Energy Transfer 2010 Annual Report Download - page 63

commitments to pay reservation charges for the firm capacity reserved for their use. In addition to
reservation revenues, additional revenue sources include commodity charges paid based on actual usage by
firm shippers, interruptible transportation charges and, for the Transwestern pipeline, operational gas sales.
• 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 NGLs processed 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. However, we have the ability to bypass our processing
plants to avoid negative margins that may occur from processing NGLs in the event it is uneconomical to
process this gas. Our processing contracts and wellhead purchases in rich natural gas areas provide that we
earn and take title to specified volumes of NGLs, referred to as equity NGLs. Equity NGLs can be derived
from performing a service in a percent of proceeds contract or NGLs that are 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.
We conduct marketing operations in which we market the natural gas that flows through our assets, referred
to as on-system gas. We also attract other customers by marketing volumes of natural gas that does not
originate from our assets, referred to as off-system gas. For both on-system and off-system gas, we purchase
natural gas from natural gas producers and other suppliers and sell that natural gas to utilities, industrial
consumers, other marketers and pipeline companies, thereby generating gross margins based upon the
difference between the purchase and resale prices of natural gas, less the costs of transportation.
• Retail propane and other retail propane related operations — Revenue is principally generated from the sale
of propane and propane-related products and services. The retail propane segment is a margin-based
business in which gross profits depend on the excess of sales price over propane supply cost. Consequently,
the profitability of our retail propane business is sensitive to changes in wholesale propane prices. Our
propane business is largely seasonal and dependent upon weather conditions in our service areas. We use
information published by the National Oceanic and Atmospheric Administration (“NOAA”) to gather
heating degree day data to analyze how our sales volumes may be affected by temperature. Our normal
temperatures are defined as the prior ten year weighted-average temperature which is based on the average
heating degree days provided by NOAA gathered from the various measuring points in our operating areas
weighted by the retail volumes attributable to each measuring point.
Trends and Outlook
Economic forecasts indicate continued high natural gas storage levels combined with strong supply primarily
from the discovery of new natural gas shale formations and we expect overall consumption of natural gas in the
United States and natural gas prices to be stable during 2011. We have mitigated much of the exposure to
changing natural gas prices within our operations. In our natural gas operations, a significant portion of our
revenue continues to be derived from long-term fee-based arrangements, pursuant to which our customers pay us
capacity reservation fees regardless of the volume of natural gas transported; however, we do recognize a portion
of our revenue from fees based on actual volumes transported. We expect these volumes to be relatively
consistent with 2010 volumes transported given the outlook on natural gas prices and production in 2011. In
addition, we continue to evaluate and execute strategies to mitigate the impacts of changing prices. These
strategies include hedging net retained fuel volume and a portion of volumes purchased at the wellhead from
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