10-Q
Table of Contents

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-32740
ENERGY TRANSFER EQUITY, L.P.
(Exact name of registrant as specified in its charter)
 
Delaware
 
30-0108820
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
8111 Westchester Drive, Suite 600, Dallas, Texas 75225
(Address of principal executive offices) (zip code)
(214) 981-0700
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
ý
 
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
At April 29, 2016, the registrant had 1,044,791,157 Common Units outstanding.
 


Table of Contents

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


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Forward-Looking Statements
Certain matters discussed in this report, excluding historical information, as well as some statements by Energy Transfer Equity, L.P. (“Energy Transfer Equity,” the “Partnership” or “ETE”) in periodic press releases and some oral statements of Energy Transfer Equity officials during presentations about the Partnership, include forward-looking statements. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. Statements using words such as “anticipate,” “project,” “expect,” “plan,” “goal,” “forecast,” “estimate,” “intend,” “continue,” “believe,” “may,” “will” or similar expressions help identify forward-looking statements. Although the Partnership and its general partner believe such forward-looking statements are based on reasonable assumptions and current expectations and projections about future events, no assurance can be given that such assumptions, expectations or projections will prove to be correct. Forward-looking statements are subject to a variety of risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, the Partnership’s actual results may vary materially from those anticipated, estimated or expressed, forecasted, projected or expected in forward-looking statements since many of the factors that determine these results are subject to uncertainties and risks that are difficult to predict and beyond management’s control. For additional discussion of risks, uncertainties and assumptions, see “Part I — Item 1A. Risk Factors” in the Partnership’s Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission on February 29, 2016 and “Part II — Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2016.
Definitions
The following is a list of certain acronyms and terms generally used in the energy industry and throughout this document:
 
/d
 
per day
 
 
 
 
AmeriGas
 
AmeriGas Partners, L.P.
 
 
 
 
 
AOCI
 
accumulated other comprehensive income (loss)
 
 
 
 
 
Bbls
 
barrels
 
 
 
 
Bcf
 
billion cubic feet
 
 
 
 
 
Btu
 
British thermal unit, an energy measurement used by gas companies to convert the volume of gas used to its heat equivalent, and thus calculate the actual energy content
 
 
 
 
 
Citrus
 
Citrus, LLC
 
 
 
 
 
Convertible Units
 
Series A Convertible Preferred Units in ETE
 
 
 
 
 
ET Rover
 
ET Rover Pipeline LLC
 
 
 
 
 
ETC
 
Energy Transfer Corp LP
 
 
 
 
 
ETP
 
Energy Transfer Partners, L.P.
 
 
 
 
 
ETP GP
 
Energy Transfer Partners GP, L.P., the general partner of ETP
 
 
 
 
 
ETP Preferred Units
 
ETP’s Series A Convertible Preferred Units
 
 
 
 
 
Exchange Act
 
Securities Exchange Act of 1934
 
 
 
 
 
FEP
 
Fayetteville Express Pipeline LLC
 
 
 
 
 
FERC
 
Federal Energy Regulatory Commission
 
 
 
 
 
FGT
 
Florida Gas Transmission Company, LLC
 
 
 
 
 
GAAP
 
accounting principles generally accepted in the United States of America
 
 
 
 
 
HPC
 
RIGS Haynesville Partnership Co.
 
 
 
 
 
IDRs
 
incentive distribution rights
 
 
 
 
 
Lake Charles LNG
 
Lake Charles LNG Company, LLC
 
 
 
 
 
LIBOR
 
London Interbank Offered Rate
 
 
 
 
 
LNG
 
liquefied natural gas
 
 
 
 

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Lone Star
 
Lone Star NGL LLC
 
 
 
 
 
MEP
 
Midcontinent Express Pipeline LLC
 
 
 
 
 
MMBtu
 
million British thermal units
 
 
 
 
 
MTBE
 
methyl tertiary butyl ether
 
 
 
 
 
NGL
 
natural gas liquid, such as propane, butane and natural gasoline
 
 
 
 
NYMEX
 
New York Mercantile Exchange
 
 
 
 
 
OSHA
 
Federal Occupational Safety and Health Act
 
 
 
 
OTC
 
over-the-counter
 
 
 
 
 
Panhandle
 
Panhandle Eastern Pipe Line Company, LP
 
 
 
 
 
PCBs
 
polychlorinated biphenyl
 
 
 
 
 
PHMSA
 
Pipeline Hazardous Materials Safety Administration
 
 
 
 
 
Plan
 
the plan of the Partnership pursuant to which eligible offerees elected to forgo certain distributions on some or all of their ETE common units and reinvest those distributions in convertible units
 
 
 
 
 
Regency
 
Regency Energy Partners LP
 
 
 
 
 
Retail Holdings
 
ETP Retail Holdings LLC, a joint venture between subsidiaries of ETC OLP and Sunoco, Inc.
 
 
 
 
 
SEC
 
Securities and Exchange Commission
 
 
 
 
 
Southern Union
 
Southern Union Company
 
 
 
 
 
Sunoco GP
 
Sunoco GP LLC, the general partner of Sunoco LP
 
 
 
 
 
Sunoco Logistics
 
Sunoco Logistics Partners L.P.
 
 
 
 
 
Sunoco LP
 
Sunoco LP (previously named Susser Petroleum Partners, LP)
 
 
 
 
 
Susser
 
Susser Holdings Corporation
 
 
 
 
 
Transwestern
 
Transwestern Pipeline Company, LLC
 
 
 
 
 
Trunkline
 
Trunkline Gas Company, LLC
 
 
 
 
 
WMB
 
The Williams Companies, Inc.
 
 
 
 
 
WMB Contribution
 
Contribution by ETC to ETE of substantially all of the assets and liabilities it assumes from WMB as a result of the proposed merger between ETC and WMB
 
 
 
 
 
WTI
 
West Texas Intermediate Crude
Adjusted EBITDA is a term used throughout this document, which we define as earnings before interest, taxes, depreciation, depletion, amortization and other non-cash items, such as non-cash compensation expense, gains and losses on disposals of assets, the allowance for equity funds used during construction, unrealized gains and losses on commodity risk management activities, non-cash impairment charges, losses on extinguishments of debt, gain on deconsolidation and other non-operating income or expense items. Unrealized gains and losses on commodity risk management activities include unrealized gains and losses on commodity derivatives and inventory fair value adjustments (excluding lower of cost or market adjustments). Adjusted EBITDA reflects amounts for less than wholly-owned subsidiaries based on 100% of the subsidiaries’ results of operations and for unconsolidated affiliates based on the Partnership’s proportionate ownership.

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
ENERGY TRANSFER EQUITY, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(unaudited)
 
 
March 31, 2016
 
December 31, 2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
807

 
$
606

Accounts receivable, net
2,412

 
2,400

Accounts receivable from related companies
96

 
119

Inventories
1,499

 
1,636

Derivative assets
27

 
46

Other current assets
743

 
603

Total current assets
5,584

 
5,410

 
 
 
 
Property, plant and equipment
56,873

 
54,979

Accumulated depreciation and depletion
(6,748
)
 
(6,296
)
 
50,125

 
48,683

 
 
 
 
Advances to and investments in unconsolidated affiliates
3,442

 
3,462

Non-current derivative assets
16

 

Other non-current assets, net
731

 
730

Intangible assets, net
5,396

 
5,431

Goodwill
7,471

 
7,473

Total assets
$
72,765

 
$
71,189


















The accompanying notes are an integral part of these consolidated financial statements.
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ENERGY TRANSFER EQUITY, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in million)
(unaudited)

 
March 31, 2016
 
December 31, 2015
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
2,399

 
$
2,274

Accounts payable to related companies
15

 
28

Derivative liabilities
74

 
69

Accrued and other current liabilities
2,273

 
2,408

Current maturities of long-term debt
930

 
131

Total current liabilities
5,691

 
4,910

 
 
 
 
Long-term debt, less current maturities
37,401

 
36,837

Non-current derivative liabilities
213

 
137

Deferred income taxes
5,256

 
4,590

Other non-current liabilities
1,117

 
1,069

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Preferred units of subsidiary
33

 
33

Redeemable noncontrolling interests
15

 
15

 
 
 
 
Equity:
 
 
 
General Partner
(2
)
 
(2
)
Limited Partners:
 
 
 
Common Unitholders
(1,684
)
 
(952
)
Class D Units

 
22

Series A Convertible Preferred Units

 

Total partners’ capital
(1,686
)
 
(932
)
Noncontrolling interest
24,725

 
24,530

Total equity
23,039

 
23,598

Total liabilities and equity
$
72,765

 
$
71,189












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

ENERGY TRANSFER EQUITY, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per unit data)
(unaudited)
 
Three Months Ended
March 31,
 
2016
 
2015
REVENUES
 
 
 
Natural gas sales
$
838

 
$
1,035

NGL sales
940

 
981

Crude sales
1,209

 
2,208

Gathering, transportation and other fees
1,003

 
1,046

Refined product sales
2,539

 
3,656

Other
1,153

 
1,454

Total revenues
7,682

 
10,380

COSTS AND EXPENSES
 
 
 
Cost of products sold
5,622

 
8,487

Operating expenses
641

 
628

Depreciation, depletion and amortization
562


493

Selling, general and administrative
156

 
155

Total costs and expenses
6,981

 
9,763

OPERATING INCOME
701

 
617

OTHER INCOME (EXPENSE)
 
 
 
Interest expense, net
(427
)

(371
)
Equity in earnings of unconsolidated affiliates
61

 
57

Losses on interest rate derivatives
(70
)

(77
)
Other, net
16

 
7

INCOME BEFORE INCOME TAX EXPENSE (BENEFIT)
281

 
233

Income tax expense (benefit)
(55
)

12

NET INCOME
336

 
221

Less: Net income (loss) attributable to noncontrolling interest
24

 
(63
)
NET INCOME ATTRIBUTABLE TO PARTNERS
312

 
284

General Partner’s interest in net income
1

 
1

Class D Unitholder’s interest in net income

 
1

Limited Partners’ interest in net income
$
311

 
$
282

NET INCOME PER LIMITED PARTNER UNIT:
 
 
 
Basic
$
0.30

 
$
0.26

Diluted
$
0.30

 
$
0.26


The accompanying notes are an integral part of these consolidated financial statements.
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ENERGY TRANSFER EQUITY, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
(unaudited)
 
 
Three Months Ended
March 31,
 
2016
 
2015
Net income
$
336

 
$
221

Other comprehensive income (loss), net of tax:
 
 
 
