Energy Transfer 2012 Annual Report Download - page 108

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spread narrows between the physical and financial prices, we will record unrealized gains or lower unrealized losses. If the spread
widens, we will record unrealized losses or lower unrealized gains. Typically, as we enter the winter months, the spread converges
so that we recognize in earnings the original locked in spread, either through mark-to-market or the physical withdrawal of natural
gas.
NGL storage and pipeline transportation revenues are recognized when services are performed or products are delivered,
respectively. Fractionation and processing revenues are recognized when product is either loaded into a truck or injected into a
third party pipeline, which is when title and risk of loss pass to the customer.
In our natural gas compression business, revenue is recognized for compressor packages and technical service jobs using the
completed contract method which recognizes revenue upon completion of the job. Costs incurred on a job are deducted at the time
revenue is recognized.
Regulatory Assets and Liabilities. Our interstate transportation and storage segment is subject to regulation by certain state and
federal authorities and has accounting policies that conform to the accounting requirements and ratemaking practices of the
regulatory authorities. The application of these accounting policies allows us to defer expenses and revenues on the balance sheet
as regulatory assets and liabilities when it is probable that those expenses and revenues will be allowed in the ratemaking process
in a period different from the period in which they would have been reflected in the consolidated statement of operations by an
unregulated company. These deferred assets and liabilities will be reported in results of operations in the period in which the same
amounts are included in rates and recovered from or refunded to customers. Management’s assessment of the probability of recovery
or pass through of regulatory assets and liabilities will require judgment and interpretation of laws and regulatory commission
orders. If, for any reason, we cease to meet the criteria for application of regulatory accounting treatment for all or part of our
operations, the regulatory assets and liabilities related to those portions ceasing to meet such criteria would be eliminated from
the consolidated balance sheet for the period in which the discontinuance of regulatory accounting treatment occurs.
Accounting for Derivative Instruments and Hedging Activities. We utilize various exchange-traded and over-the-counter
commodity financial instrument contracts to limit our exposure to margin fluctuations in natural gas, NGL and refined products.
These contracts consist primarily of futures and swaps. In addition, prior to the contribution of our retail propane activities to
AmeriGas, we used derivatives to limit our exposure to propane market prices.
If we designate a derivative financial instrument as a cash flow hedge and it qualifies for hedge accounting, the change in the fair
value is deferred in accumulated other comprehensive income (“AOCI”) until the underlying hedged transaction occurs. Any
ineffective portion of a cash flow hedge’s change in fair value is recognized each period in earnings. Gains and losses deferred in
AOCI related to cash flow hedges remain in AOCI until the underlying physical transaction occurs, unless it is probable that the
forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period
of time thereafter. For financial derivative instruments that do not qualify for hedge accounting, the change in fair value is recorded
in cost of products sold in the consolidated statements of operations.
If we designate a hedging relationship as a fair value hedge, we record the changes in fair value of the hedged asset or liability in
cost of products sold in our consolidated statement of operations. This amount is offset by the changes in fair value of the related
hedging instrument. Any ineffective portion or amount excluded from the assessment of hedge ineffectiveness is also included in
the cost of products sold in the consolidated statement of operations.
We utilize published settlement prices for exchange-traded contracts, quotes provided by brokers, and estimates of market prices
based on daily contract activity to estimate the fair value of these contracts. Changes in the methods used to determine the fair
value of these contracts could have a material effect on our results of operations. We do not anticipate future changes in the methods
used to determine the fair value of these derivative contracts. See “Item 7A. Quantitative and Qualitative Disclosures about Market
Risk” for further discussion regarding our derivative activities.
Fair Value of Financial Instruments. We have marketable securities, commodity derivatives and interest rate derivatives that
are accounted for as assets and liabilities at fair value in our consolidated balance sheets. We determine the fair value of our assets
and liabilities subject to fair value measurement by using the highest possible “level” of inputs. Level 1 inputs are observable
quotes in an active market for identical assets and liabilities. We consider the valuation of marketable securities and commodity
derivatives transacted through a clearing broker with a published price from the appropriate exchange as a Level 1 valuation. Level
2 inputs are inputs observable for similar assets and liabilities. We consider over-the-counter (“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. We currently do not have any recurring fair value
measurements that are considered Level 3 valuations.
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