OG&E 2013 Annual Report Download - page 32

26 OGE Energy Corp.
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 operating
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 state-
ments. 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 exam-
ined 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 15 and 16 of
Notes to Consolidated Financial Statements and Item 3 of Part I in
this 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 20 to 74 years.
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
From time to time, OG&E 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.
Hedges are evaluated prior to execution with respect to the impact on
the volatility of forecasted earnings and are evaluated at least quarterly
after execution for the impact on earnings.
Regulatory Assets and Liabilities
OG&E, as a regulated utility, is subject to accounting principles for
certain types of rate-regulated activities, which provide that certain
actual or anticipated costs that would otherwise be charged to expense
can be deferred as regulatory assets, based on the expected recovery
from customers in future rates. Likewise, certain actual or anticipated
credits that would otherwise reduce expense can be deferred as regula-
tory liabilities, based on the expected flowback to customers in future
rates. Management’s expected recovery of deferred costs and flowback
of deferred credits generally results from specific decisions by regulators
granting such ratemaking treatment.
OG&E records certain actual or anticipated costs and obligations
as regulatory assets or liabilities if it is probable, based on regulatory
orders or other available evidence, that the cost or obligation will be
included in amounts allowable for recovery or refund in future rates. The
benefit obligations regulatory asset is comprised of expenses recorded
which are probable of future recovery and that have not yet been recog-
nized as components of net periodic benefit cost, including net loss,
prior service cost and net transition obligation.
Unbilled Revenues
OG&E reads its customers’ meters and sends bills to its customers
throughout each month. As a result, there is a significant amount of
customers’ electricity consumption that has not been billed at the end of
each month. Unbilled revenue is presented in Accrued Unbilled Revenues
on the Consolidated Balance Sheets and in Operating Revenues on the
Consolidated Statements of Income based on estimates of usage and
prices during the period. At December 31, 2013, if the estimated usage
or price used in the unbilled revenue calculation were to increase or
decrease by one percent, this would cause a change in the unbilled
revenues recognized of $0.3 million. At December 31, 2013 and 2012,
Accrued Unbilled Revenues were $58.7 million and $57.4 million,
respectively. The estimates that management uses in this calculation
could vary from the actual amounts to be paid by customers.
Allowance for Uncollectible Accounts Receivable
Customer balances are generally written off if not collected within
six months after the final billing date. The allowance for uncollectible
accounts receivable for OG&E is calculated by multiplying the last six
months of electric revenue by the provision rate. The provision rate is
based on a 12-month historical average of actual balances written off.