Critical Accounting Policies and Estimates
Our financial statements reflect the selection and application of accounting policies that require
management to make estimates and assumptions. We believe that the following are the more critical judgment
areas in the application of our accounting policies that currently affect our financial condition and results of
operations. These accounting policies are described further in Note 2 of the Notes to Consolidated Financial
Statements in Item 8. “Financial Statements and Supplementary Data.”
Description
Judgments and Uncertainties
Effect if Actual Results Differ
from Assumptions
Inventories
Inventories, which consist of NGLs
and natural gas, are recorded at the
lower of weighted-average cost or
market value.
Judgment is required in
determining the market value of
inventory, as the geographic
location impacts market prices,
and quoted market prices may not
be available for the particular
location of our inventory.
If the market value of our
inventory is lower than the cost,
we may be exposed to losses that
could be material. If commodity
prices were to decrease by 10%
below our December 31, 2011
weighted-average cost, our net
income would be affected by
approximately $6.5 million.
Impairment of Goodwill
We evaluate goodwill for
impairment annually in the third
quarter, and whenever events or
changes in circumstances indicate it
is more likely than not that the fair
value of a reporting unit is less than
its carrying amount.
We determine fair value using
widely accepted valuation
techniques, namely discounted
cash flow and market multiple
analyses. These techniques are
also used when allocating the
purchase price to acquired assets
and liabilities. These types of
analyses require us to make
assumptions and estimates
regarding industry and economic
factors and the profitability of
future business strategies. It is our
policy to conduct impairment
testing based on our current
business strategy in light of
present industry and economic
conditions, as well as future
expectations.
We completed our impairment
testing of goodwill using the
methodology described herein, and
determined there was no
impairment. Key assumptions in
the analysis include the use of an
appropriate discount rate and
estimated future cash flows. In
estimating cash flows, we
incorporate current market
information, as well as historical
and other factors, into our
forecasted commodity prices and
throughput volumes. If actual
results are not consistent with our
assumptions and estimates, or our
assumptions and estimates change
due to new information, we may be
exposed to goodwill impairment
charges, which would be
recognized in the period in which
the carrying value exceeds fair
value. We have not recorded any
impairment charges on goodwill
during the year ended December
31, 2011.
92