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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
| |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2020
or
|
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-32740
ENERGY TRANSFER LP
(Exact name of registrant as specified in its charter)
|
| | |
Delaware | | 30-0108820 |
(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 every Interactive Data File required to be submitted 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 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 | ¨ | | 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
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Units | | ET | | New York Stock Exchange |
At May 7, 2020, the registrant had 2,694,308,251 Common Units outstanding.
FORM 10-Q
ENERGY TRANSFER LP AND SUBSIDIARIES
TABLE OF CONTENTS
Definitions
References to the “Partnership” or “ET” refer to Energy Transfer LP. In addition, the following is a list of certain acronyms and terms used 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 content |
| | | |
| CDM | | CDM Resource Management LLC and CDM Environmental & Technical Services LLC, collectively |
| | | |
| Citrus | | Citrus, LLC |
| | | |
| DOJ | | U.S. Department of Justice |
| | | |
| EPA | | U.S. Environmental Protection Agency |
| | | |
| ETC Sunoco | | ETC Sunoco Holdings LLC (formerly Sunoco, Inc.), a wholly-owned subsidiary of ETO |
| | | |
| ETO | | Energy Transfer Operating, L.P.. |
| | | |
| ETP GP | | Energy Transfer Partners GP, L.P., the general partner of ETO |
| | | |
| ETO Series A Preferred Units | | ETO’s 6.250% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units |
| | | |
| ETO Series B Preferred Units | | ETO’s 6.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units |
| | | |
| ETO Series C Preferred Units | | ETO’s 7.375% Series C Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units |
| | | |
| ETO Series D Preferred Units | | ETO’s 7.625% Series D Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units |
| | | |
| ETO Series E Preferred Units | | ETO’s 7.600% Series E Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units |
| | | |
| ETO Series F Preferred Units | | ETO’s 6.750% Series F Fixed-Rate Reset Cumulative Redeemable Perpetual Preferred Units |
| | | |
| ETO Series G Preferred Units | | ETO’s 7.125% Series G Fixed-Rate Reset Cumulative Redeemable Perpetual Preferred Units |
| | | |
| Exchange Act | | Securities Exchange Act of 1934 |
| | | |
| FEP | | Fayetteville Express Pipeline LLC |
| | | |
| FERC | | Federal Energy Regulatory Commission |
| | | |
| FGT | | Florida Gas Transmission Company, LLC, a wholly-owned subsidiary of Citrus |
| | | |
| GAAP | | accounting principles generally accepted in the United States of America |
| | | |
| IDRs | | incentive distribution rights |
| | | |
| Lake Charles LNG | | Lake Charles LNG Company, LLC (previously named Trunkline LNG Company, LLC), a wholly-owned subsidiary of ETO |
| | | |
| 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, wholly-owned by ETO |
| | |
| PES | | Philadelphia Energy Solutions Refining and Marketing LLC |
| | | |
| Regency | | Regency Energy Partners LP |
| | | |
| RIGS | | Regency Interstate Gas LP |
| | | |
| Rover | | Rover Pipeline LLC |
| | | |
| SEC | | Securities and Exchange Commission |
| | | |
| SemGroup | | SemGroup Corporation |
| | | |
| Series A Convertible Preferred Units | | ET Series A convertible preferred units |
