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 September 30, 2014
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-31219 |
SUNOCO LOGISTICS PARTNERS L.P.
(Exact name of registrant as specified in its charter)
Delaware | 23-3096839 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1818 Market Street, Suite 1500, Philadelphia, PA | 19103 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (866) 248-4344
Former name, former address and former fiscal year, if changed since last report: Not Applicable
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 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 or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer," "non-accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ý | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ | |||
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 September 30, 2014, the number of the registrant’s Common Units outstanding were 220,669,204.
SUNOCO LOGISTICS PARTNERS L.P.
INDEX
Page Number | ||
PART I. FINANCIAL INFORMATION | ||
Item 1. | Financial Statements | |
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited) | ||
Condensed Consolidated Balance Sheets at September 30, 2014 and December 31, 2013 (unaudited) | ||
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (unaudited) | ||
Condensed Consolidated Statements of Equity for the Nine Months Ended September 30, 2014 and 2013 (unaudited) | ||
Notes to Condensed Consolidated Financial Statements (unaudited) | ||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |
Item 4. | Controls and Procedures | |
PART II. OTHER INFORMATION | ||
Item 1. | Legal Proceedings | |
Item 1A. | Risk Factors | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 3. | Defaults Upon Senior Securities | |
Item 4. | Mine Safety Disclosures | |
Item 5. | Other Information | |
Item 6. | Exhibits | |
SIGNATURE | ||
1
PART I.
FINANCIAL INFORMATION
Item 1. | Financial Statements |
SUNOCO LOGISTICS PARTNERS L.P.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in millions, except per unit amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Revenues | ||||||||||||||||
Sales and other operating revenue: | ||||||||||||||||
Unaffiliated customers | $ | 4,616 | $ | 4,120 | $ | 13,199 | $ | 11,166 | ||||||||
Affiliates (Note 4) | 299 | 408 | 1,014 | 1,185 | ||||||||||||
Total Revenues | 4,915 | 4,528 | 14,213 | 12,351 | ||||||||||||
Costs and Expenses | ||||||||||||||||
Cost of products sold | 4,581 | 4,287 | 13,308 | 11,534 | ||||||||||||
Operating expenses | 48 | 36 | 105 | 87 | ||||||||||||
Selling, general and administrative expenses | 37 | 33 | 101 | 100 | ||||||||||||
Depreciation and amortization expense | 77 | 68 | 220 | 196 | ||||||||||||
Total Costs and Expenses | 4,743 | 4,424 | 13,734 | 11,917 | ||||||||||||
Operating Income | 172 | 104 | 479 | 434 | ||||||||||||
Interest cost and debt expense, net | (38 | ) | (25 | ) | (101 | ) | (72 | ) | ||||||||
Capitalized interest | 24 | 3 | 50 | 14 | ||||||||||||
Other income | 7 | 7 | 18 | 16 | ||||||||||||
Income Before Provision for Income Taxes | 165 | 89 | 446 | 392 | ||||||||||||
Provision for income taxes (Note 8) | (8 | ) | (8 | ) | (21 | ) | (23 | ) | ||||||||
Net Income | 157 | 81 | 425 | 369 | ||||||||||||
Less: Net income attributable to noncontrolling interests | (2 | ) | (3 | ) | (7 | ) | (8 | ) | ||||||||
Net Income Attributable to Sunoco Logistics Partners L.P. | 155 | 78 | 418 | 361 | ||||||||||||
Less: General Partner's interest | (49 | ) | (31 | ) | (131 | ) | (88 | ) | ||||||||
Limited Partners' interest | $ | 106 | $ | 47 | $ | 287 | $ | 273 | ||||||||
Net Income Attributable to Sunoco Logistics Partners L.P. per Limited Partner unit (Note 5): (1) | ||||||||||||||||
Basic | $ | 0.50 | $ | 0.23 | $ | 1.37 | $ | 1.32 | ||||||||
Diluted | $ | 0.50 | $ | 0.23 | $ | 1.36 | $ | 1.31 | ||||||||
Weighted average Limited Partners' units outstanding (Note 5): (1) | ||||||||||||||||
Basic | 212.5 | 207.6 | 209.6 | 207.6 | ||||||||||||
Diluted | 213.8 | 208.7 | 210.8 | 208.5 | ||||||||||||
Net Income | $ | 157 | $ | 81 | $ | 425 | $ | 369 | ||||||||
Adjustment to affiliate's pension funded status | — | — | 1 | — | ||||||||||||
Other Comprehensive Income | — | — | 1 | — | ||||||||||||
Comprehensive Income | 157 | 81 | 426 | 369 | ||||||||||||
Less: Comprehensive income attributable to noncontrolling interests | (2 | ) | (3 | ) | (7 | ) | (8 | ) | ||||||||
Comprehensive Income Attributable to Sunoco Logistics Partners L.P. | $ | 155 | $ | 78 | $ | 419 | $ | 361 | ||||||||
(1) Amounts reflect the second quarter 2014 two-for-one unit split (Note 11).
(See Accompanying Notes)
2
SUNOCO LOGISTICS PARTNERS L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in millions)
September 30, 2014 | December 31, 2013 | |||||||
Assets | ||||||||
Cash and cash equivalents | $ | 58 | $ | 39 | ||||
Advances to affiliated companies (Note 4) | — | 239 | ||||||
Accounts receivable, affiliated companies (Note 4) | — | 11 | ||||||
Accounts receivable, net | 2,842 | 2,184 | ||||||
Inventories (Note 6) | 605 | 600 | ||||||
Other current assets | 3 | 7 | ||||||
Total Current Assets | 3,508 | 3,080 | ||||||
Properties, plants and equipment | 8,685 | 6,785 | ||||||
Less accumulated depreciation and amortization | (446 | ) | (266 | ) | ||||
Properties, plants and equipment, net | 8,239 | 6,519 | ||||||
Investment in affiliates | 208 | 125 | ||||||
Long-term note receivable, affiliated companies (Note 4) | 11 | — | ||||||
Goodwill | 1,358 | 1,346 | ||||||
Intangible assets, net (Note 7) | 783 | 794 | ||||||
Other assets | 54 | 33 | ||||||
Total Assets | $ | 14,161 | $ | 11,897 | ||||
Liabilities and Equity | ||||||||
Accounts payable | $ | 2,887 | $ | 2,451 | ||||
Accounts payable, affiliated companies (Note 4) | 15 | 17 | ||||||
Accrued liabilities | 189 | 197 | ||||||
Accrued taxes payable (Note 8) | 72 | 71 | ||||||
Total Current Liabilities | 3,163 | 2,736 | ||||||
Long-term debt (Note 9) | 3,640 | 2,503 | ||||||
Other deferred credits and liabilities | 76 | 80 | ||||||
Deferred income taxes (Note 8) | 249 | 253 | ||||||
Total Liabilities | 7,128 | 5,572 | ||||||
Commitments and contingent liabilities (Note 10) | ||||||||
Redeemable noncontrolling interests (Note 3) | 15 | — | ||||||
Total Equity | 7,018 | 6,325 | ||||||
Total Liabilities and Equity | $ | 14,161 | $ | 11,897 | ||||
(See Accompanying Notes)
3
SUNOCO LOGISTICS PARTNERS L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in millions)
Nine Months Ended September 30, | ||||||||
2014 | 2013 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net Income | $ | 425 | $ | 369 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization expense | 220 | 196 | ||||||
Claim for recovery of environmental liability | — | (3 | ) | |||||
Proceeds from insurance recovery | 3 | — | ||||||
Deferred income tax expense (benefit) | (4 | ) | 4 | |||||
Amortization of bond premium | (11 | ) | (17 | ) | ||||
Amortization of financing fees and bond discount | 1 | — | ||||||
