OG&E 2009 Annual Report Download - page 79

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since inception of the three-year award cycle. There are no post-vesting restrictions related to OGE Energy’s restricted stock. The
weighted-average grant date fair value of the 2008 restricted stock was $30.88.
At December 31, 2009, there was approximately $0.2 million in unrecognized compensation cost related to non-vested
restricted stock which is expected to be recognized over a weighted-average period of 1.75 years.
5. Derivative Instruments and Hedging Activities
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed using
derivatives instruments are commodity price risk and interest rate risk. The Company is also exposed to credit risk in its business
operations.
Commodity Price Risk
The Company occasionally uses commodity price swap contracts to manage the Company’s commodity price risk exposures.
The commodity price swap contracts involve the exchange of fixed price for floating price or rate payments over the life of the
instrument without an exchange of the underlying commodity. Natural gas swaps are used to manage the Company’s natural gas price
exposure associated with a wholesale generation sales contract.
On July 1, 2009, the Company, Enogex and OERI entered into hedging transactions to offset natural gas length positions at
Enogex with short natural gas exposures at the Company resulting from the cost of generation associated with a wholesale power sales
contract with the OMPA. Enogex sold physical natural gas to OERI, and the Company entered into an offsetting natural gas swap
with OERI. These transactions are for approximately 50,000 MMBtu’s per month from August 2009 to December 2013.
Management may designate certain derivative instruments for the purchase or sale of electric power and fuel procurement as
normal purchases and normal sales contracts. Normal purchases and normal sales contracts are not recorded in PRM assets or
liabilities in the Balance Sheets and earnings recognition is recorded in the period in which physical delivery of the commodity
occurs. Management applies normal purchases and normal sales treatment to: (i) electric power contracts by the Company and (ii)
fuel procurement by the Company.
The Company recognizes its non-exchange traded derivative instruments as PRM assets or liabilities in the Balance Sheets at
fair value with such amounts classified as current or long-term based on their anticipated settlement.
Interest Rate Risk
The Company’s exposure to changes in interest rates primarily relates to short-term variable debt, treasury lock agreements
and commercial paper. The Company from time to time uses treasury lock agreements to manage its interest rate risk exposure on
new debt issuances. Additionally, the Company manages its interest rate exposure by limiting its variable-rate debt to a certain
percentage of total capitalization and by monitoring the effects of market changes in interest rates. The Company utilizes interest rate
derivatives to alter interest rate exposure in an attempt to reduce interest expense related to existing debt issues. Interest rate
derivatives are used solely to modify interest rate exposure and not to modify the overall leverage of the debt portfolio.
Credit Risk
The Company is exposed to certain credit risks relating to its ongoing business operations. Credit risk includes the risk that
counterparties that owe the Company money or energy will breach their obligations. If the counterparties to these arrangements fail to
perform, the Company may be forced to enter into alternative arrangements. In that event, the Company’s financial results could be
adversely affected and the Company could incur losses.
Cash Flow Hedges
For derivatives that are designated and qualify as a cash flow hedge, the effective portion of the change in fair value of the
derivative instrument is reported as a component of Accumulated Other Comprehensive Income and recognized into earnings in the
same period during which the hedged transaction affects earnings. The ineffective portion of a derivative’s change in fair value or
hedge components excluded from the assessment of effectiveness is recognized currently in earnings. The ineffectiveness of treasury
lock cash flow hedges is measured using the hypothetical derivative method. Under the hypothetical derivative method, the Company
designates that the critical terms of the hedging instrument are the same as the critical terms of the hypothetical derivative used to
value the forecasted transaction, and, as a result, no ineffectiveness is
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