Xcel Energy 2003 Annual Report Download - page 18

34 XCEL ENERGY 2003 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
The fair value of the energy trading contracts of continuing operations as of Dec. 31, 2003 was as follows:
(Millions of dollars)
Fair value of trading contracts outstanding at Jan. 1, 2003 $ (0.1)
Contracts realized or settled during the year (14.4)
Fair value of trading contract additions and changes during the year 18.7
Fair value of contracts outstanding at Dec. 31, 2003 $ 4.2
As of Dec. 31, 2003, the sources of fair value of the energy trading and hedging net assets were as follows:
Trading Contracts
Futures/Forwards
Source of Maturity Less Maturity Maturity Maturity Greater Total Futures/
(Thousands of dollars) Fair Value than 1 Year 1 to 3 Years 4 to 5 Years than 5 Years Forwards Fair Value
NSP-Minnesota 1$(143) $ – $ – $ – $ (143)
23,163 486 – – 3,649
PSCo 1(69) – – – (69)
2693 36 – – 729
Total futures/forwards fair value $3,644 $522 $ – $ – $4,166
Discontinued operations trading contracts are not included in the above table. The fair value of these contracts is approximately $(2.0) million, as of
Dec. 31, 2003. All of these contracts have maturities of less than one year.
Hedge Contracts
Futures/Forwards
Source of Maturity Less Maturity Maturity Maturity Greater Total Futures/
(Thousands of dollars) Fair Value than 1 Year 1 to 3 Years 4 to 5 Years than 5 Years Forwards Fair Value
NSP-Minnesota futures/forwards fair value 2$ 569 $ – $ – $ – $ 569
Discontinued operations hedging contracts are not included in the above table. As of Dec. 31, 2003, the fair value of these contracts is approximately
$1.5 million. All of these contracts have maturities of less than one year.
Options
Source of Maturity Less Maturity Maturity Maturity Greater Total Options
(Thousands of dollars) Fair Value than 1 Year 1 to 3 Years 4 to 5 Years than 5 Years Fair Value
NSP-Minnesota 2$ (1,287) $ – $ – $ – $ (1,287)
NSP-Wisconsin 2168–––168
PSCo 2(11,466) 848 – – (10,618)
Total options fair value $(12,585) $848 $ – $ – $(11,737)
1Prices actively quoted or based on actively quoted prices.
2 Prices based on models and other valuation methods. These represent the fair value of positions calculated using internal models when directly and indirectly quoted external prices
or prices derived from external sources are not available. Internal models incorporate the use of options pricing and estimates of the present value of cash flows based upon
underlying contractual terms. The models reflect management’s estimates, taking into account observable market prices, estimated market prices in the absence of quoted market
prices, the risk-free market discount rate, volatility factors, estimated correlations of energy commodity prices and contractual volumes. Market price uncertainty and other
risks also are factored into the model.
In the above tables, only hedge transactions are included for NSP-Minnesota, NSP-Wisconsin and PSCo. Normal purchases and sales transactions, as
defined by SFAS No. 133, have been excluded.
At Dec. 31, 2003, a 10-percent fluctuation in market prices over the next 12 months for trading contracts would impact pretax income from continuing
operations by approximately $1 million. Hedge contracts are accounted for as a component of Other Comprehensive Income and would not directly
impact earnings.
Xcel Energy’s trading operations and power marketing activities measure the outstanding risk exposure to price changes on transactions, contracts
and obligations that have been entered into, but not closed, using an industry standard methodology known as Value-at-Risk (VaR). VaR expresses
the potential change in fair value on the outstanding transactions, contracts and obligations over a particular period of time, with a given confidence
interval under normal market conditions. Xcel Energy utilizes the variance/covariance approach in calculating VaR. The VaR model employs a 95-percent
confidence interval level based on historical price movement, lognormal price distribution assumption, delta half-gamma approach for non-linear
instruments and various holding periods varying from two to five days.