
 
federal Occupational Safety and Health Act
 
 
 
 
 
OTC
 
over-the-counter
 
 
 
 
 
Panhandle
 
Panhandle Eastern Pipe Line Company, LP and its subsidiaries
 
 
 
 
 
PennTex
 
PennTex Midstream Partners, LP
 
 
 
 
 
PES
 
Philadelphia Energy Solutions
 
 
 
 
 
Regency
 
Regency Energy Partners LP
 
 
 
 
 
Retail Holdings
 
ETP Retail Holdings, LLC, a wholly-owned subsidiary of Sunoco, Inc.
 
 
 
 
 
RIGS
 
Regency Intrastate Gas LP
 
 
 
 
 
Rover
 
Rover Pipeline LLC, a subsidiary of ETP
 
 
 
 
 
SEC
 
Securities and Exchange Commission
 
 
 
 
 
Series A Preferred Units
 
6.250% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units
 
 
 
 
 
Series B Preferred Units
 
6.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units
 
 
 
 
 
Series C Preferred Units
 
7.375% Series C Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units
 
 
 
 
 
Series D Preferred Units
 
7.625% Series D Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units
 
 
 
 
 
Sunoco Logistics
 
Sunoco Logistics Partners L.P.
 
 
 
 
 
Transwestern
 
Transwestern Pipeline Company, LLC
 
 
 
 
 
Trunkline
 
Trunkline Gas Company, LLC, a subsidiary of Panhandle
 
 
 
 
 
USAC
 
USA Compression Partners, LP
Adjusted EBITDA is a term used throughout this document, which we define as earnings before interest, taxes, depreciation, depletion, amortization and other non-cash items, such as non-cash compensation expense, gains and losses on disposals of assets, the allowance for equity funds used during construction, unrealized gains and losses on commodity risk management activities, non-cash impairment charges, losses on extinguishments of debt and other non-operating income or expense items. Unrealized gains and losses on commodity risk management activities include unrealized gains and losses on commodity derivatives and inventory fair value adjustments. Adjusted EBITDA reflects amounts for less than wholly-owned subsidiaries based on 100% of the subsidiaries’ results of operations and for unconsolidated affiliates based on the Partnership’s proportionate ownership.


iii

Table of Contents

PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENERGY TRANSFER PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(unaudited)
 
June 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
494

 
$
306

Accounts receivable, net
3,684

 
3,946

Accounts receivable from related companies
334

 
318

Inventories
1,256

 
1,589

Income taxes receivable
172

 
135

Derivative assets
57

 
24

Other current assets
550

 
210

Total current assets
6,547

 
6,528

 
 
 
 
Property, plant and equipment
69,637

 
67,699

Accumulated depreciation and depletion
(9,861
)
 
(9,262
)
 
59,776

 
58,437

 
 
 
 
Advances to and investments in unconsolidated affiliates
3,636

 
3,816

Other non-current assets, net
762

 
758

Intangible assets, net
4,988

 
5,311

Goodwill
2,861

 
3,115

Total assets
$
78,570

 
$
77,965


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

ENERGY TRANSFER PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(unaudited)
 
June 30, 2018
 
December 31, 2017
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
3,488

 
$
4,126

Accounts payable to related companies
329

 
209

Derivative liabilities
385

 
109

Accrued and other current liabilities
2,284

 
2,143

Current maturities of long-term debt
155

 
407

Total current liabilities
6,641

 
6,994

 
 
 
 
Long-term debt, less current maturities
33,741

 
32,687

Non-current derivative liabilities
135

 
145

Deferred income taxes
2,917

 
2,883

Other non-current liabilities
1,079

 
1,084

 
 
 
 
Commitments and contingencies

 

Redeemable noncontrolling interests
21

 
21

 
 
 
 
Equity:
 
 
 
Limited Partners:
 
 
 
Series A Preferred Unitholders
958

 
944

Series B Preferred Unitholders
556

 
547

Series C Preferred Unitholders
442

 

Common Unitholders
25,546

 
26,531

General Partner
359

 
244

Accumulated other comprehensive income
4

 
3

Total partners’ capital
27,865

 
28,269

Noncontrolling interest
6,171

 
5,882

Total equity
34,036

 
34,151

Total liabilities and equity
$
78,570

 
$
77,965


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

Table of Contents

ENERGY TRANSFER PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per unit data)
(unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017*
 
2018
 
2017*
REVENUES:
 
 
 
 
 
 
 
Natural gas sales
$
1,024

 
$
1,022

 
$
2,086

 
$
2,034

NGL sales
2,141

 
1,485

 
4,171

 
3,032

Crude sales
4,241

 
2,345

 
7,495

 
4,887

Gathering, transportation and other fees
1,464

 
1,067

 
2,861

 
2,091

Refined product sales
413

 
304

 
852

 
775

Other
127

 
353

 
225

 
652

Total revenues
9,410

 
6,576

 
17,690

 
13,471

COSTS AND EXPENSES:
 
 
 
 
 
 
 
Cost of products sold
7,140

 
4,624

 
13,128

 
9,674

Operating expenses
627

 
539

 
1,231

 
1,031

Depreciation, depletion and amortization
588

 
557

 
1,191

 
1,117

Selling, general and administrative
112

 
120

 
224

 
230

Total costs and expenses
8,467

 
5,840

 
15,774

 
12,052

OPERATING INCOME
943

 
736

 
1,916

 
1,419

OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Interest expense, net
(358
)
 
(336
)
 
(704
)
 
(668
)
Equity in earnings (losses) of unconsolidated affiliates
106

 
(61
)
 
34

 
12

Gain on Sunoco LP common unit repurchase

 

 
172

 

Loss on deconsolidation of CDM
(86
)
 

 
(86
)
 

Gains (losses) on interest rate derivatives
20

 
(25
)
 
72

 
(20
)
Other, net
46

 
61

 
106

 
80

INCOME BEFORE INCOME TAX EXPENSE
671

 
375

 
1,510

 
823

Income tax expense
69

 
79

 
29

 
134

NET INCOME
602

 
296

 
1,481

 
689

Less: Net income attributable to noncontrolling interest
170

 
94

 
334

 
156

NET INCOME ATTRIBUTABLE TO PARTNERS
432

 
202

 
1,147

 
533

Series A Preferred Unitholders’ interest in net income
15

 

 
30

 

Series B Preferred Unitholders’ interest in net income
9

 

 
18

 

Series C Preferred Unitholders’ interest in net income
6

 

 
6

 

General Partner’s interest in net income
402

 
251

 
804

 
457

Class H Unitholder’s interest in net income

 

 

 
93

Common Unitholders’ interest in net income (loss)
$

 
$
(49
)
 
$
289

 
$
(17
)
NET INCOME (LOSS) PER COMMON UNIT:
 
 
 
 
 
 
 
Basic
$
(0.01
)
 
$
(0.04
)
 
$
0.23

 
$
(0.02
)
Diluted
$
(0.01
)
 
$
(0.04
)
 
$
0.23

 
$
(0.02
)
* As adjusted. See Note 1.

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

ENERGY TRANSFER PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
(unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017*
 
2018
 
2017*
Net income
$
602

 
$
296

 
$
1,481

 
689

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

 
1

 
(2
)
 
3

Actuarial loss relating to pension and other postretirement benefit plans

 
(1
)
 
(2
)
 
(3
)
Change in other comprehensive income from unconsolidated affiliates
2

 
(1
)
 
7

 
(1
)
 
2

 
(1
)
 
3

 
(1
)
Comprehensive income
604

 
295

 
1,484

 
688

Less: Comprehensive income attributable to noncontrolling interest
170

 
94

 
334

 
156

Comprehensive income attributable to partners
$
434

 
$
201

 
$
1,150

 
$
532

* As adjusted. See Note 1.

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


ENERGY TRANSFER PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2018
(Dollars in millions)
(unaudited)
 
Limited Partners
 
 
 
 
 
 
 
 
 
Series A Preferred Units
 
Series B Preferred Units
 
Series C Preferred Units
 
Common Units
 
General Partner
 
Accumulated Other Comprehensive Income (Loss)
 
Noncontrolling Interest
 
Total
Balance, December 31, 2017
$
944

 
$
547

 
$

 
$
26,531

 
$
244

 
$
3

 
$
5,882

 
$
34,151

Distributions to partners
(15
)
 
(9
)
 

 
(1,315
)
 
(672
)
 

 

 
(2,011
)
Distributions to noncontrolling interest

 

 

 

 

 

 
(359
)
 
(359
)
Units issued for cash

 

 
436

 
39

 

 

 

 
475

Capital contributions from noncontrolling interest

 

 

 

 

 

 
318

 
318

Repurchases of common units

 

 

 
(24
)
 

 

 

 
(24
)
Other comprehensive income, net of tax

 

 

 

 

 
3

 

 
3

Other, net
(1
)
 

 

 
26

 
(17
)
 
(2
)
 
(4
)
 
2

Net income
30

 
18

 
6

 
289

 
804

 

 
334

 
1,481

Balance, June 30, 2018
$
958

 
$
556

 
$
442

 
$
25,546

 
$
359

 
$
4

 
$
6,171

 
$
34,036


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


ENERGY TRANSFER PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(unaudited)
 
Six Months Ended
June 30,
 
2018
 
2017*
OPERATING ACTIVITIES
 
 
 
Net income
$
1,481

 
$
689

Reconciliation of net income to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
1,191

 
1,117

Deferred income taxes
52

 
121

Non-cash compensation expense
41

 
38

Gain on Sunoco LP common unit repurchase
(172
)
 

Loss on deconsolidation of CDM
86

 

Distributions on unvested awards
(17
)
 
(15
)
Equity in earnings of unconsolidated affiliates
(34
)
 
(12
)
Distributions from unconsolidated affiliates
215

 
197

Other non-cash
(122
)
 
(98
)
Net change in operating assets and liabilities, net of effects of acquisitions and deconsolidations
229

 
(387
)
Net cash provided by operating activities
2,950

 
1,650

INVESTING ACTIVITIES
 
 
 
Cash proceeds from CDM contribution
1,227

 

Cash proceeds from Sunoco LP common unit repurchase
540

 

Cash proceeds from Bakken pipeline transaction

 
2,000

Cash paid for acquisition of PennTex noncontrolling interest

 
(280
)
Cash paid for all other acquisitions
(29
)
 
(261
)
Capital expenditures, excluding allowance for equity funds used during construction
(3,409
)
 
(2,842
)
Contributions in aid of construction costs
60

 
10

Contributions to unconsolidated affiliates
(13
)
 
(225
)
Distributions from unconsolidated affiliates in excess of cumulative earnings
31

 
94

Proceeds from the sale of assets
2

 
25

Other

 
(7
)
Net cash used in investing activities
(1,591
)
 
(1,486
)
FINANCING ACTIVITIES
 
 
 
Proceeds from borrowings
12,476

 
11,466

Repayments of debt
(12,018
)
 
(10,953
)
Cash paid to affiliate notes

 
(255
)
Common units issued for cash
39

 
990

Preferred units issued for cash
436

 

Capital contributions from noncontrolling interest
318

 
456

Distributions to partners
(2,011
)
 
(1,702
)
Distributions to noncontrolling interest
(359
)
 
(186
)
Repurchases of common units
(24
)
 

Redemption of Legacy ETP Preferred Units

 
(53
)
Debt issuance costs
(38
)
 
(20
)
Other
10

 
5

Net cash used in financing activities
(1,171
)
 
(252
)
Increase (decrease) in cash and cash equivalents
188

 
(88
)
Cash and cash equivalents, beginning of period
306

 
360

Cash and cash equivalents, end of period
$
494

 
$
272

* As adjusted. See Note 1.

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


ENERGY TRANSFER PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollar and unit amounts, except per unit data, are in millions)
(unaudited)
1.
ORGANIZATION AND BASIS OF PRESENTATION
Organization
Energy Transfer Partners, L.P. (“ETP”) is a consolidated subsidiary of ETE. In August 2018, ETE and ETP announced that they have entered into a definitive agreement providing for the merger of ETP with a wholly-owned subsidiary of ETE in a unit-for-unit exchange. In connection with the transaction, ETE’s IDRs in ETP will be cancelled. Under the terms of the transaction, ETP unitholders (other than ETE and its subsidiaries) will receive 1.28 common units of ETE for each common unit of ETP they own. The transaction is expected to close in the fourth quarter of 2018, subject to the approval by a majority of the unaffiliated unitholders of ETP and other customary closing conditions.
In April 2017, Energy Transfer Partners, L.P. and Sunoco Logistics completed a merger transaction in which Sunoco Logistics acquired Energy Transfer Partners, L.P. in a unit-for-unit transaction (the “Sunoco Logistics Merger”), with the Energy Transfer Partners, L.P. unitholders receiving  1.5  common units of Sunoco Logistics for each Energy Transfer Partners, L.P. common unit they owned. In connection with the Sunoco Logistics Merger, Sunoco Logistics was renamed Energy Transfer Partners, L.P. and Sunoco Logistics’ general partner was merged with and into ETP GP, with ETP GP surviving as an indirect wholly-owned subsidiary of ETE.
The Sunoco Logistics Merger resulted in Energy Transfer Partners, L.P. being treated as the surviving consolidated entity from an accounting perspective, while Sunoco Logistics (prior to changing its name to “Energy Transfer Partners, L.P.”) was the surviving consolidated entity from a legal and reporting perspective. Therefore, for the pre-merger periods, the consolidated financial statements reflect the consolidated financial statements of the legal acquiree (i.e., the entity that was named “Energy Transfer Partners, L.P.” prior to the merger and name changes).
The consolidated financial statements of the Partnership presented herein include our operating subsidiaries (collectively, the “Operating Companies”), through which our activities are primarily conducted, as follows:
ETC OLP, Regency and PennTex, which are primarily engaged in midstream and intrastate transportation and storage natural gas operations. ETC OLP and Regency own and operate, through their wholly and majority-owned subsidiaries, natural gas gathering systems, intrastate natural gas pipeline systems and gas processing plants and are engaged in the business of purchasing, gathering, transporting, processing, and marketing natural gas and NGLs in the states of Texas, Louisiana, New Mexico, West Virginia, Colorado and Ohio.
Energy Transfer Interstate Holdings, LLC, (“ETIH”) with revenues consisting primarily of fees earned from natural gas transportation services and operational gas sales, which is the parent company of:
Transwestern, engaged in interstate transportation of natural gas. Transwestern’s revenues consist primarily of fees earned from natural gas transportation services and operational gas sales.
ETC Fayetteville Express Pipeline, LLC, which directly owns a 50% interest in FEP, which owns 100% of the Fayetteville Express interstate natural gas pipeline.
ETC Tiger Pipeline, LLC, engaged in interstate transportation of natural gas.
CrossCountry Energy, LLC, which indirectly owns a 50% interest in Citrus, which owns 100% of the FGT interstate natural gas pipeline.
ETC Midcontinent Express Pipeline, L.L.C., which directly owns a 50% interest in MEP.
ET Rover Pipeline, LLC, which ETIH directly owns a 50.1% interest in, which owns a 65% interest in the Rover pipeline.
ETC Compression, LLC, engaged in natural gas compression services and related equipment sales. As discussed further in Note 2 below, in April 2018, we contributed certain assets to USAC.
ETP Holdco, which indirectly owns Panhandle and Sunoco, Inc. Panhandle owns and operates assets in the regulated and unregulated natural gas industry and is primarily engaged in the transportation and storage of natural gas in the United States. Sunoco Inc.’s assets primarily consist of its ownership in Retail Holdings, which owns noncontrolling interests in Sunoco LP and PES. ETP Holdco also holds an equity method investment in ETP through its ownership of ETP Class E, Class G, and Class K units, which investment is eliminated in ETP’s consolidated financial statements.


7


Sunoco Logistics Partners Operations L.P., which owns and operates a logistics business, consisting of a geographically diverse portfolio of complementary pipeline, terminalling, and acquisition and marketing assets, which are used to facilitate the purchase and sale of crude oil, NGLs and refined products.
We currently have the following reportable business segments:
intrastate transportation and storage ;
interstate transportation and storage ;
midstream ;
NGL and refined products transportation and services ;
crude oil transportation and services ; and
all other .
Prior periods have been retrospectively adjusted to reflect the impact of the Sunoco Logistics Merger on our reportable business segments.
Basis of Presentation
The unaudited financial information included in this Form 10-Q has been prepared on the same basis as the audited consolidated financial statements of Energy Transfer Partners, L.P. for the year ended December 31, 2017 , included in the Partnership’s Annual Report on Form 10-K filed with the SEC on February 23, 2018 . In the opinion of the Partnership’s management, such financial information reflects all adjustments necessary for a fair presentation of the financial position and the results of operations for such interim periods in accordance with GAAP. All intercompany items and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been omitted pursuant to the rules and regulations of the SEC.
The historical common units and net income per limited partner unit amounts presented in these consolidated financial statements have been retrospectively adjusted to reflect the 1.5 to one unit-for-unit exchange in connection with the Sunoco Logistics Merger.
For prior periods reported herein, certain transactions related to the business of legacy Sunoco Logistics have been reclassified from cost of products sold to operating expenses; these transactions include sales between operating subsidiaries and their marketing affiliates. These reclassifications had no impact on net income or total equity.
Change in Accounting Policy
Inventory Accounting Change
During the fourth quarter of 2017, the Partnership elected to change its method of inventory costing to weighted-average cost for certain inventory that had previously been accounted for using the last-in, first-out (“LIFO”) method. The inventory impacted by this change included the crude oil, refined products and NGLs associated with the legacy Sunoco Logistics business. Management believes that the weighted-average cost method is preferable to the LIFO method as it more closely aligns the accounting policies across the consolidated entity, given that the legacy ETP inventory has been accounted for using the weighted-average cost method.


8


As a result of this change in accounting policy, the consolidated statement of operations and comprehensive income in prior periods have been retrospectively adjusted, as follows:
 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
 
As Originally Reported
 
Effect of Change
 
As Adjusted
 
As Originally Reported
 
Effect of Change
 
As Adjusted
Cost of products sold (1)
$
4,628

 
$
(4
)
 
$
4,624

 
$
9,707

 
$
(33
)
 
$
9,674

Operating income
732

 
4

 
736

 
1,386

 
33

 
1,419

Income before income tax expense
371

 
4

 
375

 
790

 
33

 
823

Net income
292

 
4

 
296

 
656

 
33

 
689

Net income attributable to partners
199

 
3

 
202

 
523

 
10

 
533

Net loss per common unit – basic
(0.04
)
 

 
(0.04
)
 
(0.04
)
 
0.02

 
(0.02
)
Net loss per common unit – diluted
(0.04
)
 

 
(0.04
)
 
(0.04
)
 
0.02

 
(0.02
)
Comprehensive income
291

 
4

 
295

 
655

 
33

 
688

Comprehensive income attributable to partners
198

 
3

 
201

 
522

 
10

 
532

(1)     As originally reported amounts reflect certain reclassifications made to conform to the current year presentation.
As a result of this change in accounting policy, the consolidated statement of cash flows in prior periods have been retrospectively adjusted, as follows:
 
Six Months Ended June 30, 2017
 
As Originally Reported
 
Effect of Change
 
As Adjusted
Net income
$
656

 
$
33

 
$
689

Inventory valuation adjustments
56

 
(56
)
 

Net change in operating assets and liabilities, net of effects from acquisitions (change in inventories)
(410
)
 
23

 
(387
)
Revenue Recognition Standard
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) , which clarifies the principles for recognizing revenue based on the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Partnership adopted ASU 2014-09 on January 1, 2018.
Upon the adoption of ASU 2014-09, the amount of revenue that the Partnership recognizes on certain contracts has changed, primarily due to decreases in revenue (with offsetting decreases to cost of sales) resulting from recognition of non-cash consideration as revenue when received and as cost of sales when sold to third parties. In addition, income statement reclassifications were required for fuel usage and loss allowances related to multiple segments as well as contracts deemed to be in-substance supply agreements in our midstream segment. In addition to the evaluation performed, we have made appropriate design and implementation updates to our business processes, systems and internal controls to support recognition and disclosure under the new standard.
Utilizing the practical expedients allowed under the modified retrospective adoption method, Accounting Standards Codification (“ASC”) Topic 606 was only applied to existing contracts for which the Partnership has remaining performance obligations as of January 1, 2018, and new contracts entered into after January 1, 2018. ASC Topic 606 was not applied to contracts that were completed prior to January 1, 2018.


9


The Partnership has elected to apply the modified retrospective method to adopt the new standard. For contracts in scope of the new revenue standard as of January 1, 2018, the cumulative effect adjustment to partners’ capital was not material. The comparative information has not been restated under the modified retrospective method and continues to be reported under the accounting standards in effect for those periods.
The adoption of the new revenue standard resulted in reclassifications between revenue, cost of sales and operating expenses. There were no material changes in the timing of recognition of revenue and therefore no material impacts to the balance sheet upon adoption.
The disclosure below shows the impact of adopting the new standard during the period of adoption compared to amounts that would have been reported under the Partnership’s previous revenue recognition policies:
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
As Reported
 
Balances Without Adoption of ASC 606
 
Effect of Change: Higher/(Lower)
 
As Reported
 
Balances Without Adoption of ASC 606
 
Effect of Change: Higher/(Lower)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Natural gas sales
$
1,024

 
$
1,024

 
$

 
$
2,086

 
$
2,086

 
$

NGL sales
2,141

 
2,134

 
7

 
4,171

 
4,153

 
18

Crude sales
4,241

 
4,238

 
3

 
7,495

 
7,488

 
7

Gathering, transportation and other fees
1,464

 
1,611

 
(147
)
 
2,861

 
3,194

 
(333
)
Refined product sales
413

 
413

 

 
852

 
852

 

Other
127

 
127

 

 
225

 
225

 

 
 
 
 
 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold
$
7,140

 
$
7,287

 
$
(147
)
 
$
13,128

 
$
13,461

 
$
(333
)
Operating expenses
627

 
617

 
10

 
1,231

 
1,206

 
25

Additional disclosures related to revenue are included in Note 12 .
Use of Estimates
The unaudited consolidated financial statements have been prepared in conformity with GAAP, which includes the use of estimates and assumptions made by management that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities that exist at the date of the consolidated financial statements. Although these estimates are based on management’s available knowledge of current and expected future events, actual results could be different from those estimates.
Recent Accounting Pronouncements
ASU 2016-02
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which establishes the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. In January 2018, the FASB issued Accounting Standards Update No. 2018-01 (“ASU 2018-01”), which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under Topic 840. The Partnership expects to adopt ASU 2016-02 and elect the practical expedient under ASU 2018-01 in the first quarter of 2019 and is currently evaluating the impact that adopting this new standard will have on the consolidated financial statements and related disclosures.
ASU 2017-12
In August 2017, the FASB issued Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this update improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the amendments in this update make certain targeted improvements to simplify the application of the hedge accounting


10


guidance in current GAAP. This ASU is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Partnership is currently evaluating the impact that adopting this new standard will have on the consolidated financial statements and related disclosures.
ASU 2018-02
In February 2018, the FASB issued Accounting Standards Update No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income , which allows a reclassification from accumulated other comprehensive income to partners’ capital for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The Partnership elected to early adopt this ASU in the first quarter of 2018. The effect of the adoption was not material.
2.
ACQUISITIONS AND OTHER INVESTING TRANSACTIONS
CDM Contribution
On April 2, 2018, ETP contributed to USAC all of the issued and outstanding membership interests of CDM for aggregate consideration of approximately $1.7 billion , consisting of (i) 19,191,351 common units representing limited partner interests in USAC, (ii) 6,397,965 units of a newly authorized and established class of units representing limited partner interests in USAC (“USAC Class B Units”) and (iii)  $1.23 billion in cash, including customary closing adjustments (the “CDM Contribution”). The USAC Class B Units are a new class of partnership interests of USAC that have substantially all of the rights and obligations of a USAC common unit, except the USAC Class B Units will not participate in distributions for the first four quarters following the closing date of April 2, 2018. Each USAC Class B Unit will automatically convert into one USAC common unit on the first business day following the record date attributable to the quarter ending June 30, 2019.
Prior to the CDM Contribution, the CDM entities were indirect wholly-owned subsidiaries of ETP. Beginning April 2018, ETP’s consolidated financial statements reflected an equity method investment in USAC. CDM’s assets and liabilities were not reflected as held for sale, nor were CDM’s results reflected as discontinued operations in these financial statements. At June 30, 2018 , the carrying value of ETP’s investment in USAC was $399 million , which is reflected in the all other segment. ETP recorded a $86 million loss on the deconsolidation of CDM including a $45 million accrual related to the indemnification of USAC related to an ongoing CDM sales and use tax audit.
In connection with the CDM Contribution, ETE acquired (i) all of the outstanding limited liability company interests in USA Compression GP, LLC, the general partner of USAC, and (ii) 12,466,912 USAC common units for cash consideration equal to $250 million .
3.
ADVANCES TO AND INVESTMENTS IN UNCONSOLIDATED AFFILIATES
HPC
ETP previously owned a 49.99% interest in HPC, which owns RIGS.  In April 2018, ETP acquired the remaining 50.01% interest in HPC.  Prior to April 2018, HPC was reflected as an unconsolidated affiliate in ETP’s financial statements; beginning in April 2018, RIGS is reflected as a wholly-owned subsidiary in ETP’s financial statements.
Sunoco LP
In February 2018, after the record date for Sunoco LP’s fourth quarter 2017 cash distributions, Sunoco LP repurchased 17,286,859   Sunoco LP common units owned by ETP for aggregate cash consideration of approximately   $540 million . ETP used the proceeds from the sale of the Sunoco LP common units to repay amounts outstanding under its revolving credit facility.
As of June 30, 2018 , ETP owns 26.2 million Sunoco LP common units representing 31.8% of Sunoco LP’s total outstanding common units. Our investment in Sunoco LP is reflected in the all other segment. As of June 30, 2018 , the carrying value of our investment in Sunoco LP is $535 million .
USAC
As of June 30, 2018 , ETP owns 19.2 million USAC common units and 6.4 million USAC Class B Units, together representing 26.6% of the limited partner interests in USAC. USAC provides compression services to producers, processors, gatherers and transporters of natural gas and crude oil. Our investment in USAC is reflected in the all other segment. As of June 30, 2018 , the carrying value of our investment in USAC is $399 million .


11


4.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash on hand, demand deposits, and investments with original maturities of three months or less. We consider cash equivalents to include short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value.
We place our cash deposits and temporary cash investments with high credit quality financial institutions. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limit.
The net change in operating assets and liabilities (net of effects of acquisitions and deconsolidations) included in cash flows from operating activities is comprised as follows:
 
Six Months Ended
June 30,
 
2018
 
2017*
Accounts receivable
$
236

 
$
88

Accounts receivable from related companies
156

 
(115
)
Inventories
299

 
160

Other current assets
(375
)
 
77

Other non-current assets, net
(3
)
 
(39
)
Accounts payable
(465
)
 
(286
)
Accounts payable to related companies
(99
)
 
131

Accrued and other current liabilities
249

 
(389
)
Other non-current liabilities
(2
)
 
7

Derivative assets and liabilities, net
233

 
(21
)
Net change in operating assets and liabilities, net of effects of acquisitions and deconsolidations
$
229

 
$
(387
)
* As adjusted. See Note 1.
Non-cash investing and financing activities are as follows:

Six Months Ended
June 30,

2018
 
2017
NON-CASH INVESTING ACTIVITIES:
 
 
 
Accrued capital expenditures
$
1,007

 
$
1,363

USAC limited partner interests received in the CDM Contribution (see Note 2)
411

 

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

 
$
988

5.
INVENTORIES
Inventories consisted of the following:
 
June 30, 2018
 
December 31, 2017
Natural gas, NGLs and refined products
$
434

 
$
733

Crude oil
571

 
551

Spare parts and other
251

 
305

Total inventories
$
1,256

 
$
1,589



12


We utilize commodity derivatives to manage price volatility associated with our natural gas inventory. Changes in fair value of designated hedged inventory are recorded in inventory on our consolidated balance sheets and cost of products sold in our consolidated statements of operations.
6.
FAIR VALUE MEASURES
Based on the estimated borrowing rates currently available to us and our subsidiaries for loans with similar terms and average maturities, the aggregate fair value and carrying amount of our consolidated debt obligations as of June 30, 2018 was $33.64 billion and $33.90 billion , respectively. As of December 31, 2017 , the aggregate fair value and carrying amount of our consolidated debt obligations was $34.28 billion and $33.09 billion , respectively. The fair value of our consolidated debt obligations is a Level 2 valuation based on the observable inputs used for similar liabilities.
We have commodity derivatives and interest rate derivatives that are accounted for as assets and liabilities at fair value in our consolidated balance sheets. We determine the fair value of our assets and liabilities subject to fair value measurement by using the highest possible “level” of inputs. Level 1 inputs are observable quotes in an active market for identical assets and liabilities. We consider the valuation of marketable securities and commodity derivatives transacted through a clearing broker with a published price from the appropriate exchange as a Level 1 valuation. Level 2 inputs are inputs observable for similar assets and liabilities. We consider OTC commodity derivatives entered into directly with third parties as a Level 2 valuation since the values of these derivatives are quoted on an exchange for similar transactions. Additionally, we consider our options transacted through our clearing broker as having Level 2 inputs due to the level of activity of these contracts on the exchange in which they trade. We consider the valuation of our interest rate derivatives as Level 2 as the primary input, the LIBOR curve, is based on quotes from an active exchange of Eurodollar futures for the same period as the future interest swap settlements. Level 3 inputs are unobservable. During the six months ended June 30, 2018 , no transfers were made between any levels within the fair value hierarchy.


