Estimates, Significant Accounting Policies and Balance Sheet Detail | 12 Months Ended |
Dec. 31, 2014 |
Accounting Policies [Abstract] | |
Estimates, Significant Accounting Policies and Balance Sheet Detail | ESTIMATES, SIGNIFICANT ACCOUNTING POLICIES AND BALANCE SHEET DETAIL: |
Use of Estimates |
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the accrual for and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. |
The natural gas industry conducts its business by processing actual transactions at the end of the month following the month of delivery. Consequently, the most current month’s financial results for the midstream, NGL and intrastate transportation and storage operations are estimated using volume estimates and market prices. Any differences between estimated results and actual results are recognized in the following month’s financial statements. Management believes that the estimated operating results represent the actual results in all material respects. |
Some of the other significant estimates made by management include, but are not limited to, the timing of certain forecasted transactions that are hedged, the fair value of derivative instruments, useful lives for depreciation, depletion and amortization, purchase accounting allocations and subsequent realizability of intangible assets, fair value measurements used in the goodwill impairment test, market value of inventory, assets and liabilities resulting from the regulated ratemaking process, contingency reserves and environmental reserves. Actual values and results could differ from those estimates. |
New Accounting Pronouncements |
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which clarifies the principles for recognizing revenue based on the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with earlier adoption not permitted. ASU 2014-09 can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. The Partnership is currently evaluating the impact, if any, that adopting this new accounting standard will have on our revenue recognition policies. |
In April 2014, the FASB issued Accounting Standards Update No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”), which changed the requirements for reporting discontinued operations. Under ASU 2014-08, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on an entity’s operations and financial results. ASU 2014-08 is effective for all disposals or classifications as held for sale of components of an entity that occur within fiscal years beginning after December 15, 2014, and early adoption is permitted. We expect to adopt this standard for the year ending December 31, 2015. ASU 2014-08 could have an impact on whether transactions will be reported in discontinued operations in the future, as well as the disclosures required when a component of an entity is disposed. |
Revenue Recognition |
Our segments are engaged in multiple revenue-generating activities. To the extent that those activities are similar among our segments, revenue recognition policies are similar. Below is a description of revenue recognition policies for significant revenue-generating activities within our segments. |
Investment in ETP |
Revenues for sales of natural gas and NGLs are recognized at the later of the time of delivery of the product to the customer or the time of sale or installation. Revenues from service labor, transportation, treating, compression and gas processing are recognized upon completion of the service. Transportation capacity payments are recognized when earned in the period the capacity is made available. |
The results of ETP’s intrastate transportation and storage and interstate transportation and storage operations are determined primarily by the amount of capacity customers reserve as well as the actual volume of natural gas that flows through the transportation pipelines. Under transportation contracts, customers are charged (i) a demand fee, which is a fixed fee for the reservation of an agreed amount of capacity on the transportation pipeline for a specified period of time and which obligates the customer to pay even if the customer does not transport natural gas on the respective pipeline, (ii) a transportation fee, which is based on the actual throughput of natural gas by the customer, (iii) fuel retention based on a percentage of gas transported on the pipeline, or (iv) a combination of the three, generally payable monthly. Fuel retained for a fee is typically valued at market prices. |
ETP’s intrastate transportation and storage operations also generate revenues and margin from the sale of natural gas to electric utilities, independent power plants, local distribution companies, industrial end-users and other marketing companies on the HPL System. Generally, ETP purchases natural gas from the market, including purchases from ETP’s marketing operations, and from producers at the wellhead. |
In addition, ETP’s intrastate transportation and storage operations generate revenues and margin from fees charged for storing customers’ working natural gas in ETP’s storage facilities. ETP also engages in natural gas storage transactions in which ETP seeks to find and profit from pricing differences that occur over time utilizing the Bammel storage reservoir. ETP purchases physical natural gas and then sells financial contracts at a price sufficient to cover ETP’s carrying costs and provide for a gross profit margin. ETP expects margins from natural gas storage transactions to be higher during the periods from November to March of each year and lower during the period from April through October of each year due to the increased demand for natural gas during colder weather. However, ETP cannot assure that management’s expectations will be fully realized in the future and in what time period, due to various factors including weather, availability of natural gas in regions in which ETP operate, competitive factors in the energy industry, and other issues. |
Results from ETP’s midstream operations are determined primarily by the volumes of natural gas gathered, compressed, treated, processed, purchased and sold through ETP’s pipeline and gathering systems and the level of natural gas and NGL prices. ETP generates midstream revenues and gross margins principally under fee-based or other arrangements in which ETP receives a fee for natural gas gathering, compressing, treating or processing services. The revenue earned from these arrangements is directly related to the volume of natural gas that flows through ETP’s systems and is not directly dependent on commodity prices. |
ETP also utilizes other types of arrangements in ETP’s midstream operations, including (i) discount-to-index price arrangements, which involve purchases of natural gas at either (1) a percentage discount to a specified index price, (2) a specified index price less a fixed amount or (3) a percentage discount to a specified index price less an additional fixed amount, (ii) percentage-of-proceeds arrangements under which ETP gathers and processes natural gas on behalf of producers, sells the resulting residue gas and NGL volumes at market prices and remits to producers an agreed upon percentage of the proceeds based on an index price, (iii) keep-whole arrangements where ETP gathers natural gas from the producer, processes the natural gas and sells the resulting NGLs to third parties at market prices, (iv) purchasing all or a specified percentage of natural gas and/or NGL delivered from producers and treating or processing ETP’s plant facilities, and (v) making other direct purchases of natural gas and/or NGL at specified delivery points to meet operational or marketing objectives. In many cases, ETP provides services under contracts that contain a combination of more than one of the arrangements described above. The terms of ETP’s contracts vary based on gas quality conditions, the competitive environment at the time the contracts are signed and customer requirements. ETP’s contract mix may change as a result of changes in producer preferences, expansion in regions where some types of contracts are more common and other market factors. |
