Energy Transfer 2010 Annual Report Download - page 86

sale or installation. Revenues from service labor, transportation, treating, compression and gas processing, are
recognized upon completion of the service. Transportation capacity payments are recognized when earned in the
period the capacity is made available. Tank rent is recognized ratably over the period it is earned.
Our intrastate transportation and storage and interstate transportation segments’ results are determined primarily
by the amount of capacity our customers reserve as well as the actual volume of natural gas that flows through
the transportation pipelines. Under transportation contracts, our customers are charged (i) a demand fee, which is
a fixed fee for the reservation of an agreed amount of capacity on the transportation pipeline for a specified
period of time and which obligates the customer to pay even if the customer does not transport natural gas on the
respective pipeline, (ii) a transportation fee, which is based on the actual throughput of natural gas by the
customer, (iii) fuel retention based on a percentage of gas transported on the pipeline, or (iv) a combination of the
three, generally payable monthly. Excess fuel retained after consumption is typically valued at market prices.
Our intrastate transportation and storage segment also generates revenues and margin from the sale of natural gas
to electric utilities, independent power plants, local distribution companies, industrial end-users and other
marketing companies on the HPL System. Generally, we purchase natural gas from the market, including
purchases from the midstream segment’s marketing operations, and from producers at the wellhead.
In addition, our intrastate transportation and storage segment generates revenues and margin from fees charged
for storing customers’ working natural gas in our storage facilities. We also engage in natural gas storage
transactions in which we seek to find and profit from pricing differences that occur over time utilizing the
Bammel storage reservoir. We purchase physical natural gas and then sell financial contracts at a price sufficient
to cover our carrying costs and provide for a gross profit margin. We expect margins from natural gas storage
transactions to be higher during the periods from November to March of each year and lower during the period
from April through October of each year due to the increased demand for natural gas during colder weather.
However, we cannot assure that management’s expectations will be fully realized in the future and in what time
period, due to various factors including weather, availability of natural gas in regions in which we operate,
competitive factors in the energy industry, and other issues.
Results from the midstream segment are determined primarily by the volumes of natural gas gathered,
compressed, treated, processed, purchased and sold through our pipeline and gathering systems and the level of
natural gas and NGL prices. We generate midstream revenues and gross margins principally under fee-based or
other arrangements in which we receive a fee for natural gas gathering, compressing, treating or processing
services. The revenue earned from these arrangements is directly related to the volume of natural gas that flows
through our systems and is not directly dependent on commodity prices.
We also utilize other types of arrangements in our midstream segment, including (i) discount-to-index price
arrangements, which involve purchases of natural gas at either (1) a percentage discount to a specified index
price, (2) a specified index price less a fixed amount or (3) a percentage discount to a specified index price less
an additional fixed amount, (ii) percentage-of-proceeds arrangements under which we gather and process natural
gas on behalf of producers, sell the resulting residue gas and NGL volumes at market prices and remit to
producers an agreed upon percentage of the proceeds based on an index price, and (iii) keep-whole arrangements
where we gather natural gas from the producer, process the natural gas and sell the resulting NGLs to third
parties at market prices. In many cases, we provide services under contracts that contain a combination of more
than one of the arrangements described above. The terms of our contracts vary based on gas quality conditions,
the competitive environment at the time the contracts are signed and customer requirements. Our contract mix
may change as a result of changes in producer preferences, expansion in regions where some types of contracts
are more common and other market factors.
We conduct marketing activities 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 do not move through
our assets, referred to as off-system gas. For both on-system and off-system gas, we purchase natural gas from
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