In the event we make a claim under our insurance policies, we will be subject to the credit risk of
the insurers. Volatility and disruption in the financial and credit markets may adversely affect the credit
quality of our insurers and impact their ability to pay out claims.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist principally
of accounts receivable with respect to our oil and gas operations and derivative instruments. For a
description of purchasers of our oil and gas production that accounted for 10% or more of our total
revenues for the three preceding calendar years, see Items 1 and 2 – Business and Properties –
Product Markets and Major Customers.
The eight financial institutions that are counterparties for our derivative commodity contracts had a
Standard & Poor’s rating of A - or better as of December 31, 2011. Our counterparties to our derivative
agreements or their affiliates are generally also lenders under our senior revolving credit facility. As a
result, the counterparties to our derivative agreements share in the collateral supporting our revolving
credit facility. Therefore, we are not generally required to post additional collateral under our derivative
agreements.
The commitments under our senior revolving credit facility and the Plains Offshore senior credit
facility are from a diverse syndicate of 21 lenders. At December 31, 2011, no single lender’s
commitments under both credit facilities combined represented more than 8% of our total
commitments. However, if banks continue to consolidate, we may experience a more concentrated
credit risk.
Critical Accounting Policies and Estimates
Management makes many estimates and assumptions in the application of generally accepted
accounting principles that may have a material impact on our consolidated financial statements and
related disclosures and on the comparability of such information over different reporting periods. All
such estimates and assumptions affect reported amounts of assets, liabilities, revenues and expenses,
as well as disclosures of contingent assets and liabilities. Estimates and assumptions are based on
information available prior to the issuance of the financial statements. Changes in facts and
circumstances or discovery of new information may result in revised estimates and actual results may
differ from these estimates.
Certain accounting estimates are considered to be critical if (a) the nature of the estimates and
assumptions is material due to the level of subjectivity and judgment necessary to account for highly
uncertain matters or the susceptibility of such matters to changes; and (b) the impact of the estimates
and assumptions on financial condition or operating performance is material. The areas of accounting
and the associated critical estimates and assumptions made are discussed below.
Oil and Gas Reserves
. Our engineering estimates of proved oil and natural gas reserves directly
impact financial accounting estimates, including DD&A and the full cost ceiling limitation.
68