Non-cash compensation expense | 12 | 10 | ||||||
Equity in earnings of unconsolidated affiliates | (18 | ) | (14 | ) | ||||
Distributions from unconsolidated affiliates | 9 | 10 | ||||||
Changes in working capital pertaining to operating activities: | ||||||||
Accounts receivable, affiliated companies | 14 | 12 | ||||||
Accounts receivable, net | (642 | ) | (388 | ) | ||||
Inventories | 18 | (85 | ) | |||||
Accounts payable, affiliated companies | (2 | ) | — | |||||
Accounts payable and accrued liabilities | 326 | 369 | ||||||
Accrued taxes payable | 1 | 13 | ||||||
Unrealized gains on commodity risk activities | (14 | ) | (12 | ) | ||||
Other | (12 | ) | (3 | ) | ||||
Net cash provided by operating activities | 326 | 461 | ||||||
Cash Flows from Investing Activities: | ||||||||
Capital expenditures | (1,790 | ) | (605 | ) | ||||
Investment in joint venture interests | (78 | ) | — | |||||
Acquisitions, net of cash received | (65 | ) | (60 | ) | ||||
Change in long-term note receivable, affiliated companies | (11 | ) | — | |||||
Net cash used in investing activities | (1,944 | ) | (665 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Distributions paid to limited and general partners | (335 | ) | (256 | ) | ||||
Distributions paid to noncontrolling interests | (4 | ) | (7 | ) | ||||
Contributions from general partner | 2 | — | ||||||
Net proceeds from issuance of limited partner units | 593 | — | ||||||
Payments of statutory withholding on net issuance of limited partner units under LTIP | (6 | ) | (1 | ) | ||||
Repayments under credit facilities | (1,770 | ) | (119 | ) | ||||
Borrowings under credit facilities | 2,095 | 15 | ||||||
Net proceeds from issuance of long-term debt | 989 | 691 | ||||||
Repayments of senior notes | (175 | ) | — | |||||
Advances to affiliated companies, net | 239 | (126 | ) | |||||
Contributions attributable to acquisition from affiliate | 9 | 6 | ||||||
Net cash provided by financing activities | 1,637 | 203 | ||||||
Net change in cash and cash equivalents | 19 | (1 | ) | |||||
Cash and cash equivalents at beginning of period | 39 | 3 | ||||||
Cash and cash equivalents at end of period | $ | 58 | $ | 2 | ||||
(See Accompanying Notes)
4
SUNOCO LOGISTICS PARTNERS L.P.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)
(in millions)
Limited Partners | General Partner | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interests | Total | ||||||||||||||||
Balance at January 1, 2013 | $ | 5,175 | $ | 897 | $ | — | $ | 123 | $ | 6,195 | ||||||||||
Net Income | 273 | 88 | — | 8 | 369 | |||||||||||||||
Total comprehensive income | 273 | 88 | — | 8 | 369 | |||||||||||||||
Non-cash compensation expense | 10 | — | — | — | 10 | |||||||||||||||
Distribution equivalent rights | (2 | ) | — | — | — | (2 | ) | |||||||||||||
Payments of statutory withholding on net issuance of limited partner units under LTIP | (1 | ) | — | — | — | (1 | ) | |||||||||||||
Distributions | (178 | ) | (78 | ) | — | (7 | ) | (263 | ) | |||||||||||
Contributions attributable to acquisition from affiliate | 6 | — | — | — | 6 | |||||||||||||||
Increase attributable to acquisition from affiliate | 4 | — | — | — | 4 | |||||||||||||||
Other | — | 1 | — | — | 1 | |||||||||||||||
Balance at September 30, 2013 | $ | 5,287 | $ | 908 | $ | — | $ | 124 | $ | 6,319 | ||||||||||
Balance at January 1, 2014 | $ | 5,292 | $ | 912 | $ | — | $ | 121 | $ | 6,325 | ||||||||||
Net Income | 287 | 131 | — | 7 | 425 | |||||||||||||||
Adjustment to affiliate's pension funded status | — | — | 1 | — | 1 | |||||||||||||||
Total comprehensive income | 287 | 131 | 1 | 7 | 426 | |||||||||||||||
Issuance of limited partner units to the public | 593 | 2 | — | — | 595 | |||||||||||||||
Non-cash compensation expense | 12 | — | — | — | 12 | |||||||||||||||
Distribution equivalent rights | (3 | ) | — | — | — | (3 | ) | |||||||||||||
Payments of statutory withholding on net issuance of limited partner units under LTIP | (6 | ) | — | — | — | (6 | ) | |||||||||||||
Distributions | (218 | ) | (117 | ) | — | (4 | ) | (339 | ) | |||||||||||
Contributions attributable to acquisition from affiliate | 9 | — | — | — | 9 | |||||||||||||||
Other | (1 | ) | — | — | — | (1 | ) | |||||||||||||
Balance at September 30, 2014 | $ | 5,965 | $ | 928 | $ | 1 | $ | 124 | $ | 7,018 | ||||||||||
(See Accompanying Notes)
5
SUNOCO LOGISTICS PARTNERS L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Basis of Presentation
Sunoco Logistics Partners L.P. (the "Partnership") is a publicly traded Delaware limited partnership that owns and operates a logistics business, consisting of crude oil, refined products and natural gas liquids ("NGL") pipelines, terminalling and storage assets, and crude oil, refined products and NGL acquisition and marketing assets. The Partnership conducts its business activities in 35 states located throughout the United States.
The condensed consolidated financial statements reflect the results of the Partnership and its wholly owned subsidiaries, including Sunoco Logistics Partners Operations L.P. (the "Operating Partnership"), the proportionate shares of the Partnership's undivided interests in assets, and the accounts of entities in which the Partnership has a controlling financial interest. The Partnership's controlling financial interests are attributed to voting interests greater than 50 percent. The Partnership holds a controlling financial interest in Inland Corporation ("Inland"), Mid-Valley Pipeline Company ("Mid-Valley"), West Texas Gulf Pipe Line Company ("West Texas Gulf") and Price River Terminal, LLC ("PRT"), which was acquired in the second quarter 2014 (Note 3), and as such, these entities are reflected as consolidated subsidiaries of the Partnership. The Partnership is not the primary beneficiary of any variable-interest entities ("VIEs"). All significant intercompany accounts and transactions are eliminated in consolidation, and noncontrolling interests in net income and equity are shown separately in the condensed consolidated statements of comprehensive income and balance sheets, respectively. Equity ownership interests in corporate joint ventures in which the Partnership does not have a controlling financial interest, but over which the Partnership can exercise significant influence, or VIEs in which the Partnership has a variable interest but of which the Partnership is not the primary beneficiary, are accounted for under the equity method of accounting.
In May 2014, the Financial Accounting Standards Board ("FASB") codified guidance related to the recognition of revenue from contracts with customers. The new guidance outlined 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 guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those reporting periods, with early adoption prohibited. The Partnership is currently assessing the impact, if any, that adoption of the new guidance will have on its consolidated financial position and results of operations.
