Energy Transfer 2010 Annual Report Download - page 62

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 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.
Approximately 22% of our long-term volumes have a remaining term of 3 years or less and 29% have a
remaining term of 5 years or less. Many of these contracts have renewal options at the end of the term, which
may or may not be exercised.
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 prior to withdrawal of the gas, 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
will 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.
• Interstate transportation — The majority of our interstate transportation 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, Fayetteville Express and Transwestern expansion shippers have made 10- to 15-year
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