Xcel Energy 2008 Annual Report Download - page 100

trading activities, including forward contracts, futures, swaps and options. All derivative instruments not designated and
qualifying for the normal purchases and normal sales exception, as defined by SFAS No. 133, are recorded on the
consolidated balance sheets at fair value as derivative instruments valuation. This includes certain instruments used to
mitigate market risk for the utility operations and all instruments related to the commodity trading operations. The
classification of changes in fair value for those derivative instruments is dependent on the designation of a qualifying
hedging relationship. Changes in fair value of derivative instruments not designated in a qualifying hedging relationship
are reflected in current earnings or as a regulatory asset or liability. The classification is dependent on the applicability
of specific regulation.
Gains or losses on hedging transactions for the sales of energy or energy-related products are primarily 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; vehicle
fuel costs are recorded as a component of capital project or operating and maintenance costs; and interest rate hedging
transactions are recorded as a component of interest expense. Certain utility subsidiaries are allowed to recover in
electric or natural gas rates the costs of certain financial instruments purchased to reduce commodity cost volatility.
Cash Flow and Fair Value Hedges — 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 designation of a cash flow hedge permits changes in fair value to be recorded within other
comprehensive income (OCI), to the extent the hedge is effective, or deferred as a regulatory asset or liability. The
designation of a fair value hedge permits a derivative instrument’s gains or losses to offset the related results of the
hedged item in the consolidated statements of income.
SFAS No. 133 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 all hedging
relationships in accordance with SFAS No. 133. The documentation includes, among other factors, the identification of
the hedging instrument and the hedged transaction, as well as the risk management objectives and strategies for
undertaking the hedging transaction. In addition, at inception and on a quarterly basis, Xcel Energy and its subsidiaries
formally assess whether the derivative instruments being used are highly effective in offsetting changes in either the fair
value or cash flows of the hedged items.
Changes in the fair value of a derivative designated and qualified as a cash flow hedge, to the extent effective are
included in OCI, or deferred as a regulatory asset or liability until earnings are affected by the hedged transaction. Xcel
Energy discontinues hedge accounting prospectively when it has determined that a derivative no longer qualifies as an
effective hedge, or when it is no longer probable that the hedged forecasted transaction will occur. To test the
effectiveness of hedges, a hypothetical hedge is used to mirror all the critical terms of the hedged transaction and the
dollar-offset method is utilized to assess the effectiveness of the actual hedge at inception and on an ongoing basis.
Gains and losses related to discontinued hedges that were previously deferred in OCI or deferred as regulatory assets or
liabilities will remain deferred until the hedged transaction is reflected in earnings, unless it is probable that the hedged
forecasted transaction will not occur, in which case associated deferred amounts are immediately recognized in current
earnings.
The effective portion of the change in the fair value of a derivative instrument qualifying as a fair value hedge offsets
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 the derivative instrument’s change in fair value is recognized in
current earnings.
Normal Purchases and Normal Sales — Xcel Energy’s utility subsidiaries enter into contracts for the purchase and sale of
commodities for use in their business operations. SFAS No. 133 requires a company to evaluate these contracts to
determine whether the contracts are derivatives. Certain contracts that meet the definition of a derivative may be
exempted from SFAS No. 133 as normal purchases or normal sales.
Xcel Energy evaluates all of its contracts at inception to determine if they are derivatives and, if so, if they qualify to
meet the normal purchases and normal sales designation requirements under SFAS No. 133. None of the contracts
entered into within the commodity trading operations qualify for a normal purchases and normal sales designation.
For further discussion of Xcel Energy’s risk management and derivative activities, see Note 13 to the consolidated
financial statements.
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