Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2011

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

(3) Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Delta and its consolidated subsidiaries (collectively, the “Company”). All inter-company balances and transactions have been eliminated in consolidation. Certain of the Company’s oil and gas activities are conducted through partnerships and joint ventures, including CRB Partners, LLC (“CRBP”) and through the date of the divestiture in 2010 to Wapiti, PGR Partners, LLC (“PGR”). The Company includes its proportionate share of assets, liabilities, revenues and expenses from these entities in its consolidated financial statements. The Company does not have any off-balance sheet financing arrangements (other than operating leases) or any unconsolidated special purpose entities.

Investments in operating entities where the Company has the ability to exert significant influence, but does not control the operating and financial policies, are accounted for using the equity method. The Company’s share of net income of these entities is recorded as income (losses) from unconsolidated affiliates in the consolidated statements of operations.

Certain reclassifications have been made to amounts reported in the previous periods to conform to the current presentation. Among other items, revenues and expenses on certain properties that were sold or held for sale during the three and nine months ended September 30, 2011 have been reclassified from continuing operations to discontinued operations for all periods presented. In addition, the assets and liabilities of DHS, and oil and gas properties that were sold or held for sale, have been separately reflected in the accompanying consolidated balance sheets as assets held for sale and liabilities related to assets held for sale. Such reclassifications had no effect on net loss (See Note 4, “Discontinued Operations”).

Property and Equipment

The Company accounts for its natural gas and crude oil exploration and development activities under the successful efforts method of accounting. Under such method, costs of productive exploratory wells, development dry holes and productive wells and undeveloped leases are capitalized. Oil and gas lease acquisition costs are also capitalized. Exploration costs, including personnel costs, certain geological or geophysical expenses and delay rentals for gas and oil leases, are charged to expense as incurred. Exploratory drilling costs are initially capitalized, then evaluated quarterly and charged to expense if and when the well is determined not to have found reserves in commercial quantities. The sale of a partial interest in a proved property is accounted for as a cost recovery and no gain or loss is recognized as long as this treatment does not significantly affect the units-of-production amortization rate. A gain or loss is recognized for all other sales of producing properties.

Unproved properties with significant acquisition costs are assessed quarterly on a property-by-property basis and any impairment in value is charged to expense. If the unproved properties are determined to be productive, the related costs are transferred to proved gas and oil properties. Proceeds from sales of partial interests in unproved leases are accounted for as a recovery of cost without recognizing any gain or loss until all costs have been recovered.

Depreciation and depletion of capitalized acquisition, exploration and development costs are computed on the units-of-production method by individual fields as the related proved reserves are produced.

Gathering systems and other property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives ranging from three to 40 years.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.

Estimates of expected future cash flows represent management’s best estimate based on reasonable and supportable assumptions and projections. For proved properties, if the expected future cash flows exceed the carrying value of the asset, no impairment is recognized. If the carrying value of the asset exceeds the expected future cash flows, an impairment exists and is measured by the excess of the carrying value over the estimated fair value of the asset. Any impairment provisions recognized are permanent and may not be restored in the future.

The Company assesses proved properties on an individual field basis for impairment on at least an annual basis. For proved properties, the review consists of a comparison of the carrying value of the asset with the asset’s expected future undiscounted cash flows without interest costs. For the three and nine months ended 2010, the expected future undiscounted cash flows of the assets exceeded the carrying value of the corresponding asset and as such no impairment provisions were recognized.

For unproved properties, the need for an impairment charge is based on the Company’s plans for future development and other activities impacting the life of the property and the ability of the Company to recover its investment. When the Company believes the costs of the unproved property are no longer recoverable, an impairment charge is recorded based on the estimated fair value of the property. For the three and nine months ended September 30, 2010, zero and $25.7 million, respectively, of unproved property impairments were recorded.

During the three months ended September 30, 2011, the Company evaluated the fair value of its properties based on market indicators in conjunction with the progression of the strategic alternatives evaluation process. The Company has not received any definitive offer with respect to an acquisition of the Company or its assets that implies a value of the assets that is greater than the Company’s aggregate indebtedness. As a result, the Company recorded an impairment of $157.5 million to its Vega unproved leasehold, $239.8 million to its Vega area proved properties, $20.5 million to its Vega area gathering system and facilities, and $2.1 million to its Vega area surface acreage.

Exploratory Well Costs

	Nine Months Ended
	September 30, 2011
	(in thousands)
Balance at beginning of year	$	6,200
Additions to capitalized exploratory well costs pending the determination of proved reserves		6,200
Exploratory well costs included in property divestitures		—
Reclassified to proved oil and gas properties based on the determination of proved reserves		(6,200	)
Capitalized exploratory well costs charged to dry hole expense		—
Balance at end of period	$	6,200
Exploratory well costs capitalized for one year or less after after completion of drilling		6,200
Exploratory well costs capitalized for greater than one year after completion of drilling		—
Balance at end of period	$	6,200

The table does not include amounts that were capitalized and either subsequently expensed or reclassified to producing well costs in the same period. During 2010, the Company spud a deep test well in the Vega Area to explore the Company’s Piceance leasehold below the currently productive Williams Fork zone. Completion activities on the well began in February 2011 and the well was completed as a producing well with proved reserves during the three months ended September 30, 2011. A second deep test well was spud and completed as a producing well with proved reserves during the nine months ended September 30, 2011 and therefore is not included in the table above. A third deep test well was spud during the second quarter of 2011 and remains in progress.

Asset Retirement Obligations

The Company’s asset retirement obligations arise from the plugging and abandonment liabilities for its oil and gas wells.

The following is a reconciliation of the Company’s asset retirement obligations from January 1, 2011 to September 30, 2011 (in thousands):

Asset retirement obligation – January 1, 2011	$	5,146
Reclassification for assets held for sale		(1,215	)
Adjusted asset retirement obligation – January 1, 2011		3,931
Accretion expense		211
Change in estimate		(98	)
Obligations incurred (from new wells)		375
Obligations settled		(20	)
Obligations on sold properties		(359	)
Asset retirement obligation – September 30, 2011		4,040
Less: Current portion of asset retirement obligation		(686	)
Long-term asset retirement obligation	$	3,354

Notes Receivable from Disposition of Unconsolidated Affiliates

During the third quarter of 2011, the Company entered into a settlement agreement with a third party to mutually release all claims associated with several prior agreements. In consideration of this settlement, Delta assigned its interest in the note receivable related to the sale of Delta Oilfield Tank Company (“DOTC”) to the third party. A loss of $1.6 million is included as a component of other expense for the three months ended September 30, 2011.

During the third quarter of 2011, the Company accepted a prepayment of $500,000 as payment in full for the outstanding note receivable related to the sale of Ally Equipment (“Ally”), forgoing $11,000 of accrued interest.

Comprehensive Income (Loss)

Comprehensive income (loss) includes all changes in equity during a period except those resulting from investments by owners and distributions to owners, if any. For the three months ended September 30, 2011 and 2010, comprehensive income (loss) attributable to Delta common stockholders was ($429.4) million and $13.9 million, respectively. For the nine months ended September 30, 2011 and 2010, comprehensive loss attributable to Delta common stockholders was ($458.2) million and ($148.6) million, respectively.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include oil and gas reserves, bad debts, depletion and impairment of oil and gas properties, income taxes, derivatives, asset retirement obligations, contingencies and litigation accruals. Actual results could differ from these estimates.