Xcel Energy 2014 Annual Report Download - page 134

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Wholesale and Commodity Trading Risk — Xcel Energy Inc.’s utility subsidiaries conduct various wholesale and commodity trading
activities, including the purchase and sale of electric capacity, energy and energy-related instruments. Xcel Energy’s risk management
policy allows management to conduct these activities within guidelines and limitations as approved by its risk management
committee, which is made up of management personnel not directly involved in the activities governed by this policy.
Commodity Derivatives — Xcel Energy enters into derivative instruments to manage variability of future cash flows from changes in
commodity prices in its electric and natural gas operations, as well as for trading purposes. This could include the purchase or sale of
energy or energy-related products, natural gas to generate electric energy, natural gas for resale, FTRs, vehicle fuel and weather
derivatives.
At Dec. 31, 2014, Xcel Energy had various vehicle fuel contracts designated as cash flow hedges extending through December 2016.
Xcel Energy also enters into derivative instruments that mitigate commodity price risk on behalf of electric and natural gas customers
but are not designated as qualifying hedging transactions. Changes in the fair value of non-trading commodity derivative instruments
are recorded in OCI or deferred as a regulatory asset or liability. The classification as a regulatory asset or liability is based on
commission approved regulatory recovery mechanisms. Xcel Energy recorded immaterial amounts to income related to the
ineffectiveness of cash flow hedges for the years ended Dec. 31, 2014 and 2013.
At Dec. 31, 2014, net losses related to commodity derivative cash flow hedges recorded as a component of accumulated other
comprehensive losses included $0.1 million of net losses expected to be reclassified into earnings during the next 12 months as the
hedged transactions occur.
Additionally, Xcel Energy enters into commodity derivative instruments for trading purposes not directly related to commodity price
risks associated with serving its electric and natural gas customers. Changes in the fair value of these commodity derivatives are
recorded in electric operating revenues, net of amounts credited to customers under margin-sharing mechanisms.
The following table details the gross notional amounts of commodity forwards, options and FTRs at Dec. 31:
(Amounts in Thousands) (a)(b) 2014 2013
MWh of electricity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,361 58,423
MMBtu of natural gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 927 9,854
Gallons of vehicle fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282 482
(a) Amounts are not reflective of net positions in the underlying commodities.
(b) Notional amounts for options are included on a gross basis, but are weighted for the probability of exercise.
Consideration of Credit Risk and Concentrations — Xcel Energy continuously monitors the creditworthiness of the counterparties to
its interest rate derivatives and commodity derivative contracts prior to settlement, and assesses each counterparty’s ability to perform
on the transactions set forth in the contracts. Given this assessment, as well as an assessment of the impact of Xcel Energy’s own
credit risk when determining the fair value of derivative liabilities, the impact of considering credit risk was immaterial to the fair
value of unsettled commodity derivatives presented in the consolidated balance sheets.
Xcel Energy Inc. and its subsidiaries employ additional credit risk control mechanisms when appropriate, such as letters of credit,
parental guarantees, standardized master netting agreements and termination provisions that allow for offsetting of positive and
negative exposures. Credit exposure is monitored and, when necessary, the activity with a specific counterparty is limited until credit
enhancement is provided.
Xcel Energy’s utility subsidiaries’ most significant concentrations of credit risk with particular entities or industries are contracts with
counterparties to their wholesale, trading and non-trading commodity activities. At Dec. 31, 2014, four of Xcel Energy’s 10 most
significant counterparties for these activities, comprising $56.2 million or 23 percent of this credit exposure, had investment grade
credit ratings from S&P’s, Moody’s or Fitch Ratings. The remaining six most significant counterparties, comprising $65.6 million or
27 percent of this credit exposure at Dec. 31, 2014, were not rated by these agencies, but based on Xcel Energy’s internal analysis, had
credit quality consistent with investment grade. All 10 of these significant counterparties are municipal or cooperative electric entities
or other utilities.