CenterPoint Energy 2008 Annual Report Download - page 110

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88
The following table presents additional information about assets or liabilities, including derivatives that are
measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair
value, for the year ended December 31, 2008:
Fair Value Measurements
Using Significant
Unobservable Inputs
(Level 3)
Derivative assets and
liabilities, net
(in millions)
Beginning liability balance as of January 1, 2008 ..............................................................
$
(3)
Total gains or (losses) (realized and unrealized):
Included in deferred fuel cost recovery ...........................................................................
(10)
Included in earnings .........................................................................................................
(11)
Purchases, sales, other settlements, net:
Included in deferred fuel cost recovery ...........................................................................
(41)
Included in earnings .........................................................................................................
6
Net transfers into Level 3................................................................................................
1
Ending liability balance as of December 31, 2008 .............................................................
$
(58)
The amount of total gains for the period included in earnings attributable to the
change in unrealized gains or losses relating to assets still held at the reporting
date ................................................................................................................................
$
7
(6) Indexed Debt Securities (ZENS) and Time Warner Securities
(a) Original Investment in Time Warner Securities
In 1995, the Company sold a cable television subsidiary to TW and received TW convertible preferred stock (TW
Preferred) as partial consideration. In July 1999, the Company converted its 11 million shares of TW Preferred into
45.8 million shares of TW Common. A subsidiary of the Company now holds 21.6 million shares of TW Common
which are classified as trading securities under SFAS No. 115 and are expected to be held to facilitate the
Company’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 Common are recorded in
the Company’s Statements of Consolidated Income.
(b) ZENS
In September 1999, the Company issued its ZENS having an original principal amount of $1.0 billion. ZENS are
exchangeable for cash equal to the market value of a specified number of shares of TW common. The Company
pays interest on the ZENS at an annual rate of 2% plus the amount of any quarterly cash dividends paid in respect of
the shares of TW Common 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 of TW
Common is less than or more than 2.309%. This is defined in the ZENS instrument as ―contingent principal.‖ At
December 31, 2008, ZENS having an original principal amount of $840 million and a contingent principal amount
of $817 million were outstanding and were exchangeable, at the option of the holders, for cash equal to 95% of the
market value of 21.6 million shares of TW Common deemed to be attributable to the ZENS. At December 31, 2008,
the market value of such shares was approximately $218 million, which would provide an exchange amount of $246
for each $1,000 original principal amount of ZENS. At maturity of the ZENS in 2029, the Company 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 TW Common, or other securities distributed with respect to TW Common.
The ZENS obligation is bifurcated into a debt component and a derivative component (the holder’s option to
receive the appreciated value of TW Common 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 the Company’s Statements of Consolidated