Xcel Energy 2009 Annual Report Download - page 75

Inflation
Inflation at its current level is not expected to materially affect Xcel Energy’s prices or returns to shareholders. However,
potential future inflation resulting from the economic and monetary stimulus policies of the U. S. Government and the
Federal Reserve could lead to future price increases for materials and services required to deliver electric and natural gas
services to customers. These potential cost increases could in turn lead to increased prices to customers.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Preparation of the consolidated financial statements and related disclosures in compliance with GAAP requires the
application of accounting rules and guidance, as well as the use of estimates. The application of these policies
necessarily involves judgments regarding future events, including the likelihood of success of particular projects, legal
and regulatory challenges and anticipated recovery of costs. These judgments could materially impact the consolidated
financial statements and disclosures, based on varying assumptions. In addition, the financial and operating environment
also may have a significant effect on the operation of the business and on the results reported even if the nature of the
accounting policies applied have not changed. The following is a list of accounting policies that are most critical to the
portrayal of Xcel Energy’s financial condition and results, and that require management’s most difficult, subjective or
complex judgments. Each of these has a higher potential likelihood of resulting in materially different reported amounts
under different conditions or using different assumptions. Each critical accounting policy has been discussed with the
Audit Committee of the Xcel Energy Board of Directors.
Regulatory Accounting
Xcel Energy is a holding company with rate-regulated subsidiaries that are subject to ASC 980 Regulated Operations,
which provides that rate-regulated entities account for and report assets and liabilities consistent with the recovery of
those incurred costs in rates, if the rates established are designed to recover the costs of providing the regulated service
and if the competitive environment makes it probable that such rates could be charged and collected. Xcel Energy’s
rates are derived through the ratemaking process, which results in the recording of regulatory assets and liabilities based
on the probability of current and future cash flows. Regulatory assets represent incurred or accrued costs that have been
deferred because they are probable of future recovery from customers. Regulatory liabilities represent incurred or accrued
credits that have been deferred because they will be returned to customers in future rates. In other businesses or
industries, regulatory assets would be charged to expense and regulatory liabilities would be recorded as income. As of
Dec. 31, 2009 and 2008, Xcel Energy has recorded regulatory assets of approximately $2.3 billion and $2.4 billion and
regulatory liabilities of approximately $1.2 billion and $1.2 billion, respectively. Each subsidiary is subject to regulation
that varies from jurisdiction to jurisdiction. If future recovery of costs, in any such jurisdiction, ceases to be probable,
Xcel Energy would be required to charge these assets to current earnings. However, there are no current or expected
proposals or changes in the regulatory environment that impact the probability of future recovery of these assets. In
addition, deregulation would be a change that occurs over time, due to legal processes and procedures, which could
moderate the impact to Xcel Energy’s consolidated financial statements.
See Note 19 for additional details on regulatory assets and liabilities.
Income Tax Accruals
Judgment, uncertainty, and estimates are a significant aspect of the income tax accrual process that accounts for the
effects of current and deferred income taxes. Uncertainty associated with the application of tax statutes and regulations
and the outcomes of tax audits and appeals require that judgment and estimates be made in the accrual process and in
the calculation of the ETR.
ETRs are also highly impacted by assumptions. ETR calculations are revised every quarter based on best available
year-end tax assumptions (income levels, deductions, credits, etc.) by legal entity; adjusted in the following year after
returns are filed, with the tax accrual estimates being trued-up to the actual amounts claimed on the tax returns; and
further adjusted after examinations by taxing authorities have been completed.
In accordance with the interim reporting rules under ASC 740 Income Taxes, a tax expense or benefit is recorded every
quarter to eliminate the difference in continuing operations tax expense computed based on the actual year-to-date ETR
and the forecasted annual ETR.
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