Energy Transfer 2013 Annual Report Download - page 112

Table of Contents
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.
•Sunoco Logistics uses derivative contracts as economic hedges against price changes related to its forecasted refined products and NGL purchase and sale
activities.
•In our all other segment, we utilized derivatives for trading purposes.
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.
Sunoco Logistics manages exposures to crude oil, refined products and NGL commodity prices by monitoring inventory levels and expectations of future
commodity prices when making decisions with respect to risk management and inventory carried. Sunoco Logistics’ policy is to purchase only commodity
products for which it has a market and to structure its sales contracts so that price fluctuations for those products do not materially affect the margin Sunoco
Logistics receives. Sunoco Logistics also seeks to maintain a position that is substantially balanced within its various commodity purchase and sale activities.
Sunoco Logistics may experience net unbalanced positions for short periods of time as a result of production, transportation and delivery variances, as well as
logistical issues associated with inclement weather conditions. When unscheduled inventory builds or draws do occur, they are monitored and managed to a
balanced position over a reasonable period of time.
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