Energy Transfer 2010 Annual Report Download - page 35

The profitability of certain activities in our midstream and intrastate transportation and storage operations are
largely dependent upon natural gas commodity prices, price spreads between two or more physical locations
and market demand for natural gas and NGLs, which are factors beyond our control and have been volatile.
Income from our midstream and intrastate transportation and storage operations is exposed to risks due to
fluctuations in commodity prices. For a portion of the natural gas gathered at the North Texas System, Southeast
Texas System and HPL System, we purchase natural gas from producers at the wellhead and then gather and
deliver the natural gas to pipelines where we typically resell the natural gas under various arrangements,
including sales at index prices. Generally, the gross margins we realize under these arrangements decrease in
periods of low natural gas prices.
For a portion of the natural gas gathered and processed at the North Texas System and Southeast Texas System,
we enter into percentage-of-proceeds arrangements, keep-whole arrangements, and processing fee agreements
pursuant to which we agree to gather and process natural gas received from the producers. Under
percentage-of-proceeds arrangements, we generally sell the residue gas and NGLs at market prices and remit to
the producers an agreed upon percentage of the proceeds based on an index price. In other cases, instead of
remitting cash payments to the producer, we deliver an agreed upon percentage of the residue gas and NGL
volumes to the producer and sell the volumes we keep to third parties at market prices. Under these
arrangements, our revenues and gross margins decline when natural gas prices and NGL prices decrease.
Accordingly, a decrease in the price of natural gas or NGLs could have an adverse effect on our results of
operations. Under keep-whole arrangements, we generally sell the NGLs produced from our gathering and
processing operations to third parties at market prices. Because the extraction of the NGLs from the natural gas
during processing reduces the Btu content of the natural gas, we must either purchase natural gas at market prices
for return to producers or make a cash payment to producers equal to the value of this natural gas. Under these
arrangements, our revenues and gross margins decrease when the price of natural gas increases relative to the
price of NGLs if we are not able to bypass our processing plants and sell the unprocessed natural gas. Under
processing fee agreements, we process the gas for a fee. If recoveries are less than those guaranteed to the
producer, we may suffer a loss by having to supply liquids or its cash equivalent to keep the producer whole with
regard to contractual recoveries.
In the past, the prices of natural gas and NGLs have been extremely volatile, and we expect this volatility to
continue. For example, during the year ended December 31, 2010, the NYMEX settlement price for the prompt
month contract ranged from a high of $5.81 per MMBtu to a low of $3.29 per MMBtu. A composite of the Mt.
Belvieu average NGLs price based upon our average NGLs composition during our year ended December 31,
2010 ranged from a high of approximately $1.25 per gallon to a low of approximately $1.00 per gallon.
Our Oasis pipeline, East Texas pipeline, ET Fuel System and HPL System receive fees for transporting natural
gas for our customers. Although a significant amount of the pipeline capacity on our pipelines is committed
under long-term fee-based contracts, the remaining capacity of our transportation pipelines is subject to
fluctuation in demand based on the markets and prices for natural gas, which factors may result in decisions by
natural gas producers to reduce production of natural gas during periods of lower prices for natural gas or may
result in decisions by end-users of natural gas to reduce consumption of these fuels during periods of higher
prices for these fuels. Our fuel retention fees are also directly impacted by changes in natural gas prices.
Increases in natural gas prices tend to increase our fuel retention fees, and decreases in natural gas prices tend to
decrease our fuel retention fees.
The markets and prices for natural gas and NGLs depend upon factors beyond our control. These factors include
demand for oil, natural gas and NGLs, which fluctuate with changes in market and economic conditions, and
other factors, including:
• the impact of weather on the demand for oil and natural gas;
• the level of domestic oil and natural gas production;
• the availability of imported oil and natural gas;
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