Xcel Energy 2013 Annual Report Download - page 56

38
Higher interest rates on short-term borrowings with variable interest rates or on incremental commercial paper issuances 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 retail customers will not pay their bills, which may lead to a reduction in liquidity and an eventual
increase in bad debt expense. Retail 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. In addition, the CFTC has granted an increase in the de minimis level for swap transactions with defined utility special
entities, generally entities owning or operating electric or natural gas facilities, from $25 million to $800 million. Our current level of
financial swap activity with special entities is significantly below this new threshold; therefore, we will not be classified as a swap
dealer in our special entity activity. Swap transactions with non special entities have a much higher level of activity considered to be
de minimis, currently $8 billion, and our level of activity is well under this limit; therefore, we will not be classified as a swap dealer
under the Dodd-Frank Act. We are currently reporting all of our swap transactions as part of the Dodd-Frank Act.
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.
Increasing costs associated with our defined benefit retirement plans and other employee benefits may adversely affect our results
of operations, financial position or liquidity.
We have defined benefit pension and postretirement plans that cover substantially all of our employees. Assumptions related to future
costs, return on investments, interest rates and other actuarial assumptions have a significant impact on our funding requirements
related to these plans. These estimates and assumptions may change based on economic conditions, actual stock and bond market
performance, changes in interest rates and changes in governmental regulations. In addition, the Pension Protection Act of 2006
changed the minimum funding requirements for defined benefit pension plans with modifications to these funding requirements that
allowed additional flexibility in the timing of contributions. Therefore, our funding requirements and related contributions may
change in the future. Also, the payout of a significant percentage of pension plan liabilities in a single year due to high retirements or
employees leaving the company would trigger settlement accounting and could require the company to recognize material incremental
pension expense related to unrecognized plan losses in the year these liabilities are paid.
Increasing costs associated with health care plans may adversely affect our results of operations.
Our self-insured costs of health care benefits for eligible employees and costs for retiree health care plans have increased substantially
in recent years. Increasing levels of large individual health care claims and overall health care claims could have an adverse impact on
our operating results, financial position and liquidity. We believe that our employee benefit costs, including costs related to health
care plans for our employees and former employees, will continue to rise. Legislation related to health care could also significantly
change our benefit programs and costs.