| | | |
| Sunoco Logistics Operations | | Sunoco Logistics Partners Operations L.P, a wholly-owned subsidiary of ETO |
| | | |
| Sunoco LP Series A Preferred Units | | Sunoco LP Series A Preferred Units previously held by ET |
| | | |
| Sunoco R&M | | Sunoco (R&M), LLC (formerly Sunoco, Inc. (R&M)) |
| | | |
| Southwest Gas | | Pan Gas Storage LLC (d.b.a. Southwest Gas Storage Company) |
| | | |
| Transwestern | | Transwestern Pipeline Company, LLC, a wholly-owned subsidiary of ETO |
| | | |
| Trunkline | | Trunkline Gas Company, LLC, a wholly-owned subsidiary of Panhandle |
| | | |
| USAC | | USA Compression Partners, LP, a wholly-owned subsidiary of ETO |
| | | |
| USAC Preferred Units | | USAC Series A Preferred Units |
| | | |
| White Cliffs | | White Cliffs Pipeline |
| | | |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENERGY TRANSFER LP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(unaudited)
|
| | | | | | | |
| March 31, 2020 | | December 31, 2019* |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 196 |
| | $ | 291 |
|
Accounts receivable, net | 3,371 |
| | 5,038 |
|
Accounts receivable from related companies | 132 |
| | 159 |
|
Inventories | 1,024 |
| | 1,532 |
|
Income taxes receivable | 115 |
| | 146 |
|
Derivative assets | 25 |
| | 23 |
|
Other current assets | 256 |
| | 275 |
|
Total current assets | 5,119 |
| | 7,464 |
|
| | | |
Property, plant and equipment | 90,959 |
| | 89,790 |
|
Accumulated depreciation and depletion | (16,373 | ) | | (15,597 | ) |
| 74,586 |
| | 74,193 |
|
| | | |
Advances to and investments in unconsolidated affiliates | 3,337 |
| | 3,460 |
|
Lease right-of-use assets, net | 1,033 |
| | 964 |
|
Other non-current assets, net | 1,515 |
| | 1,571 |
|
Intangible assets, net | 6,116 |
| | 6,154 |
|
Goodwill | 3,835 |
| | 5,167 |
|
Total assets | $ | 95,541 |
| | $ | 98,973 |
|
*As adjusted. See Note 1.
The accompanying notes are an integral part of these consolidated financial statements.
1
ENERGY TRANSFER LP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in million)
(unaudited)
|
| | | | | | | |
| March 31, 2020 | | December 31, 2019* |
LIABILITIES AND EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 2,399 |
| | $ | 4,118 |
|
Accounts payable to related companies | 9 |
| | 31 |
|
Derivative liabilities | 9 |
| | 147 |
|
Operating lease current liabilities | 54 |
| | 60 |
|
Accrued and other current liabilities | 3,662 |
| | 3,342 |
|
Current maturities of long-term debt | 33 |
| | 26 |
|
Total current liabilities | 6,166 |
| | 7,724 |
|
| | | |
Long-term debt, less current maturities | 50,299 |
| | 51,028 |
|
Non-current derivative liabilities | 573 |
| | 273 |
|
Non-current operating lease liabilities | 821 |
| | 901 |
|
Deferred income taxes | 3,214 |
| | 3,208 |
|
Other non-current liabilities | 1,193 |
| | 1,162 |
|
| | | |
Commitments and contingencies |
| |
|
Redeemable noncontrolling interests | 745 |
| | 739 |
|
| | | |
Equity: | | | |
Limited Partners: | | | |
Common Unitholders | 19,512 |
| | 21,935 |
|
General Partner | (6 | ) | | (4 | ) |
Accumulated other comprehensive loss | (59 | ) | | (11 | ) |
Total partners’ capital | 19,447 |
| | 21,920 |
|
Noncontrolling interests | 13,083 |
| | 12,018 |
|
Total equity | 32,530 |
| | 33,938 |
|
Total liabilities and equity | $ | 95,541 |
| | $ | 98,973 |
|
*As adjusted. See Note 1.
The accompanying notes are an integral part of these consolidated financial statements.