The accompanying condensed consolidated financial statements are presented in accordance with the requirements of Form 10-Q and accounting principles generally accepted in the United States for interim financial reporting. They do not include all disclosures normally made in annual financial statements contained in Form 10-K. The accompanying condensed consolidated balance sheet at December 31, 2013 has been derived from the Partnership's audited financial statements for the year ended December 31, 2013. In management's opinion, all adjustments necessary for a fair presentation of the results of operations, financial position and cash flows for the periods shown have been made. All such adjustments are of a normal recurring nature. Results for the three and nine months ended September 30, 2014 are not necessarily indicative of results for the full year 2014.
Certain amounts in the prior year condensed consolidated financial statements have been reclassified to conform to the current-year presentation.
2. Changes in Business and Other Matters
In the second quarter 2014, the Partnership entered into a joint agreement to form Bayview Refining Company, LLC ("Bayview"). Bayview will construct and operate a facility that will process crude oil into intermediate petroleum products. The Partnership will fund construction of the facility through contributions proportionate to its 49 percent economic and voting interests, with the remaining portion funded by the joint owner through a promissory note entered into with the Partnership. Through September 30, 2014, the joint owners have made contributions totaling $21 million. The facility is expected to commence operations in the second half of 2015. Bayview is a variable interest entity of which the Partnership is not the primary beneficiary. As a result, the Partnership's investment in Bayview is reflected as an equity method investment within the Crude Oil Acquisition and Marketing segment.
In connection with the formation of Bayview, the joint owners agreed to guarantee the obligations of Bayview with respect to certain third-party operating agreements over a ten-year term. The fair value of the liability recognized in connection with the guarantee was not material in relation to the Partnership’s financial position at September 30, 2014.
6
In the first quarter 2014, the Partnership exercised its rights to acquire an additional ownership interest in Explorer Pipeline Company ("Explorer") from an affiliate of Chevron for $42 million, increasing the Partnership's ownership interest from 9.4 to 13.3 percent. Explorer owns approximately 1,400 miles of refined products pipelines running from the Gulf Coast of the United States to the Chicago, Illinois area. The fair value of the investment was estimated based on the fair value of the consideration transferred. The investment continues to be accounted for as an equity method investment within the Partnership's Refined Products Pipelines segment, with the equity income recorded based on the Partnership's ownership percentage for each period presented.
In the third quarter 2013, the Partnership entered into an agreement to form SunVit Pipeline LLC ("SunVit"), a joint venture with Vitol, Inc. ("Vitol"), in which each party will maintain a 50 percent economic and voting interest. SunVit will construct and own a crude oil pipeline, which will originate in Midland, Texas and run to Garden City, Texas. The new pipeline will connect to the Partnership's existing pipelines and, along with the Partnership's Permian Express 2 pipeline project, will provide additional takeaway capacity from the Permian Basin. SunVit is expected to commence operations in 2015. Under the terms of the joint agreement, each owner will fund construction of the pipeline and operating expenses in proportion with its ownership interest. Through September 30, 2014, the Partnership and Vitol have made contributions totaling $51 million. SunVit is reflected as an equity method investment within the Partnership's Crude Oil Pipelines segment.
No pro forma information has been presented, as the impact of these investments was not material to the Partnership's consolidated financial position or results of operations.
3. Acquisitions
In the second quarter 2014, the Partnership acquired a crude oil purchasing and marketing business from EDF Trading North America, LLC ("EDF"). The purchase consisted of a crude oil acquisition and marketing business and related assets for approximately 20 thousand barrels per day. The acquisition also included a promissory note that was convertible to an equity interest in a rail facility (see below). The acquisition is included in the Crude Oil Acquisition and Marketing segment.
Also in the second quarter 2014, the Partnership acquired a 55 percent economic and voting interest in Price River Terminal, LLC ("PRT"), a rail facility in Wellington, Utah. As the Partnership acquired a controlling financial interest in PRT, the entity is reflected as a consolidated subsidiary of the Partnership from the acquisition date and is included in the Crude Oil Acquisition and Marketing segment. The terms of the acquisition provide PRT’s noncontrolling interest holders the option to sell their interests to the Partnership at a price defined in the purchase agreement. As a result, the noncontrolling interests attributable to PRT are excluded from the Partnership's total equity and are instead reflected as redeemable interests in the condensed consolidated balance sheet as of September 30, 2014.
The $65 million purchase price for these acquisitions (net of cash received) consisted primarily of net working capital largely attributable to inventory ($24 million), properties, plants and equipment ($14 million), and intangible assets ($28 million). These preliminary fair value allocations also resulted in an increase to goodwill ($12 million) and redeemable noncontrolling interests ($15 million).
In the second quarter 2013, the Partnership acquired Sunoco, Inc.'s ("Sunoco") Marcus Hook facility and related assets (the "Marcus Hook Facility") for $60 million in cash including certain acquisition costs. The acquisition included terminalling and storage assets located in Pennsylvania and Delaware, and commercial agreements, including a reimbursement agreement under which Sunoco will reimburse the Partnership $40 million for certain operating expenses of the Marcus Hook Facility through March 31, 2017. The reimbursement proceeds are reflected as contributions to equity. The Partnership will be indemnified against environmental liabilities resulting from events which occurred at the Marcus Hook Facility prior to the closing of the transaction. Since the transaction was with an entity under common control, the assets acquired and liabilities assumed were recorded by the Partnership at Sunoco's net carrying value plus acquisition costs. The difference between Sunoco’s net carrying value and the consideration transferred was recorded as an increase to equity. The acquisition was included within the Terminal Facilities segment.
No pro forma information has been presented, as the impact of these acquisitions was not material in relation to the Partnership's consolidated financial position or results of operations.
4. Related Party Transactions
The Partnership is a consolidated subsidiary of Energy Transfer Partners, L.P. ("ETP"). ETP and one of its affiliates own Sunoco Partners LLC, the Partnership's general partner, and a 30.3 percent limited partner interest in the Partnership. The Partnership has various operating and administrative agreements with ETP and its affiliates, including Sunoco, which include the agreements described below.
7
Advances to Affiliated Companies
Through the second quarter 2014, the Partnership participated in Sunoco's centralized cash management program pursuant to a treasury services agreement. Under the program, the Partnership's cash receipts and cash disbursements were processed, together with those of Sunoco and its other subsidiaries, through Sunoco's cash accounts with a corresponding credit or charge to an affiliated account. In the fourth quarter 2013, the Partnership established separate cash accounts and began to transition to processing its own cash receipts and disbursements. The Partnership has completed the transition and ceased participation in Sunoco's cash management program.
Administrative Services
The Partnership has no employees. The operations of the Partnership are carried out by employees of the general partner and its affiliates. The Partnership reimburses the general partner and its affiliates for certain costs and direct expenses incurred on the Partnership's behalf. These costs may increase if the acquisition or construction of new businesses or assets requires an increase in the level of general and administrative services performed for the Partnership.
The Partnership pays ETP and its affiliates an annual administrative fee for expenses incurred by ETP and its affiliates to perform certain centralized corporate functions, such as legal, accounting, treasury, engineering, information technology, insurance, and other corporate services, including the administration of employee benefit plans. This fee does not include the cost of shared insurance programs (which are allocated to the Partnership based upon its share of the cash premiums incurred), the salaries or wages of employees of the general partner, or the cost of employee benefits.
The Partnership's share of allocated ETP employee benefit plan expenses, including noncontributory defined benefit retirement plans, defined contribution 401(k) plans, employee and retiree medical, dental and life insurance plans, incentive compensation plans and other such benefits are reflected in cost of products sold, operating expenses, and selling, general and administrative expenses in the condensed consolidated statements of comprehensive income.