NGL storage and pipeline transportation revenues are recognized when services are performed or products are delivered, respectively. Fractionation and processing revenues are recognized when product is either loaded into a truck or injected into a third party pipeline, which is when title and risk of loss pass to the customer. |
In ETP’s natural gas compression business, revenue is recognized for compressor packages and technical service jobs using the completed contract method which recognizes revenue upon completion of the job. Costs incurred on a job are deducted at the time revenue is recognized. |
ETP conducts marketing activities in which ETP markets the natural gas that flows through ETP’s assets, referred to as on-system gas. ETP also attracts other customers by marketing volumes of natural gas that do not move through ETP’s assets, referred to as off-system gas. For both on-system and off-system gas, ETP purchases natural gas from natural gas producers and other supply points and sells that natural gas to utilities, industrial consumers, other marketers and pipeline companies, thereby generating gross margins based upon the difference between the purchase and resale prices. |
Terminalling and storage revenues are recognized at the time the services are provided. Pipeline revenues are recognized upon delivery of the barrels to the location designated by the shipper. Crude oil acquisition and marketing revenues, as well as refined product marketing revenues, are recognized when title to the product is transferred to the customer. Revenues are not recognized for crude oil exchange transactions, which are entered into primarily to acquire crude oil of a desired quality or to reduce transportation costs by taking delivery closer to end markets. Any net differential for exchange transactions is recorded as an adjustment of inventory costs in the purchases component of cost of products sold and operating expenses in the statements of operations. |
ETP’s retail marketing operations sell gasoline and diesel in addition to a broad mix of merchandise such as groceries, fast foods and beverages at its convenience stores. A portion of our gasoline and diesel sales are to wholesale customers on a consignment basis, in which we retain title to inventory, control access to and sale of fuel inventory, and recognize revenue at the time the fuel is sold to the ultimate customer. We typically own the fuel dispensing equipment and underground storage tanks at consignment sites, and in some cases we own the entire site and have entered into an operating lease whit the wholesale customer operating the site. In addition, our retail outlets derive other income from lottery ticket sales, money orders, prepaid phone cards and wireless services, ATM transactions, car washes, movie rental and other ancillary product and service offerings. Some of Sunoco, Inc.’s retail outlets provide a variety of car care services. Revenues related to the sale of products are recognized when title passes, while service revenues are recorded on a net commission basis and are recognized when services are provided. Title passage generally occurs when products are shipped or delivered in accordance with the terms of the respective sales agreements. In addition, revenues are not recognized until sales prices are fixed or determinable and collectability is reasonably assured. |
Investment in Regency |
Regency earns revenue from (i) domestic sales of natural gas, NGLs and condensate, (ii) natural gas, NGL, condensate and salt water gathering, processing and transportation, (iii) contract compression and treating services and (iv) coal royalties. Revenue associated with sales of natural gas, NGLs and condensate are recognized when title passes to the customer, which is when the risk of ownership passes to the purchaser and physical delivery occurs. Revenue associated with transportation and processing fees are recognized when the service is provided. For contract compression and contract treating services, revenue is recognized when the service is performed. For gathering and processing services, Regency receives either fees or commodities from natural gas producers depending on the type of contract. Commodities received are in turn sold and recognized as revenue in accordance with the criteria outlined above. Under the percentage-of-proceeds contract type, Regency is paid for its services by keeping a percentage of the NGLs produced and a percentage of the residue gas resulting from processing the natural gas. Under the percentage-of-index contract type, Regency earns revenue by purchasing wellhead natural gas at a percentage of the index price and selling processed natural gas and NGLs at a price approximating the index price to third parties. Regency generally reports revenue gross in the consolidated statements of operations when it acts as the principal, takes title to the product, and incurs the risks and rewards of ownership. Revenue for fee-based arrangements is presented net, because Regency takes the role of an agent for the producers. Allowance for doubtful accounts is determined based on historical write-off experience and specific identification. |
Regency recognizes coal royalties revenues on the basis of tons of coal sold by its lessees and the corresponding revenues from those sales. Regency does not have access to actual production and revenues information until 30 days following the month of production. Therefore, financial results include estimated revenues and accounts receivable for the month of production. Regency records any differences between the actual amounts ultimately received or paid and the original estimates in the period they become finalized. Most lessees must make minimum monthly or annual payments that are generally recoverable over certain time periods. These minimum payments are recorded as deferred income. If the lessee recovers a minimum payment through production, the deferred income attributable to the minimum payment is recognized as coal royalties revenues. If a lessee fails to meet its minimum production for certain pre-determined time periods, the deferred income attributable to the minimum payment is recognized as minimum rental revenues, which is a component of other revenues on our consolidated statements of operations. Other liabilities on the balance sheet also include deferred unearned income from a coal services facility lease, which is recognized as other income as it is earned. |
Investment in Lake Charles LNG |
Lake Charles LNG’s revenues from storage and re-gasification of natural gas are based on capacity reservation charges and, to a lesser extent, commodity usage charges. Reservation revenues are based on contracted rates and capacity reserved by the customers and recognized monthly. Revenues from commodity usage charges are also recognized monthly and represent the recovery of electric power charges at Lake Charles LNG’s terminal. |
Regulatory Accounting – Regulatory Assets and Liabilities |
ETP’s interstate transportation and storage operations are subject to regulation by certain state and federal authorities and certain subsidiaries in those operations have accounting policies that conform to the accounting requirements and ratemaking practices of the regulatory authorities. The application of these accounting policies allows certain of ETP’s regulated entities to defer expenses and revenues on the balance sheet as regulatory assets and liabilities when it is probable that those expenses and revenues will be allowed in the ratemaking process in a period different from the period in which they would have been reflected in the consolidated statement of operations by an unregulated company. These deferred assets and liabilities will be reported in results of operations in the period in which the same amounts are included in rates and recovered from or refunded to customers. Management’s assessment of the probability of recovery or pass through of regulatory assets and liabilities will require judgment and interpretation of laws and regulatory commission orders. If, for any reason, ETP ceases to meet the criteria for application of regulatory accounting treatment for these entities, the regulatory assets and liabilities related to those portions ceasing to meet such criteria would be eliminated from the consolidated balance sheet for the period in which the discontinuance of regulatory accounting treatment occurs. |
Although Panhandle’s natural gas transmission systems and storage operations are subject to the jurisdiction of FERC in accordance with the NGA and NGPA, it does not currently apply regulatory accounting policies in accounting for its operations. In 1999, prior to its acquisition by Southern Union, Panhandle discontinued the application of regulatory accounting policies primarily due to the level of discounting from tariff rates and its inability to recover specific costs. |
Cash, Cash Equivalents and Supplemental Cash Flow Information |
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 which are subject to an insignificant risk of changes in value. |
We place our cash deposits and temporary cash investments with high credit quality financial institutions. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limit. |
The net change in operating assets and liabilities (net of effects of acquisitions, dispositions and deconsolidation) included in cash flows from operating activities was comprised as follows: |
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| Years Ended December 31, | | | | | | | | |
| 2014 | | 2013 | | 2012 | | | | | | | | |
Accounts receivable | $ | 600 | | | $ | (556 | ) | | $ | 267 | | | | | | | | | |
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Accounts receivable from related companies | 30 | | | 64 | | | (9 | ) | | | | | | | | |
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Inventories | 51 | | | (254 | ) | | (258 | ) | | | | | | | | |
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Exchanges receivable | 18 | | | (8 | ) | | 14 | | | | | | | | | |
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Other current assets | 133 | | | (81 | ) | | 597 | | | | | | | | | |
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Other non-current assets, net | (6 | ) | | (23 | ) | | (129 | ) | | | | | | | | |
Accounts payable | (850 | ) | | 541 | | | (989 | ) | | | | | | | | |
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Accounts payable to related companies | 5 | | | (140 | ) | | 92 | | | | | | | | | |
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Exchanges payable | (99 | ) | | 128 | | | — | | | | | | | | | |
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Accrued and other current liabilities | (59 | ) | | 192 | | | (159 | ) | | | | | | | | |
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Other non-current liabilities | (73 | ) | | 147 | | | 26 | | | | | | | | | |
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Price risk management assets and liabilities, net | 19 | | | (159 | ) | | (3 | ) | | | | | | | | |
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Net change in operating assets and liabilities, net of effects of acquisitions and deconsolidations | $ | (231 | ) | | $ | (149 | ) | | $ | (551 | ) | | | | | | | | |
Non-cash investing and financing activities and supplemental cash flow information were as follows: |
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| Years Ended December 31, | | | | | | | | |
| 2014 | | 2013 | | 2012 | | | | | | | | |
NON-CASH INVESTING ACTIVITIES: | | | | | | | | | | | | | |
Accrued capital expenditures | $ | 643 | | | $ | 226 | | | $ | 420 | | | | | | | | | |
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Net gains (losses) from subsidiary common unit transactions | $ | 744 | | | $ | (384 | ) | | $ | 80 | | | | | | | | | |
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AmeriGas limited partner interest received in Propane Contribution (see Note 4) | $ | — | | | $ | — | | | $ | 1,123 | | | | | | | | | |
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NON-CASH FINANCING ACTIVITIES: | | | | | | | | | | | | | |
Issuance of Common Units in connection with Southern Union Merger (see Note 3) | $ | — | | | $ | — | | | $ | 2,354 | | | | | | | | | |
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Subsidiary issuance of common units in connection with certain acquisitions | $ | — | | | $ | — | | | $ | 2,295 | | | | | | | | | |
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Subsidiary issuances of common units in connection with PVR, Hoover and Eagle Rock Midstream acquisitions | $ | 4,281 | | | $ | — | | | $ | — | | | | | | | | | |
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Subsidiary issuances of common units in connection with the Susser Merger | $ | 908 | | | $ | — | | | $ | — | | | | | | | | | |
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Long-term debt assumed in PVR Acquisition | $ | 1,887 | | | $ | — | | | $ | — | | | | | | | | | |
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Long-term debt exchanged in Eagle Rock Midstream Acquisition | $ | 499 | | | $ | — | | | $ | — | | | | | | | | | |
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SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | | | | | | | | | |
Cash paid for interest, net of interest capitalized | $ | 1,416 | | | $ | 1,256 | | | $ | 997 | | | | | | | | | |
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Cash paid for income taxes | $ | 345 | | | $ | 58 | | | $ | 23 | | | | | | | | | |
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Accounts Receivable |
Our subsidiaries assess the credit risk of their customers. Certain of our subsidiaries deal with counterparties that are typically either investment grade or are otherwise secured with a letter of credit or other form of security (corporate guarantee prepayment, master setoff agreement or collateral). Management reviews accounts receivable and an allowance for doubtful accounts is determined based on the overall creditworthiness of customers, historical write-off experience, general and specific economic trends, and specific identification. |
Inventories |
Inventories consist principally of natural gas held in storage, crude oil, petroleum and chemical products. Natural gas held in storage is valued at the lower of cost or market utilizing the weighted-average cost method. The cost of crude oil and petroleum and chemical products is determined using the last-in, first out method. The cost of appliances, parts and fittings is determined by the first-in, first-out method. |
Inventories consisted of the following: |
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| December 31, | | | | | | | | | | | | |
| 2014 | | 2013 | | | | | | | | | | | | |
Natural gas and NGLs | $ | 392 | | | $ | 577 | | | | | | | | | | | | | |
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Crude oil | 364 | | | 488 | | | | | | | | | | | | | |
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Refined products | 392 | | | 543 | | | | | | | | | | | | | |
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Appliances, parts and fittings and other | 319 | | | 199 | | | | | | | | | | | | | |
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Total inventories | $ | 1,467 | | | $ | 1,807 | | | | | | | | | | | | | |
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During the year ended December 31, 2014, the Partnership recorded write downs of $473 million on its crude oil, refined products and NGL inventories as a result of a decline in the market price of these products. The write-down was calculated based upon current replacement costs. |
ETP utilizes commodity derivatives to manage price volatility associated with certain of its natural gas inventory and designates certain of these derivatives as fair value hedges for accounting purposes. Changes in fair value of the designated hedged inventory have been recorded in inventory on our consolidated balance sheets and in cost of products sold in our consolidated statements of operations. |
Exchanges |
Exchanges consist of natural gas and NGL delivery imbalances (over and under deliveries) with others. These amounts, which are valued at market prices or weighted average market prices pursuant to contractual imbalance agreements, turn over monthly and are recorded as exchanges receivable or exchanges payable on our consolidated balance sheets. These imbalances are generally settled by deliveries of natural gas or NGLs, but may be settled in cash, depending on contractual terms. |
