CenterPoint Energy 2009 Annual Report Download - page 97

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75
(g) Capitalization of Interest and Allowance for Funds Used During Construction
Allowance for funds used during construction (AFUDC) represents the approximate net composite interest cost of
borrowed funds and a reasonable return on the equity funds used for construction. Although AFUDC increases both
utility plant and earnings, it is realized in cash when the assets are included in rates for subsidiaries that apply the
guidance for accounting for regulated operations. Interest and AFUDC are capitalized as a component of projects
under construction and will be amortized over the assets’ estimated useful lives. During 2007, 2008 and 2009,
CenterPoint Energy capitalized interest and AFUDC of $21 million, $12 million and $5 million, respectively.
(h) Income Taxes
CenterPoint Energy files a consolidated federal income tax return and follows a policy of comprehensive
interperiod tax allocation. CenterPoint Energy uses the asset and liability method of accounting for deferred income
taxes. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. Investment tax credits that were deferred are being amortized over the estimated lives of the related
property. A valuation allowance is established against deferred tax assets for which management believes realization
is not considered more likely than not. CenterPoint Energy recognizes interest and penalties as a component of
income tax expense. For additional information regarding income taxes, see Note 9.
(i) Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are net of an allowance for doubtful accounts of $35 million and $24 million at
December 31, 2008 and 2009, respectively. The provision for doubtful accounts in CenterPoint Energy’s Statements
of Consolidated Income for 2007, 2008 and 2009 was $45 million, $54 million and $36 million, respectively.
On October 9, 2009, CERC amended its receivables facility to extend the termination date to October 8, 2010.
Availability under CERC’s 364-day receivables facility ranges from $150 million to $375 million, reflecting
seasonal changes in receivables balances. At December 31, 2008 and 2009, the facility size was $128 million and
$150 million, respectively. As of December 31, 2008 and 2009, advances under the receivables facilities were
$78 million and $-0-, respectively.
(j) Inventory
Inventory consists principally of materials and supplies and natural gas. Materials and supplies are valued at the
lower of average cost or market. Natural gas inventories of CenterPoint Energy’s Competitive Natural Gas Sales and
Services business segment are also primarily valued at the lower of average cost or market. Natural gas inventories
of CenterPoint Energy’s Natural Gas Distribution business segment are primarily valued at weighted average cost.
During 2008 and 2009, CenterPoint Energy recorded $30 million and $6 million, respectively, in write-downs of
natural gas inventory to the lower of average cost or market.
December 31,
2008 2009
(In millions)
Materials and supplies ................................
.
$128 $138
N
atural gas ..................................................
.
441 189
Total inventory.....................................
.
$569 $327
(k) Derivative Instruments
CenterPoint Energy is exposed to various market risks. These risks arise from transactions entered into in the
normal course of business. CenterPoint Energy utilizes derivative instruments such as physical forward contracts,
swaps and options to mitigate the impact of changes in commodity prices and weather on its operating results and
cash flows. Such derivatives are recognized in CenterPoint Energy’s Consolidated Balance Sheets at their fair value
unless CenterPoint Energy elects the normal purchase and sales exemption for qualified physical transactions. A
derivative may be designated as a normal purchase or normal sale if the intent is to physically receive or deliver the
product for use or sale in the normal course of business.