Xcel Energy 2005 Annual Report Download - page 67

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the regulatory recovery mechanisms in place. Amounts deferred in these accounts are recorded in earnings as the hedged purchase or sales
transaction is settled. This could include the purchase or sale of energy or energy-related products, the use of natural gas to generate electric
energy or gas purchased for resale.
As of Dec. 31, 2005, Xcel Energy had no amounts in Accumulated Other Comprehensive Income related to commodity cash flow hedge contracts
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, 2005 and 2004.
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, 2005, Xcel Energy had net losses related to interest rate swaps of approximately $0.8 million in Accumulated 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, 2005, Xcel Energy had net gains related to settled interest rate lock agreements of approximately $1.4 million in Accumulated
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, 2005 and 2004.
Financial Impact of Qualifying Cash Flow Hedges
The impact of qualifying cash flow hedges on Xcel Energy’s Accumulated Other
Comprehensive Income, included in the Consolidated Statements of Stockholders’ Equity, is detailed in the following table:
(Millions of dollars)
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
After-tax net unrealized gains related to derivatives accounted for as hedges 4.5
After-tax net realized gains on derivative transactions reclassified into earnings (13.4)
Accumulated other comprehensive loss related to hedges at Dec. 31, 2005 $ (8.8)
FAIR VALUE HEDGES
The effective portion of the change in the fair value of a derivative instrument qualifying as a fair value hedge is offset against the change in
the fair value of the underlying asset, liability or firm commitment being hedged. That is, fair value hedge accounting allows the gains or losses
of the derivative instrument to offset, in the same period, the gains and losses of the hedged item. The ineffective portion of a derivative
instrument’s change in fair value is recognized in current earnings.
Interest Rate Fair Value Hedges
Xcel Energy enters into interest rate swap instruments that effectively hedge the fair value of fixed-rate
debt. The fair market value of Xcel Energy’s interest rate swaps at Dec. 31, 2005, was a liability of approximately $14.1 million.
NORMAL PURCHASES OR NORMAL SALES CONTRACTS
Xcel Energy’s utility subsidiaries enter into contracts for the purchase and sale of various commodities for use in their business operations.
SFAS No. 133, as amended, requires a company to evaluate these contracts to determine whether the contracts are derivatives. Certain
contracts that literally meet the definition of a derivative may be exempted from SFAS No. 133, as amended, as normal purchases or normal
sales. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument
or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of
business. In addition, normal purchases and normal sales contracts must have a price based on an underlying that is clearly and closely
related to the asset being purchased or sold. An underlying is a specified interest rate, security price, commodity price, foreign exchange
rate, index of prices or rates, or other variable, including the occurrence or nonoccurrence of a specified event, such as a scheduled payment
under a contract.
Xcel Energy evaluates all of its contracts when such contracts are entered to determine if they are derivatives and, if so, if they qualify to meet
the normal designation requirements under SFAS No. 133, as amended. None of the contracts entered into within the commodity trading
operations qualify for a normal designation.
Normal purchases and normal sales contracts are accounted for as executory contracts as required under GAAP.
XCEL ENERGY 2005 ANNUAL REPORT 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS