Xcel Energy 2005 Annual Report Download - page 79

Comanche 3 Permit Litigation On Aug. 4, 2005, CCAP and Clean Energy Action filed suit against the Air Pollution Control Division, Colorado
Department of Public Health and Environment in state district court in Pueblo, Colo. The suit alleges the issuance of environmental permits
for the proposed Comanche 3 generating station by the Department violates the Colorado Air Pollution Prevention and Control Act. Th e plainti ffs
have sought judicial review of the issuance of the permits. The plaintiffs have not sought a stay of the permits or an injunction on construction
pending judicial review. On Aug. 19, 2005, the Colorado attorney general, on behalf of the Department, filed an answer in the suit. On the same
date, PSCo filed a motion to intervene and an answer in the suit. On Nov. 20, 2005, the Division submitted the formal record which was entered
by the Court. Plaintiffs’ brief was filed on Feb. 2, 2006, and the government and PSCo will have 60 days to respond.
Fru-Con Construction Corporation vs. Utility Engineering et al. On March 28, 2005, Fru-Con Construction Corporation (Fru-Con)
commenced a lawsuit in U.S. District Court for the Eastern District of California against UE and the Sacramento Municipal Utility District
(SMUD) for damages allegedly suffered during the construction of a natural gas-fired, combined-cycle power plant in Sacramento County.
Fru-Con’s complaint alleges that it entered into a contract with SMUD to construct the power plant and further alleges that UE was negligent
with regard to the design services it furnished to SMUD. UE denies this claim and intends to vigorously defend itself. Because this lawsuit
was commenced prior to the April 8, 2005, closing of the sale of UE to Zachry Group, Inc., Xcel Energy is obligated to indemnify Zachry up
to $17.5 million. Pursuant to the terms of its professional liability policy, UE is insured up to $35 million. On June 1, 2005, UE filed a motion
to dismiss Fru-Con’s complaint. A hearing concerning this motion was held on July 18, 2005, with the court taking the matter under advisement.
On Aug. 4, 2005, the court granted UE’s motion to dismiss. Because SMUD remains a defendant in this action, the court has not entered a
final judgment subject to an appeal with respect to its order to dismiss UE from the lawsuit.
Metropolitan Airports Commission vs. Northern States Power Company On Dec. 30, 2004, the Metropolitan Airports Commission
(MAC) filed a complaint in Minnesota state district court asserting that NSP-Minnesota is required to relocate facilities on MAC property at
the expense of NSP-Minnesota. MAC claims that approximately $7.1 million charged by NSP-Minnesota over the past five years for relocation
costs should be repaid. Both parties have asserted cross motions for partial summary judgment concerning legal obligations associated with
rent payments allegedly due and owing by NSP-Minnesota to MAC for the use of its property for a substation that serves the MAC. This
hearing was held in January 2006; the judge has not yet issued his decision. Both sides have scheduled depositions of key witnesses to
take place in February and March of 2006. Trial has been set for May 2006; additional summary judgment motions are likely prior to trial.
Siewert vs. Xcel Energy Plaintiffs, the owners and operators of a Minnesota dairy farm, brought an action against NSP-Minnesota alleg-
ing negligence in the handling, supplying, distributing and selling of electrical power systems; negligence in the construction and mainte-
nance of distribution systems; and failure to warn or adequately test such systems. Plaintiffs allege decreased milk production, injury, and
damage to a dairy herd as a result of stray voltage resulting from NSP-Minnesota’s distribution system. Plaintiffs’ expert report on the
economic damage to their dairy farm states that the total present value of plaintiffs’ loss is $6.8 million. Trial is scheduled to commence
in March 2007. NSP-Minnesota denies these allegations and will vigorously defend itself in this matter.
OTHER CONTINGENCIES
Tax Matters In April 2004, Xcel Energy filed a lawsuit against the government in the U.S. District Court for the District of Minnesota to
establish its right to deduct the policy loan interest expense that had accrued during tax years 1993 and 1994 on policy loans related to its
company-owned life insurance (COLI) policies that insured certain lives of employees of PSCo. These policies are owned and managed by
PSR Investments, Inc. (PSRI), a wholly owned subsidiary of PSCo.
After Xcel Energy filed this suit, the IRS sent it two statutory notices of proposed deficiency of tax, penalty and interest for taxable years 1995
through 1999. Xcel Energy then filed two Tax Court petitions challenging those notices. Xcel Energy anticipates that the dispute relating to its
claimed interest expense deductions for tax years 1993 and later will be resolved in the refund suit that is pending in the Minnesota federal
district court and that the two Tax Court petitions will be held in abeyance pending the outcome of the refund litigation.
On Oct. 12, 2005, the district court denied Xcel Energy’s motion for summary judgment on the grounds that there were disputed issues of material
fact that required a trial for resolution. At the same time, the district court denied the government’s motion for summary judgment that was
based on its contention that PSCo had lacked an insurable interest in the lives of the employees insured under the COLI policies. However, the
district court granted Xcel Energy’s motion for partial summary judgment on the grounds that PSCo did have the requisite insurable interest.
The case is expected to proceed to trial and the litigation could take another two or more years.
Xcel Energy believes that the tax deduction for interest expense on the COLI policy loans is in full compliance with the tax law. Accordingly,
PSRI has not recorded any provision for income tax or related interest or penalties that may be imposed by the IRS, and has continued to
take deductions for interest expense related to policy loans on its income tax returns for subsequent years. As discussed above, the litigation
could require several years to reach final resolution. Defense of Xcel Energy’s position may require significant cash outlays, which may or
may not be recoverable in a court proceeding. Although the ultimate resolution of this matter is uncertain, it could have a material adverse
effect on Xcel Energy’s financial position, results of operations and cash flows.
Should the IRS ultimately prevail on this issue, tax and interest payable through Dec. 31, 2005, would reduce earnings by an estimated
$361 million. In 2004, Xcel Energy received formal notification that the IRS will seek penalties. If penalties (plus associated interest) also are
included, the total exposure through Dec. 31, 2005, is approximately $428 million. Xcel Energy annual earnings for 2006 would be reduced
by approximately $44 million, after tax, or 10 cents per share, if COLI interest expense deductions were no longer available.
XCEL ENERGY 2005 ANNUAL REPORT 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS