Xcel Energy 2004 Annual Report Download - page 51

NOTES to CONSOLIDATED FINANCIAL STATEMENTS
Xcel Energy Annual Report 2004
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– NSP-Wisconsin’s rates include a cost-of-gas adjustment clause for purchased natural gas, but not for purchased electric energy or electric fuel. In
Wisconsin, requests can be made for recovery of those electric costs prospectively through the rate review process, which normally occurs every two
years, and an interim fuel-cost hearing process.
– In Colorado, PSCo operates under an electric performance-based regulatory plan, which provides for an annual earnings test. NSP-Minnesota and
PSCo operate under various service standards, which could require customer refunds if certain criteria are not met. NSP-Minnesota and PSCo’s rates
include monthly adjustments for the recovery of conservation and energy-management program costs, which are reviewed annually.
– SPS’ rates in Texas provide electric fuel and purchased energy cost recovery. In New Mexico, SPS also has a monthly fuel and purchased power
cost-recovery factor.
– NSP-Minnesota, NSP-Wisconsin, PSCo and SPS sell firm power and energy in wholesale markets, which are regulated by the FERC. Certain of
these rates include monthly wholesale fuel cost-recovery mechanisms.
Commodity Trading Operations All applicable gains and losses related to commodity trading activities, whether or not settled physically, are shown on
a net basis in the Consolidated Statements of Operations.
Xcel Energy’s commodity trading operations are conducted by NSP-Minnesota, PSCo and SPS. Pursuant to the JOA approved by the FERC, some of
the commodity trading margins are apportioned to the other operating utilities of Xcel Energy. Commodity trading activities are not associated with
energy produced from Xcel Energy’s generation assets or energy and capacity purchased to serve native load. Commodity trading results are recorded
at fair market value in accordance with SFAS No. 133, as amended. In addition, commodity trading results include the impacts of any margin-sharing
mechanisms. In 2003, Xcel Energy’s board of directors designated e prime as held for sale. e prime had conducted natural gas commodity trading activities.
Consequently, e prime financial results are presented as discontinued operations. For more information, see Note 3 to the Consolidated Financial Statements.
Derivative Financial Instruments Xcel Energy and its subsidiaries utilize a variety of derivatives, including commodity forwards, futures and options, index
or fixed-price swaps and basis swaps, to mitigate market risk and to enhance our operations. For further discussion of Xcel Energy’s risk management
and derivative activities, see Note 14 to the Consolidated Financial Statements.
Property, Plant, Equipment and Depreciation Property, plant and equipment is stated at original cost. The cost of plant includes direct labor and materials,
contracted work, overhead costs and applicable interest expense. The cost of plant retired is charged to accumulated depreciation and amortization.
Removal costs associated with non-legal obligations are reclassified from accumulated depreciation and reflected as regulatory liabilities. Significant
additions or improvements extending asset lives are capitalized, while repairs and maintenance are charged to expense as incurred. Maintenance and
replacement of items determined to be less than units of property are charged to operating expenses. Property, plant and equipment also includes
costs associated with the engineering design of future generating stations and other property held for future use.
Xcel Energy determines the depreciation of its plant by using the straight-line method, which spreads the original cost equally over the plant’s useful
life. Depreciation expense, expressed as a percentage of average depreciable property, was approximately 3.1 percent, 3.0 percent and 3.4 percent for the
years ended Dec. 31, 2004, 2003 and 2002, respectively.
Allowance for Funds Used During Construction (AFDC) AFDC represents the cost of capital used to finance utility construction activity. AFDC
is computed by applying a composite pretax rate to qualified construction work in progress. The amount of AFDC capitalized as a utility construction
cost is credited to other nonoperating income (for equity capital) and interest charges (for debt capital). AFDC amounts capitalized are included in
Xcel Energy’s rate base for establishing utility service rates. In addition to construction-related amounts, AFDC also is recorded to reflect returns on
capital used to finance conservation programs in Minnesota.
Decommissioning Xcel Energy accounts for the future cost of decommissioning, or retirement, of its nuclear generating plants through annual
depreciation accruals using an annuity approach designed to provide for full rate recovery of the future decommissioning costs. The decommissioning
calculation covers all expenses, including decontamination and removal of radioactive material, and extends over the estimated lives of the plants. The
calculation assumes that NSP-Minnesota and NSP-Wisconsin will recover those costs through rates. The fair value of external nuclear decommissioning
fund investments are estimated based on quoted market prices for those or similar investments. Unrealized gains or losses are deferred as regulatory
assets or liabilities. In 2003, NSP-Minnesota adopted SFAS No. 143, which changed the accounting methodology for nuclear decommissioning costs.
For more information on nuclear decommissioning and the impacts of adopting SFAS No. 143, see Note 17 to the Consolidated Financial Statements.
PSCo also previously operated a nuclear generating plant, which has been decommissioned and repowered using natural gas. PSCo’s costs associated
with decommissioning were deferred and are being amortized consistent with regulatory recovery.
Nuclear Fuel Expense Nuclear fuel expense, which is recorded as our nuclear generating plants use fuel, includes the cost of fuel used in the current
period, as well as future disposal costs of spent nuclear fuel. In addition, nuclear fuel expense includes fees assessed by the U.S. Department of Energy
(DOE) for NSP-Minnesota’s portion of the cost of decommissioning the DOE’s fuel-enrichment facility.
Environmental Costs Environmental costs are recorded when it is probable Xcel Energy is liable for the costs and the liability can reasonably be estimated.
Costs may be deferred as a regulatory asset based on an expectation that the costs will be recovered from customers in future rates. Otherwise, the costs are
expensed. If an environmental expense is related to facilities currently in use, such as emission-control equipment, the cost is capitalized and depreciated
over the life of the plant, assuming the costs are recoverable in future rates or future cash flow.
Estimated remediation costs, excluding inflationary increases, are recorded. The estimates are based on experience, an assessment of the current situation
and the technology currently available for use in the remediation. The recorded costs are regularly adjusted as estimates are revised and as remediation