CenterPoint Energy 2010 Annual Report Download - page 123

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101
December 31, 2009
December 31, 2010
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
(in millions)
Financial liabilities:
Long-term debt .................................................................................................
$ 9,900
$ 10,413
$ 9,303
$10,071
(9) Indexed Debt Securities (ZENS) and Time Warner Securities
(a) Investment in Time Warner Securities
In 1995, CenterPoint Energy sold a cable television subsidiary to Time Warner, Inc. (TW) and received TW
securities as partial consideration. A subsidiary of CenterPoint Energy now holds 7.2 million shares of TW common
stock (TW Common), 1.8 million shares of Time Warner Cable Inc. (TWC) common stock (TWC Common) and
0.7 million shares of AOL, Inc. (AOL) common stock (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 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, CenterPoint Energy issued ZENS having an original principal amount of $1.0 billion of
which $840 million remain outstanding at December 31, 2010. 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, 2010, 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.
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%. The adjusted principal amount is defined in the ZENS instrument as
―contingent principal.‖ At December 31, 2010, ZENS having an original principal amount of $840 million and a
contingent principal amount of $805 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, 2010, the market value of such shares was approximately $367 million, which would provide an
exchange amount of $415 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. 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.