Other Current Assets |
Other current assets consisted of the following: |
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| December 31, | | | | | | | | | | | | |
| 2014 | | 2013 | | | | | | | | | | | | |
Deposits paid to vendors | $ | 65 | | | $ | 49 | | | | | | | | | | | | | |
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Deferred income taxes | 14 | | | — | | | | | | | | | | | | | |
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Prepaid expenses and other | 222 | | | 263 | | | | | | | | | | | | | |
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Total other current assets | $ | 301 | | | $ | 312 | | | | | | | | | | | | | |
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Property, Plant and Equipment |
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful or FERC mandated lives of the assets, if applicable. Expenditures for maintenance and repairs that do not add capacity or extend the useful life are expensed as incurred. Expenditures to refurbish assets that either extend the useful lives of the asset or prevent environmental contamination are capitalized and depreciated over the remaining useful life of the asset. Natural gas and NGLs used to maintain pipeline minimum pressures is capitalized and classified as property, plant and equipment. Additionally, our subsidiaries capitalize certain costs directly related to the construction of assets including internal labor costs, interest and engineering costs. For the Lake Charles LNG project, a portion of the management fees are capitalized. Upon disposition or retirement of pipeline components or natural gas plant components, any gain or loss is recorded to accumulated depreciation. When entire pipeline systems, gas plants or other property and equipment are retired or sold, any gain or loss is included in our consolidated statements of operations. |
We and our subsidiaries review property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If such a review should indicate that the carrying amount of long-lived assets is not recoverable, we reduce the carrying amount of such assets to fair value. |
Capitalized interest is included for pipeline construction projects, except for certain interstate projects for which an allowance for funds used during construction (“AFUDC”) is accrued. Interest is capitalized based on the current borrowing rate when the related costs are incurred. AFUDC is calculated under guidelines prescribed by the FERC and capitalized as part of the cost of utility plant for interstate projects. It represents the cost of servicing the capital invested in construction work-in-process. AFUDC is segregated into two component parts – borrowed funds and equity funds. |
Components and useful lives of property, plant and equipment were as follows: |
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| December 31, | | | | | | | | | | | | |
| 2014 | | 2013 | | | | | | | | | | | | |
Land and improvements | $ | 1,307 | | | $ | 881 | | | | | | | | | | | | | |
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Buildings and improvements (1 to 45 years) | 1,922 | | | 939 | | | | | | | | | | | | | |
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Pipelines and equipment (5 to 83 years) | 27,149 | | | 21,494 | | | | | | | | | | | | | |
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Natural gas and NGL storage facilities (5 to 46 years) | 1,214 | | | 1,083 | | | | | | | | | | | | | |
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Bulk storage, equipment and facilities (2 to 83 years) | 4,010 | | | 1,933 | | | | | | | | | | | | | |
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Tanks and other equipment (5 to 40 years) | 58 | | | 1,697 | | | | | | | | | | | | | |
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Retail equipment (2 to 99 years) | 515 | | | 450 | | | | | | | | | | | | | |
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Vehicles (1 to 25 years) | 203 | | | 156 | | | | | | | | | | | | | |
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Right of way (20 to 83 years) | 2,451 | | | 2,190 | | | | | | | | | | | | | |
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Furniture and fixtures (2 to 25 years) | 59 | | | 51 | | | | | | | | | | | | | |
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Linepack | 119 | | | 118 | | | | | | | | | | | | | |
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Pad gas | 44 | | | 52 | | | | | | | | | | | | | |
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Natural resources | 454 | | | — | | | | | | | | | | | | | |
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Other (1 to 30 years) | 999 | | | 708 | | | | | | | | | | | | | |
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Construction work-in-process | 4,514 | | | 2,165 | | | | | | | | | | | | | |
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| 45,018 | | | 33,917 | | | | | | | | | | | | | |
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Less – Accumulated depreciation and depletion | (4,726 | ) | | (3,235 | ) | | | | | | | | | | | | |
Property, plant and equipment, net | $ | 40,292 | | | $ | 30,682 | | | | | | | | | | | | | |
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We recognized the following amounts of depreciation expense and capitalized interest expense for the periods presented: |
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| Years Ended December 31, | | | | | | | | |
| 2014 | | 2013 | | 2012 | | | | | | | | |
Depreciation expense | $ | 1,457 | | | $ | 1,128 | | | $ | 801 | | | | | | | | | |
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Capitalized interest, excluding AFUDC | $ | 113 | | | $ | 43 | | | $ | 99 | | | | | | | | | |
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Depletion expense related to Regency’s natural resources operations was $11 million for the year ended December 31, 2014. Coal properties are depleted on an area-by-area basis at a rate based on the cost of the mineral properties and the number of tons of estimated proven and probable coal reserves contained therein. Proven and probable coal reserves have been estimated by Regency’s own geologists. Regency’s estimates of coal reserves are updated periodically and may result in adjustments to coal reserves and depletion rates that are recognized prospectively. From time to time, Regency carries out core-hole drilling activities on coal properties in order to ascertain the quality and quantity of the coal contained in those properties. These core-hole drilling activities are expensed as incurred. Regency depletes timber using a methodology consistent with the units-of-production method, which is based on the quantity of timber harvested. Regency determines depletion of oil and gas royalty interests by the units-of-production method and these amounts could change with revisions to estimated proved recoverable reserves. |
Advances to and Investments in Affiliates |
Certain of our subsidiaries own interests in a number of related businesses that are accounted for by the equity method. In general, we use the equity method of accounting for an investment for which we exercise significant influence over, but do not control, the investee’s operating and financial policies. |
Goodwill |
Goodwill is tested for impairment annually or more frequently if circumstances indicate that goodwill might be impaired. Our annual impairment test is performed as of August 31 for reporting units within ETP’s intrastate transportation and storage and midstream operations and during the fourth quarter for reporting units within ETP’s interstate transportation and storage and liquids transportation and services operations and all others, including all of Regency’s reporting units and Lake Charles LNG. |
Changes in the carrying amount of goodwill were as follows: |
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| Investment in ETP | | Investment in Regency | | Investment in Lake Charles LNG | | Corporate, Other and Eliminations | | Total |
