OG&E 2012 Annual Report Download - page 35

OGE Energy Corp. 33
Enogex engages in asset management and hedging activities related
to the purchase and sale of natural gas and NGLs. Contracts utilized in
these activities generally include purchases and sales for physical delivery,
over-the-counter forward swap and options contracts and exchange
traded futures and options. Enogex’s transactions that qualify as deriva-
tives are reflected at fair value with the resulting unrealized gains and
losses recorded as price risk management (“PRM”) Assets or Liabilities
in the Consolidated Balance Sheets, classified as current or long-term
based on their anticipated settlement, or against the brokerage deposits
in Other Current Assets. The offsetting unrealized gains and losses
from changes in the market value of open contracts are included in
Operating Revenues in the Consolidated Statements of Income or in
Other Comprehensive Income for derivatives designated and qualifying
as cash flow hedges. Contracts resulting in delivery of a commodity
are included as sales or purchases in the Consolidated Statements of
Income as Operating Revenues or Cost of Goods Sold depending on
whether the contract relates to the sale or purchase of the commodity.
Natural Gas Purchases
Estimates for gas purchases are based on estimated volumes and
contracted purchase prices. Estimated gas purchases are included in
Accounts Payable on the Consolidated Balance Sheets and in Cost of
Goods Sold on the Consolidated Statements of Income.
Purchase and Sale Contracts
Enogex utilizes purchases and sales for physical delivery, over-the-counter
forward swap and options contracts and exchange traded futures and
options. These activities either qualify as derivatives and are recorded at
fair market value or qualify for normal purchase normal sale treatment.
Enogex’s portfolio is marked to estimated fair market value on a daily
basis. When available, actual market prices are utilized in determining
the value of natural gas and related derivative commodity instruments.
For longer-term positions, which are limited to a maximum of 60 months
and certain short-term positions for which market prices are not avail-
able, models based on forward price curves are utilized. These models
incorporate estimates and assumptions as to a variety of factors such as
pricing relationships between various energy commodities and geographic
location. Actual experience can vary significantly from these estimates
and assumptions.
In nearly all cases, independent market prices are obtained and
compared to the values used in determining the fair value. The recorded
value of the energy contracts may change significantly in the future as the
market price for the commodity changes, but the value of transactions
not designated as cash flow hedges is subject to mark-to-market risk
loss limitations provided under the Company’s risk policies. Management
utilizes models to estimate the fair value of the Company’s energy con-
tracts including derivatives that do not have an independent market
price. At December 31, 2012, unrealized mark-to-market losses
were $0.2 million, none of which were calculated utilizing models. At
December 31, 2012, a price movement of one percent for prices verified
by independent parties would result in unrealized mark-to-market gains
or losses of less than $0.1 million and a price movement of five percent
on model-based prices would result in unrealized mark-to-market gains
or losses of less than $0.1 million.
Valuation of Assets
The application of business combination and impairment accounting
requires Enogex to use significant estimates and assumptions in deter-
mining the fair value of assets and liabilities. The acquisition method
of accounting for business combinations requires Enogex to estimate
the fair value of assets acquired and liabilities assumed to allocate the
proper amount of the purchase price consideration between goodwill
and the assets that are depreciated and amortized. Enogex records
intangible assets separately from goodwill and amortizes intangible
assets with finite lives over their estimated useful life as determined by
management. Enogex does not amortize goodwill but instead annually
assesses goodwill for impairment.
In 2011 and 2012, Enogex completed gas gathering acquisitions
accounted for as business combinations as discussed in Note 3 of Notes
to Consolidated Financial Statements. As part of these acquisitions,
Enogex has engaged the services of a third-party valuation expert to
assist it in determining the fair value of the acquired assets and liabili-
ties, including goodwill; however, the ultimate determination of those
values is the responsibility of Enogex’s management. Enogex bases its
estimates on assumptions believed to be reasonable, but which are
inherently uncertain. These valuations require the use of management’s
assumptions, which would not reflect unanticipated events and circum-
stances that may occur.
Depreciable Lives of Property, Plant and Equipment and
Amortization Methodologies Related to Intangible Assets
The computation of depreciation expense requires judgment regarding
the estimated useful lives and salvage value of assets at the time the
assets are placed in service. As circumstances warrant, useful lives are
adjusted when changes in planned use, changes in estimated produc-
tion lives of affiliated natural gas basins or other factors indicate that a
different life would be more appropriate. Such changes could materially
impact future depreciation expense. Changes in useful lives that do not
result in the impairment of an asset are recognized prospectively. The
computation of amortization expense on intangible assets requires judg-
ment regarding the amortization method used. Intangible assets are
amortized on a straight-line basis over their useful lives using a method
of amortization that reflects the pattern in which the economic benefits
of the intangible asset are consumed.