Xcel Energy 2013 Annual Report Download - page 106

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Due to the effects of past regulatory practices, when deferred taxes were not required to be recorded due to the use of flow through
accounting for ratemaking purposes, the reversal of some temporary differences are accounted for as current income tax expense.
Investment tax credits are deferred and their benefits amortized over the book depreciable lives of the related property. Utility rate
regulation also has resulted in the recognition of certain regulatory assets and liabilities related to income taxes, which are summarized
in Note 15.
Xcel Energy follows the applicable accounting guidance to measure and disclose uncertain tax positions that it has taken or expects to
take in its income tax returns. Xcel Energy recognizes a tax position in its consolidated financial statements when it is more likely
than not that the position will be sustained upon examination based on the technical merits of the position. Recognition of changes in
uncertain tax positions are reflected as a component of income tax.
Xcel Energy reports interest and penalties related to income taxes within the other income and interest charges sections in the
consolidated statements of income.
Xcel Energy Inc. and its subsidiaries file consolidated federal income tax returns as well as combined or separate state income tax
returns. Federal income taxes paid by Xcel Energy Inc. are allocated to Xcel Energy Inc.’s subsidiaries based on separate company
computations of tax. A similar allocation is made for state income taxes paid by Xcel Energy Inc. in connection with combined state
filings. Xcel Energy Inc. also allocates its own income tax benefits to its direct subsidiaries based on the relative positive tax
liabilities of the subsidiaries.
See Note 6 for further discussion of income taxes.
Types of and Accounting for Derivative Instruments — Xcel Energy uses derivative instruments in connection with its interest rate,
utility commodity price, vehicle fuel price, short-term wholesale and commodity 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 the accounting guidance for derivatives and hedging, are recorded on the consolidated balance sheets at fair
value as derivative instruments. This includes certain instruments used to mitigate market risk for the utility operations including
transmission in organized markets 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 as a regulatory asset or liability is based on commission approved regulatory recovery mechanisms.
Gains or losses on commodity trading transactions are recorded as a component of electric operating revenues; hedging transactions
for vehicle fuel costs are recorded as a component of capital projects or O&M 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. For further information on derivatives entered to
mitigate commodity price risk on behalf of electric and natural gas customers, see Note 11.
Cash Flow Hedges — Certain qualifying hedging relationships are designated as a hedge of a forecasted transaction, or future cash
flow (cash flow hedge). Changes in the fair value of a derivative designated as a cash flow hedge, to the extent effective, are included
in OCI or deferred as a regulatory asset or liability based on recovery mechanisms until earnings are affected by the hedged
transaction.
Normal Purchases and Normal Sales — Xcel Energy enters into contracts for the purchase and sale of commodities for use in its
business operations. Derivatives and hedging accounting guidance 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 derivative
accounting if designated as normal purchases or normal sales.
Xcel Energy evaluates all of its contracts at inception to determine if they are derivatives and if they meet the normal purchases and
normal sales designation requirements. None of the contracts entered into within the commodity trading operations qualify for a
normal purchases and normal sales designation.
See Note 11 for further discussion of Xcel Energy’s risk management and derivative activities.
Commodity Trading Operations — All applicable gains and losses related to commodity trading activities, whether or not settled
physically, are shown on a net basis in electric operating revenues in the consolidated statements of income.