Washington, D.C. 20549
Commission File No. 1-2921
Panhandle Eastern Pipe Line Company, LP meets the conditions set forth in General Instructions I(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced disclosure format. Items 1, 2 and 7 have been reduced and Items 6, 10, 11, 12 and 13 have been omitted in accordance with Instruction I.
Certain matters discussed in this report, excluding historical information, as well as some statements by Panhandle Eastern Pipe Line Company, LP, and its subsidiaries (“PEPL” or the “Company”) in periodic press releases and some oral statements of PanhandleCompany officials during presentations about the Company, include forward-looking statements. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. Statements using words such as “anticipate,” “project,” “expect,” “plan,” “goal,” “forecast,” “estimate,” “intend,” “continue,” “believe,” “may,” “will” or similar expressions help identify forward-looking statements. Although the Company believes such forward-looking statements are based on reasonable assumptions and current expectations and projections about future events, no assurance can be given that such assumptions, expectations or projections will prove to be correct. Forward-looking statements are subject to a variety of risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, the Company’s actual results may vary materially from those anticipated, projected, forecasted, estimated or expressed in forward-looking statements since many of the factors that determine these results are subject to uncertainties and risks that are difficult to predict and beyond management’s control. For additional discussion of risks, uncertainties and assumptions, see “Part I – Itemthe risk factor summary below and “Item 1A. Risk Factors” included in this annual report.
The Company owns and operates a large natural gas open-access interstate pipeline network. The pipeline network, consisting of the PEPL,Panhandle, Trunkline and Sea Robin transmission systems, serves customers in the Midwest, Gulf Coast and Midcontinent United States with a comprehensive array of transportation and storage services. The Company’s transmission system consists of four large diameter pipelines extending approximately 1,300 miles from producing areas in the Anadarko Basin of Texas, Oklahoma and Kansas through Missouri, Illinois, Indiana, Ohio and into Michigan. Trunkline’s transmission system consists of one large diameter pipeline extending approximately 1,400 miles from the Gulf Coast area of Texas and Louisiana through Arkansas, Mississippi, Tennessee, Kentucky, Illinois, Indiana and to Michigan. Sea Robin’s transmission system consists of two offshore Louisiana natural gas supply systems extending approximately 120 miles into the Gulf of Mexico. The Company has five natural gas storage fields located in Illinois, Kansas, Louisiana, Michigan and Oklahoma. Southwest Gas operates four of these fields and Trunkline operates one.
The Company earns most of its revenue by entering into firm transportation and storage contracts, providing capacity for customers to transport and store natural gas in its facilities. The Company provides firm transportation services under contractual arrangements to local distribution company customers and their affiliates, natural gas marketers, producers, other pipelines, electric power generators and a variety of end-users. The Company’s pipelines offer both firm and interruptible transportation to customers on a short-term and long-term basis. Demand for natural gas transmission on the Company’s pipeline systems peaks during the winter months, with the highest throughput and a higher portion of annual total operating revenues occurring during the first and fourth calendar quarters. Average reservation revenue rates realized by the Company are dependent on certain factors, including but not limited to rate regulation, customer demand for capacity, and capacity sold for a given period and, to an extent, utilization of capacity. Commodity or utilization revenues, which are more variable in nature, are dependent upon a number of factors including weather, storage and pipeline capacity availability levels, and customer demand for firm and interruptible services, including parking services. The majority of PEPL’s revenues are related to firm capacity reservation charges, of which reservation charges accounted for 91%88% of total revenues in 2017.2020.
The following table provides a summary of pipeline transportation (including deliveries made throughout the Company’s pipeline network) in TBtu:
|
| | | | | |
| Years Ended December 31, |
| 2017 | | 2016 |
PEPL transportation | 636 |
| | 609 |
|
Trunkline transportation | 525 |
| | 480 |
|
Sea Robin transportation | 73 |
| | 85 |
|
The following table provides a summary of certain statistical information associated with the Company at December 31, 2017:
|
| | | | | | | |
Approximate Miles of Pipelines | | |
PEPLPanhandle | | 6,000 |
|
Trunkline | | 2,000 |
|
Sea Robin | | 1,000 |
|
Peak Day Delivery Capacity (Bcf/d) | | |
PEPLPanhandle | | 2.8 |
|
Trunkline | | 0.9 |
|
Sea Robin | | 2.0 |
|
Underground Storage Capacity-Owned (Bcf) | | 71.1 |
|
Underground Storage Capacity-Leased (Bcf) | | 18.012.0 |
|
| | |
Weighted Average Remaining Life in Years of Firm Transportation Contracts (1) | | |
PEPLPanhandle | | 6.65.3 |
|
Trunkline | | 8.57.3 |
|
Sea Robin (2) | | N/A |
|
Weighted Average Remaining Life in Years of Firm Storage Contracts (1) | | |
PEPLPanhandle | | 6.65.5 |
|
Trunkline | | 3.73.2 |
|
| |
(1)
| Weighted by firm capacity volumes. |
| |
(2)
| Sea Robin’s contracts are primarily interruptible. |
(1)Weighted by firm capacity volumes.
(2)Sea Robin’s contracts are primarily interruptible.
Regulation
Rate Regulation
The Company is subject to regulation by various federal, state and local governmental agencies, including those specifically described below.
FERC has comprehensive jurisdiction over PEPL,Panhandle, Trunkline, Sea Robin and Southwest Gas. In accordance with the Natural Gas Act of 1938, FERC’s jurisdiction over natural gas companies encompasses, among other things, the acquisition, operation and disposition of assets and facilities, the services provided and rates charged.
FERC has authority to regulate rates and charges for transportation and storage of natural gas in interstate commerce. FERC also has authority over the construction and operation of pipeline and related facilities utilized in the transportation and sale of natural gas in interstate commerce, including the extension, enlargement or abandonment of service using such facilities. PEPL,Panhandle, Trunkline, Sea Robin, and Southwest Gas hold certificates of public convenience and necessity issued by FERC, authorizing them to operate the pipelines, facilities and properties now in operation and to transport and store natural gas in interstate commerce.
The Company is also subject to the Natural Gas Pipeline Safety Act of 1968 and the Pipeline Safety Improvement Act of 2002, which regulate the safety of natural gas pipelines.
Effective January 2018, the 2017 Tax and Jobs Act (the “Tax Act”) changed several provisions of the federal tax code, including a reduction in the maximum corporate tax rate. On March 15, 2018, in a set of related proposals, the FERC addressed treatment of federal income tax allowances in regulated entity rates. The FERC issued a Revised Policy Statement on Treatment of Income Taxes (“Revised Policy Statement”) stating that it will no longer permit master limited partnerships to recover an income tax allowance in their cost of service rates. The FERC issued the Revised Policy Statement in response to a remand from the United States Court of Appeals for the District of Columbia Circuit in United Airlines v. FERC, in which the court determined that the FERC had not justified its conclusion that a pipeline organized as a master limited partnership would not “double recover” its taxes under the current policy by both including an income-tax allowance in its cost of service and earning a return on equity calculated using the discounted cash flow methodology. On July 18, 2018, the FERC issued an order denying requests for rehearing and clarification of its Revised Policy Statement. In the rehearing order, the FERC clarified that a pipeline organized as a master limited partnership will not be precluded in a future proceeding from arguing and providing evidentiary support that it is entitled to an income tax allowance and demonstrating that its recovery of an income tax allowance does not result in a double-recovery of investors’ income tax costs. On July 31, 2020, the United States Court of Appeals for the District of Columbia Circuit issued an opinion upholding the FERC’s decision denying a separate master limited partnership recovery of an income tax allowance and its decision not to require the master limited partnership to refund accumulated deferred income tax balances. In light of the rehearing order’s clarification regarding individual entities’ ability to argue in support of recovery of an income tax allowance and the court’s subsequent opinion upholding denial of an income tax allowance to a master limited partnership, the impacts that FERC's policy on the treatment of income taxes may have on the rates we can charge for FERC-regulated transportation services are unknown at this time.
Even without application of the FERC’s recent rate making-related policy statements and rulemakings, the FERC or our shippers may challenge the cost of service rates we charge. The FERC’s establishment of a just and reasonable rate is based on many component, including tax-related components, although changes in the components may tend to decrease our cost of service rate, other components in the cost of service rate calculation may increase and result in a newly calculated cost of service rate that is less than, the same as, or greater than the prior cost of service rate. Moreover, we receive revenues from our pipelines based on a variety of rate structures, including cost of service rates, negotiated rates, discounted rates and market-based rates. The revenues we receive from natural gas transportation services we provide pursuant to cost of service based rates may decrease in the future as a result of the ultimate outcome of the Tax Law NOI, the Final Rule, and the Revised Policy Statement, combined with the reduced corporate federal income tax rate established in the Tax Act. The extent of any revenue reduction related to our cost of service rates, if any, will depend on a detailed review of all of our cost of service components and the outcomes of any challenges to our rates by the FERC or our shippers.
On July 18, 2018, the FERC issued a final rule establishing procedures to evaluate rates charged by the FERC-jurisdictional gas pipelines in light of the Tax Act and the FERC’s Revised Policy Statement. By order issued January 16, 2019, the FERC initiated a review of Panhandle’s existing rates pursuant to Section 5 of the Natural Gas Act (“NGA”) to determine whether the rates currently charged by Panhandle are just and reasonable and set the matter for hearing. Panhandle filed a cost and revenue study on April 1, 2019 and an NGA Section 4 rate case on August 30, 2019. The Section 4 and Section 5 proceedings were consolidated by order of the Chief Judge on October 1, 2019. A hearing in the combined proceedings commenced on August 25, 2020 and adjourned on September 15, 2020. By order dated January 19, 2021, the Chief Judge has extended the deadline for initial decision to March 26, 2021.
Pipeline Certification
The FERC issued a Notice of Inquiry on April 19, 2018 (“Pipeline Certification NOI”), thereby initiating a review of its policies on certification of natural gas pipelines, including an examination of its long-standing Policy Statement on Certification of New Interstate Natural Gas Pipeline Facilities, issued in 1999, that is used to determine whether to grant certificates for new pipeline projects. We are unable to predict what, if any, changes may be proposed as a result of the Pipeline Certification NOI that will affect our natural gas pipeline business or when such proposals, if any, might become effective. Comments in response to the Pipeline Certification NOI were due on or before July 25, 2018. We do not expect that any change in this policy would affect us in a materially different manner than any other natural gas pipeline company operating in the United States.
For additional information regarding the Company’s regulation and rates, see “Item 1. Business – Environmental” and “Item 1A. Risk Factors.”
Competition
The interstate pipeline and storage systems of the Company compete with those of other interstate and intrastate pipeline companies in the transportation and storage of natural gas. The principal elements of competition among pipelines are rates, terms of service, flexibility and reliability of service.
Natural gas competes with other forms of energy available to the Company’s customers and end-users, including electricity, coal and fuel oils. The primary competitive factor is price. Changes in the availability or price of natural gas and other forms of energy, the level of business activity, conservation, legislation and governmental regulation, the capability to convert to alternate fuels and other factors, including weather and natural gas storage levels, affect the ongoing demand for natural gas in the areas served by the Company. In order to meet these challenges, the Company will need to adapt its marketing strategies, the types of transportation
and storage services provided and its pricing and rates to address competitive forces. In addition, FERC may authorize the construction of new interstate pipelines that compete with the Company’s existing pipelines.
Environmental
The Company is subject to federal, state and local laws and regulations regarding water quality, hazardous and solid waste management, air quality control and other environmental matters. These laws and regulations require the Company to conduct its operations in a specified manner and to obtain and comply with a wide variety of environmental regulations, licenses, permits, inspections and other approvals. Failure to comply with environmental requirements may expose the Company to significant fines, penalties and/or interruptions in operations. The Company’s environmental policies and procedures are designed to achieve compliance with such laws and regulations. These evolving laws and regulations and claims for damages to property, employees, other persons and the environment resulting from current or past operations may result in significant expenditures and liabilities in the future. The Company engages in a process of updating and revising its procedures for the ongoing evaluation of its operations to identify potential environmental exposures and enhance compliance with regulatory requirements. For additional information concerning the impact of environmental regulation on the Company, see “Item 1A. Risk Factors” and Note 98 to our consolidated financial statements.
Employees
At December 31, 2017, the Company had 496 employees. Of these employees, 208 were represented by the United Steel, Paperstatements included in “Item 8. Financial Statements and Forestry, Rubber, Manufacturing, Energy, Allied Industrial, and Service Workers International AFL-CIO, CLC. The current union contract expires on May 28, 2019.Supplementary Data.”
SEC Reporting
We file or furnish annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any related amendments and supplements thereto with the SEC. You may read and copy any materials we file or furnish with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information regarding the Public Reference Room by calling the SEC at 1-800-732-0330. In addition, theThe SEC maintains an internet website at http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
We provide electronic access, free of charge, to our periodic and current reports on our internet website located at http://www.energytransfer.com. These reports are available on our website as soon as reasonably practicable after we electronically file such materials with the SEC. Information contained on our website is not part of this report.
ITEM 1A. RISK FACTORS
The risks and uncertainties described below are not the only ones faced by the Company. Additional risks and uncertainties that the Company is unaware of, or that it currently deems immaterial, may become important factors that affect it. If any of the following risks occurs, the Company’s business, financial condition, results of operations or cash flows could be materially and adversely affected.
Risks That RelateRelated to the Company’s Business
Results of Operations and Financial Condition
Fluctuations in energy commodity prices could adversely affect the business of the Company.
If natural gas prices in the supply basins connected to the pipeline systems of the Company are not competitive with prices in other natural gas producing regions able to serve the Company’s customers, the volume of natural gas transported by the Company may be negatively impacted. Natural gas prices can also affect customer demand for the various services provided by the Company.
The pipeline revenues of the Company has substantial debtare generated under contracts that must be renegotiated periodically.
The pipeline revenues of the Company are generated under natural gas transportation contracts that expire periodically and may notmust be replaced. Although the Company will actively pursue the renegotiation, extension and/or replacement of all of its contracts, it cannot assure that it will be able to obtain fundingextend or obtain funding on acceptablereplace these contracts when they expire or that the terms because of deterioration inany renegotiated contracts will be as favorable as the credit and capital markets. This may hinder or preventexisting contracts. If the Company from meeting its future capital needs.
The Company has a significant amount of debt outstanding. As of December 31, 2017, debt on the consolidated balance sheets totaled $818 million.
Covenants exist in certain of the Company’s debt agreements that require the Companyis unable to maintain a fixed charge coverage ratio, a leverage ratio and to meet certain ratios of earnings before depreciation, interest and taxes to cash interest expense. A failure by the Company to satisfy any such covenant would give rise to an event of default under the associated debt, which could become immediately due and payable if the Company did not cure such default within any permitted cure periodrenew, extend or replace these contracts, or if the Company did not obtain amendments, consents or waivers from its lenders with respect to such covenants. Any such acceleration or inability to borrow could causerenews them on less favorable terms, it may suffer a material adverse changereduction in revenues and earnings.
The outbreak of COVID-19 could adversely impact our business, financial condition and results of operations.
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus known as COVID-19 due to the risks it imposes on the international community as the virus spreads globally. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The global spread of COVID-19 caused a significant decline in economic activity and a reduced demand for goods and services, particularly in the Company’senergy industry, due to reduced operations and/or closures of businesses, “shelter in place” and other similar requirements imposed by government authorities, or other actions voluntarily undertaken by individuals and businesses concerned about exposure to COVID-19. The extent to which the COVID-19 pandemic continues to impact our business, operations and financial condition.results depends on numerous evolving factors that we cannot accurately predict, including: the duration and scope of the pandemic; governmental, business and individuals’ actions taken in response to the pandemic and the associated impact on economic activity; the effect on the level of demand for natural gas; our ability to procure materials and services from third parties that are necessary for the operation of our business; our ability to provide our services, including as a result of travel restrictions on our employees and employees of third parties that we utilize in connection with our services; the potential for key executives or employees to fall ill with COVID-19; and the ability of our customers to pay for our services if their businesses suffer as a result of the pandemic.
Reduced demand for natural gas caused by the COVID-19 pandemic may result in the shut-in of production from U.S. oil and gas wells, which in turn may result in decreased utilization of our services related to natural gas.
The Company relies on access to both short- and long-term credit as a significant source of liquidity for capital requirements not satisfied by the cash flow from its operations. Deterioration in the Company’s financial condition could hamper its ability to access the capital markets.
Global financial markets and economic conditions have been, and may continue to be, disrupted and volatile. The current weak economic conditions have made, and may continue to make, obtaining funding more difficult.
Due to these factors the Company cannot be certain that funding will be available if needed and, to the extent required, on acceptable terms. If funding is not available when needed, or is available only on unfavorable terms, the Company may be unable to grow its existing business, complete acquisitions, refinance its debt or otherwise take advantage of business opportunities or respond to competitive pressures, any of whichdiscussed above could have a material adverse effect on our business, results of operations and financial condition. We may be forced to delay some of our capital projects and our customers, who may be in financial distress, may slow down decision-making, delay planned projects or seek to renegotiate or terminate agreements with us. To the Company’s revenuesextent our counterparties are successful, we may not be able to obtain new contract terms that are favorable to us or to replace contracts that are terminated.
Further, the effects of the pandemic and geopolitical developments have market impacts, such that additional capital may be more difficult for us to obtain or available only on terms less favorable to us. Our inability to fund capital expenditures could have a material impact on our results of operations.
At this time, we cannot estimate the magnitude and duration of potential social, economic and labor instability as a direct result of COVID-19. Should any of these potential impacts continue for an extended period of time, it will have a negative impact on the demand for our services and an adverse effect on our financial position and results of operations.
Credit ratings downgrades could increase To the Company’s financing costsextent these factors adversely affect our business and limit itsfinancial results, they may also have the effect of heightening many of the other risks described in this “Risk Factors” section, as well as the risks discussed or referenced in any applicable prospectus supplement, including in the documents we incorporate by reference herein or therein, such as those relating to our indebtedness, our need to generate sufficient cash flows to service our indebtedness and our ability to accesscomply with the capital markets.
The Company is not party to any lending agreement that would accelerate the maturity date of any obligation due to a failure to maintain any specific credit rating, nor would a reduction in any credit rating, by itself, cause an event of default under any of the Company’s lending agreements. However, if its current credit ratings were downgraded below investment grade, the Company could be negatively impacted as follows:
Borrowing costs associated with existing debt obligations could increasecovenants contained in the event of a credit rating downgrade;
The costs of refinancing debtagreements that is maturing or any new debt issuances could increase due to a credit rating downgrade; and
FERC may be unwilling to allow the Company to pass along increased debt service costs to natural gas customers.
The Company’s credit rating can be impacted by the credit rating and activities of its parent company. Thus, adverse impacts to ETP and its activities, which may include activities unrelated to the Company, may have adverse impacts on the Company’s credit rating and financing and operating costs.govern our indebtedness.
The financial soundness of the Company’s customers could affect its business and operating results and the Company’s credit risk management may not be adequate to protect against customer risk.
As a result of macroeconomic challenges that have impactedmay impact the economy of the United States and other parts of the world, the Company’s customers may experience cash flow concerns. As a result, if customers’ operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain credit, customers may not be able to pay, or may delay payment of, accounts receivable owed to the Company. The Company’s credit procedures and policies may not be adequate to fully eliminate customer credit risk. In addition, in certain situations, the Company may assume certain additional credit risks for competitive reasons or otherwise. Any inability of the Company’s customers to pay for services could adversely affect the Company’s financial condition, results of operations and cash flows.
