Energy Transfer 2010 Annual Report Download - page 148

Those subsidiaries which are taxable corporations follow the asset and liability method of accounting for
income taxes, under which deferred income taxes are recorded based upon differences between the financial
reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that
will be in effect when the underlying assets are received and liabilities settled.
The effective tax rate differs from the statutory rate due primarily to Partnership earnings that are generally
not subject to federal and state income taxes at the Partnership level.
The components of the federal and state income tax expense (benefit) of our taxable subsidiaries are
summarized as follows:
Years Ended December 31,
2010 2009 2008
Current expense (benefit):
Federal $ 507 $ (8,851) $ (180)
State 8,591 9,662 12,216
Total 9,098 811 12,036
Deferred expense (benefit):
Federal 6,325 11,541 (5,634)
State 113 425 278
Total 6,438 11,966 (5,356)
Total income tax expense $ 15,536 $ 12,777 $ 6,680
As of December 31, 2010 and 2009, we had deferred income tax liabilities of $119.2 million and $113.0
million, respectively, recorded in other non-current liabilities in our consolidated balance sheets.
Substantially all of our deferred tax liability relates to property, plant and equipment, including $49.2
million and $45.2 million as of December 31, 2010 and 2009, respectively, and basis differences associated
with our Class E Units of $70.2 million and $67.5 million as of December 31, 2010 and 2009, respectively.
As of December 31, 2010 we had deferred income tax liabilities of $0.4 million recorded in accrued and
other liabilities in our consolidated balance sheet.
Accounting for Derivative Instruments and Hedging Activities
For qualifying hedges, we formally document, designate and assess the effectiveness of transactions that
receive hedge accounting treatment and the gains and losses offset related results on the hedged item in the
statement of operations. 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.
At inception of a hedge, we formally document the relationship between the hedging instrument and the
hedged item, the risk management objectives, and the methods used for assessing and testing effectiveness
and how any ineffectiveness will be measured and recorded. We also assess, both at the inception of the
hedge and on a quarterly basis, whether the derivatives that are used in our hedging transactions are highly
effective in offsetting changes in cash flows. If we determine that a derivative is no longer highly effective
as a hedge, we discontinue hedge accounting prospectively by including changes in the fair value of the
derivative in net income for the period.
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
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