Energy Transfer 2010 Annual Report Download - page 88

If we designate a derivative financial instrument as a cash flow hedge and it qualifies for hedge accounting, the
change in the fair value is deferred in accumulated other comprehensive income (“AOCI”) until the underlying
hedged transaction occurs. Any ineffective portion of a cash flow hedge’s change in fair value is recognized each
period in earnings. Gains and losses deferred in AOCI related to cash flow hedges remain in AOCI until the
underlying physical transaction occurs, unless it is probable that the forecasted transaction will not occur by the
end of the originally specified time period or within an additional two-month period of time thereafter. For
financial derivative instruments that do not qualify for hedge accounting, the change in fair value is recorded in
cost of products sold in the consolidated statements of operations.
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 offset by the
changes in fair value of the related hedging instrument. Any ineffective portion or amount excluded from the
assessment of hedge ineffectiveness is also included in the cost of products sold in the consolidated statement of
operations.
We utilize published settlement prices for exchange-traded contracts, quotes provided by brokers, and estimates
of market prices based on daily contract activity to estimate the fair value of these contracts. Changes in the
methods used to determine the fair value of these contracts could have a material effect on our results of
operations. We do not anticipate future changes in the methods used to determine the fair value of these
derivative contracts. See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” for further
discussion regarding our derivative activities.
Fair Value of Financial Instruments. We have marketable securities, commodity derivatives and interest rate
derivatives that are accounted for as assets and liabilities at fair value in our consolidated balance sheets. We
determine the fair value of our assets and liabilities subject to fair value measurement by using the highest
possible “level” of inputs. Level 1 inputs are observable quotes in an active market for identical assets and
liabilities. We consider the valuation of marketable securities and commodity derivatives transacted through a
clearing broker with a published price from the appropriate exchange as a Level 1 valuation. Level 2 inputs are
inputs observable for similar assets and liabilities. We consider over-the-counter commodity derivatives entered
into directly with third parties as a Level 2 valuation since the values of these derivatives are quoted on an
exchange for similar transactions. Additionally, we consider our options transacted through our clearing broker
as having Level 2 inputs due to the level of activity of these contracts on the exchange in which they trade. We
consider the valuation of our interest rate derivatives as Level 2 since we use a LIBOR curve based on quotes
from an active exchange of Eurodollar futures for the same period as the future interest swap settlements and
discount the future cash flows accordingly, including the effects of our credit risk. Level 3 inputs are
unobservable. We currently do not have any fair value measurements that are considered Level 3 valuations. See
further information on our fair value assets and liabilities in Note 2 of our consolidated financial statements.
Impairment of Long-Lived Assets and Goodwill.Long-lived assets are required to be tested for recoverability
whenever events or changes in circumstances indicate that the carrying amount of the asset may not be
recoverable. Goodwill and intangibles with indefinite lives must be tested for impairment annually or more
frequently if events or changes in circumstances indicate that the related asset might be impaired. An impairment
loss should be recognized only if the carrying amount of the asset/goodwill is not recoverable and exceeds its fair
value.
In order to test for recoverability, we must make estimates of projected cash flows related to the asset, which
include, but are not limited to, assumptions about the use or disposition of the asset, estimated remaining life of
the asset, and future expenditures necessary to maintain the asset’s existing service potential. In order to
determine fair value, we make certain estimates and assumptions, including, among other things, changes in
general economic conditions in regions in which our markets are located, the availability and prices of natural
gas and propane supply, our ability to negotiate favorable sales agreements, the risks that natural gas exploration
and production activities will not occur or be successful, our dependence on certain significant customers and
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