Xcel Energy 2007 Annual Report Download - page 99

2. The recognition of this settlement resulted in total expense of $59.5 million, including federal and state tax,
interest on the federal and state tax liabilities, penalties, and tax benefits on the interest expense for the nine
months ended Sept. 30, 2007. The expense of $59.5 million includes $43.4 million of interest and penalties and
income tax of $16.1 million (net of tax benefit on the interest expense of $14.3 million).
3. Xcel Energy surrendered the policies to its insurer on Oct. 31, 2007, without recognizing a taxable gain.
Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (FIN 48) — Xcel Energy
adopted FIN 48 as of Jan. 1, 2007. Xcel Energy files a consolidated federal income tax return, state tax returns based
on income in its major operating jurisdictions of Colorado, Minnesota, Texas, and Wisconsin, and various other state
income-based tax returns.
Xcel Energy has been audited by the IRS through tax year 2003, with a limited exception for 2003 research tax credits.
The IRS commenced an examination of Xcel Energy’s federal income tax returns for 2004 and 2005 (and research
credits for 2003) in the third quarter of 2006, and that examination is anticipated to be complete by March 31, 2008.
As of Dec. 31, 2007, the IRS has not proposed any material adjustments to tax years 2003 through 2005. The statute
of limitations applicable to Xcel Energy’s 2000 through 2002 federal income tax returns expired as of June 30, 2007.
As previously disclosed, Xcel Energy was in litigation with the federal government to establish its right to deduct
interest expense on COLI policy loans incurred since 1993. Xcel Energy and the IRS have reached a final settlement
regarding this litigation (see above discussion of COLI).
Xcel Energy is also currently under examination by the state of Minnesota for years 1998 through 2001 and the state
of Texas for years 2003 through 2005. No material adjustments have been proposed as of Dec. 31, 2007 for these state
audits. In the fourth quarter of 2007, the states of Colorado and Wisconsin concluded income tax audits through tax
year 2005. As of Dec. 31, 2007, Xcel Energy’s earliest open tax years in which an audit can be initiated by state taxing
authorities in its major operating jurisdictions are as follows: Colorado-2002, Minnesota-1998, Texas-2003, and
Wisconsin-2002.
The amount of unrecognized tax benefits reported in continuing operations was $42.6 million on Jan. 1, 2007 and
$26.3 million on Dec. 31, 2007. The amount of unrecognized tax benefits reported in discontinued operations was
$4.7 million on Jan. 1, 2007 and $4.3 million on Dec. 31, 2007. A reconciliation of the beginning and ending
amount of unrecognized tax benefit in continuing operations is as follows:
(Millions of
Dollars)
Balance at Jan. 1, 2007 .................................................. $42.6
Additions based on tax positions related to the current year ............................ 10.4
Reductions based on tax positions related to the current year ........................... (0.4)
Additions for tax positions of prior years ....................................... 42.3
Reductions for tax positions of prior years ...................................... (5.0)
Settlements with taxing authorities ........................................... (63.6)
Balance at Dec. 31, 2007 ................................................. $26.3
These unrecognized tax benefit amounts were reduced by the tax benefits associated with net operating loss and tax
credit carryovers reported in continuing operations of $14.3 million on Jan. 1, 2007 and $7.8 million on Dec. 31,
2007 and net operating loss and tax credit carryovers reported in discontinued operations of $28.9 million on Jan. 1,
2007 and $17.8 million on Dec. 31, 2007.
The unrecognized tax benefit balance reported in continuing operations included $12.7 million and $9.8 million of tax
positions on Jan. 1, 2007 and Dec. 31, 2007, respectively, which if recognized would affect the annual effective tax
rate. In addition, the unrecognized tax benefit balance reported in continuing operations included $29.9 million and
$16.5 million of tax positions on Jan. 1, 2007 and Dec. 31, 2007, respectively, for which the ultimate deductibility is
highly certain but for which there is uncertainty about the timing of such deductibility. A change in the period of
deductibility would not affect the effective tax rate but would accelerate the payment of cash to the taxing authority to
an earlier period.
The change in the unrecognized tax benefit balance reported in continuing operations of $16.3 million from Jan. 1,
2007 to Dec. 31, 2007, was due to the addition of similar uncertain tax positions related to ongoing activity and the
resolution of certain federal and state audit matters. Xcel Energy’s amount of unrecognized tax benefits for continuing
operations could significantly change in the next 12 months as the IRS and state audits progress. At this time, due to
the uncertain nature of the audit process, it is not reasonably possible to estimate an overall range of possible change.
However, as state taxing authorities complete the audits that are currently in progress, it is reasonably possible that the
amount of unrecognized tax benefits in continuing operations could decrease up to $5 million.
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