Derivatives and Hedging Activities
The accounting standards for derivatives and hedging require that derivative instruments be recorded on the balance sheet as
either an asset or liability measured at its fair value and that changes in the derivative instrument’s fair value be recognized
currently in earnings unless specific hedge accounting criteria are met and designated accordingly, and if they qualify for certain
exemptions, including the normal purchases and normal sales exemption. Each Consolidated Balance Sheet reflects the
offsetting of net derivative positions with fair value amounts for cash collateral with the same counterparty when a legal right of
offset exists.
Accounting standards for derivatives and hedging require that the unrealized gains or losses on a derivative instrument
designated and qualifying as a fair value hedging instrument as well as the offsetting unrealized gain or loss on the hedged item
attributable to the hedged risk be recognized currently in earnings in the same accounting period. Conversely, the effective
portion of the unrealized gain or loss on a derivative instrument designated and qualifying as a cash flow hedging instrument
must be reported as a component of other comprehensive income and be reclassified into earnings in the same period or periods
during which the hedged forecasted transaction affects earnings. The remaining gain or loss on the derivative instrument, if any,
is recognized currently in earnings.
FORM 10K
Revenues and expenses on contracts that qualify are designated as normal purchases and normal sales and are recognized when
the underlying physical transaction is completed under the accrual basis of accounting. Normal purchases and normal sales are
contracts where physical delivery is probable, quantities are expected to be used or sold in the normal course of business over a
reasonable amount of time, and price is not tied to an unrelated underlying derivative. As part of our regulated electric and gas
operations, we enter into contracts to buy and sell energy to meet the requirements of our customers. These contracts include
short-term and long-term commitments to purchase and sell energy in the retail and wholesale markets with the intent and
ability to deliver or take delivery. If it was determined that a transaction designated as a normal purchase or normal sale no
longer met the exceptions, the fair value of the related contract would be reflected as either an asset or liability, under the
accounting standards for derivatives and hedging.
We utilize master netting agreements which consist of an agreement between two parties who have multiple contracts with each
other that provide for the net settlement of all contracts in the event of default on or termination of any one contract. When the
right of offset exists, accounting standards permit the netting of receivables and payables under a legally enforceable master
netting agreement between counterparties. Accounting standards also permit offsetting of fair value amounts recognized for the
right to reclaim, or the obligation to return, cash collateral against fair value amounts recognized for derivative instruments
executed with the same counterparty.
Deferred Financing Costs
Deferred financing costs are amortized using the effective interest method over the estimated useful life of the related debt.
Development Costs
According to accounting standards for business combinations, we expense, when incurred, development and acquisition costs
associated with corporate development activities prior to acquiring or beginning construction of a project. Expensed
development costs are included in Other operating expenses on the accompanying Consolidated Statements of Income.
Legal Costs
Litigation liabilities, including potential settlements, are recorded when it is both probable that a liability or settlement has been
incurred and the amount can be reasonably estimated. Legal costs related to ongoing litigation are expensed as incurred.
When a range of the probable loss exists and no amount within the range is a better estimate than any other amount, we record a
loss contingency at the minimum amount in the range. If the loss contingency at issue is not both probable and reasonably
estimable, we do not establish an accrual and the matter will continue to be monitored for any developments that would make
the loss contingency both probable and reasonably estimable.
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