2
ENERGY TRANSFER LP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per unit data)
(unaudited)
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019* |
REVENUES: | | | |
Refined product sales | $ | 3,232 |
| | $ | 3,726 |
|
Crude sales | 3,543 |
| | 3,525 |
|
NGL sales | 1,689 |
| | 2,402 |
|
Gathering, transportation and other fees | 2,385 |
| | 2,267 |
|
Natural gas sales | 588 |
| | 964 |
|
Other | 190 |
| | 237 |
|
Total revenues | 11,627 |
| | 13,121 |
|
COSTS AND EXPENSES: | | | |
Cost of products sold | 8,291 |
| | 9,477 |
|
Operating expenses | 879 |
| | 808 |
|
Depreciation, depletion and amortization | 867 |
| | 774 |
|
Selling, general and administrative | 204 |
| | 147 |
|
Impairment losses | 1,325 |
| | 50 |
|
Total costs and expenses | 11,566 |
| | 11,256 |
|
OPERATING INCOME | 61 |
| | 1,865 |
|
OTHER INCOME (EXPENSE): | | | |
Interest expense, net of interest capitalized | (602 | ) | | (590 | ) |
Equity in earnings (losses) of unconsolidated affiliates | (7 | ) | | 65 |
|
Losses on extinguishments of debt | (62 | ) | | (18 | ) |
Losses on interest rate derivatives | (329 | ) | | (74 | ) |
Other, net | 3 |
| | (4 | ) |
INCOME (LOSS) BEFORE INCOME TAX EXPENSE | (936 | ) | | 1,244 |
|
Income tax expense | 28 |
| | 126 |
|
NET INCOME (LOSS) | (964 | ) | | 1,118 |
|
Less: Net income (loss) attributable to noncontrolling interests | (121 | ) | | 297 |
|
Less: Net income attributable to redeemable noncontrolling interests | 12 |
| | 13 |
|
NET INCOME (LOSS) ATTRIBUTABLE TO PARTNERS | (855 | ) | | 808 |
|
General Partner’s interest in net income (loss) | (1 | ) | | 1 |
|
Limited Partners’ interest in net income (loss) | $ | (854 | ) | | $ | 807 |
|
NET INCOME (LOSS) PER LIMITED PARTNER UNIT: | | | |
Basic | $ | (0.32 | ) | | $ | 0.31 |
|
Diluted | $ | (0.32 | ) | | $ | 0.31 |
|
*As adjusted. See Note 1.
The accompanying notes are an integral part of these consolidated financial statements.
3
ENERGY TRANSFER LP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
(unaudited)
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019* |
Net income (loss) | $ | (964 | ) | | $ | 1,118 |
|
Other comprehensive income (loss), net of tax: | | | |
Change in value of available-for-sale securities | (9 | ) | | 5 |
|
Actuarial gain related to pension and other postretirement benefit plans | 3 |
| | 7 |
|
Foreign currency translation adjustments | (64 | ) | | — |
|
Change in other comprehensive loss from unconsolidated affiliates | (16 | ) | | (4 | ) |
| (86 | ) | | 8 |
|
Comprehensive income (loss) | (1,050 | ) | | 1,126 |
|
Less: Comprehensive income (loss) attributable to noncontrolling interests | (121 | ) | | 297 |
|
Less: Comprehensive income attributable to redeemable noncontrolling interests | 12 |
| | 13 |
|
Comprehensive income (loss) attributable to partners | $ | (941 | ) | | $ | 816 |
|
*As adjusted. See Note 1.
The accompanying notes are an integral part of these consolidated financial statements.
