Income Taxes

The components of CenterPoint Houston’s income tax expense were as follows:



	Year Ended December 31,
	2010			2011		2012
	(in millions)
Current income tax expense:
Federal	$	105		$	80	$	160
State	17			19		22
Total current expense	122			99		182
Deferred income tax expense (benefit):
Federal	(5		)	146		(69		)
State	(1		)	3		—
Total deferred expense (benefit)	(6		)	149		(69		)
Total income tax expense	$	116		$	248	$	113

A reconciliation of the expected federal income tax expense using the federal statutory income tax rate to the actual income tax expense and resulting effective income tax rate is as follows:



	Year Ended December 31,
	2010			2011			2012
	(in millions)
Income before income taxes and extraordinary item	$	316		$	736		$	392
Federal statutory income tax rate	35.0		%	35.0		%	35.0		%
Expected federal income tax expense	111			258			137
Increase (decrease) in tax expense resulting from:
State income tax expense, net of federal income tax	10			15			14
Amortization of investment tax credit	(7		)	(6		)	(1		)
Increase (decrease) in settled and uncertain tax positions	9			(4		)	(26		)
Other, net	(7		)	(15		)	(11		)
Total	5			(10		)	(24		)
Total income tax expense	$	116		$	248		$	113
Effective tax rate	36.7		%	33.7		%	28.8		%

CenterPoint Houston recorded a net decrease in income tax expense of $26 million related to the release of certain income tax reserves due to its settlements with the Internal Revenue Service (IRS) in 2012. The remaining $1 million of investment tax credit was completely amortized in 2012.

As a result of the enactment in March 2010 of the Patient Protection and Affordable Care Act and the related Health Care and Education Reconciliation Act of 2010, a portion of retiree health care costs that are reimbursed by Medicare Part D subsidies will no longer be tax deductible effective for tax years beginning after December 31, 2012. Based upon the actuarially determined net present value of lost future retiree health care deductions related to the subsidies, CenterPoint Houston reduced its deferred tax asset related to future retiree health care deductions by approximately $7 million in March 2010. The entire reduction in the deferred tax asset was recorded as an adjustment to regulatory assets because CenterPoint Houston believes it will be recovered through the regulatory process. Additionally, the regulatory assets were adjusted in March 2010 by approximately $4 million related to the recovery of CenterPoint Houston’s income taxes.

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities were as follows:



	December 31,
	2011		2012
	(in millions)
Deferred tax assets:
Current:
Allowance for doubtful accounts	$	1	$	1
Other	2		—
Total current deferred tax assets	3		1
Non-current:
Employee benefits	94		95
Other	10		9
Total non-current deferred tax assets	104		104
Total deferred tax assets	107		105

Deferred tax liabilities:
Non-current:
Depreciation	943		1,103
Regulatory assets, net	1,274		1,098
Total deferred tax liabilities	2,217		2,201
Accumulated deferred income taxes, net	$	2,110	$	2,096

CenterPoint Houston is included in the consolidated income tax returns of CenterPoint Energy. CenterPoint Houston calculates its income tax provision on a separate return basis under a tax sharing agreement with CenterPoint Energy.

Uncertain Income Tax Positions. The following table reconciles the beginning and ending balance of CenterPoint Houston’s unrecognized tax benefits:



	December 31,
	2010			2011			2012
	(in millions)
Balance, beginning of year	$	175		$	232		$	44
Tax Positions related to prior years:
Additions	10			—			—
Reductions	(3		)	(192		)	(46		)

Tax Positions related to current year:
Additions	50			4			—
Settlements	—			—			2
Balance, end of year	$	232		$	44		$	—

Unrecognized tax benefits were reduced to zero during 2012 primarily due to the re-measurement of certain unrecognized tax benefits related to an IRS issuance of new guidance with respect to repairs on tangible property and CenterPoint Energy's IRS settlements for tax years 2006 through 2009.

CenterPoint Houston had approximately $14 million and $18 million of unrecognized tax benefits that, if recognized, would have reduced the effective income tax rate for 2010 and 2011, respectively. CenterPoint Houston recognizes interest and penalties as a component of income tax expense. CenterPoint Houston recognized approximately $8 million of income tax expense, $12 million of income tax benefit and $5 million of income tax benefit related to interest on uncertain income tax positions during 2010, 2011 and 2012, respectively. CenterPoint Houston had approximately $5 million of interest on uncertain income tax positions accrued at December 31, 2011.

Tax Audits and Settlements. CenterPoint Energy's consolidated federal income tax returns have been audited and settled through the 2009 tax year. CenterPoint Energy has filed claims for income tax refunds that are pending review by the IRS for tax years 2002, 2003 and 2004. CenterPoint Energy is currently under examination by the IRS for tax years 2010 and 2011 and is at various stages of the examination process. CenterPoint Houston has considered the effects of these examinations in its accrual for settled issues and liability for uncertain income tax positions as of December 31, 2012.