Investments in Unconsolidated Entities

9 Months Ended

Sep. 30, 2019

Equity Method Investments and Joint Ventures [Abstract]

Our investments in unconsolidated entities consisted of the following (in millions, except percentage data):



		Ownership Interest at	Investment Balance
Entity ⁽¹⁾	Type of Operation	September 30, 2019	September 30, 2019		December 31, 2018
Advantage Pipeline Holdings LLC	Crude Oil Pipeline	50%	$	74	$	72
BridgeTex Pipeline Company, LLC	Crude Oil Pipeline	20%	432		435
Cactus II Pipeline LLC	Crude Oil Pipeline	65%	666		455
Caddo Pipeline LLC	Crude Oil Pipeline	50%	66		65
Capline Pipeline Company LLC	Crude Oil Pipeline ⁽²⁾	54%	462		—
Cheyenne Pipeline LLC	Crude Oil Pipeline	50%	44		44
Diamond Pipeline LLC	Crude Oil Pipeline	50%	476		479
Eagle Ford Pipeline LLC	Crude Oil Pipeline	50%	386		383
Eagle Ford Terminals Corpus Christi LLC (“Eagle Ford Terminals”)	Crude Oil Terminal and Dock	50%	124		108
Midway Pipeline LLC	Crude Oil Pipeline	50%	76		78
Red Oak Pipeline LLC (“Red Oak”)	Crude Oil Pipeline ⁽³⁾	50%	3		—
Saddlehorn Pipeline Company, LLC	Crude Oil Pipeline	40%	227		215
Settoon Towing, LLC	Barge Transportation Services	50%	58		58
STACK Pipeline LLC	Crude Oil Pipeline	50%	116		120
White Cliffs Pipeline, LLC	Crude Oil Pipeline	36%	196		190
Wink to Webster Pipeline LLC (“W2W Pipeline”)	Crude Oil Pipeline ⁽³⁾	16%	79		—
Total investments in unconsolidated entities			$	3,485	$	2,702


⁽¹⁾	Except for Eagle Ford Terminals, which is reported in our Facilities segment, the financial results from the entities are reported in our Transportation segment.


⁽²⁾	The Capline pipeline was taken out of service in the fourth quarter of 2018. During the third quarter of 2019, the owners of Capline Pipeline Company LLC sanctioned the reversal of the Capline pipeline system.


⁽³⁾	Asset is currently under construction and has not yet been placed in service.

Formations

Capline LLC. During the first quarter of 2019, the owners of the Capline pipeline system, which originates in St. James, Louisiana and terminates in Patoka, Illinois, contributed their undivided joint interests in the system to a newly formed entity, Capline Pipeline Company LLC (“Capline LLC”), in exchange for equity interests in such entity. After the contribution, Capline LLC owns 100% of the pipeline system. Each owner’s undivided joint interest in the Capline pipeline system prior to the transaction is equal to each owner’s equity interest in Capline LLC. Although we own a majority of Capline LLC’s equity, we do not have a controlling financial interest in Capline LLC because the other members have substantive participating rights. Therefore, we account for our ownership interest in Capline LLC as an equity method investment.

Under applicable accounting rules, the transaction resulted in a “loss of control” of our undivided joint interest, which was derecognized and contributed to Capline LLC. The “loss of control” required us to measure our equity interest in Capline LLC at fair value. At the time of the transaction, our 54% undivided joint interest in the Capline pipeline system had a carrying value of $175 million, which primarily related to property and equipment included in our Transportation segment. We determined the fair value of our investment in Capline LLC to be approximately $444 million, resulting in the recognition of a gain of $269 million during the nine months ended September 30, 2019. Such gain is included in “Gain on investment in unconsolidated entities” on our Condensed Consolidated Statement of Operations.

The fair value of our investment in Capline LLC was based on an income approach utilizing a discounted cash flow analysis. This approach requires us to make long-term forecasts of future revenues and expenditures. Those forecasts require the use of various assumptions and estimates which include those related to the timing and amount of capital expenditures, the expected tariff rates and volumes of crude oil, and the terminal value. These assumptions are based on a potential reversal of the Capline pipeline and the initiation of southbound service on the Capline pipeline from Patoka to St. James, and potential service on our Diamond joint venture pipeline and the Capline pipeline from Cushing, Oklahoma to St. James. We probability weighted various forecasted cash flow scenarios utilized in the analysis when we considered the possible outcomes. We used a discount rate representing our estimate of the risk adjusted discount rate that would be used by market participants. These projects are dependent upon shipper interest. If shipper interest varies from the levels assumed in our model, the related cash flows, and thus the fair value of our investment, could be materially impacted. The fair value of our investment was determined using significant unobservable inputs, or Level 3 inputs in the fair value hierarchy.

W2W Pipeline. In the first quarter of 2019, we announced the formation of W2W Pipeline, a joint venture with subsidiaries of ExxonMobil and Lotus Midstream, LLC. During the third quarter of 2019, three additional entities joined as partners in W2W Pipeline. As a result, our ownership interest in W2W Pipeline decreased from 20% to 16%. We account for our interest in W2W Pipeline under the equity method of accounting. W2W Pipeline is currently developing a new pipeline system that will originate in the Permian Basin in West Texas and transport crude oil to the Texas Gulf Coast. The pipeline system will provide approximately 1.5 million barrels per day of crude oil and condensate capacity, and the project is targeted to commence operations in 2021. W2W Pipeline has entered into an undivided joint-ownership arrangement with a third party whereby the third party has acquired 29% of the capacity of the pipeline segment from Midland, Texas to Webster, Texas, and W2W Pipeline now owns 71% of this segment of the pipeline.

Red Oak. In June 2019, we announced the formation of Red Oak, a joint venture with a subsidiary of Phillips 66. We own a 50% interest in Red Oak, which is currently developing a new pipeline that will provide crude oil transportation service from Cushing, Oklahoma, and the Permian Basin in West Texas to Corpus Christi, Ingleside, Houston and Beaumont, Texas. Initial service from Cushing to the Gulf Coast is targeted to commence in 2021, subject to receipt of applicable permits and regulatory approvals. We account for our interest in Red Oak under the equity method of accounting.

In addition to contributing cash for construction of the Red Oak pipeline system, we have also entered into a pipeline capacity lease agreement with Red Oak whereby Red Oak has agreed to lease 260,000 barrels of capacity on our Sunrise II pipeline once the Red Oak pipeline system is operational. Once the Red Oak pipeline system is operational, we will record (i) a $155 million increase to our investment in Red Oak associated with our deemed contribution of the value attributable to the capacity lease and (ii) corresponding deferred revenue that will be recognized on a straight-line basis over the initial lease term of 33 years.