Xcel Energy 2012 Annual Report Download - page 77

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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.
In conjunction with the NSP-Minnesota debt issuance in August 2012, NSP-Minnesota settled interest rate hedging instruments
with a notional amount of $225 million with cash payments of $45.0 million. In conjunction with the PSCo debt issuance in
September 2012, PSCo settled interest rate hedging instruments with a notional amount of $250 million with cash payments of
$44.7 million. These losses are classified as a component of accumulated other comprehensive loss on the consolidated balance
sheet, net of tax, and are being reclassified to earnings over the term of the hedged interest payments. See Note 4 for further
discussion of long-term borrowings.
At Dec. 31, 2012 and 2011, a 100-basis-point change in the benchmark rate on Xcel Energy’s variable rate debt would impact
pretax interest expense annually by approximately $6.0 million and $2.9 million, respectively. See Note 11 to the consolidated
financial statements for a discussion of Xcel Energy Inc. and its subsidiaries’ interest rate derivatives.
NSP-Minnesota 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, 2012, 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. Given the purpose and legal restrictions on the use of nuclear decommissioning fund assets, realized
and unrealized gains on fund investments over the life of the fund are deferred as an offset of NSP-Minnesota’s regulatory asset
for nuclear decommissioning costs. Consequently, any realized and unrealized gains and losses on securities in the nuclear
decommissioning fund, including any other-than-temporary impairments, are deferred as a component of the regulatory asset for
nuclear decommissioning. Since the accounting for nuclear decommissioning recognizes that costs are recovered through rates,
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, 2012, a 10 percent increase in commodity prices would have resulted in a decrease in credit exposure of $11.6
million, while a decrease of 10 percent in prices would have resulted in an increase in credit exposure of $12.6 million. At Dec.
31, 2011, a 10 percent increase in commodity prices would have resulted in a 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 requires disclosure of the observability of the inputs used in these 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, 2012. Adjustments to fair
value for credit risk of commodity trading instruments are recorded in electric revenues. 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, 2012.