4
ENERGY TRANSFER LP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(Dollars in millions)
(unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Common Unitholders | | General Partner | | AOCI | | Noncontrolling Interests | | Total |
Balance, December 31, 2019* | $ | 21,935 |
| | $ | (4 | ) | | $ | (11 | ) | | $ | 12,018 |
| | $ | 33,938 |
|
Distributions to partners | (1,591 | ) | | (1 | ) | | — |
| | — |
| | (1,592 | ) |
Distributions to noncontrolling interests | — |
| | — |
| | — |
| | (444 | ) | | (444 | ) |
Subsidiary units issued | — |
| | — |
| | — |
| | 1,580 |
| | 1,580 |
|
Capital contributions from noncontrolling interests | — |
| | — |
| | — |
| | 95 |
| | 95 |
|
Other comprehensive loss, net of tax | — |
| | — |
| | (48 | ) | | (38 | ) | | (86 | ) |
Other, net | 22 |
| | — |
| | — |
| | (7 | ) | | 15 |
|
Net loss, excluding amounts attributable to redeemable noncontrolling interests | (854 | ) | | (1 | ) | | — |
| | (121 | ) | | (976 | ) |
Balance, March 31, 2020 | $ | 19,512 |
| | $ | (6 | ) | | $ | (59 | ) | | $ | 13,083 |
| | $ | 32,530 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Common Unitholders | | General Partner | | AOCI | | Noncontrolling Interests | | Total |
Balance, December 31, 2018* | $ | 20,773 |
| | $ | (5 | ) | | $ | (42 | ) | | $ | 10,291 |
| | $ | 31,017 |
|
Distributions to partners | (799 | ) | | (1 | ) | | — |
| | — |
| | (800 | ) |
Distributions to noncontrolling interests | — |
| | — |
| | — |
| | (425 | ) | | (425 | ) |
Capital contributions from noncontrolling interests | — |
| | — |
| | — |
| | 140 |
| | 140 |
|
Sale of noncontrolling interest in subsidiary | — |
| | — |
| | — |
| | 93 |
| | 93 |
|
Other comprehensive income, net of tax | — |
| | — |
| | 8 |
| | — |
| | 8 |
|
Other, net | 17 |
| | — |
| | — |
| | 12 |
| | 29 |
|
Net income, excluding amounts attributable to redeemable noncontrolling interests | 807 |
| | 1 |
| | — |
| | 297 |
| | 1,105 |
|
Balance, March 31, 2019* | $ | 20,798 |
| | $ | (5 | ) | | $ | (34 | ) | | $ | 10,408 |
| | $ | 31,167 |
|
*As adjusted. See Note 1.
The accompanying notes are an integral part of these consolidated financial statements.
5
ENERGY TRANSFER LP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(unaudited)
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019* |
OPERATING ACTIVITIES | | | |
Net income (loss) | $ | (964 | ) | | $ | 1,118 |
|
Reconciliation of net income (loss) to net cash provided by operating activities: | | | |
Depreciation, depletion and amortization | 867 |
| | 774 |
|
Deferred income taxes | 42 |
| | 98 |
|
Inventory valuation adjustments | 227 |
| | (93 | ) |
Non-cash compensation expense | 22 |
| | 29 |
|
Impairment losses | 1,325 |
| | 50 |
|
Losses on extinguishments of debt | 62 |
| | 18 |
|
Distributions on unvested awards | (11 | ) | | (8 | ) |
Equity in (earnings) losses of unconsolidated affiliates | 7 |
| | (65 | ) |
Distributions from unconsolidated affiliates | 58 |
| | 66 |
|
Other non-cash | 17 |
| | 107 |
|
Net change in operating assets and liabilities, net of effects of acquisitions | 164 |
| | (279 | ) |
Net cash provided by operating activities | 1,816 |
| | 1,815 |
|
INVESTING ACTIVITIES | | | |
Cash proceeds from sale of noncontrolling interest in subsidiary | — |
| | 93 |
|
Cash paid for all other acquisitions, net of cash received | — |
| | (5 | ) |
Capital expenditures, excluding allowance for equity funds used during construction | (1,621 | ) | | (1,150 | ) |
Contributions in aid of construction costs | 25 |
| | 15 |
|
Contributions to unconsolidated affiliates | (9 | ) | | (28 | ) |
Distributions from unconsolidated affiliates in excess of cumulative earnings | 52 |
| | 13 |
|
Proceeds from the sale of other assets | 2 |
| | 4 |
|
Other | (6 | ) | | (40 | ) |
Net cash used in investing activities | (1,557 | ) | | (1,098 | ) |
FINANCING ACTIVITIES | | | |
Proceeds from borrowings | 12,134 |
| | 11,295 |
|
Repayments of debt | (12,898 | ) | | (10,733 | ) |
Subsidiary units issued for cash | 1,580 |
| | — |
|
Capital contributions from noncontrolling interests | 95 |
| | 140 |
|
Distributions to partners | (770 | ) | | (800 | ) |
Distributions to noncontrolling interests | (444 | ) | | (425 | ) |
Debt issuance costs | (51 | ) | | (84 | ) |
Net cash used in financing activities | (354 | ) | | (607 | ) |
Increase (decrease) in cash and cash equivalents | (95 | ) | | 110 |
|
Cash and cash equivalents, beginning of period | 291 |
| | 419 |
|
Cash and cash equivalents, end of period | $ | 196 |
| | $ | 529 |
|
*As adjusted. See Note 1.