Balance, December 31, 2012 | $ | 5,606 | | | $ | 1,127 | | | $ | 873 | | | $ | (1,172 | ) | | $ | 6,434 | |
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Goodwill acquired | 156 | | | — | | | — | | | — | | | 156 | |
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Deconsolidation of SUGS (1) | (337 | ) | | — | | | — | | | 337 | | | — | |
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Goodwill impairment | (689 | ) | | — | | | (689 | ) | | 689 | | | (689 | ) |
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Other | (7 | ) | | — | | | — | | | — | | | (7 | ) |
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Balance, December 31, 2013 | 4,729 | | | 1,127 | | | 184 | | | (146 | ) | | 5,894 | |
|
Goodwill acquired | 1,874 | | | 449 | | | — | | | — | | | 2,323 | |
|
Lake Charles LNG Transaction (2) | (184 | ) | | — | | | — | | | 184 | | | — | |
|
Goodwill impairment | — | | | (370 | ) | | — | | | — | | | (370 | ) |
|
Other | — | | | 17 | | | — | | | 1 | | | 18 | |
|
Balance, December 31, 2014 | $ | 6,419 | | | $ | 1,223 | | | $ | 184 | | | $ | 39 | | | $ | 7,865 | |
|
| | | | | | | | | | | | | | | | | | | |
(1) | As discussed in Note 3, Regency completed its acquisition of SUGS on April 30, 2013 which was a transaction between entities under common control. Therefore, the investment in Regency segment amounts have been retrospectively adjusted to reflect SUGS beginning March 26, 2012. Therefore, the December 31, 2012 goodwill balance includes goodwill attributable to SUGS of $337 million in both segments that was correspondingly included in the elimination column. ETP deconsolidated SUGS on April 30, 2013. | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
(2) | As discussed in Note 3, ETP completed the transfer to ETE of Lake Charles LNG on February 19, 2014. Therefore, the December 31, 2012 and 2013 goodwill balances include goodwill attributable to Lake Charles LNG of $873 million and$184 million, respectively, in both the investment in ETP and investment in Lake Charles LNG segments that was correspondingly included in the elimination column. The transaction was effective January 1, 2014. | | | | | | | | | | | | | | | | | | |
Goodwill is recorded at the acquisition date based on a preliminary purchase price allocation and generally may be adjusted when the purchase price allocation is finalized. We recorded a net increase in goodwill of $1.97 billion during the year ended December 31, 2014 primarily due to the Susser Merger and PVR Acquisition where we recorded goodwill of $1.73 billion and $370 million, respectively, offset by an impairment of $370 million. The additional goodwill recorded during the years ended December 31, 2014 and 2013 is not expected to be deductible for tax purposes. |
During the fourth quarter of 2014, a $370 million goodwill impairment was recorded related to Regency’s Permian Basin gathering and processing operations. The decline in estimated fair value of that reporting unit was primarily driven by the significant decline in commodity prices in the fourth quarter of 2014, and the resulting impact to future commodity prices as well as increases in future estimated operations and maintenance expenses. An assessment of these factors in the fourth quarter of 2014 led to a conclusion that the estimated fair value of Regency’s Permian reporting unit was less than its carrying amount. |
During the fourth quarter of 2013, ETP performed a goodwill impairment test on its Lake Charles LNG reporting unit. In accordance with GAAP, ETP performed step one of the goodwill impairment test and determined that the estimated fair value of the Lake Charles LNG reporting unit was less than its carrying amount, primarily due to changes related to (i) the structure and capitalization of the planned LNG export project at Lake Charles LNG’s Lake Charles facility, (ii) an analysis of current macroeconomic factors, including global natural gas prices and relative spreads, as of the date of our assessment, (iii) judgments regarding the prospect of obtaining regulatory approval for a proposed LNG export project and the uncertainty associated with the timing of such approvals, and (iv) changes in assumptions related to potential future revenues from the import facility and the proposed export facility. An assessment of these factors in the fourth quarter of 2013 led to a conclusion that the estimated fair value of the Lake Charles LNG reporting unit was less than its carrying amount. ETP then applied the second step in the goodwill impairment test, allocating the estimated fair value of the reporting unit among all of the assets and liabilities of the reporting unit in a hypothetical purchase price allocation. The assets and liabilities of the reporting unit had recently been measured at fair value in 2012 as a result of the acquisition of Southern Union, and those estimated fair values had been recorded at the reporting unit through the application of “push-down” accounting. For purposes of the hypothetical purchase price allocation used in the goodwill impairment test, ETP estimated the fair value of the assets and liabilities of the reporting unit in a manner similar to the original purchase price allocation. In allocating value to the property, plant and equipment, ETP used current replacement costs adjusted for assumed depreciation. ETP also included the estimated fair value of working capital and identifiable intangible assets in the reporting unit. ETP adjusted deferred income taxes based on these estimated fair values. Based on this hypothetical purchase price allocation, estimated goodwill was $184 million, which was less than the balance of $873 million that had originally been recorded by the reporting unit through “push-down” accounting in 2012. As a result, ETP recorded a goodwill impairment of $689 million during the fourth quarter of 2013. |
No other goodwill impairments were identified or recorded for our reporting units. |
Intangible Assets |
Intangible assets are stated at cost, net of amortization computed on the straight-line method. We eliminate from our consolidated balance sheets the gross carrying amount and the related accumulated amortization for any fully amortized intangibles in the year they are fully amortized. |
Components and useful lives of intangible assets were as follows: |
|
| | | | |
| | | | | | | | | | | | | | | | | | | |
| December 31, 2014 | | December 31, 2013 | | | | |
| Gross Carrying | | Accumulated | | Gross Carrying | | Accumulated | | | | |
Amount | Amortization | Amount | Amortization | | | | |
Amortizable intangible assets: | | | | | | | | | | | |
Customer relationships, contracts and agreements (3 to 46 years) | $ | 5,144 | | | $ | (485 | ) | | $ | 2,135 | | | $ | (264 | ) | | | | |
| | | |
Trade names (15 to 20 years) | 556 | | | (15 | ) | | 66 | | | (12 | ) | | | | |
| | | |
Patents (9 years) | 48 | | | (11 | ) | | 48 | | | (6 | ) | | | | |
| | | |
Other (1 to 15 years) | 36 | | | (7 | ) | | 7 | | | (4 | ) | | | | |
| | | |
Total amortizable intangible assets | 5,784 | | | (518 | ) | | 2,256 | | | (286 | ) | | | | |
| | | |
Non-amortizable intangible assets: | | | | | | | | | | | |
Trademarks | 316 | | | — | | | 294 | | | — | | | | | |
| | | |
Total intangible assets | $ | 6,100 | | | $ | (518 | ) | | $ | 2,550 | | | $ | (286 | ) | | | | |
| | | |
Aggregate amortization expense of intangibles assets was as follows: |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | | | | | |
| 2014 | | 2013 | | 2012 | | | | | | | | |
Reported in depreciation, depletion and amortization | $ | 219 | | | $ | 120 | | | $ | 70 | | | | | | | | | |
| | | | | | | |
Estimated aggregate amortization expense of intangible assets for the next five years was as follows: |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Years Ending December 31: | | | | | | | | | | | | | | | | | |
2015 | $ | 263 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
2016 | 260 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
2017 | 260 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
2018 | 259 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
2019 | 256 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