13


The following tables summarize the gross fair value of our financial assets and liabilities measured and recorded at fair value on a recurring basis as of June 30, 2018 and December 31, 2017 based on inputs used to derive their fair values:
 
 
 
Fair Value Measurements at
June 30, 2018
 
Fair Value Total
 
Level 1
 
Level 2
Assets:
 
 
 
 
 
Commodity derivatives:
 
 
 
 
 
Natural Gas:
 
 
 
 
 
Basis Swaps IFERC/NYMEX
$
22

 
$
22

 
$

Swing Swaps IFERC
1

 

 
1

Fixed Swaps/Futures
11

 
11

 

Forward Physical Contracts
9

 

 
9

Power:
 
 
 
 
 
Forwards
69

 

 
69

Options – Puts
1

 
1

 

NGLs – Forwards/Swaps
300

 
300

 

Total commodity derivatives
413

 
334

 
79

Other non-current assets
21

 
14

 
7

Total assets
$
434

 
$
348

 
$
86

Liabilities:
 
 
 
 
 
Interest rate derivatives
$
(147
)
 
$

 
$
(147
)
Commodity derivatives:
 
 
 
 
 
Natural Gas:
 
 
 
 
 
Basis Swaps IFERC/NYMEX
(70
)
 
(70
)
 

Swing Swaps IFERC
(2
)
 
(1
)
 
(1
)
Fixed Swaps/Futures
(14
)
 
(14
)
 

Forward Physical Contracts
(5
)
 

 
(5
)
Power – Forwards
(57
)
 

 
(57
)
NGLs – Forwards/Swaps
(316
)
 
(316
)
 

Refined Products – Futures
(5
)
 
(5
)
 

Crude – Forwards/Swaps
(307
)
 
(307
)
 

Total commodity derivatives
(776
)
 
(713
)
 
(63
)
Total liabilities
$
(923
)
 
$
(713
)
 
$
(210
)


14


 
 
 
Fair Value Measurements at
December 31, 2017
 
Fair Value Total
 
Level 1
 
Level 2
Assets:
 
 
 
 
 
Commodity derivatives:
 
 
 
 
 
Natural Gas:
 
 
 
 
 
Basis Swaps IFERC/NYMEX
$
11

 
$
11

 
$

Swing Swaps IFERC
13

 

 
13

Fixed Swaps/Futures
70

 
70

 

Forward Physical Swaps
8

 

 
8

Power – Forwards
23

 

 
23

NGLs – Forwards/Swaps
191

 
191

 

Crude:
 
 
 
 
 
Forwards/Swaps
2

 
2

 

Futures
2

 
2

 

Total commodity derivatives
320

 
276

 
44

Other non-current assets
21

 
14

 
7

Total assets
$
341

 
$
290

 
$
51

Liabilities:
 
 
 
 
 
Interest rate derivatives
$
(219
)
 
$

 
$
(219
)
Commodity derivatives:
 
 
 
 
 
Natural Gas:
 
 
 
 
 
Basis Swaps IFERC/NYMEX
(24
)
 
(24
)
 

Swing Swaps IFERC
(15
)
 
(1
)
 
(14
)
Fixed Swaps/Futures
(57
)
 
(57
)
 

Forward Physical Swaps
(2
)
 

 
(2
)
Power – Forwards
(22
)
 

 
(22
)
NGLs – Forwards/Swaps
(186
)
 
(186
)
 

Refined Products – Futures
(25
)
 
(25
)
 

Crude:
 
 
 
 
 
Forwards/Swaps
(6
)
 
(6
)
 

Futures
(1
)
 
(1
)
 

Total commodity derivatives
(338
)
 
(300
)
 
(38
)
Total liabilities
$
(557
)
 
$
(300
)
 
$
(257
)
7.
NET INCOME (LOSS) PER LIMITED PARTNER UNIT
The historical common units and net income per limited partner unit amounts presented in these consolidated financial statements have been retrospectively adjusted to reflect the 1.5 to one unit-for-unit exchange in connection with the Sunoco Logistics Merger.


15


A reconciliation of net income and weighted average units used in computing basic and diluted net income per unit is as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017*
 
2018
 
2017*
Net income
$
602

 
$
296

 
$
1,481

 
$
689

Less: Income attributable to noncontrolling interest
170

 
94

 
334

 
156

Net income, net of noncontrolling interest
432

 
202

 
1,147

 
533

Series A Preferred Unitholders’ interest in net income
15

 

 
30

 

Series B Preferred Unitholders’ interest in net income
9

 

 
18

 

Series C Preferred Unitholders’ interest in net income
6

 

 
6

 

General Partner’s interest in net income
402

 
251

 
804

 
457

Class H Unitholder’s interest in net income

 

 

 
93

Common Unitholders’ interest in net income (loss)

 
(49
)
 
289

 
(17
)
Additional (earnings) distributions allocated to General Partner
(1
)
 
15

 
(3
)
 
12

Distributions on employee unit awards, net of allocation to General Partner
(7
)
 
(6
)
 
(15
)
 
(13
)
Net income (loss) available to Common Unitholders
$
(8
)
 
$
(40
)
 
$
271

 
$
(18
)
Weighted average Common Units – basic
1,165.4

 
1,021.7

 
1,164.6

 
922.5

Basic net income (loss) per Common Unit
$
(0.01
)
 
$
(0.04
)
 
$
0.23

 
$
(0.02
)
 
 
 
 
 
 
 
 
Weighted average Common Units – diluted
1,165.4

 
1,021.7

 
1,169.4

 
922.5

Diluted net income (loss) per Common Unit
$
(0.01
)
 
$
(0.04
)
 
$
0.23

 
$
(0.02
)
* As adjusted. See Note 1.
For certain periods reflected above, distributions paid for the period exceeded net income attributable to partners. Accordingly, the distributions paid to preferred unitholders and the General Partner, including incentive distributions, further exceeded net income, and as a result, a net loss was allocated to the Limited Partners for the period.
8.
DEBT OBLIGATIONS
ETP Senior Notes Offering and Redemption
In June 2018, ETP issued the following senior notes:
$500 million aggregate principal amount of 4.20% senior notes due 2023 ;
$1.00 billion aggregate principal amount of 4.95% senior notes due 2028 ;
$500 million aggregate principal amount of 5.80% senior notes due 2038 ; and
$1.00 billion aggregate principal amount of 6.00% senior notes due 2048.
The senior notes were registered under the Securities Act of 1933 (as amended).  The Partnership may redeem some or all of the senior notes at any time, or from time to time, pursuant to the terms of the indenture and related indenture supplements related to the senior notes. The principal on the senior notes is payable upon maturity and interest is paid semi-annually.
The senior notes rank equally in right of payment with ETP’s existing and future senior debt, and senior in right of payment to any future subordinated debt ETP may incur.  The notes of each series will initially be fully and unconditionally guaranteed by our subsidiary, Sunoco Logistics Partners Operations L.P., on a senior unsecured basis so long as it guarantees any of our other long-term debt. The guarantee for each series of notes ranks equally in right of payment with all of the existing and future senior debt of Sunoco Logistics Partners Operations L.P., including its senior notes.


16


The $2.96 billion net proceeds from the offering were used to repay borrowings outstanding under ETP’s revolving credit facility, for general partnership purposes and to redeem all of the following senior notes:
ETP’s $650 million aggregate principal amount of 2.50% senior notes due June 15, 2018;
Panhandle’s $400 million aggregate principal amount of 7.00% senior notes due June 15, 2018; and
ETP’s $600 million aggregate principal amount of 6.70% senior notes due July 1, 2018.
The aggregate amount paid to redeem these notes was approximately   $1.65 billion .
Credit Facilities and Commercial Paper
ETP Five-Year Credit Facility
ETP’s revolving credit facility (the “ETP Five-Year Credit Facility”) allows for unsecured borrowings up to $4.00 billion and matures in December 2022. The ETP 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 of June 30, 2018 , the ETP Five-Year Credit Facility had $1.23 billion outstanding, all of which was commercial paper. The amount available for future borrowings was $2.61 billion after taking into account letters of credit of $167 million . The weighted average interest rate on the total amount outstanding as of June 30, 2018 was 2.87% .
ETP 364-Day Facility
ETP’s 364-day revolving credit facility (the “ETP 364-Day Facility”) allows for unsecured borrowings up to $1.00 billion and matures on November 30, 2018. As of June 30, 2018 , the ETP 364-Day Facility had no outstanding borrowings.
Bakken Credit Facility
In August 2016, ETP and Phillips 66 completed project-level financing of the Bakken pipeline. The $2.50 billion credit facility matures in August 2019 (the “Bakken Credit Facility”). As of June 30, 2018 , the Bakken Credit Facility had $2.50 billion of outstanding borrowings. The weighted average interest rate on the total amount outstanding as of June 30, 2018 was 3.72% .
Compliance with Our Covenants
We were in compliance with all requirements, tests, limitations, and covenants related to our credit agreements as of June 30, 2018 .
9.
EQUITY
The changes in outstanding common units during the six months ended June 30, 2018 were as follows:
 
 
Number of Units
Number of common units at December 31, 2017
 
1,164.1

Common units issued in connection with the distribution reinvestment plan
 
2.1

Common units issued in connection with certain transactions
 
1.3

Issuance of common units under equity incentive plans
 
0.1

Repurchases of common units in open-market transactions
 
(1.2
)
Number of common units at June 30, 2018
 
1,166.4

Equity Distribution Program
During the six months ended June 30, 2018 , there were no units issued under the Partnership’s equity distribution agreement. As of June 30, 2018 , $752 million of the Partnership’s common units remained available to be issued under the Partnership’s existing $1.00 billion equity distribution agreement.
Distribution Reinvestment Program
During the six months ended June 30, 2018 , distributions of $39 million were reinvested under the Partnership’s distribution reinvestment plan.


17


Preferred Units
ETP issued 950,000 Series A Preferred Units and 550,000 Series B Preferred Units in November 2017.
Series C Preferred Units Issuance
In April 2018, ETP issued 18 million of its 7.375% Series C Preferred Units at a price of   $25  p er unit, resulting in total gross proceeds of $450 million . The proceeds were used to repay amounts outstanding under ETP’s revolving credit facility and for general partnership purposes.
Distributions on the Series C Preferred Units will accrue and be cumulative from and including the date of original issue to, but excluding, May 15, 2023, at a rate of 7.375% per annum of the stated liquidation preference of   $25 . On and after May 15, 2023, distributions on the Series C Preferred Units will accumulate at a percentage of the   $25   liquidation preference equal to an annual floating rate of the three-month LIBOR, determined quarterly, plus a spread of 4.530% per annum. The Series C Preferred Units are redeemable at ETP’s option on or after May 15, 2023 at a redemption price of $25   per Series C Preferred Unit, plus an amount equal to all accumulated and unpaid distributions thereon to, but excluding, the date of redemption.
Series D Preferred Units Issuance
In July 2018, ETP issued 17.8 million of its 7.625% Series D Preferred Units at a price of $25 per unit, resulting in total gross proceeds of $445 million . The proceeds were used to repay amounts outstanding under ETP’s revolving credit facility and for general partnership purposes.
Distributions on the Series D Preferred Units will accrue and be cumulative from and including the date of original issue to, but excluding, August 15, 2023, at a rate of 7.625% per annum of the stated liquidation preference of   $25 . On and after August 15, 2023, distributions on the Series D Preferred Units will accumulate at a percentage of the   $25 liquidation preference equal to an annual floating rate of the three-month LIBOR, determined quarterly, plus a spread of 4.378% per annum. The Series D Preferred Units are redeemable at ETP’s option on or after August 15, 2023 at a redemption price of   $25   per Series D Preferred Unit, plus an amount equal to all accumulated and unpaid distributions thereon to, but excluding, the date of redemption.
Cash Distributions
Under our limited partnership agreement, within 45 days after the end of each quarter, the Partnership distributes all cash on hand at the end of the quarter, less reserves established by the general partner in its discretion. This is defined as “available cash” in the partnership agreement. The general partner has broad discretion to establish cash reserves that it determines are necessary or appropriate to properly conduct the Partnership’s business. The Partnership will make quarterly distributions to the extent there is sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to the general partner.
Distributions on common units declared and/or paid by the Partnership subsequent to December 31, 2017 were as follows:
Quarter Ended
 
Record Date
 
Payment Date
 
Rate
December 31, 2017
 
February 8, 2018
 
February 14, 2018
 
$
0.5650

March 31, 2018
 
May 7, 2018
 
May 15, 2018
 
0.5650

June 30, 2018
 
August 6, 2018
 
August 14, 2018
 
0.5650

ETE agreed to relinquish its right to the following amounts of incentive distributions in future periods:
 
 
Year Ending December 31,
2018 (remainder)
 
$
69

2019
 
128

Each year beyond 2019
 
33



18


Distributions on preferred units declared and/or paid by the Partnership subsequent to December 31, 2017 were as follows:
Period Ended
 
Record Date
 
Payment Date
 
Rate
Series A Preferred Units
 
 
 
 
 
 
December 31, 2017
 
February 1, 2018
 
February 15, 2018
 
$
15.451

June 30, 2018
 
August 1, 2018
 
August 15, 2018
 
31.250

Series B Preferred Units
 
 
 
 
 
 
December 31, 2017
 
February 1, 2018
 
February 15, 2018
 
$
16.378

June 30, 2018
 
August 1, 2018
 
August 15, 2018
 
33.125

Series C Preferred Units
 
 
 
 
 
 
June 30, 2018
 
August 1, 2018
 
August 15, 2018
 
$
0.56337

Accumulated Other Comprehensive Income
The following table presents the components of AOCI, net of tax:
 
June 30, 2018
 
December 31, 2017
Available-for-sale securities (1)
$
4

 
$
8

Foreign currency translation adjustment
(5
)
 
(5
)
Actuarial loss related to pensions and other postretirement benefits
(7
)
 
(5
)
Investments in unconsolidated affiliates, net
12

 
5

Total AOCI, net of tax
$
4

 
$
3

(1)  
Effective January 1, 2018, the Partnership adopted Accounting Standards Update No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities , which resulted in the reclassification of $2 million from accumulated other comprehensive income related to available-for-sale securities to common unitholders.
10.
INCOME TAXES
The Partnership’s effective tax rate differs from the statutory rate primarily due to partnership earnings that are not subject to United States federal and most state income taxes at the partnership level. For the three and six months ended June 30, 2018 , the Partnership’s income tax benefit also reflected $3 million and $70 million , respectively, of deferred benefit adjustments as the result of a state statutory rate reduction.
11.
REGULATORY MATTERS, COMMITMENTS, CONTINGENCIES AND ENVIRONMENTAL LIABILITIES
Guarantee of Sunoco LP Notes
In connection with previous transactions whereby Retail Holdings contributed assets to Sunoco LP, Retail Holdings provided a limited contingent guarantee of collection, but not of payment, to Sunoco LP with respect to certain of Sunoco LP’s senior notes and $2.035 billion aggregate principal for Sunoco LP’s term loan due 2019. In December 2016, Retail Holdings contributed its interests in Sunoco LP, along with the assignment of the guarantee of Sunoco LP’s senior notes, to its subsidiary, ETC M-A Acquisition LLC (“ETC M-A”).
On January 23, 2018, Sunoco LP redeemed the previously guaranteed senior notes, repaid and terminated the term loan and issued the following notes for which ETC M-A has also guaranteed collection with respect to the payment of principal amounts:
$1.00 billion aggregate principal amount of 4.875% senior notes due 2023;
$800 million aggregate principal amount of 5.50% senior notes due 2026; and
$400 million aggregate principal amount of 5.875% senior notes due 2028.
Under the guarantee of collection, ETC M-A would have the obligation to pay the principal of each series of notes once all remedies, including in the context of bankruptcy proceedings, have first been fully exhausted against Sunoco LP with respect to such payment obligation, and holders of the notes are still owed amounts in respect of the principal of such notes. ETC M-A will not otherwise be subject to the covenants of the indenture governing the notes.


19


FERC Audit
In March 2016, the FERC commenced an audit of Trunkline for the period from January 1, 2013 to present to evaluate Trunkline’s compliance with the requirements of its FERC gas tariff, the accounting regulations of the Uniform System of Accounts as prescribed by the FERC, and the FERC’s annual reporting requirements. The audit is ongoing.
Commitments
In the normal course of business, ETP purchases, processes and sells natural gas pursuant to long-term contracts and enters into long-term transportation and storage agreements. Such contracts contain terms that are customary in the industry. ETP believes that the terms of these agreements are commercially reasonable and will not have a material adverse effect on its financial position or results of operations.
Our joint venture agreements require that we fund our proportionate share of capital contributions to our unconsolidated affiliates. Such contributions will depend upon our unconsolidated affiliates’ capital requirements, such as for funding capital projects or repayment of long-term obligations.
We have certain non-cancelable leases for property and equipment, which require fixed monthly rental payments and expire at various dates through 2034 . The table below reflects rental expense under these operating leases included in operating expenses in the accompanying statements of operations, which include contingent rentals, and rental expense recovered through related sublease rental income:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Rental expense
$
22

 
$
19

 
$
39

 
$
39

Litigation and Contingencies
We may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business. Natural gas and crude oil are flammable and combustible. Serious personal injury and significant property damage can arise in connection with their transportation, storage or use. In the ordinary course of business, we are sometimes threatened with or named as a defendant in various lawsuits seeking actual and punitive damages for product liability, personal injury and property damage. We maintain liability insurance with insurers in amounts and with coverage and deductibles management believes are reasonable and prudent, and which are generally accepted in the industry. However, there can be no assurance that the levels of insurance protection currently in effect will continue to be available at reasonable prices or that such levels will remain adequate to protect us from material expenses related to product liability, personal injury or property damage in the future.
Dakota Access Pipeline
On July 25, 2016, the United States Army Corps of Engineers (“USACE”) issued permits to Dakota Access to make two crossings of the Missouri River in North Dakota. The USACE also issued easements to allow the pipeline to cross land owned by the USACE adjacent to the Missouri River. On July 27, 2016, the Standing Rock Sioux Tribe (“SRST”) filed a lawsuit in the United States District Court for the District of Columbia against the USACE and challenged the legality of these permits and claimed violations of the National Historic Preservation Act (“NHPA”). The SRST also sought a preliminary injunction to rescind the USACE permits while the case was pending, which the court denied on September 9, 2016. Dakota Access intervened in the case. The Cheyenne River Sioux Tribe (“CRST”) also intervened. The SRST filed an amended complaint and added claims based on treaties between the Tribes and the United States and statutes governing the use of government property.
In February 2017, in response to a presidential memorandum, the Department of the Army delivered an easement to Dakota Access allowing the pipeline to cross Lake Oahe. The CRST moved for a preliminary injunction and temporary restraining order (“TRO”) to block operation of the pipeline, which was denied, and raised claims based on the religious rights of the Tribe.
The SRST and the CRST amended their complaints to incorporate religious freedom and other claims. In addition, the Oglala and Yankton Sioux tribes (collectively, “Tribes”) have filed related lawsuits to prevent construction of the Dakota Access pipeline project. These lawsuits have been consolidated into the action initiated by the SRST. Several individual members of the Tribes have also intervened in the lawsuit asserting claims that overlap with those brought by the four Tribes.


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On June 14, 2017, the Court ruled on SRST’s and CRST’s motions for partial summary judgment and the USACE’s cross-motions for partial summary judgment. The Court concluded that the USACE had not violated trust duties owed to the Tribes and had generally complied with its obligations under the Clean Water Act, the Rivers and Harbors Act, the Mineral Leasing Act, the National Environmental Policy Act (“NEPA”) and other related statutes; however, the Court remanded to the USACE three discrete issues for further analysis and explanation of its prior determinations under certain of these statutes. On May 3, 2018, the District Court ordered the USACE to file a status report by June 8, 2018 informing the Court when the USACE expects the remand process to be complete. On June 8, 2018, the USACE filed a status report stating that they will conclude the remand process by August 10, 2018. On August 7, 2018, the USACE informed the Court that they will need until August 31, 2018 to finish the remand process. Following the completion of the remand process by the USACE, the Court will make a determination regarding the three discrete issues covered by the remand order.
On December 4, 2017, the Court imposed three conditions on continued operation of the pipeline during the remand process. First, Dakota Access must retain an independent third-party to review its compliance with the conditions and regulations governing its easements and to assess integrity threats to the pipeline. The assessment report was filed with the Court. Second, the Court has directed Dakota Access to continue its work with the Tribes and the USACE to revise and finalize its emergency spill response planning for the section of the pipeline crossing Lake Oahe. Dakota Access filed the revised plan with the Court. And third, the Court has directed Dakota Access to submit bi-monthly reports during the remand period disclosing certain inspection and maintenance information related to the segment of the pipeline running between the valves on either side of the Lake Oahe crossing. The first and second reports were filed with the court on December 29, 2017 and February 28, 2018, respectfully.
In November 2017, the Yankton Sioux Tribe (“YST”), moved for partial summary judgment asserting claims similar to those already litigated and decided by the Court in its June 14, 2017 decision on similar motions by CRST and SRST. YST argues that the USACE and Fish and Wildlife Service violated NEPA, the Mineral Leasing Act, the Rivers and Harbors Act, and YST’s treaty and trust rights when the government granted the permits and easements necessary for the pipeline.
On March 19, 2018, the District Court denied YST’s motion for partial summary judgment and instead granted judgment in favor of Dakota Access pipeline and the USACE on the claims raised in YST’s motion. The Court concluded that YST’s NHPA claims are moot because construction of the pipeline is complete and that the government’s review process did not violate NEPA or the various treaties cited by the YST.
On February 8, 2018, the Court docketed a motion by CRST to “compel meaningful consultation on remand.” SRST then made a similar motion for “clarification re remand process and remand conditions.” The motions seek an order from the Court directing the USACE as to how it should conduct its additional review on remand. Dakota Access pipeline and the USACE opposed both motions. On April 16, 2018, the Court denied both motions.
While ETP believes that the pending lawsuits are unlikely to halt or suspend operation of the pipeline, we cannot assure this outcome. ETP cannot determine when or how these lawsuits will be resolved or the impact they may have on the Dakota Access project.
Mont Belvieu Incident
On June 26, 2016, a hydrocarbon storage well located on another operator’s facility adjacent to Lone Star NGL Mont Belvieu’s (“Lone Star”) facilities in Mont Belvieu, Texas experienced an over-pressurization resulting in a subsurface release. The subsurface release caused a fire at Lone Star’s South Terminal and damage to Lone Star’s storage well operations at its South and North Terminals. Normal operations have resumed at the facilities with the exception of one of Lone Star’s storage wells. Lone Star is still quantifying the extent of its incurred and ongoing damages and has or will be seeking reimbursement for these losses.
MTBE Litigation
Sunoco, Inc. and/or Sunoco, Inc. (R&M) (now known as Sunoco (R&M), LLC) are defendants in lawsuits alleging MTBE contamination of groundwater. The plaintiffs, state-level governmental entities, assert product liability, nuisance, trespass, negligence, violation of environmental laws, and/or deceptive business practices claims. The plaintiffs seek to recover compensatory damages, and in some cases also seek natural resource damages, injunctive relief, punitive damages, and attorneys’ fees.
As of June 30, 2018, Sunoco, Inc. is a defendant in six cases, including one case each initiated by the States of Maryland, Vermont and Rhode Island, one by the Commonwealth of Pennsylvania and two by the Commonwealth of Puerto Rico. The more recent Puerto Rico action is a companion case alleging damages for additional sites beyond those at issue in the initial


21


Puerto Rico action. The actions brought by the State of Maryland and Commonwealth of Pennsylvania have also named as defendants Energy Transfer Partners, L.P., ETP Holdco Corporation, and Sunoco Partners Marketing & Terminals, L.P.
Sunoco, Inc. and Sunoco, Inc. (R&M) have reached a settlement with the State of New Jersey. The Court approved the Judicial Consent Order on December 5, 2017. On April 5, 2018, the Court entered an Order dismissing the matter with prejudice.
It is reasonably possible that a loss may be realized in the remaining cases; however, we are unable to estimate the possible loss or range of loss in excess of amounts accrued. An adverse determination with respect to one or more of the MTBE cases could have a significant impact on results of operations during the period in which any such adverse determination occurs, but such an adverse determination likely would not have a material adverse effect on the Partnership’s consolidated financial position.
Regency Merger Litigation
Purported Regency unitholders filed lawsuits in state and federal courts in Dallas and Delaware asserting claims relating to the Regency-ETP merger (the “Regency Merger”). All but one Regency Merger-related lawsuits have been dismissed. On June 10, 2015, Adrian Dieckman (“Dieckman”), a purported Regency unitholder, filed a class action complaint in the Court of Chancery of the State of Delaware (the “Regency Merger Litigation”), on behalf of Regency’s common unitholders against Regency GP, LP; Regency GP LLC; ETE, ETP, ETP GP, and the members of Regency’s board of directors (“Defendants”).
The Regency Merger Litigation alleges that the Regency Merger breached the Regency partnership agreement because Regency’s conflicts committee was not properly formed, and the Regency Merger was not approved in good faith. On March 29, 2016, the Delaware Court of Chancery granted Defendants’ motion to dismiss the lawsuit in its entirety. Dieckman appealed. On January 20, 2017, the Delaware Supreme Court reversed the judgment of the Court of Chancery. On May 5, 2017, Plaintiff filed an Amended Verified Class Action Complaint. Defendants then filed Motions to Dismiss the Amended Complaint and a Motion to Stay Discovery on May 19, 2017. On February 20, 2018, the Court of Chancery issued an Order granting in part and denying in part the motions to dismiss, dismissing the claims against all defendants other than Regency GP, LP and Regency GP LLC (the “Regency Defendants”). On March 6, 2018, the Regency Defendants filed their Answer to Plaintiff’s Verified Amended Class Action Complaint. Trial is currently set for September 23-27, 2019.
The Regency Defendants cannot predict the outcome of the Regency Merger Litigation or any lawsuits that might be filed subsequent to the date of this filing; nor can the Regency Defendants predict the amount of time and expense that will be required to resolve the Regency Merger Litigation. The Regency Defendants believe the Regency Merger Litigation is without merit and intend to vigorously defend against it and any others that may be filed in connection with the Regency Merger.
Enterprise Products Partners, L.P. and Enterprise Products Operating LLC Litigation
On January 27, 2014, a trial commenced between ETP against Enterprise Products Partners, L.P. and Enterprise Products Operating LLC (collectively, “Enterprise”) and Enbridge (US) Inc.  Trial resulted in a verdict in favor of ETP against Enterprise that consisted of $319 million in compensatory damages and $595 million in disgorgement to ETP.  The jury also found that ETP owed Enterprise $1 million under a reimbursement agreement.  On July 29, 2014, the trial court entered a final judgment in favor of ETP and awarded ETP $536 million , consisting of compensatory damages, disgorgement, and pre-judgment interest.  The trial court also ordered that ETP shall be entitled to recover post-judgment interest and costs of court and that Enterprise is not entitled to any net recovery on its counterclaims.  Enterprise filed a notice of appeal with the Court of Appeals. On July 18, 2017, the Court of Appeals issued its opinion and reversed the trial court’s judgment. ETP’s motion for rehearing to the Court of Appeals was denied. On June 8, 2018, the Texas Supreme Court ordered briefing on the merits. ETP’s petition for review remains under consideration by the Texas Supreme Court.
Bayou Bridge
On January 11, 2018, environmental groups and a trade association filed suit against the USACE in the United States District Court for the Middle District of Louisiana. Plaintiffs allege that the USACE’s issuance of permits authorizing the construction of the Bayou Bridge Pipeline through the Atchafalaya Basin (“Basin”) violated the National Environmental Policy Act, the Clean Water Act, and the Rivers and Harbors Act. They asked the district court to vacate these permits and to enjoin construction of the project through the Basin until the USACE corrects alleged deficiencies in its decision-making process. ETP, through its subsidiary Bayou Bridge Pipeline, LLC (“Bayou Bridge”), intervened on January 26, 2018. On March 27, 2018, Bayou Bridge filed an answer to the complaint.
On January 29, 2018, Plaintiffs filed motions for a preliminary injunction and TRO. United States District Court Judge Shelly Dick denied the TRO on January 30, 2018, but subsequently granted the preliminary injunction on February 23, 2018. On February 26, 2018, Bayou Bridge filed a notice of appeal and a motion to stay the February 23, 2018 preliminary injunction