The Company depends on distributions from its subsidiaries to meet its needs.
Thepipeline business of the Company is dependent on the earnings and cash flowsa small number of and dividends, loans, advances or other distributions from,customers for a significant percentage of its subsidiaries to generate the funds necessary to meet its obligations. The availabilitysales.
Historically, a small number of distributions from such entities is subject to their earnings and capital requirements, the satisfaction of various covenants and conditions contained in financing documents by which they are bound or in their organizational documents, and in the case of the regulated subsidiaries, regulatory restrictions that limit their ability to distribute profits to the Company.
The Company is controlled by ETP.
The Company is an indirect wholly-owned subsidiary of ETP. ETP executives serve as the board of managers and as executive officers of the Company. Accordingly, ETP controls and directs allcustomers has accounted for a large portion of the Company’s business affairs, decides all matters submitted for member approval and may unilaterally effect changes to its management team. In circumstances involving a conflict of interest between ETP, on the one hand, and the Company’s creditors, on the other hand, the Company can give no assurance that ETP would not exercise its power to control the Company in a manner that would benefit ETP to the detriment of the Company’s creditors.
Some of our executive officers and directors face potential conflicts of interest in managing our business.
Certain of our executive officers and directors are also officers and/or directors of ETE and/or ETP. These relationships may create conflicts of interest regarding corporate opportunities and other matters.revenue. The resolutionloss of any such conflicts may not always be in ourone or our creditors’ best interests. In addition,more of these overlapping executive officers and directors allocate their time among us and ETE and/or ETP. These officers and directors face potential conflicts regarding the allocation of their time, which may adversely affect our business, results of operations and financial condition.
Our affiliates may compete with us.
Our affiliates and related parties are not prohibited from engaging in other businesses or activities, including those that might be in direct competition with us.
The Company’s growth strategy entails risk.
The Company may actively pursue acquisitions in the energy industry to complement and diversify its existing businesses. As part of its growth strategy, PEPL may:
examine and potentially acquire regulated or unregulated businesses, including transportation and storage assets and gathering and processing businesses within the natural gas industry;
enter into joint venture agreements and/or other transactions with other industry participants or financial investors;
selectively divest parts of its business, including parts of its core operations; and
continue expanding its existing operations.
The Company’s ability to acquire new businesses will depend upon the extent to which opportunities become available, as well as, among other things:
its success in valuing and bidding for the opportunities;
its ability to assess the risks of the opportunities;
its ability to obtain regulatory approvals on favorable terms; and
its access to financing on acceptable terms.
Once acquired, the Company’s ability to integrate a new business into its existing operations successfully will largely depend on the adequacy of implementation plans, including the ability to identify and retain employees to manage the acquired business, and the ability to achieve desired operating efficiencies. The successful integration of any businesses acquired in the future may entail numerous risks, including:
the risk of diverting management’s attention from day-to-day operations;
the risk that the acquired businesses will require substantial capital and financial investments;
the risk that the investments will fail to perform in accordance with expectations; and
the risk of substantial difficulties in the transition and integration process.
These factorscustomers could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
The pipeline business of the Company is subject to competition.
The interstate pipeline and cash flows, particularlystorage business of the Company competes with those of other interstate and intrastate pipeline companies in the casetransportation and storage of a larger acquisition or multiple acquisitions in a short periodnatural gas. The principal elements of time.
The consideration paid in connectioncompetition among pipelines are rates, terms of service and the flexibility and reliability of service. Natural gas competes with an investment or acquisition also affectsother forms of energy available to the Company’s financial results. In addition, acquisitions or expansions may result customers and end-users, including electricity, coal and fuel oils. The primary competitive factor is price. Changes
in the incurrenceavailability or price of additional debt.natural gas and other forms of energy, the level of business activity, conservation, legislation and governmental regulations, the capability to convert to alternate fuels and other factors, including weather and natural gas storage levels, affect the demand for natural gas in the areas served by the Company.
The Company is subject to operating risks.
The Company’s operations are subject to all operating hazards and risks incident to handling, storing, transporting and providing customers with natural gas, including adverse weather conditions, explosions, pollution, release of toxic substances, fires and other hazards, each of which could result in damage to or destruction of its facilities or damage to persons and property. If any of these events were to occur, the Company could suffer substantial losses. Moreover, as a result, the Company has been, and likely will be, a defendant in legal proceedings and litigation arising in the ordinary course of business. While the Company maintains insurance against many of these risks to the extent and in amounts that it believes are reasonable, the Company’s insurance coverages have significant deductibles and self-insurance levels, limits on maximum recovery, and do not cover all risks. There is also the risk that the coverages will change over time in light of increased premiums or changes in the terms of the insurance coverages that could result in the Company’s decision to either terminate certain coverages, increase deductibles and self-insurance levels, or decrease maximum recoveries. In addition, there is a risk that the insurers may default on their coverage obligations. As a result,
the Company’s results of operations, cash flows or financial condition could be adversely affected if a significant event occurs that is not fully covered by insurance.
Terrorist attacks aimed at our facilities could adversely affect our business, results of operations, cash flows and financial condition.
The United States government has issued warnings that energy assets, including the nation’s pipeline infrastructure, may be the future target of terrorist organizations. Some of our facilities are subject to standards and procedures required by the Chemical Facility Anti-Terrorism Standards. We believe we are in compliance with all material requirements; however, such compliance may not prevent a terrorist attack from causing material damage to our facilities or pipelines. Any such terrorist attack on our facilities or pipelines, those of our customers, or in some cases, those of other pipelines could have a material adverse effect on our business, financial condition and results of operations.
The impact that terrorist attacks, such as the attacks of September 11, 2001, may have on the energy industry in general, and on the Company in particular, is not known at this time. Uncertainty surrounding military activity may affect the Company’s operations in unpredictable ways, including disruptions of fuel supplies and markets and the possibility that infrastructure facilities, including pipelines, gathering facilities and processing plants, could be direct targets of, or indirect casualties of, an act of terror or a retaliatory strike. The Company may have to incur significant additional costs in the future to safeguard its physical assets.
Our business could be affected adversely by union disputes and strikes or work stoppages by unionized employees.
As of December 31, 2020, 210 employees of the Company, representing approximately 40% of our workforce, is covered by a number of collective bargaining agreements with various terms and dates of expiration. There can be no assurances that we will not experience a work stoppage in the future as a result of labor disagreements. Any work stoppage could, depending on the affected operations and the length of the work stoppage, have a material adverse effect on our business, financial position, results of operations or cash flows.
Cybersecurity breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personal identification information of our employees, in our data centers and on our networks. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disruption of our operations, damage to our reputation, and cause a loss of confidence in our products and services, which could adversely affect our business.
Our operations could be disrupted if our information systems fail, causing increased expenses and loss of sales.
Our business is highly dependent on financial, accounting and other data processing systems and other communications and information systems, including our enterprise resource planning tools. We process a large number of transactions on a daily
basis and rely upon the proper functioning of computer systems. If a key system was to fail or experience unscheduled downtime for any reason, even if only for a short period, our operations and financial results could be affected adversely. Our systems could be damaged or interrupted by a security breach, fire, flood, power loss, telecommunications failure or similar event. We have a formal disaster recovery plan in place, but this plan may not entirely prevent delays or other complications that could arise from an information systems failure. Our business interruption insurance may not compensate us adequately for losses that may occur.
Security breaches and other disruptions could compromise our information and operations, and expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our employees, in our data centers and on our networks. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties for divulging shipper information, disruption of our operations, damage to our reputation, and loss of confidence in our products and services, which could adversely affect our business.
Our information technology infrastructure is critical to the efficient operation of our business and essential to our ability to perform day-to-day operations. Breaches in our information technology infrastructure or physical facilities, or other disruptions, could result in damage to our assets, safety incidents, damage to the environment, potential liability or the loss of contracts, and have a material adverse effect on our operations, financial position and results of operations.
The success of the pipeline business depends, in part, on factors beyond the Company’s control.
Third parties own most of the natural gas transported and stored through the pipeline systems operated by the Company. As a result, the volume of natural gas transported and stored depends on the actions of those third parties and is beyond the Company’s control. Further, other factors beyond the Company’s and those third parties’ control may unfavorably impact the Company’s ability to maintain or increase current transmission and storage rates, to renegotiate existing contracts as they expire or to remarket unsubscribed capacity. High utilization of contracted capacity by firm customers reduces capacity available for interruptible transportation and parking services.
The expansion of the Company’s pipeline systems by constructing new facilities subjects the Company to construction and other risks that may adversely affect the financial results of the pipeline businesses.
The Company may expand the capacity of its existing pipeline and storage facilities by constructing additional facilities. Construction of these facilities is subject to various regulatory, development and operational risks, including:
the Company’s ability to obtain necessary approvals and permits from FERC and other regulatory agencies on a timely basis and on terms that are acceptable to it;
the ability to access sufficient capital at reasonable rates to fund expansion projects, especially in periods of prolonged economic decline when the Company may be unable to access capital markets;
the availability of skilled labor, equipment, and materials to complete expansion projects;
adverse weather conditions;
potential changes in federal, state and local statutes, regulations, and orders, including environmental requirements that delay or prevent a project from proceeding or increase the anticipated cost of the project;
impediments on the Company’s ability to acquire rights-of-way or land rights or to commence and complete construction on a timely basis or on terms that are acceptable to it;
the Company’s ability to construct projects within anticipated costs, including the risk that the Company may incur cost overruns, resulting from inflation or increased costs of equipment, materials, labor, contractor productivity, delays in construction or other factors beyond its control, that the Company may not be able to recover from its customers;
the lack of future growth in natural gas supply and/or demand; and
the lack of transportation, storage and throughput commitments.
Any of these risks could prevent a project from proceeding, delay its completion or increase its anticipated costs. There is also the risk that a downturn in the economy and its potential negative impact on natural gas demand may result in either slower development in the Company’s expansion projects or adjustments in the contractual commitments supporting such projects. As a result, new facilities could be delayed or may not achieve the Company’s expected investment return, which may adversely affect the Company’s business, financial condition, results of operations and cash flows.
The inability to continue to access lands owned by third parties could adversely affect the Company’s ability to operate and/or expand its pipeline and gathering and processing businesses.
The ability of the Company to operate in certain geographic areas will depend on the Company’s success in maintaining existing rights-of-way and obtaining new rights-of-way. Securing additional rights-of-way is also critical to the Company’s ability to pursue expansion projects. The Company cannot assure that it will be able to acquire all of the necessary new rights-of-way or maintain access to existing rights-of-way upon the expiration of the current rights-of-way or that all of the rights-of-way will be obtainable in a timely fashion. The Company’s financial position could be adversely affected if the costs of new or extended rights-of-way materially increase or the Company is unable to obtain or extend the rights-of-way timely.
The expansion of the Company’s pipeline systems by constructing new facilities subjects the Company to construction and other risks that may adversely affect the financial results of the pipeline businesses.
The Company may expand the capacity of its existing pipeline and storage facilities by constructing additional facilities. Construction of these facilities is subject to various regulatory, development and operational risks, including:
•the Company’s ability to obtain necessary approvals and permits from FERC and other regulatory agencies on a timely basis and on terms that are acceptable to it;
•the ability to access sufficient capital at reasonable rates to fund expansion projects, especially in periods of prolonged economic decline when the Company may be unable to access capital markets;
•the availability of skilled labor, equipment, and materials to complete expansion projects;
•adverse weather conditions;
•potential changes in federal, state and local statutes, regulations, and orders, including environmental requirements that delay or prevent a project from proceeding or increase the anticipated cost of the project;
•impediments on the Company’s ability to acquire rights-of-way or land rights or to commence and complete construction on a timely basis or on terms that are acceptable to it;
•the Company’s ability to construct projects within anticipated costs, including the risk that the Company may incur cost overruns, resulting from inflation or increased costs of equipment, materials, labor, contractor productivity, delays in construction or other factors beyond its control, that the Company may not be able to recover from its customers;
•the lack of future growth in natural gas supply and/or demand; and
•the lack of transportation, storage and throughput commitments.
Any of these risks could prevent a project from proceeding, delay its completion or increase its anticipated costs. There is also the risk that a downturn in the economy and its potential negative impact on natural gas demand may result in either slower development in the Company’s expansion projects or adjustments in the contractual commitments supporting such projects. As a result, new facilities could be delayed or may not achieve the Company’s expected investment return, which may adversely affect the Company’s business, financial condition, results of operations and cash flows.
The success of the Company depends on the continued development of additional natural gas reserves in the vicinity of its facilities and the ability to access additional reserves to offset the natural decline from existing sources connected to its system.
The amount of revenue generated by the Company ultimately depends upon the access to reserves of available natural gas. As the reserves available through the supply basins connected to the Company’s system naturally decline, a decrease in development or production activity could cause a decrease in the volume of natural gas available for transmission. If production from these natural gas reserves is substantially reduced and not replaced with other sources of natural gas, such as new wells or interconnections with other pipelines, and certain of the Company’s assets are consequently not utilized, the Company may have to accelerate the recognition and settlement of asset retirement obligations. Investments by third parties in the development of new natural gas reserves or other sources of natural gas in proximity to the Company’s facilities depend on many factors beyond the Company’s control. Revenue reductions or the acceleration of asset retirement obligations resulting from the decline of natural gas reserves and the lack of new sources of natural gas may have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.
The costs of providing postretirement health care benefits and related funding requirements are subject to changes in other postretirement fund values and fluctuating actuarial assumptions and may have a material adverse effect on the Company’s financial results. In addition, the passage of the Health Care Reform Act in 2010 could significantly increase the cost of providing health care benefits for Company employees.
The Company provides postretirement healthcare benefits to certain of its employees. The costs of providing postretirement health care benefits and related funding requirements are subject to changes in postretirement fund values and fluctuating actuarial assumptions that may have a material adverse effect on the Company’s future financial results. In addition, the passage of the Health Care Reform Act of 2010 has increased the cost of health care benefits for its employees. While certain of the costs incurred in providing such postretirement healthcare benefits are recovered through the rates charged by the Company’s regulated businesses, the Company may not recover all of its costs and those rates are generally not immediately responsive to current market conditions or funding requirements. Additionally, if the current cost recovery mechanisms are changed or eliminated, the impact of these benefits on operating results could significantly increase.
We compete with other businesses in our market with respect to attracting and retaining qualified employees.
Our continued success depends on our ability to attract and retain qualified personnel in all areas of our business. We compete with other businesses in our market with respect to attracting and retaining qualified employees. A tight labor market, increased overtime and a higher full-time employee ratio may cause labor costs to increase. A shortage of qualified employees may require us to enhance wage and benefits packages in order to compete effectively in the hiring and retention of such employees or to hire more expensive temporary employees. No assurance can be given that our labor costs will not increase, or that such increases can be recovered through increased prices charged to customers. We are especially vulnerable to labor shortages in oil and gas drilling areas when energy prices drive higher exploration and production activity.
Indebtedness
Credit ratings downgrades could increase the Company’s financing costs.
The Company is not party to any lending agreement that would accelerate the maturity date of any obligation due to a failure to maintain any specific credit rating, nor would a reduction in any credit rating, by itself, cause an event of default under any of the Company’s lending agreements. However, if its current credit ratings were downgraded below investment grade, the Company could be negatively impacted as follows:
•Borrowing costs associated with existing debt obligations could increase in the event of a credit rating downgrade;
•The costs of refinancing debt that is maturing or any new debt issuances could increase due to a credit rating downgrade; and
•FERC may be unwilling to allow the Company to pass along increased debt service costs to natural gas customers.
The Company’s credit rating can be impacted by the credit rating and activities of its parent company. Thus, adverse impacts to ETO and its activities, which may include activities unrelated to the Company, may have adverse impacts on the Company’s credit rating and financing and operating costs.
Regulatory Matters
The Company’s business is highly regulated.
The Company’s transportation and storage business is subject to regulation by federal, state and local regulatory authorities. FERC, the United States Department of Transportation and various state and local regulatory agencies regulate the interstate pipeline business. In particular, FERC has authority to regulate rates charged by the Company for the transportation and storage of natural gas in interstate commerce. FERC also has authority over the construction, acquisition, operation and disposition of these pipeline and storage assets.
The Company’s rates and operations are subject to extensive regulation by federal regulators as well as the actions of Congress and state legislatures and, in some respects, state regulators. The Company cannot predict or control what effect future actions of regulatory agencies may have on its business or its access to the capital markets. Furthermore, the nature and degree of regulation of natural gas companies has changed significantly during the past several decades and there is no assurance that further substantial changes will not occur or that existing policies and rules will not be applied in a new or different manner. Should new and more stringent regulatory requirements be imposed, the Company’s business could be unfavorably impacted and the Company could be subject to additional costs that could adversely affect its financial condition or results of operations if these costs are not ultimately recovered through rates.
The Company’s transportation and storage business is also influenced by fluctuations in costs, including operating costs such as insurance, postretirement and other benefit costs, wages, outside contractor services costs, asset retirement obligations for certain assets and other operating costs. The profitability of regulated operations depends on the business’ ability to collect such increased costs as a part of the rates charged to its customers. To the extent that such operating costs increase in an amount greater than that for which revenue is received, or for which rate recovery is allowed, this differential could impact operating results. The lag between an increase in costs and the ability of the Company to file to obtain rate relief from FERC to recover those increased costs can have a direct negative impact on operating results. As with any request for an increase in rates in a regulatory filing, once granted, the rate increase may not be adequate. In addition, FERC may prevent the business from passing along certain costs in the form of higher rates. Competition may prevent the recovery of increased costs even if allowed in rates.
FERC may also exercise its Section 5 authority to initiate proceedings to review rates that it believes may not be just and reasonable. FERC has recently exercised this authority with respect to several other pipeline companies. If FERC were to initiate a Section 5 proceeding against the Company and find that the Company’s rates at that time were not just and reasonable due to a lower rate base, reduced or disallowed operating costs, or other factors, the applicable maximum rates the Company is allowed to charge customers could be reduced and the reduction could potentially have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
A rate reduction is also a possible outcome with any Section 4 rate case proceeding for the regulated entities of the Company, including any rate case proceeding required to be filed as a result of a prior rate case settlement. A regulated entity’s rate base, upon which a rate of return is allowed in the derivation of maximum rates, is primarily determined by a combination of accumulated capital investments, accumulated regulatory basis depreciation, and accumulated deferred income taxes. Such rate base can decline due to capital investments being less than depreciation over a period of time, or due to accelerated tax depreciation in excess of regulatory basis depreciation. By order issued January 16, 2019, the FERC initiated a review of Panhandle’s existing rates pursuant to Section 5 of the Natural Gas Act to determine whether the rates currently charged by Panhandle are just and reasonable and set the matter for hearing. Panhandle filed a cost and revenue study on April 1, 2019 and filed an NGA Section 4 rate case on August 30, 2019. By order issued October 1, 2019, the Panhandle Section 5 and Section 4 cases were consolidated. An initial decision is expected to be issued in the first quarter of 2021.
Our interstate pipelines are subject to laws, regulations and policies governing the rates they are allowed to charge for their services, which may prevent us from fully recovering our costs.