We review amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If such a review should indicate that the carrying amount of amortizable intangible assets is not recoverable, we reduce the carrying amount of such assets to fair value. We review non-amortizable intangible assets for impairment annually, or more frequently if circumstances dictate. |
Other Non-Current Assets, net |
Other non-current assets, net are stated at cost less accumulated amortization. Other non-current assets, net consisted of the following: |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| December 31, | | | | | | | | | | | | |
| 2014 | | 2013 | | | | | | | | | | | | |
Unamortized financing costs (3 to 30 years) | $ | 203 | | | $ | 167 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Regulatory assets | 85 | | | 86 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Deferred charges | 220 | | | 144 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Restricted funds | 177 | | | 378 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Other | 223 | | | 147 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Total other non-current assets, net | $ | 908 | | | $ | 922 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Restricted funds primarily consisted of restricted cash held in our wholly-owned captive insurance companies. |
Asset Retirement Obligations |
We have determined that we are obligated by contractual or regulatory requirements to remove facilities or perform other remediation upon retirement of certain assets. The fair value of any ARO is determined based on estimates and assumptions related to retirement costs, which the Partnership bases on historical retirement costs, future inflation rates and credit-adjusted risk-free interest rates. These fair value assessments are considered to be Level 3 measurements, as they are based on both observable and unobservable inputs. Changes in the liability are recorded for the passage of time (accretion) or for revisions to cash flows originally estimated to settle the ARO. |
An ARO is required to be recorded when a legal obligation to retire an asset exists and such obligation can be reasonably estimated. We will record an asset retirement obligation in the periods in which management can reasonably estimate the settlement dates. |
Except for certain amounts recorded by Panhandle, Sunoco Logistics and ETP’s retail marketing operations. discussed below, management was not able to reasonably measure the fair value of asset retirement obligations as of December 31, 2014 and 2013, in most cases because the settlement dates were indeterminable. Although a number of other onshore assets in Panhandle’s system are subject to agreements or regulations that give rise to an ARO upon Panhandle’s discontinued use of these assets, AROs were not recorded because these assets have an indeterminate removal or abandonment date given the expected continued use of the assets with proper maintenance or replacement. Sunoco, Inc. has legal asset retirement obligations for several other assets at its previously owned refineries, pipelines and terminals, for which it is not possible to estimate when the obligations will be settled. Consequently, the retirement obligations for these assets cannot be measured at this time. At the end of the useful life of these underlying assets, Sunoco, Inc. is legally or contractually required to abandon in place or remove the asset. Sunoco Logistics believes it may have additional asset retirement obligations related to its pipeline assets and storage tanks, for which it is not possible to estimate whether or when the retirement obligations will be settled. Consequently, these retirement obligations cannot be measured at this time. |
Below is a schedule of AROs by segment recorded as other non-current liabilities in our consolidated balance sheets: |
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| | | | | | | | | | | | | | | | | | | |
| December 31, | | | | | | | | | | | | |
| 2014 | | 2013 | | | | | | | | | | | | |
Investment in ETP: | | | | | | | | | | | | | | | |
Interstate transportation and storage operations | $ | 58 | | | $ | 55 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Retail marketing operations | 87 | | | 84 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Investment in Sunoco Logistics | 41 | | | 41 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Investment in Regency | 2 | | | — | | | | | | | | | | | | | |
| | | | | | | | | | | |
| $ | 188 | | | $ | 180 | | | | | | | | | | | | | |
| | | | | | | | | | | |
|
Individual component assets have been and will continue to be replaced, but the pipeline and the natural gas gathering and processing systems will continue in operation as long as supply and demand for natural gas exists. Based on the widespread use of natural gas in industrial and power generation activities, management expects supply and demand to exist for the foreseeable future. We have in place a rigorous repair and maintenance program that keeps the pipelines and the natural gas gathering and processing systems in good working order. Therefore, although some of the individual assets may be replaced, the pipelines and the natural gas gathering and processing systems themselves will remain intact indefinitely. |
As of December 31, 2014, there were no legally restricted funds for the purpose of settling AROs. |
Accrued and Other Current Liabilities |
Accrued and other current liabilities consisted of the following: |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| December 31, | | | | | | | | | | | | |
| 2014 | | 2013 | | | | | | | | | | | | |
Interest payable | $ | 440 | | | $ | 357 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Customer advances and deposits | 103 | | | 142 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Accrued capital expenditures | 673 | | | 260 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Accrued wages and benefits | 233 | | | 173 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Taxes payable other than income taxes | 236 | | | 211 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Income taxes payable | 54 | | | 4 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Deferred income taxes | 99 | | | 119 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Other | 363 | | | 412 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Total accrued and other current liabilities | $ | 2,201 | | | $ | 1,678 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Deposits or advances are received from customers as prepayments for natural gas deliveries in the following month. Prepayments and security deposits may also be required when customers exceed their credit limits or do not qualify for open credit. |
Environmental Remediation |
We accrue environmental remediation costs for work at identified sites where an assessment has indicated that cleanup costs are probable and reasonably estimable. Such accruals are undiscounted and are based on currently available information, estimated timing of remedial actions and related inflation assumptions, existing technology and presently enacted laws and regulations. If a range of probable environmental cleanup costs exists for an identified site, the minimum of the range is accrued unless some other point in the range is more likely in which case the most likely amount in the range is accrued. |
Fair Value of Financial Instruments |
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate their fair value. Price risk management assets and liabilities are recorded at fair value. |
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 December 31, 2014 was $31.68 billion and $30.66 billion, respectively. As of December 31, 2013, the aggregate fair value and carrying amount of our consolidated debt obligations was $23.97 billion and $23.20 billion, respectively. The fair value of our consolidated debt obligations is a Level 2 valuation based on the observable inputs used for similar liabilities. |
