OG&E 2011 Annual Report Download - page 46

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Commodity Price Risk
The commodity price risks inherent in the Company’s commodity price
sensitive instruments, positions and anticipated commodity transactions
are the potential losses in value arising from adverse changes in the
commodity prices to which the Company is exposed. These risks can
be classified as trading, which includes transactions that are entered
into voluntarily to capture subsequent changes in commodity prices,
or non-trading, which includes the exposure some of the Company’s
assets have to commodity prices.
Trading activities are conducted throughout the year subject to
$2.5 million daily and monthly trading stop loss limits set by the Risk
Oversight Committee. The loss exposure from trading activities is meas-
ured primarily using value-at-risk, which estimates the potential losses
the trading activities could incur over a specified time horizon and confi-
dence level. Currently, the Company utilizes the variance/co-variance
method for calculating value-at-risk, assuming a 95 percent confidence
level. The value-at-risk limit set by the Risk Oversight Committee for the
Company’s trading activities is currently $1.5 million. These limits are
designed to mitigate the possibility of trading activities having a material
adverse effect on the Company’s operating income.
A sensitivity analysis has been prepared to estimate the Company’s
exposure to commodity price risk created by trading activities. The value
of trading positions is a summation of the fair values calculated for each
net commodity position based upon quoted market prices. Commodity
price risk is estimated as the potential loss in fair value resulting from a
hypothetical 20 percent adverse change in quoted market prices. The
result of this analysis, which may differ from actual results, reflects net
commodity price risk to be $0.1 million at December 31, 2011. This
amount represents the Company’s exposure, net of the ArcLight group’s
proportional share.
Commodity price risk is present in the Company’s non-trading
activities because changes in the prices of natural gas, NGLs and
NGLs processing spreads have a direct effect on the compensation the
Company receives for operating some of its assets. These prices are
subject to fluctuations resulting from changes in supply and demand. To
partially reduce non-trading commodity price risk, the Company utilizes
risk mitigation tools such as default processing fees and ethane rejection
capabilities to protect its downside exposure while maintaining its upside
potential. Additionally, the Company hedges, through the utilization of
derivatives and other forward transactions, the effects these market
fluctuations have on the Company’s operating income. Because the
commodities covered by these hedges are substantially the same com-
modities that the Company buys and sells in the physical market, no
special studies other than monitoring the degree of correlation between
the derivative and cash markets are deemed necessary.
A sensitivity analysis has been prepared to estimate the Company’s
exposure to commodity price risk created by non-trading activities.
The Company’s daily net commodity position consists of natural gas
inventories, commodity purchase and sales contracts, financial and
commodity derivative instruments and anticipated natural gas process-
ing spreads and fuel recoveries. Quoted market prices are not available
for all of the Company’s non-trading positions; therefore, the value of
non-trading positions is a summation of the forecasted values calculated
for each commodity based upon internally generated forward price curves.
Commodity price risk is estimated as the potential loss in fair value
resulting from a hypothetical 20 percent adverse change in quoted market
prices. The result of this analysis, which may differ from actual results,
reflects net commodity price risk to be $32.0 million at December 31,
2011. This amount represents the Company’s exposure, net of the
ArcLight group’s proportional share.
44 OGE Energy Corp.