Xcel Energy 2010 Annual Report Download - page 47

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The profitability of our utility operations is dependent on our ability to recover the costs of providing energy and utility services
to our customers and earn a return on our capital investment in our utility operations. 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 costs 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 costs
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.
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or that a rating will not be lowered or withdrawn entirely by a rating agency.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.
Also, our utility subsidiaries may enter into certain procurement and derivative contracts that require the posting of collateral or
settlement of applicable contracts if credit ratings fall below investment grade.
We are subject to capital market and interest rate risks.
Utility operations require significant capital investment in property, plant and equipment; consequently, we are 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 issues and events throughout the world economy,
such as the recent concerns regarding European sovereign debt. Capital market disruption events, and resulting broad financial
market distress, such as the events surrounding the collapse in the U.S. sub-prime mortgage market, could prevent us from issuing
new securities or cause us to issue securities with less than ideal terms and conditions, such as higher interest rates.
Higher interest rates on short-term borrowings with variable interest rates or on incremental commercial paper issuances could
also have an adverse effect on our operating results. Changes in interest rates may also impact the fair value of the debt securities
in the nuclear decommissioning fund and master pension trust, as well as our ability to earn a return on short-term investments of
excess cash.
We are subject to credit risks.
Credit risk includes the risk that our retail customers will not pay their bills, which may lead to a reduction in liquidity and an
eventual increase in bad debt expense. Retail credit risk is comprised of numerous factors including the price of products and
services provided, the overall economy and local economies in the geographic areas we serve, including local unemployment
rates.
Credit risk also includes the risk that various counterparties that owe us money or product will breach their obligations. Should
the counterparties to these arrangements fail to perform, we may be forced to enter into alternative arrangements. In that event,
our financial results could be adversely affected and we could incur losses.