Energy Transfer 2013 Annual Report Download - page 105

Table of Contents
Revenue Recognition Revenues for sales of natural gas and NGLs are recognized at the later of the time of delivery of the product to the customer or the time
of sale. Revenues from service labor, transportation, treating, compression and gas processing, are recognized upon completion of the service. Transportation
capacity payments are recognized when earned in the period the capacity is made available.
Our intrastate transportation and storage and interstate transportation and storage segments’ results are determined primarily by the amount of capacity our
customers reserve as well as the actual volume of natural gas that flows through the transportation pipelines. Under transportation contracts, our customers are
charged (i) a demand fee, which is a fixed fee for the reservation of an agreed amount of capacity on the transportation pipeline for a specified period of time
and which obligates the customer to pay even if the customer does not transport natural gas on the respective pipeline, (ii) a transportation fee, which is based
on the actual throughput of natural gas by the customer, (iii) fuel retention based on a percentage of gas transported on the pipeline, or (iv) a combination of the
three, generally payable monthly. Excess fuel retained after consumption is typically valued at market prices.
Our intrastate transportation and storage segment also generates revenues and margin from the sale of natural gas to electric utilities, independent power plants,
local distribution companies, industrial end-users and other marketing companies on the HPL System. Generally, we purchase natural gas from the market,
including purchases from our marketing operations, and from producers at the wellhead.
In addition, our intrastate transportation and storage segment generates revenues and margin from fees charged for storing customers’ working natural gas in
our storage facilities. We also engage in natural gas storage transactions in which we seek to find and profit from pricing differences that occur over time
utilizing the Bammel storage reservoir. We purchase physical natural gas and then sell financial contracts at a price sufficient to cover our carrying costs and
provide for a gross profit margin. We expect margins from natural gas storage transactions to be higher during the periods from November to March of each
year and lower during the period from April through October of each year due to the increased demand for natural gas during colder weather. However, we
cannot assure that management’s expectations will be fully realized in the future and in what time period, due to various factors including weather, availability
of natural gas in regions in which we operate, competitive factors in the energy industry, and other issues.
Results from the midstream segment are determined primarily by the volumes of natural gas gathered, compressed, treated, processed, purchased and sold
through our pipeline and gathering systems and the level of natural gas and NGL prices. We generate midstream revenues and gross margins principally under
fee-based or other arrangements in which we receive a fee for natural gas gathering, compressing, treating or processing services. The revenue earned from these
arrangements is directly related to the volume of natural gas that flows through our systems and is not directly dependent on commodity prices.
We also utilize other types of arrangements in our midstream segment, including (i) discount-to-index price arrangements, which involve purchases of natural
gas at either (1) a percentage discount to a specified index price, (2) a specified index price less a fixed amount or (3) a percentage discount to a specified index
price less an additional fixed amount, (ii) percentage-of-proceeds arrangements under which we gather and process natural gas on behalf of producers, sell the
resulting residue gas and NGL volumes at market prices and remit to producers an agreed upon percentage of the proceeds based on an index price, and
(iii) keep-whole arrangements where we gather natural gas from the producer, process the natural gas and sell the resulting NGLs to third parties at market
prices. In many cases, we provide services under contracts that contain a combination of more than one of the arrangements described above. The terms of our
contracts vary based on gas quality conditions, the competitive environment at the time the contracts are signed and customer requirements. Our contract mix
may change as a result of changes in producer preferences, expansion in regions where some types of contracts are more common and other market factors.
We conduct marketing activities in which we market the natural gas that flows through our assets, referred to as on-system gas. We also attract other
customers by marketing volumes of natural gas that do not move through our assets, referred to as off-system gas. For both on-system and off-system gas, we
purchase natural gas from natural gas producers and other supply points and sell that natural gas to utilities, industrial consumers, other marketers and
pipeline companies, thereby generating gross margins based upon the difference between the purchase and resale prices.
We have a risk management policy that provides for oversight over our marketing activities. These activities are monitored independently by our risk
management function and must take place within predefined limits and authorizations. As a result of our use of derivative financial instruments that may not
qualify for hedge accounting, 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 senior management and predefined limits and authorizations
set forth in our risk management policy.
We inject and hold natural gas in our Bammel storage facility to take advantage of contango markets, 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
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