CenterPoint Energy 2008 Annual Report Download - page 45

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pass the tax benefits back to customers without creating normalization violations. In addition, we received a PLR
from the IRS in August 2007, prior to adoption of the final regulations that confirmed that the Texas Utility
Commission’s order reducing CenterPoint Houston’s stranded cost recovery by $146 million for ADITC and EDFIT
would cause normalization violations with respect to the ADITC and EDFIT.
If the Texas Utility Commission’s order relating to the ADITC reduction is not reversed or otherwise modified on
remand so as to eliminate the normalization violation, the IRS could require us to pay an amount equal to
CenterPoint Houston’s unamortized ADITC balance as of the date that the normalization violation is deemed to
have occurred. In addition, the IRS could deny CenterPoint Houston the ability to elect accelerated tax depreciation
benefits beginning in the taxable year that the normalization violation is deemed to have occurred. Such treatment, if
required by the IRS, could have a material adverse impact on our results of operations, financial condition and cash
flows in addition to any potential loss resulting from final resolution of the True-Up Order. In its opinion, the court
of appeals ordered that this issue be remanded to the Texas Utility Commission, as that commission requested. No
party, in the petitions for review or briefs filed with the Texas Supreme Court, has challenged that order by the court
of appeals, though the Texas Supreme Court, if it grants review, will have authority to consider all aspects of the
rulings above, not just those challenged specifically by the appellants. We and CenterPoint Houston will continue to
pursue a favorable resolution of this issue through the appellate or administrative process. Although the Texas
Utility Commission has not previously required a company subject to its jurisdiction to take action that would result
in a normalization violation, no prediction can be made as to the ultimate action the Texas Utility Commission may
take on this issue on remand.
CenterPoint Houston must seek recovery of significant restoration costs arising from Hurricane Ike.
CenterPoint Houston’s electric delivery system suffered substantial damage as a result of Hurricane Ike, which
struck the upper Texas coast on September 13, 2008. CenterPoint Houston estimates that total costs to restore the
electric delivery facilities damaged as a result of Hurricane Ike will be in the range of $600 million to $650 million.
CenterPoint Houston believes it is entitled to recover prudently incurred storm costs in accordance with
applicable regulatory and legal principles. The Texas Legislature currently is considering passage of legislation that
would (i) authorize the Texas Utility Commission to determine the amount of storm restoration costs that
CenterPoint Houston would be entitled to recover and (ii) permit the Texas Utility Commission to issue a financing
order that would allow CenterPoint Houston to recover the amount of storm restoration costs determined in such a
proceeding through issuance of dedicated securitization bonds, which would be repaid over time through a charge
imposed on REPs. In proceedings to determine and seek recovery of storm restoration costs under the proposed
legislation, CenterPoint Houston would be required to prove to the Texas Utility Commission’s satisfaction its
prudently incurred costs as well as to demonstrate the cost benefit from using securitization to recover those costs
instead of alternative means. Alternatively, CenterPoint Houston has the right to seek recovery of these costs under
traditional rate making principles. CenterPoint Houston’s failure to recover costs incurred as a result of Hurricane
Ike could adversely affect its liquidity, results of operations and financial condition. For more information about
CenterPoint Houston’s recovery from Hurricane Ike, please read ―Business — Electric Transmission &
Distribution — Hurricane Ike‖ in Item 1 of this report.
CenterPoint Houston’s receivables are concentrated in a small number of retail electric providers, and any
delay or default in payment could adversely affect CenterPoint Houston’s cash flows, financial condition and
results of operations.
CenterPoint Houston’s receivables from the distribution of electricity are collected from REPs that supply the
electricity CenterPoint Houston distributes to their customers. As of December 31, 2008, CenterPoint Houston did
business with 79 REPs. Adverse economic conditions, structural problems in the market served by ERCOT or
financial difficulties of one or more REPs could impair the ability of these REPs to pay for CenterPoint Houston’s
services or could cause them to delay such payments. In 2008, seven REPs selling power within CenterPoint
Houston’s service territory ceased to operate, and their customers were transferred to the provider of last resort or to
other REPs. CenterPoint Houston depends on these REPs to remit payments on a timely basis. Applicable regulatory
provisions require that customers be shifted to a provider of last resort if a REP cannot make timely payments.
Applicable Texas Utility Commission regulations significantly limit the extent to which CenterPoint Houston can
demand credit protection from REPs for payments not made prior to the shift to the provider of last resort. However,