We have commodity derivatives, interest rate derivatives, the Preferred Units, the preferred units of a subsidiary and embedded derivatives in the preferred units of a subsidiary (the “Regency Preferred Units”) 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. Derivatives related to the Regency Preferred Units are valued using a binomial lattice model. The market inputs utilized in the model include credit spread, probabilities of the occurrence of certain events, common unit price, dividend yield, and expected value, and are considered Level 3. At December 31, 2012, the fair value of the Preferred Units was based predominantly on an income approach model and considered Level 3. The Preferred Units were redeemed on April 1, 2013. |
The following tables summarize the fair value of our financial assets and liabilities measured and recorded at fair value on a recurring basis as of December 31, 2014 and 2013 based on inputs used to derive their fair values: |
| | | | |
| | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at | | | | |
31-Dec-14 | | | | |
| Fair Value | | Level 1 | | Level 2 | | Level 3 | | | | |
Total | | | | |
Assets: | | | | | | | | | | | |
Interest rate derivatives | $ | 3 | | | $ | — | | | $ | 3 | | | $ | — | | | | | |
| | | |
Commodity derivatives: | | | | | | | | | | | |
Condensate — Forward Swaps | 36 | | | — | | | 36 | | | — | | | | | |
| | | |
Natural Gas: | | | | | | | | | | | |
Basis Swaps IFERC/NYMEX | 19 | | | 19 | | | — | | | — | | | | | |
| | | |
Swing Swaps IFERC | 26 | | | 1 | | | 25 | | | — | | | | | |
| | | |
Fixed Swaps/Futures | 566 | | | 541 | | | 25 | | | — | | | | | |
| | | |
Forward Physical Contracts | 1 | | | — | | | 1 | | | — | | | | | |
| | | |
Power: | | | | | | | | | | | |
Forwards | 3 | | | — | | | 3 | | | — | | | | | |
| | | |
Futures | 4 | | | 4 | | | — | | | — | | | | | |
| | | |
Natural Gas Liquids — Forwards/Swaps | 69 | | | 46 | | | 23 | | | — | | | | | |
| | | |
Refined Products — Futures | 21 | | | 21 | | | — | | | — | | | | | |
| | | |
Total commodity derivatives | 745 | | | 632 | | | 113 | | | — | | | | | |
| | | |
Total assets | $ | 748 | | | $ | 632 | | | $ | 116 | | | $ | — | | | | | |
| | | |
Liabilities: | | | | | | | | | | | |
Interest rate derivatives | $ | (155 | ) | | $ | — | | | $ | (155 | ) | | $ | — | | | | | |
| | | |
Embedded derivatives in the Regency Preferred Units | (16 | ) | | — | | | — | | | (16 | ) | | | | |
| | | |
Commodity derivatives: | | | | | | | | | | | |
Natural Gas: | | | | | | | | | | | |
Basis Swaps IFERC/NYMEX | (18 | ) | | (18 | ) | | — | | | — | | | | | |
| | | |
Swing Swaps IFERC | (25 | ) | | (2 | ) | | (23 | ) | | — | | | | | |
| | | |
Fixed Swaps/Futures | (490 | ) | | (490 | ) | | — | | | — | | | | | |
| | | |
Power: | | | | | | | | | | | |
Forwards | (4 | ) | | — | | | (4 | ) | | — | | | | | |
| | | |
Futures | (2 | ) | | (2 | ) | | — | | | — | | | | | |
| | | |
Natural Gas Liquids — Forwards/Swaps | (32 | ) | | (32 | ) | | — | | | — | | | | | |
| | | |
Refined Products — Futures | (7 | ) | | (7 | ) | | — | | | — | | | | | |
| | | |
Total commodity derivatives | (578 | ) | | (551 | ) | | (27 | ) | | — | | | | | |
| | | |
Total liabilities | $ | (749 | ) | | $ | (551 | ) | | $ | (182 | ) | | $ | (16 | ) | | | | |
| | | | |
| | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at | | | | |
31-Dec-13 | | | | |
| Fair Value | | Level 1 | | Level 2 | | Level 3 | | | | |
Total | | | | |
Assets: | | | | | | | | | | | |
Interest rate derivatives | $ | 47 | | | $ | — | | | $ | 47 | | | $ | — | | | | | |
| | | |
Commodity derivatives: | | | | | | | | | | | |
Natural Gas: | | | | | | | | | | | |
Basis Swaps IFERC/NYMEX | 5 | | | 5 | | | — | | | — | | | | | |
| | | |
Swing Swaps IFERC | 8 | | | 1 | | | 7 | | | — | | | | | |
| | | |
Fixed Swaps/Futures | 203 | | | 201 | | | 2 | | | — | | | | | |
| | | |
Natural Gas Liquids — Forwards/Swaps | 7 | | | 5 | | | 2 | | | — | | | | | |
| | | |
Power — Forwards | 3 | | | — | | | 3 | | | — | | | | | |
| | | |
Refined Products – Futures | 5 | | | 5 | | | — | | | — | | | | | |
| | | |
Total commodity derivatives | 231 | | | 217 | | | 14 | | | — | | | | | |
| | | |
Total assets | $ | 278 | | | $ | 217 | | | $ | 61 | | | $ | — | | | | | |
| | | |
Liabilities: | | | | | | | | | | | |
Interest rate derivatives | $ | (95 | ) | | $ | — | | | $ | (95 | ) | | $ | — | | | | | |
| | | |
Embedded derivatives in the Regency Preferred Units | (19 | ) | | — | | | — | | | (19 | ) | | | | |
| | | |
Commodity derivatives: | | | | | | | | | | | |
Condensate — Forward Swaps | (1 | ) | | — | | | (1 | ) | | — | | | | | |
| | | |
Natural Gas: | | | | | | | | | | | |
Basis Swaps IFERC/NYMEX | (4 | ) | | (4 | ) | | — | | | — | | | | | |
| | | |
Swing Swaps IFERC | (6 | ) | | — | | | (6 | ) | | — | | | | | |
| | | |
Fixed Swaps/Futures | (206 | ) | | (201 | ) | | (5 | ) | | — | | | | | |
| | | |
Forward Physical Contracts | (1 | ) | | — | | | (1 | ) | | — | | | | | |
| | | |
Natural Gas Liquids — Forwards/Swaps | (9 | ) | | (5 | ) | | (4 | ) | | — | | | | | |
| | | |
Power — Forwards | (1 | ) | | — | | | (1 | ) | | — | | | | | |
| | | |
Refined Products – Futures | (5 | ) | | (5 | ) | | — | | | — | | | | | |
| | | |
Total commodity derivatives | (233 | ) | | (215 | ) | | (18 | ) | | — | | | | | |
| | | |
Total liabilities | $ | (347 | ) | | $ | (215 | ) | | $ | (113 | ) | | $ | (19 | ) | | | | |
At December 31, 2013, the fair value of the Lake Charles LNG reporting unit was classified as Level 3 of the fair value hierarchy due to the significance of unobservable inputs developed using company-specific information. We used the income approach to measure the fair value of the Lake Charles LNG reporting unit. Under the income approach, we calculated the fair value based on the present value of the estimated future cash flows. The discount rate used, which was an unobservable input, was based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the business's ability to execute on the projected cash flows. |
The following table presents the material unobservable inputs used to estimate the fair value of Regency’s Preferred Units and the embedded derivatives in Regency’s Preferred Units: |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Unobservable Input | | December 31, 2014 | | | | | | | | | | | | | | | |
Embedded derivatives in the Regency Preferred Units | Credit Spread | | 4.76 | % | | | | | | | | | | | | | | | |
| Volatility | | 35.8 | % | | | | | | | | | | | | | | | |
Changes in the remaining term of the Preferred Units, U.S. Treasury yields and valuations in related instruments would cause a change in the yield to value the Preferred Units. Changes in Regency’s cost of equity and U.S. Treasury yields would cause a change in the credit spread used to value the embedded derivatives in the Regency Preferred Units. Changes in Regency’s historical unit price volatility would cause a change in the volatility used to value the embedded derivatives. |
The following table presents a reconciliation of the beginning and ending balances for our Level 3 financial instruments measured at fair value on a recurring basis using significant unobservable inputs for the year ended December 31, 2014. There were no transfers between the fair value hierarchy levels during the years ended December 31, 2014 or 2013. |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2013 | $ | (19 | ) | | | | | | | | | | | | | | | | |
Net unrealized gains included in other income (expense) | 3 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Balance, December 31, 2014 | $ | (16 | ) | | | | | | | | | | | | | | | | |
Contributions in Aid of Construction Cost |
On certain of our capital projects, third parties are obligated to reimburse us for all or a portion of project expenditures. The majority of such arrangements are associated with pipeline construction and production well tie-ins. Contributions in aid of construction costs (“CIAC”) are netted against our project costs as they are received, and any CIAC which exceeds our total project costs, is recognized as other income in the period in which it is realized. |
Shipping and Handling Costs |
Shipping and handling costs are included in cost of products sold, except for shipping and handling costs related to fuel consumed for compression and treating which are included in operating expenses. |
Costs and Expenses |
