Xcel Energy 2005 Annual Report Download - page 51

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 if it is probable 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 proceeds. If several designated responsible parties exist, only Xcel Energy’s expected share of the cost is estimated
and recorded. Any future costs of restoring sites where operation may extend indefinitely are treated as a capitalized cost of plant retirement.
The depreciation expense levels recoverable in rates include a provision for removal expenses, which may include final remediation costs.
Removal costs recovered in rates are classified as a regulatory liability.
Legal Costs Litigation accruals are recorded when it is probable Xcel Energy is liable for the costs and the liability can be reasonably
estimated. Legal accruals are recorded net of insurance recovery. Legal costs related to settlements are not accrued, but expensed as incurred.
Income Taxes Xcel Energy and its domestic subsidiaries file consolidated federal income tax returns. Xcel Energy and its domestic subsidiaries
file combined and separate state income tax returns. NRG and one or more of its domestic subsidiaries were included in some state returns,
but not all, of these combined returns in 2003. NRG has not been consolidated or combined in any of Xcel Energy’s income tax returns
since 2003.
Federal income taxes paid by Xcel Energy, as parent of the Xcel Energy consolidated group, are allocated to the Xcel Energy subsidiaries
based on separate company computations of tax. A similar allocation is made for state income taxes paid by Xcel Energy in connection with
combined state filings. In accordance with the PUHCA requirements, the holding company also allocates its own net income tax benefits to
its direct subsidiaries based on the positive tax liability of each company.
Xcel Energy defers income taxes for all temporary differences between pretax financial and taxable income, and between the book and tax
bases of assets and liabilities. Xcel Energy uses the tax rates that are scheduled to be in effect when the temporary differences are expected
to turn around, or reverse.
Due to the effects of past regulatory practices, when deferred taxes were not required to be recorded, the reversal of some temporary differences
are accounted for as current income tax expense. Investment tax credits are deferred and their benefits amortized over the estimated lives
of the related property. Utility rate regulation also has created certain regulatory assets and liabilities related to income taxes, which are
summarized in Note 16 to the Consolidated Financial Statements.
Use of Estimates In recording transactions and balances resulting from business operations, Xcel Energy uses estimates based on the
best information available. Estimates are used for such items as plant depreciable lives, asset retirement obligations, decommissioning, tax
provisions, uncollectible amounts, environmental costs, unbilled revenues, jurisdictional fuel and energy cost allocations and actuarially
determined benefit costs. The recorded estimates are revised when better information becomes available or when actual amounts can
be determined. Those revisions can affect operating results. The depreciable lives of certain plant assets are reviewed or revised annually,
if appropriate.
Cash and Cash Equivalents Xcel Energy considers investments in certain debt instruments with a remaining maturity of three months or
less at the time of purchase to be cash equivalents. Those debt instruments are primarily commercial paper and money market funds.
Inventory All inventory is recorded at average cost.
Regulatory Accounting Our regulated utility subsidiaries account for certain income and expense items in accordance with SFAS No. 71 –
“Accounting for the Effects of Certain Types of Regulation.” Under SFAS No. 71:
– Certain costs, which would otherwise be charged to expense, are deferred as regulatory assets based on the expected ability to recover
them in future rates; and
– Certain credits, which would otherwise be reflected as income, are deferred as regulatory liabilities based on the expectation they will be
returned to customers in future rates.
Estimates of recovering deferred costs and returning deferred credits are based on specific ratemaking decisions or precedent for each item.
Regulatory assets and liabilities are amortized consistent with the period of expected regulatory treatment. See more discussion of regulatory
assets and liabilities at Note 16 to the Consolidated Financial Statements.
Stock-Based Employee Compensation Xcel Energy has several stock-based compensation plans. Those plans are accounted for using the
intrinsic-value method. Compensation expense is not recorded for stock options because there is no difference between the market price and
the purchase price at grant date. Compensation expense is recorded for restricted stock and stock units awarded to certain employees, which
are held until the restriction lapses or the stock is forfeited. For more information on stock compensation impacts, see Note 9 to the
Consolidated Financial Statements.
Deferred Financing Costs Other assets also included deferred financing costs, net of amortization, of approximately $42 million and
$44 million at Dec. 31, 2005 and 2004, respectively. Xcel Energy is amortizing these financing costs over the remaining maturity periods of
the related debt.
XCEL ENERGY 2005 ANNUAL REPORT 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS