OG&E 2012 Annual Report Download - page 55

In 2012, 2011 and 2010, amortization expense for intangible assets
was $9.6 million, $2.1 million and $0.6 million, respectively, including
amortization of certain customer-based intangible assets associated
with the acquisition from Cordillera in November 2011, which is
included in gross margin for financial reporting purposes.
The following table summarizes Enogex’s expected amortization of
intangible assets for each of the next five years.
(In millions) 2013 2014 2015 2016 2017
Expected amortization
of intangible assets $9.5 $9.5 $9.5 $9.5 $9.1
Depreciation and Amortization
OG&E
The provision for depreciation, which was 3.0 percent and 2.9 percent,
respectively, of the average depreciable utility plant for 2012 and 2011,
is provided on a straight-line method over the estimated service life of
the utility assets. Depreciation is provided at the unit level for production
plant and at the account or sub-account level for all other plant, and is
based on the average life group method. Amortization of intangible assets
is computed using the straight-line method. Of the remaining amortizable
intangible plant balance at December 31, 2012, 92.4 percent will be
amortized over 9.25 years with 7.6 percent of the remaining amortizable
intangible plant balance at December 31, 2012 being amortized over
their respective lives ranging from three to five years. Amortization of
plant acquisition adjustments is provided on a straight-line basis over
the estimated remaining service life of the acquired asset. Plant acqui -
sition adjustments include $148.3 million for the Redbud Plant, which
are being amortized over a 27-year life and $3.3 million for certain sub-
station facilities in OG&E’s service territory, which are being amortized
over a 26 to 59-year period.
Enogex
For Enogex, depreciation is computed principally on the straight-line
method using estimated useful lives of three to 83 years for transporta-
tion and storage assets, three to 30 years for gathering and processing
assets and three to 15 years for general plant assets. Amortization of
intangible assets other than debt costs is computed using the straight-
line method over the respective lives of the intangible assets ranging
up to 20 years.
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
production 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 prospec-
tively. The computation of amortization expense on intangible assets
requires judgment 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.
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 following table summarizes changes to the Company’s asset
retirement obligations during the years ended December 31, 2012
and 2011.
(In millions) 2012 2011
Balance at January 1 $24.8 $11.1
Liabilities incurred(A) 0.4 13.0
Accretion expense 1.9 0.7
Revisions in estimated cash flows(B) 26.9 –
Balance at December 31 $54.0 $24.8
(A) Due to certain Enogex compression assets in 2012 and OG&E’s Crossroads wind farm in 2011.
(B) Due to changes to OG&E’s asset retirement obligations related to its wind farms due to a
change in the assumption related to the timing of removal used in the valuation of the asset
retirement obligations.
Assessing Impairment of Long-Lived Assets
(Including Intangible Assets) and Goodwill
The Company assesses its long-lived assets, including intangible assets
with finite useful lives, for impairment when there is evidence that events
or changes in circumstances require an analysis of the recoverability of
an asset’s carrying amount. Estimates of future cash flows used to test
the recoverability of long-lived assets and intangible assets shall include
only the future cash flows (cash inflows less associated cash outflows)
that are directly associated with and that are expected to arise as a
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
similar 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 recog-
nized 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 mil-
lion, of which $2.5 million was the noncontrolling interest portion (see
Note 5), 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.
OGE Energy Corp. 53