Income Taxes

9 Months Ended

Sep. 30, 2011

Income Taxes [Abstract]

Income Taxes

 Income Taxes

During the three and nine months ended September 30, 2010, the effective tax rate was 38% and 44%, respectively.  During the three and nine months ended September 30, 2011, the effective tax rate was 38% and 39%, respectively.  The comparability of the effective tax rate for the nine months ended September 30, 2010 and 2011 is primarily affected by a non-cash, $19 million increase in the 2010 income tax expense as a result of a change in tax law upon the enactment in March 2010 of the Patient Protection and Affordable Care Act and the related Health Care and Education Reconciliation Act of 2010.

The change in tax law, which becomes effective for tax years beginning after December 31, 2012, eliminates the tax deductibility of the portion of retiree health care costs that are reimbursed by Medicare Part D subsidies.  Based upon the actuarially determined net present value of lost future retiree health care deductions related to the subsidies, CERC reduced its deferred tax asset by approximately $22 million in March 2010.  The portion of the reduction that CERC believes will be recovered through the regulatory process, or approximately $2 million, was recorded as an adjustment to regulatory assets.  The regulatory assets were also increased in March 2010 by approximately $1 million related to the recovery of CERC's income taxes.  The remaining $19 million of the reduction in CERC's deferred tax asset was recorded as a charge to income tax expense in the first quarter of 2010.

The following table summarizes CERC's unrecognized tax benefits at December 31, 2010 and September 30, 2011:

	December 31, 2010			September 30, 2011
	(in millions)
Unrecognized tax benefits	$	11		$	8
Portion of unrecognized tax benefits that, if recognized, would reduce the effective income tax rate		5			5
Interest accrued on unrecognized tax benefits		(5	)		(4	)

It is reasonably possible that the total amount of unrecognized tax benefits could decrease by as much as $1 million over the next 12 months primarily as a result of the anticipated resolution of CenterPoint Energy's administrative appeal associated with an Internal Revenue Service (IRS) examination, the conclusion of which would result in the final disposition of an uncontested adjustment proposed by the IRS relating to the capitalization into inventory of certain direct and indirect expenses incurred by CERC.  It is also reasonably possible that the total amount of unrecognized tax benefits could increase by as much as $17 million primarily as a result of the acceptance by the IRS of a refund claim related to the timing of a deduction for debt issuance costs.  Additionally, the capitalization of expenses into inventory and the deduction for debt issuance costs are temporary differences and, therefore, any increase or decrease in the balance of unrecognized tax benefits related thereto would not affect the effective tax rate.

In January 2011, the IRS commenced its examination of CenterPoint Energy's 2008 and 2009 consolidated federal income tax returns, of which CERC is a member.