Laws, regulations and policies governing interstate natural gas pipeline rates could affect the ability of our interstate pipelines to establish rates, to charge rates that would cover future increases in its costs, or to continue to collect rates that cover current costs.
We are required to file tariff rates (also known as recourse rates) with the FERC that shippers may pay for interstate natural gas transportation services. We may also agree to discount these rates on a not unduly discriminatory basis or negotiate rates with
shippers who elect not to pay the recourse rates. The FERC must approve or accept all rate filings for us to be allowed to charge such rates.
The FERC may review existing tariff rates on its own initiative or upon receipt of a complaint filed by a third party. The FERC may, on a prospective basis, order refunds of amounts collected if it finds the rates to have been shown not to be just and reasonable or to have been unduly discriminatory. The FERC has recently exercised this authority with respect to several other pipeline companies. If the FERC were to initiate a proceeding against us and find that our rates were not just and reasonable or unduly discriminatory, the maximum rates we are permitted to charge may be reduced and the reduction could have an adverse effect on our revenues and results of operations.
The costs of our interstate pipeline operations may increase and we may not be able to recover all of those costs due to FERC regulation of our rates. If we propose to change our tariff rates, our proposed rates may be challenged by the FERC or third parties, and the FERC may deny, modify or limit our proposed changes if we are unable to persuade the FERC that changes would result in just and reasonable rates that are not unduly discriminatory. We also may be limited by the terms of rate case settlement agreements or negotiated rate agreements with individual customers from seeking future rate increases, or we may be constrained by competitive factors from charging our tariff rates.
To the extent our costs increase in an amount greater than our revenues increase, or there is a lag between our cost increases and our ability to file for and obtain rate increases, our operating results would be negatively affected. Even if a rate increase is permitted by the FERC to become effective, the rate increase may not be adequate. We cannot guarantee that our interstate pipelines will be able to recover all of our costs through existing or future rates.
The ability of interstate pipelines held in tax-pass-through entities, like us, to include an allowance for income taxes as a cost-of-service element in their regulated rates has been subject to extensive litigation before the FERC and the courts for a number of years. It is currently the FERC’s policy to permit pipelines to include in cost-of-service a tax allowance to reflect actual or potential income tax liability on their public utility income attributable to all partnership or limited liability company interests, to the extent that the ultimate owners have an actual or potential income tax liability on such income. Whether a pipeline’s owners have such actual or potential income tax liability will be reviewed by the FERC on a case-by-case basis. Under the FERC’s policy, we thus remain eligible to include an income tax allowance in the tariff rates we charge for interstate natural gas transportation. On December 15, 2016, FERC issued a Notice of Inquiry requesting energy industry input on how FERC should address income tax allowances in cost-based rates proposed by pipeline companies organized as part of a master limited partnership. FERC issued the Notice of Inquiry in response to a remand from the United States Court of Appeals for the D.C. Circuit in United Airlines v. FERC, in which the court determined that FERC had not justified its conclusion that an oil pipeline organized as a partnership would not “double recover” its taxes under the current policy by both including a tax allowance in its cost-based rates and earning a return on equity calculated on a pre-tax basis. We cannot predict whether FERC will successfully justify its conclusion that there is no double recovery of taxes under these circumstances or whether FERC will modify its current policy on either income tax allowances or return on equity calculations for pipeline companies organized as part of a master limited partnership. However, any modification that reduces or eliminates an income tax allowance for pipeline companies organized as part of a master limited partnership or decreases the return on equity for such pipelines could result in an adverse impact on our revenues associated with the transportation and storage services we provide pursuant to cost-based rates. In December 2016, FERC issued a Notice of Inquiry Regarding the Commission’s Policy for Recovery of Income Tax Costs. FERC requested comments regarding how to address any double recovery resulting from the Commission’s current income tax allowance and rate of return policies. The comment period with respect to the notice of inquiry ended on April 7, 2017. The outcome of the inquiry is still pending.
Effective January 2018, the 2017 Tax Cuts and Jobs Act changed several provisions of the federal tax code, including a reduction in the maximum corporate tax rate. FollowingOn March 15, 2018, in a set of related proposals, the 2017 Tax CutsFERC addressed treatment of federal income tax allowances in regulated entity rates. The FERC issued a Revised Policy Statement stating that it will no longer permit master limited partnerships to recover an income tax allowance in their cost of service rates. The FERC issued the Revised Policy Statement in response to a remand from the United States Court of Appeals for the District of Columbia Circuit in United Airlines v. FERC, in which the court determined that the FERC had not justified its conclusion that a pipeline organized as a master limited partnership would not “double recover” its taxes under the current policy by both including an income-tax allowance in its cost of service and Jobs Act being signed into law, filingsearning a return on equity calculated using the discounted cash flow methodology. On July 18, 2018, the FERC issued an order denying requests for rehearing and clarification of its Revised Policy Statement because it is non-binding policy and parties will have been made atthe opportunity to address the policy as applied in future cases. In the rehearing order, the FERC requestingclarified that FERCa pipeline organized as a master limited partnership will not be not be precluded in a future proceeding from arguing and providing evidentiary support that it is entitled to an income tax allowance and demonstrating that its recovery of an income tax allowance does not result in a double-recovery of investors’ income tax costs. On July 31, 2020, the United States Court of Appeals for the District of Columbia Circuit issued an opinion upholding FERC’s decision denying a separate master limited partnership recovery of an income tax allowance and its decision not to require pipelinesthe master limited partnership to lower their transportation rates to account for lower taxes. Following the effective daterefund accumulated deferred income tax balances. In light of the law, the FERC orders granting certificatesrehearing order’s clarification regarding individual entities’ ability to construct proposed pipeline facilities have directed pipelines proposing new rates for service on those facilities to re-file such rates so that the rates reflect the reductionargue in the corporatesupport of recovery of an income tax rate, and FERC has issued data requests in pending certificate proceedings for proposed pipeline facilities requesting pipelines to explainallowance, the impacts of the reductionFERC’s policy on the treatment of income taxes may have on the rates an interstate pipeline held in a tax-pass-through entity can charge for the FERC regulated transportation services are unknown at this time.
By order issued January 16, 2019, the FERC initiated a review of Panhandle’s existing rates pursuant to Section 5 of the NGA to determine whether the rates currently charged by Panhandle are just and reasonable and set the matter for hearing. On August 30, 2019, Panhandle filed a general rate proceeding under Section 4 of the NGA. The NGA Section 5 and Section 4 proceedings were consolidated by FERC in an order dated October 1, 2019. A hearing in the corporate tax ratecombined proceedings commenced on August 25, 2020 and adjourned on September 15, 2020. An initial decision is expected in early 2021.
In March 2019, following the rate proposalsdecision of the D.C. Circuit Court in those proceedingsEmera Maine v. Federal Energy Regulatory Commission, the FERC issued a Notice of Inquiry regarding its policy for determining ROE. The FERC specifically sought information and stakeholder views to provide re-calculated initialhelp the FERC explore whether, and if so, how it should modify its policies concerning the determination of ROE to be used in designing jurisdictional rates charged by public utilities. The FERC also expressly sought comment on whether any changes to its policies concerning public utility ROEs should be applied to interstate natural gas and oil pipelines. Initial comments were due in June 2019, and reply comments were due in July 2019. On May 21, 2020, FERC issued a Policy Statement on Determining Return on Equity for service onNatural Gas and Oil Pipelines establishing a revised policy for determining ROE, including the proposed pipeline facilities. FERC may enact other regulations or issue further requestsuse of the Capital Asset Pricing Model in addition to pipelinesthe Discounted Cash Flow Model for determining ROE and clarification regarding the impactformation of proxy groups for establishing a pipeline’s ROE.
Even without application of FERC’s recent policy statements and rulemakings, under the corporate tax rate change onNGA, FERC or our shippers may challenge the rates.cost of service rates we charge. The FERC’s establishment of a just and reasonable rate is based on many components, including ROE and the reduction in the corporate tax rate may impact two of such components:tax-related components, including the allowance for income taxes and the amount for accumulated deferred income taxes. Becausetaxes, but also other pipeline costs that will continue to affect the FERC’s determination of just and reasonable cost of service rates. Although changes in these two tax related components may decrease, other components in the cost of service rate calculation may increase and result in a newly calculated cost of service rate that is the same as or greater than the prior cost of service rate. Moreover, we receive revenues from our existing jurisdictional rates were establishedpipelines based on a highervariety of rate structures, including cost of service rates, negotiated rates, discounted rates and market-based rates. We do not expect market based rates, negotiated rates or discounted rates that are not tied to the cost of service rates to be materially affected by the Revised Policy Statement or any final regulations that may result from the March 15, 2018 proposals. The revenues we receive from natural gas transportation services we provide pursuant to cost of service based rates may decrease in the future as a result of the ultimate outcome of the Tax Law NOI, the Final Rule, and the Revised Policy Statement, combined with the reduced corporate federal income tax rate established in the Tax Act. The extent of any revenue reduction related to our cost of service rates, if any, will depend on a detailed review of all of ETO’s cost of service components and the outcomes of any challenges to our rates by the FERC or our shippers may challenge these rates in the future, and the resulting new rate may be lower than the rates we currently charge.
shippers.
Our interstate pipelines are subject to laws, regulations and policies governing terms and conditions of service, which could adversely affect our business and results of operations.
In addition to rate oversight, the FERC’s regulatory authority extends to many other aspects of the business and operations of our interstate pipelines, including:
•terms and conditions of service;
•the types of services interstate pipelines may or must offer their customers;
•construction of new facilities;
•acquisition, extension or abandonment of services or facilities;
•reporting and information posting requirements;
•accounts and records; and
•relationships with affiliated companies involved in all aspects of the natural gas and energy businesses.
Compliance with these requirements can be costly and burdensome. In addition, we cannot guarantee that the FERC will authorize tariff changes and other activities we might propose and do so in a timely manner and free from potentially burdensome conditions. Future changes to laws, regulations, policies and interpretations thereof in these and other applicable areas may impair our access to capital markets or may impair the ability of our interstate pipelines to compete for business, may impair their ability to recover costs or may increase the cost and burden of operation.
The current FERC Chairman announced in December 2017 that FERC will review its policies on certification of natural gas pipelines, including an examination of its long-standing Policy Statement on Certification of New Interstate Natural Gas Pipeline Facilities, issued in 1999, that is used to determine whether to grant certificates for new pipeline projects. We are unable to predict what, if any, changes may be proposed that will affect our natural gas pipeline business or when such proposals, if any, might become effective. We do not expect that any change in this policy would affect us in a materially different manner than any other similarly sized natural gas pipeline company operating in the United States.
We may incur significant costs and liabilities resulting from performance of pipeline integrity programs and related repairs.
Pursuant to authority under the NGPSA and HLPSA, PHMSA has established a series of rules requiring pipeline operators to develop and implement integrity management programs for natural gas transmission and hazardous liquid pipelines that, in the event of a pipeline leak or rupture, could affect high consequence areas, or HCAs, which are areas where a release could have the most significant adverse consequences, including high population areas, certain drinking water sources, and unusually sensitive ecological areas. These regulations require operators of covered pipelines to:
•perform ongoing assessments of pipeline integrity;
•identify and characterize applicable threats to pipeline segments that could impact a high consequence area;an HCA;
•improve data collection, integration and analysis;
•repair and remediate the pipeline as necessary; and
•implement preventive and mitigating actions.
In addition, states have adopted regulations similar to existing PHMSA regulations for intrastate gathering and transmission lines. At this time, we cannot predict the ultimate cost of compliance with applicable pipeline integrity management regulations, as the cost will vary significantly depending on the number and extent of any repairs found to be necessary as a result of the pipeline integrity testing. We will continue our pipeline integrity testing programs to assess and maintain the integrity of our pipelines. The results of these tests could cause us to incur significant and unanticipated capital and operating expenditures for repairs or upgrades deemed necessary to ensure the continued safe and reliable operation of our pipelines. Any changes to pipeline safety laws by Congress and regulations by PHMSA that result in more stringent or costly safety standards could have a significant adverse effect on us and similarly situated midstream operators. For example, in January 2017, PHMSA issued a final rule for hazardous liquid pipelines that significantly expands the reach of certain PHMSA integrity management requirements, such as, for example, periodic assessments, leak detection and repairs, regardless of the pipeline’spipeline���s proximity to a HCA. The final rule also imposes new reporting requirements for certain unregulated pipelines, including all hazardous liquid gathering lines. However, the date of implementation of this final rule by publication in the Federal Register is uncertain given the recent change in Presidential Administrations. In a second example, in April 2016, PHMSA published a proposed rulemaking that would impose new or more stringent requirements for certain natural gas lines and gathering lines including, among other things, expanding certain of PHMSA’s current regulatory safety programs for natural gas pipelines in newly defined “moderate consequence areas” that contain as few as 5 dwellings within
a potential impact area; requiring gas pipelines installed before 1970 and thus excluded from certain pressure testing obligations to be tested to determine their maximum allowable operating pressure (“MAOP”); and requiring certain onshore and offshore gathering lines in Class I areas to comply with damage prevention, corrosion control, public education, MAOP limits, line markers and emergency planning standards. Additional requirements proposed by this proposed rulemaking would increase PHMSA’s integrity management requirements and also require consideration of seismicity in evaluating threats to pipelines. The changes adopted or proposed by these rulemakings or made in future legal requirements could have a material adverse effect on our results of operations and costs of transportation services.
Federal, state and local jurisdictions may challenge the Company’s tax return positions.
The positions taken by the tax return filings of the Company’s parent company require significant judgment, use of estimates, and the interpretation and application of complex tax laws. Significant judgment is also required in assessing the timing and amounts of deductible and taxable items. Despite management’s belief that the tax return positions are fully supportable, certain positions may be challenged successfully by federal, state and local jurisdictions.
The Company is subject to extensive federal, state and local laws and regulations regulating the environmental aspects of its business that may increase its costs of operations, expose it to environmental liabilities and require it to make material unbudgeted expenditures.
The Company is subject to extensive federal, state and local laws and regulations regulating the environmental aspects of its business (including air emissions), which are complex, change from time to time and have tended to become increasingly strict. These laws and regulations have necessitated, and in the future may necessitate, increased capital expenditures and operating costs. In addition, certain environmental laws may result in liability without regard to fault concerning contamination at a broad range of properties, including currently or formerly owned, leased or operated properties and properties where the Company disposed of, or arranged for the disposal of, waste.
The Company is currently monitoring or remediating contamination at several of its facilities and at waste disposal sites pursuant to environmental laws and regulations and indemnification agreements. The Company cannot predict with certainty the sites for which it may be responsible, the amount of resulting cleanup obligations that may be imposed on it or the amount and timing of future expenditures related to environmental remediation because of the difficulty of estimating cleanup costs and the uncertainty of payment by other PRPs.potentially responsible parties.
Costs and obligations also can arise from claims for toxic torts and natural resource damages or from releases of hazardous materials on other properties as a result of ongoing operations or disposal of waste. Compliance with amended, new or more stringently enforced existing environmental requirements, or the future discovery of contamination, may require material unbudgeted expenditures. These costs or expenditures could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows, particularly if such costs or expenditures are not fully recoverable from insurance or through the rates charged to customers or if they exceed any amounts that have been reserved.
An impairment of goodwill and intangible assets could reduce our earnings.
Goodwill is recorded when the purchase price of a business exceeds the fair value of the tangible and separately measurable intangible net assets. Accounting principles generally accepted in the United States require us to test goodwill for impairment on an annual basis or when events or circumstances occur, indicating that goodwill might be impaired. Long-lived assets such as intangible assets with finite useful lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If we determine that any of our goodwill or intangible assets were impaired, we would be required to take an immediate charge to earnings with a correlative effect on partners’ capital and balance sheet leverage as measured by debt to total capitalization.
The Company’s business could be affected adversely by union disputes and strikes or work stoppages by its unionized employees.
As of December 31, 2017, 208 of the Company’s 496 employees were represented by collective bargaining units under collective bargaining agreements. Any future work stoppage could, depending on the affected operations and the length of the work stoppage, have a material adverse effect on the Company’s business, financial position, results of operations or cash flows.
The adoption of climate change legislation or regulations restricting emissions of greenhouse gases could result in increased operating costs and reduced demand for the services we provide.
The EPAUnited States Environmental Protection Act (“EPA”) has determined that emissions of carbon dioxide, methane and other greenhouse gases present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth’s atmosphere and other climatic changes. Based on these findings, the EPA has adopted rules under the Clean Air Act that, among
other things, establish PSDPotential for Significant Deterioration (“PSD”) construction and Title V operating permit reviews for greenhouse gas emissions from certain large stationary sources that already are potential major sources of certain principal, or criteria, pollutant emissions, which reviews could require securing PSD permits at covered facilities emitting greenhouse gases and meeting “best available control technology” standards for those greenhouse gas emissions. In addition, the EPA has adopted rules requiring the monitoring and annual reporting of greenhouse gas emissions from specified onshore and offshore production facilities and onshore processing, transmission and storage
facilities in the United States, which includes certain of our operations. More recently, onIn October 22, 2015, the EPA published a final rule that expands the petroleum and natural gas system sources for which annual greenhouse gas emissions reporting is currently required to include greenhouse gas emissions reporting beginning in the 2016 reporting year for certain onshore gathering and boosting systems consisting primarily of gathering pipelines, compressors and process equipment used to perform natural gas compression, dehydration and acid gas removal. While Congress has from time to time considered adopting legislation to reduce emissions of greenhouse gases, there has not been significant activity in the form of adopted legislation. In the absence of such federal climate legislation, a number of state and regional efforts have emerged that are aimed at tracking and/or reducing greenhouse gas emissions by means of cap and trade programs. The adoption of any legislation or regulations that requires reporting of greenhouse gases or otherwise restricts emissions of greenhouse gases from our equipment and operations could require us to incur significant added costs to reduce emissions of greenhouse gases or could adversely affect demand for the natural gas and NGLsnatural gas liquids we gather and process or fractionate.
Additional deepwater drilling laws and regulations, delays in the processing and approval of drilling permits and exploration, development, oil spill-response and decommissioning plans, and other related developments may have a material adverse effect on our business, financial condition, or results of operations.
The federal Bureau of Ocean Energy Management (“BOEM”) and the federal Bureau of Safety and Environmental Enforcement (“BSEE”), each agencies of the United States Department of the Interior, have imposed more stringent permitting procedures and regulatory safety and performance requirements for new wells to be drilled in federal waters. Compliance with these more stringent regulatory requirements and with existing environmental and oil spill regulations, together with any uncertainties or inconsistencies in decisions and rulings by governmental agencies, delays in the processing and approval of drilling permits or exploration, development, oil spill-response and decommissioning plans, and possible additional regulatory initiatives could result in difficult and more costly actions and adversely affect or delay new drilling and ongoing development efforts.
In addition, new regulatory initiatives may be adopted or enforced by the BOEM or the BSEE in the future that could result in additional costs, delays, restrictions, or obligations with respect to oil and natural gas exploration and production operations conducted offshore by certain of our customers. For example, in April 2016, the BOEM published a proposed rule that would update existing air-emissions requirements relating to offshore oil and natural-gasnatural gas activity on federal Outer Continental Shelf waters. However, in May 2017, Order 3350 was issued by the Department of the Interior Secretary Ryan Zinke, directing the BOEM to reconsider a number of regulatory initiatives governing oil and gas exploration in offshore waters, including, among other things, a cessation of all activities to promulgate the April 2016 proposed rulemaking (“Order 3350”). In an unrelated legal initiative, BOEM issued a Notice to Lessees and Operators (“NTL #2016-N01”) that became effective in September 2016 and imposes more stringent requirements relating to the provision of financial assurance to satisfy decommissioning obligations. Together with a recent re-assessment by BSEE in 2016 in how it determines the amount of financial assurance required, the revised BOEM-administered offshore financial assurance program that is currently being implemented is expected to result in increased amounts of financial assurance being required of operators on the OCS, which amounts may be significant. However, as directed under Order 3350, the BOEM has delayed implementation of NTL #2016-N01 so that it may reconsider this regulatory initiative and, currently, this NTL’s implementation timeline has been extended indefinitely beyond June 30, 2017, except in certain circumstances where there is a substantial risk of nonperformance of the interest holder’s decommissioning liabilities. The April 2016 proposed rule and NTL #2016-N01, should they be finalized and/or implemented, as well as any new rules, regulations, or legal initiatives could delay or disrupt our customers operations, increase the risk of expired leases due to the time required to develop new technology, result in increased supplemental bonding and costs, limit activities in certain areas, or cause our customers’ to incur penalties, or shut-in production or lease cancellation. Also, if material spill events were to occur in the future, the United States or other countries could elect to issue directives to temporarily cease drilling activities offshore and, in any event, may from time to time issue further safety and environmental laws and regulations regarding offshore oil and gas exploration and development. The overall costs imposed on our customers to implement and complete any such spill response activities or any decommissioning obligations could exceed estimated accruals, insurance limits, or supplemental bonding amounts, which could result in the incurrence of additional costs to complete. We cannot predict with any certainty the full impact of any new laws or regulations on our customers’ drilling operations or on the cost or availability of insurance to cover some or all of the risks associated with such operations. The occurrence of any one or more of these developments could result in decreased demand for our services, which could have a material adverse effect on our business as well as our financial position, results of operation and liquidity.
Competition for water resources or limitations on water usage for hydraulic fracturing could disrupt crude oil and natural gas production from shale formations.
The costsHydraulic fracturing is the process of providing postretirement health care benefitscreating or expanding cracks by pumping water, sand and related funding requirements are subjectchemicals under high pressure into an underground formation in order to changesincrease the productivity of crude oil and natural gas wells. Water used in other postretirement fund valuesthe process
is generally fresh water, recycled produced water or salt water. There is competition for fresh water from municipalities, farmers, ranchers and fluctuating actuarial assumptions and may have a material adverse effect on the Company’s financial results.industrial users. In addition, the passageavailable supply of the Health Care Reform Act in 2010 could significantlyfresh water can also be reduced directly by drought. Prolonged drought conditions increase the costintensity of providing health care benefitscompetition for Company employees.
The Company provides postretirement healthcare benefits to certain of its employees. The costs of providing postretirement health care benefitsfresh water. Limitations on oil and related funding requirements are subject to changes in postretirement fund values and fluctuating actuarial assumptions that may have a material adverse effect on the Company’s future financial results. In addition, the passage of the Health Care Reform Act of 2010 could significantly increase the cost of health care benefits for its employees. While certain of the costs incurred in providing such postretirement healthcare benefits are recovered through the rates charged by the Company’s regulated businesses, the Company may not recover all of its costs and those rates are generally not immediately responsive to current market conditions or funding requirements. Additionally, if the current cost recovery mechanisms are changed or eliminated, the impact of these benefits on operating results could significantly increase.
The Company’s business is highly regulated.
The Company’s transportation and storage business is subject to regulation by federal, state and local regulatory authorities. FERC, the United States Department of Transportation and various state and local regulatory agencies regulate the interstate pipeline business. In particular, FERC has authority to regulate rates charged by the Company for the transportation and storage of natural gas in interstate commerce. FERC also has authority over the construction, acquisition, operation and disposition of these pipeline and storage assets.
The Company’s rates and operations are subject to extensive regulation by federal regulators as well as the actions of Congress and state legislatures and, in some respects, state regulators. The Company cannot predict or control what effect future actions of regulatory agencies may have on its business or itsproducers’ access to the capital markets. Furthermore, the nature and degree of regulation of natural gas companies has changed significantly during the past several decades and there is no assurance that further substantial changes will not occur or that existing policies and rules will not be applied in a new or different manner. Should new and more stringent regulatory requirements be imposed, the Company’s business could be unfavorably impacted and the Company could be subject to additional costs that could adversely affect its financial condition or results of operations if these costs are not ultimately recovered through rates.
The Company’s transportation and storage business is also influenced by fluctuations in costs, including operating costs such as insurance, postretirement and other benefit costs, wages, outside contractor services costs, asset retirement obligations for certain assets and other operating costs. The profitability of regulated operations depends on the business’fresh water may restrict their ability to collect such increased costs as a part of the rates charged to its customers. To the extent that such operating costs increase in an amount greater than that for which revenue is received, or for which rate recovery is allowed, this differentialuse hydraulic fracturing and could impact operating results. The lag between an increase in costs and the ability of the Company to file to obtain rate relief from FERC to recover those increased costs can have a direct negative impact on operating results. As with any request for an increase in rates in a regulatory filing, once granted, the rate increase may not be adequate. In addition, FERC may prevent the business from passing along certain costs in the form of higher rates. Competition may prevent the recovery of increased costs even if allowed in rates.
FERC may also exercise its Section 5 authority to initiate proceedings to review rates that it believes may not be just and reasonable. FERC has recently exercised this authority with respect to several other pipeline companies, as it had in 2007 with respect to Southwest Gas. If FERC were to initiate a Section 5 proceeding against the Company and find that the Company’s rates at that time were not just and reasonable due to a lower rate base, reduced or disallowed operating costs, or other factors, the applicable maximum rates the Company is allowed to charge customers could be reduced and the reductionreduce new production. Such disruptions could potentially have a material adverse effectimpact on our financial condition or results of operations.
Risks Related to our Structure
Our General Partner.
The Company is controlled by ETO.
The Company is an indirect wholly-owned subsidiary of ETO. ETO executives serve as the board of managers and as executive officers of the Company. Accordingly, ETO controls and directs all of the Company’s business financial condition, resultsaffairs, decides all matters submitted for member approval and may unilaterally effect changes to its management team. In circumstances involving a conflict of operations or cash flows.
A rate reduction is also a possible outcome with any Section 4 rate case proceeding forinterest between ETO, on the regulated entities ofone hand, and the Company’s creditors, on the other hand, the Company including any rate case proceeding requiredcan give no assurance that ETO would not exercise its power to be filed as a result of a prior rate case settlement. A regulated entity’s rate base, upon which a rate of return is allowed in the derivation of maximum rates, is primarily determined by a combination of accumulated capital investments, accumulated regulatory basis depreciation, and accumulated deferred income taxes. Such rate base can decline due to capital investments being less than depreciation over a period of time, or due to accelerated tax depreciation in excess of regulatory basis depreciation.
In March 2016, the FERC commenced an audit of Trunkline for the period from January 1, 2013 to present to evaluate Trunkline’s compliance with the requirements of its FERC gas tariff, the accounting regulations of the Uniform System of Accounts as prescribed by the FERC, and the FERC’s annual reporting requirements. The audit is ongoing.
The pipeline business ofcontrol the Company is subject to competition.
The interstate pipeline and storage business of the Company competes with those of other interstate and intrastate pipeline companies in the transportation and storage of natural gas. The principal elements of competition among pipelines are rates, terms of service and the flexibility and reliability of service. Natural gas competes with other forms of energy availablea manner that would benefit ETO to the Company’s customers and end-users, including electricity, coal and fuel oils. The primary competitive factor is price. Changes in the availability or price of natural gas and other forms of energy, the level of business activity, conservation, legislation and governmental regulations, the capability to convert to alternate fuels and other factors, including weather and natural gas storage levels, affect the demand for natural gas in the areas served by the Company.
Substantial risks are involved in operating a natural gas pipeline system.
Numerous operational risks are associated with the operation of a complex pipeline system. These include adverse weather conditions, accidents, the breakdown or failure of equipment or processes, the performance of pipeline facilities below expected levels of capacity and efficiency, the collision of equipment with pipeline facilities (such as may occur if a third party were to perform excavation or construction work near the facilities) and other catastrophic events beyond the Company’s control. In particular, the Company’s pipeline system, especially those portions that are located offshore, may be subject to adverse weather conditions, including hurricanes, earthquakes, tornadoes, extreme temperatures and other natural phenomena, making it more difficult for the Company to realize the historic rates of return associated with these assets and operations. A casualty occurrence might result in injury or loss of life, extensive property damage or environmental damage. Insurance proceeds may not be adequate to cover all liabilities or expenses incurred or revenues lost.
Fluctuations in energy commodity prices could adversely affect the business of the Company.
If natural gas prices in the supply basins connected to the pipeline systems of the Company are competitive with prices in other natural gas producing regions able to serve the Company’s customers, the volume of natural gas transported by the Company may be negatively impacted. Natural gas prices can also affect customer demand for the various services provided by the Company.
The pipeline business of the Company is dependent on a small number of customers for a significant percentage of its sales.
Historically, a small number of customers has accounted for a large portiondetriment of the Company’s revenue.creditors.
Risks Related to Conflicts of Interest
Some of our executive officers and directors face potential conflicts of interest in managing our business.
Certain of our executive officers and directors are also officers and/or directors of ET and/or ETO. These relationships may create conflicts of interest regarding corporate opportunities and other matters. The lossresolution of any onesuch conflicts may not always be in our or moreour creditors’ best interests. In addition, these overlapping executive officers and directors allocate their time among us and ET and/or ETO. These officers and directors face potential conflicts regarding the allocation of these customers could have a material adverse effect on the Company’stheir time, which may adversely affect our business, financial condition, results of operations or cash flows.
The success of the Company depends on the continued development of additional natural gas reserves in the vicinity of its facilities and its ability to access additional reserves to offset the natural decline from existing sources connected to its system.
The amount of revenue generated by the Company ultimately depends upon its access to reserves of available natural gas. As the reserves available through the supply basins connected to the Company’s system naturally decline, a decrease in development or production activity could cause a decrease in the volume of natural gas available for transmission. If production from these natural gas reserves is substantially reduced and not replaced with other sources of natural gas, such as new wells or interconnections with other pipelines, and certain of the Company’s assets are consequently not utilized, the Company may have to accelerate the recognition and settlement of asset retirement obligations. Investments by third parties in the development of new natural gas reserves or other sources of natural gas in proximity to the Company’s facilities depend on many factors beyond the Company’s control. Revenue reductions or the acceleration of asset retirement obligations resulting from the decline of natural gas reserves and the lack of new sources of natural gas may have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.financial condition.
The pipeline revenues of the CompanyOur affiliates may compete with us.
Our affiliates and related parties are generated under contractsnot prohibited from engaging in other businesses or activities, including those that mustmight be renegotiated periodically.
The pipeline revenues of the Company are generated under natural gas transportation contracts that expire periodically and must be replaced. Although the Company will actively pursue the renegotiation, extension and/or replacement of all of its contracts, it cannot assure that it will be able to extend or replace these contracts when they expire or that the terms of any renegotiated contracts will be as favorable as the existing contracts. If the Company is unable to renew, extend or replace these contracts, or if the Company renews them on less favorable terms, it may suffer a material reduction in revenues and earnings.
direct competition with us.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This reportcontains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. Forward-looking statements are based on management’s beliefs and assumptions. These forward-looking statements, which address the Company’s expected business and financial performance, among other matters, are identified by terms and phrases such as: anticipate, believe, intend, estimate, expect, continue, should, could, may, plan, project, predict, will, potential, forecast and similar expressions. Forward-looking statements involve risks and uncertainties that may or could cause actual results to be materially different from the results predicted. Factors that could cause actual results to differ materially from those indicated in any forward-looking statement include, but are not limited to:
•changes in demand for natural gas and related services by customers, in the composition of the Company’s customer base and in the sources of natural gas accessible to the Company’s system;
•the effects of inflation and the timing and extent of changes in the prices and overall demand for and availability of natural gas as well as electricity, oil, coal and other bulk materials and chemicals;
•adverse weather conditions, such as warmer or colder than normal weather in the Company’s service territories, as applicable, and the operational impact of natural disasters;
•changes in laws or regulations, third-party relations and approvals, and decisions of courts, regulators and/or governmental bodies affecting or involving the Company, including deregulation initiatives and the impact of rate and tariff proceedings before FERC and various state regulatory commissions;
•the speed and degree to which additional competition, including competition from alternative forms of energy, is introduced to the Company’s business and the resulting effect on revenues;
•the impact and outcome of pending and future litigation and/or regulatory investigations, proceedings or inquiries;
•the ability to comply with or to successfully challenge existing and/or or new environmental, safety and other laws and regulations;
•unanticipated environmental liabilities;
•the uncertainty of estimates, including accruals and costs of environmental remediation;
•the impact of potential impairment charges;
•the ability to acquire new businesses and assets and to integrate those operations into its existing operations, as well as its ability to expand its existing businesses and facilities;
•the timely receipt of required approvals by applicable governmental entities for the construction and operation of the pipelines and other projects;
•the ability to complete expansion projects on time and on budget;
•the ability to control costs successfully and achieve operating efficiencies, including the purchase and implementation of new technologies for achieving such efficiencies;
•the impact of factors affecting operations such as maintenance or repairs, environmental incidents, natural gas pipeline system constraints and relations with labor unions representing bargaining-unit employees;
•the performance of contractual obligations by customers, service providers and contractors;
•exposure to customer concentrations with a significant portion of revenues realized from a relatively small number of customers and any credit risks associated with the financial position of those customers;
•changes in the ratings of the Company’s debt securities;
•the risk of a prolonged slow-down in growth or decline in the United States economy or the risk of delay in growth or decline in the United States economy, including liquidity risks in United States credit markets;
•the impact of unsold pipeline capacity being greater than expected;
•changes in interest rates and other general market and economic conditions, and in the Company’s ability to obtain additional financing on acceptable terms, whether in the capital markets or otherwise;
•declines in the market prices of equity and debt securities and resulting funding requirements for other postretirement benefit plans;
•acts of nature, sabotage, terrorism or other similar acts that cause damage to the facilities or those of the Company’s suppliers’ or customers’ facilities;
•market risks beyond the Company’s control affecting its risk management activities including market liquidity, commodity price volatility and counterparty creditworthiness;
•the availability/cost of insurance coverage and the ability to collect under existing insurance policies;
•the risk that material weaknesses or significant deficiencies in internal controls over financial reporting could emerge or that minor problems could become significant;
•changes in accounting rules, regulations and pronouncements that impact the measurement of the results of operations, the timing of when such measurements are to be made and recorded and the disclosures surrounding these activities;
•the effects of changes in governmental policies and regulatory actions, including changes with respect to income and other taxes, environmental compliance, climate change initiatives, authorized rates of recovery of costs (including pipeline relocation costs), and permitting for new natural gas production accessible to the Company’s systems;
•market risks affecting the Company’s pricing of its services provided and renewal of significant customer contracts;
•actions taken to protect species under the Endangered Species Act and the effect of those actions on the Company’s operations;
•the impact of union disputes, employee strikes or work stoppages and other labor-related disruptions; and
•other risks and unforeseen events, including other financial, operational and legal risks and uncertainties detailed from time to time in filings with the SEC.
These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of the Company’s forward-looking statements. Other factors could also have material adverse effects on the Company’s future results. In light of these risks, uncertainties and assumptions, the events described in forward-looking statements might not occur or might occur to a different extent or at a different time than the Company has described. The
Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
See “Item 1. Business” for information concerning the general location and characteristics of the important physical properties and assets of the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company and certain of its affiliates are occasionally parties to lawsuits and administrative proceedings incidental to their businesses involving, for example, claims for personal injury and property damage, contractual matters, various tax matters, and rates and licensing. The Company and its affiliates are also subject to various federal, state and local laws and regulations relating to the environment, as described in “Item 1. Business – Regulation.” Several of these companies have been named parties to various actions involving environmental issues. Based on the Company’s current knowledge and subject to future legal and factual developments, the Company’s management believes that it is unlikely that these actions, individually or in the aggregate, will have a material adverse effect on its consolidated financial position, results of operations or cash flows. For additional information regarding various pending administrative and judicial proceedings involving regulatory, environmental and other legal matters, reference is made to Note 98 to our consolidated financial statements.statements included in “Item 8. Financial Statements and Supplementary Data.” Also see “Item 1A. Risk Factors.”
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON UNITS, RELATED UNITHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Southern Union Panhandle LLC, an indirect wholly-owned subsidiary of ETP,ETO, owns a 1% general partnershippartner interest in PEPL and ETPETO indirectly owns a 99% limited partnershippartner interest in PEPL.
ITEM 6. SELECTED FINANCIAL DATA
“Item 6,6. Selected Financial Data,” has been omitted from this report pursuant to the reduced disclosure format permitted by General Instruction I to Form 10-K.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Tabular dollar amounts are in millions)
The information in Item 7 has been prepared pursuant to the reduced disclosure format permitted by General Instruction I to Form 10-K. Accordingly, this Item 7 includes only management’s narrative analysis of the results of operations and certain supplemental information.
Overview
The Company’s business is conducted through both short- and long-term contracts with customers. Shorter-term contracts, both firm and interruptible, tend to have a greater impact on the volatility of revenues. Short-term and long-term contracts are affected by changes in market conditions and competition with other pipelines, changing supply sources and volatility in natural gas prices and basis differentials. Demand for natural gas transmission services on the Company’s pipeline system is seasonal, with the highest throughput and a higher portion of annual total operating revenues occurring in the traditional winter heating season, which occurs during the first and fourth calendar quarters. Since the majority of the Company’s revenues are related to firm capacity reservation charges, which customers pay whether they utilize their contracted capacity or not, volumes transported do not have as significant an impact on revenues over the short-term. However, longer-term demand for capacity may be affected by changes in the customers’ actual and anticipated utilization of their contracted capacity and other factors. For additional information concerning the Company’s related risk factors and the weighted average remaining lives of firm transportation and storage contracts, see “Item 1A. Risk Factors” and “Item 1. Business,” respectively.
The Company’s regulated transportation and storage businesses can file (or be required to file) for changes in their rates, which are subject to approval by FERC. Although a significant portion of the Company’s contracts are discounted or negotiated rate contracts, changes in rates and other tariff provisions resulting from regulatory proceedings have the potential to impact negatively the Company’s results of operations and financial condition. For information related to the status of current rate filings, see “Item 1. Business – Regulation.”
Results of Operations
| | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 |
OPERATING REVENUES: | | | |
Transportation and storage of natural gas | $ | 528 | | | $ | 556 | |
| | | |
| | | |
Other | 19 | | | 22 | |
Total operating revenues (1) | 547 | | | 578 | |
OPERATING EXPENSES: | | | |
| | | |
Operating and maintenance | 177 | | | 193 | |
General and administrative | 37 | | | 30 | |
Depreciation and amortization | 116 | | | 112 | |
Impairment losses | — | | | 12 | |
Total operating expenses | 330 | | | 347 | |
OPERATING INCOME | 217 | | | 231 | |
OTHER EXPENSE: | | | |
Interest expense, net | (14) | | | (17) | |
Interest expense - related company | (32) | | | (25) | |
| | | |
Other, net | (3) | | | (2) | |
Total other expense, net | (49) | | | (44) | |
INCOME BEFORE INCOME TAX BENEFIT | 168 | | | 187 | |
Income tax benefit | (3) | | | (402) | |
NET INCOME | $ | 171 | | | $ | 589 | |
| | | |
| | | |
Natural gas volumes transported (TBtu): (2) | | | |
Panhandle | 759 | | | 892 | |
Trunkline | 569 | | | 730 | |
Sea Robin | 67 | | | 102 | |
|
| | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 |
OPERATING REVENUES: | | | |
Transportation and storage of natural gas | $ | 460 |
| | $ | 494 |
|
Other | 20 |
| | 20 |
|
Total operating revenues (1) | 480 |
| | 514 |
|
OPERATING EXPENSES: | | | |
Cost of natural gas and other energy | 3 |
| | 2 |
|
Operating and maintenance | 199 |
| | 209 |
|
General and administrative | 36 |
| | 39 |
|
Depreciation and amortization | 127 |
| | 130 |
|
Impairment losses | 389 |
| | 771 |
|
Total operating expenses | 754 |
| | 1,151 |
|
OPERATING LOSS | (274 | ) | | (637 | ) |
OTHER INCOME (EXPENSE): | | | |
Interest expense, net | (46 | ) | | (49 | ) |
Interest income - affiliates | 10 |
| | 26 |
|
Other, net | 2 |
| | 1 |
|
Total other expense, net | (34 | ) | | (22 | ) |
LOSS BEFORE INCOME TAX BENEFIT | (308 | ) | | (659 | ) |
Income tax benefit | (263 | ) | | (13 | ) |
NET LOSS | $ | (45 | ) | | $ | (646 | ) |
Natural gas volumes transported (TBtu): (2) | | | |
PEPL | 636 |
| | 609 |
|
Trunkline | 525 |
| | 480 |
|
Sea Robin | 73 |
| | 85 |
|
(1)Reservation revenues comprised 88% and 90% of total operating revenues for the years ended December 31, 2020 and 2019, respectively. | |
(1)(2)Includes transportation deliveries made throughout the Company’s pipeline network. | Reservation revenues comprised 91% and 89% of total operating revenues for the years ended December 31, 2017 and 2016, respectively.
|
| |
(2)
| Includes transportation deliveries made throughout the Company’s pipeline network. |
The following is a discussion of the significant items and variances impacting the Company’s net income during the periods presented above:
•Operating Revenues. revenues. Operating revenues decreased for the year endedDecember 31, 2020 compared to the prior year primarily due to lower capacity sold and lower utilization of sold capacity.
•Operating and maintenance. Operating and maintenance expense decreased for the year ended December 31, 20172020 compared to the prior year on Panhandle and Trunklineprimarily due to lower customer demand driven by weak spreadsemployee costs and mild weatherlower maintenance project costs.
•General and on Sea Robin due to producer maintenanceadministrative. General and production declines.
Impairment Losses. The Company recorded $389 million impairment lossesadministrative expense increased for the year ended December 31, 2017, which is comprised of $262 million2020 compared to the prior year due to an increase in overhead costs allocated by the parent company.
•Impairment losses. The Company recognized a goodwill impairment of $12 million in the year ended December 31, 2019 related to TrunklineSouthwest Gas, primarily due to decreases in projected future revenues and cash flows and $127 million fixed asset impairment for Sea Robin due to lower utilization and expected further decrease in projected future cash flows. For the year ended December 31, 2016, the Company recorded a $133 million impairment
•Interest expense - related to Sea Robin property, plant and equipment and goodwill impairments of $590 million and $48 millioncompany. Interest expense - related to PEPL and Sea Robin, respectively, primarily due to decreases in projected future revenues and cash flows driven by declines in commodity prices and changes in the markets that these assets serve.
Interest income - affiliates. The decreasecompany increased for the year ended December 31, 20172020 compared to the prior year is primarily due to the settlement ofhigher average borrowings outstanding under a note receivablepayable issued from a subsidiary of ETP in August of 2016.
ETO.•Income Taxes. The change in the effective ratetaxes. Income tax benefit decreased for the year ended December 31, 2017 was2020 compared to the prior year primarily due to the reductionPEPL Restructuring transaction in July 2019. In connection with the restructuring, PEPL’s tax sharing agreement with its former corporate parent was terminated, and PEPL is no longer subject to corporate level
income tax. PEPL reversed all of its existing deferred tax assets and liabilities in July 2019, which resulted in the federal corporate income rate perrecognition of a $428 million non-cash benefit in the “Tax Cuts and Jobs Act,” as discussed in Note 2 to our consolidated financial
statement of operations.
statements included in “Item 8. Financial Statements and Supplementary Data,” as well as to goodwill impairments recorded in 2016, as discussed above, for which the Company does not recognize a tax benefit.
OTHER MATTERS
Environmental Matters
The Company is subject to federal, state and local laws and regulations relating to the protection of the environment. These evolving laws and regulations may require expenditures over a long period of time to control environmental impacts. The Company has established procedures for the ongoing evaluation of its operations to identify potential environmental exposures. These procedures are designed to achieve compliance with such laws and regulations. For additional information concerning the impact of environmental regulation on the Company, see Note 98 to our consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data.”
Contingencies and Regulatory Matters
See “Item 1. Business - Regulation” and Note 98 to our consolidated financial statements. included in “Item 8. Financial Statements and Supplementary Data.”
Contractual Obligations
The following table summarizes the Company’s expected contractual obligations by payment due date as of December 31, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 and thereafter |
Operating leases (1) | $ | 11 |
| | $ | 2 |
| | $ | 2 |
| | $ | 2 |
| | $ | 2 |
| | $ | 1 |
| | $ | 2 |
|
Total long-term debt (2) (3) | 790 |
| | 400 |
| | 150 |
| | — |
| | — |
| | 5 |
| | 235 |
|
Interest payments on debt (4) | 280 |
| | 43 |
| | 22 |
| | 16 |
| | 16 |
| | 16 |
| | 167 |
|
Natural gas purchases (5) | 31 |
| | 3 |
| | 3 |
| | 3 |
| | 2 |
| | 2 |
| | 18 |
|
Firm capacity payments (6) | 24 |
| | 18 |
| | 6 |
| | — |
| | — |
| | — |
| | — |
|
OPEB funding (7) | 48 |
| | 8 |
| | 8 |
| | 8 |
| | 8 |
| | 8 |
| | 8 |
|
Total (8) | $ | 1,184 |
| | $ | 474 |
| | $ | 191 |
| | $ | 29 |
| | $ | 28 |
| | $ | 32 |
| | $ | 430 |
|
| |
(1)
| Lease of various assets utilized for operations. |
| |
(2)
| The Company is party to debt agreements containing certain covenants that, if not satisfied, would give rise to an event of default that would cause such debt to become immediately due and payable. Such covenants require the Company to maintain a fixed charge coverage ratio, a leverage ratio and to meet certain ratios of earnings before depreciation, interest and taxes to cash interest expense. At December 31, 2017, the Company was in compliance with all of its covenants. See Note 5 to our consolidated financial statements. |
| |
(3)
| The long-term debt cash obligations exclude $28 million of unamortized fair value adjustments as of December 31, 2017. |
| |
(4)
| Interest payments on debt are based upon the applicable stated or variable interest rates as of December 31, 2017. |
| |
(5)
| The Company has tariffs in effect for its utility service areas that provide for recovery of its purchased natural gas costs under defined methodologies. |
| |
(6)
| Charges for third party storage capacity. |
| |
(7)
| PEPL is committed to the funding levels of $8 million per year until modified by future rate proceedings, the timing of which is uncertain. |
| |
(8)
| Excludes non-current deferred tax liability of $451 million due to uncertainty of the timing of future cash flows for such liabilities. |
Inflation
The Company believes that inflation has caused, and may continue to cause, increases in certain operating expenses, and will continue to result in higher capital replacement and construction costs. The Company continually reviews the adequacy of its rates in relation to such increasing cost of providing services, the inherent regulatory lag in adjusting its tariff rates and the rates it is actually able to charge in its markets.
New Accounting Standards
ASU 2014-09
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which clarifies the principles for recognizing revenue based on the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted ASU 2014-09 on January 1, 2018. The Company applied the cumulative catchup transition method and recognized the cumulative effect of the retrospective application of the standard. The effect of the retrospective application of the standard was not material.
For future periods, we do not expect that the adoption of this standard will result in a change to revenues and costs in our consolidated statements of operations.
ASU 2016-02
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which establishes the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The Company expects to adopt ASU 2016-02 in the first quarter of 2019 and is currently evaluating the impact that adopting this new standard will have on the consolidated financial statements and related disclosures.
ASU 2016-16
On January 1, 2018, the Company adopted Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which requires that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this update do not change GAAP for the pre-tax effects of an intra-entity asset transfer under Topic 810, Consolidation, or for an intra-entity transfer of inventory. We do not anticipate a material impact to our financial position or results of operations as a result of the adoption of this standard.
ASU 2017-04
In January 2017, the FASB issued ASU No. 2017-04 “Intangibles-Goodwill and other (Topic 350): Simplifying the test for goodwill impairment”. The amendments in this update remove the second step of the two-step test currently required by Topic 350. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The standard requires prospective application and therefore will only impact periods subsequent to adoption. The Company adopted this ASU for its annual goodwill impairment test in the fourth quarter of 2017.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
AtAs of December 31, 2017,2020, the Company had $54 million of floating rate debt outstanding. A hypothetical change of 100 basis points would result in a maximum potential change to interest rate on 93%expense of the Company’s long-term debt was fixed with no outstanding interest rate swaps.less than $1 million annually.
Commodity Price Risk
The Company is exposed to some commodity price risk with respect to natural gas used in operations by its interstate pipelines. Specifically, the pipelines receive natural gas from customers for use in generating compression to move the customers’ natural gas. Additionally, the pipelines may have to settle system imbalances when customers’ actual receipts and deliveries do not match. When the amount of natural gas utilized in operations by the pipelines differs from the amount provided by customers, the pipelines may use natural gas from inventory or may have to buy or sell natural gas to cover these or other operational needs, resulting in commodity price risk exposure to the Company. In addition, there is other indirect exposure to the extent commodity price changes affect customer demand for and utilization of transportation and storage services provided by the Company. At December 31, 2017,2020, the Company had no hedges outstanding.
Credit Risk
Credit risk refers to the risk that a shipper may default on its contractual obligations resulting in a credit loss to the Company. A credit policy has been approved and implemented to govern the Company’s portfolio of shippers with the objective of mitigating credit losses. This policy establishes guidelines, controls, and limits, consistent with FERC filed tariffs, to manage credit risk within approved tolerances by mandating an appropriate evaluation of the financial condition of existing and potential shippers, monitoring agency credit ratings, and by implementing credit practices that limit credit exposure according to the risk profiles of the shippers. Furthermore, the Company may, at times, require collateralcredit support under certain circumstances in order to mitigate credit risk as necessary.
The Company’s shippers consist of a diverse portfolio of customers across the energy industry, including oil and gas producers, midstream companies, municipalities, electric and gas utilities, and commercial and industrial end users. Our overall exposure may be affected positively or negatively by macroeconomic or regulatory changes that could impact our shippers to one extent or another. Currently, management does not anticipate a material adverse effect in our financial position or results of operations as a consequence of shipper non-performance.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements starting on page F-1 of this report are incorporated by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management, including the ChiefCo-Chief Executive OfficerOfficers and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such terms are defined in Rules 13a–15(e) and 15d–15(e) of the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, management, including the ChiefCo-Chief Executive OfficerOfficers and Chief Financial Officer, concluded that our disclosure controls and procedures were adequate and effective as of December 31, 2017.2020.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including the ChiefCo-Chief Executive OfficerOfficers and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO framework”).
Based on our evaluation under the COSO framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.2020.
Changes in Internal Control over Financial Reporting There has been no change in our internal control over financial reporting (as defined in Rules 13a–15(f) or Rule 15d–15(f)) that occurred in the three months ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
“Item 10,10. Directors, Executive Officers and Corporate Governance,” has been omitted from this report pursuant to the reduced disclosure format permitted by General Instruction I to Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
“Item 11,11. Executive Compensation,” has been omitted from this report pursuant to the reduced disclosure format permitted by General Instruction I to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERUNITHOLDER MATTERS
“Item 12,12. Security Ownership of Certain Beneficial Owners and Management and Related StockholderUnitholder Matters,” has been omitted from this report pursuant to the reduced disclosure format permitted by General Instruction I to Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
“Item 13,13. Certain Relationships and Related Transactions, and Director Independence,” has been omitted from this report pursuant to the reduced disclosure format permitted by General Instruction I to Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTINGACCOUNTANT FEES AND SERVICES
The following table sets forth fees billed by Grant Thornton LLP for the audits of our annual financial statements and other services rendered (dollars in thousands):
| | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 |
Audit fees (1) | $ | 667 | | | $ | 708 | |
Audit related fees (2) | 32 | | | 32 | |
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Total Fees | $ | 699 | | | $ | 740 | |
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| Years Ended December 31, |
| 2017 | | 2016 |
Audit fees (1) | $ | 620 |
| | $ | 680 |
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Audit related fees (2) | 30 |
| | 37 |
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Total Fees | $ | 650 |
| | $ | 717 |
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(1)Includes fees for audits of annual financial statements of our companies, reviews of the related quarterly financial statements, and services that are normally provided by the independent accountants in connection with statutory and regulatory filings or engagements, including reviews of documents filed with the SEC. | |
(1)(2)Includes fees in connection with the services organization control report on PEPL’s centralized data center. | Includes fees for audits of annual financial statements of our companies, reviews of the related quarterly financial statements, and services that are normally provided by the independent accountants in connection with statutory and regulatory filings or engagements, including reviews of documents filed with the SEC. |
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(2)
| Includes fees in connection with the services organization control report on PEPL’s centralized data center. |
The ETPETO Audit Committee is responsible for the oversight of our accounting, reporting and financial practices, pursuant to the charter of the ETPETO Audit Committee. The ETPETO Audit Committee has the responsibility to select, appoint, engage, oversee, retain, evaluate and terminate our external auditors; pre-approve all audit and non-audit services to be provided, consistent with all applicable laws, to us by our external auditors; and establish the fees and other compensation to be paid to our external auditors. The ETPETO Audit Committee also oversees and directs our internal auditing program and reviews our internal controls.
The ETPETO Audit Committee has adopted a policy for the pre-approval of audit and permitted non-audit services provided by our principal independent accountants. The policy requires that all services provided by Grant Thornton LLP including audit services, audit-related services, tax services and other services, must be pre-approved by the ETPETO Audit Committee. All fees paid or expected to be paid to Grant Thornton LLP for fiscal years 20172020 and 20162019 were pre-approved by the ETPETO Audit Committee in accordance with this policy.
The ETPETO Audit Committee reviews the external auditors’ proposed scope and approach as well as the performance of the external auditors. It also has direct responsibility for and sole authority to resolve any disagreements between our management and our external auditors regarding financial reporting, regularly reviews with the external auditors any problems or difficulties the auditors encountered in the course of their audit work, and, at least annually, uses its reasonable efforts to obtain and review a report from the external auditors addressing the following (among other items):
•the auditors’ internal quality-control procedures;
•any material issues raised by the most recent internal quality-control review, or peer review, of the external auditors;
•the independence of the external auditors;
•the aggregate fees billed by our external auditors for each of the previous two years; and
•the rotation of the lead partner.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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(a) | The following documents are filed as a part of this Report: |
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(1) | (a)The following documents are filed as a part of this Report: (2)Financial Statement Schedules - None. |
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(2) | Financial Statement Schedules - None. |
ITEM 16. FORM 10-K SUMMARY
None.
INDEX TO EXHIBITS
The exhibits listed on the following Exhibit Index are filed as part of this report. Exhibits required by Item 601 of Regulation S-K, but which are not listed below, are not applicable.
