Energy Transfer 2015 Annual Report Download - page 75

Table of Contents
provide additional distributable cash flow to our Partnership for years to come. Lastly, we have established and executed on cost control measures to drive
cost savings across our operations to generate additional distributable cash flow.
Our principal operations as of December 31, 2015 included the following segments:
• Intrastate transportation and storage – Revenue is principally generated from fees charged to customers to reserve firm capacity on or move gas through
our pipelines on an interruptible basis. Our interruptible or short-term business is generally impacted by basis differentials between delivery points on
our system and the price of natural gas. The basis differentials that primarily impact our interruptible business are primarily among receipt points
between West Texas to East Texas or segments thereof. When narrow or flat spreads exist, our open capacity may be underutilized and go unsold.
Conversely, when basis differentials widen, our interruptible volumes and fees generally increase. The fee structure normally consists of a monetary fee
and fuel retention. Excess fuel retained after consumption, if any, is typically sold at market prices. In addition to transport fees, we generate revenue
from purchasing natural gas and transporting it across our system. The natural gas is then sold to electric utilities, independent power plants, local
distribution companies, industrial end-users and other marketing companies. The HPL System purchases natural gas at the wellhead for transport and
selling. Other pipelines with access to West Texas supply, such as Oasis and ET Fuel, may also purchase gas at the wellhead and other supply sources for
transport across our system to be sold at market on the east side of our system. This activity allows our intrastate transportation and storage segment to
capture the current basis differentials between delivery points on our system or to capture basis differentials that were previously locked in through
hedges. Firm capacity long-term contracts are typically not subject to price differentials between shipping locations.
We also generate fee-based revenue from our natural gas storage facilities by contracting with third parties for their use of our storage capacity. From time
to time, we inject and hold natural gas in our Bammel storage facility to take advantage of contango markets, a term used to describe a pricing
environment 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. Our earnings from natural gas storage we purchase, store and sell are subject to the current market prices
(spot price in relation to forward price) at the time the storage gas is hedged. At the inception of the hedge, we lock in a margin by purchasing gas in the
spot market and entering into a financial derivative to lock in the forward sale price. If we designate the related financial derivative as a fair value hedge
for accounting purposes, we value the hedged natural gas inventory at current spot market prices whereas the financial derivative is valued using forward
natural gas prices. As a result of fair value hedge accounting, we have elected to exclude the spot forward premium from the measurement of effectiveness
and changes in the spread between forward natural gas prices and spot market prices result in unrealized gains or losses until the underlying physical gas
is withdrawn and the related financial 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. If the spread narrows between spot and forward prices, we will record unrealized
gains or lower unrealized losses. If the spread widens prior to withdrawal of the gas, we will record unrealized losses or lower unrealized gains.
As noted above, any excess retained fuel is sold at market prices. To mitigate commodity price exposure, we may use financial derivatives to hedge
prices on a portion of natural gas volumes retained. For certain contracts that qualify for hedge accounting, we designate them as cash flow hedges of the
forecasted sale of gas. The change in value, to the extent the contracts are effective, remains in accumulated other comprehensive income 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.
In addition, we use financial derivatives to lock in price differentials between market hubs connected to our assets on a portion of our intrastate
transportation system’s unreserved capacity. Gains and losses on these financial derivatives are dependent on price differentials at market locations,
primarily points in West Texas and East Texas. We account for these derivatives using mark-to-market accounting, and the change in the value of these
derivatives is recorded in earnings. During the fourth quarter of 2011, we began using derivatives for trading purposes.
• Interstate transportation and storage – The majority of our interstate transportation and storage revenues are generated through firm reservation charges
that are based on the amount of firm capacity reserved for our firm shippers regardless of usage. Tiger, FEP, Transwestern, Panhandle, MEP and Gulf
States shippers have made long-term commitments to pay reservation charges for the firm capacity reserved for their use. In addition to reservation
revenues, additional revenue sources include interruptible transportation charges as well as usage rates and overrun rates paid by firm shippers based on
their actual capacity usage.
• Midstream – Revenue is principally dependent upon the volumes of natural gas gathered, compressed, treated, processed, purchased and sold through
our pipelines as well as the level of natural gas and NGL prices.
In addition to fee-based contracts for gathering, treating and processing, we also have percent-of-proceeds and keep-whole contracts, which are subject to
market pricing. For percent-of-proceeds contracts, we retain a portion of the natural gas and
69