Change in value of derivative instruments accounted for as cash flow hedges

 
1

Change in value of available-for-sale securities
2

 
1

Actuarial gain (loss) relating to pension and other postretirement benefit plans
(9
)
 
45

Foreign currency translation adjustments
(1
)
 
(2
)
Change in other comprehensive income from unconsolidated affiliates
(6
)
 
(2
)
 
(14
)
 
43

Comprehensive income
322

 
264

Less: Comprehensive income (loss) attributable to noncontrolling interest
10

 
(20
)
Comprehensive income attributable to partners
$
312

 
$
284






























The accompanying notes are an integral part of these consolidated financial statements.
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ENERGY TRANSFER EQUITY, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2016
(Dollars in millions)
(unaudited)
 
 
General Partner    
 
Common Unitholders    
 
Class D Units
 
Accumulated Other Comprehensive Income (Loss)
 
Non-controlling Interest
 
Total    
Balance, December 31, 2015
$
(2
)
 
$
(952
)
 
$
22

 
$

 
$
24,530

 
$
23,598

Distributions to partners
(1
)
 
(298
)
 

 

 

 
(299
)
Distributions to noncontrolling interest

 

 

 

 
(658
)
 
(658
)
Subsidiary units issued

 
(12
)
 

 

 
676

 
664

Non-cash compensation expense, net of units tendered by employees for tax withholdings

 

 
(22
)
 

 
23

 
1

Capital contributions received from noncontrolling interest

 

 

 

 
132

 
132

Sunoco, Inc. retail business to Sunoco LP transaction

 
(739
)
 

 

 

 
(739
)
Other comprehensive income, net of tax

 

 

 

 
(14
)
 
(14
)
Other, net

 
6

 

 

 
12

 
18

Net income
1

 
311

 

 

 
24

 
336

Balance, March 31, 2016
$
(2
)
 
$
(1,684
)
 
$

 
$

 
$
24,725

 
$
23,039




















The accompanying notes are an integral part of these consolidated financial statements.
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ENERGY TRANSFER EQUITY, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(unaudited)
 
Three Months Ended
March 31,
 
2016
 
2015
OPERATING ACTIVITIES
 
 
 
Net income
$
336

 
$
221

Reconciliation of net income to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
562

 
493

Deferred income taxes
(46
)
 
20

Amortization included in interest expense
(3
)
 
(10
)
Unit-based compensation expense
1

 
23

Losses on disposal of assets
3

 

Inventory valuation adjustments
13

 
34

Equity in earnings of unconsolidated affiliates
(61
)
 
(57
)
Distributions from unconsolidated affiliates
84

 
64

Other non-cash
6

 
(9
)
Net change in operating assets and liabilities, net of effects of acquisition
90

 
(204
)
Net cash provided by operating activities
985

 
575

INVESTING ACTIVITIES
 
 
 
Cash paid for acquisitions, net of cash received
(2
)
 
(370
)
Cash proceeds from sale of noncontrolling interest in Rover Pipeline LLC to AE-Midco Rover, LLC

 
64

Cash paid for acquisition of a noncontrolling interest

 
(129
)
Capital expenditures, excluding allowance for equity funds used during construction
(1,948
)
 
(2,158
)
Contributions in aid of construction costs
10

 
4

Contributions to unconsolidated affiliates
(31
)
 
(34
)
Distributions from unconsolidated affiliates in excess of cumulative earnings
21

 
33

Proceeds from the sale of assets
10

 
9

Change in restricted cash
(1
)
 

Other
(1
)
 
(4
)
Net cash used in investing activities
(1,942
)
 
(2,585
)
FINANCING ACTIVITIES
 
 
 
Proceeds from borrowings
5,750

 
8,731

Repayments of long-term debt
(4,422
)
 
(5,938
)
Subsidiary units issued for cash
664

 
857

Distributions to partners
(299
)
 
(244
)
Debt issuance costs
(19
)
 
(33
)
Distributions to noncontrolling interest
(658
)
 
(565
)
Capital contributions received from noncontrolling interest
132

 
219

Other, net
10

 
(1
)
Net cash provided by financing activities
1,158

 
3,026

Increase in cash and cash equivalents
201

 
1,016

Cash and cash equivalents, beginning of period
606

 
847

Cash and cash equivalents, end of period
$
807

 
$
1,863


The accompanying notes are an integral part of these consolidated financial statements.
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ENERGY TRANSFER EQUITY, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollar and unit amounts, except per unit data, are in millions)
(unaudited)
1.
ORGANIZATION AND BASIS OF PRESENTATION
Organization
Unless the context requires otherwise, references to “we,” “us,” “our,” the “Partnership” and “ETE” mean Energy Transfer Equity, L.P. and its consolidated subsidiaries. References to the “Parent Company” mean Energy Transfer Equity, L.P. on a stand-alone basis.
The consolidated financial statements of ETE presented herein include the results of operations of:
the Parent Company;
our controlled subsidiaries, ETP and Sunoco LP (see description of their respective operations below under “Business Operations”);
consolidated subsidiaries of our controlled subsidiaries and our wholly-owned subsidiaries that own general partner interests and IDR interests in ETP and Sunoco LP; and
our wholly-owned subsidiary, Lake Charles LNG.
Our subsidiaries also own varying undivided interests in certain pipelines. Ownership of these pipelines has been structured as an ownership of an undivided interest in assets, not as an ownership interest in a partnership, limited liability company, joint venture or other forms of entities. Each owner controls marketing and invoices separately, and each owner is responsible for any loss, damage or injury that may occur to their own customers. As a result, we apply proportionate consolidation for our interests in these entities.
Business Operations
The Parent Company’s principal sources of cash flow are derived from its direct and indirect investments in the limited partner and general partner interests in ETP and Sunoco LP and cash flows from the operations of Lake Charles LNG. The Parent Company’s primary cash requirements are for general and administrative expenses, debt service requirements and distributions to its partners. Parent Company-only assets are not available to satisfy the debts and other obligations of ETE’s subsidiaries. In order to understand the financial condition of the Parent Company on a stand-alone basis, see Note 14 for stand-alone financial information apart from that of the consolidated partnership information included herein.
Our financial statements reflect the following reportable business segments:
Investment in ETP, including the consolidated operations of ETP;
Investment in Sunoco LP, including the consolidated operations of Sunoco LP;
Investment in Lake Charles LNG, including the operations of Lake Charles LNG; and
Corporate and Other, including the following:
activities of the Parent Company; and
the goodwill and property, plant and equipment fair value adjustments recorded as a result of the 2004 reverse acquisition of Heritage Propane Partners, L.P.
Basis of Presentation
The unaudited financial information included in this Form 10-Q has been prepared on the same basis as the audited consolidated financial statements included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2015. In the opinion of the Partnership’s management, such financial information reflects all adjustments necessary for a fair presentation of the financial position and the results of operations for such interim periods in accordance with GAAP. All intercompany items and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been omitted pursuant to the rules and regulations of the SEC.

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Certain prior period amounts have been reclassified to conform to the 2016 presentation. These reclassifications had no impact on net income or total equity.
Use of Estimates
The unaudited consolidated financial statements have been prepared in conformity with GAAP, which includes the use of estimates and assumptions made by management that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities that exist at the date of the consolidated financial statements. Although these estimates are based on management’s available knowledge of current and expected future events, actual results could be different from those estimates.
Subsidiary Common Unit Transactions
The Parent Company accounts for the difference between the carrying amount of its investments in ETP and Sunoco LP and the underlying book value arising from the issuance or redemption of units by ETP or Sunoco LP (excluding transactions with the Parent Company) as capital transactions.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which clarifies the principles for recognizing revenue based on the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB deferred the effective date of ASU 2014-09, which is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual periods. ASU 2014-09 can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. In March 2016, the FASB issued Accounting Standards Update No. 2016-08 to clarify the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued Accounting Standards Update No. 2016-10 to clarify guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. The Partnership is currently evaluating the impact, if any, that adopting this new accounting standard will have on our revenue recognition policies.
In February 2015, the FASB issued Accounting Standards Update No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”), which changed the requirements for consolidations analysis. Under ASU 2015-02, reporting entities are required to evaluate whether they should consolidate certain legal entities. The Partnership adopted this standard on January 1, 2016, and the adoption did not impact the Partnership’s financial position or results of operations.
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. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Partnership is currently evaluating the impact that it will have on the consolidated financial statements and related disclosures.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Stock compensation (Topic 718) (“ASU 2016-09”). The objective of the update is to reduce complexity in accounting standards. The areas for simplification in this update involve several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. In addition, the amendments in this update eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Partnership is currently evaluating the impact that it will have on the consolidated financial statements and related disclosures.

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2.
ACQUISITION AND CONTRIBUTION TRANSACTIONS
WMB Merger
In September 2015, ETE, ETC and WMB entered into a merger agreement. The merger agreement provides that WMB will be merged with and into ETC, with ETC surviving the merger. ETC is a recently formed limited partnership that will elect to be treated as a corporation for federal income tax purposes and, upon closing of the merger, would own the managing member interest in our general partner and limited partner interests in ETE. At the time of the merger, each issued and outstanding share of WMB common stock will be exchanged for (i) $8.00 in cash and 1.5274 ETC common shares representing limited partner interests in ETC, (ii) 1.8716 ETC common shares, or (iii) $43.50 in cash.
The closing of the transaction is subject to customary conditions, including the receipt of approval of the merger from WMB’s stockholders and all required regulatory approvals, including approval pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Subject to the satisfaction or waiver of these conditions, ETE and WMB anticipate that the transaction will be completed in the first half of 2016.
If the closing of the merger were to have occurred as of the date of this Quarterly Report on Form 10-Q, Latham & Watkins LLP (“Latham”) would have been unable to deliver to ETC and WMB its tax opinion to the effect that the contribution of WMB’s assets and liabilities to ETE and ETE’s issuance of Class E units to ETC should qualify as an exchange to which Section 721(a) of the Internal Revenue Code applies (the “721 Opinion”). The receipt by ETC and WMB of the 721 Opinion is one of the conditions to the closing of the merger and ETE believes that there is a substantial risk that the condition will not be satisfied or waived by ETE and that the merger will not be consummated. If the closing condition relating to the 721 Opinion is not met or waived, and as a result the merger is not consummated, ETE expects to announce that in a press release and file a Current Report on Form 8-K with the SEC regarding the same. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Recent Developments,” for additional discussion related to the 721 Opinion, the reasons why Latham has indicated it would not be able to deliver the 721 Opinion and the risks associated with the failure of the related closing condition.
Sunoco Retail to Sunoco LP
In March 2016, ETP contributed to Sunoco LP its remaining 68.42% interest in Sunoco, LLC and 100% interest in the legacy Sunoco, Inc. retail business for $2.23 billion. Sunoco LP paid $2.20 billion in cash, including a working capital adjustment, and issued 5.7 million Sunoco LP common units to Retail Holdings, a wholly-owned subsidiary of ETP. The transaction was effective January 1, 2016.
3.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash on hand, demand deposits, and investments with original maturities of three months or less. We consider cash equivalents to include short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value.
We place our cash deposits and temporary cash investments with high credit quality financial institutions. At times, our cash and cash equivalents may by uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limit.
Non-cash investing activities were as follows:
 
