Xcel Energy 2004 Annual Report Download - page 72

NOTES to CONSOLIDATED FINANCIAL STATEMENTS
Xcel Energy Annual Report 2004
70
SFAS No. 133, as amended, requires that the hedging relationship be highly effective and that a company formally designate a hedging relationship to
apply hedge accounting. Xcel Energy and its subsidiaries formally document hedging relationships, including, among other things, the identification
of the hedging instrument and the hedged transaction, as well as the risk-management objectives and strategies for undertaking the hedged transaction.
Xcel Energy and its subsidiaries also formally assess, both at inception and on an ongoing basis, if required, whether the derivative instruments being
used are highly effective in offsetting changes in either the fair value or cash flows of the hedged items.
Hedge effectiveness is recorded based on the nature of the item being hedged. Hedging transactions for the sales of electric energy are recorded as
a component of revenue; hedging transactions for fuel used in energy generation are recorded as a component of fuel costs; hedging transactions for
natural gas purchased for resale are recorded as a component of natural gas costs; and hedging transactions for interest-rate swaps and lock agreements
are recorded as a component of interest expense. Certain Xcel Energy utility subsidiaries are allowed to recover in electric or natural gas rates the costs
of certain financial instruments acquired to reduce commodity cost volatility.
Qualifying hedging relationships are designated as either a hedge of a forecasted transaction or future cash flow (cash flow hedge) or a hedge of a
recognized asset, liability or firm commitment (fair value hedge). The types of qualifying hedging transactions that Xcel Energy and its subsidiaries
are currently engaged in are discussed below.
Cash Flow Hedges
The effective portion of the change in the fair value of a derivative instrument qualifying as a cash flow hedge is recognized in Other Comprehensive
Income, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of a
derivative instrument’s change in fair value is recognized in current earnings.
Commodity Cash Flow Hedges Xcel Energy and its subsidiaries enter into derivative instruments to manage variability of future cash flows from changes
in commodity prices. These derivative instruments are designated as cash flow hedges for accounting purposes. At Dec. 31, 2004, Xcel Energy had various
commodity-related contracts classified as cash flow hedges extending through 2009. Amounts deferred from current earnings are recorded in earnings as
the hedged purchase or sales transaction is settled. This could include the purchase or sale of energy and energy-related products, the use of natural
gas to generate electric energy or natural gas purchased for resale.
As of Dec. 31, 2004, Xcel Energy had no amounts accumulated in Other Comprehensive Income that are expected to be recognized in earnings during
the next 12 months as the hedged transactions settle.
Xcel Energy had no ineffectiveness related to commodity cash flow hedges during the years ended Dec. 31, 2004 and 2003.
Interest Rate Cash Flow Hedges Xcel Energy and its subsidiaries enter into interest rate swap instruments that effectively fix the interest payments on
certain floating-rate debt obligations. These derivative instruments are designated as cash flow hedges for accounting purposes.
As of Dec. 31, 2004, Xcel Energy had net losses related to interest rate swaps of approximately $1.1 million accumulated in Other Comprehensive Income
that it expects to recognize in earnings during the next 12 months.
Xcel Energy and its subsidiaries also enter into interest rate lock agreements, including treasury-rate locks and forward starting swaps, that effectively fix the
yield or price on a specified treasury security for a specific period. These derivative instruments are designated as cash flow hedges for accounting purposes.
As of Dec. 31, 2004, Xcel Energy had net gains related to settled interest rate lock agreements of approximately $1.4 million accumulated in Other
Comprehensive Income that it expects to recognize in earnings during the next 12 months.
Xcel Energy had no ineffectiveness related to interest rate cash flow hedges during the years ended Dec. 31, 2004 and 2003.
Financial Impact of Qualifying Cash Flow Hedges The impact of qualifying cash flow hedges on Xcel Energy’s Other Comprehensive Income, included
in the Consolidated Statements of Stockholders’ Equity, are detailed in the following table:
(Millions of dollars)
Accumulated other comprehensive income related to hedges at Dec. 31, 2001 $34.2
After-tax net unrealized losses related to derivatives accounted for as hedges (68.3)
After-tax net realized losses on derivative transactions reclassified into earnings 28.8
Acquisition of NRG minority interest 27.4
Accumulated other comprehensive income related to hedges at Dec. 31, 2002 $22.1
After-tax net unrealized gains related to derivatives accounted for as hedges 24.1
After-tax net realized gains on derivative transactions reclassified into earnings (38.1)
Accumulated other comprehensive income related to hedges at Dec. 31, 2003 $ 8.1
After-tax net unrealized gains related to derivatives accounted for as hedges 1.6
After-tax net realized gains on derivative transactions reclassified into earnings (9.6)
Accumulated other comprehensive income related to hedges at Dec. 31, 2004 $ 0.1
Fair Value Hedges