CenterPoint Energy 2013 Annual Report Download - page 102

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(g) Capitalization of Interest and Allowance for Funds Used During Construction
Interest and allowance for funds used during construction (AFUDC) are capitalized as a component of projects under
construction and are amortized over the assets’ estimated useful lives once the assets are placed in service. AFUDC represents the
composite interest cost of borrowed funds and a reasonable return on the equity funds used for construction for subsidiaries that
apply the guidance for accounting for regulated operations. During 2013, 2012 and 2011, CenterPoint Energy capitalized interest
and AFUDC of $11 million, $9 million and $4 million, respectively. During 2013, 2012 and 2011, CenterPoint Energy recorded
AFUDC equity of $8 million, $6 million and $5 million, respectively, which is included in Other Income in its Statements of
Consolidated Income.
(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. A valuation allowance is established against
deferred tax assets for which management believes realization is not considered to be more likely than not. CenterPoint Energy
recognizes interest and penalties as a component of income tax expense.
(i) Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do not bear interest. It is the policy of management to review
the outstanding accounts receivable monthly, as well as the bad debt write-offs experienced in the past, and establish an allowance
for doubtful accounts. Account balances are charged off against the allowance when management determines it is probable the
receivable will not be recovered. Accounts receivable are net of an allowance for doubtful accounts of $28 million and $25 million
at December 31, 2013 and 2012, respectively. The provision for doubtful accounts in CenterPoint Energy’s Statements of
Consolidated Income for 2013, 2012 and 2011 was $21 million, $16 million and $26 million, 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. Materials and supplies are recorded to inventory when purchased and subsequently charged to expense
or capitalized to plant when installed. Natural gas inventories of CenterPoint Energy’s Energy 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 2013, 2012 and 2011, CenterPoint Energy recorded $4
million, $4 million and $11 million, respectively, in write-downs of natural gas inventory to the lower of average cost or market.
December 31,
2013 2012
Materials and supplies ................................................................................................................ $ 140 $ 177
Natural gas .................................................................................................................................. 145 145
Total inventory..................................................................................................................... $ 285 $ 322
(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.
CenterPoint Energy has a Risk Oversight Committee composed of corporate and business segment officers that oversees all
commodity price, weather and credit risk activities, including CenterPoint Energy’s marketing, risk management services and
hedging activities. The committee’s duties are to establish CenterPoint Energy’s commodity risk policies, allocate board-approved