Affiliated Revenues and Accounts Receivable, Affiliated Companies
The Partnership is party to various agreements with ETP and its affiliates (including Sunoco) to supply crude oil, refined products and NGLs, as well as to provide pipeline and terminalling services. The revenues associated with these activities are reflected as affiliated revenues in the condensed consolidated statements of comprehensive income.
The Partnership's note receivable in connection with its interest in Bayview (Note 2) is reflected in long-term note receivable, affiliated companies in the condensed consolidated balance sheet as of September 30, 2014.
Capital Contributions
During the nine months ended September 30, 2014, the Partnership issued 0.3 million limited partnership units to participants in the Sunoco Partners LLC Long-Term Incentive Plan ("LTIP") upon completion of award vesting requirements, compared to less than 0.1 million limited partnership units issued during the nine months ended September 30, 2013. In addition, during the nine months ended September 30, 2014, the Partnership issued 5.0 million limited partnership units under its at-the-market equity offering program ("ATM program"), which was established in the first quarter 2014 (Note 11). As a result of these issuances of limited partnership units, the Partnership recorded $2 million and less than $0.1 million of capital contributions from the general partner during the nine months ended September 30, 2014 and 2013, respectively. These contributions were previously required for the general partner to maintain its two percent general partner interest. In July 2014, the Partnership agreement was amended to remove the obligation of the general partner to make capital contributions upon the issuance of limited partner units to retain a two percent interest.
In connection with the acquisition of the Marcus Hook Facility in the second quarter 2013, the Partnership and Sunoco entered into an agreement under which Sunoco will reimburse the Partnership $40 million for certain operating expenses of the facility through March 31, 2017. The reimbursement proceeds are reflected as contributions to equity within the condensed consolidated balance sheets and statements of equity.
5. Net Income Attributable to Sunoco Logistics Partners L.P. per Limited Partner Unit
The general partner's interest in net income attributable to Sunoco Logistics Partners L.P. ("net income attributable to partners") through September 30, 2014 consists of its approximate two percent general partner interest and "incentive distributions," which are increasing percentages of up to 50 percent of quarterly distributions in excess of $0.0833 per common unit (Note 12). The general partner was allocated net income attributable to partners of $49 and $31 million (representing 32 and 40 percent of total net income attributable to partners) for the three months ended September 30, 2014 and 2013, respectively, and $131 and $88 million (representing 31 and 24 percent of total net income attributable to partners) for the nine months ended September 30, 2014 and 2013, respectively. Diluted net income attributable to partners per limited partner unit is
8
calculated by dividing the limited partners' interest in net income attributable to partners by the sum of the weighted average number of common units outstanding and the dilutive effect of unvested incentive unit awards (Note 13).
The following table reconciles the weighted average number of common units used to compute basic net income attributable to limited partners per unit to those used to compute diluted net income attributable to limited partners per unit for the three and nine months ended September 30, 2014 and 2013:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||
(in millions) | (in millions) | |||||||||||
Weighted average number of units outstanding, basic (1) | 212.5 | 207.6 | 209.6 | 207.6 | ||||||||
Add effect of dilutive incentive awards (1) | 1.3 | 1.1 | 1.2 | 0.9 | ||||||||
Weighted average number of units, diluted (1) | 213.8 | 208.7 | 210.8 | 208.5 | ||||||||
(1) Amounts reflect the second quarter 2014 two-for-one unit split (Note 11).
6. Inventories
The components of inventories are as follows:
September 30, 2014 | December 31, 2013 | |||||||
(in millions) | ||||||||
Crude oil | $ | 459 | $ | 488 | ||||
Refined products | 132 | 99 | ||||||
Refined products additives | 2 | 3 | ||||||
Materials, supplies and other | 12 | 10 | ||||||
$ | 605 | $ | 600 | |||||
7. Intangible Assets
The components of intangible assets are as follows:
Weighted Average Amortization Period | September 30, 2014 | December 31, 2013 | ||||||||
(in years) | (in millions) | |||||||||
Gross | ||||||||||
Customer relationships | 18 | $ | 836 | $ | 808 | |||||
Technology | 10 | 47 | 47 | |||||||
Total gross | 883 | 855 | ||||||||
Accumulated amortization | ||||||||||
Customer relationships | (90 | ) | (56 | ) | ||||||
Technology | (10 | ) | (5 | ) | ||||||
Total accumulated amortization | (100 | ) | (61 | ) | ||||||
Total Net | $ | 783 | $ | 794 | ||||||
In connection with the EDF acquisition in the second quarter 2014, the Partnership recognized intangible assets related to customer relationships. The customer relationship intangible assets represent the estimated economic value associated with certain relationships acquired in connection with the business combination whereby (i) the Partnership acquired information about or access to customers, (ii) the customers now have the ability to transact business with the Partnership and (iii) the Partnership is uniquely positioned to provide products or services to the customers. The customer relationship intangible assets are amortized on a straight-line basis over their respective economic lives.
Amortization expense was $14 and $12 million for the three months ended September 30, 2014 and 2013, respectively, and $39 and $37 million for the nine months ended September 30, 2014 and 2013, respectively. The Partnership forecasts approximately $51 million of annual amortization expense for each year through the year 2018 for these intangible assets.
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Intangible assets associated with rights of way are included in properties, plants and equipment in the Partnership's condensed consolidated balance sheets.
8. Income Taxes
The Partnership is not a taxable entity for U.S. federal income tax purposes, or for the majority of states that impose income taxes. Rather, income taxes are generally assessed at the partner level. There are some states in which the Partnership operates where it is subject to state and local income taxes. Substantially all of the income tax amounts reflected in the Partnership's condensed consolidated financial statements are related to the operations of Inland, Mid-Valley and West Texas Gulf, all of which are entities subject to income taxes for federal and state purposes at the corporate level. The effective tax rates for these entities approximate the federal statutory rate of 35 percent.
In taxable jurisdictions, the Partnership records deferred income taxes on all significant temporary differences between the book basis and the tax basis of assets and liabilities. The net deferred tax liabilities reflected in the condensed consolidated balance sheets are derived principally from the differences in the book and tax bases of properties, plants and equipment of Inland, Mid-Valley and West Texas Gulf.
9. Debt
The components of the Partnership's debt balance are as follows:
September 30, 2014 | December 31, 2013 | |||||||
(in millions) | ||||||||
Credit Facilities | ||||||||
$1.50 billion Credit Facility, due November 2018 | $ | 525 | $ | 200 | ||||
$35 million Credit Facility, due April 2015 (1) | 35 | 35 | ||||||
Senior Notes | ||||||||
Senior Notes - 8.75%, due February 2014 (2) | — | 175 | ||||||
Senior Notes - 6.125%, due May 2016 | 175 | 175 | ||||||
Senior Notes - 5.50%, due February 2020 | 250 | 250 | ||||||
Senior Notes - 4.65%, due February 2022 | 300 | 300 | ||||||
Senior Notes - 3.45%, due January 2023 | 350 | 350 | ||||||
Senior Notes - 4.25% due April 2024 | 300 | — | ||||||
Senior Notes - 6.85%, due February 2040 | 250 | 250 | ||||||
Senior Notes - 6.10%, due February 2042 | 300 | 300 | ||||||
Senior Notes - 4.95%, due January 2043 | 350 | 350 | ||||||
Senior Notes - 5.30% due April 2044 | 700 | — | ||||||
Unamortized fair value adjustments | 109 | 120 | ||||||
Total debt | 3,644 | 2,505 | ||||||
Less: | ||||||||
Unamortized bond discount | (4 | ) | (2 | ) | ||||
Long-term debt | $ | 3,640 | $ | 2,503 | ||||
(1) Amounts outstanding under West Texas Gulf's $35 million Credit Facility at September 30, 2014 have been classified as long-term debt as West Texas Gulf has the ability and intent to refinance such borrowings on a long-term basis.
