systems to increase throughput volume and to offset natural declines in the production from connected wells.
We obtain new natural gas supplies in our operating areas by contracting for production from new wells, by
connecting new wells drilled on dedicated acreage and by obtaining natural gas that has been directly received
or released from other gathering systems.
Our contracts with our producing customers in our Natural Gas Services segment are primarily a mix of
commodity sensitive percent-of-proceeds and percent-of-liquids contracts and non-commodity sensitive
fee-based contracts. Our gross margin generated from percent-of-proceeds contracts is directly related to the
price of natural gas, NGLs and condensate and our gross margin generated from percent-of-liquids contracts is
directly related to the price of NGLs and condensate. Additionally, these contracts may include fee-based
components. Generally, the initial term of these purchase agreements is for three to five years or, in some cases,
the life of the lease. The largest percentage of volume at Minden, Wyoming and Southern Oklahoma are
processed under percent-of-proceeds contracts. Discovery has percent-of-liquids contracts and fee-based
contracts, as well as some keep-whole contracts. The producer contracts at our East Texas and Southeast Texas
systems are primarily percent-of-liquids. The majority of the margin associated with contracts for our Pelico
and Ada assets, as well as our Colorado and Michigan system, are fee-based.
DCP Midstream, LLC operates our Southeast Texas system storage facility. It commits on an annual basis
a portion of such facility’s capacity to third parties pursuant to fee-based arrangements and manages the rest for
its own account. We receive distributions related to this storage business pursuant to the Southeast Texas joint
venture agreement.
Discovery’s wholly owned subsidiary, Discovery Gas Transmission, owns the mainline and the Federal
Energy Regulatory Commission, or FERC, regulated laterals, which generate revenues through a tariff on file
with FERC for several types of service: traditional firm transportation service with reservation fees; firm
transportation service on a commodity basis with reserve dedication; and interruptible transportation service. In
addition, for any of these general services, Discovery Gas Transmission has the authority to negotiate a specific
rate arrangement with an individual shipper and has several of these arrangements currently in effect.
In support of our construction of the Eagle plant, we entered into a 15-year fee-based processing
agreement with DCP Midstream, LLC, which also provides us with a fixed demand charge for a 150 MMcf/d of
the 200 MMcf/d plant capacity along with a throughput fee on all volumes processed.
Competition
The natural gas services business is highly competitive in our markets and includes major integrated oil
and gas companies, interstate and intrastate pipelines, and companies that gather, compress, treat, process,
transport, store and/or market natural gas. Competition is often the greatest in geographic areas experiencing
robust drilling by producers and during periods of high commodity prices for crude oil, natural gas and/or
NGLs. Competition is also increased in those geographic areas where our commercial contracts with our
customers are shorter in length of term and therefore must be renegotiated on a more frequent basis.
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