OG&E 2011 Annual Report Download - page 63

(In millions)
Net income attributable to OGE Energy $342.9
Transfers to the noncontrolling interest
Increase in paid-in capital for sale of 100,000 units of
Enogex Holdings (net of tax of $0.3 million) 0.5
Increase in paid-in capital for issuance of 4,303,007 units of
Enogex Holdings (net of tax of $10.9 million) 17.3
Increase in paid-in capital for issuance of 5,405,405 units of
Enogex Holdings (net of tax of $12.3 million) 19.5
Increase in paid-in capital for issuance of 5,725,190 units of
Enogex Holdings (net of tax of $5.2 million) 8.2
Net transfers to the noncontrolling interest 45.5
Total of net income attributable to OGE Energy and transfers
to noncontrolling interest $388.4
The following table summarizes the quarterly distributions by
Enogex Holdings to its partners in 2011.
OGE ArcLight
Holdings Group’s Total
(In millions) Portion Portion Distribution
First quarter 2011 $÷÷7.5 $÷0.8 $÷÷8.3
Second quarter 2011 34.3 5.3 39.6
Third quarter 2011 43.4 6.6 50.0
Fourth quarter 2011 30.4 4.7 35.1
Total $115.6 $17.4 $133.0
5. Impairment of Assets
Atoka operated a 20 MMcf/d refrigeration processing plant which
processed gas gathered in the Atoka area. The processing plant was
leased on a month-to-month basis. In August 2011, management made
a decision to use third-party processing exclusively for gathered volumes
dedicated to Atoka and, therefore, to take the processing plant out of
service and return it to the lessor in accordance with the rental agreement.
As a result, in August 2011 Enogex recorded a pre-tax impairment loss
of $5.0 million in the Gathering and Processing segment associated
with the cost it had capitalized in connection with the installation of the
leased plant as it will not be able to recover the remaining value of the
assets through future cash flows. The Atoka plant assets were measured
at fair value on a nonrecurring basis and are considered level 3 in the
fair value hierarchy (see Note 6). The noncontrolling interest portion of
the pre-tax impairment loss was $2.5 million which is included in Net
Income Attributable to Noncontrolling Interests in the Company’s
Consolidated Statement of Income.
6. Fair Value Measurements
The classification of the Company’s fair value measurements requires
judgment regarding the degree to which market data are observable
or corroborated by observable market data. GAAP establishes a fair
value hierarchy that prioritizes the inputs used to measure fair value
based on observable and unobservable data. The hierarchy categorizes
the inputs into three levels, with the highest priority given to quoted
prices in active markets for identical unrestricted assets or liabilities
(Level 1) and the lowest priority given to unobservable inputs (Level 3).
Financial assets and liabilities are classified in their entirety based on
the lowest level of input that is significant to the fair value measurement.
The three levels defined in the fair value hierarchy and examples of
each are as follows:
Level 1 inputs are quoted prices in active markets for identical
unrestricted assets or liabilities that are accessible at the measurement
date. Instruments classified as Level 1 include natural gas futures, swaps
and option transactions for contracts traded on the New York Mercantile
Exchange (“NYMEX”) and settled through a NYMEX clearing broker.
Level 2 inputs are inputs other than quoted prices in active markets
included within Level 1 that are either directly or indirectly observable at
the reporting date for the asset or liability for substantially the full term
of the asset or liability. Level 2 inputs include quoted prices for similar
assets or liabilities in active markets and quoted prices for identical or
similar assets or liabilities in markets that are not active. Instruments
classified as Level 2 include over-the-counter NYMEX natural gas swaps,
natural gas basis swaps and natural gas purchase and sales transactions
in markets such that the pricing is closely related to the NYMEX pricing.
Level 3 inputs are prices or valuation techniques for the asset
or liability that require inputs that are both significant to the fair value
measurement and unobservable (i.e., supported by little or no market
activity). Unobservable inputs reflect the reporting entity’s own assump-
tions about the assumptions that market participants would use in pricing
the asset or liability (including assumptions about risk). Instruments
classified as Level 3 include the revaluation of the Atoka plant assets
(see Note 5).
The Company utilizes the market approach in determining the fair
value of its derivative positions by using either NYMEX published market
prices, independent broker pricing data or broker/dealer valuations.
The valuations of derivatives with pricing based on NYMEX published
market prices may be considered Level 1 if they are settled through a
NYMEX clearing broker account with daily margining. Over-the-counter
derivatives with NYMEX based prices are considered Level 2 due to the
impact of counterparty credit risk. Valuations based on independent
broker pricing or broker/dealer valuations may be classified as Level 2
only to the extent they may be validated by an additional source of
independent market data for an identical or closely related active market.
In certain less liquid markets or for longer-term contracts, forward prices
are not as readily available. In these circumstances, contracts are valued
using internally developed methodologies that consider historical rela-
tionships among various quoted prices in active markets that result in
management’s best estimate of fair value. These contracts are classified
as Level 3.
The impact to the fair value of derivatives due to credit risk is
calculated using the probability of default based on Standard & Poor’s
Ratings Services and/or internally generated ratings. The fair value of
derivative assets is adjusted for credit risk. The fair value of derivative
liabilities is adjusted for credit risk only if the impact is deemed material.
OGE Energy Corp. 61