CenterPoint Energy 2009 Annual Report Download - page 119

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stock (AOL Common) for every 11 shares of TW Common held. A subsidiary of CenterPoint Energy now holds 7.2
million shares of TW Common, 1.8 million shares of TWC Common and 0.7 million shares of AOL Common
(together with the TW Common and TWC Common, the TW Securities) which are classified as trading securities
and are expected to be held to facilitate CenterPoint Energy’s ability to meet its obligation under the 2.0% Zero-
Premium Exchangeable Subordinated Notes due 2029 (ZENS). Unrealized gains and losses resulting from changes
in the market value of the TW Securities are recorded in CenterPoint Energy’s Statements of Consolidated Income.
(b) ZENS
In September 1999, we issued ZENS having an original principal amount of $1.0 billion of which $840 million
remain outstanding at December 31, 2009. Each ZENS note was originally exchangeable at the holder’s option at
any time for an amount of cash equal to 95% of the market value of the reference shares of TW Common
attributable to such note. The number and identity of the reference shares attributable to each ZENS note are
adjusted for certain corporate events. As of December 31, 2009, the reference shares for each ZENS note consisted
of 0.5 share of TW Common, 0.125505 share of TWC Common and 0.045455 share of AOL Common, which
reflects adjustments resulting from the March 2009 distribution by TW of shares of TWC Common, TW’s March
2009 reverse stock split and the December 2009 distribution by TW of shares of AOL Common. CenterPoint
Energy pays interest on the ZENS at an annual rate of 2% plus the amount of any quarterly cash dividends paid in
respect of the reference shares attributable to the ZENS. The principal amount of ZENS is subject to being increased
or decreased to the extent that the annual yield from interest and cash dividends on the reference shares is less than
or more than 2.309%. This is defined in the ZENS instrument as “contingent principal.” At December 31, 2009,
ZENS having an original principal amount of $840 million and a contingent principal amount of $814 million were
outstanding and were exchangeable, at the option of the holders, for cash equal to 95% of the market value of
reference shares deemed to be attributable to the ZENS. At December 31, 2009, the market value of such shares was
approximately $300 million, which would provide an exchange amount of $340 for each $1,000 original principal
amount of ZENS. At maturity of the ZENS in 2029, CenterPoint Energy will be obligated to pay in cash the higher
of the contingent principal amount of the ZENS or an amount based on the then-current market value of the
reference shares, which will include any additional publicly-traded securities distributed with respect to the current
reference shares prior to maturity.
The ZENS obligation is bifurcated into a debt component and a derivative component (the holder’s option to
receive the appreciated value of the reference shares at maturity). The bifurcated debt component accretes through
interest charges at 17.4% annually up to the contingent principal amount of the ZENS in 2029. Such accretion will
be reduced by annual cash interest payments, as described above. The derivative component is recorded at fair value
and changes in the fair value of the derivative component are recorded in CenterPoint Energy’s Statements of
Consolidated Income. During 2007, 2008 and 2009, CenterPoint Energy recorded a gain (loss) of $(114) million,
$(139) million and $82 million, respectively, on CenterPoint Energy’s investment in TW Securities. During 2007,
2008 and 2009, CenterPoint Energy recorded a gain (loss) of $111 million, $128 million and $(68) million,
respectively, associated with the fair value of the derivative component of the ZENS obligation. Changes in the fair
value of the TW Securities held by CenterPoint Energy are expected to substantially offset changes in the fair value
of the derivative component of the ZENS.