22


order. On February 27, 2018, Judge Dick issued an opinion that clarified her February 23, 2018 preliminary injunction order and denied Bayou Bridge’s February 26, 2018 motion to stay as moot. On March 1, 2018, Bayou Bridge filed a new notice of appeal and motion to stay the February 27, 2018 preliminary injunction order in the district court. On March 5, 2018, the district court denied the March 1, 2018 motion to stay the February 27, 2018 order.
On March 2, 2018, Bayou Bridge filed a motion to stay the preliminary injunction in the Fifth Circuit. On March 15, 2018, the Fifth Circuit granted a stay of injunction pending appeal and found that Bayou Bridge “is likely to succeed on the merits of its claim that the district court abused its discretion in granting a preliminary injunction.” Oral arguments were heard on the merits of the appeal, that is, whether the district court erred in granting the preliminary injunction in the Fifth Circuit on April 30, 2018. The district court has stayed the merits case pending decision of the Fifth Circuit. On May 10, 2018, the District Court stayed the litigation pending a decision from the Fifth Circuit. On July 6, 2018, the Fifth Circuit vacated the Preliminary Injunction and remanded the case back to the District Court. Construction is ongoing.
Rover
On November 3, 2017, the State of Ohio and the Ohio Environmental Protection Agency (“Ohio EPA”) filed suit against Rover and Pretec Directional Drilling, LLC (“Pretec”) seeking to recover approximately $2.6 million in civil penalties allegedly owed and certain injunctive relief related to permit compliance. Laney Directional Drilling Co., Atlas Trenchless, LLC, Mears Group, Inc., D&G Directional Drilling, Inc. d/b/a D&G Directional Drilling, LLC, and B&T Directional Drilling, Inc. (collectively, with Rover and Pretec, “Defendants”) were added as defendants on April 17, and July 18, 2018.
Ohio EPA alleges that the Defendants illegally discharged millions of gallons of drilling fluids into Ohio’s waters that caused pollution and degraded water quality, and that the Defendants harmed pristine wetlands in Stark County. Ohio EPA further alleges that the Defendants caused the degradation of Ohio’s waters by discharging pollution in the form of sediment-laden storm water into Ohio’s waters and that Rover violated its hydrostatic permits by discharging effluent with greater levels of pollutants than those permits allowed and by not properly sampling or monitoring effluent for required parameters or reporting those alleged violations. Defendants’ motions to dismiss are due on or before September 10, 2018.
In January 2018, Ohio EPA sent a letter to the FERC to express concern regarding drilling fluids lost down a hole during horizontal directional drilling (“HDD”) operations as part of the Rover Pipeline construction. Rover sent a January 24 response to the FERC and stated, among other things, that as Ohio EPA conceded, Rover was conducting its drilling operations in accordance with specified procedures that had been approved by the FERC and reviewed by the Ohio EPA. In addition, although the HDD operations were crossing the same resource as that which led to an inadvertent release of drilling fluids in April 2017, the drill in 2018 had been redesigned since the original crossing. Ohio EPA expressed concern that the drilling fluids could deprive organisms in the wetland of oxygen. Rover, however, has now fully remediated the site, a fact with which Ohio EPA concurs.
Other Litigation and Contingencies
We or our subsidiaries are a party to various legal proceedings and/or regulatory proceedings incidental to our businesses. For each of these matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies, the likelihood of an unfavorable outcome and the availability of insurance coverage. If we determine that an unfavorable outcome of a particular matter is probable and can be estimated, we accrue the contingent obligation, as well as any expected insurance recoverable amounts related to the contingency. As of June 30, 2018 and December 31, 2017 , accruals of approximately $52 million and $53 million , respectively, were reflected on our consolidated balance sheets related to these contingent obligations. As new information becomes available, our estimates may change. The impact of these changes may have a significant effect on our results of operations in a single period.
The outcome of these matters cannot be predicted with certainty and there can be no assurance that the outcome of a particular matter will not result in the payment of amounts that have not been accrued for the matter. Furthermore, we may revise accrual amounts prior to resolution of a particular contingency based on changes in facts and circumstances or changes in the expected outcome. Currently, we are not able to estimate possible losses or a range of possible losses in excess of amounts accrued.
On April 25, 2018, and as amended on April 30, 2018, State Senator Andrew Dinniman filed a Formal Complaint and Petition for Interim Emergency Relief (“Complaint”) against Sunoco Pipeline L.P. (“SPLP”) before the Pennsylvania Public Utility Commission (“PUC”). Specifically, the Complaint alleges that (i) the services and facilities provided by the Mariner East Pipeline (“ME1,” “ME2” or “ME2x”) in West Whiteland Township (“the Township”) are unreasonable, unsafe, inadequate, and insufficient for, among other reasons, selecting an improper and unsafe route through densely populated portions of the Township with homes, schools, and infrastructure and causing inadvertent returns and sinkholes during construction because of unstable geology in the Township; (ii) SPLP failed to warn the public of the dangers of the pipeline; (iii) the construction of ME2 and ME2x increases the risk of damage to the existing co-located ME1 pipeline; and (iv) ME1, ME2 and ME2x are


23


not public utility facilities. Based on these allegations, Senator Dinniman’s Complaint seeks emergency relief by way of an order (i) prohibiting construction of ME2 and ME2x in West Whiteland Township; (ii) prohibiting operation of ME1; (iii) in the alternative to (i) and (ii) prohibiting the construction of ME2 and ME2x and the operation of ME1 until SPLP fully assesses and the PUC approves the condition, adequacy, efficiency, safety, and reasonableness of those pipelines and the geology in which they sit; (iv) requiring SPLP to release to the public its written integrity management plan and risk analysis for these pipelines; and (v) finding that these pipelines are not public utility facilities. In short, the relief, if granted, would continue the suspension of operation of ME1 and suspend further construction of ME2 and ME2x in West Whiteland Township.
Following a hearing on May 7 and 10, 2018, Administrative Law Judge Elizabeth H. Barnes (“ALJ”) issued an Order on May 24, 2018 that granted Senator Dinniman’s petition for interim emergency relief and required SPLP to shut down ME1, to discontinue construction of ME2 and ME2x within the Township, and required SPLP to provide various types of information and perform various geotechnical and geophysical studies within the Township. The ALJ’s Order was immediately effective, and SPLP complied by shutting down service on ME1 and discontinuing all construction in the Township on ME2 and ME2x. The ALJ’s Order was automatically certified as a material question to the PUC, which issued an Opinion and Order on June 15, 2018 (following a public meeting on June 14, 2018) that reversed in part and affirmed in part the ALJ’s Order. PUC’s Opinion and Order permitted SPLP to resume service on ME1, but continued the shutdown of construction on ME2 and ME2x pending the submission of the following three types of information to PUC: (i) inspection and testing protocols; (ii) comprehensive emergency response plan; and (iii) safety training curriculum for employees and contractors. SPLP submitted the required information on June 22, 2018. On July 2, 2018, Senator Dinniman and intervenors responded to the submission. SPLP is also required to provide an affidavit that the Pennsylvania Department of Environmental Protection (“DEP”) has issued appropriate approvals for construction of ME2 and ME2x in the Township before recommencing construction of ME2 and ME2x locations within the Township. SPLP submitted all necessary affidavits. On August 2, 2018 the PUC entered an Order lifting the stay of construction on ME2 and ME2x in West Whiteland Township with respect to all areas within the Township where the necessary environmental permits had been issued. Also on August 2, 2018, the PUC ratified its prior action by notational voting of certifying for interlocutory appeal to the Pennsylvania Commonwealth Court the legal issue of whether Senator Dinniman has standing to pursue the action.
Service on ME1 was resumed in accordance with PUC’s Opinion and Order. Senator Dinniman’s Complaint will proceed forward under a schedule to be determined by the ALJ. A prehearing conference with the ALJ is scheduled for August 28, 2018.
On July 25, 2017, the Pennsylvania Environmental Hearing Board (“EHB”) issued an order to SPLP to cease HDD activities in Pennsylvania related to the Mariner East 2 project.  On August 1, 2017 the EHB lifted the order as to two drill locations.  On August 3, 2017, the EHB lifted the order as to 14 additional locations.  The EHB issued the order in response to a complaint filed by environmental groups against SPLP and the Pennsylvania Department of Environmental Protection (“PADEP”).  The EHB Judge encouraged the parties to pursue a settlement with respect to the remaining HDD locations and facilitated a settlement meeting.  On August 7, 2017 a final settlement was reached.  A stipulated order has been submitted to the EHB Judge with respect to the settlement.  The settlement agreement requires that SPLP reevaluate the design parameters of approximately 26 drills on the Mariner East 2 project and approximately 43 drills on the Mariner East 2X project.  The settlement agreement also provides a defined framework for approval by PADEP for these drills to proceed after reevaluation.  Additionally, the settlement agreement requires modifications to several of the HDD plans that are part of the PADEP permits.  Those modifications have been completed and agreed to by the parties and the reevaluation of the drills has been initiated by the company. On July 31, 2018 the underlying permit appeals in which the above settlements occurred were withdrawn in a settlement between the appellants and PADEP. That settlement did not involve SPLP.
In addition, on June 27, 2017 and July 25, 2017, the PADEP entered into a Consent Order and Agreement with SPLP regarding inadvertent returns of drilling fluids at three HDD locations in Pennsylvania related to the Mariner East 2 project.  Those agreements require SPLP to cease HDD activities at those three locations until PADEP reauthorizes such activities and to submit a corrective action plan for agency review and approval.  SPLP has fulfilled the requirements of those agreements and has been authorized by PADEP to resume drilling the locations.
No amounts have been recorded in our June 30, 2018 or December 31, 2017 consolidated balance sheets for contingencies and current litigation, other than amounts disclosed herein.
Environmental Matters
Our operations are subject to extensive federal, tribal, state and local environmental and safety laws and regulations that require expenditures to ensure compliance, including related to air emissions and wastewater discharges, at operating facilities and for remediation at current and former facilities as well as waste disposal sites. Historically, our environmental compliance costs have not had a material adverse effect on our results of operations but there can be no assurance that such costs will not


24


be material in the future or that such future compliance with existing, amended or new legal requirements will not have a material adverse effect on our business and operating results. Costs of planning, designing, constructing and operating pipelines, plants and other facilities must incorporate compliance with environmental laws and regulations and safety standards. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of investigatory, remedial and corrective action obligations, the issuance of injunctions in affected areas and the filing of federally authorized citizen suits. Contingent losses related to all significant known environmental matters have been accrued and/or separately disclosed. However, we may revise accrual amounts prior to resolution of a particular contingency based on changes in facts and circumstances or changes in the expected outcome.
Environmental exposures and liabilities are difficult to assess and estimate due to unknown factors such as the magnitude of possible contamination, the timing and extent of remediation, the determination of our liability in proportion to other parties, improvements in cleanup technologies and the extent to which environmental laws and regulations may change in the future. Although environmental costs may have a significant impact on the results of operations for any single period, we believe that such costs will not have a material adverse effect on our financial position.
Based on information available at this time and reviews undertaken to identify potential exposure, we believe the amount reserved for environmental matters is adequate to cover the potential exposure for cleanup costs.
In February 2017, we received letters from the DOJ and Louisiana Department of Environmental Quality notifying SPLP and Mid-Valley Pipeline Company (“Mid-Valley”) that enforcement actions were being pursued for three crude oil releases: (a) an estimated 550 barrels released from the Colmesneil-to-Chester pipeline in Tyler County, Texas (“Colmesneil”) operated and owned by SPLP in February 2013; (b) an estimated 4,509 barrels released from the Longview-to-Mayersville pipeline in Caddo Parish, Louisiana (a/k/a Milepost 51.5) operated by SPLP and owned by Mid-Valley in October 2014; and (c) an estimated 40 barrels released from the Wakita 4-inch gathering line in Oklahoma operated and owned by SPLP in January 2015. In May 2017, we presented to the DOJ, EPA and Louisiana Department of Environmental Quality a summary of the emergency response and remedial efforts taken by SPLP after the releases occurred as well as operational changes instituted by SPLP to reduce the likelihood of future releases. In July 2017, we had a follow-up meeting with the DOJ, EPA and Louisiana Department of Environmental Quality during which the agencies presented their initial demand for civil penalties and injunctive relief. Since then, the parties have reached an agreement in principal to resolve all penalties. We are currently working on a counteroffer to the Louisiana Department of Environmental Quality, and we are involved in settlement discussion with the agencies.
On January 3, 2018, PADEP issued an Administrative Order to SPLP directing that work on the Mariner East 2 and 2X pipelines be stopped.  The Administrative Order detailed alleged violations of the permits issued by PADEP in February 2017, during the construction of the project.  SPLP began working with PADEP representatives immediately after the Administrative Order was issued to resolve the compliance issues.  Those compliance issues could not be fully resolved by the deadline to appeal the Administrative Order, so SPLP took an appeal of the Administrative Order to the Pennsylvania Environmental Hearing Board on February 2, 2018.  On February 8, 2018, SPLP entered into a Consent Order and Agreement with PADEP that (i) withdraws the Administrative Order; (ii) establishes requirements for compliance with permits on a going forward basis; (iii) resolves the non-compliance alleged in the Administrative Order; and (iv) conditions restart of work on an agreement by SPLP to pay a $12.6 million civil penalty to the Commonwealth of Pennsylvania.  In the Consent Order and agreement, SPLP admits to the factual allegations, but does not admit to the conclusions of law that were made by PADEP.  PADEP also found in the Consent Order and Agreement that SPLP had adequately addressed the issues raised in the Administrative Order and demonstrated an ability to comply with the permits. SPLP concurrently filed a request to the Pennsylvania Environmental Hearing Board to discontinue the appeal of the Administrative Order.  That request was granted on February 8, 2018.
Environmental Remediation
Our subsidiaries are responsible for environmental remediation at certain sites, including the following:
certain of our interstate pipelines conduct soil and groundwater remediation related to contamination from past uses of polychlorinated biphenyls (“PCBs”). PCB assessments are ongoing and, in some cases, our subsidiaries could potentially be held responsible for contamination caused by other parties.
certain gathering and processing systems are responsible for soil and groundwater remediation related to releases of hydrocarbons.
legacy sites related to Sunoco, Inc. that are subject to environmental assessments, including formerly owned terminals and other logistics assets, retail sites that Sunoco, Inc. no longer operates, closed and/or sold refineries and other formerly owned sites.


25


Sunoco, Inc. is potentially subject to joint and several liability for the costs of remediation at sites at which it has been identified as a potentially responsible party (“PRP”). As of June 30, 2018 , Sunoco, Inc. had been named as a PRP at approximately 41 identified or potentially identifiable “Superfund” sites under federal and/or comparable state law. Sunoco, Inc. is usually one of a number of companies identified as a PRP at a site. Sunoco, Inc. has reviewed the nature and extent of its involvement at each site and other relevant circumstances and, based upon Sunoco, Inc.’s purported nexus to the sites, believes that its potential liability associated with such sites will not be significant.
To the extent estimable, expected remediation costs are included in the amounts recorded for environmental matters in our consolidated balance sheets. In some circumstances, future costs cannot be reasonably estimated because remediation activities are undertaken as claims are made by customers and former customers. To the extent that an environmental remediation obligation is recorded by a subsidiary that applies regulatory accounting policies, amounts that are expected to be recoverable through tariffs or rates are recorded as regulatory assets on our consolidated balance sheets.
The table below reflects the amounts of accrued liabilities recorded in our consolidated balance sheets related to environmental matters that are considered to be probable and reasonably estimable. Currently, we are not able to estimate possible losses or a range of possible losses in excess of amounts accrued. Except for matters discussed above, we do not have any material environmental matters assessed as reasonably possible that would require disclosure in our consolidated financial statements.
 
June 30, 2018
 
December 31, 2017
Current
$
42

 
$
36

Non-current
276

 
314

Total environmental liabilities
$
318

 
$
350

In 2013, we established a wholly-owned captive insurance company to bear certain risks associated with environmental obligations related to certain sites that are no longer operating. The premiums paid to the captive insurance company include estimates for environmental claims that have been incurred but not reported, based on an actuarially determined fully developed claims expense estimate. In such cases, we accrue losses attributable to unasserted claims based on the discounted estimates that are used to develop the premiums paid to the captive insurance company.
During the three months ended June 30, 2018 and 2017 , the Partnership recorded $6 million and $7 million , respectively, of expenditures related to environmental cleanup programs. During the six months ended June 30, 2018 and 2017 , the Partnership recorded $11 million and $13 million , respectively, of expenditures related to environmental programs.
On December 2, 2010, Sunoco, Inc. entered an Asset Sale and Purchase Agreement to sell the Toledo Refinery to Toledo Refining Company LLC (“TRC”) wherein Sunoco, Inc. retained certain liabilities associated with the pre-closing time period. On January 2, 2013, EPA issued a Finding of Violation (“FOV”) to TRC and, on September 30, 2013, EPA issued a Notice of Violation (“NOV”)/ FOV to TRC alleging Clean Air Act violations. To date, EPA has not issued an FOV or NOV/FOV to Sunoco, Inc. directly but some of EPA’s claims relate to the time period that Sunoco, Inc. operated the refinery. Specifically, EPA has claimed that the refinery flares were not operated in a manner consistent with good air pollution control practice for minimizing emissions and/or in conformance with their design, and that Sunoco, Inc. submitted semi-annual compliance reports in 2010 and 2011 to the EPA that failed to include all of the information required by the regulations. EPA has proposed penalties in excess of $200,000 to resolve the allegations and discussions continue between the parties. The timing or outcome of this matter cannot be reasonably determined at this time, however, we do not expect there to be a material impact to our results of operations, cash flows or financial position.
Our pipeline operations are subject to regulation by the United States Department of Transportation under the PHMSA, pursuant to which the PHMSA has established requirements relating to the design, installation, testing, construction, operation, replacement and management of pipeline facilities. Moreover, the PHMSA, through the Office of Pipeline Safety, has promulgated a rule requiring pipeline operators to develop integrity management programs to comprehensively evaluate their pipelines, and take measures to protect pipeline segments located in what the rule refers to as “high consequence areas.” Activities under these integrity management programs involve the performance of internal pipeline inspections, pressure testing or other effective means to assess the integrity of these regulated pipeline segments, and the regulations require prompt action to address integrity issues raised by the assessment and analysis. Integrity testing and assessment of all of these assets will continue, and the potential exists that results of such testing and assessment could cause us to incur future capital and operating expenditures for repairs or upgrades deemed necessary to ensure the continued safe and reliable operation of our pipelines; however, no estimate can be made at this time of the likely range of such expenditures.


26


Our operations are also subject to the requirements of OSHA, and comparable state laws that regulate the protection of the health and safety of employees. In addition, the Occupational Health and Safety Administration’s hazardous communication standard requires that information be maintained about hazardous materials used or produced in our operations and that this information be provided to employees, state and local government authorities and citizens. We believe that our past costs for OSHA required activities, including general industry standards, record keeping requirements, and monitoring of occupational exposure to regulated substances have not had a material adverse effect on our results of operations but there is no assurance that such costs will not be material in the future.
12.
REVENUE
The following disclosures discuss the Partnership’s revised revenue recognition policies upon the adoption of ASU 2014-09 on January 1, 2018, as discussed in Note 1 . These policies were applied to the current period only, and the amounts reflected in the Partnership’s consolidated financial statements for the three and six months ended June 30, 2017 were recorded under the Partnership’s previous accounting policies.
Disaggregation of revenue
The Partnership’s consolidated financial statements reflect the following six reportable segments, which also represent the level at which the Partnership aggregates revenue for disclosure purposes:
intrastate transportation and storage ;
interstate transportation and storage ;
midstream ;
NGL and refined products transportation and services ;
crude oil transportation and services ; and
all other .
Note 15 depicts the disaggregation of revenue by segment, with revenue amounts reflected in accordance with ASC Topic 606 for 2018 and ASC Topic 605 for 2017 .
Intrastate transportation and storage revenue
Our intrastate transportation and storage segment’s revenues are determined primarily by the volume of capacity our customers reserve as well as the actual volume of natural gas that flows through the transportation pipelines or that is injected or withdrawn into or out of our storage facilities. Firm transportation and storage contracts require customers to pay certain minimum fixed fees regardless of the volume of commodity they transport or store. These contracts typically include a variable incremental charge based on the actual volume of transportation commodity throughput or stored commodity injected/withdrawn. Under interruptible transportation and storage contracts, customers are not required to pay any fixed minimum amounts, but are instead billed based on actual volume of commodity they transport across our pipelines or inject/withdraw into or out of our storage facilities. Payment for services under these contracts are typically due the month after the services have been performed.
The performance obligation with respect to firm contracts is a promise to provide a single type of service (transportation or storage) daily over the life of the contract, which is fundamentally a “stand-ready” service. While there can be multiple activities required to be performed, these activities are not separable because such activities in combination are required to successfully transfer the overall service for which the customer has contracted. The fixed consideration of the transaction price is allocated ratably over the life of the contract and revenue for the fixed consideration is recognized over time, because the customer simultaneously receives and consumes the benefit of this “stand-ready” service. Incremental fees associated with actual volume for each respective period are recognized as revenue in the period the incremental volume of service is performed.
The performance obligation with respect to interruptible contracts is also a promise to provide a single type of service, but such promise is made on a case-by-case basis at the time the customer requests the service and we accept the customer’s request. Revenue is recognized for interruptible contracts at the time the services are performed.
Interstate transportation and storage revenue
Our interstate transportation and storage segment’s revenues 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 pipelines or that is injected into or withdrawn out of our storage facilities. Our interstate transportation and storage segment’s contracts can be firm or interruptible.


27


Firm transportation and storage contracts require customers to pay certain minimum fixed fees regardless of the volume of commodity transported or stored. In exchange for such fees, we must stand ready to perform a contractually agreed-upon minimum volume of services whenever the customer requests such services. These contracts typically include a variable incremental charge based on the actual volume of transportation commodity throughput or stored commodity injected or withdrawn. Under interruptible transportation and storage contracts, customers are not required to pay any fixed minimum amounts, but are instead billed based on actual volume of commodity they transport across our pipelines or inject into or withdraw out of our storage facilities. Consequently, we are not required to stand ready to provide any contractually agreed-upon volume of service, but instead provides the services based on existing capacity at the time the customer requests the services. Payment for services under these contracts are typically due the month after the services have been performed.
The performance obligation with respect to firm contracts is a promise to provide a single type of service (transportation or storage) daily over the life of the contract, which is fundamentally a “stand-ready” service. While there can be multiple activities required to be performed, these activities are not separable because such activities in combination are required to successfully transfer the overall service for which the customer has contracted. The fixed consideration of the transaction price is allocated ratably over the life of the contract and revenue for the fixed consideration is recognized over time, because the customer simultaneously receives and consumes the benefit of this “stand-ready” service. Incremental fees associated with actual volume for each respective period are recognized as revenue in the period the incremental volume of service is performed.
The performance obligation with respect to interruptible contracts is also a promise to provide a single type of services, but such promise is made on a case-by-case basis at the time the customer requests the service and we accept the customer’s request. Revenue is recognized for interruptible contracts at the time the services are performed.
Midstream revenue
Our midstream segment’s revenues are derived primarily from margins we earn for natural gas volumes that are gathered, processed, and/or transported for our customers. The various types of revenue contracts our midstream segment enters into include:
Fixed fee gathering and processing: Contracts under which we provide gathering and processing services in exchange for a fixed cash fee per unit of volume. Revenue for cash fees is recognized when the service is performed.
Keepwhole: Contracts under which we gather raw natural gas from a third party producer, process the gas to convert it to pipeline quality natural gas, and redeliver to the producer a thermal-equivalent volume of pipeline quality natural gas. In exchange for these services, we retain the NGLs extracted from the raw natural gas received from the producer as well as cash fees paid by the producer. The value of NGLs retained as well as cash fees is recognized as revenue when the services are performed.
Percent of Proceeds (“POP”): Contracts under which we provide gathering and processing services in exchange for a specified percentage of the producer’s commodity (“POP percentage”) and also in some cases additional cash fees. The two types of POP revenue contracts are described below:
In-Kind POP: We retain our POP percentage (non-cash consideration) and also any additional cash fees in exchange for providing the services. We recognize revenue for the non-cash consideration and cash fees at the time the services are performed.
Mixed POP: We purchase NGLs from the producer and retain a portion of the residue gas as non-cash consideration for services provided. We may also receive cash fees for such services. Under Topic 606, these agreements were determined to be hybrid agreements which were partially supply agreements (for the NGLs we purchased) and customer agreements (for the services provided related to the product that was returned to the customer). Given that these are hybrid agreements, we split the cash and non-cash consideration between revenue and a reduction of costs based on the value of the service provided vs. the value of the supply received.
Payment for services under these contracts are typically due the month after the services have been performed.
The performance obligations with respect to our midstream segment’s contracts are to provide gathering, transportation and processing services, each of which would be completed on or about the same time, and each of which would be recognized on the same line item on the income statement, therefore identification of separate performance obligations would not impact the timing or geography of revenue recognition.
Certain contracts of our midstream segment include throughput commitments under which customers commit to purchasing a certain minimum volume of service over a specified time period. If such volume of service is not purchased by the customer,


28


deficiency fees are billed to the customer. In some cases, the customer is allowed to apply any deficiency fees paid to future purchases of services. In such cases, we defer revenue recognition until the customer uses the deficiency fees for services provided or becomes unable to use the fees as payment for future services due to expiration of the contractual period the fees can be applied or physical inability of the customer to utilize the fees due to capacity constraints.
NGL and refined products transportation and services revenue
Our NGL and refined products segment’s revenues are primarily derived from transportation, fractionation, blending, and storage of NGL and refined products as well as acquisition and marketing activities. Revenues are generated utilizing a complementary network of pipelines, storage and blending facilities, and strategic off-take locations that provide access to multiple NGL markets. Transportation, fractionation, and storage revenue is generated from fees charged to customers under a combination of firm and interruptible contracts. Firm contracts are in the form of take-or-pay arrangements where certain fees will be charged to customers regardless of the volume of service they request for any given period. Under interruptible contracts, customers are not required to pay any fixed minimum amounts, but are instead billed based on actual volume of service provided for any given period. Payment for services under these contracts are typically due the month after the services have been performed.
The performance obligation with respect to firm contracts is a promise to provide a single type of service (transportation, fractionation, blending, or storage) daily over the life of the contract, which is fundamentally a “stand-ready” service. While there can be multiple activities required to be performed, these activities are not separable because such activities in combination are required to successfully transfer the overall service for which the customer has contracted. The fixed consideration of the transaction price is allocated ratably over the life of the contract and revenue for the fixed consideration is recognized over time, because the customer simultaneously receives and consumes the benefit of this “stand-ready” service. Incremental fees associated with actual volume for each respective period are recognized as revenue in the period the incremental volume of service is performed.
The performance obligation with respect to interruptible contracts is also a promise to provide a single type of services, but such promise is made on a case-by-case basis at the time the customer requests the service and we accept the customer’s request. Revenue is recognized for interruptible contracts at the time the services are performed.
Acquisition and marketing contracts are in most cases short-term agreements involving purchase and/or sale of NGL’s and other related hydrocarbons at market rates. These contracts were not affected by ASC 606.
Crude oil transportation and services revenue
Our crude oil transportation and service segment are primarily derived from provide transportation, terminalling and acquisition and marketing services to crude oil markets throughout the southwest, midwest and northeastern United States. Crude oil transportation revenue is generated from tariffs paid by shippers utilizing our transportation services and is generally recognized as the related transportation services are provided. Crude oil terminalling revenue is generated from fees paid by customers for storage and other associated services at the terminal. Crude oil acquisition and marketing revenue is generated from sale of crude oil acquired from a variety of suppliers to third parties. Payment for services under these contracts are typically due the month after the services have been performed.
Certain transportation and terminalling agreements are considered to be firm agreements, because they include fixed fee components that are charged regardless of the volume of crude oil transported by the customer or services provided at the terminal. For these agreements, any fixed fees billed in excess of services provided are not recognized as revenue until the earlier of (i) the time at which the customer applies the fees against cost of service provided in a later period, or (ii) the customer becomes unable to apply the fees against cost of future service due to capacity constraints or contractual terms.
The performance obligation with respect to firm contracts is a promise to provide a single type of service (transportation or terminalling) daily over the life of the contract, which is fundamentally a “stand-ready” service. While there can be multiple activities required to be performed, these activities are not separable because such activities in combination are required to successfully transfer the overall service for which the customer has contracted. The fixed consideration of the transaction price is allocated ratably over the life of the contract and revenue for the fixed consideration is recognized over time, because the customer simultaneously receives and consumes the benefit of this “stand-ready” service. Incremental fees associated with actual volume for each respective period are recognized as revenue in the period the incremental volume of service is performed.
The performance obligation with respect to interruptible contracts is also a promise to provide a single type of service, but such promise is made on a case-by-case basis at the time the customer requests the service and/or product and we accept the customer’s request. Revenue is recognized for interruptible contracts at the time the services are performed.