The accompanying notes are an integral part of these consolidated financial statements.
6
ENERGY TRANSFER LP 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
The consolidated financial statements presented herein contain the results of Energy Transfer LP and its subsidiaries (the “Partnership,” “we,” “us,” “our” or “ET”). References to the “Parent Company” mean Energy Transfer LP on a stand-alone basis.
In December 2019, we completed the acquisition of SemGroup. In connection with the transaction, a wholly owned subsidiary of ET merged with and into SemGroup, with SemGroup surviving the merger. During the first quarter of 2020, ET contributed certain former SemGroup subsidiaries to ETO through sale and contribution transactions (together, the “SemGroup Transaction”).
Substantially all of the Partnership’s cash flows are derived from distributions related to its investment in ETO, whose cash flows are derived from its subsidiaries, including ETO’s investments in Sunoco LP and USAC. The Parent Company’s primary cash requirements are for general and administrative expenses, debt service requirements and distributions to its partners. Parent Company-only assets are not available to satisfy the debts and other obligations of ET’s subsidiaries.
Our financial statements reflect the following reportable segments:
•intrastate transportation and storage;
•interstate transportation and storage;
•midstream;
•NGL and refined products transportation and services;
•crude oil transportation and services;
•investment in Sunoco LP;
•investment in USAC; and
•corporate and other, including the following:
| |
• | activities of the Parent Company; and |
| |
• | certain operations and investments that are not separately reflected as reportable 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 included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 21, 2020. 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 consolidated financial statements of ET presented herein include the results of operations of:
| |
• | our controlled subsidiary, ETO; |
| |
• | ETP GP, the general partner of ETO, and Energy Transfer Partners, L.L.C. (“ETP LLC”), the general partner of ETP GP; and |
| |
• | our subsidiary, SemCAMS. |
Our subsidiaries also own varying undivided interests in certain pipelines. Ownership of these pipelines has been structured as an ownership of an undivided interest in assets, not as an ownership interest in a partnership, limited liability company,
joint venture or other forms of entities. Each owner controls marketing and invoices separately, and each owner is responsible for any loss, damage or injury that may occur to their own customers. As a result, we apply proportionate consolidation for our interests in these entities.
Certain prior period amounts have also been reclassified to conform to the current period presentation. These reclassifications had no impact on net income or total equity.
Change in Accounting Policy
Effective January 1, 2020, the Partnership elected to change its accounting policy related to certain barrels of crude oil that were previously accounted for as inventory. Under the revised accounting policy, certain amounts of crude oil that are not available for sale have been reclassified from inventory to non-current assets. These crude oil barrels, which are owned by the Partnership’s crude oil acquisition and marketing business, include pipeline linefill and tank bottoms and are not considered to be available for sale because the volumes must be maintained in order to continue normal operation of the related pipelines or tanks and because there is no expectation of liquidation or sale of these volumes in the near term.
