CenterPoint Energy 2014 Annual Report Download - page 115

(a) Investment in Securities Related to ZENS
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 7.1 million shares of TW common stock (TW Common), 1.8 million
shares of
Time Warner Cable Inc. (TWC) common stock (TWC Common), 0.6 million
shares of AOL, Inc. (AOL) common stock (AOL Common) and
0.9 million
shares of Time Inc. common stock (Time Common) (together with the TW Common, TWC Common and AOL 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 billion of which $828 million
remain
outstanding at December 31, 2014 . 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, 2014
, 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 and 0.0625
share of Time
Common. On February 13, 2014, TWC announced that it had agreed to merge with Comcast Corporation (Comcast). In the merger, each share
of TWC Common would be exchanged for 2.875
shares of Comcast common stock (Comcast Common). Upon the closing of the merger
(assuming no change in the merger consideration), the reference shares for each ZENS note would include 0.360827
share of Comcast Common
in place of the current 0.125505 share of TWC 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, 2014
, ZENS having an
original principal amount of $828 million and a contingent principal amount of $751 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,
2014 , the market value of such shares was approximately $930 million , which would provide an exchange amount of $1,067 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.
105
(10)
Indexed Debt Securities (ZENS) and Securities Related to ZENS