29


Acquisition and marketing contracts are in most cases short-term agreements involving purchase and/or sale of crude oil at market rates. These contracts were not affected by ASC 606.
All other revenue
Our all other segment primarily includes our compression equipment business which provides full-service compression design and manufacturing services for the oil and gas industry. It also includes the management of coal and natural resources properties and the related collection of royalties. We also earn revenues from other land management activities, such as selling standing timber, leasing coal-related infrastructure facilities, and collecting oil and gas royalties. These operations also include end-user coal handling facilities. There were no material changes to the manner in which revenues within this segment are recorded under the new standard.
Contract Balances with Customers
The Partnership satisfies its obligations by transferring goods or services in exchange for consideration from customers. The timing of performance may differ from the timing the associated consideration is paid to or received from the customer, thus resulting in the recognition of a contract asset or a contract liability.
The Partnership recognizes a contract asset when making upfront consideration payments to certain customers or when providing services to customers prior to the time at which the Partnership is contractually allowed to bill for such services. As of June 30, 2018 and January 1, 2018, no contract assets have been recognized.
The Partnership recognizes a contract liability if the customer's payment of consideration precedes the Partnership’s fulfillment of the performance obligations. Certain contracts contain provisions requiring customers to pay a fixed fee for a right to use our assets, but allows customers to apply such fees against services to be provided at a future point in time. These amounts are reflected as deferred revenue until the customer applies the deficiency fees to services provided or becomes unable to use the fees as payment for future services due to expiration of the contractual period the fees can be applied or physical inability of the customer to utilize the fees due to capacity constraints. As of June 30, 2018 , the Partnership had $235 million in deferred revenues representing the current value of our future performance obligations.
The amount of revenue recognized for the three and six months ended June 30, 2018 that was included in the deferred revenue liability balance as of January 1, 2018 was $28 million and $63 million , respectively.
Performance Obligations
At contract inception, the Partnership assesses the goods and services promised in its contracts with customers and identifies a performance obligation for each promise to transfer a good or service (or bundle of goods or services) that is distinct. To identify the performance obligations, the Partnership considers all the goods or services promised in the contract, whether explicitly stated or implied based on customary business practices. For a contract that has more than one performance obligation, the Partnership allocates the total contract consideration it expects to be entitled to, to each distinct performance obligation based on a standalone-selling price basis. Revenue is recognized when (or as) the performance obligations are satisfied, that is, when the customer obtains control of the good or service. Certain of our contracts contain variable components, which, when combined with the fixed component are considered a single performance obligation. For these types of contacts, only the fixed component of the contracts are included in the table below.
As of June 30, 2018 , the aggregate amount of transaction price allocated to unsatisfied (or partially satisfied) performance obligations is $40.32 billion and the Partnership expects to recognize this amount as revenue within the time bands illustrated below:
 
 
2018 (remainder)
 
2019
 
2020
 
Thereafter
 
Total
Revenue expected to be recognized on contracts with customers existing as of June 30, 2018
 
$
2,598

 
$
5,048

 
$
4,604

 
$
28,071

 
$
40,321

Practical Expedients Utilized by the Partnership
The Partnership elected the following practical expedients in accordance with Topic 606:
Right to invoice: The Partnership elected to utilize an output method to recognize revenue that is based on the amount to which the Partnership has a right to invoice a customer for services performed to date, if that amount corresponds


30


directly with the value provided to the customer for the related performance or its obligation completed to date. As such, the Partnership recognized revenue in the amount to which it had the right to invoice customers.
Significant financing component: The Partnership elected not to adjust the promised amount of consideration for the effects of significant financing component if the Partnership expects, at contract inception, that the period between the transfer of a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Unearned variable consideration: The Partnership elected to only disclose the unearned fixed consideration associated with unsatisfied performance obligations related to our various customer contracts which contain both fixed and variable components.
13.
DERIVATIVE ASSETS AND LIABILITIES
Commodity Price Risk
We are exposed to market risks related to the volatility of commodity prices. To manage the impact of volatility from these prices, we utilize various exchange-traded and OTC commodity financial instrument contracts. These contracts consist primarily of futures, swaps and options and are recorded at fair value in our consolidated balance sheets.
We use futures and basis swaps, designated as fair value hedges, to hedge our natural gas inventory stored in our Bammel storage facility. At hedge inception, we lock in a margin by purchasing gas in the spot market or off peak season and entering into a financial contract. Changes in the spreads between the forward natural gas prices and the physical inventory spot price result in unrealized gains or losses until the underlying physical gas is withdrawn and the related designated derivatives are settled. Once the gas is withdrawn and the designated derivatives are settled, the previously unrealized gains or losses associated with these positions are realized.
We use futures, swaps and options to hedge the sales price of natural gas we retain for fees in our intrastate transportation and storage segment and operational gas sales on our interstate transportation and storage segment. These contracts are not designated as hedges for accounting purposes.
We use NGL and crude derivative swap contracts to hedge forecasted sales of NGL and condensate equity volumes we retain for fees in our midstream segment whereby our subsidiaries generally gather and process natural gas on behalf of producers, sell the resulting residue gas and NGL volumes at market prices and remit to producers an agreed upon percentage of the proceeds based on an index price for the residue gas and NGL. These contracts are not designated as hedges for accounting purposes.
We utilize swaps, futures and other derivative instruments to mitigate the risk associated with market movements in the price of refined products and NGLs to manage our storage facilities and the purchase and sale of purity NGL. These contracts are not designated as hedges for accounting purposes.
We use financial commodity derivatives to take advantage of market opportunities in our trading activities which complement our transportation and storage segment’s operations and are netted in cost of products sold in our consolidated statements of operations. We also have trading and marketing activities related to power and natural gas in our all other segment which are also netted in cost of products sold. As a result of our trading activities and the use of derivative financial instruments in our transportation and storage segment, the degree of earnings volatility that can occur may be significant, favorably or unfavorably, from period to period. We attempt to manage this volatility through the use of daily position and profit and loss reports provided to our risk oversight committee, which includes members of senior management, and the limits and authorizations set forth in our commodity risk management policy.


31


The following table details our outstanding commodity-related derivatives:
 
June 30, 2018
 
December 31, 2017
 
Notional Volume
 
Maturity
 
Notional Volume
 
Maturity
Mark-to-Market Derivatives
 
 
 
 
 
 
 
(Trading)
 
 
 
 
 
 
 
Natural Gas (BBtu):
 
 
 
 
 
 
 
Fixed Swaps/Futures
465

 
2018
 
1,078

 
2018
Basis Swaps IFERC/NYMEX (1)
102,328

 
2018-2020
 
48,510

 
2018-2020
Options – Puts
(3,043
)
 
2018
 
13,000

 
2018
Power (Megawatt):
 
 
 
 
 
 
 
Forwards
3,196,100

 
2018-2019
 
435,960

 
2018-2019
Futures
(42,768
)
 
2018
 
(25,760
)
 
2018
Options – Puts
(30,532
)
 
2018
 
(153,600
)
 
2018
Options – Calls
996,172

 
2018
 
137,600

 
2018
(Non-Trading)
 
 
 
 
 
 
 
Natural Gas (BBtu):
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
6,600

 
2018-2020
 
4,650

 
2018-2020
Swing Swaps IFERC
52,413

 
2018-2019
 
87,253

 
2018-2019
Fixed Swaps/Futures
5,360

 
2018-2019
 
(4,700
)
 
2018-2019
Forward Physical Contracts
(174,465
)
 
2018-2020
 
(145,105
)
 
2018-2020
NGL (MBbls) – Forwards/Swaps
(1,590
)
 
2018-2019
 
(2,493
)
 
2018-2019
Crude (MBbls) – Forwards/Swaps
44,190

 
2018-2019
 
9,172

 
2018-2019
Refined Products (MBbls) – Futures
(1,076
)
 
2018-2019
 
(3,783
)
 
2018-2019
Fair Value Hedging Derivatives
 
 
 
 
 
 
 
(Non-Trading)
 
 
 
 
 
 
 
Natural Gas (BBtu):
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
(21,475
)
 
2018
 
(39,770
)
 
2018
Fixed Swaps/Futures
(21,475
)
 
2018
 
(39,770
)
 
2018
Hedged Item – Inventory
21,475

 
2018
 
39,770

 
2018
(1)  
Includes aggregate amounts for open positions related to Houston Ship Channel, Waha Hub, NGPL TexOk, West Louisiana Zone and Henry Hub locations.
Interest Rate Risk
We are exposed to market risk for changes in interest rates. To maintain a cost effective capital structure, we borrow funds using a mix of fixed rate debt and variable rate debt. We also manage our interest rate exposure by utilizing interest rate swaps to achieve a desired mix of fixed and variable rate debt. We also utilize forward starting interest rate swaps to lock in the rate on a portion of our anticipated debt issuances.


32


The following table summarizes our interest rate swaps outstanding, none of which were designated as hedges for accounting purposes:
Term
 
Type (1)
 
Notional Amount Outstanding
June 30, 2018
 
December 31, 2017
July 2018 (2)
 
Forward-starting to pay a fixed rate of 3.76% and receive a floating rate
 
$

 
$
300

July 2019 (2)
 
Forward-starting to pay a fixed rate of 3.56% and receive a floating rate
 
400

 
300

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

 
400

July 2021 (2)
 
Forward-starting to pay a fixed rate of 3.55% and receive a floating rate
 
400

 

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

 
1,200

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

 
300

(1)  
Floating rates are based on 3-month LIBOR.  
(2)  
Represents the effective date. These forward-starting swaps have terms of 30 years with a mandatory termination date the same as the effective date.  
Credit Risk
Credit risk refers to the risk that a counterparty may default on its contractual obligations resulting in a loss to the Partnership. Credit policies have been approved and implemented to govern the Partnership’s portfolio of counterparties with the objective of mitigating credit losses. These policies establish guidelines, controls and limits to manage credit risk within approved tolerances by mandating an appropriate evaluation of the financial condition of existing and potential counterparties, monitoring agency credit ratings, and by implementing credit practices that limit exposure according to the risk profiles of the counterparties. Furthermore, the Partnership may, at times, require collateral under certain circumstances to mitigate credit risk as necessary. The Partnership also uses industry standard commercial agreements which allow for the netting of exposures associated with transactions executed under a single commercial agreement. Additionally, we utilize master netting agreements to offset credit exposure across multiple commercial agreements with a single counterparty or affiliated group of counterparties.
The Partnership’s counterparties consist of a diverse portfolio of customers across the energy industry, including petrochemical companies, commercial and industrials, oil and gas producers, municipalities, gas and electric utilities, midstream companies and independent power generators. Our overall exposure may be affected positively or negatively by macroeconomic or regulatory changes that impact our counterparties to one extent or another. Currently, management does not anticipate a material adverse effect in our financial position or results of operations as a consequence of counterparty non-performance.
The Partnership has maintenance margin deposits with certain counterparties in the OTC market, primarily independent system operators, and with clearing brokers. Payments on margin deposits are required when the value of a derivative exceeds our pre-established credit limit with the counterparty. Margin deposits are returned to us on or about the settlement date for non-exchange traded derivatives, and we exchange margin calls on a daily basis for exchange traded transactions. Since the margin calls are made daily with the exchange brokers, the fair value of the financial derivative instruments are deemed current and netted in deposits paid to vendors within other current assets in the consolidated balance sheets.
For financial instruments, failure of a counterparty to perform on a contract could result in our inability to realize amounts that have been recorded on our consolidated balance sheets and recognized in net income or other comprehensive income.


33


Derivative Summary
The following table provides a summary of our derivative assets and liabilities:
 
 
Fair Value of Derivative Instruments
 
 
Asset Derivatives
 
Liability Derivatives
 
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Commodity derivatives (margin deposits)
 
$

 
$
14

 
$
(2
)
 
$
(2
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Commodity derivatives (margin deposits)
 
307

 
262

 
(352
)
 
(281
)
Commodity derivatives
 
106

 
44

 
(422
)
 
(55
)
Interest rate derivatives
 

 

 
(147
)
 
(219
)
 
 
413

 
306

 
(921
)
 
(555
)
Total derivatives
 
$
413

 
$
320

 
$
(923
)
 
$
(557
)
The following table presents the fair value of our recognized derivative assets and liabilities on a gross basis and amounts offset on the consolidated balance sheets that are subject to enforceable master netting arrangements or similar arrangements:
 
 
 
 
Asset Derivatives
 
Liability Derivatives
 
 
Balance Sheet Location
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
Derivatives without offsetting agreements
 
Derivative liabilities
 
$

 
$

 
$
(147
)
 
$
(219
)
Derivatives in offsetting agreements:
 
 
 
 
 
 
 
 
OTC contracts
 
Derivative assets (liabilities)
 
106

 
44

 
(422
)
 
(55
)
Broker cleared derivative contracts
 
Other current assets (liabilities)
 
307

 
276

 
(354
)
 
(283
)
Total gross derivatives
 
413

 
320

 
(923
)
 
(557
)
Offsetting agreements:
 
 
 
 
 
 
 
 
Counterparty netting
 
Derivative assets (liabilities)
 
(49
)
 
(20
)
 
49

 
20

Counterparty netting
 
Other current assets (liabilities)
 
(306
)
 
(263
)
 
306

 
263

Total net derivatives
 
$
58

 
$
37

 
$
(568
)
 
$
(274
)
We disclose the non-exchange traded financial derivative instruments as derivative assets and liabilities on our consolidated balance sheets at fair value with amounts classified as either current or long-term depending on the anticipated settlement date.


34


The following tables summarize the amounts recognized in income with respect to our derivative financial instruments:
 
Location of Gain/(Loss) Recognized in Income on Derivatives
 
Amount of Gain/(Loss) Recognized in Income Representing Hedge Ineffectiveness and Amount Excluded from the Assessment of Effectiveness
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
 
2018
 
2017
 
2018
 
2017
Derivatives in fair value hedging relationships (including hedged item):
 
 
 
 
 
 
 
 
 
Commodity derivatives
Cost of products sold
 
$
6

 
$
6

 
$
9

 
$
2

 
Location of Gain/(Loss) Recognized in Income on Derivatives
 
Amount of Gain/(Loss) Recognized in Income on Derivatives
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
 
2018
 
2017
 
2018
 
2017
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Commodity derivatives – Trading
Cost of products sold
 
$
16

 
$
15

 
$
33

 
$
26

Commodity derivatives – Non-trading
Cost of products sold
 
(300
)
 
7

 
(373
)
 
(3
)
Interest rate derivatives
Gains (losses) on interest rate derivatives
 
20

 
(25
)
 
72

 
(20
)
Embedded derivatives
Other, net
 

 

 

 
1

Total
 
 
$
(264
)
 
$
(3
)
 
$
(268
)
 
$
4

14.
RELATED PARTY TRANSACTIONS
The Partnership has related party transactions with several of its equity method investees. In addition to commercial transactions, these transactions include the provision of certain management services and leases of certain assets.
The following table summarizes the affiliate revenues on our consolidated statements of operations:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Affiliated revenues
$
222

 
$
133

 
$
508

 
$
251



35


The following table summarizes the related company balances on our consolidated balance sheets:
 
June 30, 2018
 
December 31, 2017
Accounts receivable from related companies:
 
 
 
Sunoco LP
$
184

 
$
219

FGT
18

 
11

Other
132

 
88

Total accounts receivable from related companies:
$
334

 
$
318

 
 
 
 
Accounts payable to related companies:
 
 
 
Sunoco LP
$
195

 
$
195

USAC
45

 

Other
89

 
14

Total accounts payable to related companies:
$
329

 
$
209

 
June 30, 2018
 
December 31, 2017
Long-term notes receivable from related company:
 
 
 
Sunoco LP
$
85

 
$
85

15.
REPORTABLE SEGMENTS
Our financial statements currently reflect the following reportable segments, which conduct their business in the United States, as follows:
intrastate transportation and storage ;
interstate transportation and storage ;
midstream ;
NGL and refined products transportation and services ;
crude oil transportation and services ; and
all other .
The amounts included in the NGL and refined products transportation and services segment and the crude oil transportation and services segment have been retrospectively adjusted in these consolidated financial statements as a result of the Sunoco Logistics Merger.
Revenues from our intrastate transportation and storage segment are primarily reflected in natural gas sales and gathering, transportation and other fees. Revenues from our interstate transportation and storage segment are primarily reflected in gathering, transportation and other fees. Revenues from our midstream segment are primarily reflected in natural gas sales, NGL sales and gathering, transportation and other fees. Revenues from our NGL and refined products transportation and services segment are primarily reflected in NGL sales, refined product sales and gathering, transportation and other fees. Revenues from our crude oil transportation and services segment are primarily reflected in crude sales. Revenues from our all other segment are primarily reflected in other.
We report Segment Adjusted EBITDA as a measure of segment performance. We define Segment Adjusted EBITDA as earnings before interest, taxes, depreciation, depletion, amortization and other non-cash items, such as non-cash compensation expense, gains and losses on disposals of assets, the allowance for equity funds used during construction, unrealized gains and losses on commodity risk management activities, non-cash impairment charges, losses on extinguishments of debt and other non-operating income or expense items. Unrealized gains and losses on commodity risk management activities include unrealized gains and losses on commodity derivatives and inventory fair value adjustments. Segment Adjusted EBITDA reflects amounts for unconsolidated affiliates based on the Partnership's proportionate ownership.


36


The following tables present financial information by segment:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Intrastate transportation and storage:
 
 
 
 
 
 
 
Revenues from external customers
$
761

 
$
699

 
$
1,578

 
$
1,467

Intersegment revenues
52

 
54

 
110

 
102

 
813

 
753

 
1,688

 
1,569

Interstate transportation and storage:
 
 
 
 
 
 
 
Revenues from external customers
323

 
201

 
636

 
432

Intersegment revenues
5

 
6

 
8

 
10

 
328

 
207

 
644

 
442

Midstream:
 
 
 
 
 
 
 
Revenues from external customers
594

 
633

 
1,034

 
1,198

Intersegment revenues
1,280

 
982

 
2,454

 
2,054

 
1,874

 
1,615

 
3,488

 
3,252

NGL and refined products transportation and services:
 
 
 
 
 
 
 
Revenues from external customers
2,472

 
1,767

 
4,930

 
3,885

Intersegment revenues
96

 
12

 
184

 
160

 
2,568

 
1,779

 
5,114

 
4,045

Crude oil transportation and services:
 
 
 
 
 
 
 
Revenues from external customers
4,789

 
2,460

 
8,520

 
5,035

Intersegment revenues
14

 
5

 
28

 
5

 
4,803

 
2,465

 
8,548

 
5,040

All other:
 
 
 
 
 
 
 
Revenues from external customers
471

 
816

 
992

 
1,454

Intersegment revenues
31

 
54

 
81

 
186

 
502

 
870

 
1,073

 
1,640

Eliminations
(1,478
)
 
(1,113
)
 
(2,865
)
 
(2,517
)
Total revenues
$
9,410

 
$
6,576

 
$
17,690

 
$
13,471



37


 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017*
 
2018
 
2017*
Segment Adjusted EBITDA:
 
 
 
 
 
 
 
Intrastate transportation and storage
$
208

 
$
148

 
$
400

 
$
317

Interstate transportation and storage
330

 
262

 
653

 
527

Midstream
414

 
412

 
791

 
732

NGL and refined products transportation and services
461

 
388

 
912

 
769

Crude oil transportation and services
548

 
228

 
1,012

 
415

All other
90

 
107

 
164

 
230

Total
2,051

 
1,545

 
3,932

 
2,990

Depreciation, depletion and amortization
(588
)
 
(557
)
 
(1,191
)
 
(1,117
)
Interest expense, net
(358
)
 
(336
)
 
(704
)
 
(668
)
Gain on Sunoco LP common unit repurchase

 

 
172

 

Loss on deconsolidation of CDM
(86
)
 

 
(86
)
 

Gains (losses) on interest rate derivatives
20

 
(25
)
 
72

 
(20
)
Non-cash compensation expense
(21
)
 
(15
)
 
(41
)
 
(38
)
Unrealized gains (losses) on commodity risk management activities
(265
)
 
34

 
(352
)
 
98

Adjusted EBITDA related to unconsolidated affiliates
(228
)
 
(247
)
 
(413
)
 
(486
)
Equity in earnings (losses) of unconsolidated affiliates
106

 
(61
)
 
34

 
12

Other, net
40

 
37

 
87

 
52

Income before income tax expense
$
671

 
$
375


$
1,510


$
823

* As adjusted. See Note 1.
 
June 30, 2018
 
December 31, 2017
Assets:
 
 
 
Intrastate transportation and storage
$
5,604

 
$
5,020

Interstate transportation and storage
14,037

 
13,518

Midstream
19,949

 
20,004

NGL and refined products transportation and services
17,517

 
17,600

Crude oil transportation and services
18,168

 
17,736

All other
3,295

 
4,087

Total assets
$
78,570

 
$
77,965

16.
CONSOLIDATING GUARANTOR FINANCIAL INFORMATION
Sunoco Logistics Partners Operations L.P., a subsidiary of ETP, is the issuer of multiple series of senior notes that are guaranteed by ETP. These guarantees are full and unconditional. For the purposes of this footnote, Energy Transfer Partners, L.P. is referred to as “Parent Guarantor” and Sunoco Logistics Partners Operations L.P. is referred to as “Subsidiary Issuer.” All other consolidated subsidiaries of the Partnership are collectively referred to as “Non-Guarantor Subsidiaries.”
The following supplemental condensed consolidating financial information reflects the Parent Guarantor’s separate accounts, the Subsidiary Issuer’s separate accounts, the combined accounts of the Non-Guarantor Subsidiaries, the combined consolidating adjustments and eliminations, and the Parent Guarantor’s consolidated accounts for the dates and periods indicated. For purposes of the following condensed consolidating information, the Parent Guarantor’s investments in its subsidiaries and the Subsidiary Issuer’s investments in its subsidiaries are accounted for under the equity method of accounting.


38


The consolidating financial information for the Parent Guarantor, Subsidiary Issuer and Non-Guarantor Subsidiaries are as follows:
 
June 30, 2018
 
Parent Guarantor
 
Subsidiary Issuer
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated Partnership
Cash and cash equivalents
$

 
$

 
$
494

 
$

 
$
494

All other current assets

 
57

 
8,527

 
(2,531
)
 
6,053

Property, plant and equipment, net

 

 
59,776

 

 
59,776

Investments in unconsolidated affiliates
51,199

 
12,078

 
3,636

 
(63,277
)
 
3,636

All other assets
8

 

 
8,603

 

 
8,611

Total assets
$
51,207

 
$
12,135

 
$
81,036

 
$
(65,808
)
 
$
78,570

 
 
 
 
 
 
 
 
 
 
Current liabilities
$
390

 
$
(3,571
)
 
$
12,353

 
$
(2,531
)
 
$
6,641

Non-current liabilities
22,949

 
7,606

 
7,338

 

 
37,893

Noncontrolling interest

 

 
6,171

 

 
6,171

Total partners’ capital
27,868

 
8,100

 
55,174

 
(63,277
)
 
27,865

Total liabilities and equity
$
51,207

 
$
12,135

 
$
81,036

 
$
(65,808
)
 
$
78,570

 
December 31, 2017
 
Parent Guarantor
 
Subsidiary Issuer
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated Partnership
Cash and cash equivalents
$

 
$
(3
)
 
$
309

 
$

 
$
306

All other current assets

 
159

 
6,063

 

 
6,222

Property, plant and equipment, net

 

 
58,437

 

 
58,437

Investments in unconsolidated affiliates
48,378

 
11,648

 
3,816

 
(60,026
)
 
3,816

All other assets

 

 
9,184

 

 
9,184

Total assets
$
48,378

 
$
11,804

 
$
77,809

 
$
(60,026
)
 
$
77,965

 
 
 
 
 
 
 
 
 
 
Current liabilities
$
(1,496
)
 
$
(3,660
)
 
$
12,150

 
$

 
$
6,994

Non-current liabilities
21,604

 
7,607

 
7,609

 

 
36,820

Noncontrolling interest

 

 
5,882

 

 
5,882

Total partners’ capital
28,270

 
7,857

 
52,168

 
(60,026
)
 
28,269

Total liabilities and equity
$
48,378

 
$
11,804

 
$
77,809

 
$
(60,026
)
 
$
77,965



39


 
Three Months Ended June 30, 2018
 
Parent Guarantor
 
Subsidiary Issuer
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated Partnership
Revenues
$

 
$

 
$
9,410

 
$

 
$
9,410

Operating costs, expenses, and other

 

 
8,467

 

 
8,467

Operating income

 

 
943

 

 
943

Interest expense, net
(289
)
 
(41
)
 
(28
)
 

 
(358
)
Equity in earnings of unconsolidated affiliates
701

 
66

 
106

 
(767
)
 
106

Gains on interest rate derivatives
20

 

 

 

 
20

Loss on deconsolidation of CDM

 

 
(86
)
 

 
(86
)
Other, net

 

 
46

 

 
46

Income before income tax expense
432

 
25

 
981

 
(767
)
 
671

Income tax expense

 

 
69

 

 
69

Net income
432

 
25

 
912

 
(767
)
 
602

Less: Net income attributable to noncontrolling interest

 

 
170

 

 
170

Net income attributable to partners
$
432

 
$
25

 
$
742

 
$
(767
)
 
$
432

 
 
 
 
 
 
 
 
 
 
Other comprehensive income
$

 
$

 
$
2

 
$

 
$
2

Comprehensive income
432

 
25

 
914

 
(767
)
 
604

Comprehensive income attributable to noncontrolling interest

 

 
170

 

 
170

Comprehensive income attributable to partners
$
432

 
$
25

 
$
744

 
$
(767
)
 
$
434

 
Three Months Ended June 30, 2017*
 
Parent Guarantor
 
Subsidiary Issuer
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated Partnership
Revenues
$

 
$

 
$
6,576

 
$

 
$
6,576

Operating costs, expenses, and other

 
1

 
5,839

 

 
5,840

Operating income (loss)

 
(1
)
 
737

 

 
736

Interest expense, net

 
(39
)
 
(297
)
 

 
(336
)
Equity in earnings (losses) of unconsolidated affiliates
199

 
137

 
(61
)
 
(336
)
 
(61
)
Losses on interest rate derivatives

 

 
(25
)
 

 
(25
)
Other, net

 
3

 
59

 
(1
)
 
61

Income before income tax expense
199

 
100

 
413

 
(337
)
 
375

Income tax expense

 

 
79

 

 
79

Net income
199

 
100

 
334

 
(337
)
 
296

Less: Net income attributable to noncontrolling interest

 

 
94

 

 
94

Net income attributable to partners
$
199

 
$
100

 
$
240

 
$
(337
)
 
$
202

 
 
 
 
 
 
 
 
 
 
Other comprehensive loss
$

 
$

 
$
(1
)
 
$

 
$
(1
)
Comprehensive income
199

 
100

 
333

 
(337
)
 
295

Comprehensive income attributable to noncontrolling interest

 

 
94

 

 
94

Comprehensive income attributable to partners
$
199

 
$
100

 
$
239

 
$
(337
)
 
$
201

* As adjusted. See Note 1.


