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Critical Accounting Estimates
REGULATORY ASSETS AND LIABILITIES
Alliance Canada and the Saskatchewan System are subject to regulation by the NEB, SER and STEM. Regulatory bodies exercise statutory authority over matters such as construction, rates and ratemaking, and agreements with customers. To recognize the economic effects of the actions of the regulator, the timing of recognition of certain revenues and expenses in these operations may differ from that otherwise expected under GAAP for non rate-regulated entities. The Fund also records regulatory assets and liabilities to recognize the economic effects of the actions of the regulator. Regulatory assets represent amounts that are expected to be recovered from customers in future periods through rates. Regulatory liabilities represent amounts that are expected to be refunded to customers in future periods through rates. As of December 31, 2007, the Fund's regulatory assets totalled $65.6 million (2006 – $48.0 million). To the extent that the regulator's actions differ from the Fund's expectations, the timing and amount of recovery or settlement of regulatory balances could differ significantly from those recorded.
DEPRECIATION
Depreciation of property, plant and equipment, the Fund's largest asset with a net book value at December 31, 2007 of $1,329.0 million, or 71.5% of total assets, is generally provided on either a straight-line basis over the estimated service lives of the assets or a unit of throughput basis commencing when the asset is placed in service. When it is determined that the estimated service life of an asset does not reflect the expected remaining period of benefit, prospective changes are made to the estimated service life. In general, estimates of service lives are based on third party engineering studies, experience and industry practice. There are a number of assumptions inherent in estimating the service lives of the Fund's assets including the level of development, exploration, drilling, reserves and production of crude oil and natural gas in the supply areas served by the Fund's pipelines as well as the demand for crude oil and natural gas and the integrity of the Fund's systems. Changes in these assumptions could result in adjustments to the estimated service lives, which could result in material changes to depreciation expense in future periods in any of the Fund's operating segments. Revised assumptions have historically resulted in extending useful lives.
ASSET RETIREMENT OBLIGATIONS
The fair value of asset retirement obligations (AROs) associated with the retirement of long-lived assets are recognized as long-term liabilities in the period when they can be reasonably determined. The fair value approximates the cost a third party would charge in performing the tasks necessary to retire such assets and is recognized at the present value of expected future cash flows. AROs are added to the carrying value of the associated asset and depreciated over the asset's useful life. The corresponding liability is accreted over time through charges to earnings and is reduced by actual costs of decommissioning and reclamation. The present value of expected future cash flows is determined using assumptions such as the probability of abandonment in place versus removal and the estimated costs required upon abandonment in each case, the discount rate and the estimated time to abandonment.
The undiscounted amount of expected cash flows required to settle the AROs is estimated at $43.5 million (2006 – $43.5 million) with the majority estimated to be settled beginning in the year 2033. The liability for the expected cash flows, as reflected in the financial statements, has been discounted at 6.58%.
A legal obligation exists for costs associated with retirement of the Alliance Canada pipeline; however, a provision for AROs has not been recognized as it is not possible to make a reasonable estimate of the AROs due to the indeterminate timing, the long lived nature of the assets and the scope of the asset retirements. The Fund's estimates of retirement costs and the timing of settlement of these costs could change as a result of changes in timing and cost estimates as well as changes in regulatory requirements.