Xcel Energy 2013 Annual Report Download - page 121

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The plans invest in various instruments which are disclosed under the accounting guidance for fair value measurements which
establishes a hierarchical framework for disclosing the observability of the inputs utilized in measuring fair value. The three levels in
the hierarchy and examples of each level are as follows:
Level 1 — Quoted prices are available in active markets for identical assets as of the reporting date. The types of assets
included in Level 1 are highly liquid and actively traded instruments with quoted prices.
Level 2 — Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of
the reporting date. The types of assets included in Level 2 are typically either comparable to actively traded securities or
contracts, or priced with models using highly observable inputs.
Level 3 — Significant inputs to pricing have little or no observability as of the reporting date. The types of assets included in
Level 3 are those with inputs requiring significant management judgment or estimation.
Specific valuation methods include the following:
Cash equivalents — The fair values of cash equivalents are generally based on cost plus accrued interest; money market funds are
measured using quoted net asset values.
Insurance contracts — Insurance contract fair values take into consideration the value of the investments in separate accounts of the
insurer, which are priced based on observable inputs.
Investments in equity securities and other funds — Equity securities are valued using quoted prices in active markets. Preferred stock
is valued using recent trades and quoted prices of similar securities. The fair values for commingled funds, private equity investments
and real estate investments are measured using net asset values, which take into consideration the value of underlying fund
investments, as well as the other accrued assets and liabilities of a fund, in order to determine a per share market value. The
investments in commingled funds may be redeemed for net asset value with proper notice. Proper notice varies by fund and can range
from daily with one or two days notice to annually with 90 days notice. Private equity investments require approval of the fund for
any unscheduled redemption, and such redemptions may be approved or denied by the fund at its sole discretion. Unscheduled
distributions from real estate investments may be redeemed with proper notice, which is typically quarterly with 45-90 days notice;
however, withdrawals from real estate investments may be delayed or discounted as a result of fund illiquidity. Based on the plan’s
evaluation of its ability to redeem private equity and real estate investments, fair value measurements for private equity and real estate
investments have been assigned a Level 3.
Investments in debt securities — Fair values for debt securities are determined by a third party pricing service using recent trades and
observable spreads from benchmark interest rates for similar securities.
Derivative Instruments — Fair values for foreign currency derivatives are determined using pricing models based on the prevailing
forward exchange rate of the underlying currencies. The fair values of interest rate derivatives are based on broker quotes that utilize
current market interest rate forecasts.
Pension Benefits
Xcel Energy has several noncontributory, defined benefit pension plans that cover almost all employees. Benefits are based on a
combination of years of service, the employee’s average pay and social security benefits. Xcel Energy’s policy is to fully fund into an
external trust the actuarially determined pension costs recognized for ratemaking and financial reporting purposes, subject to the
limitations of applicable employee benefit and tax laws.
In addition to the qualified pension plans, Xcel Energy maintains a supplemental executive retirement plan (SERP) and a nonqualified
pension plan. The SERP is maintained for certain executives that were participants in the plan in 2008, when the SERP was closed to
new participants. The nonqualified pension plan provides unfunded, nonqualified benefits for compensation that is in excess of the
limits applicable to the qualified pension plans. The total obligations of the SERP and nonqualified plan as of Dec. 31, 2013 and 2012
were $36.5 million and $39.4 million, respectively. In 2013 and 2012, Xcel Energy recognized net benefit cost for financial reporting
for the SERP and nonqualified plans of $6.6 million and $15.6 million, respectively. Benefits for these unfunded plans are paid out of
Xcel Energy’s consolidated operating cash flows.