CenterPoint Energy 2010 Annual Report Download - page 130

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next 12 months primarily as a result of the tax normalization issue, a temporary difference, and the anticipated
resolution of CenterPoint Energy’s administrative appeal associated with an IRS examination described below.
CenterPoint Energy has approximately $14 million, $10 million and $17 million of unrecognized tax benefits
that, if recognized, would reduce the effective income tax rate for 2008, 2009 and 2010, respectively. CenterPoint
Energy recognizes interest and penalties as a component of income tax expense. CenterPoint Energy recognized
approximately $6 million of income tax expense, $7 million of income tax benefit and $8 million of income tax
expense related to interest on uncertain income tax positions during 2008, 2009 and 2010, respectively. CenterPoint
Energy had approximately $3 million and $12 million of interest on uncertain income tax positions accrued at
December 31, 2009 and 2010, respectively.
Tax Audits and Settlements. CenterPoint Energy’s consolidated federal income tax returns have been audited and
settled through the 2005 tax year. As further described in the following paragraph, CenterPoint Energy has an
administrative appeal pending before the IRS’s Appeals Division related to tax years 2006 through 2007. In January
2011, the IRS commenced its examination of CenterPoint Energy’s 2008 and 2009 consolidated federal income tax
returns.
In July 2010, the IRS issued a report outlining proposed adjustments with respect to its examination of
CenterPoint Energy’s 2006 and 2007 federal income tax returns. The most significant adjustment proposed by the
IRS relates to the disallowance of CenterPoint Energy’s casualty loss deduction totaling $603 million associated
with the damage caused by Hurricane Ike. Pursuant to an election made by CenterPoint Energy, the casualty loss
deduction was taken in the taxable year preceding the taxable year in which the hurricane occurred. CenterPoint
Energy has filed an administrative appeal with the IRS’s Appeals Division and intends to vigorously defend its
reporting of the casualty loss. CenterPoint Energy has considered the effects of the proposed disallowance of the
casualty loss deduction by the IRS in its accrual for uncertain income tax positions as of December 31, 2010.
Additionally, the casualty loss deduction is a temporary difference and, therefore, any increase or decrease in the
balance of unrecognized tax benefits related thereto would not affect the effective tax rate.
As of December 31, 2010, CenterPoint Energy’s taxes receivable includes an estimated liability of approximately
$31 million associated with an increase in income taxes plus applicable interest related to CenterPoint Energy’s
1998 federal income tax return. The estimated liability is attributable to a proposed reduction by the IRS in RRI’s
net operating loss in a post-distribution period that was carried back to the 1998 tax year, a tax year during which
CenterPoint and RRI joined in the filing of a consolidated federal income tax return. Pursuant to an agreement
between RRI and CenterPoint Energy, RRI agreed to indemnify CenterPoint Energy against any increase in tax and
applicable IRS interest related to a reduction in net operating loss deductions in a pre-distribution period carried
back from a post-distribution period. The indemnification receivable totaling approximately $27 million, net of tax,
has been reflected in CenterPoint Energy’s accounts receivable.
(13) Commitments and Contingencies
(a) Natural Gas Supply Commitments
Natural gas supply commitments include natural gas contracts related to CenterPoint Energy’s Natural Gas
Distribution and Competitive Natural Gas Sales and Services business segments, which have various quantity
requirements and durations, that are not classified as non-trading derivative assets and liabilities in CenterPoint
Energy’s Consolidated Balance Sheets as of December 31, 2009 and 2010 as these contracts meet the exception to
be classified as "normal purchases contracts" or do not meet the definition of a derivative. Natural gas supply
commitments also include natural gas transportation contracts that do not meet the definition of a derivative. As of
December 31, 2010, minimum payment obligations for natural gas supply commitments are approximately
$502 million in 2011, $496 million in 2012, $437 million in 2013, $312 million in 2014, $193 million in 2015 and
$453 million after 2015.