Page 217 - DCP AR2011 Dev

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DCP SOUTHEAST TEXAS HOLDINGS, GP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Years Ended December 31, 2011, 2010 and 2009
• a significant adverse change in the market value of an asset; or
• a current expectation that, more likely than not, an asset will be sold or otherwise disposed of before the
end of its estimated useful life.
If the carrying value is not recoverable, the impairment loss is measured as the excess of the asset’s
carrying value over its fair value. We assess the fair value of long-lived assets using commonly accepted
techniques, and may use more than one method, including, but not limited to, recent third party comparable
sales and discounted cash flow models. Significant changes in market conditions resulting from events such as
the condition of an asset or a change in management’s intent to utilize the asset would generally require
management to reassess the cash flows related to the long-lived assets.
Distributions
— Under the terms of the joint venture agreement, we are required to make quarterly
distributions to our owners based on available cash. The terms of the joint venture agreement provide that DCP
Partners’ distributions from Southeast Texas for the first seven years related to storage and transportation gross
margin will be pursuant to a fee-based arrangement, based on storage capacity and tailgate volumes.
Distributions related to the gathering and processing business, along with reductions for all expenditures, will
be pursuant to DCP Midstream, GSR and DCP Partners’ respective ownership interests in Southeast Texas.
During the year ended December 31, 2011, distributions totaled $84.9 million.
Accounting for Risk Management and Derivative Activities and Financial Instruments
— We designate
each energy commodity derivative as either trading or non-trading. Certain non-trading derivatives are further
designated as either a hedge of a forecasted transaction or future cash flow (cash flow hedge) or normal
purchases or normal sales. The remaining non-trading derivatives, which are related to asset-based activities for
which the normal purchases or normal sale exception are not elected, are recorded at fair value in the
consolidated balance sheets as unrealized gains or unrealized losses in derivative instruments, with changes in
the fair value recognized in the consolidated statements of operations. For each derivative, the accounting
method and presentation of gains and losses or revenue and expense in the consolidated statements of
operations are as follows:
Classification of Contract
Accounting Method
Presentation of Gains & Losses or Revenue & Expense
Non-Trading Derivative Activity Mark-to-market method (a) Net basis in gains and losses from commodity
derivative activity
Cash Flow Hedge
Hedge method (b)
Gross basis in the same consolidated statements
of operations category as the related hedged item
(a) Mark-to-market — An accounting method whereby the change in the fair value of the asset or liability is
recognized in the consolidated statements of operations in gains and losses from commodity derivative activity
during the current period.
(b) Hedge method — An accounting method whereby the change in the fair value of the asset or liability is recorded
in the consolidated balance sheets as unrealized gains or unrealized losses on derivative instruments. For cash
flow hedges, there is no recognition in the consolidated statements of operations for the effective portion until
the service is provided or the associated delivery period impacts earnings.
Cash Flow Hedges
— For derivatives designated as a cash flow hedge, we maintain formal documentation
of the hedge. In addition, we formally assess both at the inception of the hedging relationship and on an
ongoing basis, whether the hedge contract is highly effective in offsetting changes in cash flows of hedged
items. All components of each derivative gain or loss are included in the assessment of hedge effectiveness,
unless otherwise noted.
The fair value of a derivative designated as a cash flow hedge is recorded in the consolidated balance
sheets as unrealized gains or unrealized losses on derivative instruments. The effective portion of the change in
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