Xcel Energy 2011 Annual Report Download - page 47

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To the extent climate change impacts a region’s economic health, it may also impact our revenues. Our financial performance is
tied to the health of the regional economies we serve. The price of energy, as a factor in a region’s cost of living as well as an
important input into the cost of goods and services, has an impact on the economic health of our communities. The cost of
additional regulatory requirements, such as a tax on GHGs or additional environmental regulation could impact the availability of
goods and prices charged by our suppliers which would normally be borne by consumers through higher prices for energy and
purchased goods. To the extent financial markets view climate change and emissions of GHGs as a financial risk, this could
negatively affect our ability to access capital markets or cause us to receive less than ideal terms and conditions.
Financial Risks
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, the sale of electric energy in interstate commerce and certain natural gas
transactions 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 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 and 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 an 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 purchased 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 Inc. and its subsidiaries credit ratings could be adversely affected based on the level of capacity payments associated
with purchased 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.