Three Months Ended
March 31,
 
2016
 
2015
NON-CASH INVESTING ACTIVITIES:
 
 
 
Accrued capital expenditures
$
829

 
$
658

Net losses from subsidiary common unit issuances
(12
)
 


9

Table of Contents

4.
INVENTORIES
Inventories consisted of the following:
 
March 31, 2016
 
December 31, 2015
Natural gas and NGLs
$
331

 
$
415

Crude oil
453

 
424

Refined products
342

 
420

Other
373

 
377

Total inventories
$
1,499

 
$
1,636

We utilize commodity derivatives to manage price volatility associated with our natural gas inventory. Changes in fair value of designated hedged inventory are recorded in inventory on our consolidated balance sheets and cost of products sold in our consolidated statements of operations.
5.
FAIR VALUE MEASURES
Based on the estimated borrowing rates currently available to us and our subsidiaries for loans with similar terms and average maturities, the aggregate fair value and carrying amount of our consolidated debt obligations as of March 31, 2016 was $35.61 billion and $38.33 billion, respectively. As of December 31, 2015, the aggregate fair value and carrying amount of our consolidated debt obligations was $33.22 billion and $36.97 billion, respectively. The fair value of our consolidated debt obligations is a Level 2 valuation based on the observable inputs used for similar liabilities.
We have commodity derivatives, interest rate derivatives and embedded derivatives in the ETP Preferred Units that are accounted for as assets and liabilities at fair value in our consolidated balance sheets. We determine the fair value of our assets and liabilities subject to fair value measurement by using the highest possible “level” of inputs. Level 1 inputs are observable quotes in an active market for identical assets and liabilities. We consider the valuation of marketable securities and commodity derivatives transacted through a clearing broker with a published price from the appropriate exchange as a Level 1 valuation. Level 2 inputs are inputs observable for similar assets and liabilities. We consider OTC commodity derivatives entered into directly with third parties as a Level 2 valuation since the values of these derivatives are quoted on an exchange for similar transactions. Additionally, we consider our options transacted through our clearing broker as having Level 2 inputs due to the level of activity of these contracts on the exchange in which they trade. We consider the valuation of our interest rate derivatives as Level 2 as the primary input, the LIBOR curve, is based on quotes from an active exchange of Eurodollar futures for the same period as the future interest swap settlements. Level 3 inputs are unobservable. Derivatives related to the embedded derivatives in the preferred units are valued using a binomial lattice model. The market inputs utilized in the model include credit spread, probabilities of the occurrence of certain events, common unit price, dividend yield, and expected value, and are considered Level 3. During the three months ended March 31, 2016, no transfers were made between any levels within the fair value hierarchy.

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The following tables summarize the fair value of our financial assets and liabilities measured and recorded at fair value on a recurring basis as of March 31, 2016 and December 31, 2015 based on inputs used to derive their fair values:
 
Fair Value Measurements at
March 31, 2016
 
Fair Value Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Interest rate derivatives
$
25

 
$

 
$
25

 
$

Commodity derivatives:
 
 
 
 
 
 
 
Natural Gas:
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
6

 
6

 

 

Swing Swaps IFERC
1

 

 
1

 

Fixed Swaps/Futures
67

 
67

 

 

Forward Physical Swaps
3

 

 
3

 

Power:
 
 
 
 
 
 
 
Forwards
22

 

 
22

 

Futures
1

 
1

 

 

Options — Calls
2

 
2

 

 

Natural Gas Liquids – Forwards/Swaps
34

 
34

 

 

Refined Products — Futures
6

 
6

 

 

Crude – Futures
12

 
12

 

 

Total commodity derivatives
154

 
128

 
26

 

Total assets
$
179

 
$
128

 
$
51

 
$

Liabilities:
 
 
 
 
 
 
 
Interest rate derivatives
$
(267
)
 
$

 
$
(267
)
 
$

Embedded derivatives in the ETP Preferred Units
(5
)
 

 

 
(5
)
Commodity derivatives:
 
 
 
 
 
 
 
Natural Gas:
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
(9
)
 
(9
)
 

 

Swing Swaps IFERC
(2
)
 
(1
)
 
(1
)
 

Fixed Swaps/Futures
(50
)
 
(50
)
 

 

Power:
 
 
 
 
 
 
 
Forwards
(26
)
 

 
(26
)
 

Futures
(1
)
 
(1
)
 

 

Natural Gas Liquids – Forwards/Swaps
(33
)
 
(33
)
 

 

Refined Products — Futures
(4
)
 
(4
)
 

 

Crude — Futures
(5
)
 
(5
)
 

 

Total commodity derivatives
(130
)
 
(103
)
 
(27
)
 

Total liabilities
$
(402
)
 
$
(103
)
 
$
(294
)
 
$
(5
)

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Table of Contents

 
Fair Value Measurements at
December 31, 2015
 
Fair Value Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Natural Gas:
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
16

 
16

 

 

Swing Swaps IFERC
10

 
2

 
8

 

Fixed Swaps/Futures
274

 
274

 

 

Forward Physical Contracts
4

 

 
4

 

Power:
 
 
 
 
 
 
 
Forwards
22

 

 
22

 

Futures
3

 
3

 

 

Options — Calls
1

 
1

 

 

Options — Puts
1

 
1

 

 

Natural Gas Liquids — Forwards/Swaps
99

 
99

 

 

Refined Products — Futures
15

 
15

 

 

Crude - Futures
9

 
9

 

 

Total commodity derivatives
454

 
420

 
34

 

Total assets
$
454

 
$
420

 
$
34

 
$

Liabilities:
 
 
 
 
 
 
 
Interest rate derivatives
$
(171
)
 
$

 
$
(171
)
 
$

Embedded derivatives in the ETP Preferred Units
(5
)
 

 

 
(5
)
Commodity derivatives:
 
 
 
 
 
 
 
Natural Gas:
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
(16
)
 
(16
)
 

 

Swing Swaps IFERC
(12
)
 
(2
)
 
(10
)
 

Fixed Swaps/Futures
(203
)
 
(203
)
 

 

Power:
 
 
 
 
 
 
 
Forwards
(22
)
 

 
(22
)
 

Futures
(2
)
 
(2
)
 

 

Options — Calls
(1
)
 
(1
)
 

 

Natural Gas Liquids — Forwards/Swaps
(89
)
 
(89
)
 

 

Refined Products — Futures
(6
)
 
(6
)
 

 

Crude - Futures
(5
)
 
(5
)
 

 

Total commodity derivatives
(356
)
 
(324
)
 
(32
)
 

Total liabilities
$
(532
)
 
$
(324
)
 
$
(203
)
 
$
(5
)
The following table presents a reconciliation of the beginning and ending balances for our Level 3 financial instruments measured at fair value on a recurring basis using significant unobservable inputs for the three months ended March 31, 2016.
Balance, December 31, 2015
$
(5
)
Net unrealized gains included in other income (expense)

Balance, March 31, 2016
$
(5
)

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6.
NET INCOME PER LIMITED PARTNER UNIT
A reconciliation of income and weighted average units used in computing basic and diluted income per unit is as follows:
 
Three Months Ended
March 31,
 
2016
 
2015
Net Income
$
336

 
$
221

Less: Income (loss) attributable to noncontrolling interest
24

 
(63
)
Net Income, net of noncontrolling interest
312

 
284

Less: General Partner’s interest in income
1

 
1

Less: Class D Unitholder’s interest in income

 
1

Income available to Limited Partners
$
311

 
$
282

Basic Income per Limited Partner Unit:
 
 
 
Weighted average limited partner units
1,044.8

 
1,077.6

Basic income per Limited Partner unit
$
0.30

 
$
0.26

Diluted Income per Limited Partner Unit:
 
 
 
Income available to Limited Partners
$
311

 
$
282

Dilutive effect of equity-based compensation of subsidiaries and distributions to Class D Unitholder

 
(1
)
Diluted income available to Limited Partners
$
311

 
$
281

Weighted average limited partner units
1,044.8

 
1,077.6

Dilutive effect of unconverted unit awards

 
1.4

Diluted weighted average limited partner units
1,044.8

 
1,079.0

Diluted income per Limited Partner unit
$
0.30

 
$
0.26

7.
DEBT OBLIGATIONS
Parent Company Indebtedness
The Parent Company’s indebtedness, including its senior notes, senior secured term loan and senior secured revolving credit facility, is secured by all of its and certain of its subsidiaries’ tangible and intangible assets.
Revolving Credit Facility
The Parent Company’s revolving credit facility has a capacity of $1.5 billion. As of March 31, 2016, there were $965 million outstanding borrowings under the Parent Company Credit Facility and the amount available for future borrowings was $535 million.
Subsidiary Indebtedness
Sunoco LP Term Loan and Senior Notes
In March 2016, Sunoco LP entered into a term loan agreement which provides secured financing in an aggregate principal amount of up to $2.035 billion due 2019. The full amount was borrowed by Sunoco LP as of March 31, 2016. Amounts borrowed under the term loan bear interest at either LIBOR or base rate plus an applicable margin based on Sunoco LP’s election for each interest period. The proceeds were used to fund a portion of the ETP dropdown and to pay fees and expenses incurred in connection with the ETP dropdown and the term loan.
In April 2016, Sunoco LP issued $800 million aggregate principal amount of 6.25% Senior Notes due 2021. The net proceeds of $789 million were used to repay a portion of the borrowings under its term loan facility.
ETP Credit Facility
The ETP Credit Facility allows for borrowings of up to $3.75 billion and expires in November 2019. The indebtedness under the ETP Credit Facility is unsecured, is not guaranteed by any of ETP’s subsidiaries and has equal rights to holders of ETP’s current and future unsecured debt. As of March 31, 2016, the ETP Credit Facility had $4 million of outstanding borrowings.

