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A N N UA L
R E P O RT
Income Taxes
OPERATING RESULTS
We use the asset and liability method of accounting for income
taxes as required by SFAS No. 109, “Accounting for Income Taxes.”
Under the asset and liability method, we recognize deferred tax
assets and liabilities for the future tax consequences attributable to
temporary differences between the financial statement carrying
amounts and the tax basis of existing assets and liabilities. We
recognize the future tax benefits to the extent that realization of
such benefits is more likely than not. We amortize deferred
investment tax credits over the lives of the related properties.
We evaluate operating results based on earnings per share. We
have various classifications of sales, defined as follows:
We record deferred tax assets for capital losses, operating losses
and tax credit carryforwards. However, when we believe we do not
or will not have sufficient future capital gain income or taxable
income to realize the benefit of the capital loss, operating loss or
tax credit carryforwards, we reduce the deferred tax assets by a
valuation allowance. We recognize a valuation allowance if we
determine, based on available evidence that it is unlikely that we
will realize some portion or all of the deferred tax asset. We report
the effect of a change in the valuation allowance in the current
period tax expense.
industrial customers.
Other retail: Sales of energy for lighting public streets and
highways, net of revenue subject to refund.
Tariff-based wholesale: Sales of energy to electric cooperatives,
municipalities and other electric utilities, the rates for which are
generally based on cost as prescribed by FERC tariffs. This
category also includes changes in valuations of contracts that
have yet to settle.
Market-based wholesale: Sales of energy to wholesale
customers, the rates for which are generally based on prevailing
market prices as allowed by our FERC approved market-based
tariff, or where not permitted, pricing is based on incremental
cost plus a permitted margin. This category also includes
changes in valuations of contracts that have yet to settle.
Asset Retirement Obligations
Energy marketing: Includes: (i) transactions based on market
We calculate our asset retirement obligations and related costs
using the guidance provided by SFAS No. 143, “Accounting for
Asset Retirement Obligations” and the Financial Accounting
Standards Board’s (FASB) Interpretation No. 47, “Accounting for
Conditional Asset Retirement Obligations”(FIN 47).
prices with volumes not related to the production of our
generating assets or the demand of our retail customers; (ii)
financially settled products and physical transactions sourced
outside our control area; and (iii) changes in valuations for
contracts that have yet to settle that may not be recorded in
tariff- or market-based wholesale revenues.
We estimate our asset retirement obligations based on the fair
value of the asset retirement obligation we incurred at the time the
related long-lived asset was either acquired, placed in service or
when regulations establishing the obligation become effective.
In determining our asset retirement obligations, we make
assumptions regarding probable disposal costs. A change in these
assumptions could have a significant impact on our asset retirement
obligations reflected on our consolidated balance sheets.
Contingencies and Litigation
We are currently involved in certain legal proceedings and have
estimated the probable cost for the resolution of these claims.
These estimates are based on an analysis of potential results,
assuming a combination of litigation and settlement strategies.
It is possible that our future results could be materially affected
by changes in our assumptions. See Note 16 of the Notes to
Consolidated Financial Statements, “Legal Proceedings,” for more
detailed information.
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Retail: Sales of energy made to residential, commercial and
Transmission: Reflects transmission revenues, including those
based on a tariff with the SPP.
Other: Miscellaneous electric revenues including ancillary
service revenues and rent from electric property leased to others.
Regulated electric utility sales are significantly impacted by such
things as rate regulation, customer conservation efforts, wholesale
demand, the economy of our service area and competitive forces.
Our wholesale sales are impacted by, among other factors,
demand, cost and availability of fuel and purchased power, price
volatility, available generation capacity and transmission availability.
Changing weather affects the amount of electricity our customers
use. Hot summer temperatures and cold winter temperatures
prompt more demand, especially among our residential customers.
Mild weather serves to reduce customer demand.