(2) The 8.75 percent Senior Notes were classified as long-term debt at December 31, 2013 as the Partnership repaid these notes in February 2014 with borrowings under its $1.50 billion Credit Facility due in 2018.
Credit Facilities
The Operating Partnership maintains a $1.50 billion unsecured credit facility (the "$1.50 billion Credit Facility"), which matures in November 2018, to fund the Partnership's working capital requirements, to finance acquisitions and capital projects, to pay distributions and for general partnership purposes. The $1.50 billion Credit Facility contains an "accordion" feature, under which the total aggregate commitment may be extended to $2.25 billion under certain conditions. The facility bears interest at LIBOR or the Base Rate (as defined in the facility), each plus an applicable margin. The credit facility may be repaid
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at any time. Outstanding borrowings under this credit facility were $525 and $200 million at September 30, 2014 and December 31, 2013, respectively.
The $1.50 billion Credit Facility contains various covenants including limitations on the creation of indebtedness and liens, and related to the operation and conduct of the business of the Partnership and its subsidiaries. The credit facility also limits the Partnership, on a rolling four quarter basis, to a maximum total consolidated debt to consolidated Adjusted EBITDA ratio, as defined in the underlying credit agreement, of 5.0 to 1, which can generally be increased to 5.5 to 1 during an acquisition period. The Partnership's ratio of total consolidated debt, excluding net unamortized fair value adjustments, to consolidated Adjusted EBITDA was 3.2 to 1 at September 30, 2014, as calculated in accordance with the credit agreement.
West Texas Gulf maintains a $35 million revolving credit facility (the "$35 million Credit Facility") which expires in April 2015. The facility is available to fund West Texas Gulf's general corporate activities, including working capital and capital expenditures. The $35 million Credit Facility contains various covenants limiting West Texas Gulf's ability to grant certain liens; make certain loans, acquisitions and investments; make any material changes to the nature of its business; or enter into a merger or sale of assets. The credit facility also limits West Texas Gulf, on a rolling four quarter basis, to a minimum fixed charge coverage ratio of 1.00 to 1, as defined in the underlying credit agreement. In addition, the credit facility limits West Texas Gulf to a maximum leverage ratio of 2.00 to 1. At September 30, 2014, West Texas Gulf's fixed charge coverage ratio and leverage ratio were 1.32 to 1 and 0.82 to 1, respectively. Outstanding borrowings under this credit facility were $35 million at September 30, 2014 and December 31, 2013.
Senior Notes
The Operating Partnership had $175 million of 8.75 percent senior notes which matured and were repaid in February 2014, using borrowings under the $1.50 billion Credit Facility.
In April 2014, the Operating Partnership issued $300 million of 4.25 percent Senior Notes and $700 million of 5.30 percent Senior Notes (the "2024 and 2044 Senior Notes"), due April 2024 and April 2044, respectively. The terms and conditions of the 2024 and 2044 Senior Notes are comparable to those of the Operating Partnership's other outstanding senior notes. The net proceeds from these offerings were used to repay outstanding borrowings under the $1.50 billion Credit Facility and for general partnership purposes.
10. Commitments and Contingent Liabilities
The Partnership is subject to numerous federal, state and local laws which regulate the discharge of materials into the environment or otherwise relate to the protection of the environment. These laws and regulations can result in liabilities and loss contingencies for remediation at the Partnership's facilities and at third-party or formerly owned sites. At September 30, 2014 and December 31, 2013, there were accrued liabilities for environmental remediation in the condensed consolidated balance sheets of $4 and $5 million, respectively. The accrued liabilities for environmental remediation do not include any amounts attributable to unasserted claims, since there are no unasserted claims that are probable of settlement or are reasonably estimable, nor have any recoveries from insurance been assumed. Charges against income for environmental remediation totaled $3 and $1 million for the three months ended September 30, 2014 and 2013, respectively, and $11 and $7 million for the nine months ended September 30, 2014 and 2013, respectively. The Partnership maintains insurance programs that cover certain of its existing or potential environmental liabilities. Claims for recovery of environmental liabilities and previous expenditures that are probable of realization were not material in relation to the Partnership's consolidated financial position at September 30, 2014.
Total future costs for environmental remediation activities will depend upon, among other things, the identification of any additional sites; the determination of the extent of the contamination at each site; the timing and nature of required remedial actions; the technology available and needed to meet the various existing legal requirements; the nature and extent of future environmental laws, inflation rates and the determination of the Partnership's liability at multi-party sites, if any, in light of uncertainties with respect to joint and several liability; and the number, participation levels and financial viability of other parties. Management believes it is reasonably possible that additional environmental remediation losses will be incurred. At September 30, 2014, the aggregate of the estimated maximum additional reasonably possible losses, which relate to numerous individual sites, totaled $6 million.
The Partnership is a party to certain pending and threatened claims. Although the ultimate outcome of these claims cannot be ascertained at this time, nor can a range of reasonably possible losses be determined, it is reasonably possible that some portion of them could be resolved unfavorably for the Partnership. Management does not believe that any liabilities which may arise from such claims or the environmental matters discussed above would be material in relation to the Partnership's financial position, results of operations or cash flows at September 30, 2014. Furthermore, management does not believe that the overall costs for such matters will have a material impact, over an extended period of time, on the Partnership's financial position, results of operations or cash flows.
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Sunoco has indemnified the Partnership for 30 years for environmental and toxic tort liabilities related to the assets contributed to the Partnership, that arose from the operation of such assets prior to the closing of the February 2002 initial public offering ("IPO"). Sunoco has also indemnified the Partnership for 100 percent of all losses asserted within the first 21 years after the closing of the IPO. Sunoco's share of the liability for claims asserted thereafter will decrease by 10 percent per year. For example, for a claim asserted during the twenty-third year after the closing of the IPO, Sunoco would be required to indemnify the Partnership for 80 percent of its loss. There is no monetary cap on the amount of indemnity coverage provided by Sunoco. The Partnership has agreed to indemnify Sunoco for events and conditions associated with the operation of the Partnership's assets that occur on or after the closing of the IPO and for environmental and toxic tort liabilities to the extent that Sunoco is not required to indemnify the Partnership.
Management of the Partnership does not believe that any liabilities which may arise from claims indemnified by Sunoco would be material in relation to the Partnership's financial position, results of operations or cash flows at September 30, 2014. There are certain other pending legal proceedings related to matters arising after the IPO that are not indemnified by Sunoco. Management believes that any liabilities that may arise from these legal proceedings will not be material in relation to the Partnership's financial position, results of operations or cash flows at September 30, 2014.
11. Equity
The changes in the number of units outstanding from January 1, 2013 through September 30, 2014 are as follows:
Common Units | |||
(in millions) | |||
Balance at January 1, 2013 | 207.7 | ||
Units issued under incentive plans | — | ||
Balance at December 31, 2013 | 207.7 | ||
Units issued in public offering | 7.7 | ||
Units issued under ATM program | 5.0 | ||
Units issued under incentive plans | 0.3 | ||
Balance at September 30, 2014 | 220.7 | ||
On June 12, 2014, the Partnership completed a two-for-one split of its common units. The unit split resulted in the issuance of one additional common unit for every one common unit owned. All unit and per unit information included in this report are presented on a post-split basis.
