Energy Transfer 2012 Annual Report Download - page 194

F - 49
11. PRICE RISK MANAGEMENT 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, we 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 the consolidated balance sheets.
We inject and hold natural gas in our Bammel storage facility to take advantage of contango markets (i.e., when the price of
natural gas is higher in the future than the current spot price). We use financial derivatives to hedge the natural gas held in
connection with these arbitrage opportunities. At the inception of the hedge, we lock in a margin by purchasing gas in the
spot market or off peak season and entering into a financial contract to lock in the sale price. If we designate the related
financial contract as a fair value hedge for accounting purposes, we value the hedged natural gas inventory at current spot
market prices along with the financial derivative we use to hedge it. Changes in the spread between the forward natural gas
prices designated as fair value hedges 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underlying physical gas is withdrawn and the related designated derivatives are settled. Once the gas is withdrawn and the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.
Unrealized margins represent the unrealized gains or losses from our derivative instruments using mark-to-market accounting,
with changes in the fair value of our derivatives being recorded directly in earnings. These margins fluctuate based upon
changes in the spreads between the physical spot price and forward natural gas prices. If the 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 through either mark-to-market adjustments or the physical withdraw of natural gas.
We are also exposed to market risk on natural gas we retain for fees in our intrastate transportation and storage segment and
operational gas sales on our interstate transportation and storage segment. We use financial derivatives to hedge the sales
price of this gas, including futures, swaps and options. Certain contracts that qualify for hedge accounting are designated as
cash flow hedges of the forecasted sale of natural gas. The change in value, to the extent the contracts are effective, remains
in AOCI until the forecasted transaction occurs. When the forecasted transaction occurs, any gain or loss associated with the
derivative is recorded in cost of products sold in the consolidated statement of operations.
We are also exposed to commodity price risk on NGLs and residue gas we retain for fees in our midstream segment whereby
the Company generally gathers and processes natural gas on behalf of producers, sells the resulting residue gas and NGL
volumes at market prices and remits to producers an agreed upon percentage of the proceeds based on an index price for the
residue gas and NGLs. We use derivative swap contracts to hedge forecasted sales of NGL equity volumes. Certain contracts
that qualify for hedge accounting are accounted for as cash flow hedges. The change in value, to the extent the contracts are
effective, remains in AOCI until the forecasted transaction occurs. When the forecasted transaction occurs, any gain or loss
associated with the derivative is recorded in cost of products sold in the consolidated statement of operations.
Our trading activities include the use of financial commodity derivatives to take advantage of market opportunities. These
trading activities are a complement to our transportation and storage segment's operations and are netted in cost of products
sold in our consolidated statements of operations. Additionally, we also have trading activities related to power 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.
Derivatives are utilized in our midstream segment in order to mitigate price volatility and manage fixed price exposure incurred
from contractual obligations. We attempt to maintain balanced positions in our marketing activities to protect against volatility
in the energy commodities markets; however, net unbalanced positions can exist. Long-term physical contracts are tied to
index prices.
Prior to the deconsolidation of the Propane Business, we also used propane futures contracts to fix the purchase price related
to certain fixed price sales contracts. Prior to the sale of our cylinder exchange business, we used propane futures contracts
to secure the purchase price of our propane inventory for a percentage of the anticipated sales.
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