Energy Transfer 2010 Annual Report Download - page 92

contracts to fix the purchase price related to these sales contracts, thereby locking in a gross profit
margin. Additionally, we may use propane futures contracts to secure the purchase price of our propane
inventory for a percentage of our anticipated propane sales.
• Derivatives are utilized in our midstream segment in order to mitigate price volatility in our marketing
activities and manage fixed price exposure incurred from contractual obligations.
The market prices used to value our financial derivatives and related transactions have been determined using
independent third party prices, readily available market information, broker quotes and appropriate valuation
techniques.
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 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 use futures and basis swaps, designated as fair value hedges, to hedge our natural gas inventory stored in our
Bammel storage facility. Changes in the spreads between the forward natural gas prices designated as fair value
hedges and the physical Bammel inventory spot price result in unrealized gains or losses until the underlying
physical gas is withdrawn and the related designated derivatives are settled. Once the gas is withdrawn and the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.
We attempt to maintain balanced positions to protect ourselves from the volatility in the energy commodities
markets; however, net unbalanced positions can exist. Long-term physical contracts are tied to index prices.
System gas, which is also tied to index prices, is expected to provide most of the gas required by our long-term
physical contracts. When third-party gas is required to supply long-term contracts, a hedge is put in place to
protect the margin on the contract. Financial contracts, which are not tied to physical delivery, are expected to be
offset with financial contracts to balance our positions. To the extent open commodity positions exist, fluctuating
commodity prices can impact our financial position and results of operations, either favorably or unfavorably.
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