OG&E 2012 Annual Report Download - page 33

OGE Energy Corp. 31
direct result of the use and eventual disposition of the asset. The fair
value of these assets is based on third-party evaluations, prices for simi-
lar assets, historical data and projected cash flows. An impairment loss
is recognized when the sum of the expected future net cash flows is less
than the carrying amount of the asset. The amount of any recognized
impairment is based on the estimated fair value of the asset subject to
impairment compared to the carrying amount of such asset. In 2011, the
Company recorded a pre-tax impairment loss of $5.0 million, of which
$2.5 million was the noncontrolling interest portion (see Note 5 of Notes
to Consolidated Financial Statements), related to the Atoka processing
plant. The Company recorded no other material impairments in 2012,
2011 or 2010.
As a result of the gas gathering acquisitions in November 2011,
Enogex recorded goodwill of $39.4 million. Enogex assesses its goodwill
for impairment at least annually as of October 1 by comparing the fair
value of the reporting unit with its book value, including goodwill. Enogex
utilizes the income approach (generally accepted valuation approach) to
estimate the fair value of the reporting unit, also giving consideration to
alternative methods such as the market and cost approaches. Under the
income approach, anticipated cash flows over a period of years plus a
terminal value are discounted to present value using appropriate discount
rates. Enogex performs its goodwill impairment testing at the natural gas
gathering and processing segment reporting unit level. Enogex recorded
no impairments of goodwill in 2012.
Income Taxes
The Company uses the asset and liability method of accounting for
income taxes. Under this method, a deferred tax asset or liability is
recognized for the estimated future tax effects attributable to temporary
differences between the financial statement basis and the tax basis of
assets and liabilities as well as tax credit carry forwards and net operat-
ing loss carry forwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the period of the change.
The application of income tax law is complex. Laws and regulations
in this area are voluminous and often ambiguous. Interpretations and
guidance surrounding income tax laws and regulations change over time.
Accordingly, it is necessary to make judgments regarding income tax
exposure. As a result, changes in these judgments can materially affect
amounts the Company recognized in its consolidated financial statements.
Tax positions taken by the Company on its income tax returns that are
recognized in the financial statements must satisfy a more likely than not
recognition threshold, assuming that the position will be examined by
taxing authorities with full knowledge of all relevant information.
Commitments and Contingencies
In the normal course of business, the Company is confronted with
issues or events that may result in a contingent liability. These generally
relate to lawsuits or claims made by third parties, including governmental
agencies. When appropriate, management consults with legal counsel
and other appropriate experts to assess the claim. If, in management’s
opinion, the Company has incurred a probable loss as set forth by GAAP,
an estimate is made of the loss and the appropriate accounting entries
are reflected in the Company’s Consolidated Financial Statements.
Except as disclosed otherwise in this Form 10-K, the Company
believes that any reasonably possible losses in excess of accrued
amounts arising out of pending or threatened lawsuits or claims would
not be quantitatively material to its financial statements and would not
have a material adverse effect on the Company’s consolidated financial
position, results of operations or cash flows. See Notes 16 and 17 of
Notes to Consolidated Financial Statements and Item 3 of Part I in the
Company’s Form 10-K for a discussion of the Company’s commitments
and contingencies.
Asset Retirement Obligations
The Company has previously recorded asset retirement obligations
that are being amortized over their respective lives ranging from three
months to 74 years. The Company also has certain asset retirement
obligations primarily related to Enogex’s processing plants and com-
pression sites that have not been recorded because the Company
cannot determine when these obligations will be incurred. The inputs
used in the valuation of asset retirement obligations include the
assumed life of the asset placed into service, the average inflation rate,
market risk premium, the credit-adjusted risk free interest rate and the
timing of incurring costs related to the retirement of the asset.
Hedging Policies
The Company designates as cash flow hedges derivatives used to
manage commodity price risk exposure for Enogex’s NGLs volumes
and corresponding keep-whole natural gas resulting from its natural
gas processing contracts (processing hedges) and natural gas positions
resulting from its natural gas gathering and processing operations and
natural gas transportation and storage operations (operational gas
hedges). The Company also designates as cash flow hedges certain
derivatives used to manage natural gas commodity exposure for certain
natural gas storage inventory positions. Hedges are evaluated prior to
execution with respect to the impact on the volatility of forecasted earn-
ings and are evaluated at least quarterly after execution for the impact
on earnings. Enogex’s cash flow hedges at December 31, 2012 mature
by the end of the first quarter of 2013.
From time to time, OG&E and Enogex may engage in cash flow and
fair value hedge transactions to modify interest rate exposure and not to
modify the overall leverage of the debt portfolio.