In the first quarter 2014, the Partnership filed a registration statement and established a $250 million ATM program. The program allows the Partnership to issue common units directly to the public and raise capital in a timely and efficient manner to finance its growth capital program, while supporting the Partnership's investment grade credit ratings. For the three and nine months ended September 30, 2014, the Partnership issued 2.8 and 5.0 million common units under this program, for net proceeds of $129 and $231 million, respectively. All remaining units authorized under the $250 million ATM program were issued during October 2014.
In the third quarter 2014, the Partnership filed a registration statement which will allow the Partnership to issue up to an additional $1.0 billion of common units directly to the public under its ATM program.
In September 2014, the Partnership completed an overnight public offering of 7.7 million common units for net proceeds of $362 million. The net proceeds from this offering were used to repay outstanding borrowings under the $1.50 billion Credit Facility and for general partnership purposes.
12. Cash Distributions
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 at 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 the establishment of cash reserves and the payment of fees and expenses, including payments to the general partner.
If cash distributions exceed $0.0833 per unit in a quarter, the general partner will receive increasing percentages, up to 50 percent, of the cash distributed in excess of that amount. These distributions are referred to as "incentive distributions." The
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percentage interests for the unitholders and the general partner for the minimum quarterly distribution are also applicable to the quarterly distribution amounts that are less than the minimum quarterly distribution.
The following table shows the target distribution levels and distribution "splits" between the general partner and the holders of the Partnership's common units through September 30, 2014:
Marginal Percentage Interest in Distributions | |||||||||||
Total Quarterly Distribution Target Amount | General Partner | Unitholders | |||||||||
Minimum Quarterly Distribution | $ | 0.0750 | 2 | % | 98 | % | |||||
First Target Distribution | up to | $ | 0.0833 | 2 | % | 98 | % | ||||
above | $ 0.0833 | ||||||||||
Second Target Distribution | up to | $ 0.0958 | 15 | % | (1) | 85 | % | ||||
above | $ 0.0958 | ||||||||||
Third Target Distribution | up to | $ 0.2638 | 37 | % | (1) | 63 | % | ||||
Thereafter | above | $ | 0.2638 | 50 | % | (1) | 50 | % | |||
(1) Includes general partner interest.
The distributions paid by the Partnership for the periods presented were as follows:
Cash Distribution Payment Date | Cash Distribution per Limited Partner Unit | Total Cash Distribution to the Limited Partners | Total Cash Distribution to the General Partner | |||||||||
(in millions) | (in millions) | |||||||||||
August 14, 2014 | $ | 0.3650 | $ | 77 | $ | 43 | ||||||
May 15, 2014 | $ | 0.3475 | $ | 72 | $ | 39 | ||||||
February 14, 2014 | $ | 0.3312 | $ | 69 | $ | 35 | ||||||
November 14, 2013 | $ | 0.3150 | $ | 65 | $ | 32 | ||||||
August 14, 2013 | $ | 0.3000 | $ | 62 | $ | 29 | ||||||
May 15, 2013 | $ | 0.2863 | $ | 59 | $ | 26 | ||||||
February 14, 2013 | $ | 0.2725 | $ | 57 | $ | 23 | ||||||
On October 21, 2014, the Partnership's general partner announced a cash distribution of $0.3825 per common unit ($1.53 annualized), representing the distribution for the third quarter 2014. The $133 million distribution, including $49 million to the general partner for its interest and incentive distribution rights, will be paid on November 14, 2014 to unitholders of record on November 7, 2014.
13. Management Incentive Plan
The general partner has adopted the LTIP for employees and directors of the general partner who perform services for the Partnership. The LTIP is administered by the independent directors of the Compensation Committee of the general partner's board of directors with respect to employee awards, and by the general partner's board of directors with respect to awards granted to the independent directors. The LTIP currently permits the grant of restricted units and unit options covering an additional 0.8 million common units.
During the nine months ended September 30, 2014, the Partnership issued 0.3 million common units under the LTIP, compared to less than 0.1 million common units during the nine months ended September 30, 2013. The Partnership recognized share based compensation expense of $12 and $10 million for the nine months ended September 30, 2014 and 2013, respectively. Each of the outstanding restricted unit grants have tandem distribution equivalent rights which are recognized as a reduction to equity when earned.
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14. Derivatives and Risk Management
The Partnership is exposed to various risks, including volatility in the prices of the products that the Partnership markets, counterparty credit risk and changes in interest rates.
Price Risk Management
The Partnership is exposed to risks associated with changes in the market price of crude oil, refined products and NGLs. These risks are primarily associated with price volatility related to pre-existing or anticipated purchases, sales and storage. Price changes are often caused by shifts in the supply and demand for these commodities, as well as their locations. In order to manage such exposure, the Partnership's policy is (i) to only purchase crude oil, refined products and NGLs for which sales contracts have been executed or for which ready markets exist, (ii) to structure sales contracts so that price fluctuations do not materially impact the margins earned, and (iii) not to acquire and hold physical inventory, futures contracts or other derivative instruments for the purpose of speculating on commodity price changes. Although the Partnership seeks to maintain a balanced inventory position within its commodity inventories, net unbalances may occur for short periods of time due to production, transportation and delivery variances. When physical inventory builds or draws do occur, the Partnership continuously manages the variances to a balanced position over a period of time.
The physical contracts related to the Partnership's crude oil, refined products and NGL businesses that qualify as derivatives are designated as normal purchases and sales and accounted for using accrual accounting under United States generally accepted accounting principles. The Partnership accounts for derivatives that do not qualify as normal purchases and sales at fair value. The Partnership currently does not utilize derivative instruments to manage its exposure to prices related to crude oil purchase and sale activities.
Pursuant to the Partnership's approved risk management policy, derivative contracts such as swaps, futures and other instruments may be used to hedge or reduce exposure to price risk associated with acquired inventory or forecasted physical transactions. The Partnership uses such derivative instruments to mitigate the risk associated with market movements in the price of refined products and NGLs. These derivative contracts act as a hedging mechanism against the volatility of prices by allowing the Partnership to transfer this price risk to counterparties who are able and willing to bear it. Since the first quarter 2013, the Partnership has not designated any of its derivative contracts as hedges for accounting purposes. Therefore, all realized and unrealized gains and losses from these derivative contracts are recognized in the condensed consolidated statement of comprehensive income as they are incurred. For refined products, derivative contracts that were designated and qualified as cash flow hedges during the first quarter 2013, the portion of the gain or loss on the derivative contract that was effective in offsetting the variable cash flows associated with the hedged forecasted transaction was reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affected earnings. The remaining gain or loss on the derivative contract in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffective portion), was recognized immediately in earnings. The amount of hedge ineffectiveness on derivative contracts was not material during the first quarter 2013. All realized gains and losses associated with refined products derivative contracts are recorded in earnings in the same line item associated with the forecasted transaction (either in sales and other operating revenue or cost of products sold).
The Partnership had open derivative positions on approximately 7.0 and 1.6 million barrels of refined products and NGLs at September 30, 2014 and December 31, 2013, respectively. The derivatives outstanding as of September 30, 2014 vary in duration but do not extend beyond one year. The Partnership records its derivatives at fair value based on observable market prices (levels 1 and 2). As of September 30, 2014, the fair value of the Partnership's derivative assets and liabilities were $18 and $6 million, respectively, compared to $1 and $3 million, respectively, at December 31, 2013.
Derivative asset and liability balances are recorded in accounts receivable and accrued liabilities, respectively, in the condensed consolidated balance sheets.
