CenterPoint Energy 2009 Annual Report Download - page 111

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In June 2009, the Texas Supreme Court granted the petitions for review of the court of appeals decision. Oral
argument before the court was held in October 2009. Although CenterPoint Energy and CenterPoint Houston
believe that CenterPoint Houston’s true-up request is consistent with applicable statutes and regulations and,
accordingly, that it is reasonably possible that it will be successful in its appeal to the Texas Supreme Court,
CenterPoint Energy can provide no assurance as to the ultimate court rulings on the issues to be considered in the
appeal or with respect to the ultimate decision by the Texas Utility Commission on the tax normalization issue
described below.
To reflect the impact of the True-Up Order, in 2004 and 2005, CenterPoint Energy recorded a net after-tax
extraordinary loss of $947 million. No amounts related to the district court’s judgment or the decision of the court of
appeals have been recorded in CenterPoint Energy’s consolidated financial statements. However, if the court of
appeals decision is not reversed or modified as a result of further review by the Texas Supreme Court, CenterPoint
Energy anticipates that it would be required to record an additional loss to reflect the court of appeals decision. The
amount of that loss would depend on several factors, including ultimate resolution of the tax normalization issue
described below and the calculation of interest on any amounts CenterPoint Houston ultimately is authorized to
recover or is required to refund beyond the amounts recorded based on the True-Up Order, but could range from
$180 million to $410 million (pre-tax) plus interest subsequent to December 31, 2009.
In the True-Up Order, the Texas Utility Commission reduced CenterPoint Houston’s stranded cost recovery by
approximately $146 million, which was included in the extraordinary loss discussed above, for the present value of
certain deferred tax benefits associated with its former electric generation assets. CenterPoint Energy believes that
the Texas Utility Commission based its order on proposed regulations issued by the Internal Revenue Service (IRS)
in March 2003 that would have allowed utilities owning assets that were deregulated before March 4, 2003 to make
a retroactive election to pass the benefits of Accumulated Deferred Investment Tax Credits (ADITC) and Excess
Deferred Federal Income Taxes (EDFIT) back to customers. However, the IRS subsequently withdrew those
proposed normalization regulations and, in March 2008, adopted final regulations that would not permit utilities like
CenterPoint Houston to pass the tax benefits back to customers without creating normalization violations. In
addition, CenterPoint Energy received a Private Letter Ruling (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 CenterPoint Energy 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 CenterPoint Energy’s 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 has challenged that order by the court of appeals although the
Texas Supreme Court has the authority to consider all aspects of the rulings above, not just those challenged
specifically by the appellants. CenterPoint Energy and CenterPoint Houston will continue to pursue a favorable
resolution of this issue through the appellate and 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.
The Texas electric restructuring law allowed the amounts awarded to CenterPoint Houston in the Texas Utility
Commission’s True-Up Order to be recovered either through securitization or through implementation of a
competition transition charge (CTC) or both. Pursuant to a financing order issued by the Texas Utility Commission
in March 2005 and affirmed by a Travis County district court, in December 2005, a new special purpose subsidiary
of CenterPoint Houston issued $1.85 billion in transition bonds with interest rates ranging from 4.84% to 5.30% and
final maturity dates ranging from February 2011 to August 2020. Through issuance of the transition bonds,