-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TR1leYtaleWYhyDpoPPEJc7lWoQ5yMaoFqSCwLWjdD6l0iyS0KUeT2xmP86lF2rv 3j8hl7tetwXJiVyYQ85wRw== 0001104659-03-026136.txt : 20031113 0001104659-03-026136.hdr.sgml : 20031113 20031113132913 ACCESSION NUMBER: 0001104659-03-026136 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNION LIGHT HEAT & POWER CO CENTRAL INDEX KEY: 0000100858 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 310473080 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 002-07793 FILM NUMBER: 03997047 BUSINESS ADDRESS: STREET 1: 139 E FOURTH ST STREET 2: C/O TREASURER DEPT, PO BOX 960 CITY: CINCINNATI STATE: OH ZIP: 45201 BUSINESS PHONE: 5133812000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CINERGY CORP CENTRAL INDEX KEY: 0000899652 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 311385023 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11377 FILM NUMBER: 03997046 BUSINESS ADDRESS: STREET 1: 139 E FOURTH ST CITY: CINCINNATI STATE: OH ZIP: 45202 BUSINESS PHONE: 5132872644 MAIL ADDRESS: STREET 1: 139 E FOURTH STREET STREET 2: P.O BOX 960 CITY: CINCINATI STATE: OH ZIP: 45202 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CINCINNATI GAS & ELECTRIC CO CENTRAL INDEX KEY: 0000020290 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 310240030 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-01232 FILM NUMBER: 03997049 BUSINESS ADDRESS: STREET 1: 139 E FOURTH ST ROOM 362-ANNEX STREET 2: PO BOX 960 CITY: CINCINNATI STATE: OH ZIP: 45202 BUSINESS PHONE: 5132872291 MAIL ADDRESS: STREET 1: 139 E. FOURTH ST. STREET 2: PO BOX 960 CITY: CINCINNATTI STATE: OH ZIP: 45202 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PSI ENERGY INC CENTRAL INDEX KEY: 0000081020 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 350594457 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03543 FILM NUMBER: 03997048 BUSINESS ADDRESS: STREET 1: 1000 EAST MAIN STREET STREET 2: PO BOX 960 CITY: PLAINFIELD STATE: IN ZIP: 46168 BUSINESS PHONE: 3178399611 MAIL ADDRESS: STREET 1: 1000 EAST MAIN STREET STREET 2: PO BOX 960 CITY: PLAINFIELD STATE: IN ZIP: 46168 FORMER COMPANY: FORMER CONFORMED NAME: PUBLIC SERVICE CO OF INDIANA INC DATE OF NAME CHANGE: 19900509 10-Q 1 a03-4769_110q.htm 10-Q

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

ý  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2003

 

or

 

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from             to             

 

Commission
File Number

 

Registrant, State of Incorporation,
Address and Telephone Number

 

I.R.S. Employer
Identification No.

 

 

 

 

 

1-11377

 

CINERGY CORP.

 

31-1385023

 

 

(A Delaware Corporation)
139 East Fourth Street
Cincinnati, Ohio 45202
(513) 421-9500

 

 

 

 

 

 

 

1-1232

 

THE CINCINNATI GAS & ELECTRIC COMPANY

 

31-0240030

 

 

(An Ohio Corporation)
139 East Fourth Street
Cincinnati, Ohio 45202
(513) 421-9500

 

 

 

 

 

 

 

1-3543

 

PSI ENERGY, INC.

 

35-0594457

 

 

(An Indiana Corporation)
1000 East Main Street
Plainfield, Indiana 46168
(513) 421-9500

 

 

 

 

 

 

 

2-7793

 

THE UNION LIGHT, HEAT AND POWER COMPANY

 

31-0473080

 

 

(A Kentucky Corporation)
139 East Fourth Street
Cincinnati, Ohio 45202
(513) 421-9500

 

 

 


 

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.

Yes ý  No o

 


 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ý  No o


 

This combined Form 10-Q is separately filed by Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The Union Light, Heat and Power Company.  Information contained herein relating to any individual registrant is filed by such registrant on its own behalf.  Each registrant makes no representation as to information relating to the other registrants.

 

The Union Light, Heat and Power Company meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing its company specific information with the reduced disclosure format specified in General Instruction H(2) of Form 10-Q.

 


 

As of October 31, 2003, shares of common stock outstanding for each registrant were as listed:

 

Registrant

 

Description

 

Shares

 

 

 

 

 

 

 

Cinergy Corp.

 

Par value $.01 per share

 

178,070,206

 

 

 

 

 

 

 

The Cincinnati Gas & Electric Company

 

Par value $8.50 per share

 

89,663,086

 

 

 

 

 

 

 

PSI Energy, Inc.

 

Without par value, stated value $.01 per share

 

53,913,701

 

 

 

 

 

 

 

The Union Light, Heat and Power Company

 

Par value $15.00 per share

 

585,333

 

 


 

 

2



 

TABLE OF CONTENTS

 

Item
Number

 

 

PART I  FINANCIAL INFORMATION

 

 

 

1

 

Financial Statements

 

 

Cinergy Corp.

 

 

Condensed Consolidated Statements of Income

 

 

Condensed Consolidated Balance Sheets

 

 

Condensed Consolidated Statements of Changes in Common Stock Equity

 

 

Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

The Cincinnati Gas & Electric Company

 

 

Condensed Consolidated Statements of Income and Comprehensive Income

 

 

Condensed Consolidated Balance Sheets

 

 

Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

PSI Energy, Inc.

 

 

Condensed Consolidated Statements of Income and Comprehensive Income

 

 

Condensed Consolidated Balance Sheets

 

 

Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

The Union Light, Heat and Power Company

 

 

Condensed Statements of Income

 

 

Condensed Balance Sheets

 

 

Condensed Statements of Cash Flows

 

 

 

 

 

Notes to Condensed Financial Statements

 

 

 

 

 

Cautionary Statements Regarding Forward-Looking Information

 

 

 

2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

Introduction

 

 

Organization

 

 

Liquidity and Capital Resources

 

 

2003 Quarterly Results of Operations - Historical

 

 

2003 Year to Date Results of Operations - Historical

 

 

Results of Operations - Future

 

 

 

3

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

4

 

Controls and Procedures

 

 

 

PART II  OTHER INFORMATION

 

 

 

1

 

Legal Proceedings

 

 

 

4

 

Submission of Matters to a Vote of Security Holders

 

 

 

6

 

Exhibits and Reports on Form 8-K

 

 

 

 

 

Signatures

 

3



 

CINERGY CORP.

AND SUBSIDIARY COMPANIES

 

4



 

CINERGY CORP.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

 

 

Quarter Ended
September 30

 

Year to Date
September 30

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

(dollars in thousands, except per share amounts)
(unaudited)

 

Operating Revenues (Note 1(g)(i))

 

 

 

 

 

 

 

 

 

Electric

 

$

920,638

 

$

965,435

 

$

2,512,954

 

$

2,531,283

 

Gas

 

124,533

 

104,073

 

638,378

 

374,345

 

Other

 

46,806

 

49,730

 

142,525

 

89,291

 

Total Operating Revenues

 

1,091,977

 

1,119,238

 

3,293,857

 

2,994,919

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

Fuel and purchased and exchanged power (Note 1(g)(i))

 

329,997

 

302,366

 

840,332

 

761,858

 

Gas purchased (Note 1(g)(i))

 

79,582

 

49,283

 

368,896

 

188,725

 

Operation and maintenance

 

317,897

 

363,362

 

973,065

 

962,280

 

Depreciation

 

104,856

 

100,050

 

313,719

 

294,345

 

Taxes other than income taxes

 

55,828

 

64,890

 

200,535

 

201,559

 

Total Operating Expenses

 

888,160

 

879,951

 

2,696,547

 

2,408,767

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

203,817

 

239,287

 

597,310

 

586,152

 

 

 

 

 

 

 

 

 

 

 

Equity in Earnings of Unconsolidated Subsidiaries

 

4,956

 

3,248

 

11,652

 

7,356

 

Miscellaneous Income – Net

 

12,296

 

6,965

 

27,678

 

2,517

 

Interest Expense

 

73,075

 

62,518

 

192,623

 

180,122

 

Preferred Dividend Requirement of Subsidiary Trust (Note 1(g)(iii))

 

 

5,966

 

11,940

 

17,847

 

 

 

 

 

 

 

 

 

 

 

Income Before Taxes

 

147,994

 

181,016

 

432,077

 

398,056

 

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

35,155

 

47,799

 

102,121

 

123,641

 

Preferred Dividend Requirements of Subsidiaries

 

858

 

859

 

2,574

 

2,575

 

 

 

 

 

 

 

 

 

 

 

Income Before Discontinued Operations and Cumulative Effect of Changes in Accounting Principles

 

111,981

 

132,358

 

327,382

 

271,840

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of tax (Note 8)

 

 

(1,790

)

8,875

 

(561

)

Cumulative effect of changes in accounting principles, net of tax (Note 1(g)(vii))

 

 

 

26,462

 

(10,899

)

Net Income

 

$

111,981

 

$

130,568

 

$

362,719

 

$

260,380

 

 

 

 

 

 

 

 

 

 

 

Average Common Shares Outstanding

 

177,751

 

167,967

 

175,944

 

166,544

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Common Share (Note 10)

 

 

 

 

 

 

 

 

 

Income Before Discontinued Operations and Cumulative Effect of Changes in Accounting Principles

 

$

0.63

 

$

0.79

 

$

1.86

 

$

1.63

 

Discontinued operations, net of tax

 

 

(0.01

)

0.05

 

 

Cumulative effect of changes in accounting principles, net of tax

 

 

 

0.15

 

(0.06

)

Net Income

 

$

0.63

 

$

0.78

 

$

2.06

 

$

1.57

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Common Share - Assuming Dilution (Note 10)

 

 

 

 

 

 

 

 

 

Income Before Discontinued Operations and Cumulative Effect of Changes in Accounting Principles

 

$

0.62

 

$

0.78

 

$

1.84

 

$

1.61

 

Discontinued operations, net of tax

 

 

(0.01

)

0.05

 

 

Cumulative effect of changes in accounting principles, net of tax

 

 

 

0.15

 

(0.06

)

Net Income

 

$

0.62

 

$

0.77

 

$

2.04

 

$

1.55

 

 

 

 

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

$

0.46

 

$

0.45

 

$

1.38

 

$

1.35

 

 

The accompanying notes as they relate to Cinergy Corp. are an integral part of these condensed consolidated financial statements.

 

5



 

CINERGY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS

 

ASSETS

 

 

 

September 30
2003

 

December 31
2002

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

486,400

 

$

200,112

 

Restricted deposits

 

709

 

3,092

 

Notes receivable, current

 

63,594

 

135,873

 

Accounts receivable less accumulated provision for doubtful accounts of $10,873 at September 30, 2003, and $16,368 at December 31, 2002

 

1,029,127

 

1,280,810

 

Materials, supplies, and fuel (Note 1(d))

 

319,632

 

319,454

 

Energy risk management current assets (Note 1(c)(i))

 

224,299

 

464,028

 

Prepayments and other

 

138,236

 

107,086

 

Total Current Assets

 

2,261,997

 

2,510,455

 

 

 

 

 

 

 

Property, Plant, and Equipment - at Cost

 

 

 

 

 

Utility plant in service (Note 12)

 

9,557,536

 

8,641,351

 

Construction work in progress

 

288,069

 

469,300

 

Total Utility Plant

 

9,845,605

 

9,110,651

 

Non-regulated property, plant, and equipment (Note 12)

 

4,326,626

 

4,616,754

 

Accumulated depreciation (Note 1(g)(vi))

 

5,319,500

 

5,157,040

 

Net Property, Plant, and Equipment

 

8,852,731

 

8,570,365

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Regulatory assets

 

1,012,457

 

1,022,696

 

Investments in unconsolidated subsidiaries

 

482,978

 

417,188

 

Energy risk management non-current assets (Note 1(c)(i))

 

127,407

 

162,773

 

Notes receivable, non-current (Note 4)

 

218,347

 

 

Other investments

 

173,790

 

163,851

 

Goodwill (Note 1 (g)(v))

 

43,717

 

43,717

 

Other intangible assets

 

1,723

 

2,059

 

Other

 

300,825

 

266,659

 

Total Other Assets

 

2,361,244

 

2,078,943

 

 

 

 

 

 

 

Assets of Discontinued Operations (Note 8)

 

7,187

 

147,265

 

 

 

 

 

 

 

Total Assets

 

$

13,483,159

 

$

13,307,028

 

 

The accompanying notes as they relate to Cinergy Corp. are an integral part of these condensed consolidated financial statements.

 

6



 

CINERGY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

September 30
2003

 

December 31
2002

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts payable

 

$

947,882

 

$

1,318,379

 

Accrued taxes

 

228,225

 

258,613

 

Accrued interest

 

79,161

 

62,244

 

Notes payable and other short-term obligations (Note 5)

 

336,687

 

667,973

 

Long-term debt due within one year

 

1,113,319

 

176,000

 

Energy risk management current liabilities (Note 1(c)(i))

 

186,146

 

407,710

 

Other

 

133,677

 

105,026

 

Total Current Liabilities

 

3,025,097

 

2,995,945

 

 

 

 

 

 

 

Non-Current Liabilities

 

 

 

 

 

Long-term debt (Note 3)

 

4,129,946

 

4,011,568

 

Deferred income taxes

 

1,519,097

 

1,458,171

 

Unamortized investment tax credits

 

111,186

 

118,095

 

Accrued pension and other postretirement benefit costs

 

606,375

 

626,167

 

Energy risk management non-current liabilities (Note 1(c)(i))

 

117,777

 

143,991

 

Other

 

233,768

 

179,767

 

Total Non-Current Liabilities

 

6,718,149

 

6,537,759

 

 

 

 

 

 

 

Liabilities of Discontinued Operations (Note 8)

 

8,877

 

108,833

 

 

 

 

 

 

 

Commitments and Contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

9,752,123

 

9,642,537

 

 

 

 

 

 

 

Preferred Trust Securities (Note 1(g)(iii))

 

 

 

 

 

Company obligated, mandatorily redeemable, preferred trust securities of subsidiary, holding solely debt securities of the company

 

 

308,187

 

 

 

 

 

 

 

Cumulative Preferred Stock of Subsidiaries

 

 

 

 

 

Not subject to mandatory redemption

 

62,818

 

62,828

 

 

 

 

 

 

 

Common Stock Equity (Note 2)

 

 

 

 

 

Common stock - $.01 par value; authorized shares - 600,000,000; outstanding shares - 177,899,822 at September 30, 2003, and 168,663,115 at December 31, 2002

 

1,779

 

1,687

 

Paid-in capital

 

2,170,392

 

1,918,136

 

Retained earnings

 

1,525,727

 

1,403,453

 

Accumulated other comprehensive income (loss)

 

(29,680

)

(29,800

)

Total Common Stock Equity

 

3,668,218

 

3,293,476

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

13,483,159

 

$

13,307,028

 

 

The accompanying notes as they relate to Cinergy Corp. are an integral part of these condensed consolidated financial statements.

 

7



 

CINERGY CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY

 

 

 

Common
Stock

 

Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income/(Loss)

 

Total
Common
Stock
Equity

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended September 30, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 1, 2003 (176,947,118 shares)

 

$

1,769

 

$

2,135,968

 

$

1,495,502

 

$

(24,423

)

$

3,608,816

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

111,981

 

 

 

111,981

 

Other comprehensive income (loss), net of tax effect of $2,532

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

(8,365

)

(8,365

)

Minimum pension liability adjustment

 

 

 

 

 

 

 

26

 

26

 

Unrealized gain (loss) on investment trusts

 

 

 

 

 

 

 

32

 

32

 

Cash flow hedges (Note 1(c))

 

 

 

 

 

 

 

3,050

 

3,050

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

106,724

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock - net (952,704 shares)

 

10

 

31,824

 

 

 

 

 

31,834

 

Dividends on common stock ($.46 per share)

 

 

 

 

 

(81,725

)

 

 

(81,725

)

Other (Note 2(b))

 

 

 

2,600

 

(31

)

 

 

2,569

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance at September 30, 2003 (177,899,822 shares)

 

$

1,779

 

$

2,170,392

 

$

1,525,727

 

$

(29,680

)

$

3,668,218

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended September 30, 2002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 1, 2002 (167,486,129 shares)

 

$

1,675

 

$

1,861,689

 

$

1,319,881

 

$

(4,787

)

$

3,178,458

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

130,568

 

 

 

130,568

 

Other comprehensive income (loss), net of tax effect of $12,501

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

4,810

 

4,810

 

Unrealized gain (loss) on investment trusts

 

 

 

 

 

 

 

(3,003

)

(3,003

)

Cash flow hedges (Note 1(c))

 

 

 

 

 

 

 

(18,744

)

(18,744

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

113,631

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock - net (781,597 shares)

 

8

 

22,888

 

 

 

 

 

22,896

 

Dividends on common stock ($.45 per share)

 

 

 

 

 

(75,469

)

 

 

(75,469

)

Other

 

 

 

4,542

 

8

 

 

 

4,550

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance at September 30, 2002 (168,267,726 shares)

 

$

1,683

 

$

1,889,119

 

$

1,374,988

 

$

(21,724

)

$

3,244,066

 

 

The accompanying notes as they relate to Cinergy Corp. are an integral part of these condensed consolidated financial statements.

 

8



CINERGY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY

 

 

Common
Stock

 

Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income/(Loss)

 

Total
Common
Stock
Equity

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Year to Date September 30, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2003 (168,663,115 shares)

 

$

1,687

 

$

1,918,136

 

$

1,403,453

 

$

(29,800

)

$

3,293,476

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

362,719

 

 

 

362,719

 

Other comprehensive income (loss), net of tax effect of $(26)

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment, net of reclassification adjustments of $6,134 (net of tax) (Note 8)

 

 

 

 

 

 

 

(2,312

)

(2,312

)

Minimum pension liability adjustment

 

 

 

 

 

 

 

26

 

26

 

Unrealized gain (loss) on investment trusts

 

 

 

 

 

 

 

2,551

 

2,551

 

Cash flow hedges (Note 1(c))

 

 

 

 

 

 

 

(145

)

(145

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

362,839

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock - net (9,236,707 shares)

 

92

 

251,179

 

 

 

 

 

251,271

 

Dividends on common stock ($1.38 per share)

 

 

 

 

 

(240,402

)

 

 

(240,402

)

Other (Note 2(b))

 

 

 

1,077

 

(43

)

 

 

1,034

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance at September 30, 2003 (177,899,822 shares)

 

$

1,779

 

$

2,170,392

 

$

1,525,727

 

$

(29,680

)

$

3,668,218

 

 

 

 

 

 

 

 

 

 

 

 

 

Year to Date September 30, 2002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2002 (159,402,839 shares)

 

$

1,594

 

$

1,619,659

 

$

1,337,135

 

$

(16,929

)

$

2,941,459

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

260,380

 

 

 

260,380

 

Other comprehensive income (loss), net of tax effect of $7,879

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

20,123

 

20,123

 

Minimum pension liability adjustment

 

 

 

 

 

 

 

136

 

136

 

Unrealized gain (loss) on investment trusts

 

 

 

 

 

 

 

(4,637

)

(4,637

)

Cash flow hedges (Note 1(c))

 

 

 

 

 

 

 

(20,417

)

(20,417

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

255,585

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock - net (8,864,887 shares)

 

89

 

258,300

 

 

 

 

 

258,389

 

Dividends on common stock ($1.35 per share)

 

 

 

 

 

(222,551

)

 

 

(222,551

)

Other

 

 

 

11,160

 

24

 

 

 

11,184

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance at September 30, 2002 (168,267,726 shares)

 

$

1,683

 

$

1,889,119

 

$

1,374,988

 

$

(21,724

)

$

3,244,066

 

 

The accompanying notes as they relate to Cinergy Corp. are an integral part of these condensed consolidated financial statements.

 

9



 

CINERGY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Year to Date
September 30

 

 

 

2003

 

2002

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

Cash Flows from Continuing Operations

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net income

 

$

362,719

 

$

260,380

 

Items providing or (using) cash currently:

 

 

 

 

 

Depreciation

 

313,719

 

294,345

 

(Income) Loss of discontinued operations, net of tax

 

(8,875

)

561

 

Cumulative effect of changes in accounting principles, net of tax

 

(26,462

)

10,899

 

Change in net position of energy risk management activities

 

(18,097

)

(61,838

)

Deferred income taxes and investment tax credits – net

 

35,828

 

169,377

 

Equity in (earnings) losses of unconsolidated subsidiaries

 

(11,652

)

(7,356

)

Allowance for equity funds used during construction

 

(7,111

)

(8,802

)

Regulatory assets deferrals

 

(61,846

)

(69,923

)

Regulatory assets amortization

 

74,686

 

93,163

 

Accrued pension and other postretirement benefit costs

 

(19,792

)

51,587

 

Deferred costs under gas recovery mechanism

 

(31,803

)

(2,592

)

Changes in current assets and current liabilities:

 

 

 

 

 

Restricted deposits

 

2,383

 

(798

)

Accounts and notes receivable

 

338,099

 

(357,370

)

Materials, supplies, and fuel

 

(178

)

(71,535

)

Prepayments

 

(29,923

)

(40,044

)

Accounts payable

 

(364,181

)

432,766

 

Accrued taxes and interest

 

(15,069

)

(97,625

)

Other assets

 

5,772

 

48,362

 

Other liabilities

 

58,130

 

11,322

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

596,347

 

654,879

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Change in short-term debt

 

(332,404

)

(417,228

)

Issuance of long-term debt

 

688,166

 

628,170

 

Redemption of long-term debt

 

(187,873

)

(115,672

)

Funds on deposit from issuance of debt securities

 

 

(131,600

)

Retirement of preferred stock of subsidiaries

 

(10

)

(3

)

Issuance of common stock

 

251,271

 

258,389

 

Dividends on common stock

 

(240,402

)

(222,551

)

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

178,748

 

(495

)

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Construction expenditures (less allowance for equity funds used during construction)

 

(508,671

)

(587,445

)

Proceeds from notes receivable

 

5,076

 

 

Acquisitions and other investments

 

(36,464

)

(56,439

)

Proceeds from sale of subsidiaries and equity investments

 

51,252

 

7,305

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

(488,807

)

(636,579

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents from continuing operations

 

286,288

 

17,805

 

 

 

 

 

 

 

Cash and cash equivalents from continuing operations at beginning of period

 

200,112

 

87,257

 

 

 

 

 

 

 

Cash and cash equivalents from continuing operations at end of period

 

$

486,400

 

$

105,062

 

 

 

 

 

 

 

Cash Flows from Discontinued Operations

 

 

 

 

 

Operating activities

 

$

(7,285

)

$

17,992

 

Financing activities

 

(13,484

)

(22,551

)

Investing activities

 

(202

)

(5,046

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents from discontinued operations

 

(20,971

)

(9,605

)

 

 

 

 

 

 

Cash and cash equivalents from discontinued operations at beginning of period

 

20,971

 

23,810

 

 

 

 

 

 

 

Cash and cash equivalents from discontinued operations at end of period

 

$

 

$

14,205

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest (net of amount capitalized)

 

$

182,108

 

$

207,659

 

Income taxes

 

$

90,281

 

$

30,900

 

 

The accompanying notes as they relate to Cinergy Corp. are an integral part of these condensed consolidated financial statements.

 

10



 

THE CINCINNATI GAS & ELECTRIC COMPANY

AND SUBSIDIARY COMPANIES

 

11



 

THE CINCINNATI GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 

 

 

Quarter Ended
September 30

 

Year to Date
September 30

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Operating Revenues (Note 1(g)(i))

 

 

 

 

 

 

 

 

 

Electric

 

$

474,840

 

$

492,617

 

$

1,300,859

 

$

1,301,442

 

Gas

 

66,399

 

41,452

 

426,986

 

277,069

 

Total Operating Revenues

 

541,239

 

534,069

 

1,727,845

 

1,578,511

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

Fuel and purchased and exchanged power (Note 1(g)(i))

 

144,794

 

136,459

 

381,615

 

352,292

 

Gas purchased

 

32,223

 

12,594

 

252,074

 

145,033

 

Operation and maintenance

 

133,474

 

150,247

 

394,171

 

394,443

 

Depreciation

 

42,542

 

49,005

 

142,119

 

146,057

 

Taxes other than income taxes

 

44,553

 

50,304

 

154,810

 

149,509

 

Total Operating Expenses

 

397,586

 

398,609

 

1,324,789

 

1,187,334

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

143,653

 

135,460

 

403,056

 

391,177

 

 

 

 

 

 

 

 

 

 

 

Miscellaneous Income - Net

 

9,654

 

4,140

 

23,137

 

4,002

 

Interest Expense

 

29,506

 

23,746

 

84,766

 

68,375

 

 

 

 

 

 

 

 

 

 

 

Income Before Taxes

 

123,801

 

115,854

 

341,427

 

326,804

 

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

44,938

 

44,085

 

125,347

 

124,780

 

 

 

 

 

 

 

 

 

 

 

Income Before Cumulative Effect of Changes in Accounting Principles

 

78,863

 

71,769

 

216,080

 

202,024

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of changes in accounting principles, net of tax (Note 1(g)(vii))

 

 

 

30,938

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

78,863

 

$

71,769

 

$

247,018

 

$

202,024

 

 

 

 

 

 

 

 

 

 

 

Preferred Dividend Requirement

 

211

 

211

 

634

 

634

 

 

 

 

 

 

 

 

 

 

 

Net Income Applicable to Common Stock

 

$

78,652

 

$

71,558

 

$

246,384

 

$

201,390

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

78,863

 

$

71,769

 

$

247,018

 

$

202,024

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss), Net of Tax

 

2,720

 

(17,588

)

(307

)

(19,673

)

 

 

 

 

 

 

 

 

 

 

Comprehensive Income

 

$

81,583

 

$

54,181

 

$

246,711

 

$

182,351

 

 

The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these condensed consolidated financial statements.

 

12



 

THE CINCINNATI GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

 

ASSETS

 

 

 

September 30
2003

 

December 31
2002

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

99,551

 

$

45,336

 

Restricted deposits

 

137

 

3,071

 

Notes receivable from affiliated companies

 

137,144

 

148,823

 

Accounts receivable less accumulated provision for doubtful accounts of $4,096 at September 30, 2003, and $5,942 at December 31, 2002

 

103,345

 

117,269

 

Accounts receivable from affiliated companies

 

9,730

 

97,584

 

Materials, supplies, and fuel

 

135,035

 

121,881

 

Energy risk management current assets (Note 1(c)(i))

 

78,689

 

57,912

 

Prepayments and other

 

35,565

 

8,560

 

Total Current Assets

 

599,196

 

600,436

 

 

 

 

 

 

 

Property, Plant, and Equipment - at Cost

 

 

 

 

 

Utility plant in service (Note 12)

 

 

 

 

 

Electric

 

2,146,147

 

2,073,133

 

Gas

 

1,043,356

 

1,003,870

 

Common

 

249,382

 

248,938

 

Total Utility Plant In Service

 

3,438,885

 

3,325,941

 

Construction work in progress

 

115,161

 

84,249

 

Total Utility Plant

 

3,554,046

 

3,410,190

 

Non-regulated property, plant, and equipment (Note 12)

 

3,510,124

 

3,445,056

 

Accumulated depreciation (Note 1(g)(vi))

 

2,754,575

 

2,712,105

 

Net Property, Plant, and Equipment

 

4,309,595

 

4,143,141

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Regulatory assets

 

594,727

 

604,776

 

Energy risk management non-current assets (Note 1(c)(i))

 

61,789

 

64,762

 

Other investments

 

1,084

 

1,082

 

Other

 

178,884

 

127,550

 

Total Other Assets

 

836,484

 

798,170

 

 

 

 

 

 

 

Total Assets

 

$

5,745,275

 

$

5,541,747

 

 

The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these condensed consolidated financial statements.

 

13



THE CINCINNATI GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

 

LIABILITIES AND SHAREHOLDER’S EQUITY

 

 

 

September 30
2003

 

December 31
2002

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts payable

 

$

145,449

 

$

195,812

 

Accounts payable to affiliated companies

 

33,253

 

146,558

 

Accrued taxes

 

193,641

 

159,199

 

Accrued interest

 

32,478

 

22,872

 

Notes payable and other short-term obligations (Note 5)

 

112,100

 

112,100

 

Notes payable to affiliated companies (Note 5)

 

9,042

 

8,947

 

Long-term debt due within one year

 

395,500

 

120,000

 

Energy risk management current liabilities (Note 1(c)(i))

 

73,445

 

49,288

 

Other

 

28,834

 

37,160

 

Total Current Liabilities

 

1,023,742

 

851,936

 

 

 

 

 

 

 

Non-Current Liabilities

 

 

 

 

 

Long-term debt (Note 3)

 

1,456,716

 

1,569,713

 

Deferred income taxes

 

942,250

 

882,628

 

Unamortized investment tax credits

 

80,689

 

85,198

 

Accrued pension and other postretirement benefit costs

 

206,003

 

201,284

 

Energy risk management non-current liabilities (Note 1(c)(i))

 

43,204

 

31,326

 

Other

 

82,430

 

88,843

 

Total Non-Current Liabilities

 

2,811,292

 

2,858,992

 

 

 

 

 

 

 

Commitments and Contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

3,835,034

 

3,710,928

 

 

 

 

 

 

 

Cumulative Preferred Stock

 

 

 

 

 

Not subject to mandatory redemption

 

20,485

 

20,485

 

 

 

 

 

 

 

Common Stock Equity

 

 

 

 

 

Common stock - $8.50 par value; authorized shares - 120,000,000; outstanding shares - 89,663,086 at September 30, 2003, and December 31, 2002

 

762,136

 

762,136

 

Paid-in capital

 

586,292

 

586,292

 

Retained earnings

 

567,381

 

487,652

 

Accumulated other comprehensive income (loss)

 

(26,053

)

(25,746

)

Total Common Stock Equity

 

1,889,756

 

1,810,334

 

 

 

 

 

 

 

Total Liabilities and Shareholder’s Equity

 

$

5,745,275

 

$

5,541,747

 

 

The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these condensed consolidated financial statements.

 

14



 

THE CINCINNATI GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Year to Date
September 30

 

 

 

2003

 

2002

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net income

 

$

247,018

 

$

202,024

 

Items providing or (using) cash currently:

 

 

 

 

 

Depreciation

 

142,119

 

146,057

 

Deferred income taxes and investment tax credits - net

 

35,406

 

95,730

 

Cumulative effect of changes in accounting principles, net of tax

 

(30,938

)

 

Change in net position of energy risk management activities

 

(24,465

)

(19,560

)

Allowance for equity funds used during construction

 

(2,566

)

261

 

Regulatory assets deferrals

 

(17,984

)

(45,007

)

Regulatory assets amortization

 

31,411

 

38,024

 

Accrued pension and other postretirement benefit costs

 

4,719

 

5,549

 

Deferred costs under gas cost recovery mechanism

 

(31,803

)

(2,592

)

Changes in current assets and current liabilities:

 

 

 

 

 

Restricted deposits

 

2,934

 

(765

)

Accounts and notes receivable

 

157,926

 

(199,985

)

Materials, supplies, and fuel

 

(13,154

)

6,576

 

Prepayments

 

(8,040

)

(14,830

)

Accounts payable

 

(163,059

)

214,967

 

Accrued taxes and interest

 

44,048

 

(7,301

)

Other assets

 

(12,307

)

5,856

 

Other liabilities

 

(15,350

)

(7,506

)

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

345,915

 

417,498

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Change in short-term debt, including net affiliate notes

 

(44,374

)

(451,627

)

Issuance of long-term debt

 

256,198

 

580,570

 

Redemption of long-term debt

 

(100,000

)

(100,000

)

Funds on deposit from issuance of debt securities

 

 

(84,000

)

Retirement of preferred stock

 

 

(1

)

Dividends on preferred stock

 

(634

)

(634

)

Dividends on common stock

 

(166,655

)

(138,712

)

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

(55,465

)

(194,404

)

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Construction expenditures (less allowance for equity funds used during construction)

 

(236,235

)

(223,740

)

Other investments

 

 

98

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

(236,235

)

(223,642

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

54,215

 

(548

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

45,336

 

9,074

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

99,551

 

$

8,526

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest (net of amount capitalized)

 

$

69,321

 

$

68,749

 

Income taxes

 

$

38,146

 

$

16,121

 

 

The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these condensed consolidated financial statements.

 

15



 

PSI ENERGY, INC.

AND SUBSIDIARY COMPANY

 

16



 

PSI ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 

 

 

Quarter Ended
September 30

 

Year to Date
September 30

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Operating Revenues(Note 1(g)(i))

 

 

 

 

 

 

 

 

 

Electric

 

$

437,084

 

$

470,772

 

$

1,210,157

 

$

1,215,791

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

Fuel and purchased and exchanged power (Note 1(g)(i))

 

177,786

 

168,683

 

466,656

 

420,278

 

Operation and maintenance

 

113,336

 

128,931

 

348,668

 

386,559

 

Depreciation

 

47,695

 

39,826

 

135,351

 

115,954

 

Taxes other than income taxes

 

10,322

 

13,446

 

42,354

 

46,992

 

Total Operating Expenses

 

349,139

 

350,886

 

993,029

 

969,783

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

87,945

 

119,886

 

217,128

 

246,008

 

 

 

 

 

 

 

 

 

 

 

Miscellaneous Income (Expense) - Net

 

(2,221

)

4,434

 

5,348

 

14,155

 

Interest Expense

 

21,324

 

18,782

 

63,477

 

55,862

 

 

 

 

 

 

 

 

 

 

 

Income Before Taxes

 

64,400

 

105,538

 

158,999

 

204,301

 

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

26,808

 

37,895

 

64,107

 

68,861

 

 

 

 

 

 

 

 

 

 

 

Income Before Cumulative Effect of a Change in Accounting Principle

 

37,592

 

67,643

 

94,892

 

135,440

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of a change in accounting principle, net of tax (Note 1(g)(vii))

 

 

 

(494

)

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

37,592

 

$

67,643

 

$

94,398

 

$

135,440

 

 

 

 

 

 

 

 

 

 

 

Preferred Dividend Requirement

 

647

 

648

 

1,940

 

1,941

 

 

 

 

 

 

 

 

 

 

 

Net Income Applicable to Common Stock

 

$

36,945

 

$

66,995

 

$

92,458

 

$

133,499

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

37,592

 

$

67,643

 

$

94,398

 

$

135,440

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss), Net of Tax

 

(77

)

(2,716

)

2,247

 

(3,684

)

 

 

 

 

 

 

 

 

 

 

Comprehensive Income

 

$

37,515

 

$

64,927

 

$

96,645

 

$

131,756

 

 

The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these condensed consolidated financial statements.

 

17



 

PSI ENERGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

ASSETS

 

 

 

September 30
2003

 

December 31
2002

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

11,452

 

$

2,007

 

Restricted deposits

 

571

 

20

 

Notes receivable from affiliated companies

 

21,108

 

53,755

 

Accounts receivable less accumulated provision for doubtful accounts of $2,068 at September 30, 2003, and $5,656 at December 31, 2002

 

48,295

 

84,819

 

Accounts receivable from affiliated companies

 

4,328

 

437

 

Materials, supplies, and fuel

 

122,574

 

137,292

 

Energy risk management current assets (Note 1(c)(i))

 

7,090

 

8,701

 

Prepayments and other

 

33,751

 

44,725

 

Total Current Assets

 

249,169

 

331,756

 

 

 

 

 

 

 

Property, Plant, and Equipment - at Cost

 

 

 

 

 

Utility plant in service

 

6,118,651

 

5,315,410

 

Construction work in progress

 

172,908

 

385,051

 

Total Utility Plant

 

6,291,559

 

5,700,461

 

Accumulated depreciation

 

2,436,536

 

2,334,157

 

Net Property, Plant, and Equipment (Note 12)

 

3,855,023

 

3,366,304

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Regulatory assets

 

417,730

 

417,920

 

Energy risk management non-current assets (Note 1(c)(i))

 

8,988

 

16,590

 

Other investments

 

60,852

 

54,683

 

Other

 

46,278

 

35,703

 

Total Other Assets

 

533,848

 

524,896

 

 

 

 

 

 

 

Total Assets

 

$

4,638,040

 

$

4,222,956

 

 

The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these condensed consolidated financial statements.

 

18



PSI ENERGY, INC.
condensed consolidated balance sheets

 

LIABILITIES AND SHAREHOLDER’S EQUITY

 

 

 

September 30
2003

 

December 31
2002

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts payable

 

$

42,452

 

$

113,563

 

Accounts payable to affiliated companies

 

13,486

 

107,364

 

Accrued taxes

 

117,415

 

105,960

 

Accrued interest

 

26,011

 

23,078

 

Notes payable and other short-term obligations (Note 5)

 

 

35,000

 

Notes payable to affiliated companies (Note 5)

 

164,974

 

138,055

 

Long-term debt due within one year

 

1,038

 

56,000

 

Energy risk management current liabilities (Note 1(c)(i))

 

14,648

 

8,000

 

Other

 

27,936

 

22,335

 

Total Current Liabilities

 

407,960

 

609,355

 

 

 

 

 

 

 

Non-Current Liabilities

 

 

 

 

 

Long-term debt (Note 3)

 

1,720,330

 

1,315,984

 

Deferred income taxes

 

556,636

 

538,745

 

Unamortized investment tax credits

 

30,497

 

32,897

 

Accrued pension and other postretirement benefit costs

 

176,828

 

184,299

 

Energy risk management non-current liabilities (Note 1(c)(i))

 

3,352

 

17,157

 

Other

 

77,426

 

80,879

 

Total Non-Current Liabilities

 

2,565,069

 

2,169,961

 

 

 

 

 

 

 

Commitments and Contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

2,973,029

 

2,779,316

 

 

 

 

 

 

 

Cumulative Preferred Stock

 

 

 

 

 

Not subject to mandatory redemption

 

42,333

 

42,343

 

 

 

 

 

 

 

Common Stock Equity

 

 

 

 

 

Common stock - without par value; $.01 stated value; authorized shares - 60,000,000; outstanding shares - 53,913,701 at September 30, 2003, and December 31, 2002

 

539

 

539

 

Paid-in capital (Note 2(c))

 

626,931

 

426,931

 

Retained earnings

 

1,001,080

 

981,946

 

Accumulated other comprehensive income (loss)

 

(5,872

)

(8,119

)

Total Common Stock Equity

 

1,622,678

 

1,401,297

 

 

 

 

 

 

 

Total Liabilities and Shareholder’s Equity

 

$

4,638,040

 

$

4,222,956

 

 

The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these condensed consolidated financial statements.

 

19



 

PSI ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Year to Date
September 30

 

 

 

2003

 

2002

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net income

 

$

94,398

 

$

135,440

 

Items providing or (using) cash currently:

 

 

 

 

 

Depreciation

 

135,351

 

115,954

 

Cumulative effect of a change in accounting principle, net of tax

 

494

 

 

Deferred income taxes and investment tax credits - net

 

14,370

 

46,376

 

Change in net position of energy risk management activities

 

(1,731

)

8,443

 

Allowance for equity funds used during construction

 

(4,545

)

(9,063

)

Regulatory assets deferrals

 

(43,862

)

(24,916

)

Regulatory assets amortization

 

43,275

 

55,139

 

Accrued pension and other postretirement benefit costs

 

(7,471

)

4,603

 

Changes in current assets and current liabilities:

 

 

 

 

 

Restricted deposits

 

(551

)

(34

)

Accounts and notes receivable

 

65,280

 

222,369

 

Materials, supplies, and fuel

 

14,718

 

(35,243

)

Prepayments

 

(154

)

(3,857

)

Accounts payable

 

(164,989

)

(147,681

)

Accrued taxes and interest

 

14,388

 

875

 

Other assets

 

6,980

 

4,881

 

Other liabilities

 

(909

)

(8,338

)

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

165,042

 

364,948

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Change in short-term debt, including net affiliate notes

 

(8,081

)

37,287

 

Issuance of long-term debt

 

431,968

 

47,600

 

Redemption of long-term debt

 

(459,865

)

(23,000

)

Contribution from parent

 

200,000

 

 

Funds on deposit from issuance of debt securities

 

 

(47,600

)

Retirement of preferred stock

 

(10

)

(2

)

Dividends on preferred stock

 

(1,940

)

(1,940

)

Dividends on common stock

 

(73,324

)

(83,448

)

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

88,748

 

(71,103

)

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Construction expenditures (less allowance for equity funds used during construction)

 

(241,859

)

(286,610

)

Other investments

 

(2,486

)

(3,098

)

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

(244,345

)

(289,708

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

9,445

 

4,137

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

2,007

 

1,587

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

11,452

 

$

5,724

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest (net of amount capitalized)

 

$

72,455

 

$

75,807

 

Income taxes

 

$

50,419

 

$

13,590

 

 

 

 

 

 

 

Non-cash financing and investing activities:

 

 

 

 

 

Issuance of promissory notes to affiliated company for acquisition of assets

 

$

375,969

 

$

 

 

The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these condensed consolidated financial statements.

 

20



 

THE UNION LIGHT, HEAT

AND POWER COMPANY

 

21



 

THE UNION LIGHT, HEAT AND POWER COMPANY

CONDENSED STATEMENTS OF INCOME

 

 

 

Quarter Ended
September 30

 

Year to Date
September 30

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Operating Revenues

 

 

 

 

 

 

 

 

 

Electric

 

$

64,199

 

$

68,353

 

$

170,224

 

$

175,346

 

Gas

 

11,240

 

7,364

 

75,007

 

53,584

 

Total Operating Revenues

 

75,439

 

75,717

 

245,231

 

228,930

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

Electricity purchased from parent company for resale

 

44,546

 

48,445

 

120,805

 

123,091

 

Gas purchased

 

5,620

 

2,732

 

46,570

 

30,932

 

Operation and maintenance

 

14,689

 

14,819

 

41,068

 

38,199

 

Depreciation

 

4,554

 

4,277

 

13,582

 

13,009

 

Taxes other than income taxes

 

1,135

 

1,167

 

3,417

 

3,535

 

Total Operating Expenses

 

70,544

 

71,440

 

225,442

 

208,766

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

4,895

 

4,277

 

19,789

 

20,164

 

 

 

 

 

 

 

 

 

 

 

Miscellaneous Income (Expense) - Net

 

886

 

1,690

 

3,266

 

(2,516

)

Interest Expense

 

1,548

 

1,431

 

4,520

 

4,388

 

 

 

 

 

 

 

 

 

 

 

Income Before Taxes

 

4,233

 

4,536

 

18,535

 

13,260

 

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

1,667

 

1,302

 

7,058

 

4,150

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

2,566

 

$

3,234

 

$

11,477

 

$

9,110

 

 

The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these condensed financial statements.

 

22



 

THE UNION LIGHT, HEAT AND POWER COMPANY

CONDENSED BALANCE SHEETS

 

ASSETS

 

 

 

September 30
2003

 

December 31
2002

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

5,108

 

$

3,926

 

Notes receivable from affiliated companies

 

4,009

 

13,337

 

Accounts receivable less accumulated provision for doubtful accounts of $163 at September 30, 2003, and $84 at December 31, 2002

 

417

 

703

 

Accounts receivable from affiliated companies

 

509

 

1,671

 

Materials, supplies, and fuel

 

9,774

 

8,182

 

Prepayments and other

 

418

 

316

 

Total Current Assets

 

20,235

 

28,135

 

 

 

 

 

 

 

Property, Plant, and Equipment - at Cost

 

 

 

 

 

Utility plant in service

 

 

 

 

 

Electric

 

271,763

 

258,094

 

Gas

 

228,436

 

215,505

 

Common

 

32,324

 

31,679

 

Total Utility Plant In Service

 

532,523

 

505,278

 

Construction work in progress

 

11,717

 

14,745

 

Total Utility Plant

 

544,240

 

520,023

 

Accumulated depreciation

 

198,059

 

187,876

 

Net Property, Plant, and Equipment (Note 12)

 

346,181

 

332,147

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Regulatory assets

 

9,441

 

5,134

 

Other

 

19,095

 

16,811

 

Total Other Assets

 

28,536

 

21,945

 

 

 

 

 

 

 

Total Assets

 

$

394,952

 

$

382,227

 

 

The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these condensed financial statements.

 

23



 

THE UNION LIGHT, HEAT AND POWER COMPANY

CONDENSED BALANCE SHEETS

 

LIABILITIES AND SHAREHOLDER’S EQUITY

 

 

 

September 30
2003

 

December 31
2002

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts payable

 

$

3,775

 

$

8,816

 

Accounts payable to affiliated companies

 

17,291

 

22,297

 

Accrued taxes

 

3,877

 

1,487

 

Accrued interest

 

1,289

 

1,226

 

Long-term debt due within one year

 

20,000

 

20,000

 

Notes payable to affiliated companies (Note 5)

 

23,726

 

14,076

 

Other

 

6,146

 

6,368

 

Total Current Liabilities

 

76,104

 

74,270

 

 

 

 

 

 

 

Non-Current Liabilities

 

 

 

 

 

Long-term debt

 

54,676

 

54,653

 

Deferred income taxes

 

47,716

 

43,360

 

Unamortized investment tax credits

 

2,945

 

3,143

 

Accrued pension and other postretirement benefit costs

 

15,958

 

15,620

 

Other

 

15,217

 

14,017

 

Total Non-Current Liabilities

 

136,512

 

130,793

 

 

 

 

 

 

 

Commitments and Contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

212,616

 

205,063

 

 

 

 

 

 

 

Common Stock Equity

 

 

 

 

 

Common stock - $15.00 par value; authorized shares - 1,000,000; outstanding shares - 585,333 at September 30, 2003, and December 31, 2002

 

8,780

 

8,780

 

Paid-in capital

 

23,644

 

23,644

 

Retained earnings

 

149,972

 

144,800

 

Accumulated other comprehensive income (loss)

 

(60

)

(60

)

Total Common Stock Equity

 

182,336

 

177,164

 

 

 

 

 

 

 

Total Liabilities and Shareholder’s Equity

 

$

394,952

 

$

382,227

 

 

The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these condensed financial statements.

 

24



 

THE UNION LIGHT, HEAT AND POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS

 

 

 

Year to Date
September 30

 

 

 

2003

 

2002

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net income

 

$

11,477

 

$

9,110

 

Items providing or (using) cash currently:

 

 

 

 

 

Depreciation

 

13,582

 

13,009

 

Deferred income taxes and investment tax credits - net

 

4,157

 

1,395

 

Allowance for equity funds used during construction

 

(224

)

(523

)

Regulatory assets deferrals

 

(424

)

4,168

 

Regulatory assets amortization

 

505

 

(1,064

)

Accrued pension and other postretirement benefit costs

 

338

 

1,417

 

Deferred costs under gas cost recovery mechanism

 

(7,279

)

7,246

 

Changes in current assets and current liabilities:

 

 

 

 

 

Accounts and notes receivable

 

10,776

 

17,142

 

Materials, supplies, and fuel

 

(1,592

)

(1,671

)

Prepayments

 

(102

)

(174

)

Accounts payable

 

(10,047

)

(1,619

)

Accrued taxes and interest

 

2,453

 

2,194

 

Other assets

 

1,071

 

3,284

 

Other liabilities

 

375

 

(627

)

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

25,066

 

53,287

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Change in short-term debt, including net affiliate notes

 

9,650

 

(24,581

)

Dividends on common stock

 

(6,305

)

(2,675

)

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

3,345

 

(27,256

)

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Construction expenditures (less allowance for equity funds used during construction)

 

(27,229

)

(26,268

)

Other investments

 

 

(70

)

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

(27,229

)

(26,338

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

1,182

 

(307

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

3,926

 

4,099

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

5,108

 

$

3,792

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest (net of amount capitalized)

 

$

4,240

 

$

4,194

 

Income taxes

 

$

3,001

 

$

2,398

 

 

The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these condensed financial statements.

 

25



 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

In this report Cinergy (which includes Cinergy Corp. and all of our regulated and non-regulated subsidiaries) is, at times, referred to in the first person as “we”, “our”, or “us”.

 

1.              Summary of Significant Accounting Policies

 

(a)                                  Presentation

 

Our Condensed Financial Statements reflect all adjustments (which include normal, recurring adjustments) necessary in the opinion of the registrants for a fair presentation of the interim results.  These results are not necessarily indicative of results for a full year.  These statements should be read in conjunction with the Financial Statements and the notes thereto included in the registrants’ combined Form 10-K for the year ended December 31, 2002 and Form 8-K filed on June 10, 2003 (together, the 2002 10-K).  Certain amounts in the 2002 Condensed Financial Statements have been reclassified to conform to the 2003 presentation.

 

Management makes estimates and assumptions when preparing financial statements under generally accepted accounting principles (GAAP).  Actual results could differ, as these estimates and assumptions involve judgment.

 

(b)                                  Revenue Recognition

 

(i)          Operating Revenues

 

The Cincinnati Gas & Electric Company (CG&E), PSI Energy, Inc. (PSI), and The Union Light, Heat and Power Company (ULH&P) (collectively, our operating companies) record Operating Revenues for electric and gas service when delivered to customers.  Customers are billed throughout the month as both gas and electric meters are read.  We recognize revenues for retail energy sales that have not yet been billed, but where gas or electricity has been consumed.  This is termed “unbilled revenue” and is a widely recognized and accepted practice for utilities.  In making our estimates of unbilled revenue, we use complex systems that consider various factors, including weather, in our calculation of retail customer consumption at the end of each month.  Given the use of these systems and the fact that customers are billed monthly, we believe it is unlikely that materially different results will occur in future periods when revenue is subsequently billed.

 

The amount of unbilled revenues for Cinergy, CG&E, PSI, and ULH&P as of September 30, 2003 and 2002, were as follows:

 

 

 

2003

 

2002

 

 

 

(in millions)

 

 

 

 

 

 

 

Cinergy

 

$

117

 

$

124

 

CG&E and subsidiaries

 

60

 

63

 

PSI

 

57

 

61

 

ULH&P

 

11

 

11

 

 

26



 

(ii)      Energy Marketing and Trading Revenues

 

We market and trade electricity, natural gas, coal, and other energy-related products.  Many of the contracts associated with these products qualify as derivatives in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement 133).  We designate derivative transactions as either trading or non-trading at the time they are originated in accordance with Emerging Issues Task Force (EITF) Issue 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities (EITF 02-3).  Generally, trading contracts are reported on a net basis and non-trading contracts are reported on a gross basis.

 

1.               Gross Reporting

 

Gross reporting requires presentation of sales contracts in Operating Revenues and purchase contracts in Fuel and purchased and exchanged power expense or Gas purchased expense.  Non-trading derivatives typically involve physical delivery of the underlying commodity and are therefore generally presented on a gross basis.

 

Derivatives are classified as non-trading only when (a) the contracts involve the purchase of gas or electricity to serve our native load requirements (end-use customers within our public utility companies’ franchise service territory), or (b) the contracts involve the sale of gas or electricity and we have the intent and projected ability to fulfill substantially all obligations from company-owned assets, which generally is limited to the sale of generation to third parties when it is not required to meet native load requirements.

 

Energy activities that do not principally involve derivatives (e.g., natural gas sales from storage) are presented on a gross basis.

 

2.               Net Reporting

 

Net reporting requires presentation of realized and unrealized gains and losses on trading derivatives on a net basis in Operating Revenues.  In 2003, we began reflecting the results of trading derivatives on a net basis pursuant to the requirements of EITF 02-3, regardless of whether the transactions were settled physically.  Prior to 2003, the realized results for trading contracts that were physical in nature were presented on a gross basis.  The presentation for 2002 has been reclassified to conform to the new presentation.  See (g)(i) below for further discussion.

 

Energy derivatives that are not classified as non-trading based on the above requirements are deemed to be trading.  Trading typically involves frequent buying and selling with the objective of generating profits from differences in price.

 

(c)                                  Derivatives

 

We account for derivatives pursuant to Statement 133, which requires all derivatives, subject to certain exemptions, to be accounted for at fair value.  Changes in the derivative’s fair value must be recognized currently in earnings unless specific hedge accounting criteria are met.  Gains and

 

27



 

losses on derivatives that qualify as hedges can (a) offset related fair value changes on the hedged item in the Statements of Income for fair value hedges; or (b) be recorded in other comprehensive income for cash flow hedges.  To qualify for hedge accounting, derivatives must be designated as a hedge (for example, an offset of interest rate risks) and must be effective at reducing the risk associated with the hedged item.  Accordingly, changes in the fair values or cash flows of instruments designated as hedges must be highly correlated with changes in the fair values or cash flows of the related hedged items.

 

(i)          Energy Marketing and Trading

 

We account for all energy trading derivatives at fair value.  These derivatives are shown in our Balance Sheets as Energy risk management assets and Energy risk management liabilities.  Changes in the derivative’s fair value represent unrealized gains and losses and are recognized as revenues in our Statements of Income unless specific hedge accounting criteria are met.

 

In October 2002, the EITF reached a consensus in EITF 02-3 to rescind EITF Issue 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities (EITF 98-10).  EITF 98-10 permitted non-derivative contracts to be accounted for at fair value if certain criteria were met.  Effective with the adoption of EITF 02-3 on January 1, 2003, non-derivative contracts and natural gas inventory previously accounted for at fair value were required to be accounted for on an accrual basis.  See (d) for further discussion.

 

As a response to this discontinuance of fair value accounting, in June 2003, Cinergy began designating derivatives as fair value hedges for certain volumes of our natural gas inventory.  Under this accounting election, changes in the fair value of both the derivative as well as the hedged item (the specified inventory) are included in the Statements of Income.  We assess the effectiveness of the derivatives in offsetting the change in fair value of the inventory on a quarterly basis.  For the three months ended, September 30, 2003, the hedges’ ineffectiveness was not material.

 

Non-trading derivatives involve the physical delivery of energy and are therefore typically accounted for as accrual contracts, unless the contract does not qualify for the normal purchases and sales scope exception in Statement 133.

 

Although we intend to settle accrual contracts with company-owned assets, occasionally we settle these contracts with purchases on the open trading markets.  The cost of these purchases could be in excess of the associated revenues.  We recognize the gains or losses on these transactions as delivery occurs.  Open market purchases may occur for the following reasons:

 

                  generating station outages;

                  least-cost alternative;

                  native load requirements; and

                  extreme weather.

 

28



 

We value derivatives using end-of-the-period fair values, utilizing the following factors (as applicable):

 

                  closing exchange prices (that is, closing prices for standardized electricity and natural gas products traded on an organized exchange, such as the New York Mercantile Exchange);

                  broker-dealer and over-the-counter price quotations; and

                  model pricing (which considers time value and historical volatility factors of electricity and natural gas).

 

(ii)      Financial

 

We use interest rate swaps (an agreement by two parties to exchange fixed-interest rate cash flows for floating-interest rate cash flows) and treasury locks (an agreement that fixes the yield or price on a specific treasury security for a specific period, which we sometimes use in connection with the issuance of fixed rate debt).  We account for such derivatives at fair value and assess the effectiveness of any such derivative used in hedging activities.

 

At September 30, 2003, the ineffectiveness of instruments that we have classified as fair value or cash flow hedges of debt instruments was not material.  Reclassification of unrealized gains or losses on cash flow hedges of debt instruments from Accumulated other comprehensive income (loss) occurs as interest is accrued on the debt instrument.  The unrealized losses that will be reclassified as a charge to Interest Expense during the twelve-month period ending September 30, 2004 is not expected to be material.

 

(d)                                  Inventory

 

Prior to January 1, 2003, natural gas inventory for our gas trading operation was accounted for at fair value.  All other inventory was accounted for at the lower of cost or market, cost being determined through the weighted average method.  Effective January 1, 2003, accounting for our gas trading operation’s inventory was adjusted to the lower of cost or market method with a cumulative effect adjustment, as required by EITF 02-3.  The impacts of adopting EITF 02-3 are discussed in (g)(i).

 

(e)                                  Stock-Based Compensation

 

Effective January 1, 2003, Cinergy adopted prospectively the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, for all employee awards granted or modified after January 1, 2003.  Prior to 2003, we accounted for all stock-based compensation plans using the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.  The following table illustrates the effect on our Net Income and Earnings Per Common Share (EPS) if the fair value based method had been applied to all outstanding and unvested awards in each period.

 

29



 

 

 

Quarter Ended September 30

 

Year to Date September 30

 

 

 

(in millions, except per share amounts)

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Net income, as reported

 

$

112

 

$

131

 

$

363

 

$

260

 

 

 

 

 

 

 

 

 

 

 

Add:                         Stock-based employee compensation expense included in reported net income, net of related tax effects.

 

3

 

5

 

12

 

10

 

 

 

 

 

 

 

 

 

 

 

Deduct:          Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects.

 

4

 

5

 

14

 

11

 

 

 

 

 

 

 

 

 

 

 

Pro-forma net income

 

$

111

 

$

131

 

$

361

 

$

259

 

 

 

 

 

 

 

 

 

 

 

EPS - as reported

 

$

0.63

 

$

0.78

 

$

2.06

 

$

1.57

 

EPS - pro-forma

 

$

0.63

 

$

0.78

 

$

2.05

 

$

1.56

 

 

 

 

 

 

 

 

 

 

 

EPS assuming dilution - as reported

 

$

0.62

 

$

0.77

 

$

2.04

 

$

1.55

 

EPS assuming dilution - pro-forma

 

$

0.62

 

$

0.77

 

$

2.03

 

$

1.54

 

 

The pro-forma amounts reflect certain assumptions used in estimating fair values.  As a result of this and other factors which may affect the timing and amounts of stock-based compensation, the pro-forma effect on Net Income and EPS may not be representative of future periods.

 

(f)                                    Asset Retirement Obligations

 

We recognize the fair value of legal obligations associated with the retirement or removal of long-lived assets at the time the obligations are incurred.  The initial recognition of this liability is accompanied by a corresponding increase in property, plant, and equipment.  Subsequent to the initial recognition, the liability is adjusted for any revisions to the expected cash flows of the retirement obligation (with corresponding adjustments to property, plant, and equipment), and for accretion of the liability due to the passage of time (recognized as Operation and maintenance expense).  Additional depreciation expense is recorded prospectively for any property, plant, and equipment increases.

 

We do not recognize liabilities for asset retirement obligations for which the fair value cannot be reasonably estimated.  CG&E and PSI have asset retirement obligations associated with river structures at certain generating stations.  However, the retirement date for these river structures cannot be reasonably estimated; therefore, the fair value of the associated liability currently cannot be estimated and no amounts are recognized in the financial statements herein.

 

Effective with our adoption of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (Statement 143), on January 1, 2003, we do not accrue the estimated cost of removal when no obligation associated with retirement or removal exists for any of our non-regulated assets, even if removal of the asset is likely.  For our rate-regulated assets where our tariff rate includes a cost of removal component, we recognize a charge for estimated cost of removal under Statement of Financial Accounting Standards No. 71,

 

30



 

Accounting for the Effects of Certain Types of Regulation (Statement 71), as part of depreciation.  This includes most assets for PSI, CG&E, except for its generating assets, and ULH&P.  See (g)(vi) for additional information.

 

(g)                                 Accounting Changes

 

(i)          Energy Trading

 

In October 2002, the EITF reached consensus in EITF 02-3, to (a) rescind EITF 98-10, (b) generally preclude the recognition of gains at the inception of derivatives, and (c) require all realized and unrealized gains and losses on energy trading derivatives to be presented net in the Statements of Income, whether or not settled physically.  The consensus to rescind EITF 98-10 required most energy trading contracts that do not qualify as derivatives to be accounted for on an accrual basis, rather than at fair value.  The consensus was immediately effective for all new contracts executed after October 25, 2002, and required a cumulative effect adjustment to income, net of tax, on January 1, 2003, for all contracts executed on or prior to October 25, 2002.  The cumulative effect adjustment, on a net of tax basis, was a loss of $13 million for Cinergy and $8 million for CG&E, which includes primarily the impact of certain coal contracts, gas inventory, and certain gas contracts, which were all accounted for at fair value.  We expect this rescission to have the largest ongoing impact on our gas trading business, which uses financial contracts, physical contracts, and gas inventory to take advantage of various arbitrage opportunities.  Prior to the rescission of EITF 98-10, all of these activities were accounted for at fair value.  Under the revised guidance, only certain items are accounted for at fair value, which could increase inter-period volatility in reported results of operations.  As a result, we began applying fair value hedge accounting in June 2003 to certain quantities of gas inventory (more fully discussed in (c)(i) above) and are further reviewing additional applications for hedge accounting.

 

The consensus to require all gains and losses on energy trading derivatives to be presented net in the Statements of Income was effective January 1, 2003, and required reclassification for all periods presented.  This resulted in substantial reductions in reported Operating Revenues, Fuel and purchased and exchanged power expense, and Gas purchased expense.  However, Operating Income and Net Income were not affected by this change.

 

31



 

The following table presents the effect of the change in revenue presentation in Operating Revenues, Fuel and purchased and exchanged power expense, and Gas purchased expense for the quarter ended and year to date September 30, 2002.

 

 

 

Cinergy(1)

 

CG&E and
subsidiaries

 

PSI

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended September 30, 2002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric Operating Revenues as previously reported

 

$

2,554,687

 

$

1,747,379

 

$

776,837

 

 

 

 

 

 

 

 

 

Adjustment for effect of EITF 02-3 implementation

 

(1,574,214

)

(1,254,762

)

(306,065

)

Other(2)

 

(15,038

)

 

 

 

 

 

 

 

 

 

 

Electric Operating Revenues as adjusted

 

$

965,435

 

$

492,617

 

$

470,772

 

 

 

 

 

 

 

 

 

Gas Operating Revenues as previously reported

 

$

1,281,411

 

$

41,452

 

$

 

 

 

 

 

 

 

 

 

Adjustment for effect of EITF 02-3 implementation

 

(1,171,709

)

 

 

Other(2)

 

(5,629

)

 

 

 

 

 

 

 

 

 

 

Gas Operating Revenues as adjusted

 

$

104,073

 

$

41,452

 

$

 

 

 

 

 

 

 

 

 

Fuel and purchased and exchanged power expense as previously reported

 

$

1,871,365

 

$

1,391,221

 

$

474,748

 

 

 

 

 

 

 

 

 

Adjustment for effect of EITF 02-3 implementation

 

(1,555,263

)

(1,254,762

)

(306,065

)

Other(2)

 

(13,736

)

 

 

 

 

 

 

 

 

 

 

Fuel and purchased and exchanged power expense as adjusted

 

$

302,366

 

$

136,459

 

$

168,683

 

 

 

 

 

 

 

 

 

Gas purchased expense as previously reported

 

$

1,243,507

 

$

12,594

 

$

 

 

 

 

 

 

 

 

 

Adjustment for effect of EITF 02-3 implementation

 

(1,190,659

)

 

 

Other(2)

 

(3,565

)

 

 

 

 

 

 

 

 

 

 

Gas purchased expense as adjusted

 

$

49,283

 

$

12,594

 

$

 

 

 

 

 

 

 

 

 

Year to Date September 30, 2002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric Operating Revenues as previously reported

 

$

5,178,481

 

$

3,249,715

 

$

1,874,109

 

 

 

 

 

 

 

 

 

Adjustment for effect of EITF 02-3 implementation

 

(2,578,261

)

(1,948,273

)

(658,318

)

Other(2)

 

(68,937

)

 

 

 

 

 

 

 

 

 

 

Electric Operating Revenues as adjusted

 

$

2,531,283

 

$

1,301,442

 

$

1,215,791

 

 

 

 

 

 

 

 

 

Gas Operating Revenues as previously reported

 

$

3,301,625

 

$

277,069

 

$

 

 

 

 

 

 

 

 

 

Adjustment for effect of EITF 02-3 implementation

 

(2,921,651

)

 

 

Other(2)

 

(5,629

)

 

 

 

 

 

 

 

 

 

 

Gas Operating Revenues as adjusted

 

$

374,345

 

$

277,069

 

$

 

 

 

 

 

 

 

 

 

Fuel and purchased and exchanged power expense as previously reported

 

$

3,357,585

 

$

2,300,565

 

$

1,078,596

 

 

 

 

 

 

 

 

 

Adjustment for effect of EITF 02-3 implementation

 

(2,549,301

)

(1,948,273

)

(658,318

)

Other(2)

 

(46,426

)

 

 

 

 

 

 

 

 

 

 

Fuel and purchased and exchanged power expense as adjusted

 

$

761,858

 

$

352,292

 

$

420,278

 

 

 

 

 

 

 

 

 

Gas purchased expense as previously reported

 

$

3,142,899

 

$

145,033

 

$

 

 

 

 

 

 

 

 

 

Adjustment for effect of EITF 02-3 implementation

 

(2,950,609

)

 

 

Other(2)

 

(3,565

)

 

 

 

 

 

 

 

 

 

 

Gas purchased expense as adjusted

 

$

188,725

 

$

145,033

 

$

 

 


(1)          The results of Cinergy also include amounts related to non-registrants and include the elimination of certain intercompany amounts.

(2)          Item represents amounts reclassified to Discontinued operations, net of tax.

 

32



 

(ii)      Derivatives

 

In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (Statement 149).  Statement 149 primarily amends Statement 133 to incorporate implementation conclusions previously cleared by the FASB staff, to clarify the definition of a derivative and to require derivative instruments that include up-front cash payments to be classified as a financing activity in the Statements of Cash Flows.  Implementation issues that had been previously cleared by the FASB staff were effective at the time that they were cleared and new guidance was effective in the third quarter of 2003.  In connection with our adoption, we reviewed certain power purchase or sale contracts to determine if they met the revised normal purchase and normal sale scope exception criteria in Statement 149.  If these criteria were not met, the contract was accounted for at fair value.  The impact of adopting Statement 149 was not material to our results of operations or financial position.

 

In June 2003, the FASB issued final guidance on the use of broad market indices (e.g., consumer price index) in power purchase and sales contracts.  This guidance clarifies that the normal purchases and sales scope exception is precluded if a contract contains a broad market index that is not clearly and closely related to the asset being sold or purchased (or a direct factor in the production of the asset sold or purchased).  The guidance provides criteria that must be met for the index to be considered clearly and closely related.  This guidance, which is effective in the fourth quarter of 2003, is not expected to have a material impact on our results of operations or financial position upon adoption.

 

(iii)  Consolidation of Variable Interest Entities (VIE)

 

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (Interpretation 46), which significantly changes the consolidation requirements for traditional special purpose entities (SPE) and certain other entities subject to its scope.  This interpretation defines a VIE as (a) an entity that does not have sufficient equity to support its activities without additional financial support or (b) an entity that has equity investors that do not have voting rights or do not absorb losses or receive returns.  These entities must be consolidated when certain criteria are met.  The interpretation was originally to be effective as of July 1, 2003 for Cinergy; however, the FASB subsequently permitted deferral of the effective date to December 31, 2003 for either some or all potential VIEs.  During this deferral period, the FASB plans to clarify and amend several provisions, much of which is intended to assist in the application of Interpretation 46 to operating entities.  Clarifications were not needed for most traditional SPEs and we therefore elected to implement Interpretation 46 for such entities, as discussed below, in accordance with the original implementation date of July 1, 2003.  Prior period financial statements were not restated for these changes.

 

Interpretation 46 requires us to consolidate two SPEs that have individual power sale agreements to Central Maine Power Company (CMP) for approximately 45 megawatts (MW) of capacity, ending in 2009, and 35 MW of capacity, ending in 2016.  In addition, these SPEs have individual power purchase agreements with Cinergy Capital & Trading, Inc. (Capital & Trading) to supply the power.  Capital & Trading also provides various services, including certain credit support

 

33



 

facilities.  Upon the initial consolidation of these two SPEs, approximately $239 million of notes receivable, $225 million of non-recourse debt, and miscellaneous other assets and liabilities were included on Cinergy’s Balance Sheets.  The debt was incurred by the SPEs to finance the buyout of existing power contracts that CMP held with former suppliers.  The cash flows from the notes receivable are designed to repay the debt.  Notes 3 and 4 provide additional information regarding the debt and the notes receivable, respectively.

 

In accordance with Interpretation 46, we are no longer permitted to consolidate a trust that was established by Cinergy Corp. in 2001 to issue approximately $316 million of combined preferred trust securities and stock purchase contracts.  These securities are more fully described in the 2002 10-K.  In 2001, the trust loaned the proceeds from the issuance of the securities to Cinergy Corp. in exchange for a note payable to the trust that was eliminated in consolidation.  As a result of no longer consolidating the trust beginning July 1, 2003, the preferred trust securities (previously recorded as Company obligated, mandatorily redeemable, preferred trust securities of subsidiary, holding solely debt securities of the company) are no longer included in Cinergy’s Balance Sheets.  In addition, the note payable owed to the trust, which has a current carrying value of approximately $319 million, was included in Long-term debt.  The impact of not consolidating the trust was immaterial to Cinergy’s results of operations.

 

Cinergy has concluded that its accounts receivable sale facility, as discussed in the 2002 10-K, will remain unconsolidated since it involves transfers of financial assets to a qualifying SPE, which is exempted from consolidation by Interpretation 46 and Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.

 

Cinergy is continuing to evaluate the impact of Interpretation 46 on several operating joint ventures, primarily involved in cogeneration and energy efficiency operations, that we currently do not consolidate.  If all these entities were consolidated, their total assets of approximately $675 million (the majority of which is non-current) and total liabilities of approximately $225 million (which includes long-term debt of approximately $100 million) would be recognized on our Balance Sheets.  Cinergy’s current investment in these entities is approximately $250 million.  We also guarantee certain performance obligations of these entities with an estimated maximum potential exposure of approximately $55 million, as disclosed in Note 7(a).  As discussed above, we expect additional interpretative guidance to be issued by the FASB during the fourth quarter of 2003 and Cinergy will adopt those provisions effective December 31, 2003.

 

(iv)    Financial Instruments with Characteristics of Both Liabilities and Equity

 

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (Statement 150).  Statement 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.  This statement was effective for financial instruments entered into or modified after May 31, 2003, and was effective on July 1, 2003, for financial instruments held prior to issuance of this statement.  Statement 150 would have required Cinergy Corp.’s preferred trust securities to be reported as a liability; however, as described more fully above, the trust holding these securities is no longer permitted to be consolidated and the preferred trust securities are no longer reported on

 

34



 

Cinergy’s Balance Sheets.  However, Cinergy’s note payable to the trust is recorded on the Balance Sheets as Long-term debt.  As a result, the impact of adopting Statement 150 was not material to our results of operations or financial position.

 

As discussed in the 2002 10-K, Cinergy issued forward stock sale contracts that require purchase by the holder of a certain number of Cinergy shares in February 2005 (stock contracts).  The number of shares to be issued is contingent on the market price of Cinergy Corp. stock, but subject to a predetermined ceiling and floor price.  In October 2003, the FASB Staff released an interpretation of Statement 150 that requires an evaluation of these stock contracts to determine whether they constitute a liability, with any changes in accounting required in January 2004.  We believe that this interpretation will have no impact on our current accounting.

 

(v)        Intangible Assets

 

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (Statement 142).  With the adoption of Statement 142, goodwill and other intangibles with indefinite lives are no longer subject to amortization.  Statement 142 requires that goodwill be assessed for impairment upon adoption (transition impairment test) and at least annually thereafter by applying a fair-value-based test, as opposed to the undiscounted cash flow test applied under prior accounting standards.

 

We began applying Statement 142 in the first quarter of 2002.  We finalized our transition impairment test in the fourth quarter of 2002 and recognized a non-cash impairment charge of approximately $11 million (net of tax) for goodwill related to certain of our international assets.  This amount is reflected in Cinergy’s Statements of Income as a cumulative effect adjustment, net of tax.  While Statement 142 did not require the initial transition impairment test to be completed until December 31, 2002, it required the cumulative effect adjustment to be reflected as of January 1, 2002.

 

Cinergy Corp.’s condensed financial results below revise previously reported results as filed in the Form 10-Q for the year to date period ended September 30, 2002, to reflect the impairment charge as of January 1, 2002.

 

 

 

Year to Date
September 30, 2002

 

 

 

Net
Income

 

EPS

 

EPS-
Assuming
Dilution

 

 

 

(in millions, except for EPS)

 

 

 

 

 

 

 

 

 

Reported results

 

$

271

 

$

1.63

 

$

1.61

 

Cumulative effect of a change in accounting principle, net of tax

 

(11

)

(0.06

)

(0.06

)

Revised results

 

$

260

 

$

1.57

 

$

1.55

 

 

35



 

(vi)    Asset Retirement Obligations

 

In July 2001, the FASB issued Statement 143, which requires fair value recognition beginning January 1, 2003, of legal obligations associated with the retirement or removal of long-lived assets, at the time the obligations are incurred.  Our accounting policy for such legal obligations is described in (f) above.

 

We adopted Statement 143 on January 1, 2003, and Cinergy and CG&E both recognized a gain of $39 million (net of tax) for the cumulative effect of this change in accounting principle.  Substantially all of this adjustment reflects the reversal of previously accrued cost of removal for CG&E’s generating assets, which do not apply Statement 71.  Accumulated depreciation at adoption includes $316 million, $25 million, and $146 million of accumulated cost of removal related to PSI’s, ULH&P’s, and CG&E’s utility plant in service assets, respectively, which represent regulatory liabilities and were not included as part of the cumulative effect adjustment.  The increases in assets and liabilities from adopting Statement 143 were not material to our financial position.

 

Pro-forma results as if Statement 143 was applied retroactively for the years ended December 31, 2002, 2001, and 2000 and the quarter ended and year to date September 30, 2002 are not materially different from reported results.

 

(vii)  Cumulative Effect of Changes in Accounting Principles, Net of Tax

 

The following table summarizes the various cumulative effect adjustments (net of tax) discussed above for the rescission of EITF 98-10 and the adoption of Statement 142 and Statement 143:

 

 

 

Year to Date September 30

 

 

 

2003

 

2002

 

 

 

(in thousands)

 

 

 

 

 

 

 

Cinergy(1)

 

 

 

 

 

Goodwill impairment (Statement 142 adoption)

 

$

 

$

(10,899

)

Rescission of EITF 98-10 (EITF 02-3 adoption)

 

(12,512

)

 

Asset retirement obligation (Statement 143 adoption)

 

38,974

 

 

 

 

$

26,462

 

$

(10,899

)

CG&E

 

 

 

 

 

Rescission of EITF 98-10 (EITF 02-3 adoption)

 

$

(8,239

)

$

 

Asset retirement obligation (Statement 143 adoption)

 

39,177

 

 

 

 

$

30,938

 

$

 

PSI

 

 

 

 

 

Rescission of EITF 98-10 (EITF 02-3 adoption)

 

$

(494

)

$

 

 

 

$

(494

)

$

 

 


(1)          The results of Cinergy also include amounts related to non-registrants.

 

36



 

2.              Common Stock Equity

 

(a)                                  Changes In Common Stock Outstanding

 

As discussed in the 2002 10-K, Cinergy issues new Cinergy Corp. common stock shares to satisfy obligations under its various employee stock plans and the Cinergy Corp. Direct Stock Purchase and Dividend Reinvestment Plan.  During 2003, Cinergy has issued approximately 3.5 million shares under these plans.

 

On January 15, 2003, Cinergy Corp. filed a registration statement with the Securities and Exchange Commission (SEC) with respect to the issuance of common stock, preferred stock, and other securities in an aggregate offering amount of $750 million.  On February 5, 2003, Cinergy sold 5.7 million shares of common stock of Cinergy Corp. with net proceeds of approximately $175 million under this registration statement.  The net proceeds from the transaction were used to reduce short-term debt of Cinergy Corp. and for other general corporate purposes.

 

(b)                                  Stock-Based Compensation Plan

 

The Compensation Committee of the Board of Directors (Compensation Committee) grants certain performance share awards under the Cinergy Corp. 1996 Long-Term Incentive Compensation Plan (LTIP).  Historically, the performance shares have been paid 100 percent in the form of common stock.  In order to maintain market-competitiveness with respect to the form of LTIP awards and to ensure continued compliance with internal guidelines on common share dilution, the Compensation Committee approved the future payment of performance share awards 50 percent in common stock and 50 percent in cash.  As a result, we have reclassified the expected cash payout portion of the performance shares from Paid-in capital to other current liabilities and other non-current liabilities.

 

(c)                                  Contributed Capital

 

Cinergy Corp. contributed $200 million in capital to PSI in two separate $100 million capital contributions in the second and third quarters of 2003, respectively.  These capital contributions were made to support PSI’s current credit ratings.

 

3.              Long-term Debt

 

In October 2002, PSI filed a petition with the Indiana Utility Regulatory Commission (IURC) for the purpose of securing authorization and approval to issue two subordinated promissory notes to Cinergy Corp. for the acquisition of the Butler County, Ohio and Henry County, Indiana peaking plants.  In January 2003, the IURC granted this request, and in February 2003, PSI issued the notes.  One subordinated note was for the principal amount of $200 million with an annual interest rate of 6.30% scheduled to mature on April 15, 2004.  The second subordinated note was for $176 million with an annual interest rate of 6.40% scheduled to mature on September 1, 2004.

 

In March 2003, PSI borrowed the proceeds from the issuance by the Indiana Development Finance Authority of $35 million of its Environmental Refunding Revenue Bonds Series 2003,

 

37



 

due April 1, 2022.  Interest was initially set at 1.05% and resets every 35 days by auction.  The bonds are not putable by the holders; therefore, PSI’s debt obligation is classified as Long-term debt.  Later in March 2003, the proceeds from this borrowing plus the interest income earned were used to cause the refunding of the $35 million principal amount outstanding of the City of Princeton, Indiana Pollution Control Revenue Refunding Bonds, 1997 Series.

 

In April 2003, PSI redeemed $26.8 million of the following Series A, Medium-term Notes:

 

Principal Amount

 

Interest Rate

 

Maturity Date

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

$

2.0

 

8.37

%

11/08/2006

 

5.0

 

8.81

 

05/16/2022

 

3.0

 

8.80

 

05/18/2022

 

16.8

 

8.67

 

06/01/2022

 

 

In June 2003, CG&E issued $200 million principal amount of its 5 3/8% 2003 Series B Debentures due June 15, 2033 (effective interest rate of 5.66%).  Proceeds from this issuance were used for general corporate purposes, including the funding of capital expenditures related to construction projects and environmental compliance initiatives, and the repayment of outstanding indebtedness.

 

Also, in June 2003, CG&E modified existing debt resulting in a $200 million principal amount 5.40% 2003 Series A Debenture with a 30 year maturity.  The effective interest rate is 6.90%.  In June 2003, CG&E redeemed its $100 million 8.28% Junior Subordinated Debentures due July 1, 2025.

 

Cinergy adopted Interpretation 46 on July 1, 2003, as discussed in Note 1(g)(iii).  The adoption of this new accounting principle had the following effects on long-term debt:

 

                  Cinergy no longer consolidates the trust that held Company obligated, mandatorily redeemable, preferred trust securities of subsidiary, holding solely debt securities of the company.  This resulted in the removal of these securities from our Balance Sheets and the addition to long-term debt of a $319 million note payable that Cinergy owes to the trust.

 

                  Cinergy consolidated two SPEs effective July 1, 2003.  As a result, Cinergy has approximately $221 million of additional non-recourse debt as of September 30, 2003, comprised of two separate notes.

 

The first note, with a September 30, 2003 balance of $114 million bears an interest rate of 7.81% and matures in June 2009.  The second note, with a September 30, 2003 balance of $107 million, bears an interest rate of 9.23% and matures in November 2016.

 

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The following table reflects the long-term maturities for this non-recourse debt.

 

Selected Long-term Debt Maturities

 

 

 

Cinergy

 

 

 

(in millions)

 

 

 

 

 

Next 12 months

 

$

17

 

 

 

 

 

 

13-24 months

 

19

 

 

 

 

 

25-36 months

 

22

 

 

 

 

 

37-48 months

 

24

 

 

 

 

 

49-60 months

 

27

 

 

 

 

 

Thereafter

 

112

 

 

 

 

 

 

 

$

221

 

 

In September 2003, PSI redeemed $56 million of its 5.93% Series B, Medium-term Notes at maturity.

 

In September 2003, PSI issued $400 million principal amount of its 5.00% Debentures due September 15, 2013 (effective interest rate of 5.20%).  Proceeds from this issuance were used for the early redemption at par of two intercompany promissory notes, as discussed above, totaling $376 million.  The remaining proceeds were used to reduce short-term indebtedness associated with general corporate purposes including funding capital expenditures related to construction projects and environmental compliance initiatives.

 

In October 2003, CG&E redeemed its $265.5 million First Mortgage Bonds, 7.20% due October 1, 2023.

 

4.              Notes Receivable

 

As discussed in Note 1(g)(iii), Cinergy consolidated two previously unconsolidated SPEs effective July 1, 2003.  As a result, Cinergy has approximately $235 million of additional notes receivable as of September 30, 2003, comprised of two separate notes.

 

The first note, with a September 30, 2003 balance of $122 million bears an effective interest rate of 7.81% and matures in August 2009.  The second note, with a September 30, 2003 balance of $113 million, bears an effective interest rate of 9.23% and matures in December 2016.

 

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The following table reflects the maturities of these notes.

 

Notes Receivable Maturities

 

 

 

Cinergy

 

 

 

(in millions)

 

 

 

 

 

Next 12 months

 

$

17

 

 

 

 

 

 

13-24 months

 

19

 

 

 

 

 

25-36 months

 

22

 

 

 

 

 

37-48 months

 

24

 

 

 

 

 

49-60 months

 

28

 

 

 

 

 

Thereafter

 

125

 

 

 

 

 

 

 

$

235

 

 

5.              Notes Payable and Other Short-term Obligations

 

At September 30, 2003, Cinergy Corp. had $776 million remaining unused and available capacity relating to its $1 billion revolving credit facilities.  These revolving credit facilities included the following:

 

Credit Facility

 

Expiration

 

Established
Lines

 

Outstanding
and
Committed

 

Unused and Available

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

364-day senior revolving

 

April 2004

 

 

 

 

 

 

 

Direct borrowing

 

 

 

$

 

 

$

 

$

 

 

Commercial paper support

 

 

 

 

 

209

 

 

 

 

 

 

 

 

 

 

 

 

 

Total 364-day facility

 

 

 

600

 

209

 

391

 

 

 

 

 

 

 

 

 

 

 

Three-year senior revolving

 

May 2004

 

 

 

 

 

 

 

Direct borrowing

 

 

 

 

 

 

 

 

Commercial paper support

 

 

 

 

 

 

 

 

Letter of Credit support

 

 

 

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

Total three-year facility

 

 

 

400

 

15

 

385

 

 

 

 

 

 

 

 

 

 

 

Total credit facilities

 

 

 

$

1,000

 

$

224

 

$

776

 

 

In April 2003, Cinergy Corp. successfully placed a $600 million, 364-day senior unsecured revolving credit facility.  This facility replaced the $600 million, 364-day facility that expired April 30, 2003.

 

In August 2003, CG&E caused the remarketing by the Ohio Air Quality Development Authority of $84 million of its State of Ohio Air Quality Development Revenue Refunding Bonds, due

 

40



 

September 1, 2030.  The issuance consists of a $42 million 1995 Series A and a $42 million 1995 Series B.  The remarketing effected the conversion from a daily interest rate reset mode supported by a letter of credit to an unsecured weekly interest rate mode.  The interest rate for both series was initially set at 1.30% and will reset every seven days going forward.  Because the holders of these notes have the right to have their notes redeemed on a weekly basis, they are reflected in Notes payable and other short-term obligations on the Balance Sheets of Cinergy and CG&E.

 

Also in August 2003, CG&E caused the remarketing by the Ohio Air Quality Development Authority of $12.1 million of its State of Ohio Air Quality Development Revenue Bonds 2001 Series A due August 1, 2033.  The remarketing effected the conversion from an unsecured one-year interest rate reset mode to a daily interest rate reset mode supported by a letter of credit.  The interest rate was initially set at 0.95% and will be reset daily going forward.  Because the holders of these notes have the right to have their notes redeemed on a daily basis, they are reflected in Notes payable and other short-term obligations on the Balance Sheets of Cinergy and CG&E.

 

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The following table summarizes our Notes payable and other short-term obligations, and Notes payable to affiliated companies.

 

 

 

September 30, 2003

 

December 31, 2002

 

 

 

Established
Lines

 

Outstanding

 

Established
Lines

 

Outstanding

 

 

 

(in millions)

 

Cinergy

 

 

 

 

 

 

 

 

 

Cinergy Corp.

 

 

 

 

 

 

 

 

 

Revolving lines

 

$

1,000

 

$

 

$

1,000

 

$

25

 

Uncommitted lines (1)

 

65

 

 

65

 

 

Commercial paper (2)

 

 

 

209

 

 

 

473

 

 

 

 

 

 

 

 

 

 

 

Operating companies

 

 

 

 

 

 

 

 

 

Uncommitted lines (1)

 

75

 

 

75

 

 

Pollution control notes

 

 

 

112

 

 

 

147

 

 

 

 

 

 

 

 

 

 

 

Non-regulated subsidiaries

 

 

 

 

 

 

 

 

 

Revolving lines

 

17

 

9

 

7

 

1

 

Short-term debt

 

 

 

7

 

 

 

22

 

 

 

 

 

 

 

 

 

 

 

Cinergy Total

 

 

 

$

337

 

 

 

$

668

 

 

 

 

 

 

 

 

 

 

 

CG&E and subsidiaries

 

 

 

 

 

 

 

 

 

Uncommitted lines (1)

 

$

15

 

$

 

$

15

 

$

 

Pollution control notes

 

 

 

112

 

 

 

112

 

Money pool

 

 

 

9

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

CG&E Total

 

 

 

$

121

 

 

 

$

121

 

 

 

 

 

 

 

 

 

 

 

PSI

 

 

 

 

 

 

 

 

 

Uncommitted lines (1)

 

$

60

 

$

 

$

60

 

$

 

Pollution control notes

 

 

 

 

 

 

35

 

Money pool

 

 

 

165

 

 

 

138

 

 

 

 

 

 

 

 

 

 

 

PSI Total

 

 

 

$

165

 

 

 

$

173

 

 

 

 

 

 

 

 

 

 

 

ULH&P

 

 

 

 

 

 

 

 

 

Money pool

 

 

 

$

24

 

 

 

$

14

 

 

 

 

 

 

 

 

 

 

 

ULH&P Total

 

 

 

$

24

 

 

 

$

14

 

 


(1)          Outstanding amounts may be greater than established lines as uncommitted lenders are, at times, willing to loan funds in excess of the established lines.

(2)          The commercial paper program is limited to $800 million and is supported by Cinergy Corp.’s revolving lines.

 

In our credit facilities, Cinergy Corp. has covenanted to maintain:

 

                  a consolidated net worth of $2 billion; and

                  a ratio of consolidated indebtedness to consolidated total capitalization not in excess of 65 percent.

 

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A breach of these covenants could result in the termination of the credit facilities and the acceleration of the related indebtedness.  In addition to breaches of covenants, certain other events that could result in the termination of available credit and acceleration of the related indebtedness include:

 

                  bankruptcy;

                  defaults in the payment of other indebtedness; and

                  judgments against the company that are not paid or insured.

 

The latter two events, however, are subject to dollar-based materiality thresholds.

 

As discussed in Note 1(g)(iii), long-term debt increased in the third quarter of 2003 resulting from the adoption of Interpretation 46.  The debt which was recorded as a result of this new accounting pronouncement did not cause Cinergy to be in breach of any covenants.

 

6.                                      Energy Trading Credit Risk

 

Cinergy’s extension of credit for energy marketing and trading is governed by a Corporate Credit Policy.  Written guidelines document the management approval levels for credit limits, evaluation of creditworthiness, and credit risk mitigation procedures.  Exposures to credit risks are measured and monitored daily by our Corporate Credit Risk function, which is independent of all trading operations.  As of September 30, 2003, approximately 99 percent of the credit exposure related to energy trading and marketing activity was with counterparties rated Investment Grade or the counterparties’ obligations were guaranteed or secured by an Investment Grade entity.  No single non-investment grade counterparty accounts for more than one percent of our total credit exposure.  Energy commodity prices can be extremely volatile and the market can, at times, lack liquidity.  Because of these issues, credit risk for energy commodities is generally greater than with other commodity trading.

 

We continually review and monitor our credit exposure to all counterparties and secondary counterparties.  If appropriate, we may adjust our credit reserves to attempt to compensate for increased credit risk within the industry.  Counterparty credit limits may be adjusted on a daily basis in response to changes in a counterparty’s creditworthiness, financial status, or public debt ratings.

 

7.                                      Commitments and Contingencies

 

(a)                                  Guarantees

 

In the ordinary course of business, Cinergy enters into various agreements providing financial or performance assurances to third parties on behalf of certain unconsolidated subsidiaries and joint ventures.  These agreements are entered into primarily to support or enhance the creditworthiness otherwise attributed to these entities on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish their intended commercial purposes.  The guarantees have various termination dates, from short-term (less than one year) to open-ended.

 

43



 

In many cases, the maximum potential amount of an outstanding guarantee is an express term, set forth in the guarantee agreement, representing the maximum potential obligation of Cinergy under that guarantee (excluding, at times, certain legal fees to which a guaranty beneficiary may be entitled).  In those cases where there is no maximum potential amount expressly set forth in the guarantee agreement, we calculate the maximum potential amount by considering the terms of the guaranteed transactions, to the extent such amount is estimable.

 

Cinergy has guaranteed the payment of $32 million as of September 30, 2003, for unconsolidated subsidiaries’ debt and for borrowings by individuals under the Director, Officer, and Key Employee Stock Purchase Program.  Cinergy may be obligated to pay the debt’s principal and any related interest in the event of an unexcused breach of a guaranteed payment obligation by the unconsolidated subsidiaries or by certain directors, officers, and key employees.  Most of the guarantees do not have a set termination date; however, the borrowings associated with the majority of the guarantees are due in the first quarter of 2005.

 

Cinergy Corp. has also provided performance guarantees on behalf of certain unconsolidated subsidiaries and joint ventures.  These guarantees support performance under various agreements and instruments (such as construction contracts, operation and maintenance agreements, and energy service agreements).  Cinergy Corp. may be liable in the event of an unexcused breach of a guaranteed performance obligation by an unconsolidated subsidiary.  Cinergy Corp. has estimated its maximum potential amount to be $133 million under these guarantees as of September 30, 2003.  Cinergy Corp. may also have recourse to third parties for claims required to be paid under certain of these guarantees.  The majority of these guarantees expire at the completion of the underlying performance agreements, the majority of which expire from 2016 to 2019.

 

Cinergy has entered into contracts that include indemnification provisions as a routine part of its business activities.  Examples of these contracts include purchase and sale agreements and operating agreements.  In general, these provisions indemnify the counterparty for matters such as breaches of representations and warranties and covenants contained in the contract.  In some cases, particularly with respect to purchase and sale agreements, the potential liability for certain indemnification obligations is capped, in whole or in part (generally at an aggregate amount not exceeding the sale price), and subject to a deductible amount before any payments would become due.  In other cases (such as indemnifications for willful misconduct of employees in a joint venture), the maximum potential amount is not estimable given that the magnitude of any claims under those indemnifications would be a function of the extent of damages actually incurred, which is not practicable to estimate unless and until the event occurs.  Cinergy has estimated the maximum potential amount, where estimable, to be $124 million under these indemnification provisions.  The termination period for the majority of matters provided by indemnification provisions in purchase and sale agreements generally ranges from 2003 to 2009.

 

We believe the likelihood that Cinergy would be required to perform or otherwise incur any significant losses associated with any or all of the guarantees described in the preceding paragraphs is remote.

 

44



 

(b)                                  Ozone Transport Rulemakings

 

In June 1997, the Ozone Transport Assessment Group, which consisted of 37 states, made a wide range of recommendations to the Environmental Protection Agency (EPA) to address the impact of ozone transport on serious non-attainment areas (geographic areas defined by the EPA as non-compliant with ozone standards) in the Northeast, Midwest, and South.  Ozone transport refers to wind-blown movement of ozone and ozone-causing materials across city and state boundaries.

 

(i)          Nitrogen Oxide (NOX) State Implementation Plan (SIP) Call

 

In October 1998, the EPA finalized its ozone transport rule, also known as the NOX SIP Call.  It applied to 22 states in the eastern half of the United States (U.S.), including the three states in which our electric utilities operate, and proposed a model NOX emission allowance trading program.  This rule recommended that states reduce NOX emissions primarily from industrial and utility sources to a certain level by May 2003.

 

In August 2000, the U.S. Circuit Court of Appeals for the District of Columbia (Court of Appeals) extended the deadline for NOX reductions to May 31, 2004.  The states of West Virginia and Illinois, along with various industry groups (some of which we are a member), have challenged portions of the final rule that was published on May 1, 2002, in an action filed in the Court of Appeals.  A decision is expected some time after December 2003.  It is unclear whether the Court of Appeals’ decision in this matter will result in an increase or decrease in the size of the NOX reduction requirement, or a deferral of the May 31, 2004 compliance deadline.

 

The states of Indiana and Kentucky developed final NOX SIP rules in response to the NOX SIP Call, through cap and trade programs, in June and July of 2001, respectively.  The EPA has approved Indiana’s and Kentucky’s SIP rules, which have both become effective, and has conditionally approved Ohio’s SIP rules.  Ohio EPA is still promulgating the changes to its rules to satisfy the EPA’s conditions for approval.  Cinergy’s current plans for compliance with the EPA’s NOX SIP Call would also satisfy compliance with Indiana’s, Kentucky’s, and Ohio’s SIP rules.

 

On September 25, 2000, Cinergy announced a plan for its subsidiaries, CG&E and PSI, to invest in pollution control equipment and other methods to reduce NOX emissions.  This plan includes the following:

 

                  install selective catalytic reduction units at several different generating stations;

                  install other pollution control technologies, including new computerized combustion controls, at all generating stations;

                  make combustion improvements; and

                  utilize the NOX allowance market to buy or sell NOX allowances as appropriate.

 

The current estimate for additional expenditures for this plan is approximately $167 million and is in addition to the $682 million already incurred to comply with this program.

 

45



 

(ii)      Section 126 Petitions

 

In February 1998, several northeast states filed petitions seeking the EPA’s assistance in reducing ozone in the Eastern U.S. under Section 126 of the Clean Air Act (CAA).  The EPA believes that Section 126 petitions allow a state to claim that sources in another state are contributing to its air quality problem and request that the EPA require the upwind sources to reduce their emissions.

 

In December 1999, the EPA granted four Section 126 petitions relating to NOX emissions.  This ruling affected all of our Ohio and Kentucky facilities, as well as some of our Indiana facilities, and required us to reduce our NOX emissions to a certain level by May 2003.  The EPA subsequently extended the Section 126 rule compliance deadline to May 31, 2004, thus harmonizing the deadline with that for the NOX SIP Call.

 

On April 4, 2003, the EPA issued a proposed rule withdrawing the Section 126 rule in states with approved SIPs under the NOX SIP Call, which include the states of Indiana and Kentucky.  The proposed rule states that the EPA will withdraw the Section 126 in Ohio once Ohio has a fully approved SIP.  As a result of these actions, we anticipate that the Section 126 rule will not affect any of our facilities.

 

See (e) below for a discussion of the tentative EPA Agreement, which could affect our strategy for compliance with the final NOX SIP Call.

 

(c)                                  New Source Review (NSR)

 

The CAA’s NSR provisions require that a company obtain a pre-construction permit if it plans to build a new stationary source of pollution or make a major modification to an existing facility, unless the changes are exempt.

 

On November 3, 1999, the United States sued a number of holding companies and electric utilities, including Cinergy, CG&E, and PSI, in various U.S. District Courts.  The Cinergy, CG&E, and PSI suit alleged violations of the CAA at two of our generating stations relating to NSR and New Source Performance Standards requirements.  The suit sought (1) injunctive relief to require installation of pollution control technology on each of the generating units at CG&E’s W.C. Beckjord Generating Station (Beckjord Station) and at PSI’s Cayuga Generating Station, and (2) civil penalties in amounts of up to $27,500 per day for each violation.  Since that time, two amendments to the complaint have been filed by the United States, alleging additional violations of the CAA, including allegations involving different generating units.  In addition, three northeast states and two environmental groups have intervened in the case.

 

Consistent with a Revised Case Management Plan, the Indiana District Court set the case for trial by jury commencing on June 6, 2005.

 

On December 21, 2000, Cinergy, CG&E, and PSI reached an agreement in principle with the parties in the litigation for a negotiated resolution of the CAA claims in the litigation.  See (e) below for a discussion of the tentative EPA Agreement, which relates to matters discussed within this note.  At this time, we believe it is unlikely that a final agreement will be reached on the

 

46



 

terms currently proposed by the plaintiffs.  If the settlement is not completed, we intend to defend against the allegations vigorously in court.  At this time, it is not possible to determine the likelihood that the plaintiffs would prevail upon their claims, whether resolution of these matters will be on terms similar to the terms of the tentative agreement, or whether resolution of these matters would have a material effect on our financial position or results of operations.

 

On March 1, 2000, the EPA also filed an amended complaint in a separate lawsuit alleging violations of the CAA relating to NSR, Prevention of Significant Deterioration (PSD), and Ohio SIP requirements regarding various generating stations, including a generating station operated by the Columbus Southern Power Company (CSP) and jointly-owned by CSP, the Dayton Power and Light Company (DP&L), and CG&E.  The EPA is seeking injunctive relief and civil penalties of up to $27,500 per day for each violation.  This suit is being defended by CSP.  On April 4, 2001, the District Court in that case ruled that neither the Government nor the intervening plaintiff environmental groups could obtain civil penalties for any alleged violations that occurred more than five years prior to the filing of the complaint, but that both parties could seek injunctive relief for alleged violations that occurred more than five years before the filing of the complaint.  Thus, if the plaintiffs prevail in their claims, any calculation for penalties will not start on the date of the alleged violations, unless those alleged violations occurred after November 3, 1994, but CSP would be forced to install the controls required under the CAA.  Neither party appealed that decision.

 

In addition, Cinergy and CG&E have been informed by DP&L, that on June 30, 2000, the EPA issued a Notice of Violation (NOV) to DP&L for alleged violations of NSR, PSD, and SIP requirements at a generating station operated by DP&L and jointly-owned by CG&E.  The NOVs indicated the EPA may (1) issue an order requiring compliance with the requirements of the SIP, or (2) bring a civil action seeking injunctive relief and civil penalties of up to $27,500 per day for each violation.

 

At this time, it is not possible to predict whether resolution of these matters would have a material effect on our financial position or results of operations.

 

(d)                                  Beckjord Station NOV

 

On November 30, 1999, the EPA filed an NOV against Cinergy and CG&E, alleging that emissions of particulate matter at the Beckjord Station exceeded the allowable limit.  On June 22, 2000, the EPA issued an NOV and a finding of violation (FOV) alleging additional particulate emission violations at Beckjord Station.  The NOV/FOV indicated the EPA may issue an administrative compliance order, issue an administrative penalty order, or bring a civil or criminal action.

 

See (e) below for a discussion of the tentative EPA Agreement, which relates to matters discussed within this note.

 

(e)                                  EPA Agreement

 

On December 21, 2000, Cinergy, CG&E, and PSI reached an agreement in principle with the United States, three northeast states, and two environmental groups for a negotiated resolution of

 

47



 

CAA claims and other related matters brought against coal-fired power plants owned and operated by Cinergy’s operating subsidiaries.  The complete resolution of these issues is contingent upon establishing a final agreement with the EPA and other parties.  If a final agreement is reached with these parties, it would resolve past claims of alleged NSR violations as well as the Beckjord Station NOVs/FOV discussed previously under (c) and (d).

 

In return for resolution of claims regarding past maintenance activities, as well as future operational certainty, we tentatively committed in the agreement in principle to:

 

                  shut down or repower with natural gas, nine small coal-fired boilers at three power plants beginning in 2004;

                  build four additional sulfur dioxide (SO2) scrubbers, the first of which must be operational by December 31, 2007;

                  upgrade existing particulate control systems;

                  phase in the operation of NOX reduction technology year-round starting in 2004;

                  reduce our existing Title IV SO2 cap by 35 percent in 2013;

                  pay a civil penalty of $8.5 million to the U.S. government; and

                  implement $21.5 million in environmental mitigation projects, including retiring 50,000 tons of SO2 allowances by 2005.

 

In reaching the tentative agreement, we did not admit to any wrongdoing.

 

The estimated cost for these capital expenditures is expected to be approximately $700 million through 2013.  These capital expenditures are in addition to our previously announced commitment to install NOX controls as discussed in (b) above, but does include capital costs that Cinergy would expect to spend regardless of the settlement due to new environmental requirements expected in the second half of this decade.

 

Although we have continued to negotiate with the plaintiffs to achieve a final agreement, the plaintiffs have insisted on commitments from us which go beyond those contained in the agreement in principle.  At this time we believe it is unlikely that a final agreement will be reached on the terms currently proposed by the plaintiffs.

 

If the settlement is not completed, we intend to defend against the allegations, discussed in (c) and (d) above, vigorously in court.  At this time, it is not possible to determine the likelihood that the plaintiffs would prevail upon their claims, whether resolution of these matters will be on terms similar to the terms of the tentative agreement, or whether resolution of these matters would have a material effect on our financial position or results of operations.

 

(f)                                    Manufactured Gas Plant (MGP) Sites

 

Prior to the 1950s, gas was produced at MGP sites through a process that involved the heating of coal and/or oil.  The gas produced from this process was sold for residential, commercial, and industrial uses.

 

Coal tar residues, related hydrocarbons, and various metals have been found at former MGP sites in Indiana, including at least 22 sites that PSI or its predecessors previously owned and sold in a

 

48



 

series of transactions with Northern Indiana Public Service Company (NIPSCO) and Indiana Gas Company, Inc. (IGC).

 

In a combination of lawsuits and notices of violation, the 22 sites are in the process of being studied and will be remediated, if necessary.  In 1998 NIPSCO, IGC, and PSI entered into Site Participation and Cost Sharing Agreements to allocate liability and responsibilities between them.  The Indiana Department of Environmental Management (IDEM) oversees investigation and cleanup of all of these sites.  Thus far, PSI has primary responsibility for investigating, monitoring and remediating, if necessary, nine of these sites.

 

PSI notified its insurance carriers of the claims related to MGP sites raised by IGC, NIPSCO, and IDEM.  In April 1998, PSI filed suit in Hendricks County in the State of Indiana against its general liability insurance carriers.  PSI sought a declaratory judgment to obligate its insurance carriers to (1) defend MGP claims against PSI, or (2) pay PSI’s costs of defense and compensate PSI for its costs of investigating, preventing, mitigating, and remediating damage to property and paying claims related to MGP sites.  The trial court issued a variety of rulings with respect to the claims and defenses in the litigation.  PSI has appealed certain adverse rulings to the Indiana Court of Appeals.  Oral argument on the appeal occurred on November 5, 2003.  At the present time, PSI cannot predict the outcome of this litigation, including the outcome of the appeals.

 

CG&E has performed site assessments on its sites where we believe MGP activities have occurred at some point in the past and found no imminent risk to the environment.

 

PSI and CG&E, including its utility subsidiaries, have accrued costs related to investigation, remediation, and groundwater monitoring for those sites where such costs are probable and can be reasonably estimated.  As we continue to investigate and remediate the sites and additional facts become known, additional costs may be incurred beyond those currently accrued.  Until all investigation and remediation is complete, we are unable to determine the overall impact on our financial position or results of operations.

 

(g)                                 Asbestos Claims Litigation

 

CG&E and PSI have been named as defendants or co-defendants in lawsuits related to asbestos at their electric generating stations.  Currently, there are approximately 70 pending lawsuits.  In these lawsuits, plaintiffs claim to have been exposed to asbestos-containing products in the course of their work at the CG&E and PSI generating stations.  The plaintiffs further claim that as the property owner of the generating stations, CG&E and PSI should be held liable for their injuries and illnesses based on an alleged duty to warn and protect them from any asbestos exposure.  A majority of the lawsuits to date have been brought against PSI.  The impact on CG&E’s and PSI’s financial position or results of operations of these cases to date has not been material.

 

Of these lawsuits, one case filed against PSI has been tried to verdict.  The jury returned a verdict against PSI in the amount of approximately $500,000 on a negligence claim and for PSI on punitive damages.  PSI is appealing the judgment in this case.  In addition, we have settled a number of other lawsuits for substantially less than $500,000.

 

49



 

At this time, CG&E and PSI are not able to predict the ultimate outcome of these lawsuits or the impact on CG&E’s and PSI’s financial position or results of operations.

 

(h)                                 Gas Customer Choice

 

In January 2000, Cinergy Investments (Investments) sold Cinergy Resources, Inc. (Resources), a former subsidiary, to Licking Rural Electrification, Inc., doing business as The Energy Cooperative (Energy Cooperative).  In February 2001, Cinergy, CG&E, and Resources were named as defendants in three class action lawsuits brought by customers relating to Energy Cooperative’s removal from the Ohio Gas Customer Choice program and the failure to deliver gas to customers.  Subsequently, these class action suits were amended and consolidated into one suit.  CG&E has been dismissed as a defendant in the consolidated suit.  This customer litigation is pending in the Hamilton County Common Pleas Court.  A trial date has not been set.

 

In March 2001, Cinergy, CG&E, and Investments were named as defendants in a lawsuit filed by Energy Cooperative and Resources.  This lawsuit concerns any obligations or liabilities Investments may have to Energy Cooperative following its sale of Resources.  This lawsuit is pending in the Licking County Common Pleas Court.  Trial is anticipated to occur in November 2004.  In October 2001, Cinergy, CG&E, and Investments initiated litigation against the Energy Cooperative requesting indemnification by the Energy Cooperative for the claims asserted by former customers in the class action litigation.  We intend to vigorously defend these lawsuits.  At the present time, we cannot predict the outcome of these suits.

 

(i)                                    PSI Fuel Adjustment Charge

 

In June 2001, PSI filed a petition with the IURC requesting authority to recover $16 million in under billed deferred fuel costs incurred from March 2001 through May 2001.  The IURC approved recovery of these costs subject to refund pending the findings of an investigative sub-docket.  The sub-docket was opened to investigate the reasonableness of, and underlying reasons for, the under billed deferred fuel costs.  A hearing was held in July 2002, and in March 2003 the IURC issued an order giving final approval to PSI’s recovery of the $16 million.

 

(j)                                    PSI Retail Electric Rate Case

 

In December 2002, PSI filed a petition with the IURC seeking approval of a base retail electric rate increase.  PSI has filed initial and rebuttal testimony in this case and the final set of hearings will take place in November 2003.  Based on updated testimony filed in October 2003, PSI proposes an increase in annual revenues of approximately $180 million, or an average increase of approximately 14 percent over PSI’s retail electric rates in effect at the end of 2002.  An IURC decision is expected in the first quarter of 2004.

 

(k)                                PSI Construction Work in Progress (CWIP) Ratemaking Treatment for NOX Equipment

 

In April 2003, PSI filed an application with the IURC requesting that its CWIP rate adjustment mechanism be updated for expenditures through December 2002 related to NOX equipment currently being installed at certain PSI generation facilities.  CWIP ratemaking treatment allows

 

50



 

for the recovery of carrying costs on certain pollution control equipment while and after the equipment is under construction.  A final order was issued on September 24, 2003.  The order granted substantially all of PSI’s requested relief, leaving only the issue of whether certain equipment qualified for CWIP ratemaking treatment to be decided in the first quarter of 2004.  Amounts approved for recovery are presented below:

 

PSI CWIP Ratemaking for NOX Equipment

 

 

 

PSI

 

 

 

(in millions)

 

 

 

 

 

Total retail CWIP expenditures as of December 31, 2002

 

$

305

 

 

 

 

 

Total amount requested through CWIP mechanism(1)

 

35

 

Less: previously approved CWIP mechanism amounts

 

(28

)

Incremental CWIP mechanism amounts

 

$

7

 

 


(1)          Amounts include retail customers’ portion only and represent an annual return on qualified NOX equipment expenditures.

 

PSI’s initial CWIP rate mechanism adjustment (authorized in July 2002) resulted in an approximately one percent increase in customer rates.  Under the IURC’s CWIP rules, PSI may update its CWIP tracker at six-month intervals.  The first such update to PSI’s CWIP rate mechanism occurred in the first quarter of 2003.  The IURC’s July 2002 order also authorized PSI to defer, for subsequent recovery, post-in-service depreciation and to continue the accrual for allowance for funds used during construction (AFUDC).  Pursuant to Statement of Financial Accounting Standards No. 92, Regulated Enterprises-Accounting for Phase-in Plans, the equity component of AFUDC will not be deferred for financial reporting after the related assets are placed in service.

 

(l)                                    Environmental Compliance Cost Recovery

 

In 2002, the Indiana General Assembly passed legislation that, among other things, encourages the deployment of advanced technologies that reduce regulated air emissions, while allowing the continued use of high sulfur Midwestern coal in existing electric generating plants.  The legislation authorizes the IURC to provide financial incentives to utilities that deploy such advanced technologies.  PSI is currently seeking IURC approval, under this new law, of a cost tracking mechanism for PSI’s NOX equipment-related depreciation and operation and maintenance costs, authority to use accelerated (18-year) depreciation for its NOX compliance equipment, and approval of a NOX emission allowance purchase and sales tracker.  In October, PSI reached a settlement with the other parties to this case that, if approved by the IURC, will provide for the relief described above for most of PSI’s environmental compliance equipment.  PSI expects an IURC order addressing approval of the settlement agreement by the end of 2003.  The issue of whether the remainder of PSI’s environmental compliance projects qualify for financial incentives is expected to be decided in the second quarter of 2004.

 

51



 

(m)                              PSI Purchased Power Tracker (Tracker)

 

The Tracker was designed to provide for the recovery of costs related to purchases of power necessary to meet native load requirements to the extent such costs are not recovered through the existing fuel adjustment clause.

 

PSI is authorized to seek recovery of 90 percent of its purchased power expenses through the Tracker (net of the displaced energy portion recovered through the fuel recovery process and net of the mitigation credit portion), with the remaining 10 percent deferred for subsequent recovery in PSI’s general retail electric rate case.  In March 2002, PSI filed a petition with the IURC seeking approval to extend the Tracker process beyond the summer of 2002.  A hearing was held in January 2003, and in June 2003 the IURC approved the extension for up to an additional two years with the ultimate determination concerning PSI’s continued use of the Tracker process to be made in PSI’s pending retail electric rate case.

 

In June 2002, PSI also filed a petition with the IURC seeking approval of the recovery through the Tracker of its actual summer 2002 purchased power costs.  In May 2003, the IURC approved PSI’s recovery of $18 million related to its summer 2002 purchased power costs, and also authorized $2 million of deferred costs sought for recovery in PSI’s general retail electric rate case.

 

In June 2003, PSI filed a petition with the IURC seeking approval of the recovery through the Tracker of its actual summer 2003 purchased power costs.  Testimony was filed in support of PSI’s request in August 2003.  An evidentiary hearing is scheduled for March 2004.

 

(n)                                 CG&E Gas Rate Case

 

In the third quarter of 2001, CG&E filed a retail gas rate case with the Public Utilities Commission of Ohio (PUCO) seeking to increase base rates for natural gas distribution service and requesting recovery through a tracking mechanism of the costs of an accelerated gas main replacement program with an estimated capital cost of $716 million over 10 years.  CG&E entered into a settlement agreement with most of the parties and a hearing on this matter was held in April 2002.  An order was issued in May 2002, in which the PUCO approved the settlement agreement and authorized a base rate increase of approximately $15 million, or 3.3 percent overall, effective May 30, 2002.  In addition, the PUCO authorized CG&E to implement the tracking mechanism to recover the costs of the accelerated gas main replacement program, subject to certain rate caps that increase in amount annually through May 2007, through the effective date of new rates in CG&E’s next retail gas rate case.  In the fourth quarter of 2002, CG&E filed an application to increase its rates under the tracking mechanism.  In April 2003, CG&E entered into a settlement agreement with the parties, providing for an increase of $6.5 million, which the PUCO subsequently approved.  This increase was effective in May 2003.  CG&E expects to file another application to increase its rates by approximately $6.4 million under the tracking mechanism in the fourth quarter of 2003.  CG&E expects the PUCO will rule on this application by May 2004.

 

52



 

(o)                                  ULH&P Gas Rate Case

 

As discussed in the 2002 10-K, in the second quarter of 2001, ULH&P filed a retail gas rate case with the Kentucky Public Service Commission (KPSC) seeking to increase base rates for natural gas distribution services and requesting recovery through a tracking mechanism of the costs of an accelerated gas main replacement program with an estimated capital cost of $112 million over 10 years.  ULH&P made its second annual filing for an increase under the tracking mechanism in March 2003.  The application sought an increase of $2 million.  A hearing was held in July 2003, and the KPSC approved the application in August 2003.  The Kentucky Attorney General has appealed to the Franklin Circuit Court the KPSC’s approval of the tracking mechanism and the KPSC’s orders approving the new tracking mechanism rates.  At the present time, ULH&P cannot predict the timing or outcome of this litigation.

 

(p)                                  Gas Distribution Plant

 

In June 2003, the PUCO approved an amended settlement agreement between CG&E and the PUCO Staff in a gas distribution safety case arising out of a gas leak at a service head-adapter (SHA) style riser on CG&E’s distribution system.  The amended settlement agreement calls for CG&E to expend a minimum of $700,000 to replace SHA risers by December 31, 2003, and to file a comprehensive plan addressing all SHA risers on its distribution system.  Cinergy has an estimated 198,000 SHA risers on its distribution system, of which 155,000 are in CG&E’s service area.  The remaining SHA risers are included in ULH&P’s service area.  Further investigation as to whether any additional SHA risers will need maintenance or replacement is ongoing.  If CG&E and ULH&P determine that replacement of all SHA risers is appropriate, the replacement cost could be up to approximately $50 million.  CG&E and ULH&P would pursue recovery of this cost through rates.  At this time, Cinergy, CG&E, and ULH&P cannot predict the outcome of this matter.

 

(q)                                  Contract Disputes

 

Cinergy, through a subsidiary of Investments, is currently involved in negotiations to resolve a customer billing dispute.  The primary issue of contention between the parties relates to the determinants used in calculating the monthly charge billed for electricity.  Receivables from the customer are recorded at what Cinergy believes to be their net realizable value.  Although we cannot predict the outcome of this matter, we believe the ultimate impact on Cinergy’s financial position and results of operations will not be material.

 

Cinergy Marketing & Trading, LP (Marketing & Trading) was in arbitration with Apache Corporation (Apache) concerning disputes under an agreement whereby we marketed natural gas that Apache produced or acquired in North America.  Effective July 1, 2003, Marketing & Trading terminated its marketing relationship with Apache.  The termination of the marketing relationship ended the arbitration and all outstanding monetary issues related to the arbitration were settled.  The impact of the settlement was not material to our financial position or results of operations.

 

53



 

(r)                                  Enron Corp. (Enron) Bankruptcy

 

In December 2001, Enron filed for protection under Chapter 11 of the U.S. Bankruptcy Code in the Southern District of New York.  We decreased our trading activities with Enron in the months prior to its bankruptcy filing and have filed a motion with the bankruptcy court overseeing the Enron bankruptcy seeking appropriate netting of the various payables and receivables between and among Enron and Cinergy entities.  We intend to resolve any contract differences pursuant to the terms of those contracts, business practices, and the applicable provisions of the U.S. Bankruptcy Code, as approved by the court.  We have recently been involved in a court-sponsored mediation of our claims in the bankruptcy case and are attempting to resolve our disputes through that process.  Based on judicial decisions regarding the permissibility of certain broad netting arrangements and the results of our mediation, we have entered into a tentative settlement agreement with Enron, which must go through creditors’ committee and bankruptcy court approval before becoming final.  As a result of this tentative agreement, we believe the resolution of our contract differences will result in a net payable to Enron of approximately $14 million.  During the third quarter of 2003, an additional $12 million was charged to expense to reflect our current assessment of this matter.  We believe this would resolve all of our claims with the Enron entities, except for one claim being handled outside the United States proceeding involving the recovery of an insignificant amount.

 

(s)                                  Synthetic Fuel Production

 

In July 2002, Capital & Trading acquired a coal-based synthetic fuel production facility.  As of September 30, 2003, Capital & Trading’s net book value in this facility was approximately $60 million.  The synthetic fuel produced at this facility qualifies for tax credits in accordance with Section 29 of the Internal Revenue Code.  Eligibility for these credits expires after 2007.  Cinergy received a private letter ruling from the Internal Revenue Service (IRS) in connection with the acquisition of the facility.  To date, Cinergy has produced and sold approximately 3.6 million tons of synthetic fuel at this facility, resulting in approximately $100 million in tax credits, including approximately $60 million in 2003.

 

In the second quarter of 2003, the IRS announced, as a result of an audit of another taxpayer, that it had reason to question and was reviewing the scientific validity of test procedures and results that were presented as evidence the fuel underwent a significant chemical change.  The IRS recently announced that it has finished its review and has determined that test procedures and results used by taxpayers are scientifically valid if the procedures are applied in a consistent and unbiased manner.  The IRS also announced that it plans to impose new testing and record-keeping requirements on synthetic fuel producers and plans to issue guidance extending these requirements to taxpayers already holding private letter rulings on the issue of significant chemical change.

 

Cinergy believes that its testing procedures comply with the standards recently announced by the IRS.  We do not anticipate that any new testing or record-keeping requirements imposed by the IRS will have a material effect on our financial position or results of operations.

 

54



 

(t)                                    Energy Market Investigations

 

In July 2003, Cinergy received a subpoena from the Commodity Futures Trading Commission (CFTC).  As has been previously reported by the press, the CFTC has served subpoenas on numerous other energy companies.  The CFTC request sought certain information regarding our trading activities, including price reporting to energy industry publications.  The CFTC sought particular information concerning these matters for the period May 2000 through January 2001 as to one of Cinergy’s employees.  Based on an initial review of these matters, we placed that employee on administrative leave and have subsequently terminated his employment.  Cinergy is continuing an investigation of these matters and has been cooperating fully with the CFTC.

 

In September 2003, Cinergy, along with 38 other companies, was named as a defendant in civil litigation filed as a purported class action on behalf of all persons who purchased and/or sold New York Mercantile Exchange natural gas futures and options contracts between January 1, 2000 and December 31, 2002.  The complaint alleges that improper price reporting caused damages to the class.  Responsive pleadings in the case are due on November 17, 2003.  We believe this action against us is without merit.  At this time, it is not possible to predict the outcome of this matter.

 

In the second quarter of 2003, Cinergy received initial and follow-up third-party subpoenas from the SEC requesting information related to particular trading activity with one of its counterparties who was the target of an investigation by the SEC.  Cinergy has and intends to fully cooperate with the SEC in connection with this matter.

 

At this time it is not possible to predict the outcome of these investigations and lawsuit or the impact on Cinergy’s financial position or results of operations; although, in the opinion of management, they are not likely to have a material adverse effect on our financial position or results of operations.

 

(u)                                 CG&E Transmission and Distribution Rate Filings

 

In October 2003, CG&E filed an application with the PUCO seeking deferral of approximately $173 million, of which approximately $37 million has been incurred as of September 30, 2003, in depreciation, property taxes and carrying costs related to net additions to transmission and distribution utility plant in service from January 2001 through December 2005.  Rates are frozen in Ohio under the state’s electric restructuring law from 2001 through the end of the market development period.  CG&E intends to file a rate case to collect those costs after the market development period ends.  CG&E has not deferred any of these costs as of September 30, 2003.

 

CG&E is also proposing a mechanism to recover costs related to net additions to transmission and distribution utility plant in service after the end of the market development period.  The mechanism would work in a similar manner to the monthly customer charge the PUCO approved for CG&E’s accelerated natural gas main replacement program, discussed above in (n), which is adjusted annually based on expenditures in the previous year.

 

55



 

8.              Discontinued Operations

 

During the second quarter of 2003, Cinergy completed the disposal of its gas distribution operation in South Africa, sold its remaining wind assets in the United States, and substantially sold or liquidated the assets of its energy trading operation in the Czech Republic.

 

GAAP requires consolidated entities, which have been disposed of, to be presented as Discontinued operations, net of tax in the Statements of Income and as Assets/Liabilities of Discontinued Operations in the Balance Sheets.  The accompanying financial statements have been reclassified to account for the disposals occurring during the second quarter of 2003, as well as disposals in prior periods, as discontinued operations.

 

As a result of the second quarter 2003 transactions, assets of discontinued operations of approximately $140 million have been sold or converted into cash and liabilities of discontinued operations of approximately $100 million have been assumed by buyers or liquidated.  The net, after-tax, gain from these disposal and liquidation transactions was approximately $9 million (including a net after-tax cumulative currency translation gain of approximately $6 million).

 

The table below reflects the results of operations and the income (loss) on disposal related to investments accounted for as discontinued operations for the quarter ended and year to date September 30, 2003 and 2002:

 

 

 

Quarter Ended
September 30

 

Year to Date
September 30

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Revenues (1)

 

$

 

$

20,827

 

$

22,257

 

$

74,945

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) Before Taxes

 

$

 

$

(4,954

)

$

(593

)

$

(2,903

)

 

 

 

 

 

 

 

 

 

 

Income (Loss) from Discontinued Operations

 

 

 

 

 

 

 

 

 

Income (Loss) from operations

 

$

 

$

(1,790

)

$

(3

)

$

(561

)

Gain on disposal, net of tax

 

 

 

8,878

 

 

 

 

 

 

 

 

 

 

 

 

Total Income (Loss) from Discontinued Operations

 

$

 

$

(1,790

)

$

8,875

 

$

(561

)

 


(1)          Presented for informational purposes only.  All results of operations are reported net in our Statements of Income.

 

56



 

 

The table below reflects the assets and liabilities related to the investments accounted for as discontinued operations as of September 30, 2003 and December 31, 2002:

 

 

 

September 30
2003

 

December 31
2002

 

 

 

(in thousands)

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets

 

$

7,187

 

$

48,719

 

Property, plant, and equipment-net

 

 

78,309

 

Other assets

 

 

20,237

 

 

 

 

 

 

 

Total Assets

 

$

7,187

 

$

147,265

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Current liabilities

 

$

8,877

 

$

6,632

 

Long-term debt (including Long-term debt due within one year)

 

 

84,654

 

Other

 

 

17,547

 

 

 

 

 

 

 

Total Liabilities

 

$

8,877

 

$

108,833

 

 

9.                                      Financial Information by Business Segment

 

As discussed in the 2002 10-K, we conduct operations through our subsidiaries, and manage through the following three business units:

 

                  Commercial Business Unit (Commercial), formerly named the Energy Merchant Business Unit;

                  Regulated Businesses Business Unit (Regulated Businesses); and

                  Power Technology and Infrastructure Services Business Unit (Power Technology).

 

The following section describes the activities of our business units as of September 30, 2003.

 

Commercial manages wholesale generation and energy marketing and trading of energy commodities.  Additionally, Commercial operates and maintains our electric generating plants including some of our jointly-owned plants.  Commercial is also responsible for all of our international operations and performs the following activities:

 

                  energy risk management;

                  proprietary arbitrage activities; and

                  customized energy solutions.

 

Regulated Businesses consists of PSI’s regulated, integrated utility operations, and Cinergy’s other regulated electric and gas transmission and distribution systems.  Regulated Businesses plans, constructs, operates, and maintains Cinergy’s transmission and distribution systems and delivers gas and electric energy to consumers.  Regulated Businesses also earns revenues from wholesale customers primarily by transmitting electric power through Cinergy’s transmission system.

 

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Power Technology primarily manages the development, marketing, and sales of our non-regulated retail energy and energy-related businesses.  This is accomplished through various subsidiaries and joint ventures.  Power Technology also manages Cinergy Ventures, LLC (Ventures), Cinergy’s venture capital subsidiary.  Ventures invests in emerging energy technologies that can benefit future Cinergy business development activities.

 

Following are the financial results by business unit.  Certain amounts for the prior year have been restated to reflect implementation of EITF 02-3 and other prior year amounts have been reclassified to conform to the current presentation.

 

58



 

Financial results by business unit for the quarters ended September 30, 2003, and September 30, 2002, are as indicated below.

 

Business Units

 

 

 

Cinergy Business Units

 

 

 

 

 

 

 

Commercial

 

Regulated
Businesses

 

Power
Technology

 

Total

 

Reconciling Eliminations   (1)

 

Consolidated

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended
September 30, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues -

 

 

 

 

 

 

 

 

 

 

 

 

 

External customers

 

$

439,059

 

$

652,946

 

$

(28

)

$

1,091,977

 

$

 

$

1,091,977

 

Intersegment revenues

 

44,526

 

 

 

44,526

 

(44,526

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales -

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel and purchased and exchanged power

 

 

 

 

 

 

 

 

 

 

 

 

 

External customers

 

188,356

 

141,641

 

 

329,997

 

 

 

329,997

 

Intersegment costs

 

 

44,526

 

 

44,526

 

(44,526

)

 

Gas purchased

 

47,360

 

32,222

 

 

79,582

 

 

 

79,582

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment profit (loss)(2)

 

52,204

 

62,814

(3) 

(3,037

)

111,981

 

 

111,981

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended
September 30, 2002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues -

 

 

 

 

 

 

 

 

 

 

 

 

 

External customers

 

$

449,571

 

$

669,605

 

$

62

 

$

1,119,238

 

$

 

$

1,119,238

 

Intersegment revenues

 

51,590

 

 

 

51,590

 

(51,590

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales -

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel and purchased and exchanged power

 

 

 

 

 

 

 

 

 

 

 

 

 

External customers

 

174,224

 

128,142

 

 

302,366

 

 

 

302,366

 

Intersegment costs

 

 

51,590

 

 

51,590

 

(51,590

)

 

Gas purchased

 

36,689

 

12,594

 

 

49,283

 

 

 

49,283

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of tax

 

(1,790

)

 

 

(1,790

)

 

(1,790

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment profit (loss)(2)

 

57,534

 

74,939

 

(1,905

)

130,568

 

 

130,568

 

 


(1)          The Reconciling Eliminations category eliminates the intersegment revenues of Commercial and the intersegment costs of Regulated Businesses.

(2)          Management utilizes segment profit (loss) to evaluate segment performance.

(3)          The decrease in 2003 is primarily due to lower megawatt hour (MWh) sales resulting from milder weather and the effects of a continuing sluggish economy.

 

59



 

Financial results by business unit for year to date September 30, 2003 and September 30, 2002, are as indicated below.

 

Business Units

 

 

 

Cinergy Business Units

 

 

 

 

 

 

 

Commercial

 

Regulated
Businesses

 

Power
Technology

 

Total

 

Reconciling
Eliminations (1)

 

Consolidated

 

 

 

(in thousands)

 

Year to Date
September 30, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues -

 

 

 

 

 

 

 

 

 

 

 

 

 

External customers

 

$

1,222,898

(3) 

$

2,070,984

(4)

$

(25

)

$

3,293,857

 

$

 

$

3,293,857

 

Intersegment revenues

 

120,805

 

 

 

120,805

 

(120,805

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales -

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel and purchased and exchanged power

 

 

 

 

 

 

 

 

 

 

 

 

 

External customers

 

450,219

 

390,113

 

 

840,332

 

 

840,332

 

Intersegment costs

 

 

120,805

 

 

120,805

 

(120,805

)

 

Gas purchased

 

116,823

 

252,073

 

 

368,896

 

 

368,896

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of tax

 

8,875

 

 

 

8,875

 

 

8,875

 

Cumulative effect of changes in accounting principles, net of tax

 

26,462

 

 

 

26,462

 

 

26,462

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment profit (loss)(2)

 

213,641

(5) 

162,988

(6)

(13,910

)

362,719

 

 

362,719

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year to Date
September 30, 2002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues -

 

 

 

 

 

 

 

 

 

 

 

 

 

External customers

 

$

1,052,068

 

$

1,942,789

 

$

62

 

$

  2,994,919

 

$

 

$

2,994,919

 

Intersegment revenues

 

127,788

 

 

 

127,788

 

(127,788

)

 

Cost of sales -

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel and purchased and exchanged power

 

 

 

 

 

 

 

 

 

 

 

 

 

External customers

 

417,084

 

344,774

 

 

761,858

 

 

761,858

 

Intersegment costs

 

 

127,788

 

 

127,788

 

(127,788

)

 

Gas purchased

 

43,692

 

145,033

 

 

188,725

 

 

188,725

 

Discontinued operations, net of tax

 

(561

)

 

 

(561

)

 

(561

)

Cumulative effect of changes in accounting principles, net of tax

 

(10,899

)

 

 

(10,899

)

 

(10,899

)

Segment profit (loss)(2)

 

97,677

 

176,877

 

(14,174

)

260,380

 

 

260,380

 

 


(1)          The Reconciling Eliminations category eliminates the intersegment revenues of Commercial and the intersegment costs of Regulated Businesses.

(2)          Management utilizes segment profit (loss) to evaluate segment performance.

(3)          The increase in 2003 is primarily due to the increase in average price realized on wholesale commodity transactions and the sale of synthetic fuel which began in July 2002.

(4)          The increase in 2003 is primarily due to the increase in the average price received per thousand cubic feet (mcf) of gas delivered reflecting a substantial increase in the wholesale gas commodity costs, which is passed directly to the retail customer dollar-for-dollar under the state mandated gas cost recovery mechanism.  Also contributing to this increase was higher mcf volumes sold due to colder weather.

(5)          The increase in 2003 is primarily due to a change in accounting principle, the gain on disposal of discontinued operations and synthetic fuel credits discussed in Note 1(g)(iii), Note 8 and Note 7(s), respectively.  This increase also reflects charges associated with employee severance programs and the write-offs of certain equipment and technology investments that were taken in the second quarter of 2002.

(6)          The decrease in 2003 is primarily due to lower MWh sales resulting from milder than normal weather during the summer and the effects of a continuing sluggish economy.

 

 

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Total segment assets at September 30, 2003, and December 31, 2002, were as follows:

 

Business Units

 

 

 

Cinergy Business Units

 

 

 

 

 

 

 

Commercial

 

Regulated
Businesses

 

Power
Technology

 

Total

 

All
Other(1)

 

Consolidated

 

 

 

(in thousands)

 

Segment assets from continuing operations

 

$

5,339,831

(2)

$

7,866,961

(2)

$

168,117

 

$

13,374,909

 

$

101,063

 

$

13,475,972

 

Segment assets from discontinued operations

 

7,187

 

 

 

7,187

 

 

7,187

 

Total segment assets at September 30, 2003

 

$

5,347,018

 

$

7,866,961

 

$

168,117

 

$

13,382,096

 

$

101,063

 

$

13,483,159

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment assets from continuing operations

 

$

5,627,485

 

$

7,283,812

 

$

155,252

 

$

13,066,549

 

$

93,214

 

$

13,159,763

 

Segment assets from discontinued operations

 

147,265

 

 

 

147,265

 

 

147,265

 

Total segment assets at December 31, 2002

 

$

5,774,750

 

$

7,283,812

 

$

155,252

 

$

13,213,814

 

$

93,214

 

$

13,307,028

 

 


(1)          The All Other category represents miscellaneous corporate items which are not allocated to business units for purposes of segment performance measurement.

(2)          September 30, 2003 balances reflect the transfer of generating assets as discussed in Note 12.

 

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10.       EPS

 

A reconciliation of EPS to EPS – assuming dilution is presented below for the quarters ended September 30, 2003 and 2002:

 

 

 

Income

 

Shares

 

EPS

 

 

 

(in thousands, except per share amounts)

 

Quarter Ended September 30, 2003

 

 

 

 

 

 

 

EPS:

 

 

 

 

 

 

 

Net Income

 

$

111,981

 

177,751

 

$

0.63

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Common stock options

 

 

 

629

 

 

 

Directors’ compensation plans

 

 

 

148

 

 

 

Contingently issuable common stock

 

 

 

891

 

 

 

Stock purchase contracts

 

 

 

118

 

 

 

 

 

 

 

 

 

 

 

EPS - assuming dilution:

 

 

 

 

 

 

 

Net income plus assumed conversions

 

$

111,981

 

179,537

 

$

0.62

 

 

 

 

 

 

 

 

 

Quarter Ended September 30, 2002

 

 

 

 

 

 

 

EPS:

 

 

 

 

 

 

 

Income before discontinued operations

 

$

132,358

 

 

 

$

0.79

 

Discontinued operations, net of tax

 

(1,790

)

 

 

(0.01

Net Income

 

$

130,568

 

167,967

 

$

0.78

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Common stock options

 

 

 

843

 

 

 

Directors’ compensation plans

 

 

 

160

 

 

 

Contingently issuable common stock

 

 

 

1,118

 

 

 

 

 

 

 

 

 

 

 

EPS - assuming dilution:

 

 

 

 

 

 

 

Net income plus assumed conversions

 

$

130,568

 

170,088

 

$

0.77

 

 

Options to purchase shares of common stock are excluded from the calculation of EPS - assuming dilution when the exercise price of these options plus unrecognized compensation expense are greater than the average market price of a common share during the period multiplied by the number of options outstanding at the end of the period because they are anti-dilutive.  Approximately 2.1 million and 3.3 million shares were excluded from the EPS - assuming dilution calculation for the quarters ended September 30, 2003 and 2002, respectively.

 

Also excluded from the EPS - assuming dilution calculation for the quarters ended September 30, 2003 and 2002, are up to 10.7 million and 10.8 million shares, respectively, issuable pursuant to the stock purchase contracts issued by Cinergy Corp. in December 2001 associated with the preferred trust securities transaction.  The number of shares issuable pursuant to the stock purchase contracts is contingent upon the market price of Cinergy Corp. stock in February 2005 and could range between 9.2 and 10.8 million shares.

 

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A reconciliation of EPS to EPS - assuming dilution is presented below for the year to date September 30, 2003 and 2002:

 

 

 

Income

 

Shares

 

EPS

 

 

 

(in thousands, except per share amounts)

 

Year to Date September 30, 2003

 

 

 

 

 

 

 

EPS:

 

 

 

 

 

 

 

Income before discontinued operations and cumulative effect of changes in accounting principles

 

$

327,382

 

 

 

$

1.86

 

Discontinued operations, net of tax

 

8,875

 

 

 

0.05

 

Cumulative effect of changes in accounting principles, net of tax

 

26,462

 

 

 

0.15

 

Net Income

 

$

362,719

 

175,944

 

$

2.06

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Common stock options

 

 

 

738

 

 

 

Directors’ compensation plans

 

 

 

147

 

 

 

Contingently issuable common stock

 

 

 

811

 

 

 

Stock purchase contracts

 

 

 

39

 

 

 

 

 

 

 

 

 

 

 

EPS - assuming dilution:

 

 

 

 

 

 

 

Net income plus assumed conversions

 

$

362,719

 

177,679

 

$

2.04

 

 

 

 

 

 

 

 

 

Year to Date September 30, 2002

 

 

 

 

 

 

 

EPS:

 

 

 

 

 

 

 

Income before discontinued operations and cumulative effect of changes in accounting principles

 

$

271,840

 

 

 

$

1.63

 

Discontinued operations, net of tax

 

(561

)

 

 

 

Cumulative effect of changes in accounting principles, net of tax

 

(10,899

)

 

 

(0.06

)

Net Income

 

$

260,380

 

166,544

 

$

1.57

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Common stock options

 

 

 

981

 

 

 

Employee stock purchase and savings plan

 

 

 

5

 

 

 

Directors’ compensation plans

 

 

 

160

 

 

 

Contingently issuable common stock

 

 

 

1,138

 

 

 

 

 

 

 

 

 

 

 

EPS - assuming dilution:

 

 

 

 

 

 

 

Net income plus assumed conversions

 

$

260,380

 

168,828

 

$

1.55

 

 

Options to purchase shares of common stock are excluded from the calculation of EPS - assuming dilution when the exercise price of these options plus unrecognized compensation expense are greater than the average market price of a common share during the period multiplied by the number of options outstanding at the end of the period because they are anti-dilutive.  For year to date September 30, 2003 and 2002, approximately 2.1 million and 2.7 million shares, respectively, were excluded from the EPS - assuming dilution calculation.

 

Also excluded from the EPS - assuming dilution calculation for year to date September 30, 2003 and 2002, are up to 10.8 million shares issuable pursuant to the stock purchase contracts issued by Cinergy Corp. in December 2001 associated with the preferred trust securities transaction.  The number of shares issuable pursuant to the stock purchase contracts is contingent upon the market price of Cinergy Corp. stock in February 2005 and could range between 9.2 and 10.8 million shares.

 

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11.       Ohio Deregulation

 

As discussed in the 2002 10-K, CG&E is in a market development period, transitioning to electric deregulation in the state of Ohio.  The transition period is governed by Amended Substitute Senate Bill No. 3 (Electric Restructuring Bill) and a stipulated transition plan adopted and approved by the PUCO.  Under CG&E’s transition plan, retail customers continue to receive electric distribution services from CG&E, but may purchase electricity from another supplier.  Retail customers that purchase electricity from another supplier receive shopping credits from CG&E.  The shopping credits generally reflect the costs of electric generation included in CG&E’s frozen rates.  However, shopping credits for the first 20 percent of electricity usage in each customer class to switch suppliers are higher than shopping credits for subsequent switchers in order to stimulate the development of the competitive retail electric service market, pursuant to CG&E’s stipulated agreement.

 

CG&E recovers its generation related regulatory assets and certain other transition costs deferred during the market development period through a Regulatory Transition Charge (RTC) paid by all retail customers.  As the RTC is collected from customers, CG&E amortizes the deferred balance of regulatory assets and other transition costs.  A portion of the RTC collected from customers is recognized in earnings currently as a return on the deferred balance of regulatory assets and other transition costs and as reimbursement for the difference between the shopping credits provided to customers and the wholesale revenues from switched generation.  The ability of CG&E to recover its regulatory assets and other transition costs is dependent on several factors, including, but not limited to, the level of CG&E’s electric sales, prices in the wholesale power markets, and the amount of customers switching to other electric suppliers.

 

On January 10, 2003, CG&E filed an application with the PUCO for approval of a methodology to establish how market-based rates for non-residential customers will be determined when the market development period ends.  In the filing, CG&E seeks to establish a market-based standard service offer rate for non-residential customers that do not switch suppliers and a process for establishing the competitively bid generation service option required by the Electric Restructuring Bill.  As of September 30, 2003, more than 20 percent of the load of CG&E’s commercial and industrial customer classes have switched to other electric suppliers.  Under its transition plan, CG&E may end the market development period for those classes of customers once 20 percent switching has been achieved; however, PUCO approval of the standard service offer rate and competitive bidding process is required before the market development period can be ended.  CG&E is not requesting to end the market development period for any customers at this time.  CG&E is unable to predict the outcome of this proceeding.

 

12.       Transfer of Generating Assets

 

In December 2002, the IURC approved a settlement agreement among PSI, the Indiana Office of the Utility Consumer Counselor, and the IURC Testimonial Staff authorizing PSI’s purchases of the Henry County, Indiana and Butler County, Ohio, gas-fired peaking plants from two non-regulated affiliates.  In February 2003, the Federal Energy Regulatory Commission (FERC) issued an order under Section 203 of the Federal Power Act authorizing PSI’s acquisitions of the plants, which occurred on February 5, 2003.  Subsequently, in April 2003, the FERC issued a

 

64



 

tolling order allowing additional time to consider a request for rehearing filed in response to the February 2003 FERC order.  At this time, we cannot predict the outcome of this matter.

 

On July 21, 2003, ULH&P filed an application with the KPSC requesting a certificate of public convenience and necessity to acquire CG&E’s ownership interests in the East Bend Generating Station, located in Boone County, Kentucky, the Woodsdale Generating Station, located in Butler County, Ohio, and one generating unit at the four-unit Miami Fort Generating Station located in Hamilton County, Ohio.  ULH&P also requested KPSC approval of a back-up power supply agreement under which CG&E would provide replacement power to ULH&P when the transferred generating facilities are out of service, and for approval of another agreement under which the transferred units would be jointly dispatched with CG&E’s remaining fleet of generating units.  An order from the KPSC is expected by the end of the year.  The transfer, which will be made at net book value, will not affect current electric rates for ULH&P’s customers, as power will be provided under the same terms as under the current wholesale power contract with CG&E through at least December 31, 2006.  This transfer is also contingent upon receipt of approval from the FERC and the SEC.  ULH&P is unable to predict the outcome of this matter.

 

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CAUTIONARY STATEMENTS

 

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

 

This document includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Forward-looking statements are based on management’s beliefs and assumptions.  These forward-looking statements are identified by terms and phrases such as “anticipate”, “believe”, “intend”, “estimate”, “expect”, “continue”, “should”, “could”, “may”, “plan”, “project”, “predict”, “will”, and similar expressions.

 

Forward-looking statements involve risks and uncertainties that may cause actual results to be materially different from the results predicted.  Factors that could cause actual results to differ materially from those indicated in any forward-looking statement include, but are not limited to:

 

                  Factors affecting operations, such as:

 

(1)          unanticipated weather conditions;

(2)          unscheduled generation outages;

(3)          unusual maintenance or repairs;

(4)          unanticipated changes in costs;

(5)          environmental incidents, including costs of compliance with existing and future environmental requirements; and

(6)          electric transmission or gas pipeline system constraints.

 

                  Legislative and regulatory initiatives.

 

                  Additional competition in electric or gas markets and continued industry consolidation.

 

                  Financial or regulatory accounting principles.

 

                  Political, legal, and economic conditions and developments in the countries in which we have a presence.

 

                  Changing market conditions and other factors related to physical energy and financial trading activities.

 

                  The performance of projects undertaken by our non-regulated businesses and the success of efforts to invest in and develop new opportunities.

 

                  Availability of, or cost of, capital.

 

                  Employee workforce factors.

 

                  Delays and other obstacles associated with mergers, acquisitions, and investments in joint ventures.

 

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                  Costs and effects of legal and administrative proceedings, settlements, investigations, and claims.  Examples can be found in Note 7 of the “Notes to Condensed Financial Statements” in “Part I. Financial Information”.

 

We undertake no obligation to update the information contained herein.

 

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MD&A - LIQUIDITY AND CAPITAL RESOURCES

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

In this report Cinergy (which includes Cinergy Corp. and all of our regulated and non-regulated subsidiaries) is, at times, referred to in the first person as “we”, “our”, or “us”.

 

The following discussion should be read in conjunction with the accompanying condensed financial statements and related notes included elsewhere in this report and the combined Form 10-K for the year ended December 31, 2002 and Form 8-K filed on June 10, 2003 (together, the 2002 10-K).  The results discussed below are not necessarily indicative of the results that may occur in any future periods.

 

INTRODUCTION

 

In Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), we explain our general operating environment, as well as our liquidity and capital resources and results of operations.  Specifically, we discuss the following:

 

                  factors affecting current and future operations;

                  potential sources of cash for future capital expenditures;

                  why revenues and expenses changed from period to period; and

                  how the above items affect our overall financial condition.

 

ORGANIZATION

 

Cinergy Corp., a Delaware corporation created in October 1994, owns all outstanding common stock of The Cincinnati Gas & Electric Company (CG&E) and PSI Energy, Inc. (PSI), both of which are public utility subsidiaries.  As a result of this ownership, we are considered a utility holding company.  Because we are a holding company with material utility subsidiaries operating in multiple states, we are registered with and are subject to regulation by the Securities and Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935, as amended (PUHCA).  Our other principal subsidiaries are:

 

                  Cinergy Wholesale Energy, Inc. (Wholesale Energy);

                  Cinergy Services, Inc. (Services); and

                  Cinergy Investments, Inc. (Investments).

 

CG&E, an Ohio corporation, is a combination electric and gas public utility company that provides service in the southwestern portion of Ohio and, through its subsidiaries, in nearby areas of Kentucky and Indiana.  CG&E is responsible for the majority of our power marketing and trading activity.  CG&E’s principal subsidiary, The Union Light, Heat and Power Company (ULH&P), is a Kentucky corporation that provides electric and gas service in northern Kentucky.  CG&E’s other subsidiaries are insignificant to its results of operations.

 

In 2001, CG&E began a transition to electric deregulation and customer choice.  Currently, the competitive retail electric market in Ohio is in the development stage.  CG&E is recovering its

 

68



 

Public Utilities Commission of Ohio (PUCO) approved costs and retail electric rates are frozen during this market development period.

 

PSI, an Indiana corporation, is a vertically integrated and regulated electric utility that provides service in north central, central, and southern Indiana.

 

Services is a service company that provides our subsidiaries with a variety of centralized administrative, management, and support services.  Investments holds most of our domestic non-regulated, energy-related businesses and investments, including gas marketing and trading operations.

 

Wholesale Energy, through a wholly-owned subsidiary, Cinergy Power Generation Services, LLC, provides electric production-related construction, operation, and maintenance services to certain affiliates and non-affiliated third parties.

 

The majority of our operating revenues are derived from the sale of electricity and the sale and/or transportation of natural gas.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Ambient Air Standards
 

In 1997, the Environmental Protection Agency (EPA) revised the National Ambient Air Quality Standards (NAAQS) for ozone and fine particulate matter.  State ozone non-attainment area designations were due to the EPA on July 15, 2003, and the EPA is under a court-ordered deadline to make final designations by April 15, 2004.  The following counties in which we operate have been tentatively designated (by their respective states) as being in non-attainment with the new ozone standard:  Boone County, Kentucky; Hamilton County, Indiana; Floyd County, Indiana; Clermont County, Ohio; and Hamilton County, Ohio.  The EPA has stated that it will require state fine particulate non-attainment designations on February 15, 2004, and will make final designations by December 15, 2004.  Following identification of non-attainment areas, each individual state will identify the sources of emissions and develop emission reduction plans.  Under the Clean Air Act (CAA), individual states have up to 12 years from the date of designation to secure emissions reductions from sources contributing to the problem.  Cinergy cannot predict the timing or effect of either the ozone or fine particulate matter non-attainment designations at this time.

 

In the second quarter of 2003, the EPA announced that it would propose, within the next year or so, a regional or national regulation requiring significant reductions in sulfur dioxide and nitrogen oxide (NOX) emissions from power plants to implement the fine particulate matter NAAQS.  This regulation would be expected to impact all of Cinergy’s coal-fired power plants.  However, Cinergy cannot predict the exact amount and timing of these reductions at this time.  Nonetheless, Cinergy expects that compliance costs with these new standards will be significant.

 

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Global Climate Change
 

On September 9, 2003, Cinergy announced an internal voluntary greenhouse gas (GHG) management goal to reduce its GHG emissions by 2010.  Cinergy expects to spend $21 million between 2004 and 2010 on projects to reduce or offset its emissions.  Cinergy’s goal is to support the President’s voluntary initiative, to address shareholder interest in the issue, and to build internal expertise in GHG management and GHG markets.

 

Our plan for managing the potential risk and uncertainty of regulations relating to climate change includes the following:

 

                  implementing an internal voluntary goal to reduce Cinergy’s GHG emissions 5 percent below Cinergy’s 2000 baseline emission levels by 2010;

                  measuring and inventorying company related sources of GHG emissions;

                  identifying and pursuing cost-effective GHG emission reduction and offsetting activities;

                  funding research of more efficient and alternative electric generating technologies;

                  funding research to better understand the causes and consequences of climate change;

                  encouraging a global discussion of the issues and how best to manage them; and

                  advocating comprehensive legislation for fossil-fired power plants.

 

As discussed in Cinergy’s 2002 10-K, additional environmental issues that could affect our liquidity include:

 

                  Air Toxics Regulation;

                  Regional Haze; and

                  Global Climate Change

 

In addition, see Note 7 of the “Notes to Condensed Financial Statements” in “Part I.  Financial Information” contained herein, for additional information regarding other environmental items and other matters that could affect our liquidity.

 

Pensions
 

Cinergy maintains qualified defined benefit pension plans covering substantially all United States (U.S.) employees meeting certain minimum age and service requirements.  Plan assets consist of investments in equity and fixed income securities.  Due to the decline in market value of the investment portfolio over the last few years, assets held in trust to satisfy plan obligations have decreased.  Additionally, recent decreases in long-term interest rates have the effect of increasing the measured liability for funding purposes.  As a result of these events, future funding obligations could increase substantially.  Cinergy’s minimum required contributions for the calendar year 2003 are $11 million, as compared to $4 million for the calendar year 2002.  We made an additional contribution of $63 million in the calendar year 2003.

 

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Long-term debt due within one year
 

Long-term debt due within one year for Cinergy increased approximately $1 billion from December 31, 2002 to September 30, 2003.  The primary cause of the increase was the reclassification of Cinergy Corp.’s $200 million 6.125% Debentures due April 15, 2004 and $500 million 6.25% Debentures due September 1, 2004 from Long-term debt to Long-term debt due within one year.  An additional $265.5 million was reclassified from Long-term debt to Long-term debt due within one year for CG&E to reflect the early redemption on October 1, 2003 of its 7.20% first mortgage bonds due October 1, 2023.

 

As discussed in Note 3 of the “Notes to Condensed Financial Statements” in “Part I.  Financial Information”, proceeds from the June 2003 issuance of debt by CG&E were used for the repayment of outstanding indebtedness including the early redemption of the 7.20% first mortgage bonds mentioned above.  In September 2003, PSI issued $400 million principal amount of its 5.00% Debentures largely using the proceeds from this issuance for the early redemption of two intercompany promissory notes to Cinergy Corp. totaling $376 million.  Cinergy Corp. plans to use the proceeds to partially fund the maturity of the 6.125% and 6.25% debentures discussed above.  In the interim, Cinergy Corp. has used the proceeds to repay short-term indebtedness.

 

Cinergy plans to meet its remaining future debt obligations from the issuance of debt and/or equity securities and internally-generated funds.

 

Other Investing Activities
 

Our ability to invest in growth initiatives is limited by certain legal and regulatory requirements, including PUHCA.  The PUHCA limits the types of non-utility businesses in which Cinergy and other registered holding companies under PUHCA can invest as well as the amount of capital that can be invested in permissible non-utility businesses.  Also, the timing and amount of investments in the non-utility businesses is dependent on the development and favorable evaluations of opportunities.  Under the PUHCA restrictions, we are allowed to invest or commit to invest in certain non-utility businesses, including:

 

                  Exempt Wholesale Generators (EWG) and Foreign Utility Companies (FUCO)

 

An EWG is an entity, certified by the Federal Energy Regulatory Commission (FERC), devoted exclusively to owning and/or operating, and selling power from one or more electric generating facilities.  An EWG whose generating facilities are located in the U.S. is limited to making only wholesale sales of electricity.

 

A FUCO is a company all of whose utility assets and operations are located outside the U.S. and which are used for the generation, transmission, or distribution of electric energy for sale at retail or wholesale, or the distribution of gas at retail.  A FUCO may not derive any income, directly or indirectly, from the generation, transmission or distribution of electric energy for sale or the distribution of gas at retail within the U.S.  An entity claiming status as a FUCO must provide notification thereof to the SEC under PUHCA.

 

71



 

Cinergy has been granted SEC authority under PUHCA to invest (including by way of guarantees) an aggregate amount in EWGs and FUCOs equal to the sum of (1) our average consolidated retained earnings from time to time plus (2) $2 billion.  As of September 30, 2003, we had invested or committed to invest approximately $775 million in EWGs and FUCOs, leaving available investment capacity under the order of approximately $2.7 billion.

 

                  Qualifying Facilities and Energy-Related Non-utility Entities

 

SEC regulations under the PUHCA permit Cinergy and other registered holding companies to invest and/or guarantee an amount equal to 15 percent of consolidated capitalization (consolidated capitalization is the sum of Notes payable and other short-term obligations, Long-term debt (including amounts due within one year), Preferred Trust Securities, Cumulative Preferred Stock of Subsidiaries, and total Common Stock Equity) in domestic qualifying cogeneration and small power production plants (qualifying facilities) and certain other domestic energy-related non-utility entities.  At September 30, 2003, we had invested and/or guaranteed approximately $735 million of the $1.4 billion available.

 

                  Energy-Related Assets

 

Cinergy has been granted SEC authority under PUHCA to invest up to $1 billion in non-utility Energy-Related Assets within the U.S., Canada, and Mexico.  Energy-Related Assets include, natural gas exploration, development, production, gathering, processing, storage and transportation facilities and equipment, liquid oil reserves and storage facilities, and associated assets, facilities and equipment, but would exclude any assets, facilities or equipment that would cause the owner or operator thereof to be deemed a public utility company.  As of September 30, 2003, we did not have any investments in these Energy-Related Assets.

 

                  Infrastructure Services Companies

 

Cinergy has been granted SEC authority under PUHCA to invest up to $500 million in companies that derive or will derive substantially all of their operating revenues from the sale of Infrastructure Services including:

 

                  Design, construction, retrofit and maintenance of utility transmission and distribution systems;

                  Installation and maintenance of natural gas pipelines, water and sewer pipelines, and underground and overhead telecommunications networks; and

                  Installation and servicing of meter reading devices and related communications networks, including fiber optic cable.

 

At September 30, 2003, we had invested approximately $25 million in these Infrastructure Services companies.