Under the previous accounting policy, all crude oil barrels were recorded as inventory under the weighted-average cost method. Under the revised accounting policy, barrels related to pipeline linefill and tank bottoms are accounted for as long-lived assets and reflected as non-current assets on the consolidated balance sheet. These crude oil barrels will be tested for impairment consistent with the Partnership’s existing accounting policy for impairments of long-lived assets. The Partnership’s management believes that the change in accounting policy is preferable as it more closely aligns the accounting policies across the consolidated entity, given that similar assets in the Partnership’s natural gas, NGLs and refined products businesses are accounted for as non-current assets. In addition, management believes that reflecting these crude oil barrels as non-current assets better represents the economic results of the Partnership’s crude oil acquisition and marketing business by reducing volatility resulting from market price adjustments to crude oil barrels that are not expected to be sold or liquidated in the near term.
The impact of this accounting policy change on the Partnership’s net income for three months ended March 31, 2020, was approximately $265 million, or $0.10 per limited partner unit. As a result of this change in accounting policy, the Partnership’s consolidated balance sheets for prior periods have been retrospectively adjusted as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | December 31, 2018 |
| As Originally Reported | | Effect of Change | | As Adjusted | | As Originally Reported | | Effect of Change | | As Adjusted |
Inventories | $ | 1,935 |
| | $ | (403 | ) | | $ | 1,532 |
| | $ | 1,677 |
| | $ | (305 | ) | | $ | 1,372 |
|
Total current assets | 7,867 |
| | (403 | ) | | 7,464 |
| | 6,750 |
| | (305 | ) | | 6,445 |
|
Other non-current assets, net | 1,075 |
| | 496 |
| | 1,571 |
| | 1,006 |
| | 472 |
| | 1,478 |
|
Total assets | 98,880 |
| | 93 |
| | 98,973 |
| | 88,246 |
| | 167 |
| | 88,413 |
|
Total partners’ capital | 21,827 |
| | 93 |
| | 21,920 |
| | 20,559 |
| | 167 |
| | 20,726 |
|
In addition, the Partnership’s consolidated statements of operations, comprehensive income and cash flows for prior periods have been retrospectively adjusted as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, | | Three Months Ended March 31, |
| 2019 | | 2018 | | 2019 |
As originally reported: | | | | | |
Consolidated Statements of Operations and Comprehensive Income | | | | | |
Cost of products sold | $ | 39,727 |
| | $ | 41,658 |
| | $ | 9,415 |
|
Operating income | 7,277 |
| | 5,348 |
| | 1,927 |
|
Income from continuing operations before income tax expense (benefit) | 5,094 |
| | 3,634 |
| | 1,306 |
|
Net income | 4,899 |
| | 3,365 |
| | 1,180 |
|
Net income per limited partner unit | 1.37 |
| | 1.16 |
| | 0.33 |
|
Comprehensive income | 4,930 |
| | 3,322 |
| | 1,188 |
|
Comprehensive income attributable to partners | 3,623 |
| | 1,651 |
| | 878 |
|
| | | | | |
Consolidated Statements of Cash Flows | | | | | |
Net income | 4,899 |
| | 3,365 |
| | 1,180 |
|
Net change in operating assets and liabilities | (518 | ) | | 289 |
| | (341 | ) |
| | | | | |
Effect of change: | | | | | |
Consolidated Statements of Operations and Comprehensive Income | | | | | |
Cost of products sold | 74 |
| | (55 | ) | | 62 |
|
Operating income | (74 | ) | | 55 |
| | (62 | ) |
Income from continuing operations before income tax expense (benefit) | (74 | ) | | 55 |
| | (62 | ) |
Net income | (74 | ) | | 55 |
| | (62 | ) |
Net income per limited partner unit | (0.03 | ) | | 0.04 |
| | (0.02 | ) |
Comprehensive income | (74 | ) | | 55 |
| | (62 | ) |
Comprehensive income attributable to partners | (74 | ) | | 55 |
| | (62 | ) |
| | | | | |
Consolidated Statements of Cash Flows | | | | | |
Net income | (74 | ) | | 55 |
| | (62 | ) |
Net change in operating assets and liabilities | 74 |
| | (55 | ) | | 62 |
|
| | | | | |
As adjusted: | | | | | |
Consolidated Statements of Operations and Comprehensive Income | | | | | |
Cost of products sold | 39,801 |
| | 41,603 |
| | 9,477 |
|
Operating income | 7,203 |
| | 5,403 |
| | 1,865 |
|
Income from continuing operations before income tax expense (benefit) | 5,020 |
