Energy Transfer 2015 Annual Report Download - page 76

Table of Contents
NGLs processed, or a portion of the proceeds of the sales of those commodities, as a fee. When natural gas and NGL prices increase, the value of the
portion we retain as a fee increases. Conversely, when prices of natural gas and NGLs decrease, so does the value of the portion we retain as a fee. For
wellhead (keep-whole) contracts, we retain the difference between the price of NGLs and the cost of the gas to process the NGLs. In periods of high NGL
prices relative to natural gas, our margins increase. During periods of low NGL prices relative to natural gas, our margins decrease or could become
negative. Our processing contracts and wellhead purchases in rich natural gas areas provide that we earn and take title to specified volumes of NGLs,
which we also refer to as equity NGLs. Equity NGLs in our midstream segment are derived from performing a service in a percent-of-proceeds contract or
produced under a keep-whole arrangement.
In addition to NGL price risk, our processing activity is also subject to price risk from natural gas because, in order to process the gas, in some cases we
must purchase it. Therefore, lower gas prices generally result in higher processing margins.
• Liquids transportation and services – Liquids transportation revenue is principally generated from fees charged to customers under dedicated contracts or
take-or-pay contracts. Under a dedicated contract, the customer agrees to deliver the total output from particular processing plants that are connected to
the NGL pipeline. Take-or-pay contracts have minimum throughput commitments requiring the customer to pay regardless of whether a fixed volume is
transported. Transportation fees are market-based, negotiated with customers and competitive with regional regulated pipelines.
NGL storage revenues are derived from base storage fees and throughput fees. Base storage fees are based on the volume of capacity reserved, regardless
of the capacity actually used. Throughput fees are charged for providing ancillary services, including receipt and delivery, custody transfer, rail/truck
loading and unloading fees. Storage contracts may be for dedicated storage or fungible storage. Dedicated storage enables a customer to reserve an entire
storage cavern, which allows the customer to inject and withdraw proprietary and often unique products. Fungible storage allows a customer to store
specified quantities of NGL products that are commingled in a storage cavern with other customers’ products of the same type and grade. NGL storage
contracts may be entered into on a firm or interruptible basis. Under a firm basis contract, the customer obtains the right to store products in the storage
caverns throughout the term of the contract; whereas, under an interruptible basis contract, the customer receives only limited assurance regarding the
availability of capacity in the storage caverns.
This segment also includes revenues earned from processing and fractionating refinery off-gas. Under these contracts we receive an O-grade stream from
cryogenic processing plants located at refineries and fractionate the products into their pure components. We deliver purity products to customers
through pipelines and across a truck rack located at the fractionation complex. In addition to revenues for fractionating the O-grade stream, we have
percentage-of-proceeds and income sharing contracts, which are subject to market pricing of olefins and NGLs. For percentage-of-proceeds contracts, we
retain a portion of the purity NGLs and olefins processed, or a portion of the proceeds from the sales of those commodities, as a fee. When NGLs and
olefin prices increase, the value of the portion we retain as a fee increases. Conversely, when NGLs and olefin prices decrease, so does the value of the
portion we retain as a fee. Under our income sharing contracts, we pay the producer the equivalent energy value for their liquids, similar to a traditional
keep-whole processing agreement, and then share in the residual income created by the difference between NGLs and olefin prices as compared to natural
gas prices. As NGLs and olefins prices increase in relation to natural gas prices, the value of the percent we retain as a fee increases. Conversely, when
NGLs and olefins prices decrease as compared to natural gas prices, so does the value of the percent we retain as a fee.
• Investment in Sunoco Logistics – Revenues are generated by charging tariffs for transporting crude oil, NGLs and refined products through Sunoco
Logistics’ pipelines as well as by charging fees for terminalling services for crude oil, NGLs and refined products at its facilities. Revenues are also
generated by acquiring and marketing crude oil, NGLs and refined products. Generally, crude oil, NGLs and refined products purchases are entered into
in contemplation of or simultaneously with corresponding sale transactions involving physical deliveries, which enables us to secure a profit on the
transaction at the time of purchase.
• Retail marketing – Revenue is principally generated from the sale of gasoline and middle distillates and the operation of convenience stores in 14 states,
primarily on the east coast and in the southern regions of the United States. These stores complement sales of fuel products with a broad mix of
merchandise such as groceries, fast foods, beverages and tobacco products.
Trends and Outlook
We continue to evaluate and execute strategies to enhance unitholder value through growth, as well as the integration and optimization of our diversified
asset portfolio. We intend to continue our goal of maintaining a distribution coverage ratio of 1.05x, thereby promoting a prudent balance between
distribution rate increases and enhanced financial flexibility and strength while maintaining our investment grade ratings. While we anticipate significant
earnings growth in 2017 from the completion of our fully-contracted project backlog, we are currently experiencing the impacts of recent declines in
commodity prices, as well as challenging conditions in the capital markets.
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