 

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Guarantees
 

We are subject to an SEC order under the PUHCA, which limits the amounts Cinergy Corp. can have outstanding under guarantees at any one time to $2 billion.  As of September 30, 2003, we had $538 million outstanding under the guarantees issued, of which approximately 86 percent represents guarantees of obligations reflected on Cinergy’s Balance Sheets.  The amount outstanding represents Cinergy Corp.’s guarantees of liabilities and commitments of its consolidated subsidiaries, unconsolidated subsidiaries, and joint ventures.  See Note 7(a) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for a discussion of guarantees in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (Interpretation 45).  Interpretation 45 requires disclosure of maximum potential liabilities for guarantees issued on behalf of unconsolidated subsidiaries and joint ventures and under indemnification clauses in various contracts.  The Interpretation 45 disclosure differs from the PUHCA restrictions in that it requires a calculation of maximum potential liability, rather than actual amounts outstanding; it excludes guarantees issued on behalf of consolidated subsidiaries; and it includes potential liabilities under indemnification clauses.

 

Collateral Requirements
 

Cinergy has certain contracts in place, primarily with trading counterparties, that require the issuance of collateral in the event our debt ratings are downgraded below investment grade.  Based upon our September 30, 2003 trading portfolio, if such an event were to occur, Cinergy would be required to issue up to approximately $64 million in collateral related to its gas and power trading operations, of which $34 million is related to CG&E.

 

Capital Resources

 

We meet our current and future capital requirement needs through a combination of internally and externally generated funds, including the issuance of debt and/or equity securities.  Cinergy believes that it has adequate financial resources to meet its future needs.

 

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Notes Payable and Other Short-term Obligations
 

We are required to secure authority to issue short-term debt from the SEC under the PUHCA and from the PUCO.  The SEC under the PUHCA regulates the issuance of short-term debt by Cinergy Corp., PSI, and ULH&P.  The PUCO has regulatory jurisdiction over the issuance of short-term debt by CG&E.

 

 

 

Short-term Regulatory Authority
September 30, 2003

 

 

 

(millions)

 

 

 

Authority

 

Outstanding

 

 

 

 

 

 

 

Cinergy Corp.

 

$

5,000

(1)

$

209

 

CG&E and subsidiaries

 

671

 

9

 

PSI

 

600

 

165

 

ULH&P

 

65

 

24

 

 


(1)          Cinergy Corp., under the PUHCA, was granted approval to increase total capitalization (excluding retained earnings and accumulated other comprehensive income (loss)), which may be any combination of debt and equity securities, by $5 billion.  Outside this requirement, Cinergy Corp. is not subject to specific regulatory debt authorizations.

 

For the purposes of quantifying regulatory authority, short-term debt includes revolving credit borrowings, uncommitted credit line borrowings, intercompany money pool obligations, and commercial paper.

 

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Cinergy Corp.’s short-term borrowing consists primarily of unsecured revolving lines of credit and the sale of commercial paper.  Cinergy Corp.’s $1 billion revolving credit facilities and $800 million commercial paper program also support the short-term borrowing needs of CG&E and PSI.  In addition, Cinergy, CG&E, and PSI maintain uncommitted lines of credit.  These facilities are not firm sources of capital but rather informal agreements to lend money, subject to availability, with pricing determined at the time of advance.  The following is a summary of outstanding short-term borrowings for Cinergy, CG&E, PSI, and ULH&P, including variable rate pollution control notes:

 

 

 

Short-term Borrowings
September 30, 2003

 

 

 

Established
Lines

 

Outstanding

 

Unused

 

Standby
Liquidity(3)

 

Available
Revolving
Lines of
Credit

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cinergy

 

 

 

 

 

 

 

 

 

 

 

Cinergy Corp.

 

 

 

 

 

 

 

 

 

 

 

Revolving lines

 

$

1,000

 

$

 

$

1,000

 

$

224

 

$

776

 

Uncommitted lines(1)

 

65

 

 

65

 

 

 

 

 

Commercial paper(2)

 

 

 

209

 

591

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating companies

 

 

 

 

 

 

 

 

 

 

 

Uncommitted lines(1)

 

75

 

 

75

 

 

 

 

 

Pollution control notes

 

 

 

112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-regulated subsidiaries

 

 

 

 

 

 

 

 

 

 

 

Revolving lines

 

17

 

9

 

8

 

 

 

8

 

Short-term debt

 

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cinergy Total

 

 

 

$

337

 

 

 

 

 

$

784

 

 

 

 

 

 

 

 

 

 

 

 

 

CG&E and subsidiaries

 

 

 

 

 

 

 

 

 

 

 

Uncommitted lines(1)

 

$

15

 

$

 

$

15

 

 

 

 

 

Pollution control notes

 

 

 

112

 

 

 

 

 

 

 

Money pool

 

 

 

9

 

 

 

 

 

 

 

CG&E Total

 

 

 

$

121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PSI

 

 

 

 

 

 

 

 

 

 

 

Uncommitted lines(1)

 

$

60

 

$

 

$

60

 

 

 

 

 

Money pool

 

 

 

165

 

 

 

 

 

 

 

PSI Total

 

 

 

$

165

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ULH&P

 

 

 

 

 

 

 

 

 

 

 

Money pool

 

 

 

$

24

 

 

 

 

 

 

 

ULH&P Total

 

 

 

$

24

 

 

 

 

 

 

 

 


(1)       Outstanding amounts may be greater than established lines as uncommitted lenders are, at times, willing to loan funds in excess of the established lines.

(2)       The commercial paper program is limited to $800 million and is supported by Cinergy Corp.’s revolving lines.

(3)       Standby liquidity is reserved against the revolving lines to support the commercial paper program and outstanding letters of credit (currently $209 million and $15 million, respectively).

 

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At September 30, 2003, Cinergy Corp. had $776 million remaining unused and available capacity relating to its $1 billion revolving credit facilities.  These revolving credit facilities included the following:

 

Credit Facility

 

Expiration

 

Established
Lines

 

Outstanding
and
Committed

 

Unused and
Available

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

364-day senior revolving

 

April 2004

 

 

 

 

 

 

 

Direct borrowing

 

 

 

$

 

 

$

 

$

 

 

Commercial paper support

 

 

 

 

 

209

 

 

 

 

 

 

 

 

 

 

 

 

 

Total 364-day facility

 

 

 

600

 

209

 

391

 

 

 

 

 

 

 

 

 

 

 

Three-year senior revolving

 

May 2004

 

 

 

 

 

 

 

Direct borrowing

 

 

 

 

 

 

 

 

Commercial paper support

 

 

 

 

 

 

 

 

Letter of Credit support

 

 

 

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

Total three-year facility

 

 

 

400

 

15

 

385

 

 

 

 

 

 

 

 

 

 

 

Total credit facilities

 

 

 

$

1,000

 

$

224

 

$

776

 

 

In April 2003, Cinergy Corp. successfully placed a $600 million, 364-day senior unsecured revolving credit facility.  This facility replaced the $600 million, 364-day facility that expired April 30, 2003.

 

In our credit facilities, Cinergy Corp. has covenanted to maintain:

 

                  a consolidated net worth of $2 billion; and

                  a ratio of consolidated indebtedness to consolidated total capitalization not in excess of 65 percent.

 

A breach of these covenants could result in the termination of the credit facilities and the acceleration of the related indebtedness.  In addition to breaches of covenants, certain other events that could result in the termination of available credit and acceleration of the related indebtedness include:

 

                  bankruptcy;

                  defaults in the payment of other indebtedness; and

                  judgments against the company that are not paid or insured.

 

The latter two events, however, are subject to dollar-based materiality thresholds.

 

As discussed in Note 1(g)(iii) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information”, long-term debt increased in the third quarter of 2003 resulting from the adoption of Interpretation No. 46, Consolidation of Variable Interest Entities (Interpretation 46).

 

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The debt which was recorded as a result of this new accounting pronouncement did not cause Cinergy to be in breach of any covenants.

 

Variable Rate Pollution Control Notes

 

CG&E has issued certain variable rate pollution control notes (tax-exempt notes obtained to finance equipment or land development for pollution control purposes).  Because the holders of these notes have the right to have their notes redeemed on a daily, monthly, or annual basis, they are reflected in Notes payable and other short-term obligations on the Balance Sheets of Cinergy and CG&E.  At September 30, 2003, CG&E had $112 million outstanding in variable rate pollution control notes, classified as short-term debt.  PSI and ULH&P had no outstanding short-term pollution control notes.  Any short-term pollution control note borrowings outstanding do not reduce the unused and available short-term debt regulatory authority of CG&E, PSI, and ULH&P.  See Note 5 of the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for additional information regarding pollution control notes.

 

Money Pool

 

Cinergy Corp., Services, and our operating companies participate in a money pool arrangement to better manage cash and working capital requirements.  Under this arrangement, those companies with surplus short-term funds provide short-term loans to affiliates (other than Cinergy Corp.) participating under this arrangement.  This surplus cash may be from internal or external sources.  The amounts outstanding under this money pool arrangement are shown as a component of Notes receivable from affiliated companies and/or Notes payable to affiliated companies on the Balance Sheets of CG&E, PSI, and ULH&P.  Any money pool borrowings outstanding reduce the unused and available short-term debt regulatory authority of CG&E, PSI, and ULH&P.

 

Long-term Debt
 

We are required to secure authority to issue long-term debt from the SEC under the PUHCA and the state utility commissions of Ohio, Kentucky, and Indiana.  The SEC under the PUHCA regulates the issuance of long-term debt by Cinergy Corp.  The respective state utility commissions regulate the issuance of long-term debt by our operating companies.

 

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A summary of our long-term debt authorizations at September 30, 2003, was as follows:

 

 

 

Authorized

 

Used

 

Available

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

Cinergy Corp.

 

 

 

 

 

 

 

PUHCA total capitalization(1)

 

$

5,000

 

$

1,601

 

$

3,399

 

 

 

 

 

 

 

 

 

CG&E and subsidiaries(2)

 

 

 

 

 

 

 

State Public Utility Commissions

 

575

 

400

 

175

 

 

 

 

 

 

 

 

 

PSI

 

 

 

 

 

 

 

State Public Utility Commission

 

500

 

483

 

17

 

 

 

 

 

 

 

 

 

ULH&P

 

 

 

 

 

 

 

State Public Utility Commission

 

75

 

 

75

 

 


(1)          Cinergy Corp., under PUHCA, was granted approval to increase total capitalization (excluding retained earnings and accumulated other comprehensive income (loss)), which may be any combination of debt and equity securities, by $5 billion.  Outside this requirement, Cinergy Corp. is not subject to specific regulatory debt authorizations.

(2)          Includes amounts for ULH&P.

 

Cinergy Corp. has an effective shelf registration statement with the SEC relating to the issuance of up to $750 million in any combination of common stock, preferred stock, stock purchase contracts or unsecured debt securities, of which approximately $574 million remains available for issuance.  CG&E has an effective shelf registration statement with the SEC relating to the issuance of up to $500 million in any combination of unsecured debt securities, first mortgage bonds, or preferred stock, of which $100 million remains available for issuance.  PSI has an effective shelf registration statement with the SEC relating to the issuance of up to $700 million in any combination of unsecured debt securities, first mortgage bonds, or preferred stock, of which $300 million remains available for issuance.  ULH&P has effective shelf registration statements with the SEC relating to the issuance of up to $50 million in unsecured debt securities and up to $40 million in first mortgage bonds, of which $30 million in unsecured debt securities and $20 million in first mortgage bonds remain available for issuance.

 

Off-Balance Sheet Financing
 

As discussed in the 2002 10-K, Cinergy uses special-purpose entities (SPE) to finance various projects.  The FASB issued Interpretation 46 in January 2003.  This interpretation significantly changes the consolidation requirements for SPEs and certain other entities subject to its scope.  For further discussions see “Consolidation of Variable Interest Entities” under “Accounting Changes” in MD&A-Future.

 

As of September 30, 2003, Cinergy held investments in various unconsolidated subsidiaries which are accounted for under the equity method and had guaranteed approximately $8 million of the debt of these entities.  In October 2003, Cinergy Corp. acquired controlling interest in these entities, and as a result, the entities will be consolidated by Cinergy Corp.

 

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Securities Ratings

 

As of September 30, 2003, the major credit ratings agencies rated our securities as follows:

 

 

 

Fitch(1)

 

Moody’s(2)

 

S&P(3)

 

 

 

 

 

 

 

 

 

Cinergy Corp.

 

 

 

 

 

 

 

Corporate Credit

 

BBB+

 

Baa2

 

BBB+

 

Senior Unsecured Debt

 

BBB+

 

Baa2

 

BBB

 

Commercial Paper

 

F-2

 

P-2

 

A-2

 

Preferred Trust Securities

 

BBB+

 

Baa2

 

BBB

 

 

 

 

 

 

 

 

 

CG&E

 

 

 

 

 

 

 

Senior Secured Debt

 

A-

 

A3

 

A-

 

Senior Unsecured Debt

 

BBB+

 

Baa1

 

BBB

 

Junior Unsecured Debt

 

BBB

 

Baa2

 

BBB-

 

Preferred Stock

 

BBB

 

Baa3

 

BBB-

 

Commercial Paper

 

F-2

 

P-2

 

Not Rated

 

 

 

 

 

 

 

 

 

PSI

 

 

 

 

 

 

 

Senior Secured Debt

 

A-

 

A3

 

A-

 

Senior Unsecured Debt

 

BBB+

 

Baa1

 

BBB

 

Junior Unsecured Debt

 

BBB

 

Baa2

 

BBB-

 

Preferred Stock

 

BBB

 

Baa3

 

BBB-

 

Commercial Paper

 

F-2

 

P-2

 

Not Rated

 

 

 

 

 

 

 

 

 

ULH&P

 

 

 

 

 

 

 

Senior Unsecured Debt

 

Not Rated

 

Baa1

 

BBB

 

 


(1)          Fitch IBCA (Fitch)

(2)          Moody’s Investors Service (Moody’s)

(3)          Standard & Poor’s Ratings Services (S&P)

 

The lowest investment grade credit rating for Fitch is BBB-, Moody’s is Baa3, and S&P is BBB-.

 

These securities ratings may be revised or withdrawn at any time, and each rating should be evaluated independently of any other rating.

 

Equity
 

As discussed in the 2002 10-K, the SEC has granted Cinergy Corp. authority to increase its total capitalization by $5 billion.  The proceeds from any new issuances will be used for general corporate purposes.

 

In January 2003, Cinergy Corp. filed a registration statement with the SEC with respect to the issuance of common stock, preferred stock, and other securities in an aggregate offering amount of $750 million.  In February 2003, Cinergy sold 5.7 million shares of common stock of Cinergy Corp. with net proceeds of approximately $175 million under this registration statement.

 

See Note 2(a) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for additional information regarding other common stock issuances.

 

Cinergy Corp. contributed $200 million in capital to PSI in two separate $100 million capital contributions in the second and third quarters of 2003, respectively.  These capital contributions were made to support PSI’s current credit ratings.

 

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MD&A – QUARTERLY RESULTS OF OPERATIONS - HISTORICAL

 

2003 QUARTERLY RESULTS OF OPERATIONS - HISTORICAL

 

Summary of Results

 

Electric and gas gross margins and net income for Cinergy, CG&E, and PSI for the quarters ended September 30, 2003 and 2002 were as follows:

 

 

 

Cinergy (1)

 

CG&E and subsidiaries

 

PSI

 

 

 

2003

 

2002

 

2003

 

2002

 

2003

 

2002

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric gross margin

 

$

590,641

 

$

663,069

 

$

330,046

 

$

356,158

 

$

259,298

 

$

302,089

 

Gas gross margin

 

44,951

 

54,790

 

34,176

 

28,858

 

 

 

Net income

 

111,981

 

130,568

 

78,863

 

71,769

 

37,592

 

67,643

 

 


(1)  The results of Cinergy also include amounts related to non-registrants.

 

Cinergy’s net income for the third quarter of 2003 was $112 million ($.62 per share on a diluted basis) as compared to $131 million ($.77 per share on a diluted basis) for the same period last year.  Income before taxes for the period was $148 million compared to $181 million for the same period a year ago.  Electric margins at PSI and CG&E declined due to milder weather during the quarter.  Gas margins decreased primarily due to the results of our gas trading operation, Cinergy Marketing & Trading, LP (Marketing & Trading), although this was partially offset by higher usage by CG&E’s retail customers due to cooler weather.  During the quarter, fewer trading opportunities were available as a result of market conditions.  Also contributing to the decrease in net income were costs associated with the likely resolution of claims with respect to the bankruptcy of Enron Corp. (Enron).  Partially offsetting these decreases in net income were reductions in transmission costs and property taxes.

 

Electric Operating Revenues

 

 

 

Cinergy (1)

 

CG&E and subsidiaries

 

PSI

 

 

 

2003

 

2002

 

% Change

 

2003

 

2002

 

% Change

 

2003

 

2002

 

% Change

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

744

 

$

805

 

(8

)

$

377

 

$

429

 

(12

)

$

367

 

$

377

 

(3

)

Wholesale

 

141

 

109

 

29

 

65

 

27

 

N/M

 

61

 

79

 

(23

)

Other

 

36

 

51

 

(29

)

33

 

37

 

(11

)

9

 

15

 

(40

)

Total

 

$

921

 

$

965

 

(5

)

$

475

 

$

493

 

(4

)

$

437

 

$

471

 

(7

)

 


(1)  The results of Cinergy also include amounts related to non-registrants.

N/M Not meaningful to an understanding of the change.

 

Electric operating revenues decreased for Cinergy, CG&E, and PSI for the quarter ended September 30, 2003, as compared to 2002.  Retail revenues decreased for Cinergy, CG&E, and PSI primarily due to lower megawatt hour (MWh) sales resulting from milder weather.  The number of cooling degree days for the third quarter was approximately 35 percent lower than the

 

80



 

comparable period of 2002, contributing to a reduction in residential MWh sales of approximately 15 percent and 10 percent for CG&E and PSI, respectively.  Also contributing to the decrease were lower commercial and industrial MWh sales reflecting the effects of a continuing sluggish economy.  Partially offsetting this decrease for PSI were increased tariff adjustments associated with the fuel cost recovery mechanism and certain construction programs.

 

Wholesale revenues increased for Cinergy and CG&E for the quarter ended September 30, 2003, as compared to the same period last year.  Due to lower retail demand as a result of mild weather, more Cinergy generation capacity was available for wholesale transactions.  In addition CG&E’s increase and PSI’s decrease in wholesale revenues reflects the implementation of the new joint operating agreement as discussed in the 2002 10-K.  With this agreement, the majority of new wholesale contracts entered into are originated on behalf of CG&E.

 

Other electric operating revenues decreased for Cinergy, CG&E and PSI for the quarter ended September 30, 2003, as compared to 2002.  Cinergy’s and CG&E’s decrease was primarily the result of decreased third party coal sales and lower transmission revenues.  PSI’s decrease was primarily the result of decreased transmission revenues.

 

Gas Operating Revenues

 

 

 

Cinergy (1)

 

CG&E and subsidiaries

 

 

 

2003

 

2002

 

% Change

 

2003

 

2002

 

% Change

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

66

 

$

41

 

61

 

$

66

 

$

41

 

61

 

Wholesale

 

10

 

26

 

(62

)

 

 

 

Storage and transportation

 

49

 

36

 

36

 

 

 

 

Other

 

 

1

 

N/M

 

 

 

 

Total

 

$

125

 

$

104

 

20

 

$

66

 

$

41

 

61

 

 


(1)  The results of Cinergy also include amounts related to non-registrants.

N/M Not meaningful to an understanding of the change.

 

Gas operating revenues increased for Cinergy and CG&E for the quarter ended September 30, 2003, as compared to 2002.  Retail gas revenues increased due to both an increase in thousand cubic feet (mcf) delivered and an increase in price received per mcf.  CG&E’s volumes delivered increased primarily due to cooler weather in the third quarter of 2003, as compared to 2002.  The higher prices per mcf reflect an increase in tariff adjustments associated with the gas main replacement program, the Ohio excise taxes, and the gas cost recovery mechanism.

 

CG&E’s wholesale gas commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism mandated by state law.  For further information see Note 7(n) in the “Notes to Condensed Financial Statements” in “Part I. Financial Information”.

 

Cinergy began reporting revenues from energy trading derivative contracts on a net basis in 2003, in accordance with the required adoption of Emerging Issues Task Force (EITF) Issue 02-3, Issues Involved in Accounting for Derivatives Contracts Held for Trading Purposes and

 

81



 

Contracts Involved in Energy Trading and Risk Management Activities (EITF 02-3).  See Note 1(g)(iii) in the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for additional information.

 

Cinergy’s wholesale gas revenues (which represent net gains and losses on energy trading activity) decreased for the quarter ended September 30, 2003, as compared to 2002, primarily due to fewer trading opportunities in 2003 as a result of market conditions.

 

Cinergy’s gas storage and transportation revenues increased for the quarter ended September 30, 2003, as compared to 2002 due to an overall increase in the number of storage contracts that were entered into in the third quarter of 2003.

 

Other Revenues

 

Other revenues for Cinergy decreased for the quarter ended September 30, 2003, as compared to 2002, primarily due to a decrease in the production of synthetic fuel as a result of a reduction in electric production by the third party purchaser of our synthetic fuel.

 

Operating Expenses

 

 

 

Cinergy (1)

 

CG&E and subsidiaries

 

PSI

 

 

 

2003

 

2002

 

% Change

 

2003

 

2002

 

% Change

 

2003

 

2002

 

% Change

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel

 

$

287

 

$

270

 

6

 

$

111

 

$

114

 

(3

)

$

164

 

$

140

 

17

 

Purchased and exchanged power

 

43

 

32

 

34

 

34

 

23

 

48

 

14

 

29

 

(52

)

Gas purchased

 

30

 

13

 

N/M

 

32

 

13

 

N/M

 

 

 

 

Gas storage and transportation

 

50

 

36

 

39

 

 

 

 

 

 

 

Operation and maintenance

 

317

 

364

 

(13

)

133

 

150

 

(11

)

113

 

129

 

(12

)

Depreciation

 

105

 

100

 

5

 

43

 

49

 

(12

)

48

 

40

 

20

 

Taxes other than income taxes

 

56

 

65

 

(14

)

45

 

50

 

(10

)

10

 

13

 

(23

)

Total

 

$

888

 

$

880

 

1

 

$

398

 

$

399

 

 

$

349

 

$

351

 

(1

)

 


(1)  The results of Cinergy also include amounts related to non-registrants.

N/M Not meaningful to an understanding of the change.

 

82



 

Fuel
 

Fuel primarily represents the cost of coal, natural gas, and oil that is used to generate electricity.  The following table details the changes to fuel expense from the quarter ended September 30, 2002, to the quarter ended September 30, 2003:

 

 

 

Cinergy (1)

 

CG&E

 

PSI

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

Fuel expense – September 30, 2002

 

$

270

 

$

114

 

$

140

 

 

 

 

 

 

 

 

 

Increase (decrease) due to changes in:

 

 

 

 

 

 

 

Price of fuel

 

3

 

2

 

1

 

Deferred fuel cost(2)

 

21

 

 

21

 

Fuel consumption

 

2

 

 

2

 

Other(3)

 

(9

)

(5

)

 

 

 

 

 

 

 

 

 

Fuel expense – September 30, 2003

 

$

287

 

$

111

 

$

164

 

 


(1)  The results of Cinergy also include amounts related to non-registrants.

(2)  Deferred fuel cost represents changes in fuel expense associated with PSI's fuel adjustment charge, which recovers retail fuel costs from customers on a dollar-for-dollar basis.  Amounts that have been deferred are adjusted through fuel expense as fuel adjustment charge revenue is collected from customers.

(3)  Includes costs of third party coal sales.

 

Purchased and Exchanged Power
 

Purchased and exchanged power expense increased for Cinergy for the quarter ended September 30, 2003, as compared to the same period last year.  The majority of Cinergy’s and CG&E’s increase is a result of an increase in the price paid per MWh and a lower amount of deferred purchased power cost.  Offsetting the increase was a decrease in purchased and exchanged power expense at PSI.  More generation is available to serve PSI native load customers due to the repowering of PSI’s Noblesville Station and the addition of peaking plants as discussed in Note 12 in the “Notes to Condensed Financial Statements” in “Part I. Financial Information”.

 

Gas Purchased
 

Gas purchased expense increased for Cinergy and CG&E for the quarter ended September 30, 2003, as compared to 2002.  This increase was primarily due to an increase in the average cost per mcf of gas purchased.  In addition, CG&E’s gas customers usage increased approximately 17 percent in the quarter as compared to the same period last year.  CG&E’s wholesale commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism mandated by state law.

 

Gas Storage and Transportation
 

Gas storage and transportation expense increased for Cinergy for the quarter ended September 30, 2003, as compared to 2002, primarily due to an increase in storage withdrawals which reflects increased storage contract activity.  Gas storage expense is recognized on our Statements of Income as natural gas is sold from inventory.

 

83



 

Operation and Maintenance
 

Operation and maintenance expense decreased for Cinergy, CG&E, and PSI for the quarter ended September 30, 2003, as compared to 2002.  The decrease for Cinergy was a result of a decrease in the costs associated with the production of synthetic fuel in the third quarter of 2003 compared to 2002.  Partially offsetting the decrease for Cinergy were the costs associated with our anticipated resolution of claims with respect to the bankruptcy of Enron.  Cinergy’s, CG&E’s, and PSI’s decreases were also affected by a decrease in the amortization of certain regulatory assets due to lower electric revenues.  Also contributing to the decrease for Cinergy, CG&E, and PSI were decreased transmission costs.

 

Depreciation
 

Depreciation expense increased for Cinergy and PSI and decreased for CG&E for the quarter ended September 30, 2003, as compared to 2002.  Cinergy’s and PSI’s increase was primarily attributable to the addition of depreciable plant.  CG&E’s decrease is primarily attributable to an increase in the estimated useful lives of our generating assets, resulting from a new depreciation study completed during the third quarter of 2003.  Also contributing to CG&E’s decrease was the discontinuance of accruing costs of removal for our generating assets (which was previously included as part of Depreciation expense) as a result of the adoption of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (Statement 143).  See Note 1(g)(vi) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for further details.  Prior periods were not restated for the adoption of Statement 143.

 

Taxes Other Than Income Taxes
 

Taxes other than income taxes expense decreased for Cinergy, CG&E, and PSI for the quarter ended September 30, 2003, as compared to 2002.  This decrease was primarily due to lower property taxes.

 

Miscellaneous Income (Expense) - Net

 

Miscellaneous Income (Expense) - Net increased for Cinergy for the quarter ended September 30, 2003, as compared to 2002.  Cinergy’s increase primarily reflects the interest income on the notes receivable of two newly consolidated subsidiaries.  See Note 1(g)(iii) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for further details regarding the consolidation of these entities.  In addition, CG&E’s increase and PSI’s decrease was a result of a final reconciliation between the two entities of a previous demutualization of a medical insurance carrier used by both companies.

 

Interest Expense

 

Interest Expense increased for Cinergy, CG&E, and PSI for the quarter ended September 30, 2003, as compared to 2002.  The impact of a decrease in short-term interest rates was more than offset by an increase in the amount of long-term debt outstanding for Cinergy, CG&E, and PSI.  Interest on long-term debt increased as a result of the additional debt recorded with the

 

84



 

consolidation of two new entities and the recognition of a note payable to a trust in accordance with the adoption of Interpretation 46, see Note 1(g)(iii) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information”.

 

Preferred Dividend Requirement of Subsidiary Trust

 

Preferred Dividend Requirement of Subsidiary Trust decreased for Cinergy for the quarter ended September 30, 2003, as a result of the implementation of Interpretation 46.  Effective July 1, 2003, the preferred trust securities and the related dividends are no longer reported in Cinergy’s financial statements.  See Note 1(g)(iii) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for further details.

 

Income Taxes

 

Income Taxes expense decreased for Cinergy and PSI for the quarter ended September 30, 2003, as compared to 2002.  Cinergy’s decrease was primarily a result of a decrease in taxable book income.  Based on its current estimates, Cinergy expects that its effective income tax rate for 2003 will approximate 24 percent.  PSI’s decrease was primarily due to a decrease in taxable book income.  This decrease was partially offset by an increase in the Indiana state income tax rate in 2003.

 

85



 

MD&A - YEAR TO DATE RESULTS OF OPERATIONS - - HISTORICAL

 

 

2003 YEAR TO DATE RESULTS OF OPERATIONS - HISTORICAL

 

Summary of Results

 

Electric and gas gross margins and net income for Cinergy, CG&E, and PSI for the nine months ended September 30, 2003 and 2002 were as follows:

 

 

 

Cinergy (1)

 

CG&E and subsidiaries

 

PSI

 

 

 

2003

 

2002

 

2003

 

2002

 

2003

 

2002

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric gross margin

 

$

1,672,622

 

$

1,769,425

 

$

919,244

 

$

949,150

 

$

743,501

 

$

795,513

 

Gas gross margin

 

269,482

 

185,620

 

174,912

 

132,036

 

 

 

Net income

 

362,719

 

260,380

 

247,018

 

202,024

 

94,398

 

135,440

 

 


(1)  The results of Cinergy also include amounts related to non-registrants.

 

Cinergy’s net income for the nine months ended September 30, 2003, was $363 million ($2.04 per share on a diluted basis) as compared to $260 million ($1.55 per share on a diluted basis) for the same period last year.  Income before taxes for the period was $432 million compared to $398 million for the same period a year ago.  The increase in 2003 income primarily reflects higher gas margins from wholesale and retail operations in 2003 and $66 million in charges associated with employee severance programs and the write-offs of certain equipment and technology investments that were taken in the second quarter of 2002.  The increased gas margins primarily reflect the results of our domestic gas trading operation, Marketing & Trading, as well as increased volume of retail gas sales due to colder weather during the first and third quarters of 2003.  Also contributing to the gas margin increase over 2002 was the impact of accounting changes that required certain gas contracts and inventory to be accounted for on the accrual basis beginning in 2003.  Offsetting the increase in gas margins was a decrease in electric margins due to milder than normal weather in the second and third quarter of 2003.  Cinergy’s increased net income also reflects a net gain resulting from the implementation of certain accounting changes, which have been reflected as a cumulative effect of changes in accounting principles (see Note 1(g)(v) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information”), and gains realized in the second quarter of 2003 from the disposal of discontinued operations and lower income taxes resulting primarily from tax credits associated with the production of synthetic fuel which began in July 2002.

 

86



 

Electric Operating Revenues

 

 

 

Cinergy (1)

 

CG&E and subsidiaries

 

PSI

 

 

 

2003

 

2002

 

% Change

 

2003

 

2002

 

% Change

 

2003

 

2002

 

% Change

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

2,063

 

$

2,129

 

(3

)

$

1,030

 

$

1,110

 

(7

)

$

1,033

 

$

1,020

 

1

 

Wholesale

 

364

 

283

 

29

 

194

 

95

 

N/M

 

156

 

168

 

(7

)

Other

 

86

 

119

 

(28

)

77

 

96

 

(20

)

21

 

28

 

(25

)

Total

 

$

2,513

 

$

2,531

 

(1

)

$

1,301

 

$

1,301

 

 

$

1,210

 

$

1,216

 

 

 


(1)  The results of Cinergy also include amounts related to non-registrants.

N/M  Not meaningful to an understanding of the change.

 

Electric operating revenues decreased for Cinergy and PSI for the nine months ended September 30, 2003, as compared to 2002.

 

Electric retail operating revenues decreased for Cinergy for the nine months ended September 30, 2003, compared to the same period last year.  Contributing to Cinergy’s decrease was a decrease in MWh sales for PSI and CG&E due to milder than normal weather during the summer and a sluggish economy.  For the nine months ended September 30, 2003, cooling degree-days were 39 percent lower for CG&E and 37 percent lower for PSI as compared to 2002.  The mild summer weather was offset by a colder heating season during the first half of the year.  For the nine months ended September 30, 2003, heating degree-days were approximately 17 percent and 19 percent higher for CG&E and PSI, respectively.  The net effect contributed to a decrease in residential MWh of approximately four percent for CG&E and approximately two percent for PSI.  The sluggish economy caused CG&E’s and PSI’s commercial and industrial MWh sales to decrease by approximately two percent for the nine months ended September 30, 2003, compared to the same period last year.  Partially offsetting Cinergy’s decrease in electric retail revenue from lower MWh sales was an increase in the price paid per MWh at PSI during 2003.  Increases in tariff adjustments associated with the fuel cost recovery mechanism and certain construction projects caused PSI’s retail operating revenue to increase for 2003.

 

Electric wholesale revenues increased for Cinergy and CG&E and decreased for PSI for the nine months ended September 30, 2003, as compared to the same period last year.  Due to lower retail demand as a result of milder weather, more Cinergy generation capacity was available for wholesale transactions in the second and third quarters of 2003.  In addition, CG&E’s increase and PSI’s decrease in wholesale revenues reflects the implementation of the new joint operating agreement as discussed in the 2002 10-K.  With this agreement, the majority of new wholesale contracts entered into are originated on behalf of CG&E.

 

Other electric operating revenues decreased for Cinergy, CG&E, and PSI for the nine months ended September 30, 2003, as compared to 2002, primarily reflecting lower transmission revenues.  The decrease for Cinergy and CG&E also reflects a reduction in third party coal sales.

 

87



 

Gas Operating Revenues

 

 

 

Cinergy (1)

 

CG&E and subsidiaries

 

 

 

2003

 

2002

 

% Change

 

2003

 

2002

 

% Change

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

424

 

$

274

 

55

 

$

424

 

$

274

 

55

 

Wholesale

 

73

 

50

 

46

 

 

 

 

Storage and transportation

 

140

 

48

 

N/M

 

 

 

 

Other

 

1

 

2

 

(50

)

3

 

3

 

 

Total

 

$

638

 

$

374

 

71

 

$

427

 

$

277

 

54

 

 


(1)  The results of Cinergy also include amounts related to non-registrants.

N/M  Not meaningful to an understanding of the change.

 

Gas operating revenues increased for Cinergy and CG&E for the nine months ended September 30, 2003, as compared to 2002.  Cinergy’s and CG&E’s retail gas revenues increased due to an increase in retail sales volumes and higher prices received per mcf.  The increase in retail gas sales volumes was primarily the result of the colder weather in the first and third quarters of 2003 as compared to the same period in 2002.  The higher price per mcf reflects an increase in CG&E’s base rates, as approved by the PUCO in May 2002, and tariff adjustments associated with the gas main replacement program and gas cost recovery mechanism.  For further information see Note 7(n) in the “Notes to Condensed Financial Statements” in “Part I. Financial Information”.  CG&E’s wholesale gas commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism mandated by state law.

 

Cinergy began reporting revenues from energy trading derivative contracts on a net basis in 2003, in accordance with the required adoption of EITF 02-3.  See Note 1(g)(i) in the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for additional information.

 

Cinergy’s wholesale gas revenues (which represent net gains and losses on energy trading derivatives) increased for the nine months ended September 30, 2003, as compared to 2002, primarily due to an increase in the volatility of natural gas prices in the first quarter of 2003, as compared to the same period in 2002.

 

Cinergy’s gas storage and transportation revenues increased for the nine months ended September 30, 2003, as compared to 2002.  Marketing & Trading began engaging in significant storage activities at the end of the second quarter of 2002.

 

88



 

Operating Expenses

 

 

 

Cinergy (1)

 

CG&E and subsidiaries

 

PSI

 

 

 

2003

 

2002

 

% Change

 

2003

 

2002

 

% Change

 

2003

 

2002

 

% Change

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel

 

$

746

 

$

680

 

10

 

$

304

 

$

304

 

 

$

415

 

$

349

 

19

 

Purchased and exchanged power

 

94

 

82

 

15

 

78

 

48

 

63

 

52

 

71

 

(27

)

Gas purchased

 

252

 

145

 

74

 

252

 

145

 

74

 

 

 

 

Gas storage and transportation

 

117

 

44

 

N/M

 

 

 

 

 

 

 

Operation and maintenance

 

973

 

962

 

1

 

394

 

394

 

 

349

 

387

 

(10

)

Depreciation

 

314

 

294

 

7

 

142

 

146

 

(3

)

135

 

116

 

16

 

Taxes other than income taxes

 

201

 

202

 

 

155

 

150

 

3

 

42

 

47

 

(11

)

Total

 

$

2,697

 

$

2,409

 

12

 

$

1,325

 

$

1,187

 

12

 

$

993

 

$

970

 

2

 

 


(1)  The results of Cinergy also include amounts related to non-registrants.

N/M  Not meaningful to an understanding of the change.

 

Fuel
 

Fuel primarily represents the cost of coal, natural gas, and oil that is used to generate electricity. The following table details the changes to fuel expense from the nine months ended September 30, 2002, to the nine months ended September 30, 2003:

 

 

 

Cinergy (1)

 

CG&E

 

PSI

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

Fuel expense - September 30, 2002

 

$

680

 

$

304

 

$

349

 

 

 

 

 

 

 

 

 

Increase (decrease) due to changes in:

 

 

 

 

 

 

 

Price of fuel

 

15

 

 

15

 

Deferred fuel cost(2)

 

44

 

 

44

 

Fuel consumption

 

9

 

2

 

7

 

Other (3)

 

(2

)

(2

)

 

 

 

 

 

 

 

 

 

Fuel expense - September 30, 2003

 

$

746

 

$

304

 

$

415

 

 


(1)  The results of Cinergy also include amounts related to non-registrants.

(2)  Deferred fuel cost represents changes in fuel expense associated with PSI's fuel adjustment charge, which recovers retail fuel costs from customers on a dollar-for-dollar basis.  Amounts that have been deferred are adjusted through fuel expense as fuel adjustment charge revenue is collected from customers.

(3)  Includes costs of third party coal sales.

 

Purchased and Exchanged Power
 

Purchased and exchanged power expense increased for Cinergy and CG&E for the nine months ended September 30, 2003, as compared to the same period last year.  The majority of Cinergy’s and CG&E’s increase is a result of an increase in the price paid per MWh and a lower amount of deferred purchased power cost.  PSI’s decrease in purchased and exchanged power is a result of more generation being available to serve PSI native load customers due to the repowering of

 

89



 

PSI’s Noblesville station and the addition of peaking plants as discussed in Note 12 in the “Notes to Condensed Financial Statements” in “Part I. Financial Information”.

 

Gas Purchased
 

Gas purchased expense increased for Cinergy and CG&E for the nine months ended September 30, 2003, as compared to 2002, primarily due to an increased average cost per mcf of gas purchased.  In addition, CG&E’s gas customers usage increased approximately 21 percent for the nine months ended September 30, 2003, as compared to the same period last year.  CG&E’s wholesale commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism mandated by state law.

 

Gas Storage and Transportation
 

Gas storage and transportation expense increased for Cinergy for the nine months ended September 30, 2003, as compared to 2002, primarily due to an increase in storage activity in 2003.  Also contributing to this increase was an increase in storage capacity in the third quarter of 2002 that was optimized during the first quarter of 2003.  Marketing & Trading began engaging in significant storage activities at the end of the second quarter of 2002.  Gas storage expense is recognized on our Statements of Income as natural gas is sold from inventory.