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Table of Contents

Sunoco Logistics Credit Facilities
Sunoco Logistics maintains a $2.5 billion unsecured revolving credit agreement (the “Sunoco Logistics Credit Facility”), which matures in March 2020. The Sunoco Logistics Credit Facility contains an accordion feature, under which the total aggregate commitment may be increased to $3.25 billion under certain conditions. As of March 31, 2016, the Sunoco Logistics Credit Facility had $942 million of outstanding borrowings.
Sunoco LP Credit Facility
Sunoco LP maintains a $1.5 billion revolving credit facility (the “Sunoco LP Credit Facility”), which expires in September 2019. The Sunoco LP Credit Facility can be increased from time to time upon Sunoco LP’s written request, subject to certain conditions, up to an additional $250 million. As of March 31, 2016, the Sunoco LP Credit Facility had $675 million of outstanding borrowings.
Compliance with Our Covenants
We and our subsidiaries were in compliance with all requirements, tests, limitations, and covenants related to our respective credit agreements as of March 31, 2016.
8.
EQUITY
ETE
The changes in ETE common units and Convertible Units during the three months ended March 31, 2016 were as follows:
 
Number of
Convertible Units
 
Number of
Common Units
Outstanding at December 31, 2015

 
1,044.8

Issue Series A Convertible Preferred Units
329.3

 

Outstanding at March 31, 2016
329.3

 
1,044.8

Series A Convertible Preferred Units
On March 8, 2016, the Partnership completed a private offering of 329.3 million Series A Convertible Preferred Units representing limited partner interests in the Partnership (the “Convertible Units”) to certain common unitholders (“Electing Unitholders”) who elected to participate in a plan to forgo a portion of their future potential cash distributions on common units participating in the plan for a period of up to nine fiscal quarters, commencing with distributions for the fiscal quarter ended March 31, 2016, and reinvest those distributions in the Convertible Units. With respect to each quarter for which the declaration date and record date occurs prior to the closing of the merger, or earlier termination of the merger agreement (the “WMB End Date”), each participating common unit will receive the same cash distribution as all other ETE common units up to $0.11 per unit, which represents approximately 40% of the per unit distribution paid with respect to ETE common units for the quarter ended December 31, 2015 (the “Preferred Distribution Amount”), and the holder of such participating common unit will forgo all cash distributions in excess of that amount (other than (i) any non-cash distribution or (ii) any cash distribution that is materially and substantially greater, on a per unit basis, than ETE’s most recent regular quarterly distribution, as determined by the ETE general partner (such distributions in clauses (i) and (ii), “Extraordinary Distributions”)). With respect to each quarter for which the declaration date and record date occurs after the WMB End Date, each participating common unit will forgo all distributions for each such quarter (other than Extraordinary Distributions), and each Convertible Unit will receive the Preferred Distribution Amount payable in cash prior to any distribution on ETE common units (other than Extraordinary Distributions). At the end of the plan period, which is expected to be May 18, 2018, the Convertible Units are expected to automatically convert into common units based on the Conversion Value (as defined and described below) of the Convertible Units and a conversion rate of $6.56.
The conversion value of each Convertible Unit (the “Conversion Value”) on the closing date of the offering is zero. The Conversion Value will increase each quarter in an amount equal to $0.285, which is the per unit amount of the cash distribution paid with respect to ETE common units for the quarter ended December 31, 2015 (the “Conversion Value Cap”), less the cash distribution actually paid with respect to each Convertible Unit for such quarter (or, if prior to the WMB End Date, each participating common unit). Any cash distributions in excess of $0.285 per ETE common unit, and any Extraordinary Distributions, made with respect to any quarter during the plan period will be disregarded for purposes of calculating the Conversion Value. The Conversion Value will be reflected in the carrying amount of the Convertible Units until the conversion into common units at the end of the plan period.

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Table of Contents

ETE issued 329,299,267 Convertible Units to the Electing Unitholders at the closing of the offering, which represents the participation by common unitholders with respect to approximately 31.5% of ETE’s total outstanding common units. ETE’s Chairman, Kelcy L. Warren, participated in the Plan with respect to substantially all of his common units, which represent approximately 18% of ETE’s total outstanding common units, and was issued 187,313,942 Convertible Units. In addition, John McReynolds, a director of our general partner and President of our general partner; and Matthew S. Ramsey, a director of our general partner and the general partner of ETP and Sunoco LP and President of the general partner of ETP, participated in the Plan with respect to substantially all of their common units, and Marshall S. McCrea, III, a director of our general partner and the general partner of ETP and Sunoco Logistics and the Group Chief Operating Officer and Chief Commercial Officer of our general partner, participated in the Plan with respect to a substantial portion of his common units. The common units for which Messrs. McReynolds, Ramsey and McCrea elected to participate in the Plan collectively represent approximately 2.2% of ETE’s total outstanding common units. ETE issued 21,382,155 Convertible Units to Mr. McReynolds, 51,317 Convertible Units to Mr. Ramsey and 1,112,728 Convertible Units to Mr. McCrea. Mr. Ray Davis, who owns an 18.8% membership interest in our general partner, participated in the Plan with respect to substantially all of his ETE common units, which represents approximately 6.9% of ETE’s total outstanding common units, and was issued 72,042,486 Convertible Units. Other than Mr. Davis, no other Electing Unitholder owns a material amount of equity securities of ETE or its affiliates.
Repurchase Program
During the three months ended March 31, 2016, ETE did not repurchase any ETE common units under its current buyback program. As of March 31, 2016, $936 million remained available to repurchase under the current program.
Subsidiary Common Unit Transactions
The Parent Company accounts for the difference between the carrying amount of its investment in ETP and Sunoco LP and the underlying book value arising from the issuance or redemption of units by ETP and Sunoco LP (excluding transactions with the Parent Company) as capital transactions. As a result of these transactions during the three months ended March 31, 2016, we recognized decreases in partners’ capital of $12 million.
ETP Common Unit Transactions
During the three months ended March 31, 2016, ETP received proceeds of $324 million, net of $3 million commissions, from the issuance of common units pursuant to equity distribution agreements, which were used for general partnership purposes. As of March 31, 2016, approximately none of ETP’s common units were available to be issued under an equity distribution agreement.
During the three months ended March 31, 2016, distributions of $39 million were reinvested under ETP’s distribution reinvestment plan resulting in the issuance of 1.8 million common units. As of March 31, 2016, a total of 9.7 million common units remain available to be issued under the existing registration statement in connection with the distribution reinvestment plan.
Sunoco Logistics Common Unit Transactions
During the three months ended March 31, 2016, Sunoco Logistics received proceeds of $301 million, net of commissions of $3 million, from the issuance of Sunoco Logistics common units pursuant to equity distribution agreements, which were used for general partnership purposes.
Sunoco LP Common Unit Transactions
In January 2016, Sunoco LP issued 16.4 million Class C units representing limited partner interest consisting of (i) 5.2 million Class C Units issued by Sunoco LP to Aloha as consideration for the contribution by Aloha to an indirect wholly-owned subsidiary, and (ii) 11.2 million Class C Units that were issued by Sunoco LP to its indirect wholly-owned subsidiaries in exchange for all of the outstanding Class A Units held by such subsidiaries.
In March 2016, ETP contributed to Sunoco LP its remaining 68.42% interest in Sunoco, LLC and 100% interest in the legacy Sunoco, Inc. retail business for $2.23 billion. Sunoco LP paid $2.20 billion in cash, including a working capital adjustment, and issued 5.7 million Sunoco LP common units to Retail Holdings, a wholly-owned subsidiary of ETP.
On March 31, 2016, Sunoco LP sold 2.3 million of Sunoco LP’s common units in a private placement to the Partnership.

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Table of Contents

Parent Company Quarterly Distributions of Available Cash
Following are distributions declared and/or paid by us subsequent to December 31, 2015:
Quarter Ended
 
Record Date
 
Payment Date
 
Rate
December 31, 2015
 
February 4, 2016
 
February 19, 2016
 
$
0.2850

March 31, 2016
 
May 6, 2016
 
May 19, 2016
 
0.2850

ETP Quarterly Distributions of Available Cash
Following are distributions declared and/or paid by ETP subsequent to December 31, 2015:
Quarter Ended
 
Record Date
 
Payment Date
 
Rate
December 31, 2015
 
February 8, 2016
 
February 16, 2016
 
$
1.0550

March 31, 2016
 
May 6, 2016
 
May 16, 2016
 
1.0550

ETE has agreed to relinquish its right to the following amounts of incentive distributions in future periods, including distributions on ETP Class I Units.
 
 
Total Year
2016 (remainder)
 
$
103

2017
 
128

2018
 
105

2019
 
95

Sunoco Logistics Quarterly Distributions of Available Cash
Following are distributions declared and/or paid by Sunoco Logistics subsequent to December 31, 2015:
Quarter Ended
 
Record Date
 
Payment Date
 
Rate
December 31, 2015
 
February 8, 2016
 
February 12, 2016
 
$
0.4790

March 31, 2016
 
May 9, 2016
 
May 13, 2016
 
0.4890

Sunoco LP Quarterly Distributions of Available Cash
Following are distributions declared and/or paid by Sunoco LP subsequent to December 31, 2015:
Quarter Ended
 
Record Date
 
Payment Date
 
Rate
December 31, 2015
 
February 5, 2016
 
February 16, 2016
 
$
0.8013

March 31, 2016
 
May 6, 2016
 
May 16, 2016
 
0.8173


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Table of Contents

Accumulated Other Comprehensive Income
The following table presents the components of AOCI, net of tax:
 
March 31, 2016
 
December 31, 2015
Available-for-sale securities
$
2

 
$

Foreign currency translation adjustment
(5
)
 
(4
)
Net loss on interest rate derivatives
(6
)
 

Actuarial loss related to pensions and other postretirement benefits
(1
)
 
8

Subtotal
(10
)
 