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Exhibit Number | | Exhibit
Number
| | Description |
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| | | | Indenture, dated as of March 29, 1999, among CMS Panhandle Holding Company, Panhandle Eastern Pipe Line Company and NBD Bank (the predecessor to Bank One Trust Company, National Association, J.P. Morgan Trust Company, National Association, The Bank of New York Trust Company, N.A. and The Bank of New York Mellon Trust Company, N.A.), as Trustee. (Filed asTrustee (incorporated by reference to Exhibit 4(a) to PEPL’s Form 10-Q for the quarter ended March 31, 1999.)(File No. 001-02921) filed May 15, 1999) |
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| | | | First Supplemental Indenture dated, as of March 29, 1999, among CMS Panhandle Holding Company, Panhandle Eastern Pipe Line Company and NBD Bank (the predecessor to Bank One Trust Company, National Association, J.P. Morgan Trust Company, National Association, The Bank of New York Trust Company, N.A. and The Bank of New York Mellon Trust Company, N.A.), as Trustee, including a form of Guarantee by Panhandle Eastern Pipe Line Company of the obligations of CMS Panhandle Holding Company. (Filed asCompany (incorporated by reference to Exhibit 4(b) to PEPL’s Form 10-Q for the quarter ended March 31, 1999.)(File No. 001-02921) filed May 15, 1999) |
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| | SecondThird Supplemental Indenture, dated as of March 27, 2000,June 24, 2013, between PEPLSouthern Union Company and Bank One Trust Company, National Association (succeeded to by The Bank of New York Mellon Trust Company, N.A., which changed its nameas Trustee (incorporated by reference to The Bank of New York Mellon Trust Company, N.A.), as Trustee. (Filed as Exhibit 4(e)4.3 to PEPL’s Form S-48-K (File No. 333-39850)001-06407) filed on June 22, 2000.)26, 2013) |
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| | | | Credit Agreement between Trunkline LNG Holdings, LLC, as borrower, Panhandle Eastern Pipeline Company, LP and Trunkline LNG Company, LLC, as guarantors, the financial institutions listed therein and the Bank of Tokyo-Mitsubishi UFJ, Ltd., as administrative agent, dated as of February 23, 2012 (Filed as Exhibit 10(a) to PEPL’s Form 10-K for the year ended December 31, 2011.) |
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| | | | Amended and Restated Credit Agreement between Trunkline LNG Holdings, LLC, as borrower, Panhandle Eastern Pipe Line Company, LP and CrossCountry Citrus, LLC, as guarantors, the financial institutions listed therein and Bayerische Hypo-Und Vereinsbank AG, New York Branch, as administrative agent,Supplemental Indenture No. 3, dated as of June 29, 2007 (Filed24, 2013 between Southern Union Company and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 10.14.1 to PEPL’s Form 8-K (File No. 001-06407) filed on July 6, 2007.)June 26, 2013) |
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| | Exhibit
Number
| | Description |
| | | | Amendment Number 1 to the Amended and Restated Credit Agreement between Trunkline LNG Holdings, LLC as borrower, Panhandle Eastern Pipe Line Company, LP and CrossCountry Citrus, LLC, as guarantors, the financial institutions listed therein and Bayerische Hypo-Und Vereinsbank AG, New York Branch, as administrative agent, dated as of June 13, 2008 (Filed as Exhibit 10(b) to PEPL’s Form 10-Q for the quarter ended June 30, 2008.) |
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**Exhibit Number | | Description |
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| | 101.INS | | XBRL Instance Document |
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| | 101.SCH | | XBRL Taxonomy Extension Schema Document |
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| | 101.CAL | | XBRL Taxonomy Calculation Linkbase Document |
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| | 101.DEF | | XBRL Taxonomy Extension Definitions Document |
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| | 101.LAB | | XBRL Taxonomy Label Linkbase Document |
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| | 101.PRE | | XBRL Taxonomy Presentation Linkbase Document |
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* | Filed herewith. |
** | Furnished herewith. | |
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101* | | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) our Consolidated Balance Sheets as of December 31, 2020 and 2019; (ii) our Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2020, 2019 and 2018; (iii) our Consolidated Statements of Partners’ Capital for the years ended December 31, 2020, 2019 and 2018; and (iv) our Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018 |
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104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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* | | Filed herewith. |
** | | Furnished herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Panhandle Eastern Pipe Line Company, LP has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| PANHANDLE EASTERN PIPE LINE COMPANY, LP |
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February 23, 201819, 2021 | By: | /s/ A. Troy Sturrock |
| | A. Troy Sturrock Senior
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| | Vice President and Controller (duly |
| | (duly authorized to sign on behalf of the registrant) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Panhandle Eastern Pipe Line Company, LP, in the capacities and on the dates indicated:
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| Signature | | Title | | Date |
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(i) | /s/ Marshall S. McCrea, III | | Co-Chief Executive Officer | | February 19, 2021 |
| Marshall S. McCrea, III | | (Co-Principal Executive Officer) | | |
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(ii) | Signature | | Title | | Date |
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(i) | Principal executive officer: | | | | |
| /s/ Kelcy L. Warren | | Chief Executive Officer | | February 23, 2018 |
| Kelcy L. Warren | | | | |
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(ii) | Principal financial officer: | | | | |
| /s/ Thomas E. Long | | Chief FinancialCo-Chief Executive Officer | | February 23, 201819, 2021 |
| Thomas E. Long | | (Co-Principal Executive Officer) | | |
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(iii) | /s/ Bradford D. Whitehurst | | Chief Financial Officer | | February 19, 2021 |
| Bradford D. Whitehurst | | (Principal Financial Officer) | | |
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(iv) | The Board of Directors of SUG Holding Company, Sole MemberManagers of Southern Union Panhandle LLC, General Partner of Panhandle Eastern Pipe Line Company, LP
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| Signature | | Title | | Date |
| /s/ Kelcy L. Warren | | Chief Executive Officer and Director,Manager | | February 23, 201819, 2021 |
| Kelcy L. Warren | | SUG Holding CompanySouthern Union Panhandle LLC | | |
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| /s/ John W. McReynoldsThomas E. Long | | Director, SUG Holding CompanyManager | | February 23, 201819, 2021 |
| John W. McReynoldsThomas E. Long | | Southern Union Panhandle LLC | | |
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Panhandle Eastern Pipe Line Company, LP and Subsidiaries
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Financial Statements and Supplementary Data: | Page: |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors of SUG Holding CompanySouthern Union Panhandle LLC and
UnitholdersMember of Panhandle Eastern Pipe Line Company, LP
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Panhandle Eastern Pipe Line Company, LP (a Delaware limited partnership)Partnership) and subsidiaries (the “Partnership”“Company”) as of December 31, 20172020 and 2016,2019, the related consolidated statements of operations and comprehensive income (loss), partners’ capital, and cash flows for each of the three years in the period ended December 31, 2017,2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Partnership Companyas of December 31, 20172020 and 2016,2019, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 2017,2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for opinion
These financial statements are the responsibility of the Partnership’sCompany’s management. Our responsibility is to express an opinion on the Partnership’sCompany’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the PartnershipCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The PartnershipCompany is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Partnership’sCompany’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit mattercommunicated below is a matterarising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matterbelow, providing a separate opinion on the critical audit matteror on the accounts or disclosures to which it relates.
Pension and Other Postretirement Benefit Obligations
At December 31, 2020, the Company’s aggregate pension and other postretirement benefit obligations were $98 million and were exceeded by the fair value of the pension and other postretirement plan assets of $191 million, resulting in overfunded pension and other postretirement benefit obligations of $93 million. As explained in Note 5 to the consolidated financial statements, the Company utilized key assumptions to determine the pension and other postretirement benefit obligations. We identified the determination of the pension and other postretirement benefit obligations as a critical audit matter.
The principal consideration for our determination that the pension and other postretirement benefit obligations was a critical audit matter is that there was high estimation uncertainty due to significant judgments with respect to assumptions used to project the pension and other postretirement benefit obligations, including discount rates, future compensation levels, mortality rates, and expected returns on plan assets. Changes in these assumptions could have a significant effect on the pension and other postretirement benefit obligations.
Our audit procedures related to the determination of the pension and other postretirement benefit obligations included the following procedures, among others:
•We tested management’s process for determining the pension and other postretirement benefit obligations, including evaluating the methodologies used and the appropriateness of significant actuarial assumptions, including discount rates, future compensation levels, mortality rates, and expected returns on plan assets;
•We compared the actuarial assumptions used by management to historical trends and evaluated the reasonableness of changes in the funded status from prior year;
•We tested completeness and accuracy of the underlying data used to determine the pension and other postretirement benefit obligations, including participant data;
•We utilized an internal valuation specialist to evaluate the appropriateness and reasonableness of the valuation methods used by management’s third-party actuarial specialist, including the methodology for determining the discount rates, future compensation levels, mortality rates, and the expected returns on plan assets.
/s/ GRANT THORNTON LLP
We have served as the Partnership’sCompany’s auditor since 2012.
Houston, Texas
February 23, 201819, 2021
PANHANDLE EASTERN PIPE LINE COMPANY, LP
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 0 | | | $ | 0 | |
Accounts receivable, net | 47 | | | 45 | |
Accounts receivable from related companies | 8 | | | 9 | |
Exchanges receivable | 6 | | | 9 | |
| | | |
Inventories | 86 | | | 61 | |
Other current assets | 6 | | | 7 | |
Total current assets | 153 | | | 131 | |
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Property, plant and equipment | 3,349 | | | 3,281 | |
Accumulated depreciation | (717) | | | (607) | |
| 2,632 | | | 2,674 | |
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Operating lease right-of-use assets | 5 | | | 5 | |
Other non-current assets, net | 169 | | | 159 | |
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Total assets | $ | 2,959 | | | $ | 2,969 | |
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LIABILITIES AND PARTNERS’ CAPITAL | | | |
Current liabilities: | | | |
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Accounts payable | $ | 4 | | | $ | 6 | |
Accounts payable to related companies | 14 | | | 34 | |
Exchanges payable | 71 | | | 47 | |
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Other current liabilities | 33 | | | 75 | |
Total current liabilities | 122 | | | 162 | |
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Long-term debt, less current maturities | 245 | | | 247 | |
Note payable to related company | 550 | | | 732 | |
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Non-current operating lease liabilities | 5 | | | 5 | |
Other non-current liabilities | 243 | | | 221 | |
Commitments and contingencies | | | 0 |
Partners’ capital: | | | |
Partners’ capital | 1,803 | | | 1,626 | |
Accumulated other comprehensive loss | (9) | | | (24) | |
Total partners’ capital | 1,794 | | | 1,602 | |
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Total liabilities and partners’ capital | $ | 2,959 | | | $ | 2,969 | |
The accompanying notes are an integral part of these consolidated financial statements.
F - 4
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| December 31, |
| 2017 | | 2016 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 2 |
| | $ | 4 |
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Accounts receivable, net | 45 |
| | 46 |
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Accounts receivable from related companies | 12 |
| | 17 |
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Exchanges receivable | 5 |
| | 7 |
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Inventories | 150 |
| | 179 |
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Other current assets | 3 |
| | 4 |
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Total current assets | 217 |
| | 257 |
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Property, plant and equipment | 3,199 |
| | 3,242 |
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Accumulated depreciation | (419 | ) | | (355 | ) |
| 2,780 |
| | 2,887 |
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Other non-current assets, net | 167 |
| | 153 |
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Note receivable from related party | — |
| | 251 |
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Goodwill | 23 |
| | 285 |
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Total assets | $ | 3,187 |
| | $ | 3,833 |
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PANHANDLE EASTERN PIPE LINE COMPANY, LP
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
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| December 31, |
| 2017 | | 2016 |
LIABILITIES AND PARTNERS’ CAPITAL | | | |
Current liabilities: | | | |
Current maturities of long-term debt | $ | 407 |
| | $ | 307 |
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Accounts payable and accrued liabilities | 3 |
| | 11 |
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Accounts payable to related companies | 32 |
| | 66 |
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Exchanges payable | 131 |
| | 165 |
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Other current liabilities | 53 |
| | 61 |
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Total current liabilities | 626 |
| | 610 |
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Long-term debt, less current maturities | 411 |
| | 834 |
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Note payable to related party | 113 |
| | — |
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Deferred income taxes | 451 |
| | 711 |
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Other non-current liabilities | 241 |
| | 217 |
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Commitments and contingencies |
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Partners’ capital: | | | |
Partners’ capital | 1,348 |
| | 1,456 |
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Accumulated other comprehensive income (loss) | (3 | ) | | 5 |
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Total partners’ capital | 1,345 |
| | 1,461 |
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Total liabilities and partners’ capital | $ | 3,187 |
| | $ | 3,833 |
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PANHANDLE EASTERN PIPE LINE COMPANY, LP
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
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| Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
OPERATING REVENUES: | | | | | |
Transportation and storage of natural gas | $ | 528 | | | $ | 556 | | | $ | 544 | |
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Other | 19 | | | 22 | | | 30 | |
Total operating revenues | 547 | | | 578 | | | 574 | |
OPERATING EXPENSES: | | | | | |
Cost of natural gas and other energy | 0 | | | 0 | | | 4 | |
Operating and maintenance | 177 | | | 193 | | | 215 | |
General and administrative | 37 | | | 30 | | | 30 | |
Depreciation and amortization | 116 | | | 112 | | | 122 | |
Impairment losses | 0 | | | 12 | | | 0 | |
Total operating expenses | 330 | | | 347 | | | 371 | |
OPERATING INCOME | 217 | | | 231 | | | 203 | |
OTHER EXPENSE: | | | | | |
Interest expense, net | (14) | | | (17) | | | (28) | |
Interest expense - related company | (32) | | | (25) | | | (13) | |
| | | | | |
Other, net | (3) | | | (2) | | | (5) | |
Total other expense, net | (49) | | | (44) | | | (46) | |
INCOME BEFORE INCOME TAX EXPENSE (BENEFIT) | 168 | | | 187 | | | 157 | |
Income tax expense (benefit) | (3) | | | (402) | | | 49 | |
NET INCOME | 171 | | | 589 | | | 108 | |
| | | | | |
| | | | | |
| | | | | |
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: | | | | | |
Actuarial gain (loss) relating to postretirement benefits, net of tax amounts of $6, $4, and $11, respectively | 21 | | | 23 | | | (42) | |
| | | | | |
COMPREHENSIVE INCOME | $ | 192 | | | $ | 612 | | | $ | 66 | |
The accompanying notes are an integral part of these consolidated financial statements.
F - 5
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
OPERATING REVENUES: | | | | | |
Transportation and storage of natural gas | $ | 460 |
| | $ | 494 |
| | $ | 525 |
|
Other | 20 |
| | 20 |
| | 23 |
|
Total operating revenues | 480 |
| | 514 |
| | 548 |
|
OPERATING EXPENSES: | | | | | |
Cost of natural gas and other energy | 3 |
| | 2 |
| | 4 |
|
Operating and maintenance | 199 |
| | 209 |
| | 216 |
|
General and administrative | 36 |
| | 39 |
| | 42 |
|
Depreciation and amortization | 127 |
| | 130 |
| | 133 |
|
Impairment losses | 389 |
| | 771 |
| | — |
|
Total operating expenses | 754 |
| | 1,151 |
| | 395 |
|
OPERATING INCOME (LOSS) | (274 | ) | | (637 | ) | | 153 |
|
OTHER INCOME (EXPENSE): | | | | | |
Interest expense, net | (46 | ) | | (49 | ) | | (50 | ) |
Interest income - affiliates | 10 |
| | 26 |
| | 23 |
|
Other, net | 2 |
| | 1 |
| | 31 |
|
Total other income (expense), net | (34 | ) | | (22 | ) | | 4 |
|
INCOME (LOSS) BEFORE INCOME TAX EXPENSE | (308 | ) | | (659 | ) | | 157 |
|
Income tax expense (benefit) | (263 | ) | | (13 | ) | | 52 |
|
NET INCOME (LOSS) | (45 | ) | | (646 | ) | | 105 |
|
| | | | | |
OTHER COMPREHENSIVE INCOME, NET OF TAX: | | | | | |
Actuarial gain (loss) relating to postretirement benefits, net of tax amounts of $3, $0, and $1, respectively | (10 | ) | | 3 |
| | 2 |
|
Change in value of available-for-sale securities | 2 |
| | — |
| | — |
|
COMPREHENSIVE INCOME (LOSS) | $ | (53 | ) | | $ | (643 | ) | | $ | 107 |
|
PANHANDLE EASTERN PIPE LINE COMPANY, LP
CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
(Dollars in millions)
| | | | | | | | | | | | | | | | | |
| Partners’ Capital | | Accumulated Other Comprehensive Loss | | Total |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Balance, December 31, 2017 | $ | 1,348 | | | $ | (3) | | | $ | 1,345 | |
Net income | 108 | | | 0 | | | 108 | |
Distributions to partners | (95) | | | 0 | | | (95) | |
Deemed contribution from partners | 31 | | | 0 | | | 31 | |
Other comprehensive loss, net of tax | 0 | | | (42) | | | (42) | |
Other | 17 | | | (2) | | | 15 | |
Balance, December 31, 2018 | 1,409 | | | (47) | | | 1,362 | |
Net income | 589 | | | 0 | | | 589 | |
Distributions to partners | (375) | | | 0 | | | (375) | |
Other comprehensive income, net of tax | 0 | | | 23 | | | 23 | |
Other | 3 | | | 0 | | | 3 | |
Balance, December 31, 2019 | 1,626 | | | (24) | | | 1,602 | |
Net income | 171 | | | 0 | | | 171 | |
Deemed contribution from partners | 4 | | | 0 | | | 4 | |
Other comprehensive income, net of tax | 0 | | | 21 | | | 21 | |
Other | 2 | | | (6) | | | (4) | |
Balance, December 31, 2020 | $ | 1,803 | | | $ | (9) | | | $ | 1,794 | |
The accompanying notes are an integral part of these consolidated financial statements.
F - 6
|
| | | | | | | | | | | |
| Partners’ Capital | | Accumulated Other Comprehensive Income (Loss) | | Total |
Balance, December 31, 2014 | $ | 2,889 |
| | $ | — |
| | $ | 2,889 |
|
Distribution to partners | (125 | ) | | — |
| | (125 | ) |
Unit-based compensation expense | 2 |
| | — |
| | 2 |
|
Other comprehensive income, net of tax | — |
| | 2 |
| | 2 |
|
Contribution to SUG Holding | (28 | ) | | — |
| | (28 | ) |
Other | 38 |
| | — |
| | 38 |
|
Net income | 105 |
| | — |
| | 105 |
|
Balance, December 31, 2015 | 2,881 |
| | 2 |
| | 2,883 |
|
Deemed distribution to partners | (781 | ) | | — |
| | (781 | ) |
Unit-based compensation expense | 2 |
| | — |
| | 2 |
|
Other comprehensive income, net of tax | — |
| | 3 |
| | 3 |
|
Net loss | (646 | ) | | — |
| | (646 | ) |
Balance, December 31, 2016 | 1,456 |
| | 5 |
| | 1,461 |
|
Distributions to partners | (74 | ) | | — |
| | (74 | ) |
Unit-based compensation expense | 3 |
| | — |
| | 3 |
|
Other comprehensive loss, net of tax | — |
| | (8 | ) | | (8 | ) |
Deemed contribution from partners | 8 |
| | — |
| | 8 |
|
Net loss | (45 | ) | | — |
| | (45 | ) |
Balance, December 31, 2017 | $ | 1,348 |
| | $ | (3 | ) | | $ | 1,345 |
|
PANHANDLE EASTERN PIPE LINE COMPANY, LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
OPERATING ACTIVITIES: | | | | | |
Net income | $ | 171 | | | $ | 589 | | | $ | 108 | |
Reconciliation of net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 116 | | | 112 | | | 122 | |
Impairment losses | 0 | | | 12 | | | 0 | |
Deferred income taxes | (3) | | | (13) | | | 12 | |
| | | | | |
| | | | | |
Amortization of deferred financing fees | (2) | | | (4) | | | (13) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
PEPL Restructuring income tax benefit | 0 | | | (428) | | | 0 | |
Other non-cash | 9 | | | 13 | | | 8 | |
Changes in operating assets and liabilities | (25) | | | (51) | | | 31 | |
Net cash flows provided by operating activities | 266 | | | 230 | | | 268 | |
INVESTING ACTIVITIES: | | | | | |
| | | | | |
| | | | | |
| | | | | |
Capital expenditures | (84) | | | (101) | | | (70) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Net cash flows used in investing activities | (84) | | | (101) | | | (70) | |
FINANCING ACTIVITIES: | | | | | |
Distributions to partners | 0 | | | (375) | | | (24) | |
| | | | | |
Note payable issued from related company | 262 | | | 759 | | | 497 | |
Repayments of loan from related company | (444) | | | (383) | | | (252) | |
Repayment of long-term debt | 0 | | | (150) | | | (400) | |
| | | | | |
| | | | | |
Other | 0 | | | 0 | | | (1) | |
Net cash flows used in financing activities | (182) | | | (149) | | | (180) | |
NET CHANGE IN CASH AND CASH EQUIVALENTS | 0 | | | (20) | | | 18 | |
CASH AND CASH EQUIVALENTS, beginning of period | 0 | | | 20 | | | 2 | |
CASH AND CASH EQUIVALENTS, end of period | $ | 0 | | | $ | 0 | | | $ | 20 | |
| | | | | |
| | | | | |
| | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F - 7
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
OPERATING ACTIVITIES: | | | | | |
Net income (loss) | $ | (45 | ) | | $ | (646 | ) | | $ | 105 |
|
Reconciliation of net income (loss) to net cash provided by operating activities: | |
| | |
| | |
|
Depreciation and amortization | 127 |
| | 130 |
| | 133 |
|
Impairment losses | 389 |
| | 771 |
| | — |
|
Deferred income taxes | (252 | ) | | (21 | ) | | 31 |
|
Amortization of deferred financing fees | (24 | ) | | (24 | ) | | (23 | ) |
Distributions of earnings received from unconsolidated affiliates | 6 |
| | — |
| | 9 |
|
Other non-cash | 8 |
| | 10 |
| | (13 | ) |
Changes in operating assets and liabilities | (49 | ) | | 103 |
| | (66 | ) |
Net cash flows provided by operating activities | 160 |
| | 323 |
| | 176 |
|
INVESTING ACTIVITIES: | | | | | |
Capital expenditures | (154 | ) | | (106 | ) | | (128 | ) |
Distributions from unconsolidated affiliates in excess of cumulative earnings | — |
| | — |
| | 46 |
|
Repayment of note receivable from related party | 291 |
| | 49 |
| | 40 |
|
Note receivable issued to related party | (40 | ) | | (265 | ) | | (40 | ) |
Other | 2 |
| | — |
| | 2 |
|
Net cash flows provided by (used in) investing activities | 99 |
| | (322 | ) | | (80 | ) |
FINANCING ACTIVITIES: | | | | | |
Distributions to partners | (74 | ) | | — |
| | (125 | ) |
Note payable issued from related party | 113 |
| | — |
| | — |
|
Repayment of long-term debt | (300 | ) | | — |
| | — |
|
Net cash flows used in financing activities | (261 | ) | | — |
| | (125 | ) |
NET CHANGE IN CASH AND CASH EQUIVALENTS | (2 | ) | | 1 |
| | (29 | ) |
CASH AND CASH EQUIVALENTS, beginning of period | 4 |
| | 3 |
| | 32 |
|
CASH AND CASH EQUIVALENTS, end of period | $ | 2 |
| | $ | 4 |
| | $ | 3 |
|
PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollar amounts are in millions)
| |
1. | OPERATIONS AND ORGANIZATION: |
Panhandle Eastern Pipe Line1.OPERATIONS AND ORGANIZATION:
The Company LP (“PEPL”) and its subsidiaries (collectively, the “Company”) primarily operateoperates interstate pipelines that transport natural gas from the Gulf of Mexico, South Texas and the Panhandle region of Texas and Oklahoma to major United States markets in the Midwest and Great Lakes regions and natural gas storage assets and are subject to the rules and regulations of the FERC. The Company’sPEPL’s subsidiaries are Trunkline, Gas Company, LLC (“Trunkline”), Sea Robin Pipeline Company, LLC (“Sea Robin”) and Pan Gas Storage LLC (“Southwest Gas”).Gas.
Southern Union Panhandle LLC, an indirect wholly-owned subsidiary of ETP,ETO, owns a 1% general partnershippartner interest in PEPL and ETPETO indirectly owns a 99% limited partnershippartner interest in PEPL.
In April 2017, Energy Transfer Partners, L.P. (“ETP”) merged withOn July 1, 2019, ETO executed a series of internal restructuring transactions that resulted in PEPL becoming a subsidiary of Sunoco Logistics Partners L.P., ata non-corporate subsidiary of ETO (“PEPL Restructuring”). As a result, PEPL’s tax status changed from a disregarded entity for federal income tax purposes wholly owned by a corporate entity to a disregarded entity for federal income tax purposes wholly owned by a limited partnership. In connection with this restructuring, PEPL’s tax sharing agreement with its former corporate parent was terminated, and PEPL reversed all of its existing deferred tax assets and liabilities in July 2019, which time ETP changed its name from “Energy Transfer Partners, L.P.” to “Energy Transfer, LP” and Sunoco Logistics Partners L.P. changed its name to “Energy Transfer Partners, L.P.” References to “ETP” refer toresulted in the recognition of a $428 million non-cash benefit in the consolidated entity named Energy Transfer Partners, L.P. subsequent to the closestatement of the merger.operations.
Certain prior period amounts have been reclassified to conform to the 20172020 presentation. These reclassifications had no impact on net income, total partners’ capital, or cash flows.
| |
2. | ESTIMATES, SIGNIFICANT ACCOUNTING POLICIES AND BALANCE SHEET DETAIL: |
2.ESTIMATES, SIGNIFICANT ACCOUNTING POLICIES AND BALANCE SHEET DETAIL:
Basis of Presentation. The Company’s consolidated financial statements have been prepared in accordance with GAAP.accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of all majority-owned subsidiaries, after eliminating significant intercompany transactions and balances. Investments in which the Company has significant influence over the operations of the investee are accounted for using the equity method.
The Company is subject to regulation by certain state and federal authorities. The Company has accounting policies which are in accordance with the accounting requirements and ratemaking practices of the regulatory authorities. The Company does not apply regulatory-based accounting policies, primarily due to the level of discounting from tariff rates and its inability to recover specific costs. If regulatory-based accounting policies were applied, certain transactions would be recorded differently, including, among others, recording of regulatory assets, the capitalization of an equity component of invested funds on regulated capital projects and depreciation differences. The Company periodically reviews its level of discounting and negotiated rate contracts, the length of rate moratoriums and other related factors to determine if the regulatory-based authoritative guidance should be applied.
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 disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements.
ASU 2014-09
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which clarifies the principles for recognizing revenue based on the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted ASU 2014-09 on January 1, 2018. The Company applied the cumulative catchup transition method and recognized the cumulative effect of the retrospective application of the standard. The effect of the retrospective application of the standard was not material.
For future periods, we do not expect that the adoption of this standard will result in a change to revenues and costs in our consolidated statements of operations.
ASU 2016-02
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which establishes the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The Company expects to adopt ASU 2016-02 in the first quarter of 2019 and is currently evaluating the impact that adopting this new standard will have on the consolidated financial statements and related disclosures.
ASU 2016-16
On January 1, 2018, the Company adopted Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which requires that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this update do not change GAAP for the pre-tax effects of an intra-entity asset transfer under Topic 810, Consolidation, or for an intra-entity transfer of inventory. We do not anticipate a material impact to our financial position or results of operations as a result of the adoption of this standard.
ASU 2017-04
In January 2017, the FASB issued ASU No. 2017-04 “Intangibles-Goodwill and other (Topic 350): Simplifying the test for goodwill impairment”. The amendments in this update remove the second step of the two-step test currently required by Topic 350. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The standard requires prospective application and therefore will only impact periods subsequent to adoption. The Company adopted this ASU for its annual goodwill impairment test in the fourth quarter of 2017.
Cash and Cash Equivalents. Cash equivalents consist of highly liquid investments, which are readily convertible into cash and have original maturities of three months or less. The Company places cash deposits and temporary cash investments with high credit quality financial institutions. At times, cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limit.
Non-cash investing and financing activities and supplemental cash flow information are as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
Non-cash investing and financing activities: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Settlement of affiliate liability - tax payable | $ | 0 | | | $ | 0 | | | $ | (19) | |
Settlement of affiliate liability - related company payables | (4) | | | 0 | | | (12) | |
Contribution of assets from affiliate | 0 | | | 0 | | | (7) | |
Distribution of non-cash assets to parent | 0 | | | 0 | | | 68 | |
Supplemental cash flow information: | | | | | |
Accrued capital expenditures | $ | 4 | | | $ | 11 | | | $ | 13 | |
Cash paid for interest, net of interest capitalized | 16 | | | 23 | | | 43 | |
| | | | | |
Cash paid for interest on note payable to related company | 33 | | | 23 | | | 13 | |
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Non-cash investing activities: | | | | | |
Note receivable issued in exchange for investment in ETP | $ | — |
| | $ | — |
| | $ | (1,369 | ) |
Settlement of affiliate receivable - note receivable | — |
| | 541 |
| | 793 |
|
Settlement of affiliate receivable - tax receivable | — |
| | 240 |
| | — |
|
Settlement of affiliate liability - tax liability | (8 | ) | | — |
| | — |
|
Supplemental cash flow information: | | | | | |
Accrued capital expenditures | $ | 11 |
| | $ | 15 |
| | $ | 21 |
|
Cash paid for interest, net of interest capitalized | 75 |
| | 75 |
| | 76 |
|
Cash received for interest on note receivable from affiliate | 18 |
| | 40 |
| | 16 |
|
Inventories. System natural gas and operating supplies consist of natural gas held for operations and materials and supplies, both of which are carried at the lower of weighted average cost or market, while natural gas owed back to customers is valued at market. The natural gas held for operations that the Company does not expect to consume in its operations in the next twelve months is reflected in non-current assets.
The following table presents the components of inventory:
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| | | |
Natural gas (1) | $ | 63 | | | $ | 39 | |
Materials and supplies | 23 | | | 22 | |
| $ | 86 | | | $ | 61 | |
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Natural gas (1) | $ | 132 |
| | $ | 163 |
|
Materials and supplies | 18 |
| | 16 |
|
| $ | 150 |
| | $ | 179 |
|
(1)Natural gas volumes held for operations at December 31, 2020 and 2019 were 29.2 TBtu and 19.3 TBtu, respectively. | |
(1)
| Natural gas volumes held for operations at December 31, 2017 and 2016 were 37.9 TBtu and 45.6 TBtu, respectively.
|
Natural Gas Imbalances. Natural gas imbalances occur as a result of differences in volumes of natural gas received and delivered. The Company records natural gas imbalance in-kind receivables and payables at cost or market. Net imbalances that have reduced system natural gas are valued at the cost basis of the system natural gas, while net imbalances that have increased system natural gas and are owed back to customers are priced, along with the corresponding system natural gas, at market.
Fuel Tracker. The fuel tracker is the cumulative balance of compressor fuel volumes owed to the Company by its customers or owed by the Company to its customers. The customers, pursuant to each pipeline’s tariff and related contracts, provide all compressor fuel to the pipeline based on specified percentages of the customer’s natural gas volumes delivered into the pipeline. The percentages are designed to match the actual natural gas consumed in moving the natural gas through the pipeline facilities, with any difference between the volumes provided versus volumes consumed reflected in the fuel tracker. The tariff of Trunkline, , in conjunction with the customers’ contractual obligations, allows the Company to record an asset and direct bill customers for any fuel ultimately under-recovered. The other FERC-regulated PEPL entities record an expense when fuel is under-recovered or record a credit to expense to the extent any under-recovered prior period balances are subsequently recouped as they do not have such explicit billing rights specified in their tariffs. Liability accounts are maintained for net volumes of compressor fuel natural gas owed to customers collectively. The pipelines’ fuel reimbursement is in-kind and non-discountable.
Property, Plant and Equipment.
The following table presents the components of property, plant and equipment:
| | | | | | | | | | | | | | | | | | | | |
| | | | December 31, |
| | Lives in Years | | 2020 | | 2019 |
Land and improvements | | | | $ | 4 | | | $ | 4 | |
Buildings and improvements | | 6 – 46 | | 197 | | | 194 | |
Pipelines and equipment | | 5 – 46 | | 2,631 | | | 2,556 | |
Natural gas storage facilities | | 26 – 46 | | 360 | | | 348 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Other | | 3 – 21 | | 142 | | | 139 | |
Construction work in progress | | | | 15 | | | 40 | |
Property, plant and equipment | | | | 3,349 | | | 3,281 | |
Accumulated depreciation and amortization | | | | (717) | | | (607) | |
Property, plant and equipment, net | | | | $ | 2,632 | | | $ | 2,674 | |
|
| | | | | | | | | | |
| | | | December 31, |
| | Lives in Years | | 2017 | | 2016 |
Land and improvements | |
| | $ | 3 |
| | $ | 3 |
|
Buildings and improvements | | 6 – 46 | | 162 |
| | 174 |
|
Pipelines and equipment | | 5 – 46 | | 2,571 |
| | 2,540 |
|
Natural gas storage facilities | | 26 – 46 | | 279 |
| | 277 |
|
Other | | 3 – 21 | | 157 |
| | 194 |
|
Construction work in progress | | | | 27 |
| | 54 |
|
Property, plant and equipment | | | | 3,199 |
| | 3,242 |
|
Accumulated depreciation and amortization | | | | (419 | ) | | (355 | ) |
Property, plant and equipment, net | | | | $ | 2,780 |
| | $ | 2,887 |
|
For certain components above, the balances as of December 31, 2016 have been reclassified to conform to the 2017 presentation.
Additions.Ongoing additions of property, plant and equipment are stated at cost. The Company capitalizes all construction-related direct labor and material costs, as well as indirect construction costs. Such indirect construction costs primarily include capitalized interest costs and labor and related costs of departments associated with supporting construction activities. The indirect capitalized labor and related costs are largely based upon results of periodic time studies or management reviews of time allocations, which provide an estimate of time spent supporting construction projects. The cost of replacements and betterments that extend the useful life of property, plant and equipment is also capitalized. The cost of repairs and replacements of minor property, plant and equipment items is charged to expense as incurred.
Retirements.When ordinary retirements of property, plant and equipment occur, the original cost less salvage value is removed by a charge to accumulated depreciation and amortization, with no gain or loss recorded. When entire regulated operating
units of property, plant and equipment are retired or sold, the original cost less salvage value and related accumulated depreciation and amortization accounts are removed, with any resulting gain or loss recorded in earnings.
Depreciation.The Company computes depreciation expense using the straight-line method.
Interest Cost Capitalized.The Company capitalizes interest on certain qualifying assets that are undergoing activities to prepare them for their intended use. Interest costs incurred during the construction period are capitalized and amortized over the life of the assets. TheFor the year ended December 31, 2020, the Company recognized 0 capitalized interest. For the years ended December 31, 2019 and 2018 the Company recognized capitalized interest of $3 million, $2 million and $1 million, for the years ended December 31, 2017, 2016 and 2015, respectively.
Long-Lived Assets and Goodwill. Long-lived assets are required to be tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Goodwill and intangibles with indefinite lives must be tested for impairment annually or more frequently if events or changes in circumstances indicate that the related asset might be impaired. An impairment loss should be recognized only if the carrying amount of the asset/goodwill is not recoverable and exceeds its fair value.
In order to test for recoverability when performing a quantitative impairment test, the Company makes estimates of projected cash flows related to the asset, which include, but are not limited to, assumptions about the use or disposition of the asset, estimated remaining life of the asset, and future expenditures necessary to maintain the asset’s existing service potential. In order to determine fair value, the Company makes certain estimates and assumptions, including, among other things, changes in general economic conditions in the Company’s operating regions, the availability and prices of natural gas, the ability to negotiate favorable sales agreements, the risks that natural gas exploration and production activities will not occur or be successful, dependence on certain significant customers and producers of natural gas, and competition from other companies, including major energy producers. If future results are not consistent with the Company’s estimates, future impairment losses that could be material may be recorded to our results of operations.
The Company determines the fair value of its reporting units using a weighted combination of the discounted cash flow method and the guideline company method. Determining the fair value of a reporting unit requires judgment and the use of significant estimates and assumptions. Such estimates and assumptions include revenue growth rates, operating margins, weighted average costs of capital and future market conditions, among others. The Company believes the estimates and assumptions used in our impairment assessments are reasonable; however, 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. Under the discounted cash flow method, the Company determined fair value based on estimated future cash flows of each reporting unit including estimates for capital expenditures, discounted to present value using the risk-adjusted industry rate, which reflect the overall level of inherent risk of the reporting unit. Cash flow projections are derived from one year budgeted amounts and five 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. Under the guideline company method, the Company determined the estimated fair value of each of our reporting units by applying valuation multiples of comparable publicly-traded companies to each reporting unit’s projected EBITDA and then averaging that estimate with similar historical calculations using a three year average. In addition, the Company estimated a reasonable control premium representing the incremental value that accrues to the majority owner from the opportunity to dictate the strategic and operational actions of the business.
Key assumptions for the measurement of goodwill impairment is management’s estimate of future cash flows and EBITDA. These estimates are based on the annual budget for the upcoming year and forecasted amounts for multiple subsequent years. The annual budget process is typically completed near the annual goodwill impairment testing date, and management uses the most recent information for the annual impairment tests. The forecast is also subjected to a comprehensive update annually in conjunction with the annual budget process and is revised periodically to reflect new information and/or revised expectations. The estimates of future cash flows and EBITDA are subjective in nature and are subject to impacts from the business risks described in “Item 1A. Risk Factors.” Therefore, the actual results could differ significantly from the amounts used for goodwill impairment testing, and significant changes in fair value estimates could occur in a given period.
During the fourth quarter of 2017, the Company performed goodwill impairment tests and recognized goodwill impairment of $262 million related to Trunkline, primarily due to decreases in projected future revenues and cash flows driven by declines in commodity prices and changes in the markets that the assets serve. The Company also recorded a $127 million fixed asset impairment related to Sea Robin, primarily due to lower utilization and expected decrease in projected future cash flows.
During the fourth quarter of 2016, the Company performed goodwill impairment tests and recognized goodwill impairment of $590 million and $48 million related to PEPL and Sea Robin, respectively, primarily due to decreases in projected future revenues and cash flows driven by declines in commodity prices and changes in the markets that these assets serve. The
Company also recorded a $133 million fixed asset impairment related to Sea Robin, primarily due to a decrease in projected future cash flows driven by declines in commodity prices.
The Company did not record a goodwill or fixed asset impairment for the year ended December 31, 2015.
Changes in the carrying amount of goodwill were as follows:
|
| | | |
| Total |
Balance, December 31, 2015 | $ | 923 |
|
Impairment losses | (638 | ) |
Balance, December 31, 2016 | 285 |
|
Impairment losses | (262 | ) |
Balance, December 31, 2017 | $ | 23 |
|
Related Party Transactions. Related party expenses primarily include payments for services provided by ETE, ETPET, ETO and other affiliates. Other income includesaffiliates, as well as interest incomeexpense on notes receivable from related parties.a note payable to ETO.
PEPL and certain of its subsidiaries are not treated as separate taxpayers for federal and certain state income tax purposes. Instead, the Company’s income is taxable to its parent, SUG Holding Company. The Company has entered into a tax sharing agreement with SUG Holding Company pursuant to which the Company will be required to make payments to SUG Holding Company in order to reimburse SUG Holding Company for federal and state taxes that it pays on the Company’s income, or to receive payments from SUG Holding Company to the extent that tax losses generated by the Company are utilized by SUG Holding Company. In addition, the Company’s subsidiaries that are corporations are included in consolidated and combined federal and state income tax returns filed by SUG Holding Company. The Company’s liability generally is equal to the liability that the Company and its subsidiaries would have incurred based upon the Company’s taxable income if the Company was a taxpayer filing separately from SUG Holding Company, except that the Company will receive credit under an intercompany note for any increased liability resulting from its tax basis in its assets having been reduced as a result of the like-kind exchange under Section 1031 of the Internal Revenue Code of 1986, as amended.
Environmental Expenditures. Environmental expenditures that relate to an existing condition caused by past operations that do not contribute to current or future revenue generation are expensed. Environmental expenditures relating to current or future revenues are expensed or capitalized as appropriate. Liabilities are recorded when environmental assessments and/or clean-ups are probable and the costs can be reasonably estimated. Remediation obligations are not discounted because the timing of future cash flow streams is not predictable.
Other Current Liabilities. Other current liabilities consisted of the following:
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Deposits from customers | $ | 8 | | | $ | 13 | |
Accrued expenses | 13 | | | 21 | |
Accrued capital expenditures | 4 | | | 11 | |
Current income tax payable | 0 | | | 16 | |
ARO | 0 | | | 5 | |
Other | 8 | | | 9 | |
Total other current liabilities | $ | 33 | | | $ | 75 | |
Other Non-Current Liabilities. Other non-current liabilities consisted of the following:
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Pension liability | $ | 97 | | | $ | 103 | |
ARO | 37 | | | 30 | |
Other | 109 | | | 88 | |
Total other non-current liabilities | $ | 243 | | | $ | 221 | |
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Pension liability | $ | 120 |
| | $ | 96 |
|
ARO Liability | 57 |
| | 54 |
|
Other | 64 |
| | 67 |
|
Total other non-current liabilities | $ | 241 |
| | $ | 217 |
|
Revenues. The Company’s revenues from transportation and storage 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 are recognized monthly. Revenues from commodity usage charges are also recognized monthly, based on the volumes received from or delivered for the customer, based on the tariff, of that particular PEPL entity, with any differences in volumes received and delivered resulting in an imbalance. Volume imbalances generally are settled in-kind with no impact on revenues, with the exception of Trunkline, which settles certain imbalances in cash pursuant to its tariff, and records gains and losses on such cashout sales as a component of revenue, to the extent not owed back to customers. Because PEPLthe Company is subject to FERC regulation, revenues collected during the pendency of a rate proceeding may be required by FERC to be refunded in the final order. PEPLThe Company establishes reserves for such potential refunds, as appropriate.