The following table sets forth the impact of derivatives on the Partnership's results of operations for the three and nine months ended September 30, 2014 and 2013:
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Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Location of Gains (Losses) Recognized in Earnings | (in millions) | (in millions) | ||||||||||||||
Commodity contracts designated as cash flow hedging instruments: | ||||||||||||||||
Sales and other operating revenue | $ | — | $ | — | $ | — | $ | (1 | ) | |||||||
Cost of products sold | — | — | — | — | ||||||||||||
$ | — | $ | — | $ | — | $ | (1 | ) | ||||||||
Commodity contracts not designated as cash flow hedging instruments: | ||||||||||||||||
Sales and other operating revenue | $ | 22 | $ | 1 | $ | 13 | $ | 2 | ||||||||
Cost of products sold | (3 | ) | 4 | (3 | ) | — | ||||||||||
$ | 19 | $ | 5 | $ | 10 | $ | 2 | |||||||||
Credit Risk Management
The Partnership maintains credit policies with regard to its counterparties that management believes minimize the overall credit risk through credit analysis, credit approvals, credit limits and monitoring procedures. The credit positions of the Partnership's customers are analyzed prior to the extension of credit and periodically after credit has been extended. The Partnership's counterparties consist primarily of financial institutions and major integrated oil companies. This concentration of counterparties may impact the Partnership's overall exposure to credit risk, either positively or negatively, as the counterparties may be similarly affected by changes in economic, regulatory or other conditions. At September 30, 2014 and December 31, 2013, the Partnership did not hold any over-the-counter derivatives.
Interest Rate Risk Management
The Partnership has interest rate risk exposure for changes in interest rates related to its outstanding borrowings. The Partnership manages its exposure to changes in interest rates through the use of a combination of fixed-rate and variable-rate debt. At September 30, 2014, the Partnership had $560 million of consolidated variable-rate borrowings under its revolving credit facilities.
15. Fair Value Measurements
The Partnership applies fair value accounting for all assets and liabilities that are required to be measured at fair value under current accounting rules. The assets and liabilities that are measured at fair value on a recurring basis are comprised primarily of derivatives.
The Partnership determines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Partnership utilizes valuation techniques that maximize the use of observable inputs (levels 1 and 2) and minimize the use of unobservable inputs (level 3) within the fair value hierarchy established by the FASB. The Partnership generally applies a "market approach" to determine fair value. This method uses pricing and other information generated by market transactions for identical or comparable assets and liabilities. Assets and liabilities are classified within the fair value hierarchy based on the lowest level (least observable) input that is significant to the measurement in its entirety.
The estimated fair value of the Partnership's financial instruments has been determined based on management's assessment of available market information and appropriate valuation methodologies. The Partnership's current assets (other than derivatives and inventories) and current liabilities (other than derivatives) are financial instruments and most of these items are recorded at cost in the condensed consolidated balance sheets. The estimated fair value of these financial instruments approximates their carrying value due to their short-term nature. The Partnership's derivatives are measured and recorded at fair value based on observable market prices (Note 14). The estimated fair values of the Partnership's senior notes are determined using observable market prices, as these notes are actively traded (level 1). The estimated aggregate fair value of the senior notes at September 30, 2014 was $3.09 billion, compared to the carrying amount of $3.08 billion. The estimated aggregate fair value of the senior notes at December 31, 2013 was $2.17 billion, compared to the carrying amount of $2.27 billion.
For further information regarding the Partnership's fair value measurements, see Notes 3 and 14.
15
16. Business Segment Information
The following tables summarize condensed consolidated statement of comprehensive income information for the Partnership's business segments and reconcile total segment Adjusted EBITDA to net income attributable to the Partnership for the three and nine months ended September 30, 2014 and 2013, respectively:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Sales and other operating revenue (1) | ||||||||||||||||
Crude Oil Pipelines | $ | 144 | $ | 139 | $ | 413 | $ | 356 | ||||||||
Crude Oil Acquisition and Marketing | 4,497 | 4,244 | 13,023 | 11,550 | ||||||||||||
Terminal Facilities | 298 | 177 | 868 | 536 | ||||||||||||
Refined Products Pipelines | 46 | 34 | 127 | 96 | ||||||||||||
Intersegment eliminations | (70 | ) | (66 | ) | (218 | ) | (187 | ) | ||||||||
Total sales and other operating revenue | $ | 4,915 | $ | 4,528 | $ | 14,213 | $ | 12,351 | ||||||||
Depreciation and amortization | ||||||||||||||||
Crude Oil Pipelines | $ | 25 | $ | 23 | $ | 73 | $ | 67 | ||||||||
Crude Oil Acquisition and Marketing | 15 | 12 | 41 | 36 | ||||||||||||
Terminal Facilities | 29 | 27 | 83 | 75 | ||||||||||||
Refined Products Pipelines | 8 | 6 | 23 | 18 | ||||||||||||
Total depreciation and amortization | $ | 77 | $ | 68 | $ | 220 | $ | 196 | ||||||||
Adjusted EBITDA | ||||||||||||||||
Crude Oil Pipelines | $ | 95 | $ | 98 | $ | 292 | $ | 247 | ||||||||
Crude Oil Acquisition and Marketing | 66 | 18 | 131 | 200 | ||||||||||||
Terminal Facilities | 61 | 47 | 244 | 171 | ||||||||||||
Refined Products Pipelines | 24 | 18 | 67 | 43 | ||||||||||||
Total Adjusted EBITDA | 246 | 181 | 734 | 661 | ||||||||||||
Interest expense, net | (14 | ) | (22 | ) | (51 | ) | (58 | ) | ||||||||
Depreciation and amortization expense | (77 | ) | (68 | ) | (220 | ) | (196 | ) | ||||||||
Provision for income taxes | (8 | ) | (8 | ) | (21 | ) | (23 | ) | ||||||||
Non-cash compensation expense | (4 | ) | (4 | ) | (12 | ) | (10 | ) | ||||||||
Unrealized gains on commodity risk management activities | 21 | 8 | 14 | 12 | ||||||||||||
Amortization of excess equity method investment | (1 | ) | — | (2 | ) | (1 | ) | |||||||||
Proportionate share of unconsolidated affiliates' interest, depreciation and provision for income taxes | (6 | ) | (6 | ) | (17 | ) | (16 | ) | ||||||||
Net Income | 157 | 81 | 425 | 369 | ||||||||||||
Less: Net income attributable to noncontrolling interests | (2 | ) | (3 | ) | (7 | ) | (8 | ) | ||||||||
Net Income Attributable to Sunoco Logistics Partners L.P. | $ | 155 | $ | 78 | $ | 418 | $ | 361 | ||||||||
(1) Sales and other operating revenue includes the following amounts from ETP and its affiliates (including Sunoco) for the three and nine months ended September 30, 2014 and 2013:
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Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Crude Oil Acquisition and Marketing | $ | 231 | $ | 367 | $ | 842 | $ | 1,048 | ||||||||
Terminal Facilities | 64 | 32 | 157 | 111 | ||||||||||||
Refined Products Pipelines | 4 | 9 | 15 | 26 | ||||||||||||
Total sales and other operating revenue from affiliates | $ | 299 | $ | 408 | $ | 1,014 | $ | 1,185 | ||||||||
The following table summarizes the identifiable assets for each segment as of September 30, 2014 and December 31, 2013:
September 30, 2014 | December 31, 2013 | |||||||
(in millions) | ||||||||
Crude Oil Pipelines | $ | 3,680 | $ | 3,321 | ||||
Crude Oil Acquisition and Marketing | 4,462 | 3,863 | ||||||
Terminal Facilities | 3,310 | 2,701 | ||||||
Refined Products Pipelines | 2,528 | 1,684 | ||||||
Corporate and other (1) | 181 | 328 | ||||||
Total identifiable assets | $ | 14,161 | $ | 11,897 | ||||
(1) Corporate and other assets consist of cash and cash equivalents, advances to affiliates, properties, plants and equipment and other assets.
17. Supplemental Condensed Consolidating Financial Information
The Partnership serves as guarantor of the senior notes. These guarantees are full and unconditional. For the purposes of this footnote, Sunoco Logistics 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.
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Condensed Consolidating Statement of Comprehensive Income (Loss)
Three Months Ended September 30, 2014
(in millions, unaudited)
Parent Guarantor | Subsidiary Issuer | Non-Guarantor Subsidiaries | Consolidating Adjustments | Total | ||||||||||||||||
Revenues | ||||||||||||||||||||
Sales and other operating revenue: | ||||||||||||||||||||
Unaffiliated customers | $ | — | $ | — | $ | 4,616 | $ | — | $ | 4,616 | ||||||||||
Affiliates | — | — | 299 | — | 299 | |||||||||||||||
Total Revenues | — | — | 4,915 | — | 4,915 | |||||||||||||||
Costs and Expenses | ||||||||||||||||||||
Cost of products sold | — | — | 4,581 | — | 4,581 | |||||||||||||||
Operating expenses | — | — | 48 | — | 48 | |||||||||||||||
Selling, general and administrative expenses | — | — | 37 | — | 37 | |||||||||||||||
Depreciation and amortization expense | — | — | 77 | — | 77 | |||||||||||||||
Total Costs and Expenses | — | — | 4,743 | — | 4,743 | |||||||||||||||
Operating Income | — | — | 172 | — | 172 | |||||||||||||||
Interest cost and debt expense, net | — | (37 | ) | (1 | ) | — | (38 | ) | ||||||||||||
Capitalized interest | — | 24 | — | — | 24 | |||||||||||||||
Other income | — | — | 7 | — | 7 | |||||||||||||||
Equity in earnings of subsidiaries | 155 | 168 | — | (323 | ) | — | ||||||||||||||
Income (Loss) Before Provision for Income Taxes | 155 | 155 | 178 | (323 | ) | 165 | ||||||||||||||
Provision for income taxes | — | — | (8 | ) | — | (8 | ) | |||||||||||||
Net Income (Loss) | 155 | 155 | 170 | (323 | ) | 157 | ||||||||||||||
Less: Net income attributable to noncontrolling interests | — | — | (2 | ) | — | (2 | ) | |||||||||||||
Net Income (Loss) Attributable to Sunoco Logistics Partners L.P. | $ | 155 | $ | 155 | $ | 168 | $ | (323 | ) | $ | 155 | |||||||||
Comprehensive Income (Loss) | $ | 155 | $ | 155 | $ | 170 | $ | (323 | ) | $ | 157 | |||||||||
Less: Comprehensive income attributable to noncontrolling interests | — | — | (2 | ) | — | (2 | ) | |||||||||||||
Comprehensive Income (Loss) Attributable to Sunoco Logistics Partners L.P. | $ | 155 | $ | 155 | $ | 168 | $ | (323 | ) | $ | 155 | |||||||||
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Condensed Consolidating Statement of Comprehensive Income (Loss)
Three Months Ended September 30, 2013
(in millions, unaudited)
Parent Guarantor | Subsidiary Issuer | Non-Guarantor Subsidiaries | Consolidating Adjustments | Total | ||||||||||||||||
Revenues | ||||||||||||||||||||
Sales and other operating revenue: | ||||||||||||||||||||
Unaffiliated customers | $ | — | $ | — | $ | 4,120 | $ | — | $ | 4,120 | ||||||||||
Affiliates | — | — | 408 | — | 408 | |||||||||||||||
Total Revenues | — | — | 4,528 | — | 4,528 | |||||||||||||||
Costs and Expenses | ||||||||||||||||||||
Cost of products sold | — | — | 4,287 | — | 4,287 | |||||||||||||||
Operating expenses | — | — | 36 | — | 36 | |||||||||||||||
Selling, general and administrative expenses | — | — | 33 | — | 33 | |||||||||||||||
Depreciation and amortization expense | — | — | 68 | — | 68 | |||||||||||||||
Total Costs and Expenses | — | — | 4,424 | — | 4,424 | |||||||||||||||
Operating Income | — | — | 104 | — | 104 | |||||||||||||||
Interest cost and debt expense, net | — | (23 | ) | (2 | ) | — | (25 | ) | ||||||||||||
Capitalized interest | — | 3 | — | — | 3 | |||||||||||||||
Other income | — | — | 7 | — | 7 | |||||||||||||||
Equity in earnings of subsidiaries | 78 | 98 | — | (176 | ) | — | ||||||||||||||
Income (Loss) Before Provision for Income Taxes | 78 | 78 | 109 | (176 | ) | 89 | ||||||||||||||
Provision for income taxes | — | — | (8 | ) | — | (8 | ) | |||||||||||||
Net Income (Loss) | 78 | 78 | 101 | (176 | ) | 81 | ||||||||||||||
Less: Net income attributable to noncontrolling interests | — | — | (3 | ) | — | (3 | ) | |||||||||||||
Net Income (Loss) Attributable to Sunoco Logistics Partners L.P. | $ | 78 | $ | 78 | $ | 98 | $ | (176 | ) | $ | 78 | |||||||||
Comprehensive Income (Loss) | $ | 78 | $ | 78 | $ | 101 | $ | (176 | ) | $ | 81 | |||||||||
Less: Comprehensive income attributable to noncontrolling interests | — | — | (3 | ) | — | (3 | ) | |||||||||||||
Comprehensive Income (Loss) Attributable to Sunoco Logistics Partners L.P. | $ | 78 | $ | 78 | $ | 98 | $ | (176 | ) | $ | 78 | |||||||||
19
Condensed Consolidating Statement of Comprehensive Income (Loss)
Nine Months Ended September 30, 2014
(in millions, unaudited)
Parent Guarantor | Subsidiary Issuer | Non-Guarantor Subsidiaries | Consolidating Adjustments | Total | ||||||||||||||||
Revenues | ||||||||||||||||||||
Sales and other operating revenue: | ||||||||||||||||||||
Unaffiliated customers | $ | — | $ | — | $ | 13,199 | $ | — | $ | 13,199 | ||||||||||
Affiliates | — | — | 1,014 | — | 1,014 | |||||||||||||||
Total Revenues | — | — | 14,213 | — | 14,213 | |||||||||||||||
Costs and Expenses | ||||||||||||||||||||
Cost of products sold | — | — | 13,308 | — | 13,308 | |||||||||||||||
Operating expenses | — | — | 105 | — | 105 | |||||||||||||||
Selling, general and administrative expenses | — | — | 101 | — | 101 | |||||||||||||||
Depreciation and amortization expense | — | — | 220 | — | 220 | |||||||||||||||
Total Costs and Expenses | — | — | 13,734 | — | 13,734 | |||||||||||||||
Operating Income | — | — | 479 | — | 479 | |||||||||||||||
Interest cost and debt expense, net | — | (98 | ) | (3 | ) | — | (101 | ) | ||||||||||||
Capitalized interest | ||||||||||||||||||||