4

Amounts attributable to noncontrolling interest
10

 
(4
)
Total AOCI, net of tax
$

 
$

9.
INCOME TAXES
For the three months ended March 31, 2016, the Partnership’s effective income tax rate decreased from the prior year primarily due to lower earnings among the Partnership’s consolidated corporate subsidiaries. The three months ended March 31, 2016 also reflected a benefit of $9 million of net state tax benefit attributable to statutory state rate changes resulting from the contribution by ETP to Sunoco LP of its remaining 68.42% interest in Sunoco, LLC and 100% interest in the legacy Sunoco, Inc. retail business.
10.
REGULATORY MATTERS, COMMITMENTS, CONTINGENCIES AND ENVIRONMENTAL LIABILITIES
Contingent Residual Support Agreement – AmeriGas
In connection with the closing of the contribution of its propane operations in January 2012, ETP agreed to provide contingent, residual support of $1.55 billion of intercompany borrowings made by AmeriGas and certain of its affiliates with maturities through 2022 from a finance subsidiary of AmeriGas that have maturity dates and repayment terms that mirror those of an equal principal amount of senior notes issued by this finance company subsidiary to third party purchasers.
ETP Retail Holdings Guarantee of Sunoco LP Notes
Retail Holdings has provided a guarantee of collection, but not of payment, to Sunoco LP with respect to (i) $800 million principal amount of 6.375% senior notes due 2023 issued by Sunoco LP, (ii) $800 million principal amount of 6.25% senior notes due 2021 issued by Sunoco LP and (iii) $2.035 billion of borrowings outstanding under Sunoco LP’s Term Loan.
NGL Pipeline Regulation
ETP has interests in NGL pipelines located in Texas and New Mexico. ETP commenced the interstate transportation of NGLs in 2013, which is subject to the jurisdiction of the FERC under the Interstate Commerce Act (“ICA”) and the Energy Policy Act of 1992. Under the ICA, tariff rates must be just and reasonable and not unduly discriminatory and pipelines may not confer any undue preference. The tariff rates established for interstate services were based on a negotiated agreement; however, the FERC’s rate-making methodologies may limit ETP’s ability to set rates based on our actual costs, may delay or limit the use of rates that reflect increased costs and may subject us to potentially burdensome and expensive operational, reporting and other requirements. Any of the foregoing could adversely affect ETP’s business, revenues and cash flow.
FERC Audit
In March 2016, the FERC commenced an audit of Trunkline for the period from January 1, 2013 to present to evaluate Trunkline’s compliance with the requirements of its FERC gas tariff, the accounting regulations of the Uniform System of Accounts as prescribed by the FERC, and the FERC’s annual reporting requirements.
Commitments
In the normal course of our business, we purchase, process and sell natural gas pursuant to long-term contracts and we enter into long-term transportation and storage agreements.  Such contracts contain terms that are customary in the industry.  We believe that the terms of these agreements are commercially reasonable and will not have a material adverse effect on our financial position or results of operations.

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Table of Contents

We have certain non-cancelable leases for property and equipment, which require fixed monthly rental payments and expire at various dates through 2058.  The table below reflects rental expense under these operating leases included in operating expenses in the accompanying statements of operations, which include contingent rentals, and rental expense recovered through related sublease rental income:
 
Three Months Ended
March 31,
 
2016
 
2015
Rental expense(1)
$
51

 
$
52

Less: Sublease rental income
(7
)
 
(8
)
Rental expense, net
$
44

 
$
44

(1) 
Includes contingent rentals totaling $16 million and $4 million for the three months ended March 31, 2016 and 2015 respectively.
Certain of our subsidiaries’ joint venture agreements require that they fund their proportionate shares of capital contributions to their unconsolidated affiliates.  Such contributions will depend upon their unconsolidated affiliates’ capital requirements, such as for funding capital projects or repayment of long-term obligations.
Litigation and Contingencies
We may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business.  Natural gas and crude oil are flammable and combustible.  Serious personal injury and significant property damage can arise in connection with their transportation, storage or use.  In the ordinary course of business, we are sometimes threatened with or named as a defendant in various lawsuits seeking actual and punitive damages for product liability, personal injury and property damage.  We maintain liability insurance with insurers in amounts and with coverage and deductibles management believes are reasonable and prudent, and which are generally accepted in the industry.  However, there can be no assurance that the levels of insurance protection currently in effect will continue to be available at reasonable prices or that such levels will remain adequate to protect us from material expenses related to product liability, personal injury or property damage in the future.
MTBE Litigation
Sunoco, Inc., along with other refiners, manufacturers and sellers of gasoline, is a defendant in lawsuits alleging MTBE contamination of groundwater.  The plaintiffs typically include water purveyors and municipalities responsible for supplying drinking water and governmental authorities.  The plaintiffs primarily assert product liability claims and additional claims including nuisance, trespass, negligence, violation of environmental laws and deceptive business practices.  The plaintiffs in all of the cases seek to recover compensatory damages, and in some cases also seek natural resource damages, injunctive relief, punitive damages and attorneys’ fees.
As of March 31, 2016, Sunoco, Inc. is a defendant in five cases, including cases initiated by the States of New Jersey, Vermont, Pennsylvania, and two others by the Commonwealth of Puerto Rico with the more recent Puerto Rico action being a companion case alleging damages for additional sites beyond those at issue in the initial Puerto Rico action. Four of these cases are venued in a multidistrict litigation proceeding in a New York federal court. The New Jersey, Puerto Rico, Vermont, and Pennsylvania cases assert natural resource damage claims.
Fact discovery has concluded with respect to an initial set of 19 sites each that will be the subject of the first trial phase in the New Jersey case and the initial Puerto Rico case. Insufficient information has been developed about the plaintiffs’ legal theories or the facts with respect to statewide natural resource damage claims to provide an analysis of the ultimate potential liability of Sunoco, Inc. in these matters. It is reasonably possible that a loss may be realized; however, we are unable to estimate the possible loss or range of loss in excess of amounts accrued. Management believes that an adverse determination with respect to one or more of the MTBE cases could have a significant impact on results of operations during the period in which any said adverse determination occurs, but does not believe that any such adverse determination would have a material adverse effect on the Partnership’s consolidated financial position.
Regency Merger Litigation
Following the January 26, 2015 announcement of the definitive merger agreement with Regency, purported Regency unitholders filed lawsuits in state and federal courts in Dallas, Texas and Delaware state court asserting claims relating to the

18

Table of Contents

proposed transaction. All Regency merger related lawsuits have been dismissed, though one lawsuit remains pending on appeal. On June 10, 2015, Adrian Dieckman (“Dieckman”), a purported Regency unitholder, filed a class action complaint on behalf of Regency’s common unitholders in the Court of Chancery of the State of Delaware. The lawsuit alleges that the transaction did not comply with the Regency partnership agreement because the conflicts committee was not properly formed. Defendants filed a motion to dismiss, and on March 29, 2016, the Delaware court granted Defendants’ motion and dismissed the lawsuit. On April 26, 2016, Plaintiff filed its Notice of Appeal to the Supreme Court of Delaware. This appeal is styled Adrian Dieckman v. Regency GP LP, et al., No. 208, 2016, in the Supreme Court of the State of Delaware.
Jamie Welch Litigation
On March 10, 2016, Jamie Welch (“Welch”) filed an original petition against ETE and LE GP in Texas state court in Dallas. Welch alleges that Defendants 1) breached their contractual obligation to deliver and convert Welch’s Class D units upon termination; 2) failed to deliver long term incentive shares awarded to Welch; 3) failed to pay Welch’s 2015 bonus; 4) breached their obligation to grant Welch an interest in the Lake Charles LNG project; and 5) breached their obligation to pay Welch his severance. Welch brings claims for breach of contract and quantum meruit. On April 12, 2016, Defendants removed Welch’s lawsuit from state court to federal court in Dallas pursuant to 28 U.S.C. §§ 1441 and 1446. On April 29, 2016, Welch filed an amended complaint and removed his claim for payment of severance benefits.
Enterprise Products Partners, L.P. and Enterprise Products Operating LLC Litigation
On January 27, 2014, a trial commenced between ETP against Enterprise Products Partners, L.P. and Enterprise Products Operating LLC (collectively, “Enterprise”) and Enbridge (US) Inc.  Trial resulted in a verdict in favor of ETP against Enterprise that consisted of $319 million in compensatory damages and $595 million in disgorgement to ETP.  The jury also found that ETP owed Enterprise approximately $1 million under a reimbursement agreement.  On July 29, 2014, the trial court entered a final judgment in favor of ETP and awarded ETP $536 million, consisting of compensatory damages, disgorgement, and pre-judgment interest.  The trial court also ordered that ETP shall be entitled to recover post-judgment interest and costs of court and that Enterprise is not entitled to any net recovery on its counterclaims.  Enterprise has filed a notice of appeal with the Texas Court of Appeals, and briefing by Enterprise and ETP is complete. Oral argument was held on April 20, 2016. The Court of Appeals is taking the briefs under advisement. In accordance with GAAP, no amounts related to the original verdict or the July 29, 2014 final judgment will be recorded in our financial statements until the appeal process is completed.
Litigation Relating to the Williams Companies, Inc.
On April 6, 2016, The Williams Companies, Inc. (“Williams”) filed a complaint against ETE and LE GP in the Delaware Court of Chancery (the “Delaware Williams Litigation”). This lawsuit is styled The Williams Companies, Inc. v. Energy Transfer Equity, L.P., et al., C.A. No. 12168-VCG. Williams alleges that Defendants breached the merger agreement between Williams, ETE, and several of ETE’s affiliates (the “Merger Agreement”) by issuing ETE’s Series A Convertible Preferred Units (the “Convertible Units”). According to Williams, the issuance of Convertible Units (the “Issuance”) violates various contractual restrictions on ETE’s actions between the execution and closing of the merger. Williams seeks, among other things, to (a) rescind the Issuance and (b) invalidate an amendment to ETE’s partnership agreement that was adopted on March 8, 2016 as part of the Issuance.
The Delaware Court of Chancery held a hearing on Williams’ Motion to Expedite on April 14, 2016. The Court granted Williams’ Motion to Expedite but significantly limited discovery. Williams amended its complaint in the Delaware suit on April 19, 2016, but did not add any additional claims. The Court has set a permanent injunction hearing for June 15, 2016. Defendants intend to vigorously defend this lawsuit.
Williams also filed a petition against Mr. Warren in the District Court of Dallas County, Texas, on April 6, 2016 (the “Texas Williams Litigation”). This lawsuit is styled The Williams Companies, Inc. v. Kelcy Warren, C.A. No. DC-16-03941. Williams alleges that Mr. Warren tortiously interfered with the Merger Agreement through his involvement in the Issuance. Williams seeks, among other things, damages from Mr. Warren, who intends to vigorously defend this lawsuit.
On May 3, 2016, ETE and LE GP filed an answer and counterclaim in the Delaware Williams Litigation. The counterclaim asserts that Williams materially breached its obligations under the Merger Agreement by (a) blocking ETE’s attempts to complete a public offering of the Convertible Units, including, among other things, by declining to allow Williams’ independent registered public accounting firm to provide the auditor consent required to be included in the registration statement for a public offering and (b) bringing the Texas Williams Litigation against Mr. Warren in the District Court of Dallas County, Texas.

