Xcel Energy 2015 Annual Report Download - page 54
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Management currently believes these prudently incurred costs are recoverable given the existing regulatory mechanisms in place.
However, adverse regulatory rulings or the imposition of additional regulations 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that a rating will not be lowered or withdrawn entirely by a rating agency.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. 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. As a result, we frequently need to access capital 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. Capital market disruption events and resulting broad
financial market distress 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 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 customers will not pay their bills, which may lead to a reduction in liquidity and an increase in
bad debt expense. 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.
One alternative available to address counterparty credit risk is to transact on liquid commodity exchanges. The credit risk is then
socialized through the exchange central clearinghouse function. While exchanges do remove counterparty credit risk, all participants
are subject to margin requirements, which create an additional need for liquidity to post margin as exchange positions change value
daily. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requires broad clearing of financial swap
transactions through a central counterparty, which could lead to additional margin requirements that would impact our liquidity.
However, we have taken advantage of an exception to mandatory clearing afforded to commercial end-users who are not classified as
a major swap participant. The Board of Directors has authorized Xcel Energy and its subsidiaries to take advantage of this end-user
exception.
We may at times have direct credit exposure in our short-term wholesale and commodity trading activity to various financial
institutions trading for their own accounts or issuing collateral support on behalf of other counterparties. We may also have some
indirect credit exposure due to participation in organized markets, such as SPP, PJM and MISO, in which any credit losses are
socialized to all market participants.
We do have additional indirect credit exposures to various domestic and foreign financial institutions in the form of letters of credit
provided as security by power suppliers under various long-term physical purchased power contracts. If any of the credit ratings of
the letter of credit issuers were to drop below the designated investment grade rating stipulated in the underlying long-term purchased
power contracts, the supplier would need to replace that security with an acceptable substitute. If the security were not replaced, the
party could be in technical default under the contract, which would enable us to exercise our contractual rights.