Energy Transfer 2012 Annual Report Download - page 113

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For certain of our activities, we are exposed to market risks related to the volatility of natural gas and NGL prices. To manage the
impact of volatility from these prices, we utilize various exchange-traded and over-the-counter commodity financial instrument
contracts. These contracts consist primarily of futures and swaps and are recorded at fair value in the consolidated balance sheets.
In general, we use derivatives to reduce market exposure and price risk within our segments as follows:
• We use derivative financial instruments in connection with our natural gas inventory at the Bammel storage facility by
purchasing physical natural gas and then selling forward financial contracts at a price sufficient to cover our carrying
costs and provide a gross profit margin. We also use derivatives in our intrastate transportation and storage segment to
hedge the sales price of retention natural gas in excess of consumption, a portion of volumes purchased at the wellhead
from producers, and location price differentials related to the transportation of natural gas. Additionally, we use derivatives
for trading purposes in this segment.
• Derivatives are utilized in our midstream segment in order to mitigate price volatility in our marketing activities and
manage fixed price exposure incurred from contractual obligations.
• We also use derivative swap contracts to mitigate risk from price fluctuations on NGLs we retain for fees in our midstream
segment.
• Our propane segment permitted customers to guarantee the propane delivery price for the next heating season. We executed
fixed sales price contracts with our customers and entered into propane futures contracts to fix the purchase price related
to these sales contracts, thereby locking in a gross profit margin. We used propane futures contracts to secure the purchase
price of our propane inventory for a percentage of our anticipated propane sales.
• In our Other segment, we utilized derivatives for trading purpose, primarily in the electricity markets.
The market prices used to value our financial derivatives and related transactions have been determined using independent third
party prices, readily available market information, broker quotes and appropriate valuation techniques.
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 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
cost of products sold in our consolidated statements of operations.
We use futures and basis swaps, designated as fair value hedges, to hedge our natural gas inventory stored in our Bammel storage
facility. Changes in the spreads between the forward natural gas prices designated as fair value hedges and the physical Bammel
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 attempt to maintain balanced positions to protect ourselves from the volatility in the energy commodities markets; however,
net unbalanced positions can exist. Long-term physical contracts are tied to index prices. System gas, which is also tied to index
prices, is expected to provide most of the gas required by our long-term physical contracts. When third-party gas is required to
supply long-term contracts, a hedge is put in place to protect the margin on the contract. To the extent open commodity positions
exist, fluctuating commodity prices can impact our financial position and results of operations, either favorably or unfavorably.
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