| | 3,689 |
| | 1,244 |
|
Net income | 4,825 |
| | 3,420 |
| | 1,118 |
|
Net income per limited partner unit | 1.34 |
| | 1.20 |
| | 0.31 |
|
Comprehensive income | 4,856 |
| | 3,377 |
| | 1,126 |
|
Comprehensive income attributable to partners | 3,549 |
| | 1,706 |
| | 816 |
|
| | | | | |
Consolidated Statements of Cash Flows | | | | | |
Net income | 4,825 |
| | 3,420 |
| | 1,118 |
|
Net change in operating assets and liabilities | (444 | ) | | 234 |
| | (279 | ) |
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
Effective January 1, 2020, the Partnership adopted Accounting Standards Update (“ASU”) 2016-13 "Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments." ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. The impact of adoption was immaterial to the Partnership. However, due in large part to the global economic impacts of COVID-19, the Partnership and its subsidiaries recorded an aggregate $16 million of current expected credit losses for the three months ended March 31, 2020.
Goodwill
During the first quarter of 2020, due to the impacts of the COVID-19 pandemic, the decline in commodity prices and the decreases in the Partnership’s market capitalization, we determined that interim impairment testing should be performed on certain reporting units. We performed the interim impairment tests consistent with our approach for annual impairment testing, including using similar models, inputs and assumptions. As a result of the interim impairment test, the Partnership recognized a goodwill impairment of $483 million related to our Arklatex and South Texas operations within the midstream segment, a goodwill impairment of $183 million related to our Lake Charles LNG regasification operations within the interstate transportation and storage segment due to a contractual reduction in payments for the remainder of the contract term, and a goodwill impairment of $40 million related to our all other operations primarily due to decreases in projected future revenues and cash flows as a result of the overall market demand decline. In addition, USAC recognized a goodwill impairment of $619 million during the three months ended March 31, 2020, which is included in the Partnership's consolidated results of operations. No other impairments of the Partnership’s goodwill were identified.
In connection with aforementioned impairments, the Partnership determined the fair value of our reporting units using the income approach. The income approach is based on the present value of future cash flows, which are derived from our long-term financial forecasts, and requires significant assumptions including, among others, revenue growth rates, operating margins, weighted average costs of capital and future market conditions, among others. The Partnership believes the estimates and assumptions used in our impairment assessments are reasonable and based on available market information, but variations in any of the assumptions could result in materially different calculations of fair value and determinations of whether or not an impairment is indicated. Cash flow projections are derived from one-year budgeted amounts and three-year operating forecasts plus an estimate of later period cash flows, all of which are evaluated by management. Subsequent period cash flows are developed for each reporting unit using growth rates that management believes are reasonably likely to occur.
Of the $3.84 billion of goodwill on the Partnership’s consolidated balance sheet as of March 31, 2020, approximately $1.2 billion is recorded in reporting units for which the estimated fair value exceeded the carrying value by less than 20% in the most recent quantitative test. Management believes that all of the $1.2 billion is at significant risk of impairment, if commodity prices and/or overall market demand remains low. In addition, as of March 31, 2020, the Partnership’s goodwill balance includes approximately $265 million of goodwill related to the SemGroup assets that were acquired in December 2019; these goodwill balances are subject to change as the purchase price allocation has not been finalized. Any future adjustments to the SemGroup-related goodwill balances could also increase the likelihood of a future goodwill impairment.
