Xcel Energy 2011 Annual Report Download - page 77

67
The VaRs for the NSP-Minnesota and PSCo commodity trading operations, calculated on a consolidated basis using a Monte
Carlo simulation with a 95 percent confidence level and a one-day holding period, were as follows:
(Millions of Dollars) Year Ended Dec. 31 VaR Limit Average High Low
2011................................
...........
$ 0.09 $ 3.00 $ 0.14 $ 0.33 $ 0.04
2010................................
...........
0.15 3.00 0.22 0.64 0.03
Interest Rate Risk — Xcel Energy is subject to the risk of fluctuating interest rates in the normal course of business. Xcel
Energy’s risk management policy allows interest rate risk to be managed through the use of fixed rate debt, floating rate debt and
interest rate derivatives such as swaps, caps, collars and put or call options. At Dec. 31, 2011, Xcel Energy had unsettled interest
rate swaps outstanding with a notional amount of $475 million related to expected 2012 debt issuances.
At Dec. 31, 2011, a 100-basis-point change in the benchmark rate on Xcel Energy’s variable rate debt would impact pretax
interest expense by approximately $2.9 million annually. See Note 11 to the consolidated financial statements for a discussion of
Xcel Energy Inc. and its subsidiaries’ interest rate derivatives.
Xcel Energy also maintains a nuclear decommissioning fund, as required by the NRC. The nuclear decommissioning fund is
subject to interest rate risk and equity price risk. At Dec. 31, 2011, the fund was invested in a diversified portfolio of cash
equivalents, debt securities, equity securities, and other investments. These investments may be used only for activities related to
nuclear decommissioning. The accounting for nuclear decommissioning recognizes that costs are recovered through rates;
therefore, fluctuations in equity prices or interest rates do not have an impact on earnings.
Credit Risk — Xcel Energy Inc. and its subsidiaries are also exposed to credit risk. Credit risk relates to the risk of loss resulting
from counterparties’ nonperformance on their contractual obligations. Xcel Energy Inc. and its subsidiaries maintain credit
policies intended to minimize overall credit risk and actively monitor these policies to reflect changes and scope of operations.
At Dec. 31, 2011, a 10 percent increase in prices would have resulted in an increase in credit exposure of $1.3 million, while a
decrease of 10 percent in prices would have resulted in an increase in credit exposure of $4.3 million.
Xcel Energy Inc. and its subsidiaries conduct standard credit reviews for all counterparties. Xcel Energy employs 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. Distress in the financial
markets could increase Xcel Energy’s credit risk.
Fair Value Measurements
Xcel Energy follows accounting and disclosure guidance on fair value measurements that contains a hierarchy for inputs used in
measuring fair value and generally requires that the most observable inputs available be used for fair value measurements. See
Note 11 to the consolidated financial statements for further discussion of the fair value hierarchy and the amounts of assets and
liabilities measured at fair value that have been assigned to Level 3.
Commodity Derivatives — Xcel Energy continuously monitors the creditworthiness of the counterparties to its commodity
derivative contracts and assesses each counterparty’s ability to perform on the transactions set forth in the contracts. Given this
assessment and the typically short duration of these contracts, the impact of discounting commodity derivative assets for
counterparty credit risk was not material to the fair value of commodity derivative assets at Dec. 31, 2011. Adjustments to fair
value for credit risk of commodity trading instruments are recorded in electric revenues when necessary. Credit risk adjustments
for other commodity derivative instruments are deferred as OCI or regulatory assets and liabilities. The classification as a
regulatory asset or liability is based on commission approved regulatory recovery mechanisms. Xcel Energy also assesses the
impact of its own credit risk when determining the fair value of commodity derivative liabilities. The impact of discounting
commodity derivative liabilities for credit risk was immaterial to the fair value of commodity derivative liabilities at Dec. 31,
2011.
Commodity derivative assets and liabilities assigned to Level 3 consist primarily of FTRs, as well as forwards and options that are
either long-term in nature or related to commodities and delivery points with limited observability. Level 3 commodity derivative
assets and liabilities represent immaterial percentages of total assets and liabilities measured at fair value at Dec. 31, 2011.