Accounts Receivable and Allowance for Doubtful Accounts.Expected Credit Losses. The Company has a large number of customers in the electric and gas utility industries as well as oil and natural gas producers and municipalities. The large number of customers in these energy segments may impact our overall exposure to credit risk, either positively or negatively, in that the customers may be
similarly affected by changes in economic or other conditions. The Company manages trade credit risk to mitigate credit losses and exposure to uncollectible trade receivables. Prospective and existing customers are reviewed regularly for creditworthiness based upon pre-established standards consistent with FERC filed tariffs to manage credit risk within approved tolerances. Customers that do not meet minimum credit standards are required to provide additional credit support in the form of a letter of credit, prepayment, or other forms of security.
The Company establishes an allowance for doubtful accountsexpected credit losses on trade receivables based on the expected ultimate recovery of these receivables and considers many factors including historical customer collection experience, general and specific economic trends, and known specific issues related to individual customers, sectors, and transactions that might impact collectability. Increases in the allowance are recorded as a component of operating expenses; reductions in the allowance are recorded when receivables are subsequently collected or written-off. Past duePast-due receivable balances are written-off when the Company’s efforts have been unsuccessful in collecting the amount due.
The allowance for doubtful accountsexpected credit losses was not material as of and during the years ended December 31, 20172020 and 2016.2019.
The following table presents the relative contribution to the Company’s total operating revenue from continuing operations of each customer that comprised at least 10% of its operating revenues:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
Customer A | 12 | % | | 10 | % | | 10 | % |
Customer B | 17 | | | 16 | | | 16 | |
Other top 10 customers | 31 | | | 31 | | | 28 | |
Remaining customers | 40 | | | 43 | | | 46 | |
Total percentage | 100 | % | | 100 | % | | 100 | % |
|
| | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Customer A | 13 | % | | 12 | % | | 11 | % |
Customer B | — |
| | — |
| | 10 |
|
Other top 10 customers | 41 |
| | 38 |
| | 28 |
|
Remaining customers | 46 |
| | 50 |
| | 51 |
|
Total percentage | 100 | % | | 100 | % | | 100 | % |
Accumulated Other Comprehensive Income. Loss. The main components of accumulated other comprehensive incomeloss are a net actuarial gainloss and prior service costs on pension and other postretirement benefit plans.
Retirement Benefits. The Company recognizes 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. Changes in the funded status of the plan are recorded in other comprehensive income in partners’ capital in the year in which the change occurs.
Fair Value Measurement. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about nonperformance risk, which is primarily comprised of credit risk (both the Company’s own credit risk and counterparty credit risk) and the risks inherent in the inputs to any applicable valuation techniques. The Company places more weight on current market information concerning credit risk (e.g. current credit default swap rates) as opposed to historical information (e.g. historical default probabilities and credit ratings). These inputs can be readily observable, market corroborated, or generally unobservable. The Company endeavors to utilize the best available information, including valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. A three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value, is as follows:
•Level 1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities;
•Level 2 – Observable inputs such as: (i) quoted prices for similar assets or liabilities in active markets; (ii) quoted prices for identical or similar assets or liabilities in markets that are not active and do not require significant adjustment based on unobservable inputs; or (iii) valuations based on pricing models, discounted cash flow methodologies or similar techniques where significant inputs (e.g., interest rates, yield curves, etc.) are derived principally from observable market data, or can be corroborated by observable market data, for substantially the full term of the assets or liabilities; and
•Level 3 – Unobservable inputs, including valuations based on pricing models, discounted cash flow methodologies or similar techniques where at least one significant model assumption or input is unobservable. Unobservable inputs are used to the extent that observable inputs are not available and reflect the Company’s own assumptions about the
assumptions market participants would use in pricing the assets or liabilities. Unobservable inputs are based on the best information available in the circumstances, which might include the Company’s own data.
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of these assets and liabilities and their placement within the fair value hierarchy.
The Company had $21$34 million and $13$31 million available for sale securities, included in other non-current assets, at December 31, 20172020 and 2016.2019, respectively. At December 31, 2017, $142020, $22 million in equity securities were valued at Level 1 and $7$12 million in fixed income securities were valued at Level 2. At December 31, 2016, $82019, $20 million in equity securities were valued at Level 1 and $5$11 million in fixed income securities were valued at Level 2. The carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximates fair value.
Asset Retirement Obligations. Legal obligations associated with the retirement of long-lived assets are recorded at fair value at the time the obligations are incurred, if a reasonable estimate of fair value can be made. Present value techniques
are used which reflect assumptions such as removal and remediation costs, inflation, and profit margins that third parties would demand to settle the amount of the future obligation. The Company did not include a market risk premium for unforeseeable circumstances in its fair value estimates because such a premium could not be reliably estimated. Upon initial recognition of the liability, costs are capitalized as a part of the long-lived asset and allocated to expense over the useful life of the related asset. The liability is accreted to its present value each period with accretion being recorded to operating expense with a corresponding increase in the carrying amount of the liability. To the extent the Company is permitted to collect and has reflected in its financials amounts previously collected from customers and expensed, such amounts serve to reduce what would be reflected as capitalized costs at the initial establishment of an ARO.
Income Taxes. Income taxes are accounted for 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.
In December 2017, the “Tax Cuts and Jobs Act” was signed into law. Among other provisions, the highest corporate federal income tax rate was reduced from 35% to 21% for taxable years beginning after December 31, 2017. As noted above, 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. As such, a deferred tax benefit in the amount of $249 million was recognized in 2017.
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.
As a limited partnership, the Company is treated as a disregarded entity for federal income tax purposes. Accordingly, the Company and its subsidiaries are not treated as separate taxpayers; instead, their income is directly taxable to the Company’s parent. Under the Company’s tax sharing arrangement with its parent, the Company pays its share of taxes based on taxable income, which will generally equal the liability that the Company would have incurred as a separate taxpayer.
Commitments and Contingencies. The Company is subject to proceedings, lawsuits and other claims related to environmental and other matters. Accounting for contingencies requires significant judgment by management regarding the estimated probabilities and ranges of exposure to potential liability.
| |
3. | RELATED PARTY TRANSACTIONS: |
3.RELATED PARTY TRANSACTIONS:
Accounts receivable from related companies reflected on the consolidated balance sheets primarily related to services provided to ETE, ETPET, ETO and other affiliates. Accounts payable to related companies and advance from affiliates reflected on the consolidated balance sheets related to various services provided by ETPETO and other affiliates.
The following tables providetable provides a summary of related party activity included in our consolidated statements of operations:
| | | Years Ended December 31, | | Years Ended December 31, |
| 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 |
Operating revenues | $ | 43 |
| | $ | 17 |
| | $ | 18 |
| Operating revenues | $ | 90 | | | $ | 95 | | | $ | 97 | |
| Operating and maintenance | 7 |
| | 14 |
| | 16 |
| Operating and maintenance | 10 | | | 6 | | | 3 | |
General and administrative | 23 |
| | 27 |
| | 31 |
| General and administrative | 23 | | | 18 | | | 24 | |
Interest income — affiliates | 10 |
| | 26 |
| | 23 |
| |
Income from unconsolidated affiliates | 2 |
| | 1 |
| | 26 |
| |
| Interest expense — related company | | Interest expense — related company | 32 | | | 25 | | | 13 | |
|
The Company settled related partyaffiliate payables with a subsidiary of ETPETO through a non-cash contributioncontributions during the year ended December 31, 20172020 for $8 million. During$4 million and during the year ended December 31, 2016,2018 for $31 million.
As of December 31, 2020 and 2019, the Company settled related party receivables with a subsidiary of ETP through a non-cash distribution for $240 million.
| |
4. | INVESTMENTS IN UNCONSOLIDATED AFFILIATES: |
The Company previously held an investment in Regency, which had been received in connection with a contribution transaction in 2013. In April 2015, ETP completed its acquisition of Regency$550 million and the Company’s investment converted to 15.5$732 million, ETP common units.
Subsequent to the Regency merger, the Company’s investment in ETP consisted of 17.8 million ETP common units, which included ETP common units already held by the Company prior to the Regency merger. This investment was accounted for using the equity method. Effective September 1, 2015, the Company exchanged these ETP common units forrespectively, outstanding under a note receivable from a subsidiary of ETP in the amount of $1.37 billion.payable to ETO. The note receivable accruedpayable accrues interest annually at 4.75%monthly with an annual interest rate of 4.845% as of December 31, 2020 and was duematures on September 1, 2035. On AugustJuly 31, 2016, the remaining balance2027.
The Company has other equity method investments which are not, individually or in the aggregate, significant to our consolidated financial statements.4.DEBT OBLIGATIONS:
The following table sets forth the debt obligations of the Company:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
6.20% Senior Notes due 2017 | $ | — |
| | $ | 300 |
|
7.00% Senior Notes due 2018 | 400 |
| | 400 |
|
8.125% Senior Notes due 2019 | 150 |
| | 150 |
|
7.60% Senior Notes due 2024 | 82 |
| | 82 |
|
7.00% Senior Notes due 2029 | 66 |
| | 66 |
|
8.25% Senior Notes due 2029 | 33 |
| | 33 |
|
Floating Rate Junior Subordinated Notes due 2066 | 54 |
| | 54 |
|
Other long term debt | 5 |
| | 5 |
|
Unamortized fair value adjustments | 28 |
| | 51 |
|
Total debt outstanding | 818 |
| | 1,141 |
|
Less: Current maturities of long-term debt | 407 |
| | 307 |
|
Total long-term debt, less current maturities | $ | 411 |
| | $ | 834 |
|
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| | | |
| | | |
| | | |
7.60% Senior Notes due 2024 | $ | 82 | | | $ | 82 | |
7.00% Senior Notes due 2029 | 66 | | | 66 | |
8.25% Senior Notes due 2029 | 33 | | | 33 | |
Floating Rate Junior Subordinated Notes due 2066 | 54 | | | 54 | |
| | | |
Unamortized fair value adjustments | 10 | | | 12 | |
Total long-term debt outstanding | $ | 245 | | | $ | 247 | |
| | | |
| | | |
Based on the estimated borrowing rates currently available to the Company and its subsidiaries for loans with similar terms and average maturities, the aggregate fair value of the Company’s consolidated debt obligations at December 31, 20172020 and 20162019 was $830$256 million and $1.14 billion,$247 million, respectively. The fair value of the Company’s consolidated debt obligations is a Level 2 valuation based on the observable inputs used for similar liabilities.
As of December 31, 2017,2020, the Company has scheduled long-term debt principal payments as follows:
|
| | | | |
Years Ended December 31, | | |
2018 | | 400 |
|
2019 | | 150 |
|
2020 | | — |
|
2021 | | — |
|
2022 | | 5 |
|
Thereafter | | 235 |
|
Total | | $ | 790 |
|
Senior Notes
Panhandle’s $300 million 6.20% Senior Notes matured on November 1, 2017 and were repaid with borrowings under an affiliate loan agreement. | | | | | | | | |
Years Ending December 31, | | |
2021 | | $ | 0 | |
2022 | | 0 | |
2023 | | 0 | |
2024 | | 82 | |
2025 | | 0 | |
Thereafter | | 153 | |
Total | | $ | 235 | |
Floating Rate Junior Subordinated Notes
The interest rate on the remaining portion of PEPL’s $600 million junior subordinated notes due 2066 is a variable rate based upon the three-month LIBOR rateLondon Interbank Offered Rate plus 3.0175%. The balance of the variable rate portion of the junior subordinated notes was $54 million at December 31, 2020 and 2019 at an effective interest rate of 4.394%3.232% and 3.903% at December 31, 2017, and 2016.4.927%, respectively.
Compliance With Our Covenants
The Company’s notes are subject to certain requirements, such as the maintenance of a fixed charge coverage ratio and a leverage ratio, which if not maintained, restrict the ability of the Company to make certain payments and impose limitations on the ability of the Company to subject its property to liens. Other covenants impose limitations on restricted payments, including dividends and loans to affiliates,related companies, and additional indebtedness. As of December 31, 2017,2020, the Company is in compliance with these covenants.
The Company will continue to opportunistically evaluate alternatives for funding its debt repayment obligations. Alternatives include, but are not limited to, refinancing of amounts due with new senior notes, a term loan facility or a loan provided by ETPETO or other affiliates.
| |
6. | RETIREMENT BENEFITS:5.RETIREMENT BENEFITS: |
Postretirement Benefit Plans
Prior to January 1, 2013, affiliatesAffiliates of the Company previously offered postretirement health care and life insurance benefit plans (other postretirement plans) that covered substantially all employees. Effective January 1, 2013, participationParticipation in the plan was subsequently frozen and medical benefits were no longer offered to non-union employees. Effective January 1, 2014, retiree medical benefits were no longer offered to union employees.
offered. Effective January 1, 2018, the plan was amended to extend coverage to a new closed group of former employees based on certain criteria.
Obligations and Funded Status
Other postretirement benefit liabilities are accrued on an actuarial basis during the years an employee provides services. The following tables contain information at the dates indicated about the obligations and funded status of the Company’s other postretirement plans.
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Change in benefit obligation: | | | |
Benefit obligation at beginning of period | $ | 91 | | | $ | 78 | |
Service cost | 1 | | | 1 | |
Interest cost | 3 | | | 3 | |
| | | |
Actuarial loss | 7 | | | 12 | |
Benefits paid, net | (4) | | | (3) | |
| | | |
| | | |
Benefit obligation at end of period | $ | 98 | | | $ | 91 | |
Change in plan assets: | | | |
Fair value of plan assets at beginning of period | $ | 169 | | | $ | 141 | |
Return on plan assets and other | 18 | | | 23 | |
Employer contributions | 8 | | | 8 | |
Benefits paid, net | (4) | | | (3) | |
| | | |
Fair value of plan assets at end of period | $ | 191 | | | $ | 169 | |
| | | |
Amount overfunded at end of period (1) | $ | 93 | | | $ | 78 | |
| | | |
Amounts recognized in accumulated other comprehensive loss (pre-tax basis) consist of: | | | |
Net actuarial gain | $ | (8) | | | $ | (5) | |
Prior service cost | 19 | | | 37 | |
| $ | 11 | | | $ | 32 | |
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Change in benefit obligation: | | | |
Benefit obligation at beginning of period | $ | 19 |
| | $ | 21 |
|
Interest cost | 1 |
| | 1 |
|
Amendments | 8 |
| | — |
|
Actuarial gain | (1 | ) | | (1 | ) |
Benefits paid, net | (2 | ) | | (2 | ) |
Benefit obligation at end of period | $ | 25 |
| | $ | 19 |
|
Change in plan assets: | | | |
Fair value of plan assets at beginning of period | $ | 126 |
| | $ | 118 |
|
Return on plan assets and other | 11 |
| | 2 |
|
Employer contributions | 8 |
| | 8 |
|
Benefits paid, net | (2 | ) | | (2 | ) |
Fair value of plan assets at end of period | $ | 143 |
| | $ | 126 |
|
| | | |
Amount overfunded at end of period (1) | $ | 118 |
| | $ | 107 |
|
| | | |
Amounts recognized in accumulated other comprehensive income (pre-tax basis) consist of: | | | |
Net actuarial gain | $ | (13 | ) | | $ | (7 | ) |
Prior service cost | 20 |
| | 14 |
|
| $ | 7 |
| | $ | 7 |
|
(1)Recorded as a non-current asset in the consolidated balance sheets. | |
(1)
| Recorded as a non-current asset in the consolidated balance sheets. |
Components of Net Periodic Benefit Cost
The following tables set forth the components of net periodic benefit cost of the Company’s postretirement benefit plan for the periods presented:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
Service cost | $ | 1 | | | $ | 1 | | | $ | 1 | |
Interest cost | 3 | | | 3 | | | 2 | |
Expected return on plan assets | (9) | | | (7) | | | (7) | |
Prior service credit amortization | 18 | | | 24 | | | 14 | |
| | | | | |
| | | | | |
Net periodic benefit cost | $ | 13 | | | $ | 21 | | | $ | 10 | |
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Interest cost | $ | 1 |
| | $ | 1 |
| | $ | 1 |
|
Expected return on plan assets | (7 | ) | | (6 | ) | | (6 | ) |
Prior service credit amortization | 1 |
| | 1 |
| | 1 |
|
Actuarial loss amortization | — |
| | (1 | ) | | (1 | ) |
Net periodic benefit cost | $ | (5 | ) | | $ | (5 | ) | | $ | (5 | ) |
Services cost is recorded within general and administrative expense while non-service cost components are recorded within other, net in our consolidated statements of operations.The estimated prior service cost for other postretirement plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost during 20172021 is $1 million.
Assumptions. The weighted-average discount rate used in determining benefit obligations was 3.75%2.16% and 3.71%2.92% at December 31, 20172020 and 2016,2019, respectively.
The weighted-average assumptions used in determining net periodic benefit cost for the periods presented are shown in the table below:
| | | Years Ended December 31, | | Years Ended December 31, |
| 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 |
Discount rate | 3.75 | % | | 3.88 | % | | 3.60 | % | Discount rate | 3.00 | % | | 4.05 | % | | 3.44 | % |
Expected return on assets: | | | | | | Expected return on assets: | | |
Tax exempt accounts | 7.00 | % | | 7.00 | % | | 7.00 | % | Tax exempt accounts | 7.00 | % | | 7.00 | % | | 7.00 | % |
Taxable accounts | 4.50 | % | | 4.50 | % | | 4.50 | % | Taxable accounts | 4.75 | % | | 4.75 | % | | 4.75 | % |
The Company employs a building block approach in determining the expected long-term rate of return on the plans’ assets with proper consideration for diversification and rebalancing. Historical markets are studied and long-term historical relationships between equities and fixed-income are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term market assumptions are determined. Peer data and historical returns are reviewed to check for reasonableness and appropriateness.
The assumed health care cost trend weighted-average rates used to measure the expected cost of benefits covered by the plans are shown in the table below:
| | | December 31, | | December 31, |
| 2017 | | 2016 | | 2020 | | 2019 |
Health care cost trend rate | 8.10 | % | | 8.10 | % | Health care cost trend rate | 8.05 | % | | 8.05 | % |
Rate to which the cost trend is assumed to decline (the ultimate trend rate) | 4.95 | % | | 4.70 | % | Rate to which the cost trend is assumed to decline (the ultimate trend rate) | 4.65 | % | | 4.65 | % |
Year that the rate reaches the ultimate trend rate | 2025 |
| | 2024 |
| Year that the rate reaches the ultimate trend rate | 2028 | | 2027 |
Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:no material effect on accumulated postretirement benefit obligation or on total of annual service and interest cost components.
The fair value of the Company’s other postretirement plan assets at the dates indicated by asset category is as follows: