Xcel Energy 2006 Annual Report Download - page 120

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dismissal on the pleadings, which was heard on Aug. 16, 2006. In November 2006, the court issued an order denying NSP-
Minnesota’s motion. On Nov. 28, 2006, pursuant to a motion by NSP-Minnesota, the court certified the issues raised in NSP-
Minnesota’s original motion as important and doubtful. This certification permits NSP-Minnesota to file an appeal, and it has done so.
Comer vs. Xcel Energy Inc. et al. — On April 25, 2006, Xcel Energy received notice of a purported class action lawsuit filed in U.S.
District Court for the Southern District of Mississippi. The lawsuit names more than 45 oil, chemical and utility companies, including
Xcel Energy, as defendants and alleges that defendants’ CO2 “were a proximate and direct cause of the increase in the destructive
capacity of Hurricane Katrina.” Plaintiffs allege in support of their claim, several legal theories, including negligence and public and
private nuisance and seek damages related to the loss resulting from the hurricane. Xcel Energy believes this lawsuit is without merit
and intends to vigorously defend itself against these claims. On July 19, 2006, Xcel Energy filed a motion to dismiss the lawsuit in its
entirety.
Qwest vs. Xcel Energy Inc. — On June 24, 2004, an employee of PSCo, was injured when a pole, owned by Qwest malfunctioned.
The employee is seeking damages of approximately $7 million. On Sept. 6, 2005, an action against Qwest relating to incident was
filed in Denver District Court by the employee. On April 18, 2006, Qwest filed a third party complaint against PSCo based on terms in
a joint pole use agreement between Qwest and PSCo. Pursuant to this agreement, Qwest has asserted that PSCo had an affirmative
duty to properly train and instruct its employees on pole safety, including testing the pole for soundness before climbing. PSCo filed a
counterclaim on May 15, 2006, against Qwest asserting Qwest had a duty to PSCo and an obligation under the contract to maintain its
poles in a safe and serviceable condition. This case is still in the discovery phase and set for a 7 day jury trial beginning May 14, 2007.
Other Contingencies
Tax Matters — In April 2004, Xcel Energy filed a lawsuit against the U.S. government in the U.S. District Court for the District of
Minnesota to establish its right to deduct the interest expense that had accrued during tax years 1993 and 1994 on policy loans related
to the COLI policies.
After Xcel Energy filed this suit, the IRS sent two statutory notices of deficiency of tax, penalty and interest for 1995 through 1999.
Xcel Energy has filed U.S. Tax Court petitions challenging those notices. Xcel Energy anticipates the dispute relating to its interest
expense deductions will be resolved in the refund suit that is pending in the Minnesota Federal District Court and the Tax Court
petitions will be held in abeyance pending the outcome of the refund litigation. In the third quarter of 2006, Xcel Energy also received
a statutory notice of deficiency from the IRS for tax years 2000 through 2002 and timely filed a Tax Court petition challenging the
denial of the COLI interest expense deductions for those years.
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.
On May 5, 2006, Xcel Energy filed a second motion for summary judgment. On Aug. 18, 2006, the U.S. government filed a second
motion for summary judgment. On Feb. 14, 2007, the Magistrate Judge issued his Report and Recommendation (R&R) to the Judge
concerning both motions. In his R&R the Magistrate Judge recommends both motions be denied due to fact issues in dispute. Both
parties will have an opportunity to file objections by March 5, 2007 to the Magistrate Judge’s recommendations. The Judge will then
have broad authority to, among other things, accept or reject the recommendations in whole or in part. If both sides’ motions are
ultimately denied, a trial is set to begin on July 24, 2007.
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, and has continued to take deductions
for interest expense on policy loans on its income tax returns for subsequent years. 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. The ultimate resolution of this matter is uncertain and 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, 2006, would reduce earnings by an estimated
$421 million. Xcel Energy has received formal notification that the IRS will seek penalties. If penalties (plus associated interest) also
are included, the total exposure through Dec. 31, 2006, is approximately $499 million. In addition, Xcel Energy’s annual earnings for
2007 would be reduced by approximately $49 million, after tax, or 11 cents per share, if COLI interest expense deductions were no
longer available.
Energy Efficiency and Renewables Law — On March 17, 2006, Governor Doyle signed into law 2005 Wisconsin Act 141 containing
the Governor’s Task Force recommendations on energy efficiency and renewables. The bill sets a statewide renewable portfolio
standard (RPS) of 10 percent by 2015 and revises the funding mechanism and administrative responsibilities for the state’s energy
efficiency program.
Two rulemaking dockets were subsequently initiated at the PSCW to provide the regulatory framework for administering this statute.
Docket 1-AC-220 will create Wisconsin Administrative Code PSC Chapter 137 to establish a structure under which energy utilities