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Litigation Relating to the WMB Merger
Between October 5, 2015, and December 24, 2015, purported Williams stockholders filed six putative class action lawsuits in the Delaware Court of Chancery challenging the merger. The suits are captioned Greenwald et al. v. The Williams Companies, Inc., et al., C.A. No. 11573-VCG; Ozaki v. Armstrong et al., C.A. No. 11574-VCG; Blystone v. The Williams Companies, Inc., et al., C.A. No. 11601-VCG; Glener et al. v. The Williams Companies, Inc., et al., C.A. No. 11606-VCG; Amaitis et al. v. Armstrong et al., C.A. No. 11809-VCG; and State-Boston Retirement System et al. v. Armstrong et al., C.A. No. 11844-VCG. The complaints assert various claims against the individual members of Williams’ board of directors; ETE, ETC, ETC GP, LE GP and ETE GP (the “ETE Defendants”); Williams; and others. On January 13, 2016, the Court consolidated these six actions into a new consolidated action captioned In re The Williams Companies, Inc. Merger Litigation, Consolidated C.A. No. 11844-VCG (the “Merger Litigation”). In its stipulated order, the Court dismissed without prejudice the ETE Defendants (among others) from the consolidated action.
On January 14, 2016, a purported Williams stockholder (“Bumgarner”) filed a putative class action lawsuit against Williams and ETE, captioned Bumgarner v. The Williams Companies, Inc., et al., Case No. 16-cv-26-GKF-FHM, in the United States District Court for the Northern District of Oklahoma. Bumgarner alleges that ETE and Williams have violated Section 14 of the Securities Exchange Act of 1934 (the “Exchange Act”) by making allegedly false statements concerning the merger. As relief, the complaint seeks an injunction against the proposed merger. On February 1, 2016, Bumgarner filed an amended complaint, making substantially the same allegations. On February 19, 2016, ETE and Williams moved to dismiss the amended complaint. Bumgarner moved for expedited discovery on April 21, 2016. On April 28, 2016, the Court granted the motion to dismiss and dismissed Bumgarner’s claims in their entirety with leave to amend. The Court also granted expedited proceedings with respect to any further proceedings.
On January 19, 2016, The City of Birmingham Retirement and Relief System (“CBRRS”), a purported shareholder of Williams, filed a putative class action lawsuit against the members of Williams’ board of directors, Williams, ETE, ETC, ETC GP, LE GP, and ETE GP challenging the merger and the disclosures made in connection with the merger. The lawsuit was styled City of Birmingham Retirement and Relief System v. Alan S. Armstrong, et al., C.A. No. 16-17-RGA, in the United States District Court for the District of Delaware. CBRRS alleged violations of Section 14(a) and 20(a) of the Exchange Act among other claims. CBRRS moved to expedite, and Defendants moved to dismiss the suit. The Court denied expedition. CBRRS voluntarily dismissed the suit on March 7, 2016.
Unitholder Litigation Relating to the Issuance
In April 2016, two purported ETE unitholders (the “Issuance Plaintiffs”) filed putative class action lawsuits against, Energy Transfer Equity, L.P. and LE GP, LLC, Kelcy Warren, John McReynolds, Marshall McCrea, Matthew Ramsey, Ted Collins, K. Rick Turner, William Williams, Ray Davis, and Richard Brannon in the Delaware Court of Chancery. These lawsuits have been consolidated as In re Energy Transfer Equity, L.P. Unitholder Litigation, Consolidated C.A. No. 12197-VCG, in the Court of Chancery of the State of Delaware. One of the Issuance Plaintiffs had initially filed an action to inspect the books and records of ETE on April 11, 2016 but voluntarily dismissed the books and records action on April 22, 2016.
The Issuance Plaintiffs allege that the Issuance breached various provisions of ETE’s limited partnership agreement. The Issuance Plaintiff seek, among other things, preliminary and permanent injunctive relief that (a) prevents ETE from making distributions to the Convertible Units and (b) invalidates an amendment to ETE’s partnership agreement that was adopted on March 8, 2016 as part of the issuance of Convertible Units.
One of the Issuance Plaintiffs moved for expedited proceedings. The Delaware Court of Chancery granted a Motion to Expedite filed by one of the Issuance Plaintiffs and stated that the injunction hearing should be held before any August 2016 distribution. Defendants intend to vigorously defend this consolidated lawsuit.
Other Litigation and Contingencies
We or our subsidiaries are a party to various legal proceedings and/or regulatory proceedings incidental to our businesses.  For each of these matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies, the likelihood of an unfavorable outcome and the availability of insurance coverage.  If we determine that an unfavorable outcome of a particular matter is probable and can be estimated, we accrue the contingent obligation, as well as any expected insurance recoverable amounts related to the contingency.  As of March 31, 2016 and December 31, 2015, accruals of approximately $59 million and $40 million, respectively, were reflected on our balance sheets related to these contingent obligations.  As new information becomes available, our estimates may change.  The impact of these changes may have a significant effect on our results of operations in a single period.

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The outcome of these matters cannot be predicted with certainty and there can be no assurance that the outcome of a particular matter will not result in the payment of amounts that have not been accrued for the matter.  Furthermore, we may revise accrual amounts prior to resolution of a particular contingency based on changes in facts and circumstances or changes in the expected outcome. Currently, we are not able to estimate possible losses or a range of possible losses in excess of amounts accrued.
No amounts have been recorded in our March 31, 2016 or December 31, 2015 consolidated balance sheets for contingencies and current litigation, other than amounts disclosed herein.
Attorney General of the Commonwealth of Massachusetts v. New England Gas Company.
On July 7, 2011, the Massachusetts Attorney General (“AG”) filed a regulatory complaint with the Massachusetts Department of Public Utilities (“MDPU”) against New England Gas Company with respect to certain environmental cost recoveries.  The AG is seeking a refund to New England Gas Company customers for alleged “excessive and imprudently incurred costs” related to legal fees associated with Southern Union’s environmental response activities.  In the complaint, the AG requests that the MDPU initiate an investigation into the New England Gas Company’s collection and reconciliation of recoverable environmental costs including:  (i) the prudence of any and all legal fees, totaling approximately $19 million, that were charged by the Kasowitz, Benson, Torres & Friedman firm and passed through the recovery mechanism since 2005, the year when a partner in the firm, the Southern Union former Vice Chairman, President and Chief Operating Officer, joined Southern Union’s management team; (ii) the prudence of any and all legal fees that were charged by the Bishop, London & Dodds firm and passed through the recovery mechanism since 2005, the period during which a member of the firm served as Southern Union’s Chief Ethics Officer; and (iii) the propriety and allocation of certain legal fees charged that were passed through the recovery mechanism that the AG contends only qualify for a lesser, 50%, level of recovery.  Southern Union has filed its answer denying the allegations and moved to dismiss the complaint, in part on a theory of collateral estoppel.  The hearing officer has deferred consideration of Southern Union’s motion to dismiss.  The AG’s motion to be reimbursed expert and consultant costs by Southern Union of up to $150,000 was granted. By tariff, these costs are recoverable through rates charged to New England Gas Company customers. The hearing officer previously stayed discovery pending resolution of a dispute concerning the applicability of attorney-client privilege to legal billing invoices. The MDPU issued an interlocutory order on June 24, 2013 that lifted the stay, and discovery has resumed. Panhandle (as successor to Southern Union) believes it has complied with all applicable requirements regarding its filings for cost recovery and has not recorded any accrued liability; however, Panhandle will continue to assess its potential exposure for such cost recoveries as the matter progresses.
Compliance Orders from the New Mexico Environmental Department
Regency received a Notice of Violation from the New Mexico Environmental Department on September 23, 2015 for allegations of violations of New Mexico air regulations related to Jal #3. The Partnership has accrued $250,000 related to the claims and will continue to assess its potential exposure to the allegations as the matter progresses.
Lone Star NGL Fractionators Notice of Enforcement
Lone Star NGL Fractionators received a Notice of Enforcement from the Texas Commission on Environmental Quality on August 28, 2015 for allegations of violations of Texas air regulations related to its Mont Belvieu Gas Plant. The Partnership has accrued $300,000 related to the claim. As of April 2016, the Agreed Order is in the approval process with the Texas Commission on Environmental Quality and includes a $21,000 penalty and a $21,000 Supplemental Environmental Project.
Environmental Matters
Our operations are subject to extensive federal, state and local environmental and safety laws and regulations that require expenditures to ensure compliance, including related to air emissions and wastewater discharges, at operating facilities and for remediation at current and former facilities as well as waste disposal sites.  Although we believe our operations are in substantial compliance with applicable environmental laws and regulations, risks of additional costs and liabilities are inherent in the business of transporting, storing, gathering, treating, compressing, blending and processing natural gas, natural gas liquids and other products.  As a result, there can be no assurance that significant costs and liabilities will not be incurred.  Costs of planning, designing, constructing and operating pipelines, plants and other facilities must incorporate compliance with environmental laws and regulations and safety standards.  Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations, the issuance of injunctions and the filing of federally authorized citizen suits.  Contingent losses related to all significant known environmental matters have been accrued and/or separately disclosed. However, we may revise accrual amounts prior to resolution of a particular contingency based on changes in facts and circumstances or changes in the expected outcome.
Environmental exposures and liabilities are difficult to assess and estimate due to unknown factors such as the magnitude of possible contamination, the timing and extent of remediation, the determination of our liability in proportion to other parties,

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improvements in cleanup technologies and the extent to which environmental laws and regulations may change in the future.  Although environmental costs may have a significant impact on the results of operations for any single period, we believe that such costs will not have a material adverse effect on our financial position.
Based on information available at this time and reviews undertaken to identify potential exposure, we believe the amount reserved for environmental matters is adequate to cover the potential exposure for cleanup costs.
Environmental Remediation
Our subsidiaries are responsible for environmental remediation at certain sites, including the following:
Certain of our interstate pipelines conduct soil and groundwater remediation related to contamination from past uses of PCBs.  PCB assessments are ongoing and, in some cases, our subsidiaries could potentially be held responsible for contamination caused by other parties.
Certain gathering and processing systems are responsible for soil and groundwater remediation related to releases of hydrocarbons.
Currently operating Sunoco, Inc. retail sites.
Legacy sites related to Sunoco, Inc., that are subject to environmental assessments include formerly owned terminals and other logistics assets, retail sites that Sunoco, Inc. no longer operates, closed and/or sold refineries and other formerly owned sites.
Sunoco, Inc. is potentially subject to joint and several liability for the costs of remediation at sites at which it has been identified as a potentially responsible party (“PRP”).  As of March 31, 2016, Sunoco, Inc. had been named as a PRP at approximately 48 identified or potentially identifiable “Superfund” sites under federal and/or comparable state law.  Sunoco, Inc. is usually one of a number of companies identified as a PRP at a site.  Sunoco, Inc. has reviewed the nature and extent of its involvement at each site and other relevant circumstances and, based upon Sunoco, Inc.’s purported nexus to the sites, believes that its potential liability associated with such sites will not be significant.
To the extent estimable, expected remediation costs are included in the amounts recorded for environmental matters in our consolidated balance sheets.  In some circumstances, future costs cannot be reasonably estimated because remediation activities are undertaken as claims are made by customers and former customers.  To the extent that an environmental remediation obligation is recorded by a subsidiary that applies regulatory accounting policies, amounts that are expected to be recoverable through tariffs or rates are recorded as regulatory assets on our consolidated balance sheets.
The table below reflects the amounts of accrued liabilities recorded in our consolidated balance sheets related to environmental matters that are considered to be probable and reasonably estimable.  Currently, we are not able to estimate possible losses or a range of possible losses in excess of amounts accrued. Except for matters discussed above, we do not have any material environmental matters assessed as reasonably possible that would require disclosure in our consolidated financial statements.
 
March 31, 2016
 
December 31, 2015
Current
$
40

 
$
42

Non-current
293

 
326

Total environmental liabilities
$
333

 
$
368

In 2013, we established a wholly-owned captive insurance company to bear certain risks associated with environmental obligations related to certain sites that are no longer operating. The premiums paid to the captive insurance company include estimates for environmental claims that have been incurred but not reported, based on an actuarially determined fully developed claims expense estimate. In such cases, we accrue losses attributable to unasserted claims based on the discounted estimates that are used to develop the premiums paid to the captive insurance company.
During the three months ended March 31, 2016 and 2015, Sunoco, Inc. and Sunoco LP collectively recorded $8 million and $7 million, respectively, of expenditures related to environmental cleanup programs.
On December 2, 2010, Sunoco, Inc. entered an Asset Sale and Purchase Agreement to sell the Toledo Refinery to Toledo Refining Company LLC (TRC) wherein Sunoco, Inc. retained certain liabilities associated with the pre-Closing time period.  On January 2, 2013, USEPA issued a Finding of Violation (FOV) to TRC and, on September 30, 2013, EPA issued an NOV/FOV to TRC alleging Clean Air Act violations.  To date, EPA has not issued an FOV or NOV/FOV to Sunoco, Inc. directly but some of EPA’s claims relate to the time period that Sunoco, Inc. operated the refinery.  Specifically, EPA has claimed that

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the refinery flares were not operated in a manner consistent with good air pollution control practice for minimizing emissions and/or in conformance with their design, and that Sunoco, Inc. submitted semi-annual compliance reports in 2010 and 2011 that failed to include all of the information required by the regulations. EPA has proposed penalties in excess of $200,000 to resolve the allegations and discussions continue between the parties. The timing or outcome of this matter cannot be reasonably determined at this time, however, we do not expect there to be a material impact to our results of operations, cash flows or financial position.
Our pipeline operations are subject to regulation by the U.S. Department of Transportation under the PHMSA, pursuant to which the PHMSA has established requirements relating to the design, installation, testing, construction, operation, replacement and management of pipeline facilities.  Moreover, the PHMSA, through the Office of Pipeline Safety, has promulgated a rule requiring pipeline operators to develop integrity management programs to comprehensively evaluate their pipelines, and take measures to protect pipeline segments located in what the rule refers to as “high consequence areas.”  Activities under these integrity management programs involve the performance of internal pipeline inspections, pressure testing or other effective means to assess the integrity of these regulated pipeline segments, and the regulations require prompt action to address integrity issues raised by the assessment and analysis.  Integrity testing and assessment of all of these assets will continue, and the potential exists that results of such testing and assessment could cause us to incur future capital and operating expenditures for repairs or upgrades deemed necessary to ensure the continued safe and reliable operation of our pipelines; however, no estimate can be made at this time of the likely range of such expenditures.
In April 2016, the PHMSA issued a Notice of Probable Violation ("NOPV"), Proposed Civil Penalty and Proposed Compliance Order related to certain procedures carried out during construction of Sunoco Logistics’ Permian Express 2 pipeline system in Texas. The correspondence proposes penalties in excess of $0.1 million, and Sunoco Logistics is currently in discussions with PHMSA to resolve these matters. The timing or outcome of these matters cannot be reasonably determined at this time, however, Sunoco Logistics does not expect there to be a material impact to its results of operations, cash flows, or financial position.
Our operations are also subject to the requirements of the OSHA, and comparable state laws that regulate the protection of the health and safety of employees.  In addition, OSHA’s hazardous communication standard requires that information be maintained about hazardous materials used or produced in our operations and that this information be provided to employees, state and local government authorities and citizens.  We believe that our operations are in substantial compliance with the OSHA requirements, including general industry standards, record keeping requirements, and monitoring of occupational exposure to regulated substances.
11.
DERIVATIVE ASSETS AND LIABILITIES
Commodity Price Risk
We are exposed to market risks related to the volatility of commodity prices. To manage the impact of volatility from these prices, our subsidiaries utilize various exchange-traded and OTC commodity financial instrument contracts. These contracts consist primarily of futures, swaps and options and are recorded at fair value in our consolidated balance sheets.
We use futures and basis swaps, designated as fair value hedges, to hedge our natural gas inventory stored in our Bammel storage facility. At hedge inception, we lock in a margin by purchasing gas in the spot market or off peak season and entering into a financial contract. Changes in the spreads between the forward natural gas prices and the physical inventory spot price result in unrealized gains or losses until the underlying physical gas is withdrawn and the related designated derivatives are settled. Once the gas is withdrawn and the designated derivatives are settled, the previously unrealized gains or losses associated with these positions are realized.
We use futures, swaps and options to hedge the sales price of natural gas we retain for fees in our intrastate transportation and storage segment and operational gas sales on our interstate transportation and storage segment. These contracts are not designated as hedges for accounting purposes.
We use NGL and crude derivative swap contracts to hedge forecasted sales of NGL and condensate equity volumes we retain for fees in our midstream segment whereby our subsidiaries generally gather and process natural gas on behalf of producers, sell the resulting residue gas and NGL volumes at market prices and remit to producers an agreed upon percentage of the proceeds based on an index price for the residue gas and NGL. These contracts are not designated as hedges for accounting purposes.
We use derivatives in our liquids transportation and services segment to manage our storage facilities and the purchase and sale of purity NGL. These contracts are not designated as hedges for accounting purposes.

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Sunoco Logistics utilizes swaps, futures and other derivative instruments to mitigate the risk associated with market movements in the price of refined products and NGLs. These contracts are not designated as hedges for accounting purposes.
We use futures and swaps to achieve ratable pricing of crude oil purchases, to convert certain expected refined product sales to fixed or floating prices, to lock in margins for certain refined products and to lock in the price of a portion of natural gas purchases or sales and transportation costs in our retail marketing segment. These contracts are not designated as hedges for accounting purposes.
We use financial commodity derivatives to take advantage of market opportunities in our trading activities which complement our transportation and storage segment’s operations and are netted in cost of products sold in our consolidated statements of operations. We also have trading and marketing activities related to power and natural gas in our all other segment which are also netted in cost of products sold. As a result of our trading activities and the use of derivative financial instruments in our transportation and storage segment, the degree of earnings volatility that can occur may be significant, favorably or unfavorably, from period to period. We attempt to manage this volatility through the use of daily position and profit and loss reports provided to our risk oversight committee, which includes members of senior management, and the limits and authorizations set forth in our commodity risk management policy.
The following table details our outstanding commodity-related derivatives:
 
March 31, 2016
 
December 31, 2015
 
Notional
Volume
 
Maturity
 
Notional
Volume
 
Maturity
Mark-to-Market Derivatives
 
 
 
 
 
 
 
(Trading)
 
 
 
 
 
 
 
Natural Gas (MMBtu):
 
 
 
 
 
 
 
Fixed Swaps/Futures
1,712,500

 
2016-2017
 
(602,500
)
 
2016-2017
Basis Swaps IFERC/NYMEX (1)
63,825,000

 
2016-2017
 
(31,240,000
)
 
2016-2017
Power (Megawatt):
 
 
 
 
 
 
 
Forwards
(344,954
)
 
2016-2017
 
357,092

 
2016-2017
Futures
2,675,597

 
2016-2017
 
(109,791
)
 
2016
Options — Puts
(227,600
)
 
2016
 
260,534

 
2016
Options — Calls
1,011,600

 
2016
 
1,300,647

 
2016
Crude (Bbls):
 
 
 
 
 
 
 
Futures
(616,000
)
 
2016-2017
 
(591,000
)
 
2016-2017
Options — Puts
(300,000
)
 
2016
 

 
Options — Calls
300,000

 
2016
 

 
(Non-Trading)
 
 
 
 
 
 
 
Natural Gas (MMBtu):
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
(9,175,000
)
 
2016-2017
 
(6,522,500
)
 
2016-2017
Swing Swaps IFERC
105,170,000

 
2016-2017
 
71,340,000

 
2016-2017
Fixed Swaps/Futures
(6,862,500
)
 
2016-2018
 
(14,380,000
)
 
2016-2018
Forward Physical Contracts
26,156,570

 
2016-2017
 
21,922,484

 
2016-2017
Natural Gas Liquid and Crude (Bbls) — Forwards/Swaps
(6,273,000
)
 
2016
 
(8,146,800
)
 
2016-2018
Refined Products (Bbls) — Futures
(2,846,000
)
 
2016-2017
 
(1,289,000
)
 
2016-2017
Corn (Bushels) — Futures
122,000

 
2016
 
1,185,000

 
2016
Fair Value Hedging Derivatives
 
 
 
 
 
 
 
(Non-Trading)
 
 
 
 
 
 
 
Natural Gas (MMBtu):
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
(23,215,000
)
 
2016
 
(37,555,000
)
 
2016
Fixed Swaps/Futures
(23,215,000
)
 
2016
 
(37,555,000
)
 
2016
Hedged Item — Inventory
23,215,000

 
2016
 
37,555,000

 
2016

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(1) 
Includes aggregate amounts for open positions related to Houston Ship Channel, Waha Hub, NGPL TexOk, West Louisiana Zone and Henry Hub locations.
Interest Rate Risk
We are exposed to market risk for changes in interest rates. To maintain a cost effective capital structure, we borrow funds using a mix of fixed rate debt and floating rate debt. We also manage our interest rate exposures by utilizing interest rate swaps to achieve a desired mix of fixed and floating rate debt. We also utilize forward starting interest rate swaps to lock in the rate on a portion of anticipated debt issuances.
The following table summarizes our interest rate swaps outstanding none of which were designated as hedges for accounting purposes:
 
 
 
 
Notional Amount
Outstanding
Term
 
Type(1)
 
March 31, 2016
 
December 31, 2015
July 2016(2)
 
Forward-starting to pay a fixed rate of 3.80% and receive a floating rate
 
$
200

 
$
200

July 2017(3)
 
Forward-starting to pay a fixed rate of 3.84% and receive a floating rate
 
300

 
300

July 2018(3)
 
Forward-starting to pay a fixed rate of 4.00% and receive a floating rate
 
200

 
200

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

 
1,200

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

 
300

July 2019(3)
 
Forward-starting to pay a fixed rate of 3.25% and receive a floating rate
 
200

 
200

(1) 
Floating rates are based on 3-month LIBOR.
(2) 
Represents the effective date. These forward-starting swaps have a term of 10 and 30 years with a mandatory termination date the same as the effective date.
(3) 
Represents the effective date. These forward-starting swaps have terms of 30 years with a mandatory termination date the same as the effective date.
Credit Risk
Credit risk refers to the risk that a counterparty may default on its contractual obligations resulting in a loss to the Partnership. Credit policies have been approved and implemented to govern ETP’s portfolio of counterparties with the objective of mitigating credit losses. These policies establish guidelines, controls and limits to manage credit risk within approved tolerances by mandating an appropriate evaluation of the financial condition of existing and potential counterparties, monitoring agency credit ratings, and by implementing credit practices that limit exposure according to the risk profiles of the counterparties. Furthermore, ETP may at times require collateral under certain circumstances to mitigate credit risk as necessary. ETP also implements the use of industry standard commercial agreements which allow for the netting of positive and negative exposures associated with transactions executed under a single commercial agreement. Additionally, ETP utilizes master netting agreements to offset credit exposure across multiple commercial agreements with a single counterparty or affiliated group of counterparties.
ETP’s counterparties consist of a diverse portfolio of customers across the energy industry, including petrochemical companies, commercial and industrials, oil and gas producers, motor fuel distributors, municipalities, utilities and midstream companies. ETP’s overall exposure may be affected positively or negatively by macroeconomic factors or regulatory changes that could impact its counterparties to one extent or another. Currently, management does not anticipate a material adverse effect in our financial position or results of operations as a consequence of counterparty non-performance.
ETP has maintenance margin deposits with certain counterparties in the OTC market, primarily independent system operators, and with clearing brokers. Payments on margin deposits are required when the value of a derivative exceeds our pre-established credit limit with the counterparty. Margin deposits are returned to ETP on or about the settlement date for non-exchange traded derivatives, and ETP exchanges margin calls on a daily basis for exchange traded transactions. Since the margin calls

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are made daily with the exchange brokers, the fair value of the financial derivative instruments are deemed current and netted in deposits paid to vendors within other current assets in the consolidated balance sheets.
For financial instruments, failure of a counterparty to perform on a contract could result in our inability to realize amounts that have been recorded on our consolidated balance sheets and recognized in net income or other comprehensive income.
Derivative Summary
The following table provides a summary of our derivative assets and liabilities:
 
Fair Value of Derivative Instruments
 
Asset Derivatives
 
Liability Derivatives
 
March 31, 2016
 
December 31, 2015
 
March 31, 2016
 
December 31, 2015
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Commodity derivatives (margin deposits)
$
4

 
$
38

 
$

 
$
(3
)
 
4

 
38

 

 
(3
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Commodity derivatives (margin deposits)
$
115

 
$
353

 
$
(98
)
 
$
(306
)
Commodity derivatives
35

 
63

 
(32
)
 
(47
)
Interest rate derivatives
25

 

 
(267
)
 
(171
)
Embedded derivatives in the ETP Preferred Units

 

 
(5
)
 
(5
)
 
175

 
416

 
(402
)
 
(529
)
Total derivatives
$
179

 
$
454

 
$
(402
)
 
$
(532
)
The following table presents the fair value of our recognized derivative assets and liabilities on a gross basis and amounts offset on the consolidated balance sheets that are subject to enforceable master netting arrangements or similar arrangements:
 
 
 
 
Asset Derivatives
 
Liability Derivatives
 
 
Balance Sheet Location
 
March 31, 2016
 
December 31, 2015
 
March 31, 2016
 
December 31, 2015
Derivatives without offsetting agreements
 
Derivative assets (liabilities)
 
$
25

 
$

 
$
(272
)
 
$
(176
)
Derivatives in offsetting agreements:
 
 
 
 
 
 
 
 
OTC contracts
 
Derivative assets (liabilities)
 
35

 
63

 
(32
)
 
(47
)
Broker cleared derivative contracts
 
Other current assets
 
119

 
391

 
(98
)
 
(309
)
Total gross derivatives
 
179

 
454

 
(402
)
 
(532
)
Less offsetting agreements:
 
 
 
 
 
 
 
 
Counterparty netting
 
Derivative assets (liabilities)
 
(17
)
 
(17
)
 
17

 
17

Payments on margin deposit
 
Other current assets
 
(98
)
 
(309
)
 
98

 
309

Total net derivatives
 
$
64

 
$
128

 
$
(287
)
 
$
(206
)
We disclose the non-exchange traded financial derivative instruments as price risk management assets and liabilities on our consolidated balance sheets at fair value with amounts classified as either current or long-term depending on the anticipated settlement date.

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Table of Contents

The following tables summarize the amounts recognized with respect to our derivative financial instruments:
 
Change in Value Recognized in OCI on Derivatives
(Effective Portion)
 
Three Months Ended
March 31,
 
2016
 
2015
Derivatives in cash flow hedging relationships:
 
 
 
Commodity derivatives
$

 
$
1

Total
$

 
$
1

 
Location of Gain/(Loss)
Recognized in Income
on Derivatives
 
Amount of Gain/(Loss) Recognized in Income Representing Hedge Ineffectiveness and Amount Excluded from the Assessment of Effectiveness
 
 
Three Months Ended
March 31,
 
 
 
2016
 
2015
Derivatives in fair value hedging relationships (including hedged item):
 
 
 
Commodity derivatives
Cost of products sold
 
$
(4
)
 
$
(3
)
Total
 
 
$
(4
)
 
$
(3
)
 
Location of Gain/(Loss)
Recognized in Income
on Derivatives
 
Amount of Gain/(Loss) Recognized in Income on Derivatives
 
 
Three Months Ended
March 31,
 
 
 
2016
 
2015
Derivatives not designated as hedging instruments:
 
 
 
 
Commodity derivatives – Trading
Cost of products sold
 
$
(9
)
 
$
(2
)
Commodity derivatives – Non-trading
Cost of products sold
 
8

 
(8
)
Interest rate derivatives
Gains (losses) on interest rate derivatives
 
(70
)
 
(77
)
Embedded derivatives
Other, net
 

 
2

Total
 
 
$
(71
)
 
$
(85
)
12.
RELATED PARTY TRANSACTIONS
The Parent Company has agreements with subsidiaries to provide or receive various management and general and administrative services. The Parent Company pays ETP to provide services on its behalf and on behalf of other subsidiaries of the Parent Company. The Parent Company receives management fees from certain of its subsidiaries, which include the reimbursement of various general and administrative services for expenses incurred by ETP on behalf of those subsidiaries. All such amounts have been eliminated in our consolidated financial statements.
In the ordinary course of business, our subsidiaries have related party transactions between each other which are generally based on transactions made at market-related rates. Our consolidated revenues and expenses reflect the elimination of all material intercompany transactions.
In addition, ETE recorded sales with affiliates of $81 million and $76 million during the three ended March 31, 2016 and 2015, respectively.


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Table of Contents

13.
REPORTABLE SEGMENTS
Our financial statements reflect the following reportable business segments:
Investment in ETP, including the consolidated operations of ETP;
Investment in Sunoco LP, including the consolidated operations of Sunoco LP;
Investment in Lake Charles LNG, including the operations of Lake Charles LNG; and
Corporate and Other, including the following:
activities of the Parent Company; and
the goodwill and property, plant and equipment fair value adjustments recorded as a result of the 2004 reverse acquisition of Heritage Propane Partners, L.P.
ETP completed its acquisition of Regency in April 2015; therefore, the Investment in ETP segment amounts have been retrospectively adjusted to reflect Regency for the periods presented.
The Investment in Sunoco LP segment reflects the results of Sunoco LP and the legacy Sunoco, Inc. retail business for the periods presented. ETE’s consolidated results reflect the elimination of Sunoco, LLC, Susser and the legacy Sunoco, Inc. retail business for the periods during which those entities were included in the consolidated results of both ETP and Sunoco LP. In addition, subsequent to July 2015, ETP holds an equity method investment in Sunoco, LLC, and a continuing investment in Sunoco LP the equity in earnings from which is also eliminated in ETE’s consolidated financial statements.
Related party transactions among our segments are generally based on transactions made at market-related rates. Consolidated revenues and expenses reflect the elimination of all material intercompany transactions.
We define Segment Adjusted EBITDA as earnings before interest, taxes, depreciation, depletion, amortization and other non-cash items, such as non-cash compensation expense, gains and losses on disposals of assets, the allowance for equity funds used during construction, unrealized gains and losses on commodity risk management activities, non-cash impairment charges, losses on extinguishments of debt, gain on deconsolidation and other non-operating income or expense items. Unrealized gains and losses on commodity risk management activities include unrealized gains and losses on commodity derivatives and inventory fair value adjustments (excluding lower of cost or market adjustments). Segment Adjusted EBITDA reflects amounts for unconsolidated affiliates based on the Partnership’s proportionate ownership and amounts for less than wholly owned subsidiaries based on 100% of the subsidiaries’ results of operations. Based on the change in our reportable segments we have recast the presentation of our segment results for the prior years to be consistent with the current year presentation.

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Table of Contents

The following tables present financial information by segment:
 
Three Months Ended
March 31,
 
2016
 
2015
Segment Adjusted EBITDA:
 
 
 
Investment in ETP
$
1,412

 
$
1,366

Investment in Sunoco LP
159

 
128

Investment in Lake Charles LNG
44

 
49

Corporate and Other
(37
)
 
(23
)
Adjustments and Eliminations

 
(125
)
Total
1,578

 
1,395

Depreciation, depletion and amortization
(562
)
 
(493
)
Interest expense, net
(427
)
 
(371
)
Losses on interest rate derivatives
(70
)
 
(77
)
Non-cash unit-based compensation expense
(1
)
 
(23
)
Unrealized losses on commodity risk management activities
(60
)
 
(75
)
Inventory valuation adjustments
(13
)
 
(34
)
Equity in earnings of unconsolidated affiliates
61

 
57

Adjusted EBITDA related to unconsolidated affiliates
(219
)
 
(146
)
Other, net
(6
)
 

Income before income tax expense
$
281

 
$
233