40


 
Six Months Ended June 30, 2018
 
Parent Guarantor
 
Subsidiary Issuer
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated Partnership
Revenues
$

 
$

 
$
17,690

 
$

 
$
17,690

Operating costs, expenses, and other

 

 
15,774

 

 
15,774

Operating income

 

 
1,916

 

 
1,916

Interest expense, net
(567
)
 
(82
)
 
(55
)
 

 
(704
)
Equity in earnings of unconsolidated affiliates
1,642

 
326

 
34

 
(1,968
)
 
34

Gains on interest rate derivatives
72

 

 

 

 
72

Gain on Sunoco LP unit repurchase

 

 
172

 

 
172

Loss on deconsolidation of CDM

 

 
(86
)
 

 
(86
)
Other, net

 

 
106

 

 
106

Income before income tax expense
1,147

 
244

 
2,087

 
(1,968
)
 
1,510

Income tax expense

 

 
29

 

 
29

Net income
1,147

 
244

 
2,058

 
(1,968
)
 
1,481

Less: Net income attributable to noncontrolling interest

 

 
334

 

 
334

Net income attributable to partners
$
1,147

 
$
244

 
$
1,724

 
$
(1,968
)
 
$
1,147

 
 
 
 
 
 
 
 
 
 
Other comprehensive income
$

 
$

 
$
3

 
$

 
$
3

Comprehensive income
1,147

 
244

 
2,061

 
(1,968
)
 
1,484

Comprehensive income attributable to noncontrolling interest

 

 
334

 

 
334

Comprehensive income attributable to partners
$
1,147

 
$
244

 
$
1,727

 
$
(1,968
)
 
$
1,150

 
Six Months Ended June 30, 2017*
 
Parent Guarantor
 
Subsidiary Issuer
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated Partnership
Revenues
$

 
$

 
$
13,471

 
$

 
$
13,471

Operating costs, expenses, and other

 
1

 
12,051

 

 
12,052

Operating income (loss)

 
(1
)
 
1,420

 

 
1,419

Interest expense, net

 
(81
)
 
(587
)
 

 
(668
)
Equity in earnings of unconsolidated affiliates
1,010

 
765

 
12

 
(1,775
)
 
12

Losses on interest rate derivatives

 

 
(20
)
 

 
(20
)
Other, net

 
3

 
78

 
(1
)
 
80

Income before income tax expense
1,010

 
686

 
903

 
(1,776
)
 
823

Income tax expense

 

 
134

 

 
134

Net income
1,010

 
686

 
769

 
(1,776
)
 
689

Less: Net income attributable to noncontrolling interest

 

 
156

 

 
156

Net income attributable to partners
$
1,010

 
$
686

 
$
613

 
$
(1,776
)
 
$
533

 
 
 
 
 
 
 
 
 
 
Other comprehensive loss
$

 
$

 
$
(1
)
 
$

 
$
(1
)
Comprehensive income
1,010

 
686

 
768

 
(1,776
)
 
688

Comprehensive income attributable to noncontrolling interest

 

 
156

 

 
156

Comprehensive income attributable to partners
$
1,010

 
$
686

 
$
612

 
$
(1,776
)
 
$
532

* As adjusted. See Note 1.


41


 
Six Months Ended June 30, 2018
 
Parent Guarantor
 
Subsidiary Issuer
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated Partnership
Cash flows provided by operating activities
$
3,252

 
$
102

 
$
585

 
$
(989
)
 
$
2,950

Cash flows used in investing activities
(2,925
)
 
(99
)
 
(903
)
 
2,336

 
(1,591
)
Cash flows provided by (used in) financing activities
(327
)
 

 
503

 
(1,347
)
 
(1,171
)
Change in cash

 
3

 
185

 

 
188

Cash at beginning of period

 
(3
)
 
309

 

 
306

Cash at end of period
$

 
$

 
$
494

 
$

 
$
494

 
Six Months Ended June 30, 2017
 
Parent Guarantor
 
Subsidiary Issuer
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated Partnership
Cash flows provided by operating activities
$
1,010

 
$
652

 
$
1,764

 
$
(1,776
)
 
$
1,650

Cash flows used in investing activities
(716
)
 
(421
)
 
(2,125
)
 
1,776

 
(1,486
)
Cash flows provided by (used in) financing activities
(294
)
 
(249
)
 
291

 

 
(252
)
Change in cash

 
(18
)
 
(70
)
 

 
(88
)
Cash at beginning of period

 
41

 
319

 

 
360

Cash at end of period
$

 
$
23

 
$
249

 
$

 
$
272



42


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Tabular dollar and unit amounts, except per unit data, are in millions)
The following is a discussion of our historical consolidated financial condition and results of operations, and should be read in conjunction with (i) our historical consolidated financial statements and accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q; and (ii) the consolidated financial statements and management’s discussion and analysis of financial condition and results of operations included in the Partnership’s Annual Report on Form 10-K filed with the SEC on February 23, 2018 . 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, 2017 filed with the SEC on February 23, 2018 .
References to “we,” “us,” “our,” the “Partnership” and “ETP” shall mean Energy Transfer Partners, L.P. and its subsidiaries.
OVERVIEW
The primary activities and operating subsidiaries through which we conduct those activities are as follows:
Natural gas operations, including the following:
natural gas midstream and intrastate transportation and storage; and
interstate natural gas transportation and storage.
Crude oil, NGLs and refined product transportation, terminalling services and acquisition and marketing activities, as well as NGL storage and fractionation services.
RECENT DEVELOPMENTS
ETE and ETP Simplification Transaction
In August 2018, ETE and ETP announced that they have entered into a definitive agreement providing for the merger of ETP with a wholly-owned subsidiary of ETE in a unit-for-unit exchange. In connection with the transaction, ETE’s IDRs in ETP will be cancelled. Under the terms of the transaction, ETP unitholders (other than ETE and its subsidiaries) will receive 1.28 common units of ETE for each common unit of ETP they own. The transaction is expected to close in the fourth quarter of 2018, subject to the approval by a majority of the unaffiliated unitholders of ETP and other customary closing conditions.
Series D Preferred Units Issuance
In July 2018, ETP issued 17.8 million of its 7.625% Series D Preferred Units at a price of $25 per unit, resulting in total gross proceeds of $445 million . The proceeds were used to repay amounts outstanding under ETP’s revolving credit facility and for general partnership purposes.
ETP Senior Notes Offering and Redemption
In June 2018, ETP issued $500 million aggregate principal amount of 4.20% senior notes due 2023 , $1.00 billion aggregate principal amount of 4.95% senior notes due 2028 , $500 million aggregate principal amount of 5.80% senior notes due 2038 and $1.00 billion aggregate principal amount of 6.00% senior notes due 2048. The $2.96 billion net proceeds from the offering were used to redeem outstanding senior notes, to repay borrowings outstanding under ETP’s revolving credit facility and for general partnership purposes.
Old Ocean Joint Venture Formation
In May 2018, ETP and Enterprise Products Partners L.P. announced the formation of a joint venture to resume service on the Old Ocean natural gas pipeline. The 24-inch diameter pipeline resumed service in May 2018 and ETP is the operator. Additionally, both parties are in the process of expanding their jointly owned North Texas 36-inch pipeline that will provide more capacity from West Texas for deliveries into the Old Ocean pipeline. The North Texas pipeline expansion project is expected to be complete by late fourth quarter of 2018.


43

Table of Contents

Acquisition of HPC
ETP previously owned a 49.99% interest in HPC, which owns RIGS.  In April 2018, ETP acquired the remaining 50.01% interest in HPC.  Prior to April 2018, HPC was reflected as an unconsolidated affiliate in ETP’s financial statements; beginning in April 2018, RIGS is reflected as a wholly-owned subsidiary in ETP’s financial statements.
Series C Preferred Units Issuance
In April 2018, ETP issued 18 million of its 7.375% Series C Preferred Units at a price of   $25  p er unit, resulting in total gross proceeds of $450 million . The proceeds were used to repay amounts outstanding under ETP’s revolving credit facility and for general partnership purposes.
CDM Contribution
On April 2, 2018, ETP contributed to USAC all of the issued and outstanding membership interests of CDM for aggregate consideration of approximately $1.7 billion , consisting of (i) 19,191,351 common units representing limited partner interests in USAC, (ii) 6,397,965 units of a newly authorized and established class of units representing limited partner interests in USAC (“USAC Class B Units”) and (iii)  $1.23 billion in cash, including customary closing adjustments (the “CDM Contribution”). The USAC Class B Units are a new class of partnership interests of USAC that have substantially all of the rights and obligations of a USAC common unit, except the USAC Class B Units will not participate in distributions for the first four quarters following the closing date of April 2, 2018. Each USAC Class B Unit will automatically convert into one USAC common unit on the first business day following the record date attributable to the quarter ending June 30, 2019.
In connection with the CDM Contribution, ETE acquired (i) all of the outstanding limited liability company interests in USA Compression GP, LLC, the general partner of USAC, and (ii) 12,466,912 USAC common units for cash consideration equal to $250 million .
New Ethane Export Facility Joint Venture
In March 2018, ETP and Satellite Petrochemical USA Corp. (“Satellite”) entered into definitive agreements to form a joint venture, Orbit Gulf Coast NGL Exports, LLC (“Orbit”), with the purpose of constructing a new export terminal on the United States Gulf Coast to provide ethane to Satellite for consumption at their ethane cracking facilities in China. At the terminal, Orbit will construct an 800 MBbls refrigerated ethane storage tank, a 175 MBbls/d ethane refrigeration facility and a 20-inch ethane pipeline originating at ETP’s Mont Belvieu Fractionators that will make deliveries to the terminal as well as domestic markets in the region. ETP will be the operator of the Orbit assets, provide storage and marketing services for Satellite and provide Satellite with approximately 150 MBbls/d of ethane under a long-term, demand-based agreement. Additionally, ETP will construct and wholly own the infrastructure that is required to both supply ethane to the pipeline and to load the ethane on to very large ethane carriers destined for Satellite’s newly constructed ethane crackers in China’s Jiangsu Province. Subject to Chinese Governmental approval, it is anticipated that the Orbit export terminal will be ready for commercial service in the fourth quarter of 2020.
Sunoco LP Common Unit Repurchase
In February 2018, after the record date for Sunoco LP’s fourth quarter 2017 cash distributions, Sunoco LP repurchased 17,286,859   Sunoco LP common units owned by ETP for aggregate cash consideration of approximately   $540 million . ETP used the proceeds from the sale of the Sunoco LP common units to repay amounts outstanding under its revolving credit facility.
Regulatory Update
Interstate Natural Gas Transportation Regulation
Effective December 22, 2017, 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. 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 issued an order denying requests for rehearing and clarification of its Revised Policy Statement because it is non-binding policy and parties will have the opportunity to address the policy as applied in future cases. In the rehearing order, the FERC 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


44

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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 the FERC’s policy on the treatment of income taxes may have on the rates the ETP can charge for the FERC regulated transportation services are unknown at this time.
The FERC also issued a Notice of Inquiry (“2017 Tax Law NOI”) requesting comments on the effect of the Tax Act on FERC jurisdictional rates. The 2017 Tax Law NOI states that of particular interest to the FERC is whether, and if so how, the FERC should address changes relating to accumulated deferred income taxes and bonus depreciation. Comments in response to the 2017 Tax Law NOI are due on or before May 21, 2018. It is unknown at this time what actions that the FERC will take, if any, following receipt of responses to the 2017 Tax Law NOI and any potential impacts from final rules or policy statements issued following the 2017 Tax Law NOI on the rates ETP can charge for FERC regulated transportation services.
Included in the March 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. On July 18, 2018, the FERC 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 all FERC 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 the FERC 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 each FERC regulated natural gas pipeline select one of four options: file a limited Natural Gas Act (“NGA”) Section 4 filing reducing its rates only as required related to the Tax Act and the Revised Policy Statement, 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, the FERC 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. At this time, we cannot predict the outcome of the Final Rule, but adoption of the regulation could ultimately result in a rate proceeding that may impact the rates ETP is permitted to charge its customers for FERC regulated transportation services.
Even without action on the NOI or as contemplated in the Final Rule, 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, 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 the FERC’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 as ETC 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 and Panhandle, 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 the March 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 ETP’s cost of service components and the outcomes of any challenges to our rates by the FERC or our shippers.
The FERC issued a Notice of Inquiry on April 19, 2018 (“Pipeline Certification NOI”), thereby initiating a review of its policies on certification of natural gas pipelines, including an examination of its long-standing Policy Statement on Certification of New Interstate Natural Gas Pipeline Facilities, issued in 1999, that is used to determine whether to grant certificates for new pipeline projects. 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 before July 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 in the United States.
Interstate Liquids Transportation Regulation
The FERC utilizes an indexing rate methodology which, as currently in effect, allows common carriers to change their rates within prescribed ceiling levels that are tied to changes in the Producer Price Index, or PPI. The indexing methodology is applicable to existing rates, with the exclusion of market-based rates. The FERC’s indexing methodology is subject to review every five years. During the five-year period commencing July 1, 2016 and ending June 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 the FERC liquids


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index to change transportation rates annually every July 1. With respect to liquids and refined products pipelines subject to FERC 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 the Page 700 of FERC Form No. 6. This information will be used by the FERC in its next five year review of the liquids pipeline index to generate the index level to be effective July 1, 2021, thereby including the effect of the Revised Policy Statement and the Tax Act in the determination of indexed rates prospectively, effective July 1, 2021. The FERC’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 the FERC’s determination of the appropriate pipeline index. Accordingly, depending on the FERC’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.
Results of Operations
We report Segment Adjusted EBITDA as a measure of segment performance. We define Segment Adjusted EBITDA as earnings before interest, taxes, depreciation, depletion, amortization and other non-cash items, such as non-cash compensation expense, gains and losses on disposals of assets, the allowance for equity funds used during construction, unrealized gains and losses on commodity risk management activities, non-cash impairment charges, losses on extinguishments of debt and other non-operating income or expense items. Unrealized gains and losses on commodity risk management activities include unrealized gains and losses on commodity derivatives and inventory fair value adjustments. Segment Adjusted EBITDA reflects amounts for unconsolidated affiliates based on the Partnership’s proportionate ownership.
Segment Adjusted EBITDA, as reported for each segment in the table below, is analyzed for each segment in the section below titled “Segment Operating Results.” Total Segment Adjusted EBITDA, as presented below, is equal to the consolidated measure of Adjusted EBITDA, which is a non-GAAP measure used by industry analysts, investors, lenders and rating agencies to assess the financial performance and the operating results of the Partnership’s fundamental business activities and should not be considered in isolation or as a substitution for net income, income from operations, cash flows from operating activities or other GAAP measures. Our definition of total or consolidated Adjusted EBITDA is consistent with the definition of Segment Adjusted EBITDA above.
As discussed in Note 1 of the Partnership’s consolidated financial statements included in “Item 1. Financial Statements,” during the fourth quarter of 2017, the Partnership elected to change its method of inventory costing to weighted-average cost for certain inventory that had previously been accounted for using the last-in, first-out (“LIFO”) method. The inventory impacted by this change included the crude oil, refined products and NGLs associated with the legacy Sunoco Logistics business. These changes have been applied retrospectively to all periods presented, and the prior period amounts reflected below have been adjusted from those amounts previously reported.


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Consolidated Results
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
2018
 
2017*
 
Change
 
2018
 
2017*
 
Change
Segment Adjusted EBITDA:
 
 
 
 
 
 
 
 
 
 


Intrastate transportation and storage
$
208

 
$
148

 
$
60

 
$
400

 
$
317

 
$
83

Interstate transportation and storage
330

 
262

 
68

 
653

 
527

 
126

Midstream
414

 
412

 
2

 
791

 
732

 
59

NGL and refined products transportation and services
461

 
388

 
73

 
912

 
769

 
143

Crude oil transportation and services
548

 
228

 
320

 
1,012

 
415

 
597

All other
90

 
107

 
(17
)
 
164

 
230

 
(66
)
Total
2,051

 
1,545

 
506

 
3,932

 
2,990

 
942

Depreciation, depletion and amortization
(588
)
 
(557
)
 
(31
)
 
(1,191
)
 
(1,117
)
 
(74
)
Interest expense, net
(358
)
 
(336
)
 
(22
)
 
(704
)
 
(668
)
 
(36
)
Gain on Sunoco LP common unit repurchase

 

 

 
172

 

 
172

Loss on deconsolidation of CDM
(86
)
 

 
(86
)
 
(86
)
 

 
(86
)
Gains (losses) on interest rate derivatives
20

 
(25
)
 
45

 
72

 
(20
)
 
92

Non-cash compensation expense
(21
)
 
(15
)
 
(6
)
 
(41
)
 
(38
)
 
(3
)
Unrealized gains (losses) on commodity risk management activities
(265
)
 
34

 
(299
)
 
(352
)
 
98

 
(450
)
Adjusted EBITDA related to unconsolidated affiliates
(228
)
 
(247
)
 
19

 
(413
)
 
(486
)
 
73

Equity in earnings (losses) of unconsolidated affiliates
106

 
(61
)
 
167

 
34

 
12

 
22

Other, net
40

 
37

 
3

 
87

 
52

 
35

Income before income tax expense
671

 
375


296


1,510

 
823

 
687

Income tax expense
(69
)
 
(79
)
 
10

 
(29
)
 
(134
)
 
105

Net income
$
602

 
$
296

 
$
306

 
$
1,481

 
$
689

 
$
792

* As adjusted.
See the detailed discussion of Segment Adjusted EBITDA and Segment Operating Results.
Depreciation, Depletion and Amortization. Depreciation, depletion and amortization expense increased for the three and six months ended June 30, 2018 compared to the same period last year primarily due to additional depreciation from assets recently placed in service. These increases were partially offset by the deconsolidation of CDM in April 2018, which reduced depreciation and amortization expense by $41 million for the three and six months ended June 30, 2018 compared to the prior periods.
Interest Expense, net. Interest expense, net of capitalized interest, increased for the three and six months ended June 30, 2018 compared to the same period last year primarily attributable to increases in long-term debt from ETP senior note issuances, partially offset by a decrease in credit facility borrowings and an increase in capitalized interest of $15 million and $36 million , respectively, for the three and six months ended June 30, 2018 compared to the prior periods.
Gain on Sunoco LP Common Unit Repurchase. In connection with Sunoco LP’s repurchase of its common units in February 2018, the Partnership recognized a gain of $172 million .
Loss on Deconsolidation of CDM. In connection with the CDM Contribution in April 2018, the Partnership deconsolidated CDM and recognized a loss of $86 million .


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Gains (Losses) on Interest Rate Derivatives . Gains on interest rate derivatives during the three and six months ended June 30, 2018 resulted from increases in forward interest rates, which caused our forward-starting swaps to change in value.
Unrealized Gains (Losses) on Commodity Risk Management Activities . See additional information on the unrealized gains (losses) on commodity risk management activities included in “Segment Operating Results” below.
Adjusted EBITDA Related to Unconsolidated Affiliates and Equity in Earnings (Losses) of Unconsolidated Affiliates . See additional information in “Supplemental Information on Unconsolidated Affiliates” and “Segment Operation Results” below.
Other, net. Includes amortization of regulatory assets and other income and expense amounts.
Income Tax Expense . For the three and six months ended June 30, 2018 compared to the same period last year, income tax expense decreased primarily due to the decrease in federal corporate income tax rate per the Tax Act as well as  $3 million and $70 million , respectively, of deferred tax benefit adjustments during the three and six months ended June 30, 2018 as the result of a state statutory rate reduction.


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Supplemental Information on Unconsolidated Affiliates
The following table presents financial information related to unconsolidated affiliates:
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Equity in earnings (losses) of unconsolidated affiliates:
 
 
 
 
 
 
 
 
 
 
 
Citrus
$
33

 
$
30

 
$
3

 
$
60

 
$
51

 
$
9

FEP
13

 
13

 

 
27

 
25

 
2

MEP
8

 
10

 
(2
)
 
17

 
20

 
(3
)
Sunoco LP
16

 
(110
)
 
126

 
(135
)
 
(124
)
 
(11
)
USAC
(2
)
 

 
(2
)
 
(2
)
 

 
(2
)
Other
38

 
(4
)
 
42

 
67

 
40

 
27

Total equity in earnings (losses) of unconsolidated affiliates
$
106

 
$
(61
)
 
$
167

 
$
34

 
$
12

 
$
22

 
 
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA related to unconsolidated affiliates (1) :
 
 
 
 
 
 
 
 
 
 
 
Citrus
$
85

 
$
88

 
$
(3
)
 
$
160

 
$
163

 
$
(3
)
FEP
18

 
19

 
(1
)
 
37

 
37

 

MEP
20

 
21

 
(1
)
 
42

 
43

 
(1
)
Sunoco LP
39

 
83

 
(44
)
 
68

 
137

 
(69
)
USAC
21

 

 
21

 
21

 

 
21

Other
45

 
36

 
9

 
85

 
106

 
(21
)
Total Adjusted EBITDA related to unconsolidated affiliates
$
228

 
$
247

 
$
(19
)
 
$
413

 
$
486

 
$
(73
)
 
 
 
 
 
 
 
 
 
 
 
 
Distributions received from unconsolidated affiliates:
 
 
 
 
 
 
 
 
 
 
 
Citrus
$
27

 
$
22

 
$
5

 
$
73

 
$
63

 
$
10

FEP
15

 
10

 
5

 
32

 
10

 
22

MEP
18

 
20

 
(2
)
 
31

 
93

 
(62
)
Sunoco LP
22

 
37

 
(15
)
 
58

 
72

 
(14
)
USAC
10

 

 
10

 
10

 

 
10

Other
21

 
30

 
(9
)
 
42

 
53

 
(11
)
Total distributions received from unconsolidated affiliates
$
113

 
$
119

 
$
(6
)
 
$
246

 
$
291

 
$
(45
)
(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.


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Unrealized gains or losses on commodity risk management activities . 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 . These amounts represent our proportionate share of the Adjusted EBITDA of our unconsolidated affiliates. Amounts reflected are calculated consistently with our definition of Adjusted EBITDA.
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.
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 prior periods reported herein, certain transactions related to the business of legacy Sunoco Logistics have been reclassified from cost of products sold to operating expenses; these transactions include sales between operating subsidiaries and their marketing affiliates. These reclassifications had no impact on net income or total equity.
Following is a reconciliation of segment margin to operating income, as reported in the Partnership’s consolidated statements of operations:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Intrastate transportation and storage
$
267

 
$
202

 
$
438

 
$
384

Interstate transportation and storage
328

 
207

 
644

 
$
442

Midstream
593

 
571

 
1,146

 
1,084

NGL and refined products transportation and services
587

 
516

 
1,187

 
1,075

Crude oil transportation and services
442

 
374

 
1,010

 
646

All other
57

 
76

 
152

 
178

Intersegment eliminations
(4
)
 
6

 
(15
)
 
(12
)
Total segment margin
2,270

 
1,952

 
4,562

 
3,797

 
 
 
 
 
 
 
 
Less:
 
 
 
 
 
 
 
Operating expenses
627

 
539

 
1,231

 
1,031

Depreciation, depletion and amortization
588

 
557

 
1,191

 
1,117

Selling, general and administrative
112

 
120

 
224

 
230

Operating income
$
943

 
$
736

 
$
1,916

 
$
1,419



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Table of Contents

Intrastate Transportation and Storage
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Natural gas transported (BBtu/d)
10,327

 
9,261

 
1,066

 
9,802

 
8,569

 
1,233

Withdrawals from storage natural gas inventory (BBtu)

 

 

 
17,703

 
23,093

 
(5,390
)
Revenues
$
813

 
$
753

 
$
60

 
$
1,688

 
$
1,569

 
$
119

Cost of products sold
546

 
551

 
(5
)
 
1,250

 
1,185

 
65

Segment margin
267

 
202

 
65

 
438

 
384

 
54

Unrealized (gains) losses on commodity risk management activities
(8
)
 
(21
)
 
13

 
45

 
(6
)
 
51

Operating expenses, excluding non-cash compensation expense
(51
)
 
(46
)
 
(5
)
 
(90
)
 
(84
)
 
(6
)
Selling, general and administrative expenses, excluding non-cash compensation expense
(7
)
 
(5
)
 
(2
)
 
(13
)
 
(11
)
 
(2
)
Adjusted EBITDA related to unconsolidated affiliates
7

 
18

 
(11
)
 
20

 
34

 
(14
)
Segment Adjusted EBITDA
$
208

 
$
148

 
$
60

 
$
400

 
$
317

 
$
83

Volumes . For the three and six months ended June 30, 2018 compared to the same period last year, transported volumes increased primarily due to favorable market pricing. In addition, beginning in April 2018, transported volumes also reflected RIGS as a consolidated subsidiary , as discussed in “Recent Developments” above.
Segment Margin. The components of our intrastate transportation and storage segment margin were as follows:
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Transportation fees
$
134

 
$
104

 
$
30

 
$
251

 
$
228

 
$
23

Natural gas sales and other (excluding unrealized gains and losses)
108

 
61

 
47

 
199

 
94

 
105

Retained fuel revenues (excluding unrealized gains and losses)
13

 
15

 
(2
)
 
26

 
28

 
(2
)
Storage margin (excluding unrealized gains and losses)
4

 
1

 
3

 
7

 
28

 
(21
)
Unrealized gains (losses) on commodity risk management activities
8

 
21

 
(13
)
 
(45
)
 
6

 
(51
)
Total segment margin
$
267

 
$
202

 
$
65

 
$
438

 
$
384

 
$
54

Segment Adjusted EBITDA. For the three months ended June 30, 2018 compared to the same period last year, Segment Adjusted EBITDA related to our intrastate transportation and storage segment increased due to the net impacts of the following:
an increase of $47 million in realized natural gas sales and other margin due to higher realized gains from pipeline optimization activity;
a net increase of $5 million due to the consolidation of RIGS beginning in April 2018, as discussed in “Recent Developments” above, resulting in increases in transportation fees, operating expenses, and selling, general and administrative expenses of $26 million , $6 million and $2 million , respectively, and a decrease of $13 million in Adjusted EBITDA related to unconsolidated affiliates;
an increase of $4 million in transportation fees, excluding the incremental transportation fees related to the RIGS consolidation discussed above, primarily due to higher demand on existing pipelines; and


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an increase of $3 million in realized storage margin primarily due to higher realized derivative gains; partially offset by
a decrease of $2 million in retained fuel revenues as a result of lower natural gas pricing.
Segment Adjusted EBITDA. For the six months ended June 30, 2018 compared to the same period last year, Segment Adjusted EBITDA related to our intrastate transportation and storage segment increased due to the net impacts of the following:
an increase of $105 million in realized natural gas sales and other due to higher realized gains from pipeline optimization activity; and
a net increase of $5 million due to the consolidation of RIGS beginning in April 2018, as discussed in “Recent Developments” above, resulting in increases in transportation fees, operating expenses, and selling, general and administrative expenses of $26 million , $6 million and $2 million , respectively, and a decrease of $15 million in Adjusted EBITDA related to unconsolidated affiliates; partially offset by
a decrease of $21 million in realized storage margin primarily due to an adjustment to the Bammel storage inventory;
a decrease of $3 million in transportation fees, excluding the incremental transportation fees related to the RIGS consolidation discussed above, primarily due to renegotiated contracts; and
a decrease of $2 million in retained fuel revenues due to lower natural gas pricing.
Interstate Transportation and Storage
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Natural gas transported (BBtu/d)
8,707

 
5,299

 
3,408

 
8,457

 
5,476

 
2,981

Natural gas sold (BBtu/d)
17

 
17

 

 
17

 
17

 

Revenues
$
328

 
$
207

 
$
121

 
$
644

 
$
442

 
$
202

Operating expenses, excluding non-cash compensation, amortization and accretion expenses
(105
)
 
(67
)
 
(38
)
 
(199
)
 
(141
)
 
(58
)
Selling, general and administrative expenses, excluding non-cash compensation, amortization and accretion expenses
(17
)
 
(7
)
 
(10
)
 
(34
)
 
(19
)
 
(15
)
Adjusted EBITDA related to unconsolidated affiliates
123

 
128

 
(5
)
 
239

 
243

 
(4
)
Other
1

 
1

 

 
3

 
2

 
1

Segment Adjusted EBITDA
$
330

 
$
262

 
$
68

 
$
653

 
$
527

 
$
126

Volumes. For the three months ended June 30, 2018 compared to the same period last year, transported volumes reflected an increase of 1,748 BBtu/d as a result of the partial in service of the Rover pipeline; increases of 654 BBtu/d and 425 BBtu/d on the Panhandle and Trunkline pipelines, respectively, due to increased utilization of higher contracted capacity; an increase of 350 BBtu/d on the Tiger pipeline as a result of production increases in the Haynesville Shale and deliveries into intrastate markets; and an increase of 200 BBtu/d on the Transwestern pipeline resulting from favorable opportunities in the midcontinent and Waha areas from the Permian supply basin.
For the six months ended June 30, 2018 compared to the same period last year, transported volumes reflected an increase of 1,610 BBtu/d as a result of the partial in service of the Rover pipeline; increases of 529 BBtu/d and 328 BBtu/d on the Panhandle and Trunkline pipelines, respectively, due to higher demand resulting from colder weather and increased utilization by the Rover pipeline; an increase of 397 BBtu/d on the Tiger pipeline as a result of production increases in the Haynesville Shale and deliveries into intrastate markets; and an increase of 141 BBtu/d on the Transwestern pipeline resulting from favorable market opportunities in the midcontinent and Waha areas from the Permian supply basin.
Segment Adjusted EBITDA. For the three months ended June 30, 2018 compared to the same period last year, Segment Adjusted EBITDA related to our interstate transportation and storage segment increased due to the net impacts of the following:
an increase of $68 million from the partial in service of the Rover pipeline with increases of $105 million in revenues, $30 million in operating expenses and $7 million in selling, general and administrative expenses; and


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an aggregate increase of $19 million i n revenues, excluding the incremental revenue related to the Rover pipeline in service discussed above, primarily due to capacity sold at higher rates on the Transwestern and Panhandle pipelines, partially offset by $3 million of lower revenues on the Tiger pipeline due to a customer contract restructuring; partially offset by
an increase of $8 million in operating expenses, excluding the incremental expenses related to the Rover pipeline in service discussed above, primarily due to higher maintenance project costs;
an increase of $3 million in selling, general and administrative expenses, excluding the incremental expenses related to the Rover pipeline in service discussed above, primarily due to a reimbursement of legal fees and a franchise tax settlement received in 2017; and
a decrease of $5 million in Adjusted EBITDA related to unconsolidated affiliates primarily due to lower sales of short-term firm capacity on Citrus.
Segment Adjusted EBITDA. For the six months ended June 30, 2018 compared to the same period last year, Segment Adjusted EBITDA related to our interstate transportation and storage segment increased due to the net impacts of the following:
An increase of $117 million from the partial in service of the Rover pipeline with increases of $187 million in revenues, $56 million in operating expenses and $14 million in selling, general and administrative expenses; and
an aggregate increase of $21 million in revenues, excluding the incremental revenues related to the Rover pipeline in service discussed above, primarily due to capacity sold at higher rates on the Transwestern and Panhandle pipelines, partially offset by $6 million of lower revenues on the Tiger pipeline due to a customer contract restructuring; partially offset by
an increase of $2 million in operating expenses, excluding the incremental expenses related to the Rover pipeline in service discussed above, primarily due to higher maintenance project costs; and
a decrease of $4 million in Adjusted EBITDA related to unconsolidated affiliates primarily due to lower sales of short term firm capacity on Citrus.
Midstream
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Gathered volumes (BBtu/d)
11,576

 
10,961

 
615

 
11,442

 
10,599

 
843

NGLs produced (MBbls/d)
513

 
474

 
39

 
508

 
459

 
49

Equity NGLs (MBbls/d)
31

 
28

 
3

 
30

 
27

 
3

Revenues
$
1,874

 
$
1,615

 
$
259

 
$
3,488

 
$
3,252

 
$
236

Cost of products sold
1,281

 
1,044

 
237

 
2,342

 
2,168

 
174

Segment margin
593

 
571

 
22

 
1,146

 
1,084

 
62

Unrealized gains on commodity risk management activities

 
(3
)
 
3

 

 
(19
)
 
19

Operating expenses, excluding non-cash compensation expense
(169
)
 
(152
)
 
(17
)
 
(333
)
 
(313
)
 
(20
)
Selling, general and administrative expenses, excluding non-cash compensation expense
(20
)
 
(11
)
 
(9
)
 
(40
)
 
(34
)
 
(6
)
Adjusted EBITDA related to unconsolidated affiliates
9

 
7

 
2

 
16

 
14

 
2

Other
1

 

 
1

 
2

 

 
2

Segment Adjusted EBITDA
$
414

 
$
412

 
$
2

 
$
791

 
$
732

 
$
59

Volumes. For the three and six months ended June 30, 2018 compared to the same periods last year, gathered volumes and NGL production increased primarily due to increases in the Permian and Northeast regions, partially offset by smaller declines in other regions.


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Segment Margin . The components of our midstream segment margin were as follows:
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Gathering and processing fee-based revenues
$
453

 
$
436

 
$
17

 
$
874

 
$
844

 
$
30

Non-fee-based contracts and processing (excluding unrealized gains and losses)
140

 
132

 
8

 
272

 
221

 
51

Unrealized gains on commodity risk management activities

 
3

 
(3
)
 

 
19

 
(19
)
Total segment margin
$
593

 
$
571

 
$
22

 
$
1,146

 
$
1,084

 
$
62

Segment Adjusted EBITDA. For the three months ended June 30, 2018 compared to the same period last year, Segment Adjusted EBITDA related to our midstream segment increased due to the net impacts of the following:
an increase of $17 million in fee-based margin due to growth in the Permian and Northeast regions, offset by declines in the South Texas, North Texas and midcontinent/Panhandle regions;
an increase of $6 million in non-fee-based margin primarily due to higher crude oil and NGL prices;
an increase of $2 million in non-fee-based margin due to increased throughput volume in the Permian region; and
an increase of $2 million in Adjusted EBITDA related to unconsolidated affiliates due to higher earnings from our Aqua, Mi Vida and Ranch joint ventures; partially offset by
an increase of $17 million in operating expenses primarily due to increases of $6 million in outside services, $5 million in materials, $2 million in employee costs and $2 million in ad valorem taxes; and
an increase of $9 million in selling, general and administrative expenses primarily due to a favorable impact recorded in the prior period from the adjustment of certain reserves in connection with contingent matters.
Segment Adjusted EBITDA. For the six months ended June 30, 2018 compared to the same period last year, Segment Adjusted EBITDA related to our midstream segment increased due to the net impacts of the following:
an increase of $27 million in non-fee-based margin primarily due to higher crude oil and NGL prices;
an increase of $24 million in non-fee-based margin due to increased throughput volume in the Permian region;
an increase of $30 million in fee-based margin due to growth in the Permian and Northeast regions, offset by declines in the South Texas, North Texas and midcontinent/Panhandle regions; and
an increase of $2 million in Adjusted EBITDA related to unconsolidated affiliates due to higher earnings from our Aqua, Mi Vida and Ranch joint ventures; partially offset by
an increase of $20 million in operating expenses due to increases of $8 million in outside services, $5 million in materials, $4 million in employee costs and $3 million in ad valorem taxes; and
an increase of $6 million in selling, general and administrative expenses primarily due to a favorable impact recorded in the prior period from the adjustment of certain reserves in connection with contingent matters.


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NGL and Refined Products Transportation and Services
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
NGL transportation volumes (MBbls/d)
967

 
835

 
132

 
951

 
823

 
128

Refined products transportation volumes (MBbls/d)
637

 
643

 
(6
)
 
629

 
633

 
(4
)
NGL and refined products terminal volumes (MBbls/d)
789

 
767

 
22

 
746

 
779

 
(33
)
NGL fractionation volumes (MBbls/d)
473

 
431

 
42

 
473

 
430

 
43

Revenues
$
2,568

 
$
1,779

 
$
789

 
$
5,114

 
$
4,045

 
$
1,069

Cost of products sold
1,981

 
1,263

 
718

 
3,927

 
2,970

 
957

Segment margin
587

 
516

 
71

 
1,187

 
1,075

 
112

Unrealized (gains) losses on commodity risk management activities
13

 
(4
)
 
17

 

 
(54
)
 
54

Operating expenses, excluding non-cash compensation expense
(141
)
 
(125
)
 
(16
)
 
(280
)
 
(252
)
 
(28
)
Selling, general and administrative expenses, excluding non-cash compensation expense
(17
)
 
(17
)
 

 
(35
)
 
(36
)
 
1

Adjusted EBITDA related to unconsolidated affiliates
19

 
18

 
1

 
40

 
35

 
5

Other

 

 

 

 
1

 
(1
)
Segment Adjusted EBITDA
$
461

 
$
388

 
$
73

 
$
912

 
$
769

 
$
143

Volumes. For the three and six months ended June 30, 2018 compared to the same periods last year, NGL transportation volumes increased primarily from the Permian region resulting from a ramp up in production from existing customers.
Refined products transportation volumes decreased slightly for the three and six months ended June 30, 2018 compared to the same periods last year primarily due to lower throughput volumes from the Midwest region due to end user operational issues, partially offset by increased throughput volumes from the Southwest region due to increased demand.
Compared to the same periods last year, NGL and refined products terminal volumes increased for the three months ended June 30, 2018 but decreased for the six months ended June 30, 2018 . The increase for the three months ended June 30, 2018 compared to the same period last year was primarily due to more volumes loaded at our Nederland terminal as propane export demand increased, as well as higher refined products throughput volumes at our Eagle Point terminal, partially offset by lower throughput volumes at our Marcus Hook Industrial Complex primarily due to Mariner East 1 system downtime during the second quarter of 2018. For the six months ended June 30, 2018 compared to the same period in the prior year, the decrease was primarily due to lower throughput volumes at our Marcus Hook Industrial Complex due to Mariner East 1 system downtime, lower refined product throughput volumes at our Eagle Point terminal and lower volumes at our refined products marketing terminals.
Average fractionated volumes at our Mont Belvieu, Texas fractionation facility increased for the three and six months ended June 30, 2018 compared to the same periods last year primarily due to increased volumes from Permian producers.


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Segment Margin. The components of our NGL and refined products transportation and services segment margin were as follows:
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Fractionators and Refinery services margin
$
128

 
$
117

 
$
11

 
$
262

 
$
237

 
$
25

Transportation margin
290

 
241

 
49

 
556

 
474

 
82

Storage margin
48

 
53

 
(5
)
 
104

 
110

 
(6
)
Terminal Services margin
91

 
81

 
10

 
185

 
168

 
17

Marketing margin
43

 
20

 
23

 
80

 
32

 
48

Unrealized gains (losses) on commodity risk management activities
(13
)
 
4

 
(17
)
 

 
54

 
(54
)
Total segment margin
$
587

 
$
516

 
$
71

 
$
1,187

 
$
1,075

 
$
112

Segment Adjusted EBITDA. For the three months ended June 30, 2018 compared to the same period last year, Segment Adjusted EBITDA related to our NGL and refined products transportation and services segment increased due to the net impacts of the following:
an increase of $49 million in transportation margin due to a $43 million increase resulting from increased producer volumes from the Permian region on our Texas NGL pipelines, an $11 million increase resulting from a reclassification between our transportation and fractionation margins, a $4 million increase due to higher throughput on Mariner West and a $2 million increase on Mariner South primarily due to system downtime in the prior period. These increases were partially offset by an $11 million decrease resulting from lower throughput on Mariner East 1 due to system downtime in the second quarter of 2018;
an increase of $23 million in marketing margin (excluding a net change of $17 million in unrealized gains and losses) due to gains of $10 million from our butane blending operations, a $9 million increase from sales of domestic propane and other products at our Marcus Hook Industrial Complex and a $4 million increase from optimizing sales of purity product from our Mont Belvieu fractionators;
an increase of $11 million in fractionation and refinery services margin due to a $14 million increase resulting from higher NGL volumes from the Permian region feeding our Mont Belvieu fractionation facility, a $6 million increase from blending gains as a result of improved market pricing and a $2 million increase from Mariner South as more cargoes were loaded at Mariner South. These increases were partially offset by an $11 million decrease resulting from a reclassification between our transportation and fractionation margins; and
an increase of $10 million in terminal services margin due to a $7 million increase resulting from a change in the classification of certain customer reimbursements previously recorded as a reduction to operating expenses that are now classified as revenue following the adoption of ASC 606 on January 1, 2018 and a $5 million increase at our Nederland terminal due to increased demand for propane exports. These increases were partially offset by a $2 million decrease due to the effect of Mariner East pipeline system downtime on our Marcus Hook Industrial Complex; partially offset by
an increase of $16 million in operating expenses primarily due to a $7 million increase resulting from a change in the classification of certain customer reimbursements previously recorded as a reduction to operating expenses that are now classified as revenue following the adoption of ASC 606 on January 1, 2018, a $4 million increase in utilities and ad valorem taxes on the fractionators, and a $3 million increase in overhead costs; and
a decrease of $5 million in storage margin primarily due to the expiration and amendments to various NGL and refined products storage contracts.
Segment Adjusted EBITDA. For the six months ended June 30, 2018 compared to the same period last year, Segment Adjusted EBITDA related to our NGL and refined products transportation and services segment increased due to the net impacts of the following:
an increase of $82 million in transportation margin due to $78 million from increased producer volumes from the Permian region on our Texas NGL pipelines, an $11 million increase due to higher throughput on Mariner West driven by end user facility constraints in the prior period, an $11 million increase resulting from a reclassification between our transportation and fractionation margins, a $3 million increase on Mariner South primarily due to system downtime in the prior period and a $4 million increase from higher deficiency fees. These increases were partially offset by a $17 million decrease resulting


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from lower throughput on Mariner East 1 due to system downtime in 2018, and $8 million due to lower transport revenue from the Eagle Ford and Southeast Texas regions.
an increase of $48 million in marketing margin (excluding a net change of $54 million in unrealized gains and losses) due to an $18 million increase from our butane blending operations, a $17 million increase from sales of domestic propane and other products at our Marcus Hook Industrial Complex and a $13 million increase from optimizing sales of purity product from our Mont Belvieu fractionators;
an increase of $25 million in fractionation and refinery services margin due to a $23 million increase resulting from higher NGL volumes from the Permian region feeding our Mont Belvieu fractionation facility, a $9 million increase from blending gains as a result of improved market pricing and a $4 million increase as we loaded more cargoes at our Mariner South export facility. These increases were partially offset by an $11 million decrease resulting from a reclassification between our transportation and fractionation margins;
an increase of $17 million in terminal services margin due to a $18 million increase resulting from a change in the classification of certain customer reimbursements previously recorded as a reduction to operating expenses that are now classified as revenue following the adoption of ASC 606 on January 1, 2018 and a $6 million increase at our Nederland terminal due to increased demand for propane exports. These increases were partially offset by a $4 million decrease due to the effect of Mariner East pipeline system downtime on our Marcus Hook Industrial Complex and a $3 million decrease from our marketing terminal volumes primarily due to the sale of one of our terminals in April 2017; and
an increase of $5 million in Adjusted EBITDA related to unconsolidated affiliates due to improved contributions from our unconsolidated refined products joint venture interests; partially offset by
an increase of $28 million in operating expenses due to a $18 million increase resulting from a change in the classification of certain customer reimbursements previously recorded as a reduction to operating expenses that are now classified as revenue following the adoption of ASC 606 on January 1, 2018, a $6 million increases in certain allocated overhead and a $4 million increase in utilities and ad valorem taxes on the fractionators; and
a decrease of $6 million in storage margin due to a $8 million decrease from the expiration and amendments to various NGL and refined products storage contracts and a $4 million decrease from the expiration of a fixed fee transport agreement in 2017. These increases were partially offset by a $6 million increase from throughput fees collected at our Mont Belvieu storage terminal and increased demand on the Explorer Pipeline.
Crude Oil Transportation and Services
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Crude transportation volumes (MBbls/d)
4,242

 
3,452

 
790

 
4,036

 
3,248

 
788

Crude terminals volumes (MBbls/d)
2,103

 
1,950

 
153

 
2,022

 
1,864

 
158

Revenues
$
4,803

 
$
2,465

 
$
2,338

 
$
8,548

 
$
5,040

 
$
3,508

Cost of products sold
4,361

 
2,091

 
2,270

 
7,538

 
4,394

 
3,144

Segment margin
442

 
374

 
68

 
1,010

 
646

 
364

Unrealized losses (gains) on commodity risk management activities
262

 
(2
)
 
264

 
305

 
(2
)
 
307

Operating expenses, excluding non-cash compensation expense
(144
)
 
(114
)
 
(30
)
 
(271
)
 
(186
)
 
(85
)
Selling, general and administrative expenses, excluding non-cash compensation expense
(20
)
 
(32
)
 
12

 
(42
)
 
(49
)
 
7

Adjusted EBITDA related to unconsolidated affiliates
8

 
2

 
6

 
10

 
6

 
4

Segment Adjusted EBITDA
$
548

 
$
228

 
$
320

 
$
1,012

 
$
415

 
$
597

Volumes. For the three and six months ended June 30, 2018 crude transportation volumes increased due to placing the Bakken pipeline in service in June 2017 as well as increased volumes on existing pipelines due to increased production in West Texas. For the three and six months ended June 30, 2018 crude terminal volumes increased due to increased volumes delivered to our Nederland crude terminal from the Bakken pipeline and from increased West Texas production.


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Segment Adjusted EBITDA. For the three months ended June 30, 2018 compared to the same period last 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 $332 million in segment margin (excluding unrealized losses on commodity risk management activities) due to a $193 million increase resulting primarily from placing our Bakken pipeline in service in the second quarter of 2017 as well as a $27 million increase resulting from increased throughput, primarily from Permian producers, on existing pipeline assets; a $100 million increase (excluding a net change of $264 million in unrealized gains and losses) from our crude oil acquisition and marketing business primarily resulting from more favorable market price differentials between the West Texas and Gulf Coast markets; and a $9 million increase in terminal fees primarily from ship loading fees at our Nederland facility as a result of increased exports;
a decrease of $12 million in selling, general and administrative expenses primarily due to higher professional fees recorded in the prior period; and
an increase of $6 million in Adjusted EBITDA related to unconsolidated affiliates due to a new contract at one of our joint ventures; partially offset by
an increase of $30 million in operating expenses due to a $13 million increase primarily resulting from placing our Bakken pipeline in service in the second quarter of 2017; a $3 million increase resulting from the addition of certain joint venture transportation assets in the second quarter of 2017; and a $14 million increase from existing transportation assets due to increases of $7 million in utilities, $5 million in expense projects, $5 million in ad valorem taxes and $5 million in management fees, partially offset by decreases in environmental fees of $5 million and capacity leases of $3 million .
Segment Adjusted EBITDA. For the six months ended June 30, 2018 compared to the same period last 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 $671 million in segment margin (excluding unrealized losses on commodity risk management activities) due to a $417 million increase resulting primarily from placing our Bakken pipeline in service in the second quarter of 2017; a $50 million increase resulting from increased throughput, primarily from Permian producers, on existing pipeline assets; a $188 million increase (excluding a net change of $307 million in unrealized gains and losses) from our crude oil acquisition and marketing business primarily resulting from more favorable market price differentials between the West Texas and Gulf Coast markets; and a $16 million increase primarily from our Nederland facility due to higher ship loading fees as a result of increased exports;
a decrease of $7 million in selling, general and administrative expenses due to a $13 million decrease in professional fees, partially offset by an increase of $6 million related to Bakken insurance and management fees; and
an increase of $4 million in Adjusted EBITDA related to unconsolidated affiliates due to a new contract at one of our joint ventures; partially offset by
an increase of $85 million in operating expenses due to a $39 million increase primarily resulting from placing our Bakken pipeline in service in the second quarter of 2017; a $15 million increase resulting from the addition of certain joint venture transportation assets in the second quarter of 2017; and a $31 million increase from existing transportation assets due to increases of $10 million in ad valorem taxes, $9 million in management fees, $8 million in utilities, $5 million in expense projects and $5 million in freight, partially offset by decreases in environmental fees of $5 million and capacity leases of $1 million .


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All Other
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Revenues
$
502

 
$
870

 
$
(368
)
 
$
1,073

 
$
1,640

 
$
(567
)
Cost of products sold
445

 
794

 
(349
)
 
921

 
1,462

 
(541
)
Segment margin
57

 
76

 
(19
)
 
152

 
178

 
(26
)
Unrealized (gains) losses on commodity risk management activities
(2
)
 
(4
)
 
2

 
2

 
(17
)
 
19

Operating expenses, excluding non-cash compensation expense
(10
)
 
(31
)
 
21

 
(41
)
 
(52
)
 
11

Selling, general and administrative expenses, excluding non-cash compensation expense
(19
)
 
(27
)
 
8

 
(37
)
 
(48
)
 
11

Adjusted EBITDA related to unconsolidated affiliates
62

 
76

 
(14
)
 
88

 
156

 
(68
)
Other and eliminations
2

 
17

 
(15
)
 

 
13

 
(13
)
Segment Adjusted EBITDA
$
90

 
$
107

 
$
(17
)
 
$
164

 
$
230

 
$
(66
)
Amounts reflected in our all other segment primarily include:
our equity method investment in limited partnership units of Sunoco LP consisting of 26.2 million and 43.5 million Sunoco LP common units, representing 31.8% and 43.7% of Sunoco LP’s total outstanding common units as of June 30, 2018 and June 30, 2017 , respectively. In February 2018, after the record date for Sunoco LP’s fourth quarter 2017 cash distributions, Sunoco LP repurchased 17,286,859   Sunoco LP common units owned by ETP for aggregate cash consideration of approximately $540 million ;
our natural gas marketing and compression operations. Subsequent to our contribution of CDM to USAC in April 2018, our all other segment includes our equity method investment in USAC consisting of 19.2 million USAC common units and 6.4 million USAC Class B Units, together representing 26.6% of the limited partner interests ;
a non-controlling interest in PES, comprising 33% of PES’ outstanding common units; and
our investment in coal handling facilities.
Segment Adjusted EBITDA. For the three months ended June 30, 2018 compared to the same period last year, Segment Adjusted EBITDA related to our all other segment decreased due to the net impacts of the following:
a decrease of $44 million in Adjusted EBITDA related to unconsolidated affiliates from our investment in Sunoco LP resulting from the Partnership’s lower ownership in Sunoco LP and lower operating results of Sunoco LP due to the sale of the majority of its retail assets in January 2018; and
a decrease of $12 million due to the contribution of CDM to USAC in April 2018, which decrease reflects the impact of deconsolidating CDM, partially offset by an increase in Adjusted EBITDA related to unconsolidated affiliates due to the equity method investment in USAC held by ETP subsequent to the CDM Contribution; partially offset by
a decrease of $14 million in merger and acquisition expenses related to the Sunoco Logistics merger in 2017, partially offset by the CDM Contribution in 2018;
an increase of $12 million in Adjusted EBITDA related to unconsolidated affiliates from our investment in PES;
an increase of $6 million from gains in power trading activities; and
an increase of $2 million in margin due to the expiration of a capacity contract commitment.
Segment Adjusted EBITDA. For the six months ended June 30, 2018 compared to the same period last year, Segment Adjusted EBITDA related to our all other segment decreased due to the net impacts of the following:
a decrease of $69 million in Adjusted EBITDA related to unconsolidated affiliates from our investment in Sunoco LP resulting from the Partnership’s lower ownership in Sunoco LP and lower operating results of Sunoco LP due to the sale of the majority of its retail assets in January 2018;


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a decrease of $18 million in Adjusted EBITDA related to unconsolidated affiliates primarily from our investment in PES; and
a decrease of $9 million due to the contribution of CDM to USAC in April 2018, which decrease reflects the impact of deconsolidating CDM, partially offset by an increase in Adjusted EBITDA related to unconsolidated affiliates due to the equity method investment in USAC held by ETP subsequent to the CDM Contribution; partially offset by
a decrease of $17 million in merger and acquisition expenses related to the Sunoco Logistics merger in 2017, partially offset by the CDM Contribution in 2018;
an increase of $8 million from commodity trading activities; and
an increase of $5 million in margin from the expiration of a capacity contract commitment.
LIQUIDITY AND CAPITAL RESOURCES
Overview
ETP’s ability to satisfy its obligations and pay distributions to its unitholders 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 management’s control.
We currently expect capital expenditures in 2018 to be within the following ranges:
 
Growth
 
Maintenance
 
Low
 
High
 
Low
 
High
Intrastate transportation and storage
$
275

 
$
300

 
$
30

 
$
35

Interstate transportation and storage (1)
500

 
550

 
115

 
120

Midstream
850

 
875

 
120

 
130

NGL and refined products transportation and services
2,350

 
2,500

 
60

 
70

Crude oil transportation and services (1)
450

 
475

 
90

 
100

All other (including eliminations)
75

 
100

 
60

 
65

Total capital expenditures
$
4,500

 
$
4,800

 
$
475

 
$
520

(1)  
Includes capital expenditures related to our proportionate ownership of the Bakken, Rover and Bayou Bridge pipeline projects.
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.
We generally fund maintenance capital expenditures and distributions with cash flows from operating activities. We generally fund growth capital expenditures with proceeds of borrowings under credit facilities, long-term debt, the issuance of additional common units, dropdown proceeds or the monetization of non-core assets or a combination thereof.
Cash Flows
Our internally generated cash flows may change in the future due to a number of factors, some of which we cannot control. These include regulatory changes, the price for our products and services, the demand for such products and services, margin requirements resulting from significant changes in commodity prices, operational risks, the successful integration of our acquisitions, and other factors.
Operating Activities
Changes in cash flows from operating activities between periods primarily result from changes in earnings (as discussed in “Results of Operations” above), excluding the impacts of non-cash items and net changes in operating assets and liabilities (net of effects of acquisitions and deconsolidations). 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


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such grants. Cash flows from operating activities also differ from earnings as a result of non-cash charges that may not be recurring such as impairment charges and allowance for equity funds used during construction. The allowance for equity funds used during construction increases in periods when we have a significant amount of interstate pipeline construction in progress. Changes in operating assets and liabilities between periods result from factors such as the changes in the value of derivative assets and liabilities, the timing of accounts receivable collection, the timing of payments on accounts payable, the timing of purchase and sales of inventories and the timing of advances and deposits received from customers.
Six months ended June 30, 2018 compared to six months ended June 30, 2017 . Cash provided by operating activities during 2018 was $2.95 billion compared to $1.65 billion for 2017 and net income was $1.48 billion and $689 million for 2018 and 2017 , respectively. The difference between net income and cash provided by operating activities for the six months ended June 30, 2018 primarily consisted of net changes in operating assets and liabilities (net of effects of acquisitions and deconsolidations) of $229 million and other non-cash items totaling $1.04 billion .
The non-cash activity in 2018 and 2017 consisted primarily of depreciation, depletion and amortization of $1.19 billion and $1.12 billion , respectively, and non-cash compensation expense of $41 million and $38 million , respectively. Unconsolidated affiliate activity in 2018 and 2017 consisted of equity in earnings of $34 million and $12 million , respectively, and distributions received of $215 million and $197 million , respectively. Non-cash activity in 2018 also included a gain on the sale of Sunoco LP units of $172 million , a loss on the deconsolidation of CDM of $86 million and an increase in deferred income taxes of $52 million . Non-cash activity in 2017 also included an increase in deferred income taxes of $121 million .
Cash paid for interest, net of interest capitalized, was $690 million and $673 million for the six months ended June 30, 2018 and 2017 , respectively.
Capitalized interest was $160 million and $124 million for the six months ended June 30, 2018 and 2017 , respectively.
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.
Six months ended June 30, 2018 compared to six months ended June 30, 2017 . Cash used in investing activities during 2018 was $1.59 billion compared to $1.49 billion in 2017 . Total capital expenditures (excluding the allowance for equity funds used during construction and net of contributions in aid of construction costs) for 2018 were $3.35 billion compared to $2.83 billion for 2017 . Additional detail related to our capital expenditures is provided in the table below. During 2018 , we received $1.23 billion in cash related to the CDM Contribution and $540 million in cash related to the Sunoco LP common unit repurchase. During 2017 , we received $2.00 billion in cash related to the Bakken equity sale to MarEn Bakken Company, paid $280 million in cash for the acquisition of PennTex noncontrolling interest and paid $261 million in cash for all other acquisitions.
The following is a summary of capital expenditures (net of contributions in aid of construction costs) for the six months ended June 30, 2018 :
 
Capital Expenditures Recorded During Period
 
Growth
 
Maintenance
 
Total
Intrastate transportation and storage
$
195

 
$
21

 
$
216

Interstate transportation and storage
351

 
37

 
388

Midstream
448

 
65

 
513

NGL and refined products transportation and services
974

 
26

 
1,000

Crude oil transportation and services
205

 
21

 
226

All other (including eliminations)
68

 
34

 
102

Total capital expenditures
$
2,241

 
$
204

 
$
2,445

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.


