DISCOVERY PRODUCER SERVICES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Prepaid Insurance
. Prepaid insurance represents the unamortized balance of insurance premiums. These
payments are amortized on a straight-line basis over the policy term.
Gas Imbalances.
In the course of providing transportation services to customers, we may receive different
quantities of gas from shippers than the quantities delivered on behalf of those shippers. This results in gas
transportation imbalance receivables and payables which are recovered or repaid in cash, based on market-
based prices, or through the receipt or delivery of gas in the future. Imbalance receivables are valued based on
the lower of the current market prices or weighted average cost of natural gas in the system. Imbalance payables
are valued at current market prices. Settlement of imbalances requires agreement between the pipelines and
shippers as to allocations of volumes to specific transportation contracts and the timing of delivery of gas based
on operational conditions. Pursuant to a settlement with our shippers issued by the Federal Energy Regulatory
Commission (FERC) on February 5, 2008, if a cash-out refund is due and payable to a shipper during any year
pursuant to a Transporter’s FERC Gas Tariff, the shipper will be deemed to have immediately assigned its right
to the refund amount to us.
Property, Plant and Equipment.
Property, plant and equipment is recorded at cost. We base the carrying
value of these assets on estimates, assumptions and judgments relative to capitalized costs, useful lives and
salvage values. The natural gas and natural gas liquids maintained in the pipeline facilities necessary for their
operation (line fill) are included in property, plant and equipment. Depreciation of property, plant and
equipment is provided on a straight-line basis over the estimated useful lives of 25 to 35 years. Expenditures for
maintenance and repairs are expensed as incurred. Expenditures that extend the useful lives of the assets or
increase their functionality are capitalized. The cost of property, plant and equipment sold or retired and the
related accumulated depreciation is removed from the accounts in the period of sale or disposition. Gains and
losses on the disposal of property, plant and equipment are recorded in operating income.
We record an asset and a liability equal to the present value of each expected future asset retirement
obligation (ARO). The ARO asset is depreciated in a manner consistent with the depreciation of the underlying
physical asset. We measure changes in the liability due to passage of time by applying an interest method of
allocation. This amount is recognized as an increase in the carrying amount of the liability and as corresponding
accretion expense included in operating income.
Revenue Recognition.
Revenue for sales of products is recognized in the period of delivery, and revenues
from the gathering, transportation and processing of gas are recognized in the period the service is provided
based on contractual terms and the related natural gas and liquid volumes. DGT is subject to FERC regulations,
and accordingly, certain revenues collected may be subject to possible refunds upon final orders in pending
cases. DGT records rate refund liabilities considering its and other third parties’ regulatory proceedings, advice
of counsel, estimated total exposure as discounted and risk weighted, and collection and other risks. There were
no rate refund liabilities accrued at December 31, 2011 or 2010.
Impairment of Long-Lived Assets.
We evaluate long-lived assets for impairment when events or changes in
circumstances indicate that, in our management’s judgment, the carrying value of such assets may not be
recoverable. When such a determination has been made, we compare our management’s estimate of
undiscounted future cash flows attributable to the assets to the carrying value of the assets to determine whether
the carrying value is recoverable. If the carrying value is not recoverable, we determine the amount of the
impairment recognized in the financial statements by estimating the fair value of the assets and recording a loss
for the amount that the carrying value exceeds the estimated fair value.
Income Taxes.
For federal tax purposes, we have elected to be treated as a partnership with each member
being separately taxed on its ratable share of our taxable income. This election, to be treated as a pass-through
entity, also applies to our wholly owned subsidiary, DGT. Therefore, no income taxes or deferred income taxes
are reflected in the consolidated financial statements.
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