 

Operation and Maintenance
 

Operation and maintenance expense increased for Cinergy and decreased for PSI for the nine months ended September 30, 2003, as compared to 2002.  Cinergy’s increase includes costs associated with the production of synthetic fuel, which began in July 2002, and the costs associated with Cinergy’s anticipated resolution of claims with respect to the bankruptcy of Enron.  Partially offsetting Cinergy’s increase and primarily attributing to PSI’s decrease were lower transmission costs and costs associated with employee severance programs in 2002.

 

Depreciation
 

Depreciation expense increased for Cinergy and PSI and decreased for CG&E for the nine months ended September 30, 2003, as compared to 2002.  Cinergy’s and PSI’s increase was primarily due to the addition of depreciable plant.  Also contributing to Cinergy’s increase was the addition of the depreciable equipment associated with the production of synthetic fuel.  CG&E’s decrease was primarily attributable to an increase in the estimated useful lives of certain assets resulting from a new depreciation study completed during the third quarter of 2003.  Also contributing to CG&E’s decrease was the discontinuance of accruing costs of removal for our generating assets (which was previously included as part of Depreciation expense) as a result of the adoption of Statement 143.  See Note 1(g)(vii) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for further details.  Prior periods were not restated for the adoption of Statement 143.

 

90



 

Taxes Other Than Income Taxes
 

Taxes other than income taxes expense increased for CG&E and decreased for PSI for the nine months ended September 30, 2003, as compared to 2002.  The increase for CG&E was primarily attributable to an increase in Ohio excise taxes.  PSI’s decrease was primarily the result of lower property taxes.

 

Equity in Earnings of Unconsolidated Subsidiaries

 

Equity in Earnings of Unconsolidated Subsidiaries increased for the year ended September 30, 2003, as compared to 2002, primarily due to a change in market valuation of certain investments accounted for at fair value.

 

Miscellaneous Income (Expense) - Net

 

Miscellaneous Income (Expense) - Net increased for Cinergy and CG&E for the nine months ended September 30, 2003, as compared to 2002.  Cinergy’s increase primarily reflects the 2002 write-offs of certain equipment and technology investments and the interest income on the notes receivable of two newly consolidated subsidiaries.  See Note 4 of the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for further details.  Cinergy’s and CG&E’s increase also reflects a gain on the sale of non-utility property and the recognition of expenses in 2002 for previously deferred costs that were denied recovery in the final order of ULH&P’s gas rate case.  In addition, CG&E’s increase and PSI’s decrease was a result of a final reconciliation between the two entities of a previous demutualization of a medical insurance carrier used by both companies.

 

Interest Expense

 

Interest Expense increased for Cinergy, CG&E, and PSI for the nine months ended September 30, 2003, as compared to 2002.  The impact of a decrease in short-term interest rates was more than offset by an increase in the amount of long-term debt outstanding for Cinergy, CG&E, and PSI.  Interest on long-term debt increased as a result of the additional debt recorded with the consolidation of two new entities and the recognition of a note payable to a trust in accordance with the adoption of Interpretation 46, see Note 1(g)(iii) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information”.

 

Income Taxes

 

Income Taxes expense decreased for Cinergy and PSI for the nine months ended September 30, 2003, as compared to 2002.  Cinergy’s decrease was primarily a result of the tax credits associated with the production and sale of synthetic fuel, which began in July 2002.  Based on its current estimates, Cinergy expects that its effective income tax rate for 2003 will approximate 24 percent.  PSI’s decrease was primarily due to a decrease in taxable book income.  This decrease was partially offset by a reversal in 2002 of tax reserves, which were no longer needed, and an increase in the Indiana state income tax rate in 2003.

 

91



 

Cumulative Effect of Changes in Accounting Principles, Net of Tax

 

In 2003, Cinergy, CG&E, and PSI recognized a Cumulative effect of changes in accounting principles, net of tax gain/(loss) of approximately $26 million, $31 million, and $(0.5) million, respectively.  The cumulative effect of changes in accounting principles was a result of the adoption of Statement 143 and the rescission of EITF Issue 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities (EITF 98-10).  See Note 1(g)(vii) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for further information.

 

In 2002, Cinergy recognized a Cumulative effect of changes in accounting principles, net of tax loss of approximately $11 million as a result of implementation of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (Statement 142).  See Note 1(g)(vii) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for further information.

 

Discontinued Operations

 

During the second quarter of 2003, Cinergy completed the disposal of its gas distribution operation in South Africa, sold its remaining wind assets in the U.S., and substantially sold or liquidated the assets of its energy marketing business in the Czech Republic.  Pursuant to Statement of Financial Accounting Standards No. 144, Accounting for the Impairment of Long-lived Assets, these investments have been classified as discontinued operations in our financial statements.  See Note 8 of the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for additional information.

 

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ULH&P

 

The Results of Operations discussion for ULH&P is presented only for the nine months ended September 30, 2003, in accordance with General Instruction H(2)(a) of Form 10-Q.

 

Electric and gas gross margins and net income for ULH&P for the nine months ended September 30, 2003 and 2002, were as follows:

 

 

 

ULH&P

 

 

 

2003

 

2002

 

 

 

(in thousands)

 

 

 

 

 

 

 

Electric gross margin

 

$

49,419

 

$

52,255

 

Gas gross margin

 

28,437

 

22,652

 

Net income

 

11,477

 

9,110

 

 

Electric Operating Revenues

 

Electric operating revenues decreased for the nine months ended September 30, 2003, as compared to 2002.  The majority of the decrease was a result of the milder weather in the second and third quarter of 2003, as compared to the same period in 2002, that resulted in residential usage decreasing by approximately four percent.  The residential usage decrease accounts for approximately 75 percent of the electric operating revenue decrease.  The remaining electric operating revenue decrease is associated with decreased usage of commercial and industrial customers reflecting the effects of a continuing sluggish economy.

 

Electricity Purchased from Parent Company for Resale

 

Electricity purchased from parent company for resale decreased for the nine months ended September 30, 2003, as compared to 2002, primarily due to the mild weather in the second and third quarters of 2003 and the sluggish economy.

 

Gas Operating Revenues

 

Gas operating revenues increased for the nine months ended September 30, 2003, as compared to 2002.  This increase was primarily due to an increase in mcf sold and higher prices received per mcf, as a result of colder weather in the first and third quarters of 2003.  New base rates for ULH&P, which were effective January 31, 2002, and tariff adjustments associated with the gas main replacement program and gas cost recovery mechanism also contributed to this increase.  ULH&P’s wholesale gas commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism mandated by state law.  For further information see Note 6(o) in the “Notes to Condensed Financial Statements” in “Part I.  Financial Information”.

 

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Gas Purchased

 

Gas purchased expense increased for the nine months ended September 30, 2003, as compared to 2002, due to increased purchases and higher prices paid per mcf, primarily the result of colder weather in the first three months of 2003, which drove up the demand and the price for natural gas.  In addition, the third quarter of 2003 was colder than 2002 necessitating a slight increase in gas purchases.  The wholesale gas commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism mandated under state law.

 

Operation and Maintenance
 

Operation and maintenance expense increased for the nine months ended September 30, 2003, as compared to 2002, primarily due to increased amortization of demand side management program costs and increased maintenance of overhead lines.

 

Miscellaneous Income (Expense) - Net

 

Miscellaneous Income (Expense) - Net increased for the nine months ended September 30, 2003, as compared to 2002, primarily due to the recognition of expenses in 2002 for previously deferred costs, that were denied recovery in the final order on ULH&P’s gas rate case.

 

Income Taxes

 

Income Taxes expense increased for the nine months ended September 30, 2003, as compared to 2002.  ULH&P’s increase is related to the increase in taxable book income and an increase in the Kentucky state income tax rate.

 

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MD&A - RESULTS OF OPERATIONS - FUTURE

 

FUTURE EXPECTATIONS/TRENDS

 

In the “Future Expectations/Trends” section, we discuss electric and gas industry developments, market risk sensitive instruments and positions, and accounting matters.  Each of these discussions will address the current status and potential future impact on our results of operations and financial position.

 

ELECTRIC INDUSTRY

 

Wholesale Market Developments

 

Supply-side Actions
 

In December 2001, the  Indiana Utility Regulatory Commission (IURC) approved PSI’s plan for converting its Noblesville generating station from coal to natural gas.  The conversion increases the electric generating capacity at the plant from approximately 100 megawatts (MW) to 300 MW.  The conversion was completed and the station became operational in June 2003.  In addition to increasing capacity, overall emissions to the environment will be reduced.

 

In December 2002, the IURC approved a settlement agreement among PSI, the Indiana Office of the Utility Consumer Counselor, and the IURC Testimonial Staff authorizing PSI’s purchases of the Henry County, Indiana and Butler County, Ohio, gas-fired peaking plants from two non-regulated affiliates.  In February 2003, the FERC issued an order under Section 203 of the Federal Power Act authorizing PSI’s acquisition of the plants, which occurred on February 5, 2003.  Subsequently, in April 2003, the FERC issued a tolling order allowing additional time to consider a request for rehearing filed in response to the February 2003 FERC order.  At this time, we cannot predict the outcome of this matter.

 

On July 21, 2003, ULH&P filed an application with the Kentucky Public Service Commission (KPSC) requesting a certificate of public convenience and necessity to acquire CG&E’s ownership interests in the East Bend Generating Station, located in Boone County, Kentucky, the Woodsdale Generating Station, located in Butler County, Ohio, and one generating unit at the four-unit Miami Fort Generating Station located in Hamilton County, Ohio.  ULH&P also requested KPSC approval of a back-up power supply agreement under which CG&E would provide replacement power to ULH&P when the transferred generating facilities are out of service, and for approval of another agreement under which the transferred units would be jointly dispatched with CG&E’s remaining fleet of generating units.  An order from the KPSC is expected by the end of the year.  The transfer, which will be made at net book value, will not affect current electric rates for ULH&P’s customers, as power will be provided under the same terms as under the current wholesale power contract with CG&E through at least December 31, 2006.  This transfer is also contingent upon receipt of approval from the FERC and the SEC.  ULH&P is unable to predict the outcome of this matter.

 

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Retail Market Developments

 

Ohio
 

As discussed in the 2002 10-K, CG&E is in a market development period, transitioning to electric deregulation in the state of Ohio.  The transition period is governed by Amended Substitute Senate Bill No. 3 (Electric Restructuring Bill) and a stipulated transition plan adopted and approved by the PUCO.  Under CG&E’s transition plan, retail customers continue to receive electric distribution services from CG&E, but may purchase electricity from another supplier.  Retail customers that purchase electricity from another supplier receive shopping credits from CG&E.  The shopping credits generally reflect the costs of electric generation included in CG&E’s frozen rates.  However, shopping credits for the first 20 percent of electricity usage in each customer class to switch suppliers are higher than shopping credits for subsequent switchers in order to stimulate the development of the competitive retail electric service market, pursuant to CG&E’s stipulated agreement.

 

CG&E recovers its generation related regulatory assets and certain other transition costs deferred during the market development period through a Regulatory Transition Charge (RTC) paid by all retail customers.  As the RTC is collected from customers, CG&E amortizes the deferred balance of regulatory assets and other transition costs.  A portion of the RTC collected from customers is recognized in earnings currently as a return on the deferred balance of regulatory assets and other transition costs and as reimbursement for the difference between the shopping credits provided to customers and the wholesale revenues from switched generation.  The ability of CG&E to recover its regulatory assets and other transition costs is dependent on several factors, including, but not limited to, the level of CG&E’s electric sales, prices in the wholesale power markets, and the amount of customers switching to other electric suppliers.

 

On January 10, 2003, CG&E filed an application with the PUCO for approval of a methodology to establish how market-based rates for non-residential customers will be determined when the market development period ends.  In the filing, CG&E seeks to establish a market-based standard service offer rate for non-residential customers that do not switch suppliers and a process for establishing the competitively bid generation service option required by the Electric Restructuring Bill.  As of September 30, 2003, more than 20 percent of the load of CG&E’s commercial and industrial customer classes have switched to other electric suppliers.  Under its transition plan, CG&E may end the market development period for those classes of customers once 20 percent switching has been achieved; however, PUCO approval of the standard service offer rate and competitive bidding process is required before the market development period can be ended.  CG&E is not requesting to end the market development period for any customers at this time.  CG&E is unable to predict the outcome of this proceeding.

 

Federal Update
 

Energy Bill

 

The U.S. House of Representatives (House) passed the Energy Policy Act in April 2003.  The legislation, as it passed the House, includes repeal of the PUHCA, as well as tax incentives for gas and electric distribution lines, and combined heat and power and renewable energy projects.

 

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The U.S. Senate (Senate) Energy and Natural Resources Committee passed its version of comprehensive energy legislation in April 2003.  On July 31, 2003 the Senate passed comprehensive energy legislation by substituting last year’s energy bill as it passed the Senate for the committee draft.  The legislation, as passed by the Senate, among other things, includes PUHCA repeal and creates a renewable energy portfolio standard for utilities.  The House and Senate versions of the comprehensive energy legislation are currently the subject of Conference Committee deliberations.  At this time, Cinergy is unable to predict whether or not this legislation will pass.

 

Clear Skies Legislation

 

President Bush has proposed environmental legislation that would replace a series of CAA requirements for coal-fired power plants with a cap and trade program.  The President’s “Clear Skies Initiative” would seek an overall 70 percent reduction in emissions from power plants over a phased-in reduction schedule beginning in 2010 and continuing to 2018.  The Senate Environment and Public Works Committee has held several hearings on the “Clear Skies Initiative” proposal and is expected to vote on the legislation in the third quarter of 2003.  The House Subcommittee on Energy and Air Quality of the House Energy and Commerce Committee has also held hearings on the “Clear Skies Initiative” but timing for consideration of the bill in subcommittee is less certain.  At this time, Cinergy cannot predict whether or not “Clear Skies Initiative” legislation will pass.

 

Midwest Independent Transmission System Operator, Inc. (Midwest ISO)

 

Historical
 

As part of the effort to create a competitive wholesale power marketplace, the FERC approved the formation of the Midwest ISO during 1998.  In that same year, Cinergy agreed to join the Midwest ISO in preparation for meeting anticipated changes in the FERC regulations and future deregulation requirements.  The Midwest ISO was established as a non-profit organization to maintain functional control over the combined transmission systems of its members.

 

FERC Orders
 

The FERC issued an order in December 2001, in response to protests of the Midwest ISO’s proposed methodology related to the calculation of its administrative adder fees for the services it provides.  Cinergy and a number of other parties filed protests to the proposed methodology, suggesting, among other things, that the methodology was inconsistent with the transmission owners’ prior agreement with the Midwest ISO and selectively allowed only independent transmission companies to choose which unbundled administrative adder services they wished to purchase from the Midwest ISO.  A partial settlement was reached in the FERC proceeding, resolving the issues addressed by Cinergy’s protest in a manner favorable to Cinergy.  The settlement agreement was approved by the FERC in a February 24, 2003 order with implementation initiated on March 1, 2003.  The settlement results in approximately $25 million of administrative adder credits to be shared among the Midwest ISO transmission owners and customers responsible for Schedule 10 charges.  Cinergy’s share was approximately $3 million.

 

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As discussed in the 2002 10-K, the FERC issued a Notice of Proposed Rulemaking (NOPR) in 2002 on “Remedying Undue Discrimination through Open Access Transmission Service and Standard Electricity Market Design”.  This NOPR would have required all public utilities with open access transmission tariffs to file modifications to their tariffs to implement FERC’s proposed standardization transmission services and standardized wholesale electric market design.  The FERC has not taken action on this NOPR and has indicated that they will not require such tariff revisions if the utility has filed similar tariff revisions in their own region, in our case, the Midwest ISO.

 

In response to prior FERC orders, on July 25, 2003, the Midwest ISO filed with the FERC proposed changes to its existing transmission tariff to add terms and conditions to implement Day-Ahead and Real-Time Energy Markets and Financial Transmission Rights (Energy Markets Tariff).  In October 2003, the FERC approved a Midwest ISO filing to withdraw this Energy Markets Tariff.  Cinergy anticipates that the Midwest ISO will file a new Energy Markets Tariff at sometime in the future; however, at this time, Cinergy cannot predict the effect any such filing will have on its results of operations.

 

Significant Rate Developments

 

PSI Retail Electric Rate Case
 

In December 2002, PSI filed a petition with the IURC seeking approval of a base retail electric rate increase.  PSI has filed initial and rebuttal testimony in this case and the final set of hearings will take place in November 2003.  Based on updated testimony filed in October 2003, PSI proposes an increase in annual revenues of approximately $180 million, or an average increase of approximately 14 percent over PSI’s retail electric rates in effect at the end of 2002.  An IURC decision is expected in the first quarter of 2004.

 

PSI Purchased Power Tracker (Tracker)
 

The Tracker was designed to provide for the recovery of costs related to purchases of power necessary to meet native load requirements to the extent such costs are not recovered through the existing fuel adjustment clause.

 

PSI is authorized to seek recovery of 90 percent of its purchased power expenses through the Tracker (net of the displaced energy portion recovered through the fuel recovery process and net of the mitigation credit portion), with the remaining 10 percent deferred for subsequent recovery in PSI’s general retail electric rate case.  In March 2002, PSI filed a petition with the IURC seeking approval to extend the Tracker process beyond the summer of 2002.  A hearing was held in January 2003, and in June 2003 the IURC approved the extension for up to an additional two years with the ultimate determination concerning PSI’s continued use of the Tracker process to be made in PSI’s pending retail electric rate case.

 

In June 2002, PSI also filed a petition with the IURC seeking approval of the recovery through the Tracker of its actual summer 2002 purchased power costs.  In May 2003, the IURC approved PSI’s recovery of $18 million related to its summer 2002 purchased power costs, and also

 

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authorized $2 million of deferred costs sought for recovery in PSI’s general retail electric rate case.

 

In June 2003, PSI filed a petition with the IURC seeking approval of the recovery through the Tracker of its actual summer 2003 purchased power costs.  Testimony was filed in support of PSI’s request in August 2003.  An evidentiary hearing is scheduled for March 2004.

 

PSI Fuel Adjustment Charge
 

In June 2001, PSI filed a petition with the IURC requesting authority to recover $16 million in under billed deferred fuel costs incurred from March 2001 through May 2001.  The IURC approved recovery of these costs subject to refund pending the findings of an investigative sub-docket.  The sub-docket was opened to investigate the reasonableness of, and underlying reasons for, the under billed deferred fuel costs.  A hearing was held in July 2002, and in March 2003 the IURC issued an order giving final approval to PSI’s recovery of the $16 million.

 

PSI Construction Work in Progress (CWIP) Ratemaking Treatment for NOX Equipment
 

In April 2003, PSI filed an application with the IURC requesting that its CWIP rate adjustment mechanism be updated for expenditures through December 2002 related to NOX equipment currently being installed at certain PSI generation facilities.  CWIP ratemaking treatment allows for the recovery of carrying costs on certain pollution control equipment while and after the equipment is under construction.  A final order was issued on September 24, 2003.  The order granted substantially all of PSI’s requested relief, leaving only the issue of whether certain equipment qualified for CWIP ratemaking treatment to be decided in the first quarter of 2004.  Amounts approved for recovery are presented below:

 

PSI CWIP Ratemaking for NOX Equipment

 

 

 

PSI

 

 

 

(in millions)

 

 

 

 

 

Total retail CWIP expenditures as of December 31, 2002

 

$

305

 

 

 

 

 

Total amount requested through CWIP mechanism(1)

 

35

 

Less: previously approved CWIP mechanism amounts

 

(28

)

Incremental CWIP mechanism amounts

 

$

7

 

 


(1)          Amounts include retail customers’ portion only and represent an annual return on qualified NOX equipment expenditures.

 

PSI’s initial CWIP rate mechanism adjustment (authorized in July 2002) resulted in an approximately one percent increase in customer rates.  Under the IURC’s CWIP rules, PSI may update its CWIP tracker at six-month intervals.  The first such update to PSI’s CWIP rate mechanism occurred in the first quarter of 2003.  The IURC’s July 2002 order also authorized PSI to defer, for subsequent recovery, post-in-service depreciation and to continue the accrual for allowance for funds used during construction (AFUDC).  Pursuant to Statement of Financial Accounting Standards No. 92, Regulated Enterprises-Accounting for Phase-in Plans, the equity

 

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component of AFUDC will not be deferred for financial reporting after the related assets are placed in service.

 

Environmental Compliance Cost Recovery
 

In 2002, the Indiana General Assembly passed legislation that, among other things, encourages the deployment of advanced technologies that reduce regulated air emissions, while allowing the continued use of high sulfur Midwestern coal in existing electric generating plants.  The legislation authorizes the IURC to provide financial incentives to utilities that deploy such advanced technologies.  PSI is currently seeking IURC approval, under this new law, of a cost tracking mechanism for PSI’s NOX equipment-related depreciation and operation and maintenance costs, authority to use accelerated (18-year) depreciation for its NOX compliance equipment, and approval of a NOX emission allowance purchase and sales tracker.  In October, PSI reached a settlement with the other parties to this case that, if approved by the IURC, will provide for the relief described above for most of PSI’s environmental compliance equipment.  PSI expects an IURC order addressing approval of the settlement agreement by the end of 2003.  The issue of whether the remainder of PSI’s environmental compliance projects qualify for financial incentives is expected to be decided in the second quarter of 2004.

 

CG&E Transmission and Distribution Rate Filings
 

In October 2003, CG&E filed an application with the PUCO seeking deferral of approximately $173 million, of which approximately $37 million has been incurred as of September 30, 2003, in depreciation, property taxes and carrying costs related to net additions to transmission and distribution utility plant in service from January 2001 through December 2005.  Rates are frozen in Ohio under the state’s electric restructuring law from 2001 through the end of the market development period.  CG&E intends to file a rate case to collect those costs after the market development period ends.  CG&E has not deferred any of these costs as of September 30, 2003.

 

CG&E is also proposing a mechanism to recover costs related to net additions to transmission and distribution utility plant in service after the end of the market development period.  The mechanism would work in a similar manner to the monthly customer charge the PUCO approved for CG&E’s accelerated natural gas main replacement program, discussed below in CG&E’s Gas Rate Case, which is adjusted annually based on expenditures in the previous year.

 

GAS INDUSTRY

 

ULH&P Gas Rate Case

 

As discussed in the 2002 10-K, in the second quarter of 2001, ULH&P filed a retail gas rate case with the KPSC seeking to increase base rates for natural gas distribution services and requesting recovery through a tracking mechanism of the costs of an accelerated gas main replacement program with an estimated capital cost of $112 million over 10 years.  ULH&P made its second annual filing for an increase under the tracking mechanism in March 2003.  The application sought an increase of $2 million.  A hearing was held in July 2003, and the KPSC approved the application in August 2003.  The Kentucky Attorney General has appealed to the Franklin Circuit Court the KPSC’s approval of the tracking mechanism and the KPSC’s orders approving

 

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the new tracking mechanism rates.  At the present time, ULH&P cannot predict the timing or outcome of this litigation.

 

CG&E Gas Rate Case

 

In the third quarter of 2001, CG&E filed a retail gas rate case with the PUCO seeking to increase base rates for natural gas distribution service and requesting recovery through a tracking mechanism of the costs of an accelerated gas main replacement program with an estimated capital cost of $716 million over 10 years.  CG&E entered into a settlement agreement with most of the parties and a hearing on this matter was held in April 2002.  An order was issued in May 2002, in which the PUCO approved the settlement agreement and authorized a base rate increase of approximately $15 million, or 3.3 percent overall, effective May 30, 2002.  In addition, the PUCO authorized CG&E to implement the tracking mechanism to recover the costs of the accelerated gas main replacement program, subject to certain rate caps that increase in amount annually through May 2007, through the effective date of new rates in CG&E’s next retail gas rate case.  In the fourth quarter of 2002, CG&E filed an application to increase its rates under the tracking mechanism.  In April 2003, CG&E entered into a settlement agreement with the parties, providing for an increase of $6.5 million, which the PUCO subsequently approved.  This increase was effective in May 2003.  CG&E expects to file another application to increase its rates by approximately $6.4 million under the tracking mechanism in the fourth quarter of 2003.  CG&E expects the PUCO will rule on this application by May 2004.

 

Gas Distribution Plant

 

In June 2003, the PUCO approved an amended settlement agreement between CG&E and the PUCO Staff in a gas distribution safety case arising out of a gas leak at a service head-adapter (SHA) style riser on CG&E’s distribution system.  The amended settlement agreement calls for CG&E to expend a minimum of $700,000 to replace SHA risers by December 31, 2003, and to file a comprehensive plan addressing all SHA risers on its distribution system.  Cinergy has an estimated 198,000 SHA risers on its distribution system, of which 155,000 are in CG&E’s service area.  The remaining SHA risers are included in ULH&P’s service area.  Further investigation as to whether any additional SHA risers will need maintenance or replacement is ongoing.  If CG&E and ULH&P determine that replacement of all SHA risers is appropriate, the replacement cost could be up to approximately $50 million.  CG&E and ULH&P would pursue recovery of this cost through rates.  At this time, Cinergy, CG&E, and ULH&P cannot predict the outcome of this matter.

 

Gas Prices

 

Natural gas prices escalated dramatically during the fourth quarter of 2002 and peaked midway through the first quarter of 2003.  These higher natural gas prices have moderated throughout the spring and summer but are still expected to remain higher than previous years for the remainder of 2003 and into 2004.  Currently, neither CG&E nor ULH&P profit from changes in the cost of gas since natural gas purchase costs are passed directly to the customer dollar-for-dollar under the gas cost recovery mechanism that is mandated under state law.  These higher natural gas prices could lead to increases in write-offs of our customer receivables, however we believe the overall impact will be immaterial.

 

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In July 2003, CG&E filed an application with the PUCO for approval to begin adjusting its gas cost adjustment rates on a monthly basis commencing in September 2003.  In August 2003, the PUCO approved the change from quarterly to monthly.  ULH&P filed a similar application with the KPSC for monthly gas cost adjustment rates in September 2003 for billing in December 2003.

 

In May 2003, ULH&P filed an application with the KPSC requesting approval of a gas procurement-hedging program designed to mitigate the effects of gas price volatility on customers.  In June 2003, the KPSC approved the hedging program through March 31, 2005.  The program will allow the pre-arranging of between 20-75 percent of winter heating season base load gas requirements and up to 50 percent of summer season base load gas requirements.  CG&E similarly hedges its gas procurement costs, however CG&E’s gas procurement-hedging program has not been pre-approved by the PUCO but rather it is subject to PUCO review as part of the normal fuel adjustment process.

 

CG&E and ULH&P use primarily fixed price forward contracts and contracts with a ceiling and floor on the price.  These contracts employ the normal purchases and sales scope exception, and do not involve hedges under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activity (Statement 133).

 

MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS

 

The transactions associated with the Commercial Business Unit’s (Commercial) (formerly named the Energy Merchant Business Unit) energy marketing and trading activities give rise to various risks, including price risk.  Price risk represents the potential risk of loss from adverse changes in the market price of electricity or other energy commodities.  As Commercial continues to develop its energy marketing and trading business (and due to its substantial investment in generation assets), its exposure to movements in the price of electricity and other energy commodities may become greater.  As a result, we may be subject to increased future earnings volatility.

 

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Changes in Fair Value

 

The changes in fair value of the energy risk management assets and liabilities, for the periods ended September 30, 2003 and 2002, are presented in the table below:

 

 

 

Change in Fair Value
Year to Date

 

 

 

September 30, 2003

 

September 30, 2002

 

 

 

Cinergy(1)

 

CG&E

 

PSI

 

Cinergy(1)

 

CG&E

 

PSI

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of contracts outstanding at beginning of year

 

$

75

 

$

42

 

$

 

$

18

 

$

28

 

$

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inception value of new contracts when entered (2)

 

 

 

 

6

 

5

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair value attributable to changes in valuation techniques and assumptions (3)

 

1

 

1

 

 

14

 

6

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other changes in fair value (4)

 

120

 

40

 

1

 

72

 

26

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Option premiums paid/(received)

 

(6

)

3

 

 

24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounting Changes (5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of changes in accounting principle

 

(20

)

(14

)

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidation of previously unconsolidated entities

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract reclassification (6)

 

 

 

 

14

 

18

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract acquisitions (7)

 

 

 

 

(16

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contracts settled

 

(129

)

(48

)

(2

)

(38

)

(28

)

(11

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of contracts outstanding at end of period

 

$

48

 

$

24

 

$

(2

)

$

94

 

$

55

 

$

1

 

 


(1)          The results of Cinergy also include amounts related to non-registrants.

(2)          Represents fair value, recognized in income, attributable to long-term, structured contracts, primarily in power, which is recorded on the date a deal is signed.  These contracts are primarily with end-use customers or municipalities that seek to limit their risk to power price volatility.  While caps and floors often exist in such contracts, the amount of power supplied can vary from hour to hour to mirror the customers load volatility.  See Note 1(g)(i) in the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for additional information regarding inception gains.

(3)          Represents changes in fair value recognized in income, caused by changes in assumptions used in calculating fair value or changes in modeling techniques.

(4)          Represents changes in fair value, recognized in income, primarily attributable to fluctuations in price.  This amount includes both realized and unrealized gains on energy trading contracts.

(5)          See Note 1(g)(i) and Note 1(g)(iii) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for further information.

(6)          Represents reclassifications of the settlement value of contracts that have been terminated as a result of counterparty non-performance to non-current other liabilities.  These contracts no longer have price risk and are therefore not considered energy trading contracts.

(7)          Cinergy Capital & Trading, Inc. (Capital & Trading) acquired a portfolio of gas contracts and inventory in July 2002.  This amount represents the fair value of net Energy risk management liabilities assumed.  There was no inception gain or loss recognized at the date of acquisition.

 

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The following table presents the expected maturity of the energy risk management assets and liabilities, as of September 30, 2003:

 

 

 

Fair Value of Contracts as of September 30, 2003

 

 

 

Maturing

 

 

 

Source of Fair Value(1)

 

Within
12 months

 

12-36
months

 

36-60
months

 

Thereafter

 

Total
Fair Value

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cinergy(2)

 

 

 

 

 

 

 

 

 

 

 

Prices actively quoted

 

$

32

 

$

(2

)

$

 

$

 

$

30

 

 

 

 

 

 

 

 

 

 

 

 

 

Prices based on models and other valuation methods

 

6

 

12

 

5

 

(5

)

18

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

38

 

$

10

 

$

5

 

$

(5

)

$

48

 

 

 

 

 

 

 

 

 

 

 

 

 

CG&E

 

 

 

 

 

 

 

 

 

 

 

Prices actively quoted

 

$

(2

)

$

5

 

$

 

$

 

$

3

 

 

 

 

 

 

 

 

 

 

 

 

 

Prices based on models and other valuation methods

 

8

 

9

 

4

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

6

 

$

14

 

$

4

 

$

 

$

24

 

 

 

 

 

 

 

 

 

 

 

 

 

PSI

 

 

 

 

 

 

 

 

 

 

 

Prices actively quoted

 

$

(9

)

$

1

 

$

 

$

 

$

(8

)

 

 

 

 

 

 

 

 

 

 

 

 

Prices based on models and other valuation methods

 

2

 

3

 

1

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

(7

)

$

4

 

$

1

 

$

 

$

(2

)

 


(1)          While liquidity varies by trading regions, active quotes are generally available for two years for standard electricity transactions and three years for standard gas transactions.  Non-standard transactions are classified based on the extent, if any, of modeling used in determining fair value.  Long-term transactions can have portions in both categories depending on the tenor.

(2)          The results of Cinergy also include amounts related to non-registrants.

 

Energy Trading Credit Risk

 

Cinergy’s extension of credit for energy marketing and trading is governed by a Corporate Credit Policy.  Written guidelines document the management approval levels for credit limits, evaluation of creditworthiness, and credit risk mitigation procedures.  Exposures to credit risks are measured and monitored daily by our Corporate Credit Risk function, which is independent of all trading operations.  As of September 30, 2003, approximately 99 percent of the credit exposure related to energy trading and marketing activity was with counterparties rated Investment Grade or the counterparties’ obligations were guaranteed or secured by an Investment Grade entity.  No single non-investment grade counterparty accounts for more than one percent of our total credit exposure.  Energy commodity prices can be extremely volatile and the market can, at times, lack liquidity.  Because of these issues, credit risk for energy commodities is generally greater than with other commodity trading.

 

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We continually review and monitor our credit exposure to all counterparties and secondary counterparties.  If appropriate, we may adjust our credit reserves to attempt to compensate for increased credit risk within the industry.  Counterparty credit limits may be adjusted on a daily basis in response to changes in a counterparty’s creditworthiness, financial status, or public debt ratings.

 

ACCOUNTING MATTERS

 

Critical Accounting Policies

 

Preparation of financial statements and related disclosures in compliance with generally accepted accounting principles (GAAP) requires the use of assumptions and estimates.  In certain instances, the application of GAAP requires judgments regarding future events, including the likelihood of success of particular initiatives, legal and regulatory challenges, and anticipated recovery of costs.  Therefore, the possibility exists for materially different reported amounts under different conditions or assumptions.

 

Cinergy’s 2002 10-K includes a discussion of accounting policies that are significant to the presentation of Cinergy’s financial position and results of operations.  These include:

 

                  Fair Value Accounting for Energy Marketing and Trading;

                  Retail Customer Revenue Recognition;

                  Regulatory Accounting;

                  Pension and Other Postretirement Benefits; and

                  Impairment of Long-lived Assets.

 

Accounting Changes

 

Energy Trading
 

In October 2002, the EITF reached consensus in EITF 02-3, to (a) rescind EITF 98-10, (b) generally preclude the recognition of gains at the inception of derivatives, and (c) require all realized and unrealized gains and losses on energy trading derivatives to be presented net in the Statements of Income, whether or not settled physically.  The consensus to rescind EITF 98-10 required most energy trading contracts that do not qualify as derivatives to be accounted for on an accrual basis, rather than at fair value.  The consensus was immediately effective for all new contracts executed after October 25, 2002, and required a cumulative effect adjustment to income, net of tax, on  January 1, 2003, for all contracts executed on or prior to October 25, 2002.  The cumulative effect adjustment, on a net of tax basis, was a loss of $13 million for Cinergy and $8 million for CG&E, which includes primarily the impact of certain coal contracts, gas inventory, and certain gas contracts, which were all accounted for at fair value.  We expect this rescission to have the largest ongoing impact on our gas trading business, which uses financial contracts, physical contracts, and gas inventory to take advantage of various arbitrage opportunities.  Prior to the rescission of EITF 98-10, all of these activities were accounted for at fair value.  Under the revised guidance, only certain items are accounted for at fair value, which could increase inter-period volatility in reported results of operations.  As a result, we began applying fair value hedge accounting in June 2003 to certain quantities of gas inventory (more fully discussed in Note 1(d) of the “Notes to Condensed

 

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Financial Statements” in “Part I.  Financial Information”) and are further reviewing additional applications for hedge accounting.

 

Derivatives
 

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (Statement 149).  Statement 149 primarily amends Statement 133 to incorporate implementation conclusions previously cleared by the FASB staff, to clarify the definition of a derivative and to require derivative instruments that include up-front cash payments to be classified as a financing activity in the Statements of Cash Flows.  Implementation issues that had been previously cleared by the FASB staff were effective at the time that they were cleared and new guidance was effective in the third quarter of 2003.  In connection with our adoption, we reviewed certain power purchase or sale contracts to determine if they met the revised normal purchase and normal sale scope exception criteria in Statement 149.  If these criteria were not met, the contract was accounted for at fair value.  The impact of adopting Statement 149 was not material to our results of operations or financial position.

 

In June 2003, the FASB issued final guidance on the use of broad market indices (e.g., consumer price index) in power purchase and sales contracts.  This guidance clarifies that the normal purchases and sales scope exception is precluded if a contract contains a broad market index that is not clearly and closely related to the asset being sold or purchased (or a direct factor in the production of the asset sold or purchased).  The guidance provides criteria that must be met for the index to be considered clearly and closely related.  This guidance, which is effective in the fourth quarter of 2003, is not expected to have a material impact on our results of operations or financial position upon adoption.

 

Consolidation of Variable Interest Entities (VIE)
 

In January 2003, the FASB issued Interpretation 46, which significantly changes the consolidation requirements for traditional SPEs and certain other entities subject to its scope.  This interpretation defines a VIE as (a) an entity that does not have sufficient equity to support its activities without additional financial support or (b) an entity that has equity investors that do not have voting rights or do not absorb losses or receive returns.  These entities must be consolidated when certain criteria are met.  The interpretation was originally to be effective as of July 1, 2003 for Cinergy; however, the FASB subsequently permitted deferral of the effective date to December 31, 2003 for either some or all potential VIEs.  During this deferral period, the FASB plans to clarify and amend several provisions, much of which is intended to assist in the application of Interpretation 46 to operating entities.  Clarifications were not needed for most traditional SPEs and we therefore elected to implement Interpretation 46 for such entities, as discussed below, in accordance with the original implementation date of July 1, 2003.  Prior period financial statements were not restated for these changes.

 

Interpretation 46 requires us to consolidate two SPEs that have individual power sale agreements to Central Maine Power Company (CMP) for approximately 45 MW of capacity, ending in 2009, and 35 MW of capacity, ending in 2016.  In addition, these SPEs have individual power purchase agreements with Capital & Trading to supply the power.  Capital & Trading also provides

 

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various services, including certain credit support facilities.  Upon the initial consolidation of these two SPEs, approximately $239 million of notes receivable, $225 million of non-recourse debt, and miscellaneous other assets and liabilities were included on Cinergy’s Balance Sheets.  The debt was incurred by the SPEs to finance the buyout of existing power contracts that CMP held with former suppliers.  The cash flows from the notes receivable are designed to repay the debt.  Notes 3 and 4 in the “Notes to Condensed Financial Statements” in “Part I. Financial Information” provide additional information regarding the debt and the notes receivable, respectively.

 

In accordance with Interpretation 46, we are no longer permitted to consolidate a trust that was established by Cinergy Corp. in 2001 to issue approximately $316 million of combined preferred trust securities and stock purchase contracts.  These securities are more fully described in the 2002 10-K.  In 2001, the trust loaned the proceeds from the issuance of the securities to Cinergy Corp. in exchange for a note payable to the trust that was eliminated in consolidation.  As a result of no longer consolidating the trust beginning July 1, 2003, the preferred trust securities (previously recorded as Company obligated, mandatorily redeemable, preferred trust securities of subsidiary, holding solely debt securities of the company) are no longer included in Cinergy’s Balance Sheets.  In addition, the note payable owed to the trust, which has a current carrying value of approximately $319 million, was included in Long-term debt.  The impact of not consolidating the trust was immaterial to Cinergy’s results of operations.

 

Cinergy has concluded that its accounts receivable sale facility, as discussed in the 2002 10-K, will remain unconsolidated since it involves transfers of financial assets to a qualifying SPE, which is exempted from consolidation by Interpretation 46 and Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.

 

Cinergy is continuing to evaluate the impact of Interpretation 46 on several operating joint ventures, primarily involved in cogeneration and energy efficiency operations, that we currently do not consolidate.  If all these entities were consolidated, their total assets of approximately $675 million (the majority of which is non-current) and total liabilities of approximately $225 million (which includes long-term debt of approximately $100 million) would be recognized on our Balance Sheets.  Cinergy’s current investment in these entities is approximately $250 million.  We also guarantee certain performance obligations of these entities with an estimated maximum potential exposure of approximately $55 million, as disclosed in Note 7(a) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information”.  As discussed above, we expect additional interpretative guidance to be issued by the FASB during the fourth quarter of 2003 and Cinergy will adopt those provisions effective December 31, 2003.

 

Financial Instruments with Characteristics of Both Liabilities and Equity
 

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (Statement 150).  Statement 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.  This statement was effective for financial instruments entered into or modified after May 31, 2003, and was effective on July 1, 2003, for financial instruments held prior to issuance of this statement.  Statement 150 would have required Cinergy Corp.’s preferred trust securities to be reported as a

 

107



 

liability; however, as described more fully above, the trust holding these securities is no longer permitted to be consolidated and the preferred trust securities are no longer reported on Cinergy’s Balance Sheets.  However, Cinergy’s note payable to the trust is recorded on the Balance Sheet as Long-term debt.  As a result, the impact of adopting Statement 150 was not material to our results of operations or financial position.

 

As discussed in the 2002 10-K, Cinergy issued forward stock sale contracts that require purchase by the holder of a certain number of Cinergy shares in February 2005 (stock contracts).  The number of shares to be issued is contingent on the market price of Cinergy Corp. stock, but subject to a predetermined ceiling and floor price.  In October 2003, the FASB Staff released an interpretation of Statement 150 that requires an evaluation of these stock contracts to determine whether they constitute a liability, with any changes in accounting required in January 2004.  We believe that this interpretation will have no impact on our current accounting.

 

Intangible Assets
 

In June 2001, the FASB issued Statement 142.  With the adoption of Statement 142, goodwill and other intangibles with indefinite lives are no longer subject to amortization.  Statement 142 requires that goodwill be assessed for impairment upon adoption (transition impairment test) and at least annually thereafter by applying a fair-value-based test, as opposed to the undiscounted cash flow test applied under prior accounting standards.

 

We began applying Statement 142 in the first quarter of 2002.  We finalized our transition impairment test in the fourth quarter of 2002 and recognized a non-cash impairment charge of approximately $11 million (net of tax) for goodwill related to certain of our international assets.  This amount is reflected in Cinergy’s Statements of Income as a cumulative effect adjustment, net of tax.  While Statement 142 did not require the initial transition impairment test to be completed until December 31, 2002, it required the cumulative effect adjustment to be reflected as of January 1, 2002.

 

Asset Retirement Obligations
 

In July 2001, the FASB issued Statement 143, which requires fair value recognition beginning January 1, 2003, of legal obligations associated with the retirement or removal of long-lived assets, at the time the obligations are incurred.  Our accounting policy for such legal obligations is described in Note 1(f) of the “Notes to Condensed Financial Statements” in “Part I.  Financial Information”.

 

Other Matters

 

Employee Severance Programs
 

During the second quarter of 2003, Cinergy offered a Voluntary Early Retirement Program (VERP) and other severance benefits (Severance Programs) to certain non-union employees.  As a result of the non-union employees electing the Severance Programs, Cinergy recorded expenses of approximately $9 million during the quarter.

 

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Cinergy recorded $4 million in the third quarter of 2003 as a result of union employees electing Severance Programs that ended in July 2003 under a separate program than mentioned above.

 

Additionally, in the third quarter 2003, a VERP was offered to certain non-union employees.  Cinergy recorded expenses of approximately $1 million.

 

Synthetic Fuel Production
 

In July 2002, Capital & Trading acquired a coal-based synthetic fuel production facility.  As of September 30, 2003, Capital & Trading’s net book value in this facility was approximately $60 million.  The synthetic fuel produced at this facility qualifies for tax credits in accordance with Section 29 of the Internal Revenue Code.  Eligibility for these credits expires after 2007.  Cinergy received a private letter ruling from the Internal Revenue Service (IRS) in connection with the acquisition of the facility.  To date, Cinergy has produced and sold approximately 3.6 million tons of synthetic fuel at this facility, resulting in approximately $100 million in tax credits, including approximately $60 million in 2003.

 

In the second quarter of 2003, the IRS announced, as a result of an audit of another taxpayer, that it had reason to question and was reviewing the scientific validity of test procedures and results that were presented as evidence the fuel underwent a significant chemical change.  The IRS recently announced that it has finished its review and has determined that test procedures and results used by taxpayers are scientifically valid if the procedures are applied in a consistent and unbiased manner.  The IRS also announced that it plans to impose new testing and record-keeping requirements on synthetic fuel producers and plans to issue guidance extending these requirements to taxpayers already holding private letter rulings on the issue of significant chemical change.

 

Cinergy believes that its testing procedures comply with the standards recently announced by the IRS.  We do not anticipate that any new testing or record-keeping requirements imposed by the IRS will have a material effect on our financial position or results of operations.

 

Energy Market Investigations
 

In July 2003, Cinergy received a subpoena from the Commodity Futures Trading Commission (CFTC).  As has been previously reported by the press, the CFTC has served subpoenas on numerous other energy companies.  The CFTC request sought certain information regarding our trading activities, including price reporting to energy industry publications.  The CFTC sought particular information concerning these matters for the period May 2000 through January 2001 as to one of Cinergy’s employees.  Based on an initial review of these matters, we placed that employee on administrative leave and have subsequently terminated his employment.  Cinergy is continuing an investigation of these matters and has been cooperating fully with the CFTC.

 

In September 2003, Cinergy, along with 38 other companies, was named as a defendant in civil litigation filed as a purported class action on behalf of all persons who purchased and/or sold New York Mercantile Exchange natural gas futures and options contracts between January 1, 2000, and December 31, 2002.  The complaint alleges that improper price reporting caused damages to the class.  Responsive pleadings in the case are due on November 17, 2003.  We

 

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believe this action against us is without merit.  At this time, it is not possible to predict the outcome of this matter.

 

In the second quarter of 2003, Cinergy received initial and follow-up third-party subpoenas from the SEC requesting information related to particular trading activity with one of its counterparties who was the target of an investigation by the SEC.  Cinergy has and intends to fully cooperate with the SEC in connection with this matter.

 

At this time it is not possible to predict the outcome of these investigations and lawsuit or the impact on Cinergy’s financial position or results of operations; although, in the opinion of management, they are not likely to have a material adverse effect on our financial position or results of operations.

 

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

This information is provided in, and incorporated by reference from, the “Market Risk Sensitive Instruments and Positions” section in “Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations” in “Part I. Financial Information”.

 

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CONTROLS AND PROCEDURES

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Disclosure controls and procedures are our controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s (SEC) rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2003, and, based upon this evaluation, our chief executive officer and chief financial officer have concluded that these controls and procedures are effective in providing reasonable assurance that information requiring disclosure is communicated to management in a timely manner and reported within the timeframe specified by the SEC’s rules and forms.

 

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2003 and found no change that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. - OTHER INFORMATION

 

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

 

On August 18, 2003, Cornerstone Propane Partners L.P. filed suit against Cinergy and 38 other companies in the Southern District of New York.  The suit is a purported class action on behalf of all persons who purchased and/or sold New York Mercantile Exchange natural gas futures and options contracts between January 1, 2000 and December 31, 2002.  The complaint alleges that improper price reporting caused damages to the class.  The plaintiffs are seeking unspecified damages.  We intend to defend this lawsuit vigorously; however, we cannot predict the outcome of this matter at this time.

 

We currently, and from time to time, are involved in lawsuits, claims, and complaints incidental to the conduct of our business.  In the opinion of management, no such proceeding is likely to have a material adverse effect on us.

 

See Note 7 of the “Notes to Condensed Financial Statements” in “Part I.  Financial Information” for further information regarding our commitments and contingencies.

 

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ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

In lieu of a special meeting of shareholders of The Cincinnati Gas & Electric Company (CG&E), a resolution was duly adopted via unanimous written consent of Cinergy Corp., CG&E’s sole shareholder, effective July 23, 2003, amending the Regulations to effectuate changes with respect to certain officer titles at CG&E.

 

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ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

 

(a)               The documents listed below are being furnished or filed on behalf of Cinergy Corp., The Cincinnati Gas & Electric Company (CG&E), PSI Energy, Inc. (PSI), and The Union Light, Heat and Power Company (ULH&P).  Exhibits not identified as previously furnished or filed are furnished or filed herewith:

 

Exhibit
Designation

 

Registrant

 

Nature of Exhibit

 

Previously Filed
as Exhibit to:

Additional
Exhibits

 

 

 

 

 

 

 

 

 

 

 

 

 

4.2

 

PSI

 

Eighth Supplemental Indenture between PSI and Fifth Third Bank, as Trustee, dated as of September 23, 2003 to Indenture dated as of November 15, 1996.

 

 

 

 

 

 

 

 

 

4.3

 

PSI

 

Fifty-fifth Supplemental Indenture dated as of February 15, 2003 between PSI and LaSalle Bank National Association, as Trustee, to Indenture dated as of September 1, 1939.

 

 

 

 

 

 

 

 

 

31.1

 

Cinergy Corp.
CG&E
PSI
ULH&P

 

Certification of James E. Rogers under Section 302 of Sarbanes-Oxley Act.

 

 

 

 

 

 

 

 

 

31.2

 

Cinergy Corp.
CG&E
PSI
ULH&P

 

Certification of R. Foster Duncan under Section 302 of Sarbanes-Oxley Act.

 

 

 

 

 

 

 

 

 

32.1

 

Cinergy Corp.
CG&E
PSI
ULH&P

 

Certification of James E. Rogers under Section 906 of Sarbanes-Oxley Act.

 

 

 

 

 

 

 

 

 

32.2

 

Cinergy Corp.
CG&E
PSI
ULH&P

 

Certification of R. Foster Duncan under Section 906 of Sarbanes-Oxley Act.

 

 

 

(b)              The following reports on Form 8-K were furnished or filed during the quarter ended September 30, 2003.

 

Date of Report

 

Registrant

 

Item Furnished or Filed

 

 

 

 

 

July 22, 2003

 

CG&E
ULH&P

 

Item 5. Other Events and Regulation FD Disclosure

 

 

 

 

 

July 25, 2003

 

Cinergy Corp.

 

Item 12. Results of Operations and Financial Condition

 

 

 

 

 

July 25, 2003

 

Cinergy Corp.
CG&E

 

Item 5. Other Events and Regulation FD Disclosure

 

 

 

 

 

 

 

 

 

Item 7. Financial Statements and Exhibits

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, each of the Registrants has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

CINERGY CORP.

THE CINCINNATI GAS & ELECTRIC COMPANY

PSI ENERGY, INC.

THE UNION LIGHT, HEAT AND POWER COMPANY

Registrants

 

 

 

Date:  November 13, 2003

/s/

David L. Wozny

 

 

 

David L. Wozny

 

 

(duly authorized officer
and
principal accounting officer)

 

 

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EX-4.2 3 a03-4769_1ex4d2.htm EX-4.2

Exhibit 4.2

 

Execution Copy

 

 

 

PSI ENERGY, INC.

 

AND

 

FIFTH THIRD BANK,

Trustee

 

 


 

Eighth Supplemental Indenture

 

Dated as of September 23, 2003

 

To

 

Indenture

 

Dated as of November 15, 1996

 


 

 

5.00% Debentures due 2013

 

 

 



 

EIGHTH SUPPLEMENTAL INDENTURE, dated as of September  23, 2003, between PSI Energy, Inc., a corporation duly organized and existing under the laws of the State of Indiana (herein called the “Company”), having its principal office at 1000 East Main Street, Plainfield, Indiana 46168, and Fifth Third Bank, an Ohio banking corporation, as Trustee (herein called the “Trustee”) under the Indenture, dated as of November 15, 1996, between the Company and the Trustee, as supplemented (the “Indenture”).

 

Recitals of the Company

 

The Company has executed and delivered the Indenture to the Trustee to provide for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness (the “Securities”), to be issued in one or more series as provided in the Indenture.

 

Pursuant to the terms of the Indenture, the Company desires to provide for the establishment of a new series of its Securities to be known as its 5.00% Debentures due 2013 (herein called the “Debentures”), in this Eighth Supplemental Indenture.

 

All things necessary to make this Eighth Supplemental Indenture a valid agreement of the Company  have been done.

 

Now, Therefore, This Eighth Supplemental Indenture Witnesseth:

 

For and in consideration of the premises and the purchase of the Debentures by the Holders thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Debentures, as follows:

 

ARTICLE ONE

 

Terms of the Debentures

 

Section 101.  There is hereby authorized a series of Securities designated the “5.00% Debentures due 2013”.  The Debentures shall mature and the principal shall be due and payable together with all accrued and unpaid interest thereon on September 15, 2013 and shall be issued in the form of a registered Global Security without coupons, registered in the name of Cede & Co., as nominee of The Depository Trust Company (the “Depository”).

 

The initial issue of Debentures shall be limited in aggregate principal amount to $400,000,000 (except as provided in Section 301(2) of the Indenture).  However, the Company may, from time to time, without notice to or the consent of the registered holders of the Debentures then outstanding, issue additional Debentures without limitation as to the aggregate principal amount thereof.

 

Section 102.  The provisions of Section 305 of the Indenture applicable to Global Securities shall apply to the Debentures.

 

1



 

Section 103.  Interest on each of the Debentures shall be payable semiannually on March 15 and September 15 in each year (each an “Interest Payment Date”), commencing on March 15, 2004, at the rate per annum specified in the designation of Debentures from September 23, 2003, or from the most recent Interest Payment Date to which interest has been paid or duly provided for.  The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will be paid to the Person in whose name such Debenture (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the Business Day immediately preceding such Interest Payment Date. The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months.  As used herein, “Business Day” means any day other than a Saturday or Sunday or a day on which banking institutions in New York, New York are authorized or obligated by law or executive order to be closed.

 

Section 104.  Subject to agreements with or the rules of the Depository or any successor book-entry security system or similar system with respect to Global Securities, payments of interest will be made by check mailed to the Holder of each Debenture at the address shown in the Security Register, and payments of the principal amount of each Debenture will be made at maturity by check against presentation of the Debenture at the office or agency of the Trustee.

 

Section 105.  The Debentures shall be issued in denominations of $1,000 or any integral multiple of $1,000.

 

Section 106.  Principal and interest on the Debentures shall be payable in the coin or currency of the United States of America, which, at the time of payment, is legal tender for public and private debts.

 

Section 107.  The Debentures shall be subject to defeasance and covenant defeasance, at the Company’s option, as provided for in Sections 1302 and 1303 of the Indenture.

 

Section 108.  Subject to the terms of Article Eleven of the Indenture, the Company shall have the right to redeem the Debentures, at any time in whole or from time to time in part, as provided in the form of the Debenture herein below set forth.

 

ARTICLE TWO

 

Form of the Debentures

 

Section 201.  The Debentures are to be substantially in the following form and shall include substantially the legend shown so long as the Debentures are Global Securities:

 

[THE REMAINDER OF THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.]

 

2



 

(FORM OF FACE OF DEBENTURE)

 

No. R-

 

$                       

 

CUSIP No.: 693627 AX 9

ISIN No.:  US693627AX97

 

PSI ENERGY, INC.

 

5.00% DEBENTURES DUE 2013

 

UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”), TO ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT AND SUCH CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

 

PSI ENERGY, INC., a corporation duly organized and existing under the laws of the State of Indiana (herein called the “Company”, which term includes any successor Person under the Indenture hereafter referred to), for value received, hereby promises to pay to CEDE & CO., or registered assigns, the principal sum of                                          and No/100 Dollars ($              ) on September 15, 2013, and to pay interest thereon from September  23, 2003, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semiannually, on March 15, and September 15, in each year, commencing March 15, 2004, at the rate of 5.00% per annum, until the principal hereof is paid or made available for payment.  The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months.  The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Record Date for such interest, which shall be the Business Day immediately preceding such Interest Payment Date.  Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture.

 

3



 

Payment of the principal of (and premium, if any) and interest on this Security will be made at the corporate trust office of the Trustee maintained for that purpose in the City of Cincinnati, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register.

 

Any payment on this Security due on any day which is not a Business Day in the City of New York need not be made on such day, but may be made on the next succeeding Business Day with the same force and effect as if made on the due date and no interest shall accrue for the period from and after such date, unless such payment is a payment at maturity or upon redemption, in which case interest shall accrue thereon at the stated rate for such additional days.

 

As used herein, “Business Day” means any day other than a Saturday or Sunday or a day on which banking institutions in New York, New York are authorized or obligated by law or executive order to be closed.

 

Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place.

 

Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.

 

In Witness Whereof, the Company has caused this instrument to be duly executed.

 

 

PSI ENERGY, INC.

 

 

 

By

 

 

 

4



 

CERTIFICATE OF AUTHENTICATION

 

Dated:

 

This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.

 

 

FIFTH THIRD BANK,

 

as Trustee

 

 

 

 

 

By

 

 

 

Authorized Signatory

 

 

(FORM OF REVERSE OF DEBENTURE)

 

This Security is one of a duly authorized issue of securities of the Company (herein called the “Securities”), issued and to be issued in one or more series under an Indenture, dated as of November 15, 1996 (as supplemented, herein called the “Indenture”, which term shall have the meaning assigned to it in such instrument), between the Company and Fifth Third Bank, as Trustee (herein called the  “Trustee”, which term includes any successor trustee under the Indenture), and reference is hereby made to the Indenture for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered.  This Security is one of the series designated on the face hereof, which series is issuable without limitation as to the aggregate principal amount thereof.

 

The Securities of this series are subject to optional redemption at any time in whole or from time to time in part, until maturity (such redemption, a “Make-Whole Redemption,” at any time and the date thereof, the “Redemption Date”), at a redemption price equal to the greater of (i) 100% of the principal amount of the Securities being redeemed and (ii) the Make-Whole Amount (as defined below), plus, in either case, accrued and unpaid interest on the Securities being redeemed to the Redemption Date.

 

“Make-Whole Amount” means the sum of the present value of the remaining scheduled payments of principal and interest on the Securities to be redeemed (not including any portion of such payments of interest accrued as of the Redemption Date), discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate.

 

“Adjusted Treasury Rate” means, with respect to any Redemption Date, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its

 

5



 

principal amount) equal to the Comparable Treasury Price for such Redemption Date, calculated on the third Business Day preceding the Redemption Date, plus in each case .15% (15 basis points).

 

“Comparable Treasury Issue” means the United States Treasury security selected by the Quotation Agent as having a maturity comparable to the remaining term from the Redemption Date to the Stated Maturity of the Securities that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Securities.

 

“Quotation Agent” means the Reference Treasury Dealer selected by the Trustee after consultation with the Company.

 

“Comparable Treasury Price” means, with respect to any Redemption Date, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third Business Day preceding such Redemption Date, as set forth in the daily statistical release designated “H.15” (or any successor release) published by the Board of Governors of the Federal Reserve System or (ii) if such release (or any successor release) is not published or does not contain such prices on such Business Day, (A) the average of the Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, or (B) if the Trustee obtains fewer than four such Reference Treasury Dealer Quotations, the average of such Quotations.

 

“Reference Treasury Dealer” means each of Banc of America Securities LLC and Lehman Brothers Inc. and their respective successors, and two other firms that are primary U.S. Government securities dealers (each a “Primary Treasury Dealer”) which the Company will specify from time to time, provided however, that if any of them ceases to be a Primary Treasury Dealer, the Company will substitute another Primary Treasury Dealer.

 

“Reference Treasury Dealer Quotations” means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Trustee (after consultation with the Company), of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m., New York City time, on the third Business Day preceding such Redemption Date.

 

Notice of any redemption by the Company will be mailed at least 30 days but not more than 60 days before any Redemption Date to each Holder of Securities to be redeemed.  If less than all the Securities are to be redeemed at the option of the Company, the Trustee shall select, in such manner as it shall deem fair and appropriate, the Securities to be redeemed.

 

Unless the Company defaults in payment of the Redemption Price, on and after any Redemption Date, interest will cease to accrue on the Securities or portions thereof called for redemption.

 

6



 

The Indenture contains provisions for defeasance at any time of the entire indebtedness of this Security or certain restrictive covenants and Events of Default with respect to this Security upon compliance with certain conditions set forth in the Indenture.

 

If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture.

 

The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of a majority in principal amount of the Securities at the time Outstanding of each series to be affected.  The Indenture also contains provisions permitting the Holders of a majority in principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.

 

As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy thereunder, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Securities of this series, the Holders of not less than 35% in principal amount of the Securities of this series at the time Outstanding shall have made written request to the Trustee to institute proceedings in respect of such Event of Default as Trustee and offered the Trustee reasonably satisfactory indemnity, and the Trustee shall not have received from the Holders of a majority in principal amount of Securities of this series at the time Outstanding a direction inconsistent with such request, and shall have failed to institute any such proceeding, for 60 days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or any premium or interest hereon on or after the respective due dates expressed herein.

 

No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of (and premium, if any) and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed.

 

As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of (and premium, if any) and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the

 

7



 

Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of this series and of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees.

 

The Securities of this series are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.

 

Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.

 

All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture.

 

8



 

ARTICLE THREE

 

Original Issue of Debentures

 

Section 301.  An initial issue of the Debentures in the aggregate principal amount of $400,000,000, may, upon execution of this Eighth Supplemental Indenture, or from time to time hereafter, be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Debentures upon a Company Order without any further action by the Company.  Additional Debentures may be issued by the Company pursuant to the terms of the Indenture and this Eighth Supplemental Indenture.

 

ARTICLE FOUR

 

Paying Agent and Security Registrar

 

Section 401.  Fifth Third Bank will be the Paying Agent and Security Registrar for the Debentures.

 

ARTICLE FIVE

 

Sundry Provisions

 

Section 501.  Except as otherwise expressly provided in this Eighth Supplemental Indenture or in the form of Debenture or otherwise clearly required by the context hereof or thereof, all terms used herein or in said form of Debenture that are defined in the Indenture shall have the several meanings respectively assigned to them thereby.

 

Section 502.  The Indenture, as supplemented by this Eighth Supplemental Indenture, is in all respects ratified and confirmed, and this Eighth Supplemental Indenture shall be deemed part of the Indenture in the manner and to the extent herein and therein provided.

 


 

This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.

 

 

9



 

IN WITNESS WHEREOF, the parties hereto have caused this Eighth Supplemental Indenture to be duly executed as of the day and year first above written.

 

 

 

PSI ENERGY, INC.

 

 

 

 

 

By

/s/ Wendy L. Aumiller

 

 

 

Wendy L. Aumiller

 

 

Treasurer

 

 

 

 

 

FIFTH THIRD BANK, as Trustee

 

 

 

 

 

By

/s/ Christine M. Schaub

 

 

 

Christine M. Schaub

 

 

Vice President

 

10


EX-4.3 4 a03-4769_1ex4d3.htm EX-4.3

Exhibit 4.3

 

 

 

FIFTY-FIFTH SUPPLEMENTAL
INDENTURE

 

TO

 

INDENTURE DATED SEPTEMBER 1, 1939

 


 

PSI ENERGY, INC.

 

(FORMERLY NAMED “PUBLIC SERVICE COMPANY OF INDIANA, INC.” AND
SUCCESSOR BY CONSOLIDATION TO PUBLIC SERVICE COMPANY OF INDIANA)

 

TO

 

LASALLE BANK NATIONAL ASSOCIATION
AS TRUSTEE

 

(FORMERLY NAMED “LASALLE NATIONAL BANK” AND THE
SUCCESSOR TRUSTEE TO THE FIRST NATIONAL BANK OF CHICAGO)

 


 

DATED AS OF FEBRUARY 15, 2003

 


 

CREATING FIRST MORTGAGE BONDS, SERIES  HHH, DUE APRIL 1, 2022

 

AND

 

OTHERWISE SUPPLEMENTING AND AMENDING THE INDENTURE

 

 



 

TABLE OF CONTENTS

 

PARTIES:

 

 

Company (PSI Energy, Inc. formerly named Public Service Company of Indiana, Inc., successor by consolidation to Initial Mortgagor (Public Service Company of Indiana)), and Trustee

 

 

 

RECITALS:

 

 

Indenture of the Initial Mortgagor, dated September 1, 1939, and First Supplemental Indenture thereto of the Initial Mortgagor, dated as of March 1, 1941

 

Consolidation of Initial Mortgagor (and four other companies) into the Company

 

Execution by Company of Second Supplemental Indenture to the original Indenture

 

Company substituted for Initial Mortgagor under Indenture

 

Execution by Company of Third through the Fifty-Fourth Supplemental Indentures to the original Indenture

 

LaSalle Bank National Association, successor to original Trustee

 

Change of name of Company from Public Service Company of Indiana, Inc. to PSI Energy, Inc.

 

Amount of bonds presently outstanding under the Indenture

 

Fifty-Fifth Supplemental Indenture and Bonds of Series HHH authorized

 

Conditions precedent performed

 

 

 

EXECUTING CLAUSE

 

 

i



 

ARTICLE I.

 

CONVEYANCE IN FURTHER ASSURANCE

GRANTING CLAUSE

 

DESCRIPTION OF PROPERTY

 

 

FIRST – Real estate in Butler County, Ohio

 

SECOND – Real estate in Henry County, Indiana

 

THIRD – Real estate in White County, Indiana

AFTER ACQUIRED PROPERTY

 

GRANT IN TRUST

 

 

 

ARTICLE II.

 

FIRST MORTGAGE BONDS, SERIES HHH, DUE APRIL 1, 2022.

 

Section 1.

Creation and designation of Bonds of Series HHH

Section 2.

Bonds of Series HHH to be in registered form only

 

Form of face of the Series HHH Bond

 

Form of reverse of the Series HHH Bond and Trustee’s certificate

Section 3.

Date of Bonds of Series HHH

Section 4.

Maturity dates and interest rates of Bonds of Series HHH

Section 5.

Place and manner of payment of Bonds of Series HHH

Section 6.

Denominations and numbering of definitive Bonds of Series HHH

 

Temporary Bonds of Series HHH and exchange thereof for definitive bonds

Section 7.

Maintenance and Renewal Fund shall not apply to the Bonds of Series HHH

Section 8.

Inspection requirements shall not apply to the Bonds of Series HHH

Section 9.

Company’s right to further amend the original Indenture

 

 

ARTICLE III.

 

ISSUANCE OF BONDS OF SERIES HHH.

 

Section 1.

Aggregate principal amount of Bonds of Series HHH issuable at once

 

ii



 

ARTICLE IV.

 

INDENTURE AMENDMENTS.

 

 

Section 1.

Amendments to Article I of the original Indenture

Section 2.

Amendments to Article VII of the original Indenture

Section 3.

No sinking fund for the Bonds of Series HHH

 

 

ARTICLE V.

 

CONCERNING THE TRUSTEE.

 

Acceptance of trust by Trustee

Trustee not responsible for validity or sufficiency of Fifty-Fifth Supplemental Indenture, etc.

Terms and conditions of Article XVII of the original Indenture to be applied to the Fifty-Fifth Supplemental Indenture

 

ARTICLE VI.

 

MISCELLANEOUS PROVISIONS.

 

Section 1.

References in any article or section of the original Indenture refer to such article or section as amended by all Fifty-Five Supplemental Indentures thereto

Section 2.

Operation and construction of amendments to the original Indenture

Section 3.

All covenants, etc., for sole benefit of parties to the Fifty-Fifth Supplemental Indenture and holders of bonds

Section 4.

Table of contents and headings of articles not part of Fifty-Fifth Supplemental Indenture

Section 5.

Execution of Fifty-Fifth Supplemental Indenture in counterparts

Section 6.

Payments Due on Legal Holidays

 

 

ATTESTATION CLAUSE

SIGNATURES

ACKNOWLEDGMENT BY COMPANY

ACKNOWLEDGMENT BY TRUSTEE

 

iii



 

FIFTY-FIFTH SUPPLEMENTAL INDENTURE dated as of the fifteenth day of February, 2003, made and entered into by and between PSI ENERGY, INC. (hereinafter commonly referred to as the “Company”), a corporation organized and existing under the laws of the State of Indiana, formerly named Public Service Company of Indiana, Inc., and the successor by consolidation to Public Service Company of Indiana, an Indiana corporation, party of the first part, and LASALLE BANK NATIONAL ASSOCIATION, a national banking association organized and existing under the laws of the United States and having its office or place of business in the City of Chicago, State of Illinois, formerly named LaSalle National Bank, and the successor trustee to The First National Bank of Chicago (hereinafter commonly referred to as the “Trustee”), party of the second part,

 

WITNESSETH:

 

WHEREAS, Public Service Company of Indiana (hereinafter commonly referred to as the “Initial Mortgagor”), prior to its consolidation with certain other corporations to form the Company, executed and delivered to the Trustee a certain indenture of mortgage or deed of trust (hereinafter called the “original Indenture” when referred to as existing prior to any amendment thereto, and the “Indenture” when referred to as heretofore, now or hereafter amended), dated September 1, 1939, and a First Supplemental Indenture thereto, dated as of March 1, 1941, to secure the bonds of the Initial Mortgagor, its successors and assigns, issued from time to time under the Indenture in series for the purposes of and subject to the limitations specified in the Indenture; and

 

WHEREAS, the Company on September 6, 1941, became, through a consolidation, the successor of the Initial Mortgagor (and four other companies) and succeeded to all the rights and became liable for all the obligations of the Initial Mortgagor (and such other companies); and

 

WHEREAS, after said consolidation, the Company executed and delivered a Second Supplemental Indenture, dated as of November 1, 1941, to the original Indenture for the purposes, among others, of (i) the making by the Company of an agreement of assumption and adoption by it of the Indenture, (ii) the assumption by the Company of the bonds (and interest and premium, if any, thereon) issued or to be issued under the Indenture, and of all terms, covenants and conditions binding upon it under the Indenture, and the agreeing by the Company to pay, perform and fulfill the same, and (iii) the conveying to the Trustee upon the trusts declared in the Indenture, but subject to any outstanding liens and encumbrances, all the property which the Company then owned or which it might thereafter acquire, except property of a character similar to the property of the Initial Mortgagor which is excluded from the lien of the Indenture; and

 

WHEREAS, all conditions have been met and all acts and things necessary have been done and performed to make the Indenture the valid and binding agreement of the Company and to substitute the Company for the Initial Mortgagor under the Indenture, and to vest the Company with each and every right and power of the Initial Mortgagor, including the right and power to issue bonds thereunder; and

 

1



 

WHEREAS, the Company has subsequently executed and delivered, for purposes authorized under the Indenture, a Third Supplemental Indenture dated as of March 1, 1942, a Fourth Supplemental Indenture dated as of May 1, 1943, a Fifth Supplemental Indenture dated as of August 1, 1944, a Sixth Supplemental Indenture dated as of September 1, 1945, a Seventh Supplemental Indenture dated as of November 1, 1947, an Eighth Supplemental Indenture dated as of January 1, 1949, a Ninth Supplemental Indenture dated as of May 1, 1950, a Tenth Supplemental Indenture dated as of July 1, 1952, an Eleventh Supplemental Indenture dated as of January 1, 1954, a Twelfth Supplemental Indenture dated as of October 1, 1957, a Thirteenth Supplemental Indenture dated as of February 1, 1959, a Fourteenth Supplemental Indenture dated as of July 15, 1960, a Fifteenth Supplemental Indenture dated as of June 15, 1964, a Sixteenth Supplemental Indenture dated as of January 1, 1969, a Seventeenth Supplemental Indenture dated as of March 1, 1970, an Eighteenth Supplemental Indenture dated as of January 1, 1971, a Nineteenth Supplemental Indenture dated as of January 1, 1972, a Twentieth Supplemental Indenture dated as of February 1, 1974, a Twenty-First Supplemental Indenture dated as of August 1, 1974, a Twenty-Second Supplemental Indenture dated as of August 1, 1975, a Twenty-Third Supplemental Indenture dated as of January 1, 1977, a Twenty-Fourth Supplemental Indenture dated as of October 1, 1977, a Twenty-Fifth Supplemental Indenture dated as of September 1, 1978, a Twenty-Sixth Supplemental Indenture dated as of September 1, 1978, a Twenty-Seventh Supplemental Indenture dated as of March 1, 1979, a Twenty-Eighth Supplemental Indenture dated as of May 1, 1979, a Twenty-Ninth Supplemental Indenture dated as of March 1, 1980, a Thirtieth Supplemental Indenture dated as of August 1, 1980, a Thirty-First Supplemental Indenture dated as of February 1, 1981, a Thirty-Second Supplemental Indenture dated as of August 1, 1981, a Thirty-Third Supplemental Indenture dated as of December 1, 1981, a Thirty-Fourth Supplemental Indenture dated as of December 1, 1982, a Thirty-Fifth Supplemental Indenture dated as of March 30, 1984, a Thirty-Sixth Supplemental Indenture dated as of November 15, 1984, a Thirty-Seventh Supplemental Indenture dated as of August 15, 1985, a Thirty-Eighth Supplemental Indenture dated as of October 1, 1986, a Thirty-Ninth Supplemental Indenture dated as of March 15, 1987, a Fortieth Supplemental Indenture dated as of June 1, 1987, a Forty-First Supplemental Indenture dated as of June 15, 1988, a Forty-Second Supplemental Indenture dated as of August 1, 1988, a Forty-Third Supplemental Indenture dated as of September 15, 1989, a Forty-Fourth Supplemental Indenture dated as of March 15, 1990, a Forty-Fifth Supplemental Indenture dated as of March 15, 1990, a Forty-Sixth Supplemental Indenture dated as of June 1, 1990, a Forty-Seventh Supplemental Indenture dated as of July 15, 1991, a Forty-Eighth Supplemental Indenture dated as of July 15, 1992, a Forty-Ninth Supplemental Indenture dated as of February 15, 1993, a Fiftieth Supplemental Indenture dated as of February 15, 1993, a Fifty-First Supplemental Indenture dated as of February 1, 1994, a Fifty-Second Supplemental Indenture dated as of April 30, 1999, a Fifty-Third Supplemental Indenture dated as of June 15, 2001, and a Fifty-Fourth Supplemental Indenture dated as of September 1, 2002, each supplementing and amending the Indenture; and

 

2



 

WHEREAS, the Thirty-Fifth Supplemental Indenture authorized and appointed LaSalle Bank National Association, a national banking association duly organized and existing under the law of the United States of America with its principal office in Chicago, Illinois and formerly named LaSalle National Bank, as Successor Trustee to The First National Bank of Chicago, which appointment was accepted, and all trust powers under the Indenture were thereby transferred from The First National Bank of Chicago to LaSalle Bank National Association; and

 

WHEREAS, the Forty-Sixth Supplemental Indenture amended the Indenture to reflect a change in the name of the Company from Public Service Company of Indiana, Inc. to PSI Energy, Inc. effective as of April 20, 1990; and

 

WHEREAS, as of February 15, 2003, the only bonds that have been heretofore issued under the Indenture which are now outstanding are $300,000,000 aggregate principal amount of “PSI Energy, Inc. First Mortgage Bonds, Series VV, Due July 15, 2026” and $545,000,000 aggregate principal amount of “PSI Energy, Inc. First Mortgage Bonds, Series WW, Due August 15, 2027” and $50,000,000 aggregate principal amount of “PSI Energy, Inc. First Mortgage Bonds, Series ZZ, 5 3/4%, Due February 15, 2028” and $30,000,000 aggregate principal amount of “PSI Energy, Inc. First Mortgage Bonds, Series AAA, 7 1/8%, Due February 1, 2024” and $124,665,000 aggregate principal amount of  “PSI Energy, Inc. First Mortgage Bonds, Series BBB, 8%, Due July 15, 2009” (such bonds being hereinafter referred to as “Bonds of Series BBB”) and $53,055,000 aggregate principal amount of “PSI Energy, Inc. First Mortgage Bonds, Series CCC, 8.85%, Due January 15, 2022” and $38,000,000 aggregate principal amount of “PSI Energy, Inc. First Mortgage Bonds, Series DDD, 8.31%, Due September 1, 2032” and $325,000,000 aggregate principal amount of “PSI Energy, Inc. First Mortgage Bonds, Series EEE, 6.65%, Due June 15, 2006” and $23,000,000 aggregate principal amount of “PSI Energy, Inc. First Mortgage Bonds, Series FFF, Due March 1, 2031” and $24,600,000 aggregate principal amount of “PSI Energy, Inc. First Mortgage Bonds, Series GGG, Due March 1, 2019”; and

 

WHEREAS, in accordance with the provisions of Section 1 of Article XVIII of the Indenture, the Board of Directors has authorized the execution and delivery by the Company of a Fifty-Fifth Supplemental Indenture, substantially in the form of this Fifty-Fifth Supplemental Indenture, for the purpose of creating a fifty-third series of bonds to be issued under the Indenture, to be known as “PSI Energy, Inc. First Mortgage Bonds, Series HHH, Due April 1, 2022” (such series to consist of a single bond being hereinafter referred to as the “Series HHH Bond”), and prescribing the form and substance of the Bonds of Series HHH and the terms, provisions and characteristics thereof, and for the purpose of adding to the covenants and agreements of the Company for the protection of the bondholders and of the trust estate and of making such changes in the Indenture as are deemed necessary or desirable and as are permitted by the Indenture; and

 

3



 

WHEREAS, all conditions and requirements necessary to make this Fifty-Fifth Supplemental Indenture a valid, binding and legal instrument have been done, performed and fulfilled and the execution and delivery hereof have been in all respects duly authorized:

 

NOW, THEREFORE, in consideration of the premises, and of the acceptance and purchase of the Bonds of Series HHH by the holders and registered owners thereof, and of the sum of One Dollar ($1.00) duly paid by the Trustee to the Company, the receipt whereof is hereby acknowledged, and in accordance with and subject to the terms and provisions of the Indenture, the Company and the Trustee, respectively, have entered into, executed and delivered this Fifty-Fifth Supplemental Indenture for the uses and purposes hereinafter expressed, that is to say:

 

ARTICLE I.

 

CONVEYANCE IN FURTHER ASSURANCE

 

The Company has granted, bargained, sold, transferred, assigned, pledged, mortgaged, warranted the title to and conveyed, and by these presents does grant, bargain, sell, transfer, assign, pledge, mortgage, warrant the title to and convey (subject, however, to permitted liens as defined in the Indenture), unto said LaSalle Bank National Association, as Trustee, as herein provided, and its successors in the trusts declared in the Indenture and herein, all the property, real, personal and mixed, tangible and intangible, of every kind, character and description which the Company has acquired since the execution and delivery of the Forty-Sixth Supplemental Indenture and now owns (except property, rights and assets of a character similar to the property that is excluded from the lien of the Indenture by subparagraphs (b), (c), (d), (e) and (f) of the excepting clauses of the original Indenture, which property, rights and assets are excluded from the lien of the Indenture only to the extent provided therein), including (subject to the exceptions referred to in the immediately preceding parenthetical clause of this sentence) but without otherwise limiting the generality of the foregoing, the following described properties:

 

FIRST.   The following real estate in Butler County, Ohio:

 

ITEM 1.  A parcel of land described as follows:

 

Situate in Section 7, Town 1, Range 4, Madison Township, Butler County, Ohio, and being more particularly described as follows:

 

Beginning at a set iron pin in the south line of Section 7, said point being in the north line of the lands conveyed to Cincinnati Gas and Electric Company by Deed Book 1682 Page 485, Butler County, Ohio Recorder’s Office, said point also being North 89° 58’ 54” West, 1176.81 feet from the southeast corner of said Section 7; thence continuing along said south line of Section 7 and the north line of the lands of said

 

4



 

Cincinnati Gas and Electric Company, North 89° 58’ 54” West, passing concrete monuments at 238.53 feet and 941.46 feet, a total distance of 946.46 feet to an existing iron pin, said point being witnessed by a concrete monument lying South 00° 20’ 25” West, 5.00 feet; thence along the east and north line of the lands conveyed to Philip Morris Companies by Deed Book 6207 Page 1298, Butler County, Ohio Recorder’s Office, North 00° 20’ 25” East, 2389.12 feet to an existing iron pin and North 87° 11’ 45” West, passing a concrete monument at 5.00 feet, a total distance of 1045.20 feet to an existing stone; thence along the west line of the lands conveyed to Dorothy L. Wintersteed by Deed Book 6267 Page 866, Butler County, Ohio Recorder’s Office, North 00° 20’ 25” East, passing a set iron pin at 1593.41, a total distance of 1608.42 feet to a point in the centerline of Kennel Road; thence along said centerline, South 87° 44’ 16” East, 75.04 feet to a point; thence leaving said centerline, South 00° 20’ 25” West, passing a set iron pin at 15.01 feet, a total distance of 1534.06 feet to a set iron pin; thence South 87° 11’ 45” East, 1045.20 feet to a set iron pin; thence South 00° 20’ 25” West, 1079.75 feet to a set iron pin; thence South 89° 58’ 54” East, 871.45 feet to a set iron pin in the west line of the lands conveyed to First National Bank of Southwest Ohio by Deed Book 1722 Page 501, Butler County, Ohio Recorder’s Office; thence along said west line, South 00° 20’ 25” West, 1380.79 feet to a point of beginning.  Containing 36.303 acres of land.

 

Subject to all legal highways, easements and restrictions of record.

 

SECOND.  The following additional real estate in Henry County, Indiana:

 

ITEM 1.  A parcel of land described as follows:

 

Part of the east half of Section 4, Township 17 North, Range 9 East, Henry County, Indiana, bounded and described as follows, to-wit:

 

Beginning at a point on the east line of said Section 4 and in the centerline of State Road 38, Pendleton Pike, said point being Due North (an assumed bearing) 2845.99 feet from the Southeast Corner of said Section; thence along the east line of said Section 4, passing a set concrete monument at 36.29 feet, Due South 400.96 feet to a corner fence post; thence S89º40’54”W, passing a set concrete monument at 877.07 feet, 892.07 feet to a corner fence post; thence S00º03’25”E 1052.92 feet to a set iron pin; thence S89º40’54”W 561.24 feet to a fence post; thence N00º13’24”E, passing a set concrete monument at 1822.12 feet, 1858.37 feet to a point in the centerline of State Road 38; thence with the centerline of said State Road S74º39’34”E 1498.39 feet to the point of beginning, containing 33.542 acres, more or less.

 

5



 

AND ALSO, Out Lot number 1 in the Northwest Quarter of Section 3, Township 17 North, Range 9 East; beginning at the Southwest corner of the Northwest Quarter of Section 3, Township 17 North, Range 9 East; thence running North 14 rods and 6 links; thence South 70 degrees East 44 rods; thence West 41 rods and 3 links to the place of beginning, containing 1.82 acres.

 

THIRD.   The following real estate in White County, Indiana:

 

ITEM 1.  A parcel of land described as follows:

 

Part of the Southeast Quarter (SE¼) of Section 20, Township 25 North, Range 3 West, situate in Prairie Township, White County, State of Indiana described as follows:

 

Commencing at a masonry nail marking the intersection of the centerline of the Lafayette-Monticello Road with the north line of the Northeast Quarter (NE¼) of said Section 20; thence south 15 degrees 45 minutes 20 seconds west along the centerline of said Road along the east line of a 43.673 acre tract shown in DR 97-03-1238 a distance of 1,356.31 feet to the centerline of CR 1025 South, said point being the northeast corner of land conveyed to Champion Motors of Lafayette, Inc. in DR 96-11-5520; thence south 16 degrees 33 minutes 27 seconds west along the centerline of said Road (passing thru a railroad spike at 21.57 feet) a distance of 1,406.28 feet to the intersection of the centerline of said Road with the north line of the Southeast Quarter (SE¼) of said Section 20; thence south 18 degrees 07 minutes 30 seconds west along the centerline of said Road a distance of 219.60 feet to the place of beginning of this description; thence south 73 degrees 26 minutes 30 seconds east a distance of 106 feet to a point; thence south 45 degrees 43 minutes 45 seconds east a distance of 405.54 feet to a point on the east line of a 100’ wide Easement conveyed to Indiana Hydro-Electric Power Company in DR K, page 461; thence south 30 degrees 03 minutes west along the east line of said Easement a distance of 576.81 feet to a point on the centerline of said road; thence northwestwardly along a curve to the right (R=280.53 feet) a distance of 131.26 feet (Chord: north 28 degrees 40 minutes west,130.06 feet) to the point of tangency of said curve; thence north 15 degrees 15 minutes 30 seconds west along the centerline of said Road a distance of 102.84 feet to the point of curvature of a curve to the left; thence along said curve to the left (R=252.04 feet) a distance of 70.08 feet (Chord: north 23 degrees 13 minutes 30 seconds west, 69.85 feet) to the point of tangency of said curve; thence north 31 degrees 11 minutes 30 seconds west along the centerline of said Road a distance of 121.61 feet to the point of curvature of a curve to the right; thence along said curve to the right (R=185.16 feet) a distance of 161.52 feet (Chord: north 06 degrees 12 minutes west, 156.45 feet) to the point of tangency of said curve;

 

6



 

thence north 18 degrees 47 minutes 30 seconds east along the centerline of said road a distance of 291 feet to the place of beginning of this description.  Containing 4.99 acres of land.

 

TOGETHER with all and singular the tenements, hereditaments and appurtenances belonging or in any way appertaining to the aforesaid properties or any part thereof, with the reversion or reversions, remainder and remainders, and subject to the provisions of the original Indenture and the fifty-five supplemental indentures thereto, the rents, revenues, issues, earnings, income and profits thereof, and all the estate, right, title, interest and claim whatsoever, in law as well as in equity, which the Company now has or may hereafter acquire in and to the aforesaid properties and every part and parcel thereof.

 

BUT IN TRUST, NEVERTHELESS, for the equal and proportionate benefit and security of the holders and registered owners from time to time of all bonds now or hereafter issued under the Indenture, pursuant to the provisions of the Indenture, and for the enforcement of the payment of said bonds when payable and the performance of and compliance with the covenants and conditions of the Indenture, without any preference, distinction or priority as to lien or otherwise of any bond or bonds over any other or others by reason of any difference in time of the actual issue, sale or negotiation thereof or for any other reason whatsoever, except as otherwise expressly provided under the Indenture; but so that each and every bond now or hereafter issued under the Indenture shall have the same benefit of the lien of the Indenture, and so that the principal of and interest on every such bond shall, subject to the terms of the Indenture, be equally and proportionately secured thereby, as if it had been executed, delivered, sold and negotiated simultaneously with the execution and delivery thereof.

 

And it is expressly declared that all bonds issued and secured under the Indenture are to be issued, authenticated and delivered, and all premises, plants, property, franchises, permits, rights and interests mortgaged or pledged thereunder are to be dealt with and disposed of under, upon and subject to the terms, conditions, stipulations, covenants, agreements, trusts, uses and purposes of the Indenture.

 

ARTICLE II.

 

FIRST MORTGAGE BONDS, SERIES HHH, DUE APRIL 1, 2022

 

Section 1.  There is hereby created a fifty-third series of bonds to be issued under and secured by the Indenture, to be designated as “PSI Energy, Inc. First Mortgage Bonds, Series HHH, Due April 1, 2022” (such series to consist of a single bond, which shall be the Series HHH Bond hereinbefore referred to).

 

Section 2.  The Series HHH Bond shall be issued only in the form of a separate, single, authenticated, fully registered bond which (i) need not be in the form of a lithographed or engraved certificate, but may be typewritten or printed on ordinary paper

 

7



 

or such paper as the Trustee may reasonably request, (ii) shall represent and be denominated in a principal amount not to exceed thirty-five million dollars ($35,000,000), (iii) shall be executed by the Company and authenticated by the Trustee in accordance with the provisions of the Indenture, and (iv) shall be registered in the name of Ambac Assurance Corporation, or its permitted assigns (“Ambac”).

 

The Series HHH Bond is being issued to Ambac as security for the payment by the Company of its obligations under the Insurance Agreement, dated as of March 7, 2003, between Ambac and the Company, which was entered into in connection with the delivery by Ambac of its Financial Guaranty Insurance Policy insuring certain payments of principal of, and interest on, certain bonds (the “Series 2003 IDFA Bonds”) to be issued under a Trust Indenture, dated as of February 15, 2003, between the Indiana Development Finance Authority (“IDFA”) and Fifth Third Bank, Indiana, as trustee.  The proceeds of the Series 2003 IDFA Bonds will be loaned to the Company pursuant to a Loan Agreement, dated as of February 15, 2003, between IDFA and the Company.

 

The Series HHH Bond shall be transferable only as required to effect an assignment thereof to a successor-in-interest of Ambac under the applicable Insurance Agreement referred to hereinabove, provided that the Trustee shall have received notice from the Company of such an assignment (which notice the Trustee may rely upon without further inquiry).

 

The Series HHH Bond and the Trustee’s certificate to be endorsed thereon shall be substantially in the following form:

 

 

[THE REMAINDER OF THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.]

 

8



 

(FORM OF FACE OF THE SERIES HHH BOND)

 

THE HOLDER OF THIS BOND BY ACCEPTANCE HEREOF AGREES TO RESTRICTIONS ON TRANSFER, TO WAIVERS OF CERTAIN RIGHTS OF EXCHANGE, AND TO INDEMNIFICATION PROVISIONS AS SET FORTH BELOW.  IN ADDITION, THE BOND REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND SUCH BOND MAY NOT BE TRANSFERRED WITHOUT COMPLIANCE WITH APPLICABLE SECURITIES LAWS.

 

THIS BOND IS NOT TRANSFERABLE EXCEPT TO A SUCCESSOR TO AMBAC ASSURANCE CORPORATION UNDER THE INSURANCE AGREEMENT DATED AS OF MARCH 7, 2003 BETWEEN AMBAC ASSURANCE CORPORATION AND PSI ENERGY, INC.

 

No. HHH-

$

 

 

PSI ENERGY, INC.

FIRST MORTGAGE BOND, SERIES HHH,

DUE APRIL 1, 2022

 

PSI Energy, Inc., an Indiana corporation (hereinafter called the “Company”), for value received, hereby promises to pay to AMBAC ASSURANCE CORPORATION, or registered assigns, the principal sum of                                              Dollars ($   ) on the first day of April, 2022 and to pay interest on said principal sum, on each Interest Payment Date (hereinbelow defined), until said principal sum is paid, at the rate from time to time borne by the Indiana Development Finance Authority Environmental Refunding Revenue Bonds, Series 2003 (the “Series 2003 IDFA Bonds”) issued by the Indiana Development Finance Authority (“IDFA”) under a Trust Indenture, dated as of February 15, 2003, between IDFA and Fifth Third Bank, Indiana, as trustee (the “IDFA Indenture”); provided, however, that in no event shall the rate of interest borne by this Bond exceed 13% per annum.  Both the principal of and the interest on this bond shall be payable in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts at the office or agency of the Company in Plainfield, Indiana, or, at the option of the registered owner hereof, at the office or agency of the Company in the Borough of Manhattan, the City of New York, State of New York, except that interest on this bond may be paid, at the option of the Company, by check or draft mailed to the address of the person entitled thereto as it appears on the books of the Company maintained for that purpose.

 

This bond is issued to Ambac Assurance Corporation, or its permitted assigns (“Ambac”) as security for the payment by the Company of its obligations under that certain Insurance Agreement dated as of March 7, 2003 between the Company and Ambac (the “Insurance Agreement”).  The Insurance Agreement was entered into in connection with the delivery by Ambac of its Financial Guaranty Insurance Policy insuring certain payments of principal of, and interest on, the Series 2003 IDFA Bonds.

 

9



 

The proceeds of the Series 2003 IDFA Bonds have been loaned to the Company pursuant to a Loan Agreement, dated as of February 15, 2003, between IDFA and the Company.

 

Notwithstanding any other provision of this bond, no principal shall be due and payable on this bond unless and until an Event of Default shall have occurred under Section 4.01 of the Insurance Agreement by reason of a failure by the Company to pay its obligations under the Insurance Agreement and the Trustee shall have received notice from Ambac or the Company of such an Event of Default (which notice the Trustee may rely upon without further inquiry).  If such an Event of Default under the Insurance Agreement shall occur, it shall be deemed to be a default, for purposes of the Indenture, in the payment of an amount of principal of this bond equal to the amount of such unpaid obligation.

 

REFERENCE IS MADE TO THE FURTHER PROVISIONS OF THIS BOND SET FORTH ON THE REVERSE HEREOF.  SUCH FURTHER PROVISIONS SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS THOUGH FULLY SET FORTH AT THIS PLACE.

 

This bond shall not be valid or become obligatory for any purpose unless and until it shall have been authenticated by the execution by the Trustee, or its successor in trust under the Indenture, of the certificate endorsed hereon.

 

IN WITNESS WHEREOF, PSI Energy, Inc. has caused this bond to be executed in its name by the manual or facsimile signature of its President or an Executive Vice President or one of its Vice Presidents, and its corporate seal or a facsimile thereof to be hereto affixed and attested by the manual or facsimile signature of its Secretary or one of its Assistant Secretaries.

 

Dated as of:

 

 

PSI ENERGY, INC.

 

 

 

 

 

By

 

 

 

 

 

 

President

 

 

ATTEST:

 

 

 

 

 

 

 

 

 

 

 

Secretary

 

 

10



 

(FORM OF REVERSE OF THE SERIES HHH BOND)

 

This bond is one of the bonds of the Company issued and to be issued from time to time under and in accordance with and all secured by an indenture of mortgage or deed of trust, dated September 1, 1939, from Public Service Company of Indiana (predecessor of the Company) to The First National Bank of Chicago, as Trustee, to which LaSalle Bank National Association is successor trustee, (which indenture as amended by all supplemental indentures is hereinafter referred to as the “Indenture”). Said Trustee or its successor in trust under the Indenture is hereinafter sometimes referred to as the “Trustee.” Reference is hereby made to the Indenture for a description of the property mortgaged and pledged and the nature and extent of the security for said bonds. By the terms of the Indenture, the bonds secured thereby are issuable in series which may vary as to date, amount, date of maturity, rate of interest and in other respects as in the Indenture provided.

 

This bond is designated as “PSI Energy, Inc. First Mortgage Bonds, Series HHH, Due April 1, 2022” (hereinafter referred to as the “Series HHH Bond”) of the Company issued under and secured by the Indenture and created by a Fifty-Fifth Supplemental Indenture, dated as of February 15, 2003  (the “Fifty-Fifth Supplemental Indenture”), which also amends the Indenture.

 

The rights and obligations of the Company and of the bearers and registered owners of bonds may be modified or amended with the consent of the Company by an affirmative vote of the bearers or registered owners entitled to vote of at least seventy-five per centum (75%) in principal amount of the bonds then outstanding at a meeting of bondholders called for the purpose (and by an affirmative vote of the bearers or registered owners entitled to vote of at least seventy-five per centum (75%) in principal amount of bonds of any series affected by such modification or amendment in case one or more, but less than all, series of bonds are so affected), all in the manner and subject to the limitations set forth in the Indenture, any consent by the bearer or registered owner of any bond being conclusive and binding upon such bearer or registered owner and upon all future bearers or registered owners of such bond, irrespective of whether or not any notation of such consent is made on such bond; provided that no such modification or amendment shall, among other things, extend the maturity or reduce the amount of, or reduce the rate of interest on, or otherwise modify the terms of the payment of the principal of, or interest or premium (if any) on this bond, which obligations are absolute and unconditional, or permit the creation of any lien ranking prior to or equal with the lien of the Indenture on any of the mortgaged property.  The Fifty-Fifth Supplemental Indenture provides that at any time when no bonds issued under the Indenture prior to the issuance of the “PSI Energy, Inc. First Mortgage Bonds, Series BBB, 8%, Due July 15, 2009” are outstanding, the Company reserves the right to amend the Indenture, without the consent or other action by the holders of the bonds outstanding at that time, to decrease the seventy-five per centum (75%) vote requirement referred to above to sixty-six and two-thirds per centum (66-2/3%).

 

11



 

The Series HHH Bond shall be transferable only as required to effect an assignment thereof to a successor-in-interest of Ambac under the Insurance Agreement, provided that the Trustee shall have received notice from the Company of such an assignment (which notice the Trustee may rely upon without further inquiry).

 

Each Interest Payment Date under the IDFA Indenture shall be an Interest Payment Date for the Series HHH Bond.  If and when interest is paid on the Series 2003 IDFA Bonds for any given period of time, then there is deemed to have been paid on this Series HHH Bond an amount of interest equal to such interest paid on the Series 2003 IDFA Bonds.  The Company shall promptly notify the Trustee of the amounts and Interest Payment Dates if any interest becomes payable on this Series HHH Bond.

 

The Series HHH Bond shall be deemed to have been paid and no longer outstanding under the Indenture to the extent that Series 2003 IDFA Bonds are paid or deemed to have been paid and are no longer outstanding under the IDFA Indenture and all amounts owed by the Company to Ambac under the Insurance Agreement have been indefeasibly paid in full, and the Trustee has received notice to such effect from the Company (which notice the Trustee may rely upon without further inquiry).

 

Notwithstanding the foregoing, this bond shall be deemed to have been paid and redeemed at any time if and to the extent that the Series 2003 IDFA Bonds are redeemed pursuant to the IDFA Indenture, in whole or in part, in an amount equal to 100% of the principal amount of the Series 2003 IDFA Bonds redeemed and all amounts owed by the Company to Ambac under the Insurance Agreement have been indefeasibly paid in full.  In such an event, the Company shall notify Ambac and the Trustee that a like principal amount of this bond shall be deemed to have been paid and redeemed.  The Series HHH Bond is not otherwise redeemable prior to its maturity.

 

Ambac shall surrender this bond to the Company for cancellation and discharge by the Trustee upon the expiration of the Insurance Agreement or in the event that the Release Test (as defined in the Insurance Agreement) is satisfied.  The Trustee may cancel and discharge the Series HHH Bond upon presentment thereof by the Company without making further inquiry.

 

In the case of any of certain events of default specified in the Indenture, the principal of this bond may be declared or may become due and payable prior to the stated date of maturity hereof in the manner and with the effect provided in the Indenture.

 

No recourse shall be had for the payment of the principal of or interest on this bond, or for any claim based hereon, or otherwise in respect hereof or of the Indenture, to or against any incorporator, shareholder, officer or director, past, present or future, of the Company or of any predecessor or successor company, either directly or through the Company or such predecessor or successor company, under any constitution or statute or rule of law, or by the enforcement of any assessment or penalty, or otherwise, all such liability of incorporators, shareholders, directors and officers being waived and released

 

12



 

by the registered owner hereof by the acceptance of this bond and being likewise waived and released by the terms of the Indenture.

 

 

(FORM OF TRUSTEE’S CERTIFICATE)

 

TRUSTEE’S CERTIFICATE

 

This bond is the Series HHH Bond designated therein referred to and described in the within mentioned Indenture and Fifty-Fifth Supplemental Indenture.

 

 

LASALLE BANK NATIONAL ASSOCIATION,

 

AS TRUSTEE,

 

 

 

 

 

By

 

 

 

Authorized Officer

 

 

Section 3.  Each Bond of Series HHH issued prior to the first interest payment date shall be dated as of March7, 2003, and otherwise shall be dated as provided in Section 1 of Article II of the Indenture.

 

Section 4.  The Series HHH Bond shall be due and payable on April 1, 2022, and shall bear interest from March 7, 2003, at the rate from time to time borne by the Series 2003 IDFA Bonds (as referred to in the form of the bond hereinabove set forth).

 

If and when interest is paid on the Series 2003 IDFA Bonds for any given period of time, then there is deemed to have been paid on the Series HHH Bond an amount of interest equal to such interest paid on the Series 2003 IDFA Bonds.  The Company shall promptly notify the Trustee of the amounts and interest payment dates if any interest becomes payable on the Series HHH Bond.

 

For purposes of the calculation required by the first paragraph of Section 5 of Article IV of the Indenture, annual interest in respect of the Series HHH Bond shall be equal to the sum of (i) the amount determined by multiplying the principal amount of the Series 2003 IDFA Bonds, if any, outstanding on the date of such calculation which bear a fixed rate of interest by such fixed rate, plus (ii) the amount determined by multiplying the aggregate principal amount of the Series 2003 IDFA Bonds, if any, outstanding on the date of such calculation which bear interest at rates which may fluctuate or may fluctuate from time to time in accordance with methods specified in such Series 2003 IDFA Bonds by 13% per annum.

 

13



 

Section 5.  Both the principal of and the interest on the Bonds of Series HHH shall be payable in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts, at the office or agency of the Company in Plainfield, Indiana, or, at the option of the holder thereof, at the office or agency of the Company in the Borough of Manhattan, the City of New York, State of New York, except that interest on the Bonds of Series HHH may be paid, at the option of the Company, by check or draft mailed to the address of the person entitled thereto as it appears on the books of the Company maintained for that purpose.

 

Section 6.  A single Series HHH Bond shall be issued and shall be numbered “HHH-1.”

 

The Bonds of Series HHH shall be executed on behalf of the Company by the manual or facsimile signature of its President or an Executive Vice President or one of its Vice Presidents and shall have affixed thereto the seal of the Company or a facsimile thereof attested by the manual or facsimile signature of its Secretary or one of its Assistant Secretaries and shall be authenticated by the execution by the Trustee of the certificate endorsed on said bonds.

 

No service charge will be made by the Company for the transfer or for the exchange of Bonds of Series HHH except, in the case of transfer, a charge sufficient to reimburse the Company for any tax or other governmental charge payable in connection therewith.

 

Pursuant to the provisions of Section 11 of Article II of the Indenture, Bonds of Series HHH may be issued in temporary form, and if temporary bonds be issued, the Company shall, with all reasonable dispatch, at its own expense and without charge to the holders of the temporary bonds, prepare and execute definitive Bonds of Series HHH and exchange the temporary bonds for such definitive bonds in the manner provided for in said section, provided, however, no presentation or surrender of temporary Bonds of Series HHH shall be necessary in order for the holders entitled to interest thereon to receive such interest.

 

Section 7.  Article IX of the Indenture, “Maintenance and Renewal Fund and Sinking Fund Provisions” as heretofore amended or supplemented shall not apply to the Bonds of Series BBB or to any subsequently created series of bonds (which includes the Bonds of Series HHH) from and after the date on which no series of bonds created under the Indenture prior to the Bonds of Series BBB are outstanding.

 

Section 8.  Section 22 of Article V of the Indenture as heretofore amended or supplemented which, among other things, requires an inspection of the mortgaged property every two years by an independent engineer, shall not apply to the Bonds of Series BBB or to any subsequently created series of bonds (which includes the Bonds of Series HHH), from and after the date in which no series of bonds created under the Indenture prior to the Bonds of Series BBB are outstanding.

 

14



 

Section 9.  The Company reserves the right, without consent or other action by the holders of the Bonds of Series BBB or of any subsequently created series of bonds (which includes the Bonds of Series HHH), to amend the Indenture, as heretofore amended or supplemented, at any time after all bonds of any series created prior to the Bonds of Series BBB are no longer outstanding under the Indenture, as follows:

 

(a)  by substituting for the words “in principal amount not greater than sixty per centum (60%) of” in Section 3 of Article IV thereof the following:

 

“in principal amount not greater than sixty-six and two-thirds per centum (66-2/3%) of”.

 

(b)  by substituting for the words “shall exceed sixty per centum (60%) of the value of bondable property so acquired” in Section 9 of Article V thereof the following:

 

“shall exceed sixty-six and two-thirds per centum (66-2/3%) of the value of bondable property so acquired”.

 

(c)  by substituting for the words “shall be deemed to be paid within the meaning of this article; provided, that the date for the payment or redemption of such bonds shall be not more than one (1) year after such moneys shall have been so set apart or paid.” in the first paragraph of Article XIV thereof the following:

 

“shall be deemed to be paid within the meaning of this article.”.

 

(d)  by substituting for the words “with the consent of holders of at least seventy-five per centum (75%) in aggregate principal amount of the bonds at the time outstanding;” in sub-section (a) of Section 3 of Article XVIII thereof the following:

 

“with the consent of holders of at least sixty-six and two-thirds per centum (66-2/3%) in aggregate principal amount of the bonds at the time outstanding;”.

 

(e)  by substituting for the words “holders (or persons entitled to vote the bonds) of not less than seventy-five per centum (75%) in aggregate principal amount of the bonds entitled to be voted” in sub-section (l) of Section 3 of Article XVIII thereof the following:

 

“holders (or persons entitled to vote the bonds) of not less than sixty-six and two-thirds per centum (66-2/3%) in aggregate principal amount of the bonds entitled to be voted”.

 

15



 

(f)  by substituting for the words “holders (or persons entitled to vote the bonds) of at least seventy-five per centum (75%) in principal amount of the bonds outstanding” in sub-section (m) of Section 3 of Article XVIII thereof the following:

 

“holders (or persons entitled to vote the bonds) of at least sixty-six and two-thirds per centum (66-2/3%) in principal amount of the bonds outstanding”.

 

ARTICLE III.

 

ISSUANCE OF BONDS OF SERIES HHH.

 

Section 1.  The Series HHH Bond, in the principal amount not exceeding thirty five million dollars ($35,000,000), may be executed by the Company and delivered to the Trustee for authentication, and shall be authenticated and delivered by the Trustee to or upon the order of the Company (which authentication and delivery may be made without awaiting the filing or recording of this Fifty-Fifth Supplemental Indenture), upon receipt by the Trustee of the resolutions, certificates, orders, opinions and other instruments required by the provisions of Section 3 of Article IV of the Indenture to be received by the Trustee as a condition to the authentication and delivery by the Trustee of bonds pursuant to said Section 3.

 

ARTICLE IV.

 

INDENTURE AMENDMENTS.

 

Section 1.  Article I of the Indenture, as heretofore amended, is hereby further amended (i) by adding immediately after subdivision “(94)” thereof an additional subdivision numbered “(95)” and reading as follows:

 

 “(95) The term ‘Fifty-Fifth Supplemental Indenture’ shall mean the Fifty-Fifth Supplemental Indenture executed by the Company and the Trustee, dated as of February 15, 2003, supplementing and amending the Indenture, and the terms ‘Series HHH Bond’ shall mean the ‘PSI Energy, Inc. First Mortgage Bonds, Series HHH, Due April 1, 2022,’, created by the Fifty-Fifth Supplemental Indenture.”

 

and (ii) by changing the numbering of the present subdivision “(95)” thereof to “(96)”.

 

Section 2.  Article VII of the Indenture, as heretofore amended, is hereby further amended by inserting therein immediately after Section 39 thereof, a new section designated “Section 40” and reading as follows:

 

16



 

“Section 40.  The Series HHH Bond shall be deemed to have been paid and redeemed at any time if and to the extent that the Series 2003 IDFA Bonds are redeemed pursuant to the IDFA Indenture relating thereto, in whole or in part, in an amount equal to 100% of the principal amount of the Series 2003 IDFA Bonds redeemed and all amounts owed by the Company to Ambac under the Insurance Agreement have been indefeasibly paid in full.  In such an event, the Company shall notify Ambac and the Trustee that a like principal amount of the Bonds of Series HHH shall be deemed to have been paid and redeemed.

 

The Bonds of Series HHH are not otherwise redeemable prior to their maturity.  The terms “Series 2003 IDFA Bonds”, “IDFA Indenture”, “Ambac” and “Insurance Agreement” shall have the respective meanings specified in the Fifty-Fifth Supplemental Indenture.”

 

Section 3.  The Bonds of Series HHH shall not be entitled to the benefit of a sinking fund.

 

ARTICLE V.

 

CONCERNING THE TRUSTEE.

 

The Trustee hereby accepts the trusts hereby declared and agrees to perform the same upon the terms and conditions in the Indenture and in this Fifty-Fifth Supplemental Indenture set forth.  The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Fifty-Fifth Supplemental Indenture or the due execution hereof by the Company or for or in respect of the recitals contained herein, all of which recitals are made by the Company solely. In general, each and every term and condition contained in Article XVII of the Indenture shall apply to this Fifty-Fifth Supplemental Indenture.

 

ARTICLE VI.

 

MISCELLANEOUS PROVISIONS.

 

Section 1.  Wherever in the original Indenture or in any of the fifty-five supplemental indentures thereto reference is made to any article or section of the original Indenture, such reference shall be deemed to refer to such article or section as amended by such supplemental indentures.

 

Section 2.  Upon the execution and delivery hereof, the Indenture shall thereupon be deemed to be amended as hereinabove set forth as fully and with the same effect as if the amendments made hereby were set forth in the original Indenture and each of the fifty-four supplemental indentures to the Indenture shall henceforth be read, taken and construed as one and the same instrument; but such amendments shall not operate so as to

 

17



 

render invalid or improper any action heretofore taken under the original Indenture or said supplemental indentures.

 

Section 3. All the covenants, stipulations and agreements in this Fifty-Fifth Supplemental Indenture contained are and shall be for the sole and exclusive benefit of the parties hereto, their successors and assigns, and of the holders from time to time of the bonds.

 

Section 4.  The table of contents to, and the headings of the different articles of, this Fifty-Fifth Supplemental Indenture are inserted for convenience of reference, and are not to be taken to be any part of the provisions hereof, nor to control or affect the meaning, construction or effect of the same.

 

Section 5.  This Fifty-Fifth Supplemental Indenture may be simultaneously executed in any number of counterparts, and all such counterparts shall constitute but one and the same instrument.

 

Section 6.  Whenever a payment of principal or interest in respect of the Bonds of Series HHH are due on any day other than a business day (as hereinafter defined), such payment shall be payable on the first business day next following such date, and, in the case of a principal payment, interest on such principal payment shall accrue to the date of such principal payment. For the purposes of this Section 6 the term business day shall mean any day other than a day on which the Trustee is authorized by law to close.

 

 

[THE REMAINDER OF THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.]

 

18



 

IN WITNESS WHEREOF, said PSI Energy, Inc. has caused this instrument to be executed in its corporate name by its President or one of its Vice Presidents and to be attested by its Secretary or one of its Assistant Secretaries and said LaSalle Bank National Association has caused this instrument to be executed in its corporate name by one of its First Vice Presidents and to be attested by one of its Assistant Secretaries, in several counterparts, all as of the day and year first above written.

 

 

PSI ENERGY, INC.

 

 

 

 

(CORPORATE SEAL)

By

 /s/ Ronald R. Reising

 

 

 

Ronald R. Reising

 

 

 

Vice President - Finance

 

ATTEST:

 

 

 

/s/ Richard G. Beach

 

 

Richard G. Beach, Assistant Secretary

 

 

 

Signed and delivered by PSI Energy, Inc.
in the presence of:

 

 

 

/s/ Debby Garrett

 

 

Debby Garrett, Witness

 

 

 

/s/ Julie M. Thompson

 

 

Julie M. Thompson, Witness

 

 

 

 

LASALLE BANK NATIONAL ASSOCIATION

 

 

 

 

(CORPORATE SEAL)

By

/s/ Victoria Y. Douyon

 

 

 

Victoria Y. Douyon

 

 

 

First Vice President

 

 

 

 

 

ATTEST:

 

 

 

/s/ Kristine Brutsman

 

 

Kristine Brutsman, Assistant Secretary

 

 

 

Signed and delivered by LaSalle Bank National
Association in the presence of:

 

 

 

/s/ Debra Donaldson

 

 

Debra Donaldson, Witness

 

 

 

/s/ Alvita Griffin

 

 

Alvita Griffin, Witness

 

 

19



 

STATE OF OHIO

)

 

) ss:

COUNTY OF HAMILTON

)

 

BE IT REMEMBERED, that on this 3rd day of March, 2003, before me, the undersigned, a notary public in and for the County and State aforesaid, duly commissioned and qualified, personally appeared Ronald R. Reising and Richard G. Beach, personally known to me to be the same persons whose names are subscribed to the foregoing instrument, and personally known to me to be the Vice President – Finance, and an Assistant Secretary, respectively, of PSI Energy, Inc., an Indiana corporation, and acknowledged that they signed and delivered said instrument as their free and voluntary act as such Vice President – Finance, and Assistant Secretary, respectively, and as the free and voluntary act of said PSI Energy, Inc., for the uses and purposes therein set forth; in pursuance of the power and authority granted to them by resolution of the Board of Directors of said Company.

 

IN WITNESS WHEREOF, I have hereunto set my hand and affixed my notarial seal the day and year aforesaid.

 

(NOTARIAL SEAL)

 

 

/s/ Cecilia A. Temple

 

 

Notary Public

 

 

 

My commission expires                                     .

 

County of residence: Hamilton

 

20



 

STATE OF ILLINOIS

)

 

) ss:

COUNTY OF COOK

)

 

BE IT REMEMBERED, that on this 28th day of February, 2003, before me, the undersigned, a notary public in and for the County and State aforesaid, duly commissioned and qualified, personally appeared Victoria Y. Douyon and Kristine Brutsman, personally known to me to be the same persons whose names are subscribed to the foregoing instrument, and personally known to me to be a First Vice President and an Assistant Secretary, respectively, of LaSalle Bank National Association, a national banking association, and acknowledged that they signed and delivered said instrument as their free and voluntary act as such First Vice President and Assistant Secretary, respectively, and as the free and voluntary act of said LaSalle Bank National Association, for the uses and purposes therein set forth; in pursuance of the power and authority granted to them by the bylaws of said association.

 

IN WITNESS WHEREOF, I have hereunto set my hand and affixed my notarial seal the day and year aforesaid.

 

(NOTARIAL SEAL)

 

 

/s/ Mary Ann Kicmal

 

 

Notary Public

 

 

 

My commission expires                               .

 

County of residence: Cook

 

 

This instrument was prepared by:

 

Bradley C. Arnett, Esq.

 

139 East Fourth Street

 

Cincinnati, Ohio 45202

 

21


EX-31.1 5 a03-4769_1ex31d1.htm EX-31.1

Exhibit 31.1

 

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, James E. Rogers, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The Union Light, Heat and Power Company;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrants as of, and for, the periods presented in this report;

 

4. The registrants’ other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrants and have:

 

a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrants, including their consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)   Evaluated the effectiveness of the registrants’ disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

c)    Disclosed in this report any change in the registrants’ internal control over financial reporting that occurred during the registrants’ most recent fiscal quarter (the registrants’ fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants’ internal control over financial reporting; and

 

5. The registrants’ other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants’ auditors and the audit committee of the registrants’ board of directors (or persons performing the equivalent functions):

 

a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants’ ability to record, process, summarize and report financial information; and

 

b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants’ internal control over financial reporting.

 

 

Date: November 13, 2003

 

 

/s/ James E. Rogers

 

James E. Rogers

 

Chief Executive Officer

 

 


EX-31.2 6 a03-4769_1ex31d2.htm EX-31.2

Exhibit 31.2

 

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, R. Foster Duncan, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The Union Light, Heat and Power Company;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrants as of, and for, the periods presented in this report;

 

4. The registrants’ other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrants and have:

 

a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrants, including their consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)   Evaluated the effectiveness of the registrants’ disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

c)    Disclosed in this report any change in the registrants’ internal control over financial reporting that occurred during the registrants’ most recent fiscal quarter (the registrants’ fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants’ internal control over financial reporting; and

 

5. The registrants’ other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants’ auditors and the audit committee of the registrants’ board of directors (or persons performing the equivalent functions):

 

a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants’ ability to record, process, summarize and report financial information; and

 

b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants’ internal control over financial reporting.

 

 

Date: November 13, 2003

 

 

/s/ R. Foster Duncan

 

R. Foster Duncan

 

Chief Financial Officer

 

 


EX-32.1 7 a03-4769_1ex32d1.htm EX-32.1

Exhibit 32.1

 

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc. and The Union Light, Heat and Power Company (the “Companies”) on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James E. Rogers, Chief Executive Officer of the Companies, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:

 

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Companies.

 

 

/s/ James E. Rogers

 

James E. Rogers

Chief Executive Officer

November 13, 2003

 


EX-32.2 8 a03-4769_1ex32d2.htm EX-32.2

Exhibit 32.2

 

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc. and The Union Light, Heat and Power Company (the “Companies”) on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, R. Foster Duncan, Chief Financial Officer of the Companies, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:

 

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Companies.

 

 

/s/ R. Foster Duncan

 

R. Foster Duncan

Chief Financial Officer

November 13, 2003

 


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