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Six months ended June 30, 2018 compared to six months ended June 30, 2017 . Cash used in financing activities during 2018 was $1.17 billion compared to $252 million for 2017 . In 2018 and 2017 , we received net proceeds from common unit offerings of $39 million and $990 million , respectively. In 2018 we received $436 million from preferred unit offerings. During 2018 , we had a net increase in our debt level of $458 million compared to a net increase of $258 million for 2017 . We have paid distributions of $2.01 billion to our unitholders in 2018 compared to $1.70 billion in 2017 . We have also paid distributions of $359 million to noncontrolling interests in 2018 compared to $186 million in 2017 . In addition, we have received capital contributions of $318 million in cash from noncontrolling interests in 2018 compared to $456 million in 2017 . During 2018 , we also repurchased common units for cash of $24 million and incurred debt issuance costs of $38 million . During 2017 , we also repurchased our outstanding Legacy ETP Preferred Units for cash of $53 million and incurred debt issuance costs of $20 million .
Off-Balance Sheet Arrangements
Guarantee of Sunoco LP Notes
In connection with previous transactions whereby Retail Holdings contributed assets to Sunoco LP, Retail Holdings provided a limited contingent guarantee of collection, but not of payment, to Sunoco LP with respect to certain of Sunoco LP’s senior notes and $2.035 billion aggregate principal for Sunoco LP’s term loan due 2019. In December 2016, Retail Holdings contributed its interests in Sunoco LP, along with the assignment of the guarantee of Sunoco LP’s senior notes, to its subsidiary, ETC M-A Acquisition LLC (“ETC M-A”).
On January 23, 2018, Sunoco LP redeemed the previously guaranteed senior notes, repaid and terminated the term loan and issued the following notes for which ETC M-A has also guaranteed collection with respect to the payment of principal amounts:
$1.00 billion aggregate principal amount of 4.875% senior notes due 2023;
$800 million aggregate principal amount of 5.50% senior notes due 2026; and
$400 million aggregate principal amount of 5.875% senior notes due 2028.
Under the guarantee of collection, ETC M-A would have the obligation to pay the principal of each series of notes once all remedies, including in the context of bankruptcy proceedings, have first been fully exhausted against Sunoco LP with respect to such payment obligation, and holders of the notes are still owed amounts in respect of the principal of such notes. ETC M-A will not otherwise be subject to the covenants of the indenture governing the notes.


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Description of Indebtedness
Our outstanding consolidated indebtedness was as follows:
 
June 30, 2018
 
December 31, 2017
ETP Senior Notes (1)(2)
$
29,354

 
$
27,005

Transwestern Senior Notes
575

 
575

Panhandle Senior Notes
386

 
785

Credit facilities and commercial paper:
 
 
 
ETP $4.00 billion Revolving Credit Facility due December 2022 (3)
1,228

 
2,292

ETP $1.00 billion 364-Day Credit Facility due November 2018

 
50

Bakken Project $2.50 billion Credit Facility due August 2019
2,500

 
2,500

Other long-term debt
4

 
5

Unamortized premiums, net of discounts and fair value adjustments
39

 
61

Deferred debt issuance costs
(190
)
 
(179
)
Total debt
33,896

 
33,094

Less: current maturities of long-term debt
155

 
407

Long-term debt, less current maturities
$
33,741

 
$
32,687

(1)  
Includes $600 million aggregate principal amount of 6.70% senior notes due July 1, 2018 that were classified as long-term as of June 30, 2018 as they were refinanced on a long-term basis in June 2018, see “ETP Senior Notes Offering and Redemption” below.
(2)  
Includes $400 million aggregate principal amount of 9.70% senior notes due March 15, 2019 and $450 million aggregate principal amount of 9.00% senior notes due April 15, 2019 that were classified as long-term as of June 30, 2018 as management has the intent and ability to refinance the borrowings on a long-term basis.
(3)  
Includes $1.23 billion and $2.01 billion of commercial paper outstanding at June 30, 2018 and December 31, 2017 , respectively.
ETP Senior Notes Offering and Redemption
In June 2018, ETP issued the following senior notes:
$500 million aggregate principal amount of 4.20% senior notes due 2023 ;
$1.00 billion aggregate principal amount of 4.95% senior notes due 2028 ;
$500 million aggregate principal amount of 5.80% senior notes due 2038 ; and
$1.00 billion aggregate principal amount of 6.00% senior notes due 2048.
The senior notes were registered under the Securities Act of 1933 (as amended).  The Partnership may redeem some or all of the senior notes at any time, or from time to time, pursuant to the terms of the indenture and related indenture supplements related to the senior notes. The principal on the senior notes is payable upon maturity and interest is paid semi-annually.
The senior notes rank equally in right of payment with ETP’s existing and future senior debt, and senior in right of payment to any future subordinated debt ETP may incur.  The notes of each series will initially be fully and unconditionally guaranteed by our subsidiary, Sunoco Logistics Partners Operations L.P., on a senior unsecured basis so long as it guarantees any of our other long-term debt. The guarantee for each series of notes ranks equally in right of payment with all of the existing and future senior debt of Sunoco Logistics Partners Operations L.P., including its senior notes.
The $2.96 billion net proceeds from the offering were used to repay borrowings outstanding under ETP’s revolving credit facility, for general partnership purposes and to redeem all of the following senior notes:
ETP’s $650 million aggregate principal amount of 2.50% senior notes due June 15, 2018;
Panhandle’s $400 million aggregate principal amount of 7.00% senior notes due June 15, 2018; and
ETP’s $600 million aggregate principal amount of 6.70% senior notes due July 1, 2018.


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The aggregate amount paid to redeem these notes was approximately   $1.65 billion .
Credit Facilities and Commercial Paper
ETP Five-Year Credit Facility
ETP’s revolving credit facility (the “ETP Five-Year Credit Facility”) allows for unsecured borrowings up to $4.00 billion and matures in December 2022. The ETP 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 of June 30, 2018 , the ETP Five-Year Credit Facility had $1.23 billion outstanding, all of which was commercial paper. The amount available for future borrowings was $2.61 billion after taking into account letters of credit of $167 million . The weighted average interest rate on the total amount outstanding as of June 30, 2018 was 2.87% .
ETP 364-Day Facility
ETP’s 364-day revolving credit facility (the “ETP 364-Day Facility”) allows for unsecured borrowings up to $1.00 billion and matures on November 30, 2018. As of June 30, 2018 , the ETP 364-Day Facility had no outstanding borrowings.
Bakken Credit Facility
In August 2016, ETP and Phillips 66 completed project-level financing of the Bakken pipeline. The $2.50 billion credit facility matures in August 2019 (the “Bakken Credit Facility”). As of June 30, 2018 , the Bakken Credit Facility had $2.50 billion of outstanding borrowings. The weighted average interest rate on the total amount outstanding as of June 30, 2018 was 3.72% .
Covenants Related to Our Credit Agreements
We were in compliance with all requirements, tests, limitations, and covenants related to our credit agreements as of June 30, 2018 .
CASH DISTRIBUTIONS
Under our limited partnership agreement, within 45 days after the end of each quarter, the Partnership distributes all cash on hand at the end of the quarter, less reserves established by the general partner in its discretion. This is defined as “available cash” in the partnership agreement. The general partner has broad discretion to establish cash reserves that it determines are necessary or appropriate to properly conduct the Partnership’s business. The Partnership will make quarterly distributions to the extent there is sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to the general partner.
Distributions on common units declared and/or paid by the Partnership subsequent to December 31, 2017 were as follows:
Quarter Ended
 
Record Date
 
Payment Date
 
Rate
December 31, 2017
 
February 8, 2018
 
February 14, 2018
 
$
0.5650

March 31, 2018
 
May 7, 2018
 
May 15, 2018
 
0.5650

June 30, 2018
 
August 6, 2018
 
August 14, 2018
 
0.5650

Distributions on preferred units declared and/or paid by the Partnership subsequent to December 31, 2017 were as follows:
Period Ended
 
Record Date
 
Payment Date
 
Rate
Series A Preferred Units
 
 
 
 
 
 
December 31, 2017
 
February 1, 2018
 
February 15, 2018
 
$
15.451

June 30, 2018
 
August 1, 2018
 
August 15, 2018
 
31.250

Series B Preferred Units
 
 
 
 
 
 
December 31, 2017
 
February 1, 2018
 
February 15, 2018
 
$
16.378

June 30, 2018
 
August 1, 2018
 
August 15, 2018
 
33.125

Series C Preferred Units
 
 
 
 
 
 
June 30, 2018
 
August 1, 2018
 
August 15, 2018
 
$
0.56337



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The total amounts of distributions declared for the periods presented (all from Available Cash from our operating surplus and are shown in the period with respect to which they relate):
 
Six Months Ended
June 30,
 
2018
 
2017
Limited Partners:
 
 
 
Common Units held by public
$
1,286

 
$
1,156

Common Units held by ETE
31

 
30

General Partner interest and incentive distributions held by ETE
900

 
781

IDR relinquishments
(84
)
 
(319
)
Series A Preferred Units
30

 

Series B Preferred Units
18

 

Series C Preferred Units
10

 

Total distributions declared to partners
$
2,191

 
$
1,648

In connection with previous transactions, ETE agreed to relinquish its right to the following amounts of incentive distributions in future periods:
 
 
Year Ending December 31,
2018 (remainder)
 
$
69

2019
 
128

Each year beyond 2019
 
33

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. We describe our significant accounting policies in Note 2 to our consolidated financial statements in the Partnership’s Annual Report on Form 10-K filed with the SEC on February 23, 2018. See Note 1 in “Item 1. Financial Statements” for information regarding recent changes to the Partnership’s critical accounting policies related to revenue recognition.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 in “Item 1. Financial Statements” included in this Quarterly Report for information regarding recent accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in Item 3 updates, and should be read in conjunction with, information set forth in Part II, Item 7A included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on February 23, 2018, in addition to the accompanying notes and management’s discussion and analysis of financial condition and results of operations presented in Items 1 and 2 of this Quarterly Report on Form 10-Q. Our quantitative and qualitative disclosures about market risk are consistent with those discussed for the year ended December 31, 2017 . Since December 31, 2017 , there have been no material changes to our primary market risk exposures or how those exposures are managed.


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Commodity Price Risk
The table below summarizes our commodity-related financial derivative instruments and fair values, including derivatives related to our consolidated subsidiaries, as well as the effect of an assumed hypothetical 10% change in the underlying price of the commodity. Dollar amounts are presented in millions.
 
June 30, 2018
 
December 31, 2017
 
Notional Volume
 
Fair Value Asset (Liability)
 
Effect of Hypothetical 10% Change
 
Notional Volume
 
Fair Value Asset (Liability)
 
Effect of Hypothetical 10% Change
Mark-to-Market Derivatives
 
 
 
 
 
 
 
 
 
 
 
(Trading)
 
 
 
 
 
 
 
 
 
 
 
Natural Gas (BBtu):
 
 
 
 
 
 
 
 
 
 
 
Fixed Swaps/Futures
465

 
$

 
$

 
1,078

 
$

 
$

Basis Swaps IFERC/NYMEX (1)
102,328

 
3

 

 
48,510

 
2

 
1

Options – Puts
(3,043
)
 

 

 
13,000

 

 

Power (Megawatt):
 
 
 
 
 
 
 
 
 
 
 
Forwards
3,196,100

 
12

 
8

 
435,960

 
1

 
1

Futures
(42,768
)
 

 

 
(25,760
)
 

 

Options – Puts
(30,532
)
 
1

 

 
(153,600
)
 

 
1

Options – Calls
996,172

 

 
1

 
137,600

 

 

Crude (MBbls) – Futures

 

 

 

 
1

 

(Non-Trading)
 
 
 
 
 
 
 
 
 
 
 
Natural Gas (BBtu):
 
 
 
 
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
6,600

 
(50
)
 
18

 
4,650

 
(13
)
 
4

Swing Swaps IFERC
52,413

 
(1
)
 

 
87,253

 
(2
)
 
1

Fixed Swaps/Futures
5,360

 
(2
)
 
3

 
(4,700
)
 
(1
)
 
2

Forward Physical Contracts
(174,465
)
 
4

 

 
(145,105
)
 
6

 
41

NGL (MBbls) – Forwards/Swaps
(1,590
)
 
(16
)
 
11

 
(2,493
)
 
5

 
16

Crude (MBbls) – Forwards/Swaps
44,190

 
(307
)
 
261

 
9,172

 
(4
)
 
9

Refined Products (MBbls) – Futures
(1,076
)
 
(5
)
 
5

 
(3,783
)
 
(25
)
 
4

Fair Value Hedging Derivatives
 
 
 
 
 
 
 
 
 
 
 
(Non-Trading)
 
 
 
 
 
 
 
 
 
 
 
Natural Gas (BBtu):
 
 
 
 
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
(21,475
)
 
(1
)
 

 
(39,770
)
 
(2
)
 

Fixed Swaps/Futures
(21,475
)
 
(1
)
 
7

 
(39,770
)
 
14

 
11

(1)  
Includes aggregate amounts for open positions related to Houston Ship Channel, Waha Hub, NGPL TexOk, West Louisiana Zone and Henry Hub locations.
The fair values of the commodity-related financial positions have been determined using independent third party prices, readily available market information and appropriate valuation techniques. Non-trading positions offset physical exposures to the cash market; none of these offsetting physical exposures are included in the above tables. Price-risk sensitivities were calculated by assuming a theoretical 10% change (increase or decrease) in price regardless of term or historical relationships between the contractual price of the instruments and the underlying commodity price. Results are presented in absolute terms and represent a potential gain or loss in net income or in other comprehensive income. In the event of an actual 10% change in prompt month natural gas prices, the fair value of our total derivative portfolio may not change by 10% due to factors such as when the financial instrument settles and the location to which the financial instrument is tied (i.e., basis swaps) and the relationship between prompt month and forward months.
Interest Rate Risk
As of June 30, 2018 , we had $4.33 billion of floating rate debt outstanding. A hypothetical change of 100 basis points would result in a maximum potential change to interest expense of $43 million annually; however, our actual change in interest expense may be less in a given period due to interest rate floors included in our variable rate debt instruments. We manage a portion of our


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interest rate exposure by utilizing interest rate swaps, including forward-starting interest rate swaps to lock-in the rate on a portion of anticipated debt issuances.
The following table summarizes our interest rate swaps outstanding (dollars in millions), none of which are designated as hedges for accounting purposes:
Term
 
Type (1)
 
Notional Amount Outstanding
June 30, 2018
 
December 31, 2017
July 2018 (2)
 
Forward-starting to pay a fixed rate of 3.76% and receive a floating rate
 
$

 
$
300

July 2019 (2)
 
Forward-starting to pay a fixed rate of 3.56% and receive a floating rate
 
400

 
300

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

 
400

July 2021 (2)
 
Forward-starting to pay a fixed rate of 3.55% and receive a floating rate
 
400

 

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

 
1,200

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

 
300

(1)  
Floating rates are based on 3-month LIBOR.  
(2)  
Represents the effective date. These forward-starting swaps have terms of 30 years with a mandatory termination date the same as the effective date.  
A hypothetical change of 100 basis points in interest rates for these interest rate swaps would result in a net change in the fair value of interest rate derivatives and earnings (recognized in gains and losses on interest rate derivatives) of $254 million as of June 30, 2018 . For the $1.50 billion of interest rate swaps whereby we pay a floating rate and receive a fixed rate, a hypothetical change of 100 basis points in interest rates would result in a net change in annual cash flows of $8 million . For the forward-starting interest rate swaps, a hypothetical change of 100 basis points in interest rates would not affect cash flows until the swaps are settled.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that information required to be disclosed by us, including our consolidated entities, in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Under the supervision and with the participation of senior management, including the Chief Executive Officer (“Principal Executive Officer”) and the Chief Financial Officer (“Principal Financial Officer”) of our General Partner, we evaluated our disclosure controls and procedures, as such term is defined under Rule 13a–15(e) promulgated under the Exchange Act. Based on this evaluation, the Principal Executive Officer and the Principal Financial Officer of our General Partner concluded that our disclosure controls and procedures were effective as of June 30, 2018 to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to management, including the Principal Executive Officer and Principal Financial Officer of our General Partner, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting (as defined in Rule 13(a)–15(f) or Rule 15d–15(f) of the Exchange Act) during the three months ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II – OTHER INFORMATION


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ITEM 1. LEGAL PROCEEDINGS
For information regarding legal proceedings, see our Annual Report on Form 10-K filed with the SEC on February 23, 2018 and Note 11 – Regulatory Matters, Commitments, Contingencies and Environmental Liabilities of the Notes to Consolidated Financial Statements of Energy Transfer Partners, L.P. and Subsidiaries included in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 .
Additionally, we have received notices of violations and potential fines under various federal, state and local provisions relating to the discharge of materials into the environment or protection of the environment. While we believe that even if any one or more of the environmental proceedings listed below were decided against us, it would not be material to our financial position, results of operations or cash flows, we are required to report governmental proceedings if we reasonably believe that such proceedings will result in monetary sanctions in excess of $100,000 .
Pursuant to the instructions to Form 10-Q, matters disclosed in this Part II, Item 1 include any reportable legal proceeding (i) that has been terminated during the period covered by this report, (ii) that became a reportable event during the period covered by this report, or (iii) for which there has been a material development during the period covered by this report.
In June 2018, ETC Northeast Pipeline LLC (“ETC Northeast”) entered into a Consent Order and Agreement with the PADEP, pursuant to which ETC Northeast agreed to pay $145,250 to the PADEP to settle various statutory and common law claims relating to soil discharge into, and erosion of the stream bed of, Raccoon Creek in Center Township, Pennsylvania during construction of the Revolution Pipeline. ETC Northeast has paid the settlement amount and continues to monitor the construction site and work with the landowner to resolve any remaining issues related to the restoration of the construction site.
On June 29, 2018, Luminant Energy Company, LLC (“Luminant”) filed informal and formal complaints against Energy Transfer Fuel, LP (“ETF”), with the Railroad Commission of Texas (“TRRC”).  Luminant’s complaints allege that absent an agreement between Luminant and ETF regarding the rate to be charged for bundled transportation and storage service, ETF must file a statement of intent with the TRRC to change the rate charged to Luminant for this service.  Further, on July 2, 2018, Luminant filed a request for immediate interim relief requesting that the TRRC issue an interim order requiring ETF to continue providing the same bundled transportation and storage service to Luminant that was being provided at the time Luminant filed both its formal and informal complaint.  On July 3, 2018, ETF filed a response, opposing Luminant’s motion.  On July 3, 2018, the TRRC issued an interim order denying temporary emergency relief.  ETF filed a response to Luminant’s informal complaint on July 16, 2018. ETF’s response to Luminant’s formal complaint and a Motion to Dismiss were filed on July 23, 2018. A prehearing conference in this matter was scheduled for August 2, 2018 in Austin.
ETC Field Services LLC received NOV REG-0569-1801 on February 13, 2018 for emission events that occurred September 25, 2017 through December 29, 2017 at the Jal 3 gas plant. On June, 11, 2018, the New Mexico Environmental Department sent ETP a settlement offer to resolve the NOV for a penalty of $268,212 . Negotiations for this settlement offer are ongoing.
ITEM 1A. RISK FACTORS
Set forth below are updated risk factors related to the merger of ETE and ETP. Except as set forth below, there have been no material changes from the risk factors described in Part I, Item 1A in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on February 23, 2018 or from the risk factors described in “Part II – Item 1A. Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 filed with the SEC on May 10, 2018.
Risk Factors Relating to the Merger of ETE and ETP
Because the market price of ETE common units will fluctuate prior to the consummation of the merger, ETP common unitholders cannot be sure of the market value of the ETE common units they will receive as merger consideration relative to the value of ETP common units they exchange.
The market value of the merger consideration that ETP common unitholders will receive in the merger will depend on the trading price of ETE’s common units at the closing of the merger. The exchange ratio that determines the number of ETE common units that ETP common unitholders will receive as consideration in the merger is fixed. This means that there is no mechanism contained in the merger agreement that would adjust the number of ETE common units that ETP common unitholders will receive as the merger consideration based on any decreases or increases in the trading price of ETE common units. Unit price changes may result from a variety of factors (many of which are beyond ETE’s or ETP’s control), including:
changes in ETE’s and ETP’s business, operations and prospects;
changes in market assessments of ETE’s and ETP’s business, operations and prospects;


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interest rates, general market, industry and economic conditions and other factors generally affecting the price of ETE common units; and
federal, state and local legislation, governmental regulation and legal developments in the businesses in which ETE and ETP operate.
Because the merger will be completed after the special meeting, at the time of the meeting, you will not know the exact market value of the ETE common units that you will receive upon completion of the merger. If ETE’s common unit price at the closing of the merger is less than ETE’s common unit price on the date on which the merger agreement was signed, then the market value of the merger consideration received by ETP unitholders will be less than contemplated at the time the merger agreement was signed.
The fairness opinion rendered to the ETP Conflicts Committee by Barclays Capital Inc. (“Barclays”) was based on Barclays’ financial analysis and considered factors such as market and other conditions then in effect, financial forecasts and other information made available to Barclays as of the date of the opinion. As a result, the opinion does not reflect changes in events or circumstances after the date of such opinion. The ETP Conflicts Committee has not obtained, and does not expect to obtain, an updated fairness opinion from Barclays reflecting changes in circumstances that may have occurred since the signing of the merger agreement.
The fairness opinion rendered to the ETP Conflicts Committee by Barclays was provided in connection with, and at the time of, the evaluation of the merger and the merger agreement by the ETP Conflicts Committee. The opinion was based on the financial analyses performed, which considered market and other conditions then in effect, financial forecasts and other information made available to Barclays as of the date of the opinion, which may have changed, or may change, after the date of the opinion. The ETP Conflicts Committee has not obtained an updated opinion from Barclays following the date of the merger agreement and does not expect to obtain an updated opinion prior to completion of the merger. Changes in the operations and prospects of ETE or ETP, general market and economic conditions and other factors that may be beyond the control of ETE and ETP, and on which the fairness opinion was based, may have altered the value of ETE or ETP or the prices of ETE common units or ETP common units since the date of such opinion, or may alter such values and prices by the time the merger is completed. The opinion does not speak as of any date other than the date of the opinion. For a description of the opinion that Barclays rendered to the ETP Conflicts Committee in connection with the merger, please read the proxy statement/prospectus when it becomes available.
ETP and ETE may be targets of securities class action and derivative lawsuits, which could result in substantial costs and may delay or prevent the completion of the merger.
Securities class action lawsuits and derivative lawsuits are often brought against companies that have entered into merger agreements in an effort to enjoin the merger or seek monetary relief from ETP or ETE. Even if the lawsuits are without merit, defending against these claims can result in substantial costs and divert management time and resources. ETP and ETE cannot predict the outcome of these lawsuits, or others, nor can they predict the amount of time and expense that will be required to resolve such litigation. An unfavorable resolution of any such litigation surrounding the merger could delay or prevent its consummation. In addition, the costs defending the litigation, even if resolved in ETP’s or ETE’s favor, could be substantial and such litigation could distract ETP and ETE from pursuing the consummation of the merger and other potentially beneficial business opportunities.
Maintaining credit ratings is under the control of ratings agencies, which are independent third parties. There can be no assurances that the combined partnership will qualify for an investment-grade credit rating, and the failure to qualify for an investment-grade credit rating could negatively impact the combined partnership’s access to capital and costs of doing business.
In connection with the completion of the merger, ratings agencies may reevaluate ETE’s and ETP’s credit ratings. It is expected that the combined partnership will qualify for an investment-grade credit rating consistent with ETP’s current rating; however, credit rating agencies perform independent analysis when assigning credit ratings and there can be no assurances that such ratings will be achieved in connection with the merger or maintained in the future. The analysis includes a number of criteria including, but not limited to, business composition, market and operational risks, as well as various financial tests. The combined company’s ratings upon completion of the merger will reflect each rating organization’s opinion of the combined company’s financial strength, operating performance and ability to meet the obligations associated with its securities. In addition, the trading market for ETE’s and ETP’s securities depends, in part on the research and reports that third-party securities analysts publish about ETE and ETP and the industry in which they participate. In connection with the completion of the merger, one or more of these analysts could downgrade ETE or ETP securities or issue other negative commentary about ETE or ETP and the industry in which they participate, which could cause the trading price of such securities to decline.
Failure to qualify for an investment-grade credit rating or a downgrade may increase ETE’s and ETP’s cost of borrowing, may negatively impact ETE’s and ETP’s ability to raise additional debt capital, may negatively impact ETE’s and ETP’s ability to


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successfully compete, and may negatively impact the willingness of counterparties to deal with ETE and ETP, each of which could have a material adverse effect on the business, financial condition, results of operations and cash flows of ETE and ETP, as well as the market price of their respective securities.
Credit rating agencies continue to review the criteria for industry sectors and various debt ratings on an ongoing basis and may make changes to those criteria from time to time. Ratings are subject to revision or withdrawal at any time by the rating agencies. The credit rating of the combined company will be subject to ongoing evaluation by credit rating agencies, and downgrades in the combined company’s ratings could adversely affect the combined company’s business, cash flows, financial condition, operating results and share and debt prices.
Directors and executive officers of ETP have certain interests that are different from those of ETP unitholders generally.
Directors and executive officers of ETP are parties to agreements or participants in other arrangements that give them interests in the merger that may be different from, or in addition to, your interests as a unitholder of ETP. In addition, certain of the directors and executive officers of ETP are also directors or executive officers at ETE, and each of the directors of ETP is appointed by ETE, as the sole member of ETP LLC. These and other different interests will be described in the proxy statement/prospectus when it becomes available. ETP unitholders should consider these interests in voting on the merger.
The ETP partnership agreement limits the duties of ETP GP to ETP common unitholders and restricts the remedies available to unitholders for actions taken by ETP GP that might otherwise constitute breaches of its duties.
ETP LLC, the general partner of ETP GP, the general partner of ETP, is owned by ETE. In light of potential conflicts of interest between ETE and ETP GP, on the one hand, and ETP and the ETP common unitholders, on the other hand, the ETP Board submitted the merger and related matters to the ETP Conflicts Committee for, among other things, review, evaluation, negotiation and possible approval of a majority of its members, which is referred to as “Special Approval” in the ETP partnership agreement. In addition, the merger is conditioned upon the approval of holders of a majority of ETP common units held by persons other than ETP GP and its affiliates (referred to herein as “unaffiliated ETP unitholder approval”). Under the ETP partnership agreement:
any resolution or course of action by ETP GP or its affiliates in respect of a conflict of interest is permitted and deemed approved by all partners of ETP (i.e. the ETP unitholders), and will not constitute a breach of the ETP partnership agreement or of any duty stated or implied by law or equity, if the resolution or course of action is approved by Special Approval or unaffiliated ETP unitholder approval; and
ETP GP may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants selected by it, and any act taken or omitted to be taken in reliance upon the opinion of such persons as to matters that ETP GP reasonably believes to be within such person’s professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion.
The ETP Conflicts Committee reviewed, negotiated and evaluated the merger agreement, the merger and related matters on behalf of the ETP common unitholders and ETP. Among other things, the ETP Conflicts Committee unanimously determined in good faith that the merger agreement and the transactions contemplated thereby, including the merger, are in the best interests of ETP and the unaffiliated ETP common unitholders, approved the merger agreement and the transactions contemplated thereby, including the merger, and recommended the approval of the merger agreement and the transactions contemplated thereby, including the merger, to the ETP Board.
The duties of ETP GP, the ETP Board and the ETP Conflicts Committee to ETP common unitholders in connection with the merger are substantially limited by the ETP partnership agreement.
ETE common unitholders have limited voting rights and are not entitled to elect ETE’s general partner or the directors of ETE’s general partner. Following the closing, the Class A Units issued by ETE to its general partner, LE GP, LLC (“ETE GP”) concurrently with closing would result in ETE GP and its affiliates maintaining the same relative voting power following the merger as they have prior to the merger, until such time as Kelcy L. Warren is no longer an officer or director of ETE GP.
Unlike the holders of common stock in a corporation, ETE common unitholders have only limited voting rights on matters affecting ETE’s business, and therefore limited ability to influence ETE management’s decisions regarding its business. ETE common unitholders did not elect its general partner and will have no right to elect its general partner or the officers or directors of its general partner on an annual or other continuing basis. In addition, on matters where ETE common unitholders are entitled to vote, the ETE partnership agreement generally permits ETE GP and its affiliates to vote their ETE common units on such matters, together with unaffiliated ETE unitholders, as a single class. For example, the general partner of ETE may only be removed by the affirmative vote of holders of 66 2/3% of the ETE common units (including ETE GP and its affiliates), voting together as a single class. As of August 1, 2018, ETE GP and its affiliates collectively own approximately 31.0% of the outstanding ETE common units.


