Indexed Debt Securities (ZENS) and Securities Related to ZENS (CenterPoint Energy)

(a) Investment in Securities Related to ZENS

In 1995, CenterPoint Energy sold a cable television subsidiary to TW and received certain ZENS-Related Securities as partial consideration. A subsidiary of CenterPoint Energy holds shares of certain securities detailed in the table below, 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 ZENS-Related Securities are recorded in CenterPoint Energy’s Statements of Consolidated Income.



	Shares Held at December 31,
	2018	2017
AT&T Common	10,212,945	—
Charter Common	872,912	872,503
Time Common	—	888,392
TW Common	—	7,107,130

(b) ZENS

In September 1999, CenterPoint Energy issued ZENS having an original principal amount of $1 billion of which $828 million remained outstanding as of December 31, 2018. Each ZENS 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 are adjusted for certain corporate events.

On October 22, 2016, AT&T announced that it had entered into a definitive agreement to acquire TW in a stock and cash transaction. On February 15, 2017, TW shareholders approved the announced transaction with AT&T. The merger closed on June 14, 2018. CenterPoint Energy received $53.75 and 1.437 shares of AT&T Common for each share of TW Common held, resulting in cash proceeds of $382 million and 10,212,945 shares of AT&T Common. In accordance with the terms of the ZENS, CenterPoint Energy remitted $382 million to ZENS note holders in July 2018, which reduced the ZENS contingent principal amount.

On November 26, 2017, Meredith announced that it had entered into a definitive merger agreement with Time. Pursuant to the merger agreement, upon closing of the merger, a subsidiary of Meredith would purchase for cash all outstanding Time Common shares for $18.50 per share. The transaction was consummated on January 31, 2018. CenterPoint Energy elected to make a reference share offer adjustment and distribute additional interest, if any, in accordance with the terms of its ZENS rather than electing to increase the early exchange ratio to 100%. CenterPoint Energy’s distribution of additional interest in connection with the reference share offer was proportionate to the percentage of eligible shares that were validly tendered by Time stockholders in Meredith’s tender offer. CenterPoint Energy received $18.50 for each share of Time Common held, resulting in cash proceeds of approximately $16 million. In accordance with the terms of the ZENS, CenterPoint Energy distributed additional interest of approximately $16 million to ZENS holders on March 6, 2018, which reduced the ZENS contingent principal amount.

As a result, CenterPoint Energy recorded the following during the year ended December 31, 2018 related to the events discussed above:



	Meredith/Time			AT&T/TW
	(in millions)
Cash payment to ZENS note holders	$	16		$	382
Indexed debt – reduction	(4		)	(95		)
Indexed debt securities derivative – reduction	(1		)	(45		)
Loss on indexed debt securities	$	11		$	242

CenterPoint Energy’s reference shares for each ZENS consisted of the following:



	December 31,
	2018	2017
	(in shares)
AT&T Common	0.7185	—
Charter Common	0.061382	0.061382
Time Common	—	0.0625
TW Common	—	0.5

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, 2018, ZENS having an original principal amount of $828 million and a contingent principal amount of $93 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. As of December 31, 2018, the market value of such shares was approximately $540 million, which would provide an exchange amount of $620 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 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 ZENS-Related 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 ZENS-Related Securities and each component of CenterPoint Energy’s ZENS obligation.



	ZENS-Related Securities			Debt Component of ZENS			Derivative Component of ZENS
	(in millions)
Balance as of December 31, 2015	$	805		$	145		$	442
Accretion of debt component of ZENS	—			26			—
2% interest paid	—			(17		)	—
Sale of ZENS-Related Securities	(178		)	—			—
Distribution to ZENS holders	—			(40		)	(21		)
Loss on indexed debt securities	—			—			296
Gain on ZENS-Related Securities	326			—			—
Balance as of December 31, 2016	953			114			717
Accretion of debt component of ZENS	—			27			—
2% interest paid	—			(17		)	—
Distribution to ZENS holders	—			(2		)	—
Gain on indexed debt securities	—			—			(49		)
Gain on ZENS-Related Securities	7			—			—
Balance as of December 31, 2017	960			122			668
Accretion of debt component of ZENS	—			21			—
2% interest paid	—			(17		)	—
Sale of ZENS-Related Securities	(398		)	—			—
Distribution to ZENS holders	—			(102		)	(46		)
Gain on indexed debt securities	—			—			(21		)
Loss on ZENS-Related Securities	(22		)	—			—
Balance as of December 31, 2018	$	540		$	24		$	601