Xcel Energy 2008 Annual Report Download - page 45

Item 1A — Risk Factors
Risks Associated with Our Business
Our profitability depends in part on the ability of our utility subsidiaries to recover their costs from their customers and
there may be changes in circumstances or in the regulatory environment that impair the ability of our utility
subsidiaries to recover costs from their customers.
We are subject to comprehensive regulation by federal and state utility regulatory agencies. The utility commissions in
the states where we operate our utility subsidiaries regulate many aspects of our utility operations, including siting and
construction of facilities, customer service and the rates that we can charge customers. The FERC has jurisdiction,
among other things, over wholesale rates for electric transmission service and the sale of electric energy in interstate
commerce.
The profitability of our utility operations is dependent on our ability to recover the costs of providing energy and
utility services to our customers. Our utility subsidiaries currently provide service at rates approved by one or more
regulatory commissions. These rates are generally regulated based on an analysis of the utility’s expenses incurred in a
test year. Our utility subsidiaries are subject to both future and historical test years depending upon the regulatory
mechanisms approved in each jurisdiction. Thus, the rates a utility is allowed to charge may or may not match its
expenses at any given time. While rate regulation is premised on providing a reasonable opportunity to earn a
reasonable rate of return on invested capital, there can be no assurance that the applicable regulatory commission will
judge all the costs of our utility subsidiaries to have been prudently incurred or that the regulatory process in which
rates are determined will always result in rates that will produce full recovery of such costs. Rising fuel costs could
increase the risk that our utility subsidiaries will not be able to fully recover their fuel costs from their customers.
Furthermore, there could be changes in the regulatory environment that would impair the ability of our utility
subsidiaries to recover costs historically collected from their customers. If all of the costs of our utility subsidiaries are
not recovered through customer rates, they could incur financial operating losses, which, over the long term, could
jeopardize their ability to pay us dividends and our ability to meet our financial obligations.
Management currently believes these prudently incurred costs are recoverable given the existing regulatory mechanisms
in place. However, changes in regulations or the imposition of additional regulations, including additional
environmental regulation or regulation related to climate change, could have an adverse impact on our results of
operations and hence could materially and adversely affect our ability to meet our financial obligations, including debt
payments and the payment of dividends on our common stock.
Any reductions in our credit ratings could increase our financing costs and the cost of maintaining certain contractual
relationships.
We cannot be assured that any of our current ratings or our subsidiaries’ ratings will remain in effect for any given
period of time or that a rating will not be lowered or withdrawn entirely by a rating agency. In addition, our credit
ratings may change as a result of the differing methodologies or change in the methodologies used by the various rating
agencies. For example, Standard & Poor’s calculates an imputed debt associated with capacity payments from purchase
power contracts. An increase in the overall level of capacity payments would increase the amount of imputed debt,
based on Standard & Poor’s methodology. Therefore, Xcel Energy and its subsidiaries credit ratings could be adversely
affected based on the level of capacity payments associated with purchase power contracts or changes in how imputed
debt is determined. Any downgrade could lead to higher borrowing costs.
We are subject to interest rate risk.
If interest rates increase, we may incur increased interest expense on variable interest debt, short-term borrowings or
incremental long-term debt, which could have an adverse impact on our operating results.
We are subject to capital market risk.
Utility operations require significant capital investment in property, plant and equipment; consequently, Xcel Energy is
an active participant in debt and equity markets. Any disruption in capital markets could have a material impact on our
ability to fund our operations. Capital markets are global in nature and are impacted by numerous events throughout
the world economy. Capital market disruption events, as evidenced by the collapse in the U.S. sub-prime mortgage
market and subsequent broad financial market stress, could prevent Xcel Energy from issuing new securities or cause us
to issue securities with less than ideal terms and conditions, such as higher interest rates.
35