CenterPoint Energy 2012 Annual Report Download - page 106

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84
(b) ZENS
In September 1999, CenterPoint Energy issued ZENS having an original principal amount of $1 billion of which $840 million
remain outstanding at December 31, 2012. 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,
2012, 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, 2012, ZENS having an original principal amount of $840 million and a contingent principal amount of $784 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, 2012, the market value of such shares was approximately
$540 million, which would provide an exchange amount of $611 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 17.3%
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.
The following table sets forth summarized financial information regarding CenterPoint Energy’s investment in TW Securities
and each component of CenterPoint Energy’s ZENS obligation (in millions).
TW
Securities
Debt
Component
of ZENS
Derivative
Component
of ZENS
Balance at December 31, 2009 ....................................................................... $ 300 $ 121 $ 201
Accretion of debt component of ZENS ........................................................ — 22 —
2% interest paid ............................................................................................ —(17) —
Loss on indexed debt securities.................................................................... — — 31
Gain on TW Common................................................................................... 67 — —
Balance at December 31, 2010 ....................................................................... 367 126 232
Accretion of debt component of ZENS ........................................................ — 22 —
2% interest paid ............................................................................................ —(17) —
Gain on indexed debt securities.................................................................... — — (35)
Gain on TW Securities.................................................................................. 19 — —
Balance at December 31, 2011........................................................................ 386 131 197
Accretion of debt component of ZENS ........................................................ — 24 —
2% interest paid ............................................................................................ —(17) —
Loss on indexed debt securities.................................................................... — — 71
Gain on TW Securities.................................................................................. 154 — —
Balance at December 31, 2012 ....................................................................... $ 540 $ 138 $ 268