Costs of products sold include actual cost of fuel sold, adjusted for the effects of hedging and other commodity derivative activities, and the cost of appliances, parts and fittings. Operating expenses include all costs incurred to provide products to customers, including compensation for operations personnel, insurance costs, vehicle maintenance, advertising costs, purchasing costs and plant operations. Selling, general and administrative expenses include all partnership related expenses and compensation for executive, partnership, and administrative personnel. |
We record the collection of taxes to be remitted to governmental authorities on a net basis except for our retail marketing operations in which consumer excise taxes on sales of refined products and merchandise are included in both revenues and costs and expenses in the consolidated statements of operations, with no effect on net income (loss). Excise taxes collected by ETP’s retail marketing operations were $2.46 billion, $2.22 billion and $573 million for the years ended December 31, 2014, 2013 and 2012, respectively. |
Issuances of Subsidiary Units |
We record changes in our ownership interest of our subsidiaries as equity transactions, with no gain or loss recognized in consolidated net income or comprehensive income. For example, upon our subsidiaries’ issuance of common units in a public offering, we record any difference between the amount of consideration received or paid and the amount by which the noncontrolling interest is adjusted as a change in partners’ capital. |
Income Taxes |
ETE is a publicly traded limited partnership and is not taxable for federal and most state income tax purposes. As a result, our earnings or losses, to the extent not included in a taxable subsidiary, for federal and state income tax purposes are included in the tax returns of the individual partners. Net earnings for financial statement purposes may differ significantly from taxable income reportable to Unitholders as a result of differences between the tax basis and financial reporting basis of assets and liabilities, in addition to the allocation requirements related to taxable income under our Third Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”). |
As a publicly traded limited partnership, we are subject to a statutory requirement that our “qualifying income” (as defined by the Internal Revenue Code, related Treasury Regulations, and IRS pronouncements) exceed 90% of our total gross income, determined on a calendar year basis. If our qualifying income does not meet this statutory requirement, we would be taxed as a corporation for federal and state income tax purposes. For the years ended December 31, 2014, 2013 and 2012, our qualifying income met the statutory requirement. |
The Partnership conducts certain activities through corporate subsidiaries which are subject to federal, state and local income taxes. These corporate subsidiaries include Susser and ETP Holdco, which owns Sunoco, Inc. and Panhandle. The Partnership and its corporate subsidiaries account for income taxes under the asset and liability method. |
Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized. |
The determination of the provision for income taxes requires significant judgment, use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax positions are recorded in our financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities. When facts and circumstances change, we reassess these probabilities and record any changes through the provision for income taxes. |
Accounting for Derivative Instruments and Hedging Activities |
For qualifying hedges, we formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment and the gains and losses offset related results on the hedged item in the statement of operations. The market prices used to value our financial derivatives and related transactions have been determined using independent third party prices, readily available market information, broker quotes and appropriate valuation techniques. |
At inception of a hedge, we formally document the relationship between the hedging instrument and the hedged item, the risk management objectives, and the methods used for assessing and testing effectiveness and how any ineffectiveness will be measured and recorded. We also assess, both at the inception of the hedge and on a quarterly basis, whether the derivatives that are used in our hedging transactions are highly effective in offsetting changes in cash flows. If we determine that a derivative is no longer highly effective as a hedge, we discontinue hedge accounting prospectively by including changes in the fair value of the derivative in net income for the period. |
If we designate a commodity hedging relationship as a fair value hedge, we record the changes in fair value of the hedged asset or liability in cost of products sold in the consolidated statement of operations. This amount is offset by the changes in fair value of the related hedging instrument. Any ineffective portion or amount excluded from the assessment of hedge ineffectiveness is also included in the cost of products sold in the consolidated statement of operations. |
Cash flows from derivatives accounted for as cash flow hedges are reported as cash flows from operating activities, in the same category as the cash flows from the items being hedged. |
If we designate a derivative financial instrument as a cash flow hedge and it qualifies for hedge accounting, a change in the fair value is deferred in AOCI until the underlying hedged transaction occurs. Any ineffective portion of a cash flow hedge’s change in fair value is recognized each period in earnings. Gains and losses deferred in AOCI related to cash flow hedges remain in AOCI until the underlying physical transaction occurs, unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter. For financial derivative instruments that do not qualify for hedge accounting, the change in fair value is recorded in cost of products sold in the consolidated statements of operations. |
We previously have managed a portion of our interest rate exposures by utilizing interest rate swaps and similar instruments. Certain of our interest rate derivatives are accounted for as either cash flow hedges or fair value hedges. For interest rate derivatives accounted for as either cash flow or fair value hedges, we report realized gains and losses and ineffectiveness portions of those hedges in interest expense. For interest rate derivatives not designated as hedges for accounting purposes, we report realized and unrealized gains and losses on those derivatives in gains (losses) on interest rate derivatives in the consolidated statements of operations. |
Unit-Based Compensation |
For awards of restricted units, we recognize compensation expense over the vesting period based on the grant-date fair value, which is determined based on the market price of our common units on the grant date. For awards of cash restricted units, we remeasure the fair value of the award at the end of each reporting period based on the market price of our common units as of the reporting date, and the fair value is recorded in other non-current liabilities on our consolidated balance sheets. |
Pensions and Other Postretirement Benefit Plans |
Employers are required to recognize in their balance sheets the overfunded or underfunded status of defined benefit pension and other postretirement plans, measured as the difference between the fair value of the plan assets and the benefit obligation (the projected benefit obligation for pension plans and the accumulated postretirement benefit obligation for other postretirement plans). Each overfunded plan is recognized as an asset and each underfunded plan is recognized as a liability. Employers must recognize the change in the funded status of the plan in the year in which the change occurs through AOCI in equity or are reflected as a regulatory asset or regulatory liability for regulated entities. |
Allocation of Income |
For purposes of maintaining partner capital accounts, our Partnership Agreement specifies that items of income and loss shall generally be allocated among the partners in accordance with their percentage interests. |