Xcel Energy 2015 Annual Report Download - page 80
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As of Dec. 31, 2015 and 2014, Xcel Energy has recorded regulatory assets of $3.2 billion and regulatory liabilities of $1.6 billion.
Each subsidiary is subject to regulation that varies from jurisdiction to jurisdiction. If future recovery of costs, in any such
jurisdiction, ceases to be probable, Xcel Energy would be required to charge these assets to current net income or OCI. In assessing
the probability of recovery of recognized regulatory assets, Xcel Energy noted no current or anticipated proposals or changes in the
regulatory environment that it expects will materially impact the probability of recovery of the assets. See Note 15 to the consolidated
financial statements for further discussion of regulatory assets and liabilities and Note 12 to the consolidated financial statements for
further discussion of rate matters.
Income Tax Accruals
Judgment, uncertainty, and estimates are a significant aspect of the income tax accrual process that accounts for the effects of current
and deferred income taxes. Uncertainty associated with the application of tax statutes and regulations and the outcomes of tax audits
and appeals require that judgment and estimates be made in the accrual process and in the calculation of the ETR. Changes in tax laws
and rates may affect recorded deferred tax assets and liabilities and our ETR in the future. There exists the potential for federal tax
reform that may significantly change the tax rules applicable to Xcel Energy. At this time, due to the inherent uncertainty of future
legislation, any potential resulting impact cannot be reasonably estimated.
ETRs are highly impacted by assumptions. ETR calculations are revised every quarter based on best available year-end tax
assumptions (income levels, deductions, credits, etc.); adjusted in the following year after returns are filed, with the tax accrual
estimates being trued-up to the actual amounts claimed on the tax returns; and further adjusted after examinations by taxing authorities
have been completed.
In accordance with the interim period reporting guidance, income tax expense for the first three quarters in a year is based on the
forecasted annual ETR. The forecasted ETR reflects a number of estimates including forecasted annual income, permanent tax
adjustments and tax credits.
Accounting for income taxes also requires that only tax benefits that meet the more likely than not recognition threshold can be
recognized or continue to be recognized. The change in the unrecognized tax benefits needs to be reasonably estimated based on
evaluation of the nature of uncertainty, the nature of event that could cause the change and an estimated range of reasonably possible
changes. Management will use prudent business judgment to derecognize appropriate amounts of tax benefits at any period end, and
as new developments occur. Unrecognized tax benefits can be recognized as issues are favorably resolved and loss exposures decline.
We may adjust our unrecognized tax benefits and interest accruals to the updated estimates as disputes with the IRS and state tax
authorities are resolved. These adjustments may increase or decrease earnings. See Note 6 to the consolidated financial statements for
further discussion.
Employee Benefits
Xcel Energy’s pension costs are based on an actuarial calculation that includes a number of key assumptions, most notably the annual
return level that pension and postretirement health care investment assets are expected to earn in the future and the interest rate used to
discount future pension benefit payments to a present value obligation. In addition, the pension cost calculation uses an asset-
smoothing methodology to reduce the volatility of varying investment performance over time. See Note 9 to the consolidated
financial statements for further discussion on the rate of return and discount rate used in the calculation of pension costs and
obligations.
Pension costs are expected to decrease in 2016 and continue to decline in the following few years. Funding requirements increased in
2016 and then be flat in the following years. While investment returns exceeded the assumed levels in 2014, investment returns were
below the assumed levels in 2013 and 2015. The pension cost calculation uses a market-related valuation of pension assets. Xcel
Energy uses a calculated value method to determine the market-related value of the plan assets. The market-related value is
determined by adjusting the fair market value of assets at the beginning of the year to reflect the investment gains and losses (the
difference between the actual investment return and the expected investment return on the market-related value) during each of the
previous five years at the rate of 20 percent per year. As these differences between the actual investment returns and the expected
investment returns are incorporated into the market-related value, the differences are recognized in pension cost over the expected
average remaining years of service for active employees which was approximately 11 years in 2015.