Energy Transfer 2015 Annual Report Download - page 113

Table of Contents
and in some cases we own the entire site and have entered into an operating lease with the wholesale customer operating the site. In addition, our retail
outlets derive other income from lottery ticket sales, money orders, prepaid phone cards and wireless services, ATM transactions, car washes, movie rental and
other ancillary product and service offerings. Some of Sunoco, Inc.’s retail outlets provide a variety of car care services. Revenues related to the sale of
products are recognized when title passes, while service revenues are recorded on a net commission basis and are recognized when services are provided. Title
passage generally occurs when products are shipped or delivered in accordance with the terms of the respective sales agreements. In addition, revenues are
not recognized until sales prices are fixed or determinable and collectability is reasonably assured.
Regulatory Assets and Liabilities Our interstate transportation and storage segment is subject to regulation by certain state and federal authorities, and
certain subsidiaries in that segment have accounting policies that conform to the accounting requirements and ratemaking practices of the regulatory
authorities. The application of these accounting policies allows certain of our regulated entities to defer expenses and revenues on the balance sheet as
regulatory assets and liabilities when it is probable that those expenses and revenues will be allowed in the ratemaking process in a period different from the
period in which they would have been reflected in the consolidated statement of operations by an unregulated company. These deferred assets and liabilities
will be reported in results of operations in the period in which the same amounts are included in rates and recovered from or refunded to customers.
Management’s assessment of the probability of recovery or pass through of regulatory assets and liabilities will require judgment and interpretation of laws
and regulatory commission orders. If, for any reason, we cease to meet the criteria for application of regulatory accounting treatment for all or part of our
operations, the regulatory assets and liabilities related to those portions ceasing to meet such criteria would be eliminated from the consolidated balance
sheet for the period in which the discontinuance of regulatory accounting treatment occurs.
Accounting for Derivative Instruments and Hedging Activities We utilize various exchange-traded and over-the-counter commodity financial instrument
contracts to limit our exposure to margin fluctuations in natural gas, NGL and refined products. These contracts consist primarily of futures and swaps. In
addition, prior to the contribution of our retail propane activities to AmeriGas, we used derivatives to limit our exposure to propane market prices.
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 the cost of products sold in the consolidated statement of operations.
We utilize published settlement prices for exchange-traded contracts, quotes provided by brokers, and estimates of market prices based on daily contract
activity to estimate the fair value of these contracts. Changes in the methods used to determine the fair value of these contracts could have a material effect on
our results of operations. We do not anticipate future changes in the methods used to determine the fair value of these derivative contracts. See “Item 7A.
Quantitative and Qualitative Disclosures about Market Risk” for further discussion regarding our derivative activities.
Fair Value of Financial Instruments. We have commodity derivatives, interest rate derivatives and embedded derivatives in our preferred units that are
accounted for as assets and liabilities at fair value in our consolidated balance sheets. We determine the fair value of our assets and liabilities subject to fair
value measurement by using the highest possible “level” of inputs. Level 1 inputs are observable quotes in an active market for identical assets and
liabilities. We consider the valuation of marketable securities and commodity derivatives transacted through a clearing broker with a published price from
the appropriate exchange as a Level 1 valuation. Level 2 inputs are inputs observable for similar assets and liabilities. We consider OTC commodity
derivatives entered into directly with third parties as a Level 2 valuation since the values of these derivatives are quoted on an exchange for similar
transactions. Additionally, we consider our options transacted through our clearing broker as having Level 2 inputs due to the level of activity of these
contracts on the exchange in which they trade. We consider the valuation of our interest rate derivatives as Level 2 as the primary input, the LIBOR curve, is
based on quotes from an active exchange of Eurodollar futures for the same period as the future interest swap settlements. Level 3 inputs are unobservable.
Derivatives related to the embedded derivatives in our preferred units are valued using a binomial lattice model. The market inputs utilized in the model
include credit spread, probabilities of the occurrence of certain events, common unit price, dividend yield, and expected value, and are considered level 3.
See further information on our fair value assets and liabilities in Note 2 of our consolidated financial statements.
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