Income Taxes

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



	Year Ended December 31,
	2013			2012			2011
	(in millions)
Current income tax expense:
Federal	$	201		$	160		$	80
State	20			22			19
Total current expense	221			182			99
Deferred income tax expense (benefit):
Federal	(75		)	(69		)	146
State	—			—			3
Total deferred expense (benefit)	(75		)	(69		)	149
Total income tax expense	$	146		$	113		$	248

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,
	2013			2012			2011
	(in millions)
Income before income taxes and extraordinary item	$	415		$	392		$	736
Federal statutory income tax rate	35.0		%	35.0		%	35.0		%
Expected federal income tax expense	145			137			258
Increase (decrease) in tax expense resulting from:
State income tax expense, net of federal income tax	13			14			15
Amortization of investment tax credit	—			(1		)	(6		)
Decrease in settled and uncertain tax positions	(5		)	(26		)	(4		)
Other, net	(7		)	(11		)	(15		)
Total	1			(24		)	(10		)
Total income tax expense	$	146		$	113		$	248
Effective tax rate	35.2		%	28.8		%	33.7		%

CenterPoint Houston recognized a tax benefit of $5 million based on the settlement with the Internal Revenue Service (IRS) of outstanding tax claims for the 2002 and 2003 audit cycles in 2013.

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.

In September 2013, the U.S. Treasury issued final regulations addressing the tax consequences associated with the acquisition, production and improvement of tangible property. CenterPoint Houston does not expect the adoption of the regulations to have a material impact on its financial position, results of operations or cash flows.

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



	December 31,
	2013		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	80		95
Other	17		9
Total non-current deferred tax assets	97		104
Total deferred tax assets	100		105

Deferred tax liabilities:
Non-current:
Depreciation	1,166		1,103
Regulatory assets, net	966		1,098
Total deferred tax liabilities	2,132		2,201
Accumulated deferred income taxes, net	$	2,032	$	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,
	2013		2012			2011
	(in millions)
Balance, beginning of year	$	—	$	44		$	232
Tax Positions related to prior years:
Additions	—		—			—
Reductions	—		(46		)	(192		)

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

CenterPoint Houston has recognized the financial statement effects of all tax positions when it is more likely than not, based on the technical merits, that the positions would be sustained upon examination. CenterPoint Houston did not have any uncertain tax positions as of December 31, 2013. CenterPoint Houston does not expect the change to the amount of unrecognized tax benefits over the twelve months ending December 31, 2014 to have a material impact on financial position, results of operations and cash flows.

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 $18 million of unrecognized tax benefits that, if recognized, would have reduced the effective income tax rate for 2011. CenterPoint Houston recognizes interest and penalties as a component of income tax expense. CenterPoint Houston recognized approximately $-0-, $5 million and $12 million of income tax benefit related to interest on uncertain income tax positions during 2013, 2012 and 2011, respectively. CenterPoint Houston had approximately $6 million of interest on settled income tax positions accrued at December 31, 2013.

Tax Audits and Settlements. CenterPoint Energy’s consolidated federal income tax returns have been audited by the IRS and settled through the 2011 tax year. CenterPoint Energy is currently in the early stages of examination by the IRS for tax year 2012. CenterPoint Energy has considered the effects of these examinations in its accrual for settled issues and liability for uncertain income tax positions as of December 31, 2013.