Energy Transfer 2012 Annual Report Download - page 168

F - 23
We record the collection of taxes to be remitted to government authorities on a net basis except for our retail marketing segment
in which consumer excise taxes on sales of refined products and merchandise are included in both revenues and costs and
expenses in the consolidated statements of operations, with no effect on net income (loss).
Income Taxes
ETP is a publicly traded limited partnership and is not taxable for federal and most state income tax purposes. As a result,
our earnings or losses, to the extent not included in a taxable subsidiary, for federal and most state purposes are included in
the tax returns of the individual partners. Net earnings for financial statement purposes may differ significantly from taxable
income reportable to Unitholders as a result of differences between the tax basis and financial basis of assets and liabilities,
differences between the tax accounting and financial accounting treatment of certain items, and due to allocation requirements
related to taxable income under our Second Amended and Restated Agreement of Limited Partnership (the “Partnership
Agreement”).
As a publicly traded limited partnership, we are subject to a statutory requirement that our “qualifying income” (as defined
by the Internal Revenue Code, related Treasury Regulations, and Internal Revenue Service pronouncements) exceed 90% of
our total gross income, determined on a calendar year basis. If our qualifying income does not meet this statutory requirement,
ETP would be taxed as a corporation for federal and state income tax purposes. For the years ended December 31, 2012,
2011 and 2010, our qualifying income met the statutory requirement.
The Partnership conducts certain activities through corporate subsidiaries which are subject to federal, state and local income
taxes. Holdco, formed via the Holdco Transaction (see Note 3), which includes Sunoco and Southern Union, is included
amongst these corporate subsidiaries. The Partnership and its corporate subsidiaries account for income taxes under the asset
and liability method.
Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized
in earnings in the period that includes the enactment date. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts more likely than not to be realized.
The determination of the provision for income taxes requires significant judgment, use of estimates, and the interpretation
and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and
taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax positions are recorded in
our financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand
challenge, if any, from taxing authorities. When facts and circumstances change, we reassess these probabilities and record
any changes through the provision for income taxes.
See Note 9 for income tax disclosures.
Accounting for Derivative Instruments and Hedging Activities
For qualifying hedges, we formally document, designate and assess the effectiveness of transactions that receive hedge
accounting treatment and the gains and losses offset related results on the hedged item in the statement of operations. 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.
At inception of a hedge, we formally document the relationship between the hedging instrument and the hedged item, the risk
management objectives, and the methods used for assessing and testing effectiveness and how any ineffectiveness will be
measured and recorded. We also assess, both at the inception of the hedge and on a quarterly basis, whether the derivatives
that are used in our hedging transactions are highly effective in offsetting changes in cash flows. If we determine that a
derivative is no longer highly effective as a hedge, we discontinue hedge accounting prospectively by including changes in
the fair value of the derivative in net income for the period.
If we designate a commodity 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.
Cash flows from derivatives accounted for as cash flow hedges are reported as cash flows from operating activities, in the
same category as the cash flows from the items being hedged.
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