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In connection with the closing of the merger and the issuance of the merger consideration to former ETP common unitholders, the percentage ownership of ETE GP and its affiliates of ETE common units is expected to be diluted to approximately 13.5%. However, at the closing of the merger, ETE will issue to ETE GP a number of new Class A Units necessary to ensure that ETE GP and its affiliates maintain the same relative voting power following the merger as they have prior to the merger. The Class A Units will not be entitled to distributions, will not have any economic attributes (other than the entitlement to $100 in the aggregate upon liquidation) and will not be convertible or exchangeable for ETE common units, but will generally vote as a single class with ETE common units. For so long as Mr. Warren continues as a director or officer of ETE GP, upon issuance of additional ETE common units following the merger, ETE will also issue additional Class A Units to ETE GP such that the Class A Units will continue to represent, in the aggregate, the same voting interest as they represent upon closing of the merger. The existence of the Class A Units from and after closing of the merger will therefore, in certain circumstances, reduce the voting power represented by an ETE common unit compared to a scenario in which the Class A Units had not been issued.
ETE common units to be received by ETP common unitholders as a result of the merger have different rights than ETP common units.
Following completion of the merger, ETP common unitholders will no longer hold ETP common units, but will instead be unitholders of ETE. There are important differences between the rights of ETP unitholders and the rights of ETE unitholders. See the proxy statement/prospectus when it becomes available for a discussion of the different rights associated with ETE common units and ETP common units.
The number of outstanding ETE common units will increase as a result of the merger, which could make it more difficult for ETE to pay the current level of quarterly distributions.
As of July 31, 2018, there were more than 1.158 billion ETE common units outstanding. ETE expects to issue approximately 1.5 billion common units in connection with the merger. Accordingly, the aggregate dollar amount required to pay the current per unit quarterly distribution on all ETE common units will increase, which could increase the likelihood that ETE will not have sufficient funds to pay the current level of quarterly distributions to all ETE unitholders. Using a $0.305 per ETE common unit distribution (the amount ETE has declared to pay with respect to the second fiscal quarter of 2018 on August 20, 2018 to holders of record as of August 6, 2018), the aggregate cash distribution paid to ETE unitholders totaled approximately $354 million, including a distribution of $1 million to ETE GP in respect of its general partner interest. Using the same $0.305 per ETE common unit distribution, the combined pro forma ETE distribution with respect to the second fiscal quarter of 2018, had the merger been completed prior to such distribution, would have resulted in total cash distributions of approximately $809 million, including a distribution of $1 million to ETE GP in respect of its general partner interest.
ETE and ETP will incur substantial transaction-related costs in connection with the merger, including fees paid to legal, financial and accounting advisors, filing fees and printing costs.
ETE and ETP expect to incur a number of non-recurring transaction-related costs associated with completing the merger. These fees and costs will be substantial. Non-recurring transaction costs include, but are not limited to, fees paid to legal, financial and accounting advisors, filing fees and printing costs. Thus, any net benefit of the merger may not be achieved in the near term, the long term or at all.
The merger is subject to conditions, including certain conditions that may not be satisfied on a timely basis, if at all. Failure to complete the merger, or significant delays in completing the merger, could negatively affect the trading prices of ETE common units and ETP common units and the future business and financial results of ETE and ETP.
The completion of the merger is subject to a number of conditions, some of which are beyond the parties’ control. In addition, ETE and ETP can agree not to consummate the merger even if the ETP common unitholders approve the merger proposal and the conditions to the closing of the merger are otherwise satisfied.
The completion of the merger is not assured and is subject to risks, including the risk that the closing conditions are not satisfied, including that the approval of the merger by ETP common unitholders or by governmental agencies is not obtained or the occurrence of a material adverse change to the business or results of operations of ETE and ETP. The failure to satisfy conditions to the merger may prevent or delay the merger or otherwise result in the merger not occurring. The failure of the completion of the merger, or any significant delays in completing the merger, could cause the combined company not to realize, or delay the realization of, some or all of the benefits that the combined company expects to achieve from the merger, including those relating to the trading prices of ETE common units and ETP common units and the respective future business and financial results of ETE and ETP, which could be negatively affected, and each of which are subject to risks, including the following:
the parties may be liable for damages to one another under the terms and conditions of the merger agreement;


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negative reactions from the financial markets, including declines in the price of ETE common units or ETP common units due to the fact that current prices may reflect a market assumption that the merger will be completed;
having to pay certain significant costs relating to the merger, including, in certain circumstances, the reimbursement by ETP of up to $30 million of ETE’s expenses and a termination fee of $750 million less any previous expense reimbursements by ETP; and
the attention of management of ETE and ETP will have been diverted to the merger rather than other strategic opportunities that could have been beneficial to that organization.
ETP is subject to provisions in the merger agreement that limit its ability to pursue alternatives to the merger, which could discourage a potential competing acquirer of ETP from making a favorable alternative transaction proposal and, in specified circumstances under the merger agreement, would require ETP to reimburse up to $30 million of ETE’s out-of-pocket expenses and pay a termination fee to ETE of $750 million less any previous expense reimbursements.
Under the merger agreement, ETP is restricted from entering into alternative transactions. Unless and until the merger agreement is terminated, subject to specified exceptions (which will be discussed in more detail in the proxy statement/prospectus when it becomes available), ETP is restricted from soliciting, initiating, knowingly facilitating, knowingly encouraging or knowingly inducing or taking any other action intended to lead to any inquiries or any proposals that constitute or could reasonably be expected to lead to a proposal or offer for a competing acquisition proposal with any person. In addition, ETP may not grant any waiver or release of any standstill or similar agreement with respect to any units of ETP or any of its subsidiaries. Under the merger agreement, in the event of a potential change by the ETP Board of its recommendation with respect to the proposed merger in light of a superior proposal, ETP must provide ETE with five calendar days’ notice to allow ETE to propose an adjustment to the terms and conditions of the merger agreement. These provisions could discourage a third party that may have an interest in acquiring all or a significant part of ETP from considering or proposing that acquisition, even if such third party were prepared to pay consideration with a higher per unit market value than the merger consideration, or might result in a potential competing acquirer of ETP proposing to pay a lower price than it would otherwise have proposed to pay because of the added expense of the termination fee that may become payable in specified circumstances.
If the merger agreement is terminated under specified circumstances, including due to an adverse recommendation change having occurred or ETP entering into an agreement relating to a superior proposal, ETP will be required to pay ETE a termination fee of $750 million, less any expenses of ETE previously reimbursed by ETP. If the merger agreement is terminated under specified circumstances, including if the ETP unitholder approval is not obtained or if ETP breaches certain of its obligations under the merger agreement, then ETP will be required to pay all of the reasonably documented out-of-pocket expenses incurred by ETE and its affiliates in connection with the merger agreement and the transactions contemplated thereby, up to a maximum amount of $30 million. Following payment of the termination fee or the reimbursement of expenses, as applicable, ETP will not be obligated to pay any additional expenses incurred by ETE or its affiliates. If such a termination fee is payable, the payment of this fee could have material and adverse consequences to the financial condition and operations of ETP. For a discussion of the restrictions on soliciting or entering into an alternative transaction and the ability of the ETP Board to change its recommendation.
If a governmental authority asserts objections to the merger, ETE and ETP may be unable to complete the merger or, in order to do so, ETE and ETP may be required to comply with material restrictions or satisfy material conditions.
The closing of the merger is subject to the condition that there is no law, injunction, judgment or ruling by a governmental authority in effect enjoining, restraining, preventing or prohibiting the merger contemplated by the merger agreement. If a governmental authority asserts objections to the merger, ETE or ETP may be required to divest assets or accept other remedies in order to complete the merger. There can be no assurance as to the cost, scope or impact of the actions that may be required to address any governmental authority objections to the merger. If ETE or ETP takes such actions, it could be detrimental to it or to the combined organization following the consummation of the merger. Furthermore, these actions could have the effect of delaying or preventing completion of the proposed merger or imposing additional costs on or limiting the revenues or cash available for distribution of the combined organization following the consummation of the merger.
Additionally, state attorneys general could seek to block or challenge the merger as they deem necessary or desirable in the public interest at any time, including after completion of the transaction. In addition, in some circumstances, a third party could initiate a private action under antitrust laws challenging or seeking to enjoin the merger, before or after it is completed. ETE may not prevail and may incur significant costs in defending or settling any action under the antitrust laws.
ETE and ETP are subject to contractual interim operating restrictions while the proposed merger is pending, which could adversely affect each party’s business and operations.
Under the terms of the merger agreement, each of ETE and ETP is subject to certain restrictions on the conduct of its business prior to completing the merger, which may adversely affect its ability to execute certain of its business strategies. Such limitations


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could negatively affect each party’s businesses and operations prior to the completion of the merger. For a discussion of these restrictions, please read the proxy statement/prospectus when it becomes available.
If the merger is approved by ETP common unitholders, the date on which ETP unitholders will receive the merger consideration is uncertain.
As described in this proxy statement/prospectus, completing the proposed merger is subject to several conditions, not all of which are controllable or waivable by ETE or ETP. Accordingly, if the proposed merger is approved by ETP unitholders, the date on which ETP common unitholders will receive the merger consideration depends on the completion date of the merger, which is uncertain.
ETP common unitholders will have a reduced ownership in the combined organization after the merger.
When the merger occurs, each ETP common unitholder that receives ETE common units will become a unitholder of ETE with a percentage ownership of the combined organization that is smaller than such unitholder’s percentage ownership of ETP prior to the merger. Assuming that the merger had been completed on August 1, 2018, current ETP common unitholders would have owned approximately 56% of the combined entity based on the number of ETP common units and ETE common units outstanding at that date.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended June 30, 2018 , the Partnership issued 1,261,221 ETP Common Units to settle contingent consideration related to a previous acquisition. These securities are exempt from registration under Section 4(a)(2) of the Securities Act of 1933.


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ITEM 6. EXHIBITS
The exhibits listed below are filed or furnished, as indicated, as part of this report:
Exhibit Number
 
Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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101.INS*
 
XBRL Instance Document
101.SCH*
 
XBRL Taxonomy Extension Schema Document
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document
*
 
Filed herewith.
**
 
Furnished herewith.
***
 
Denotes a management contract or compensatory plan or arrangement. Filed herewith.


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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
ENERGY TRANSFER PARTNERS, L.P.
 
 
 
 
 
 
By:
Energy Transfer Partners GP, L.P.
 
 
 
its General Partner
 
 
 
 
 
 
By:
Energy Transfer Partners, L.L.C.
 
 
 
its General Partner
 
 
 
 
Date:
August 9, 2018
By:
/s/ A. Troy Sturrock
 
 
 
A. Troy Sturrock
 
 
 
Senior Vice President, Controller and Principal Accounting Officer
(duly authorized to sign on behalf of the registrant)


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AMENDED AND RESTATED
 
 
 
 
ENERGY TRANSFER PARTNERS, L.L.C.
 
 
 
 
ANNUAL BONUS PLAN
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





AMENDED AND RESTATED
ENERGY TRANSFER PARTNERS, L.L.C.
ANNUAL BONUS PLAN
1.
Purpose. The purpose of this Plan is to motivate management and the employees who perform services for the Partnership and/or its affiliates and subsidiaries to earn annual cash awards through the achievement of performance and target goals.
2.
Definitions. As used in this Plan, the following terms shall have the meanings herein specified:
2.1
Actual Results  means the dollar amount of Adjusted EBITDA, Distributable Cash Flow, Departmental Budget or other applicable financial measure specified for the Budget Target(s) for a Plan Year actually achieved for such Plan Year as determined by the Partnership following the end of such Plan Year.
2.2
Adjusted EBITDA means earnings before interest, taxes, depreciation and amortization adjusted for non-cash compensation and extraordinary costs, including but not limited to transactional costs.
2.3
Annual Bonus means the cash bonus paid to an Eligible Employee for the Plan Year.
2.4
Annual Target Bonus means, for an Eligible Employee, a percentage of such Eligible Employee’s Eligible Earnings, and shall be dependent on a number of factors which may include but are not limited to an employee’s position title, job responsibilities, and reporting level within the Company. The Company may, but is not required to, specify a specific range for an Eligible Employee at any time prior to or during a Plan Year; provided that any such range may be adjusted from time to time or at any time in the Company’s sole discretion, including for the applicable Plan Year.
2.5
Annual Target Bonus Pool means, for a Plan Year, the Target Bonus of the Eligible Employees of the Company for that Plan Year.
2.6
Board means the Board of Directors of the Company.
2.7
Bonus Pool Payout Factor means the multiplier factor applied to the Annual Target Bonus Pool to determine the Funded Bonus Pool for the applicable Plan Year. The payout is determined by the comparison of the Budget Target(s) for the Plan Year to Actual Results. General guidelines for the Budget Target and the Bonus Pool Payout Factor associated with such Budget Target for a Plan Year are set forth below, but each are subject to the sole discretion of the Compensation Committee. The Bonus Pool Payout Factor for purposes of the Plan shall be adjusted each Plan Year based on the specific allocation of Annual Target Bonus Pools to each of the specified Budget Target(s). Such allocations of each Budget Target to the total Annual Bonus Pool shall be determined on an annual basis by the Compensation Committee. For 2018, the Adjusted EBITDA Budget Target shall comprise 60% of the total Annual Target Bonus Pool, the Distributable Cash Flow Budget Target shall comprise 20% of the total Annual Target Bonus Pool and the Departmental Budget Target shall comprise the remaining 20% of the total Annual Target Bonus Pool. While the Funded Bonus Pool will reflect an aggregation of performance under each Bonus Pool Payout Factor the performance of Adjusted EBITDA Budget Target shall drive calculation of the Bonus Pool, as no other targets shall be considered unless the Adjusted EBITDA Target results is at least 80% of its Budget Target.






Adjusted EBITDA Performance Target Payout Factor Guidelines
% of Budget Target
Bonus Pool Payout Factor
>=110.0
1.20x
109.9 – 105.0
1.10x
104.9 – 95.0
1.00x
94.9 – 90.0
.90x
89.9 – 80.0
.75x
< 80.0
.0x
Distributable Cash Flow Performance Target Payout Factor Guidelines
% of Budget Target
Bonus Pool Payout Factor
>=110.0
1.20x
109.9 – 105.0
1.10x
104.9 – 95.0
1.00x
94.9 – 90.0
.90x
89.9 – 80.0
.75x
< 80.0
.0x
Departmental Budget Target Payout Factor Guidelines
% of Budget Target
Bonus Pool Payout Factor
0.0-100.9
1.00x
101.0-105.9
.90x
106.0 – 110.9
.70x
111.0-114.9
.50x
>115
.0x

2.8
Budget Target means the specific dollar amount of Adjusted EBITDA, Distributable Cash Flow, total Departmental Budget and/or other financial measure(s) established by the Compensation Committee for the Company for a Plan Year.
2.9
Company means Energy Transfer Partners, L.L.C., a Delaware limited liability company. The term “Company” shall include any successor to Energy Transfer






Partners, L.L.C., any subsidiary or affiliate thereof that has adopted the Plan, or any entity succeeding to the business of Energy Transfer Partners, L.L.C., or any subsidiary or affiliate, by merger, consolidation, liquidation, or purchase of assets or equity, or similar transaction.
2.10
Compensation Committee means the Compensation Committee of the Company’s Board.
2.11
Departmental Budget means the specific dollar amount of general and administrative expenses (i.e. operating budget) or operating and maintenance expenses set for each department of Partnership and its subsidiaries. In the case where a department head oversees multiple departments the Departmental Budget shall be the total aggregate budget for all of his/her departments.
2.12
Distributable Cash Flow means net income, adjusted for certain non-cash items, less maintenance capital expenditures.
2.13
Eligible Earnings means the aggregate regular earnings plus overtime earnings, if any, received by an Eligible Employee during the Plan Year. For the avoidance of doubt, neither distribution payments or distribution equivalent payments on any Partnership restricted or common units nor any other bonus or sign-on payments received by an Eligible Employee during the Plan Year shall be included in the calculation of Eligible Earnings for an Eligible Employee.
2.14
Eligible Employee has the meaning set forth in Section 4 below.
2.15
Funded Bonus Pool means the Annual Target Bonus Pool for a Plan Year multiplied by the applicable Bonus Pool Payout Factor for such Plan Year. The establishment and amount of a Funded Bonus Pool is 100% discretionary and subject to the final approval of and/or adjustment by the Compensation Committee.
2.16
Operational Safety Standards means the safety standards, training and requirements set forth on Exhibit A hereto, which operations based Eligible Employees are required to comply.
2.17
Partnership means Energy Transfer Partners L.P., a Delaware master limited partnership.
2.18
Person means an individual, corporation, limited liability company, partnership, joint venture, trust, unincorporated organization, association, government agency or political subdivision thereof or other entity.
2.19
Plan means the Company’s Annual Bonus Plan as set forth herein, as the same may be amended from time to time.
2.20
Plan Year means the performance (calendar) year for the measurement and determination of the Budget Target and the calculation of Actual Results. Unless otherwise determined by the Compensation Committee, each Plan Year shall be the one year period commencing on January 1 and ending on December 31 of the calendar year.
3.
Plan Guidelines and Administration. The administration of the Plan and any potential Annual Bonus awarded pursuant to the Plan are subject to the sole determination and discretion of the Compensation Committee. The Compensation Committee will review the Partnership’s performance results for the designated Plan Year, the Budget Target and Bonus Pool Payout






Factor for each Plan Year and thereafter will determine, in consultation with the Company’s Chief Executive Officer and the Company’s Chief Human Resources Officer, whether or not and to what extent to approve the Funded Bonus Pool under the Plan.
The Compensation Committee may delegate the responsibility for the administration and operation of the Plan to the Chief Executive Officer of the Company or his/her designee(s). The Compensation Committee or the person(s) to which administrative authority has been delegated (the Committee or such person referred to as the “Plan Administrator”) shall have the authority to interpret and construe any and all provisions of the Plan, including the establishment for any designated Plan Year or from time to time any Budget Targets, Budget Target guidelines, Bonus Pool Payout Factors and/or such other economic or performance factors as the Plan Administrator shall determine and whether and to what extent any such targets, guidelines or factors has been achieved. Any determination made by the Plan Administrator shall be final and conclusive and binding on all persons.
4.
Eligible Employees. Subject to the discretion of the Compensation Committee and such other criteria as may be established by the Compensation Committee in general or for a particular Plan Year, all regular full-time employees providing services to the Partnership and its subsidiaries are eligible to participate in the Annual Target Bonus Pool for a Plan Year. No Eligible Employee shall be entitled to receive an Annual Bonus for a Plan Year unless he or she is actively employed by the Company (or one of its Affiliates) on the date the Annual Bonus for such Plan Year is paid by the Company even if such payment date is after the Plan Year.
Notwithstanding the foregoing if an Eligible Employee becomes fully disabled, in the sole discretion of the Partnership, or dies after the completion of a Plan Year but prior to the payment of the Annual Bonus, such Eligible Employee or his/her estate, as applicable shall be eligible to receive such Eligible Employee’s Annual Bonus. Additionally, in a situation where an Eligible Employee is displaced as a result of a transaction and such transaction closes on or after December 31 of the Plan Year but prior to payment of the Annual Bonus, such Eligible Employee will be able to receive a bonus award even though he/she is not employed on the date of payment of the Annual Bonus.
Employees of Sunoco LP and its subsidiaries and USA Compression Partners, LP and its subsidiaries shall participate in the Sunoco GP LLC Annual Bonus Plan and the USA Compression Partners, LP Annual Cash Incentive Plan, respectively and shall not be eligible to participate under this Plan.
5.
Annual Bonus Payments for Eligible Employees . As soon as reasonably practicable following the end of the Plan Year, management of the Company will determine the Annual Target Bonus for each Eligible Employee. The Funded Bonus Pool from which Annual Bonuses are paid to Eligible Employees shall equal (a) the aggregate of the Annual Target Bonuses of all Eligible Employees multiplied by (b) the Bonus Pool Payout Factor for such Plan Year, as determined by the Compensation Committee after review of the performance results for the Plan year. The amount of the Annual Bonus for an Eligible Employee from the Funded Bonus Pool shall be determined in management’s sole discretion and shall be based on a number of factors including an employee’s performance, length of employment and such other factors as may be determined by management in its sole discretion, which factors may not be the same fall all Eligible Employees. Notwithstanding the foregoing, the Compensation Committee shall make determination of the Annual Bonus of all of the Company’s named executive officers and such other executive officers as may be determined from time to time.
In addition, operations based Eligible Employees shall be evaluated against the Operational Safety Standards set forth on Exhibit A and any deviation or failure to meet such Operational






Safety Standards may result in a reduction of such Eligible Employee’s Annual Bonus Pool of up to 25%.
In no event, shall the aggregate amount of the Annual Bonus payments for the Plan Year exceed, in total, the Funded Bonus Pool for such Plan Year Notwithstanding any provision herein, funds allocated under this Plan for distribution to Eligible Employees is 100% discretionary.
6.
Amendment and Termination. The Compensation Committee, at its sole discretion, may, without prior notice to or consent of any Eligible Employees, amend the Plan or terminate the Plan at any time and at all times.
7.
Indemnification. Neither the Company, any participating Affiliate, nor the Board, or the Compensation Committee, of the Company or any participating affiliate, nor any officer or employee of the Company or any participating affiliate shall be liable for any act, omission, interpretation, construction or determination made in connection with the Plan in good faith; and the members of the Company’s Board, the Compensation Committee and/or management of the Company shall be entitled to indemnification and reimbursement by the Company to the maximum extent permitted by law in respect of any claim, loss, damage or expense (including counsel’s fees) arising from their acts, omission and conduct in their official capacity with respect to the Plan.
8.
General provisions.
8.1
Non-Guarantee of Employment or Participation in the Plan . Nothing contained in this Plan shall be construed as a contract of employment between the Company, the Partnership and/or any of its affiliates and any employee of the Company or any of its affiliates, and nothing in this Plan shall confer upon any employee, including an Eligible Employee, any right to continued employment with the Company and/or its affiliate, or interfere with the right of the Company, the Partnership and/or its affiliate to terminate the employment, with or without cause, of an employee, including an Eligible Employee. Nothing in this Plan shall give any employee any right to participate in the Plan and/or to receive an Annual Bonus with respect to any Plan Year.
8.2
Interests Not Transferable . No right, interest or benefit under the Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment or other legal process, or encumbrance of any kind, and any attempt to do so shall be void.
8.3
Controlling Law . To the extent not superseded by federal law, the law of the State of Texas, without regard to the conflicts of laws provisions thereunder, shall be controlling in all matters relating to the Plan.
8.4
Severability . If any Plan provision or any Annual Bonus award hereunder is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any person or award, or would disqualify the Plan or any award under the law deemed applicable by the Compensation Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Compensation Committee, materially altering the intent of the Plan or the award, such provision shall be stricken as to such jurisdiction, person or award and the remainder of the Plan and any such award shall remain in full force and effect.






8.5
No Trust or Fund Created . Neither the Plan nor any award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company and its Affiliates and an employee, including an Eligible Employee or any other person. The Plan shall constitute an unfunded mechanism for the Company to pay bonus compensation to participants from its general assets. No participant shall have any security or other interest in the assets of the Company.
8.6
Headings . Headings are given to the sections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision of it.
8.7
Tax Withholding . The Company and/or any participating Affiliate may deduct from any payment otherwise due under this Plan to a Participant (or beneficiary) amounts required by law to be withheld for purposes of federal, state or local taxes.
8.8
Off-set. The Company reserves the right to withhold any or all portions of an award or to reduce an award to a participant up to an amount equal to any amount the participant owes to the Company or any of its Affiliates.
8.9
Effective Date. This Plan was effective for the Plan Year commencing on January 1, 2014 and was amended and restated effective for the Plan year commencing on January 1, 2018.






EXHIBIT A
OPERATIONAL SAFETY STANDARDS
1.
Satisfactory completion of all required safety training and instruction
2.
Attendance at all required safety meetings
3.
Avoidance of preventable vehicle incidents
4.
Management discretion of overall compliance and understanding of safety standards and requirements for operation






Exhibit 12.1
ENERGY TRANSFER PARTNERS, L.P. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in millions, except for ratio amounts)
(Unaudited)

 
Six Months Ended June 30, 2018
 
Energy Transfer Partners, L.P. (consolidated)
 
Sunoco Logistics Partners Operations L.P.
Fixed Charges:
 
 
 
Interest expense, net
$
704

 
$
81

Capitalized interest
160

 
106

Interest charges included in rental expense
4

 
2

Total fixed charges
868

 
189

Series A, B and C preferred unit distributions
54

 

Total fixed charges and preferred unit distributions
922

 
189

 
 
 
 
Earnings:
 
 
 
Income before income tax expense
1,510

 
278

Less: equity in earnings of unconsolidated affiliates
34

 
91

Total earnings
1,476

 
187

Add:
 
 
 
Fixed charges
868

 
189

Amortization of capitalized interest
11

 
2

Distributed income of equity investees
215

 
79

Less:
 
 
 
Interest capitalized
(160
)
 
(106
)
Income available for fixed charges
$
2,410

 
$
351

 
 
 
 
Ratio of earnings to fixed charges
2.78

 
1.86

 
 
 
 
Ratio of earnings to fixed charges and preferred unit distributions
2.61

 
1.86






Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kelcy L. Warren, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Energy Transfer Partners, L.P.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 

Date: August 9, 2018
 
/s/ Kelcy L. Warren
Kelcy L. Warren
Chief Executive Officer




Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas E. Long, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Energy Transfer Partners, L.P.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 

Date: August 9, 2018
 
/s/ Thomas E. Long
Thomas E. Long
Chief Financial Officer




Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Energy Transfer Partners, L.P. (the “Partnership”) on Form 10-Q for the quarter ended June 30, 2018 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kelcy L. Warren, Chief Executive Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership.
 
Date: August 9, 2018
 
/s/ Kelcy L. Warren
Kelcy L. Warren
Chief Executive Officer
 
A signed original of this written statement required by Section 906 has been provided to and will be retained by Energy Transfer, LP and furnished to the Securities and Exchange Commission upon request.





Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Energy Transfer Partners, L.P. (the “Partnership”) on Form 10-Q for the quarter ended June 30, 2018 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas E. Long, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership.
 
Date: August 9, 2018
 
/s/ Thomas E. Long
Thomas E. Long
Chief Financial Officer
 
A signed original of this written statement required by Section 906 has been provided to and will be retained by Energy Transfer, LP and furnished to the Securities and Exchange Commission upon request.