Changes in the carrying amount of goodwill were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Intrastate Transportation and Storage | | Interstate Transportation and Storage | | Midstream | | NGL and Refined Products Transportation and Services | | Crude Oil Transportation and Services | | Investment in Sunoco LP | | Investment in USAC | | All Other | | Total |
Balance, December 31, 2019 | $ | 10 |
| | $ | 226 |
| | $ | 483 |
| | $ | 693 |
| | $ | 1,397 |
| | $ | 1,555 |
| | $ | 619 |
| | $ | 184 |
| | $ | 5,167 |
|
Impaired | — |
| | (183 | ) | | (483 | ) | | — |
| | — |
| | — |
| | (619 | ) | | (40 | ) | | (1,325 | ) |
Other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7 | ) | | (7 | ) |
Balance, March 31, 2020 | $ | 10 |
| | $ | 43 |
| | $ | — |
| | $ | 693 |
| | $ | 1,397 |
| | $ | 1,555 |
| | $ | — |
| | $ | 137 |
| | $ | 3,835 |
|
| |
2. | 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. The Partnership’s balance sheets did not include any material amounts of restricted cash as of March 31, 2020 or December 31, 2019.
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) included in cash flows from operating activities is comprised as follows:
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Accounts receivable | $ | 1,667 |
| | $ | (302 | ) |
Accounts receivable from related companies | (20 | ) | | (38 | ) |
Inventories | 281 |
| | 135 |
|
Other current assets | 110 |
| | 99 |
|
Other non-current assets, net | (101 | ) | | (34 | ) |
Accounts payable | (1,704 | ) | | 321 |
|
Accounts payable to related companies | (21 | ) | | (10 | ) |
Accrued and other current liabilities | (233 | ) | | (406 | ) |
Other non-current liabilities | 25 |
| | (31 | ) |
Derivative assets and liabilities, net | 160 |
| | (13 | ) |
Net change in operating assets and liabilities, net of effects of acquisitions | $ | 164 |
| | $ | (279 | ) |
Non-cash activities are as follows:
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | |
Accrued capital expenditures | $ | 1,015 |
| | $ | 630 |
|
Accrued distributions to partners | 822 |
| | — |
|
Lease assets obtained in exchange for new lease liabilities | 17 |
| | 8 |
|
As further discussed in Note 1, the Partnership elected to change its accounting policy related to certain barrels of crude oil that were previously accounted for as inventory. As a result of this change in accounting policy, the Partnership’s inventory balance for the prior period has been retrospectively adjusted. Inventories consisted of the following:
|
| | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Natural gas, NGLs and refined products | $ | 463 |
| | $ | 833 |
|
Crude oil | 105 |
| | 251 |
|
Spare parts and other | 456 |
| | 448 |
|
Total inventories | $ | 1,024 |
| | $ | 1,532 |
|
We utilize commodity derivatives to manage price volatility associated with its natural gas inventories. 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.
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 March 31, 2020 were $43.92 billion and $50.33 billion, respectively. As of December 31, 2019, the aggregate fair value and carrying amount of our consolidated debt obligations were $54.79 billion and $51.05 billion, respectively. The fair value of our consolidated debt obligations is a Level 2 valuation based on the respective debt obligations’ 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 three months ended March 31, 2020, no transfers were made between any levels within the fair value hierarchy.
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 March 31, 2020 and December 31, 2019 based on inputs used to derive their fair values:
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| | | | | | | | | | | |
| | | Fair Value Measurements at March 31, 2020 |
| Fair Value Total | | Level 1 | | Level 2 |
Assets: | | | | | |
Commodity derivatives: | | | | | |
Natural Gas: | | | | | |
Basis Swaps IFERC/NYMEX | $ | 108 |
| | $ | 108 |
| | $ | — |
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